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May 24, 2006

EVERYBODY’S AN EXPERT

Putting predictions to the test.
by LOUIS MENAND

Prediction is one of the pleasures of life. Conversation would wither without it. “It won’t last. She’ll dump him in a month.” If you’re wrong, no one will call you on it, because being right or wrong isn’t really the point. The point is that you think he’s not worthy of her, and the prediction is just a way of enhancing your judgment with a pleasant prevision of doom. Unless you’re putting money on it, nothing is at stake except your reputation for wisdom in matters of the heart. If a month goes by and they’re still together, the deadline can be extended without penalty. “She’ll leave him, trust me. It’s only a matter of time.” They get married: “Funny things happen. You never know.” You still weren’t wrong. Either the marriage is a bad one—you erred in the right direction—or you got beaten by a low-probability outcome.

It is the somewhat gratifying lesson of Philip Tetlock’s new book, “Expert Political Judgment: How Good Is It? How Can We Know?” (Princeton; $35), that people who make prediction their business—people who appear as experts on television, get quoted in newspaper articles, advise governments and businesses, and participate in punditry roundtables—are no better than the rest of us. When they’re wrong, they’re rarely held accountable, and they rarely admit it, either. They insist that they were just off on timing, or blindsided by an improbable event, or almost right, or wrong for the right reasons. They have the same repertoire of self-justifications that everyone has, and are no more inclined than anyone else to revise their beliefs about the way the world works, or ought to work, just because they made a mistake. No one is paying you for your gratuitous opinions about other people, but the experts are being paid, and Tetlock claims that the better known and more frequently quoted they are, the less reliable their guesses about the future are likely to be. The accuracy of an expert’s predictions actually has an inverse relationship to his or her self-confidence, renown, and, beyond a certain point, depth of knowledge. People who follow current events by reading the papers and newsmagazines regularly can guess what is likely to happen about as accurately as the specialists whom the papers quote. Our system of expertise is completely inside out: it rewards bad judgments over good ones.

“Expert Political Judgment” is not a work of media criticism. Tetlock is a psychologist—he teaches at Berkeley—and his conclusions are based on a long-term study that he began twenty years ago. He picked two hundred and eighty-four people who made their living “commenting or offering advice on political and economic trends,” and he started asking them to assess the probability that various things would or would not come to pass, both in the areas of the world in which they specialized and in areas about which they were not expert. Would there be a nonviolent end to apartheid in South Africa? Would Gorbachev be ousted in a coup? Would the United States go to war in the Persian Gulf? Would Canada disintegrate? (Many experts believed that it would, on the ground that Quebec would succeed in seceding.) And so on. By the end of the study, in 2003, the experts had made 82,361 forecasts. Tetlock also asked questions designed to determine how they reached their judgments, how they reacted when their predictions proved to be wrong, how they evaluated new information that did not support their views, and how they assessed the probability that rival theories and predictions were accurate.

Tetlock got a statistical handle on his task by putting most of the forecasting questions into a “three possible futures” form. The respondents were asked to rate the probability of three alternative outcomes: the persistence of the status quo, more of something (political freedom, economic growth), or less of something (repression, recession). And he measured his experts on two dimensions: how good they were at guessing probabilities (did all the things they said had an x per cent chance of happening happen x per cent of the time?), and how accurate they were at predicting specific outcomes. The results were unimpressive. On the first scale, the experts performed worse than they would have if they had simply assigned an equal probability to all three outcomes—if they had given each possible future a thirty-three-per-cent chance of occurring. Human beings who spend their lives studying the state of the world, in other words, are poorer forecasters than dart-throwing monkeys, who would have distributed their picks evenly over the three choices.

Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable. “We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly,” he reports. “In this age of academic hyperspecialization, there is no reason for supposing that contributors to top journals—distinguished political scientists, area study specialists, economists, and so on—are any better than journalists or attentive readers of the New York Times in ‘reading’ emerging situations.” And the more famous the forecaster the more overblown the forecasts. “Experts in demand,” Tetlock says, “were more overconfident than their colleagues who eked out existences far from the limelight.”

People who are not experts in the psychology of expertise are likely (I predict) to find Tetlock’s results a surprise and a matter for concern. For psychologists, though, nothing could be less surprising. “Expert Political Judgment” is just one of more than a hundred studies that have pitted experts against statistical or actuarial formulas, and in almost all of those studies the people either do no better than the formulas or do worse. In one study, college counsellors were given information about a group of high-school students and asked to predict their freshman grades in college. The counsellors had access to test scores, grades, the results of personality and vocational tests, and personal statements from the students, whom they were also permitted to interview. Predictions that were produced by a formula using just test scores and grades were more accurate. There are also many studies showing that expertise and experience do not make someone a better reader of the evidence. In one, data from a test used to diagnose brain damage were given to a group of clinical psychologists and their secretaries. The psychologists’ diagnoses were no better than the secretaries’.

The experts’ trouble in Tetlock’s study is exactly the trouble that all human beings have: we fall in love with our hunches, and we really, really hate to be wrong. Tetlock describes an experiment that he witnessed thirty years ago in a Yale classroom. A rat was put in a T-shaped maze. Food was placed in either the right or the left transept of the T in a random sequence such that, over the long run, the food was on the left sixty per cent of the time and on the right forty per cent. Neither the students nor (needless to say) the rat was told these frequencies. The students were asked to predict on which side of the T the food would appear each time. The rat eventually figured out that the food was on the left side more often than the right, and it therefore nearly always went to the left, scoring roughly sixty per cent—D, but a passing grade. The students looked for patterns of left-right placement, and ended up scoring only fifty-two per cent, an F. The rat, having no reputation to begin with, was not embarrassed about being wrong two out of every five tries. But Yale students, who do have reputations, searched for a hidden order in the sequence. They couldn’t deal with forty-per-cent error, so they ended up with almost fifty-per-cent error.

The expert-prediction game is not much different. When television pundits make predictions, the more ingenious their forecasts the greater their cachet. An arresting new prediction means that the expert has discovered a set of interlocking causes that no one else has spotted, and that could lead to an outcome that the conventional wisdom is ignoring. On shows like “The McLaughlin Group,” these experts never lose their reputations, or their jobs, because long shots are their business. More serious commentators differ from the pundits only in the degree of showmanship. These serious experts—the think tankers and area-studies professors—are not entirely out to entertain, but they are a little out to entertain, and both their status as experts and their appeal as performers require them to predict futures that are not obvious to the viewer. The producer of the show does not want you and me to sit there listening to an expert and thinking, I could have said that. The expert also suffers from knowing too much: the more facts an expert has, the more information is available to be enlisted in support of his or her pet theories, and the more chains of causation he or she can find beguiling. This helps explain why specialists fail to outguess non-specialists. The odds tend to be with the obvious.

Tetlock’s experts were also no different from the rest of us when it came to learning from their mistakes. Most people tend to dismiss new information that doesn’t fit with what they already believe. Tetlock found that his experts used a double standard: they were much tougher in assessing the validity of information that undercut their theory than they were in crediting information that supported it. The same deficiency leads liberals to read only The Nation and conservatives to read only National Review. We are not natural falsificationists: we would rather find more reasons for believing what we already believe than look for reasons that we might be wrong. In the terms of Karl Popper’s famous example, to verify our intuition that all swans are white we look for lots more white swans, when what we should really be looking for is one black swan.

Also, people tend to see the future as indeterminate and the past as inevitable. If you look backward, the dots that lead up to Hitler or the fall of the Soviet Union or the attacks on September 11th all connect. If you look forward, it’s just a random scatter of dots, many potential chains of causation leading to many possible outcomes. We have no idea today how tomorrow’s invasion of a foreign land is going to go; after the invasion, we can actually persuade ourselves that we knew all along. The result seems inevitable, and therefore predictable. Tetlock found that, consistent with this asymmetry, experts routinely misremembered the degree of probability they had assigned to an event after it came to pass. They claimed to have predicted what happened with a higher degree of certainty than, according to the record, they really did. When this was pointed out to them, by Tetlock’s researchers, they sometimes became defensive.

And, like most of us, experts violate a fundamental rule of probabilities by tending to find scenarios with more variables more likely. If a prediction needs two independent things to happen in order for it to be true, its probability is the product of the probability of each of the things it depends on. If there is a one-in-three chance of x and a one-in-four chance of y, the probability of both x and y occurring is one in twelve. But we often feel instinctively that if the two events “fit together” in some scenario the chance of both is greater, not less. The classic “Linda problem” is an analogous case. In this experiment, subjects are told, “Linda is thirty-one years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice and also participated in antinuclear demonstrations.” They are then asked to rank the probability of several possible descriptions of Linda today. Two of them are “bank teller” and “bank teller and active in the feminist movement.” People rank the second description higher than the first, even though, logically, its likelihood is smaller, because it requires two things to be true—that Linda is a bank teller and that Linda is an active feminist—rather than one.

Plausible detail makes us believers. When subjects were given a choice between an insurance policy that covered hospitalization for any reason and a policy that covered hospitalization for all accidents and diseases, they were willing to pay a higher premium for the second policy, because the added detail gave them a more vivid picture of the circumstances in which it might be needed. In 1982, an experiment was done with professional forecasters and planners. One group was asked to assess the probability of “a complete suspension of diplomatic relations between the U.S. and the Soviet Union, sometime in 1983,” and another group was asked to assess the probability of “a Russian invasion of Poland, and a complete suspension of diplomatic relations between the U.S. and the Soviet Union, sometime in 1983.” The experts judged the second scenario more likely than the first, even though it required two separate events to occur. They were seduced by the detail.


It was no news to Tetlock, therefore, that experts got beaten by formulas. But he does believe that he discovered something about why some people make better forecasters than other people. It has to do not with what the experts believe but with the way they think. Tetlock uses Isaiah Berlin’s metaphor from Archilochus, from his essay on Tolstoy, “The Hedgehog and the Fox,” to illustrate the difference. He says:

Low scorers look like hedgehogs: thinkers who “know one big thing,” aggressively extend the explanatory reach of that one big thing into new domains, display bristly impatience with those who “do not get it,” and express considerable confidence that they are already pretty proficient forecasters, at least in the long term. High scorers look like foxes: thinkers who know many small things (tricks of their trade), are skeptical of grand schemes, see explanation and prediction not as deductive exercises but rather as exercises in flexible “ad hocery” that require stitching together diverse sources of information, and are rather diffident about their own forecasting prowess.

A hedgehog is a person who sees international affairs to be ultimately determined by a single bottom-line force: balance-of-power considerations, or the clash of civilizations, or globalization and the spread of free markets. A hedgehog is the kind of person who holds a great-man theory of history, according to which the Cold War does not end if there is no Ronald Reagan. Or he or she might adhere to the “actor-dispensability thesis,” according to which Soviet Communism was doomed no matter what. Whatever it is, the big idea, and that idea alone, dictates the probable outcome of events. For the hedgehog, therefore, predictions that fail are only “off on timing,” or are “almost right,” derailed by an unforeseeable accident. There are always little swerves in the short run, but the long run irons them out.

Foxes, on the other hand, don’t see a single determining explanation in history. They tend, Tetlock says, “to see the world as a shifting mixture of self-fulfilling and self-negating prophecies: self-fulfilling ones in which success breeds success, and failure, failure but only up to a point, and then self-negating prophecies kick in as people recognize that things have gone too far.”

Tetlock did not find, in his sample, any significant correlation between how experts think and what their politics are. His hedgehogs were liberal as well as conservative, and the same with his foxes. (Hedgehogs were, of course, more likely to be extreme politically, whether rightist or leftist.) He also did not find that his foxes scored higher because they were more cautious—that their appreciation of complexity made them less likely to offer firm predictions. Unlike hedgehogs, who actually performed worse in areas in which they specialized, foxes enjoyed a modest benefit from expertise. Hedgehogs routinely over-predicted: twenty per cent of the outcomes that hedgehogs claimed were impossible or nearly impossible came to pass, versus ten per cent for the foxes. More than thirty per cent of the outcomes that hedgehogs thought were sure or near-sure did not, against twenty per cent for foxes.

The upside of being a hedgehog, though, is that when you’re right you can be really and spectacularly right. Great scientists, for example, are often hedgehogs. They value parsimony, the simpler solution over the more complex. In world affairs, parsimony may be a liability—but, even there, there can be traps in the kind of highly integrative thinking that is characteristic of foxes. Elsewhere, Tetlock has published an analysis of the political reasoning of Winston Churchill. Churchill was not a man who let contradictory information interfere with his idées fixes. This led him to make the wrong prediction about Indian independence, which he opposed. But it led him to be right about Hitler. He was never distracted by the contingencies that might combine to make the elimination of Hitler unnecessary.


Tetlock also has an unscientific point to make, which is that “we as a society would be better off if participants in policy debates stated their beliefs in testable forms”—that is, as probabilities—“monitored their forecasting performance, and honored their reputational bets.” He thinks that we’re suffering from our primitive attraction to deterministic, overconfident hedgehogs. It’s true that the only thing the electronic media like better than a hedgehog is two hedgehogs who don’t agree. Tetlock notes, sadly, a point that Richard Posner has made about these kinds of public intellectuals, which is that most of them are dealing in “solidarity” goods, not “credence” goods. Their analyses and predictions are tailored to make their ideological brethren feel good—more white swans for the white-swan camp. A prediction, in this context, is just an exclamation point added to an analysis. Liberals want to hear that whatever conservatives are up to is bound to go badly; when the argument gets more nuanced, they change the channel. On radio and television and the editorial page, the line between expertise and advocacy is very blurry, and pundits behave exactly the way Tetlock says they will. Bush Administration loyalists say that their predictions about postwar Iraq were correct, just a little off on timing; pro-invasion liberals who are now trying to dissociate themselves from an adventure gone bad insist that though they may have sounded a false alarm, they erred “in the right direction”—not really a mistake at all.

The same blurring characterizes professional forecasters as well. The predictions on cable news commentary shows do not have life-and-death side effects, but the predictions of people in the C.I.A. and the Pentagon plainly do. It’s possible that the psychologists have something to teach those people, and, no doubt, psychologists are consulted. Still, the suggestion that we can improve expert judgment by applying the lessons of cognitive science and probability theory belongs to the abiding modern American faith in expertise. As a professional, Tetlock is, after all, an expert, and he would like to believe in expertise. So he is distressed that political forecasters turn out to be as unreliable as the psychological literature predicted, but heartened to think that there might be a way of raising the standard. The hope for a little more accountability is hard to dissent from. It would be nice if there were fewer partisans on television disguised as “analysts” and “experts” (and who would not want to see more foxes?). But the best lesson of Tetlock’s book may be the one that he seems most reluctant to draw: Think for yourself.

Iran deploys its war machine


By Iason Athanasiadis

TEHRAN - For Hossein Shariatzadeh, a veteran of the eight-year Iran-Iraq War in the 1980s, now navigating Tehran's traffic-choked streets as a taxi driver, the issue of whether the United States will strike Iraq is hardly a frightening prospect.

"This is Iran," he roared. "It is fire. It is a nuclear bomb. Don't look at my sitting behind the wheel of this car. I would get up in a second and head off to the front to fight."

During his 18 months of service at the front, Shariatzadeh claims to have fought in several flashpoint events. Before being evacuated to Tehran after taking a bullet in the stomach, he participated in the 18th Mah, Fath-ul Mubin and Fajrs 1, 2 and 4 offensives, some of the most horrific campaigns of a drawn-out war characterized by trench warfare and tens of thousands of dead in return for minuscule advances.

Despite Shariatzadeh's lust to head to the front and defend his homeland, Iran's strategic planners are acutely aware that a military confrontation with the technologically more advanced US Army would be as rapid and multi-fronted as the Iran-Iraq War was static and slow-paced. Quite simply, there would not be a single front.

Neither the US nor Israel has ruled out taking military action against nuclear-related targets in Iran if ongoing diplomatic efforts to freeze Tehran's nuclear program do not prove successful.

Accordingly, Iran has been quietly restructuring its military, while carrying out a series of military exercises testing its new military dogma. In December, more than 15,000 members of the regular armed forces participated in war games in northwestern Iran's strategically sensitive East Azerbaijan and West Azerbaijan border provinces that focused on irregular warfare carried out by highly mobile and speedy army units.

In another telling development, a second exercise was launched in the majority-Arab province of Khuzestan, reportedly aimed at quelling insurgencies in areas subject to ethnic unrest and prone to foreign influence. Involving 100,000 troops, the exercise provided a taste of how the Islamic Republic would respond to further disturbances in the strategic, oil-rich province.

The exercise came on the heels of news that the irregular Basij forces that led Iran's offensives against Iraq were being bolstered by so-called Ashura battalions with riot-control training.

It is all part of a fundamental transition that Iran's Revolutionary Guard (RG) is undergoing as it moves away from focusing on waging its defense of the country on the borders - unrealistic in view of the vast territory that requires securing and the gulf separating Iranian and US military capabilities - and toward drawing the enemy into the heartland and defeating it with asymmetrical tactics.

At the same time, the RG is moving away from a joint command with the ordinary army and taking a more prominent role in controlling Iran's often porous borders, even as it makes each of Iran's border provinces autonomous in the event of war. Iranian military planners know that the first step taken by an invading force would be to occupy oil-rich Khuzestan province, secure the sensitive Strait of Hormuz and cut off the Iranian military's oil supply, forcing it to depend on its limited stocks.

Foreign diplomats who monitor Iran's army make it clear that Iran's leadership has acknowledged it stands little chance of defeating the US Army with conventional military doctrine. The shift in focus to guerrilla warfare against an occupying army in the aftermath of a successful invasion mirrors developments in Iraq, where a triumphant US campaign has been followed by three years of slow hemorrhaging at the hands of insurgents.

Tehran argues that it is at a high level of preparedness and points to a number of war games carried out in recent months along its coastal zones, from Bandar Abbas and the Strait of Hormuz in January to the Persian Gulf theater in April and the Khorramshahr naval base and the northwestern parts of the Persian Gulf as of Sunday.

From several interviews with Iranian officials, researchers and foreign diplomats, it is clear that the Iranian army considers itself ready to repel a US land offensive and increasingly sees itself as the main regional power.

In line with the new feeling of invulnerability sweeping through Iran's military elite, RG commander-in-chief Yehya Rahim Safavi warned last month that "the Americans should accept Iran as a great regional power, and they should know that sanctions and military threats are not going to benefit them but are going to be against their interests and against the interests of some European countries".

Iran's new asymmetrical-warfare plan appears to be aimed at neutralizing possible US-led offensives across the Mandali-Ilam (central Iraq-central Iran) axis. The Iranian Zagros mountain range offers a natural first line of defense. It has been reported that the RG is constructing new bases at Khorramabad, Pessyan, Borujerd, Zagheh and Malayer in the province of Lorestan, which would assure the logistics of a quarter of a million troops and provide temporary shelter for half a million refugees from the border. These bases are supposedly complementing older ones further west at Sahneh and Kangavar.

"We know for a fact that no two Western wars are similar," said Hossein, a member of the RG, "and we know there are at least three possible scenarios of attacking these [nuclear] sites, including using their submarines in the Persian Gulf, commandos from the sea, or Mujahideen-e-Khalq trained in Israel and Azerbaijan to destroy the Bushehr nuclear power plant from the inside."

Even while Iran's military is choosing to go low-tech, the country's leadership is continuing to apply advanced technology to military uses. Tehran is continuing with development of its long-range missiles and is forging ahead on its indigenous satellite program that centers on Russian-supplied technology.

In addition, Tehran's aging air-defense system will be boosted by Russian-supplied land-to-air rockets. Also, Iran has aging Chinese missiles that it upgraded and could deploy on coastal batteries, fast attack boats or even warplanes. Finally, were Iran to possess the fearsome Russian-made 3M-82 Moskit anti-ship missiles, it could turn the Persian Gulf into a death trap for the US fleet.

"While Iranian air power is somewhat limited, it has much in terms of land-to-air weaponry and has improvised much as well," Abdurrahman Shayyal, a Saudi Middle East and North Africa analyst, told Asia Times Online. "Furthermore, Iran has proved rather hard to infiltrate, and its military installations and bases are very well protected."

With the confrontation between Washington and Tehran escalating, a new, US-inspired plan to establish an anti-Iranian security regime has further raised tension in the Persian Gulf region. Aside from running covert operations inside Iran's ethnically mixed border provinces, the US administration is marshaling an alliance of Iran's Arab neighbors in the intensifying face-off.

The US media reported last weekend that the United States was trying to create a regional missile-defense system for the Gulf that would be integrated with real-time intelligence using sophisticated US Navy Aegis cruisers.

"Any security regime for the Persian Gulf that doesn't include Iran will not succeed," said Muhammad Reza Saedabadi, an assistant professor at the Institute of North American and European Studies at the University of Tehran. "It's splitting the region. It's good for the arms race and for arms sales to Persian Gulf states, but not for regional security."

Meanwhile, US Secretary of State Condoleezza Rice continued ratcheting up the tension by refusing to offer Iran a guarantee that the United States would not attack it. "Iran is a troublemaker in the international system, a central banker of terrorism. Security assurances are not on the table," she said.

While seen as potentially threatening by several Gulf Arab governments, Iran commands significant popularity among indigenous Shi'ite Arab populations in Bahrain, Kuwait and Saudi Arabia. To a lesser extend, Sunni Arabs in the Gulf region and the wider Middle East applaud Iranian President Mahmud Ahmadinejad for his strident anti-Western rhetoric, which emphasizes his country's independence and echoes the anti-imperialist liberation ideology of 1960s pan-Arabism.

Reflecting this mood, the English-language Gulf News published an editorial on Tuesday titled "An American offer we must refuse". It said, "As if the region was not volatile enough, the US now wants to install an advanced missile system in GCC [Gulf Cooperation Council ] states.

"Gulf countries have enough problems trying to walk a narrow path between the various positions ... so there is no need to exacerbate things further by introducing into the region such controversial measures as heightened security controls and advanced missile systems," the newspaper said.

At a "consultative summit" in Riyadh on May 6, the GCC countries indicated that they did not want Iran to have a nuclear weapon, but were also opposed to the use of force against it. Their position with regard to Iran, so far, bears greater similarity with the stance taken by Russia and China than the one adopted by the US and its European allies.

The GCC is a regional organization comprising the six Persian Gulf Arab states. Created on May 25, 1981, the council's members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

"The US is being completely ridiculous. While it wishes to police the region, it is dealing with a country that is significantly more powerful than Iraq, Afghanistan, Sudan, Vietnam, and every other country bar Germany that it has ever fought," said Abdurrahman Shayyal.
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Iason Athanasiadis is an Iran-based correspondent.

May 23, 2006

The return of fear to world stock markets


>Published: May 20 2006 03:00 | Last updated: May 20 2006 03:00
>>

Like a sudden storm on a clear day, the tempest that swept through the world's stock markets over the course of the past 10 days caught many investors by surprise. That storm abated yesterday but left the markets battered in its wake. Since peaking in late April/early May the FTSE 100 index has fallen 7.5 per cent, the S&P 500 4.6 per cent, the Eurotop 7.1 per cent and the Nikkei 225 8 per cent. During the three-year-long bull market that began in March 2003, there have been other corrections, all of which were short-lived. But this one may turn out to be more significant.

Even after the recent declines, world stock markets remain far above their 2003 lows. The FTSE 100 index is up 73 per cent, the S&P 500 58 per cent, the Eurotop 91 per cent and the Nikkei 112 per cent. It is too soon to say the bull market is over. However, the latest sell-off reflects changes in global conditions that will make further equity gains much more challenging.

One dramatic change is the increase in volatility. The Chicago Board Options Exchange VIX index, which measures market expectations of volatility, jumped from 11.83 on May 1 to a year-high of 17.31 in trading yesterday. While volatility is important in its own right, this jump reflects deeperconcerns.

The market is gripped by two scares: an inflation scare and a dollar scare. One of the most widely used measures of US inflation expectations, the spread between nominal and inflation-protected government bonds, has risen from 2.34 per cent on January 1 to 2.66 per cent yesterday. Rightly or wrongly, the credibility of the Federal Reserve under its new chairman, Ben Bernanke, is being openly questioned.

Meanwhile, equity investors have taken fright at the fall in the dollar since early April. The dollar recovered some ground this week, on expectations that inflation concerns would force the Fed to raise US interest rates further. But it remains down 3 per cent on a trade-weighted basis since April 1.

Of the two scares, investors should worry less about US inflation and more about the dollar (though the two are obviously related). All new Fed chairmen are tested by the markets. Mr Bernanke is no inflation dove, core inflation on the Fed's preferred measure is still only 2 per cent and the US economy is slowing towards trend.

The dollar is a bigger concern. While a steady and broad-based decline of the kind seen in late April/early May is both necessary and desirable, it could give way to a dollar rout and higher US interest rates. Much depends on Asian central banks, whose intervention to support fixed exchange rates frustrated a decline in the dollar in the post-dotcom bubble period, and their counterparts in oil exporting countries.

In valuation terms, the case for equities also looks weaker than it did a year ago. The rise in long term interest rates (from 4.4 per cent at the start of the year to 5.2 per cent in the US) means shares no longer look as cheap as they did relative to bonds. The yen "carry trade" (borrowing in yen at low interest rates and investing in higher yielding assets), which helped boost all risky assets, is fading away as Japan's economy revives.

If there is no cause for panic, then, there is cause for caution. Investors should expect more volatility ahead. With risk premia still very low by historic standards, there is little scope for outperformance by high-risk assets. If either the inflation scare or the dollar scare prove correct, shares could have a long way further to fall.

May 22, 2006

More on the relative abundance of Gold and Silver

 

David Zurbuchen submits:

Silver is rarer than gold. Period. There is less silver in the world, above ground than there is gold. That is easy to document. Since I have been harping on this point, no one has been able to refute it.

 

Even though there are five ounces of gold in the world now for every one ounce of silver, this 5 to 1 ratio will expand as newly mined gold is added to above ground supplies… This should get your juices flowing. It should drive you to buy silver… Silver is more rare than gold, and rarer still is someone who knows this fact. You should act accordingly.

-Ted Butler

Where has Ted Butler so easily documented his claim that silver is more rare than gold? I don’t recall ever reading his proof text. If one does happen to exist, I would appreciate someone sending it to me.

As far as I know, Ted Butler is dead wrong in all of his above pronouncements. It was comments like those above that mislead me into writing my first ever Gold-Eagle essay entitled “Silver: A Rare Opportunity”, an essay which emphasized the very ‘facts’ that I’m now attempting to refute.

Now, I realize I’ll probably be making some enemies by calling Ted Butler a liar, but I believe this is an important issue to come to terms with. If our investment decisions are founded upon fictions, then we are prone to failure. That being said, I do truly enjoy Ted’s writings, after all, he was one of the few writers who really piqued my interest in silver over the years. But nevertheless, I don’t want the average person to be misled by the above claims he has frequently made.

So here are my opposing claims:

1.Silver is not rarer than Gold.

2.The gold to silver rarity ratio is about 1 to 5, not 5 to 1.

3.Finally, there is nothing factual about the statement that silver is rarer than gold, UNLESS you qualify it with the condition that you are only referring to market accessible silver in the form of bullion.

But this is an unfair comparison, because you are including all gold in jewelry form while excluding all silver in jewelry, sterlingware, and privately held bullion/coin forms. Granted, the market price of silver will need to rise a greater percentage than the market price of gold before either its jewelry, silverware, or privately hoarded coin forms become available to the market in large quantities, but the fact still remains that this form of silver is available at some price*.

(We’ll deal more with this ‘price’ in an upcoming essay. For now one would be advised to read “Hidden Silver About to Surface?” But a word of caution, at this time I believe Gene Arensberg’s estimate of how much silver is held in private hoards, if only dealing with silver in coin and bullion form, is too high.)

The Real Silver Deficit

Let us begin by reading a very telling quote from pg. 1046 of the 1954 Minerals Yearbook:

According to the Bureau of the Mint, the world output of silver from 1493 through 1954 was 20,039,4621 troy ounces, valued at $17,278,499,800. Of this total yield, North America produced 62 percent and South America 20 percent. Mexico contributed 35 percent of the total, the United States , Bolivia 9, Peru 9, and Canada 4. It has been estimated that about one-third of the total world production of silver is in circulation as coinage or held by governments for monetary purposes; one-third, including that hoarded, is privately owned; and one-third has been misplaced or dissipated.

Since silver mine production from 3000BC to-1492AD was equal to about 7.6B ounces (Part 1), we must add to this the 20.0B ounces mined from 1492-1954 to arrive at a total of 27.6B ounces of worldwide silver production from 3000BC to 1954AD.

If only two-thirds of those 27.6B ounces remained, then in 1954 there were roughly 18.4B ounces of silver in existence, mostly in the form of coinage, government bullion, private bullion, jewelry, and silverware/sterlingware.

From the following information we can begin to determine the world’s silver supply/demand deficit for the period 1955-2005:

- Worldwide mine production from 1955-2005 was about 19.5B ounces.
- Free-World industrial demand (I.D.) from 1955-2005 was 19.4B ounces.
- I.D. from transitional economies from 1955-2005 is estimated at 3.7B ounces.

(Transitional Economies supplied roughly 16% of the mine supply during this period, so I will also assume that they contributed 16% of the overall industrial demand.)

- I.D from ‘other countries’ from 1977-2005 is estimated at 0.378B ounces.

(Assumes that of the total industrial and arts demand of 630.2M ounces, 60% was used in industrial applications. Data for the period 1955-1976 is missing, but this is relatively insignificant.)

From the above, we discover that the aggregate world demand for the period 1955-2005 was 23.48B ounces (19.4B + 3.7B + .378B = 23.48B ounces)/

If we subtract this number from the cumulative mine supply during this same period (19.5B ounces), we are left with a massive deficit of 3.98B ounces.

(Interestingly enough, in 1941 the total world monetary stocks of silver were about 4.5B ounces (see: Minerals Yearbook 1941 pp. 55-56). When considering that the above deficit of 3.98B ounces does not account for the period of 1942-1954, it becomes crystal clear that there is very little cheap silver remaining.)

But we have yet to factor in old scrap supply, which CPM Group, in their 2003 Silver Survey, defines as:

Scrapped fabricated objects, old coins, old jewelry, decorative objects, household objects, a host of industrial waste, spent ethylene oxide catalysts, old electronic scrap, old sterlingware, old silverware and finally, photographic chemicals, films, and papers [emphasis mine].

Since the vast majority of old scrap supply has come from spent photographic materials (est. 80% in 2000) and catalysts (est. 10% in 2000) [see: http://pubs.usgs.gov/circ/c1196n/], we will assume that 90% of the old scrap that comes to market had its origin in industry as opposed to the arts (i.e. jewelry, sterlingware, decorative objects, etc.). We will then subtract this additional supply from the deficit to arrive at an accurate estimate of how much silver remains.

- Estimated scrap supply from 1955-2005 was 5.45B ounces though due to a deficiency of old scrap supply data for the years 1955-1959, some approximations had to be made based upon known ratios of industrial demand vs. old scrap supply in the neighboring years.

Since we are assuming that 90% of the old scrap came from industrial sources we have:

(-3.98B ounce deficit) + (5.45B ounce scrap supply x 0.90) = 1.47B ounce surplus for the period 1955-2005.

One other factor to consider is a loss of silver content in coinage due to abrasion. For the years 1955-2005, coinage demand was 2.73B ounces. Since the vast majority of this demand was realized between 1955 and 1970 (1.83B ounces worth), I will assume that the loss due to abrasion was 15% of the total in the ensuing 35 years.

- 1.83B x 0.15 = 0.27B ounces lost to abrasion of the coinage.

I’m confident this estimate is conservative for the following reasons:

1. Obviously these newly minted coins were not the only coins in existence during this period, and if we were to include all the coinage that was undergoing abrasion, the above 15% figure would shrink relative to the context of what it described (e.g. 15% loss due to abrasion of 1B ounces worth of coinage is only 7.5% loss due to abrasion of 2B ounces worth of coinage).

2. Large amounts of coins were melted down in the late 1970s, contributing considerably to the surge in old scrap supply during those years. Therefore, my previous assumption that 90% of old scrap had its origin in industrial recycling is probably over-estimated by at least 10-30% during the period 1975-1981, since all of those coins that were melted down would have in effect undergone a 100% loss due to abrasion while simultaneously contributing to the overall old scrap supply.

3. I’m assuming that the other 900M ounces of silver coinage minted between 1971 and 2005 underwent no abrasion at all.

For reasons that I will expound upon in a future essay dealing with the topic of abrasion prior to the 20th century, I feel that the above estimate of silver lost to abrasion should be several orders of magnitude higher. But for the sake of conservatism, I will work with the above number of 0.27B ounces.

•1.47B ounce surplus - 0.27B ounces lost due to abrasion = 1.2B ounce surplus for the years 1955-2005.

Thus, at year-end 1954 we begin with 18.4B ounces of silver existing in all forms, and through the period 1955-2005 which witnessed the rise of the electronic age, it appears we only increased the overall supply of silver by 1.2B ounces, even though we mined almost 20B ounces from the ground! This leaves us with a total of just 19.6B ounces of silver left in existence!

Now, there will likely be some misgivings about the weight I have attributed to the statement from the 1954 Minerals Yearbook, which said, “one-third [of total silver production] has been misplaced or dissipated.”

One might well wonder what exactly is meant by ‘misplaced’?

In order to error towards overstating the amount of silver that remains, so as to avoid as much skepticism as possible, let us assume that 20% of the misplaced silver referred to in the Minerals Yearbook dated 1954 has since been found. This would then leave us with 7.36B ounces of ‘lost’ silver during the period 3000BC-1954AD, instead of the previously stated 9.2 billion ounce loss. All in all, this has the effect of raising the amount of silver left in existence by 1.84B ounces. Thus, our conservative total now stands at 19.6B+1.84B = 21.44B ounces.

Now to compare our findings with those of the CRA Report published in 1992.

From the CRA Report
(Year-end 1991)

CRA estimates that from 1921 through 1990, 10 billion ounces were irrecoverably lost in North America alone, and 12.6 billion ounces for the entire world.

Note: The above estimate is fairly close to the one made in the 1954 Minerals Yearbook.

Before evaluating the CRA Report’s findings, let’s make use of the above statement to make one more estimate of how much silver remains.

1. According to my data, the world produced a total of 45.38B ounces of silver from 3000BC-2005AD.

45.38B -12.6B (silver “irrecoverably lost in North America”) = 32.78B ounces of silver left in existence when accounting for silver lost during the period 1921-1990.

2. From 3000BC to 1920 the world produced about 22.17B ounces, and of this total I estimate that 25% was lost to abrasion (vast majority), shipwreck, or even buried as treasure (including silver buried in tombs).

32.78B – (22.17B x 0.25) = 27.24B ounces of silver left in existence when accounting for silver lost during the period 3000BC –1990AD.

3. From 1991-2005, the world’s industrial demand for silver was 8.63B ounces.
During this same period the world supplied only 2.5B ounces of old scrap.
Assuming that 90% of the old scrap had its origin in recycled industrial materials as before, we are left with:

27.24B ounces – (8.63B – (2.5B x 0.90)) = 20.86B ounces of silver left in existence when accounting for all the silver lost from 3000BC – 2005AD.

This number varies by less than 3% of our previous 21.44B ounce estimate.

Back to the CRA Report and what it had to say about how much silver remained in 1992:

- Total Silver that remains above-ground (all forms): 19.06 billion ounces
- Total Silver contained in silverware and art forms: 16.48 billion ounces
- Total Silver contained in bullion form: 1.40 billion ounces
- Total Silver contained in coin and medallion form: 1.18 billion ounces

Updating the CRA Numbers

During the period 1992-1994: World mine production of silver totaled 1.373 billion ounces (Minerals Yearbooks).

During the period 1995-2004: World mine production of silver totaled 5.639 billion ounces (The Silver Institute).

During 2005 (Partial): World mine production of silver in 2005 totaled 527.3 million ounces (CPM Group – Silver Survey 2005).

Total World Mine Production from 1992 to 2005 = 7.54 billion ounces

Combining this number with the CRA Report’s estimated total above-ground supply of 19.06 billion ounces, we arrive at 26.6 billion ounces of silver remaining above ground.

Since 1992, the world has used nearly 8.1B ounces of silver industrially, but has only returned 2.4B ounces as old scrap. Assuming that 90% of the old scrap had its origin in recycled industrial materials, this leaves us with a total of just 20.66B ounces [26.6 – (8.1B – (2.4 x 0.90)] remaining above ground.

This number is strikingly similar to our 2 other separate findings of 21.44B ounces and 20.86B ounces.

By taking the average of all three, we arrive at 20.99B ounces of silver remaining in the world in all forms (mostly jewelry and silverware).

But in order to temper our enthusiasm in discovering what would actually be a relative rarity ratio between gold and silver of less than 1 to 5 based upon the above numbers, let us further assume that a maximum of 4 billion ounces of silver could be recycled from existing industrial (not including jewelry or sterlingware) materials if the price were right (say $50-$100/ounce). Including this additional potential supply, 24.99B ounces of silver would remain in all forms.

Here then is our new gold to silver ratio based solely upon relative rarity, buffered for the sake of being conservative with that extra 4 billion ounces. Again, I hope the inclusion of this additional 4 billion ounces will be a more than sufficient compromise to account for my inevitable bias towards silver.

The new gold to silver ratio is 24.99 billion ounces Ag/ 4.25 billion ounces Au (see Part 1)/ = 1 to 5.88 (Gold vs. Silver)

This means that based solely upon relative abundance, silver should be trading at about $110.50/ounce (using a gold price of $650.0).

Patience, it seems, is destined to pay some incredible dividends.

Conclusion

Clearly, silver is not more rare than gold, but a 1 to 5.78 rarity ratio is indicative of the incredible leverage to be found in all silver related investments since the current ratio stands at roughly 1 to 54. Will it ever reach the ‘magical’ 1 to 5 ratio insisted upon by Bunker Hunt over 30 years ago? That remains to be seen. But at least now we know for certain that such an idea isn’t nearly as far-fetched as it might have otherwise seemed.

Sources, Updates, and Validation

Sources for calculations in this article:

1. CPM Group’s Silver Survey 2003 & 2005 (www.cpmgroup.com)
2. US Geological Survey (USGS)
3. http://minerals.usgs.gov/ds/2005/140/
4. http://pubs.usgs.gov/of/2004/1251/2004-1251.pdf
5. http://minerals.usgs.gov/minerals/pubs/commodity/silver/
6. Minerals Yearbooks 1932-2004
7. The Silver Institute (www.silverinstitute.org)
8. Stocks of Silver Around the World (Charles River Associates, 1992)

Further Validation of the 60+ Year Structural Silver Deficit

Since 1946 the industrialized nations [i.e. the free-world] of the world have consumed more silver than they have mined, to meet growing demand…

-Sarnoff, Paul. Silver Bulls: The Great Silver Boom and Bust. Connecticut: Arlington House Publishers, 1980 (p.3).

A New Data Point for “The World’s Cumulative Silver Production”

Total Silver mined from 4000 B.C. through 1991: 37.5 billion ounces.

Source: Blanchard, James. Silver Bonanza: How to Profit from the Coming Bull Market in Silver. New York: Simon and Schuster, 1993.

Since mine production from 1992 to 2004 was about 7.0 billion ounces (Part 1), the new total is 37.5 billion ounces + 7.0 billion ounces = 44.5 billion ounces

Previously, the average cumulative silver production based upon 5 sources was 45.55 billion ounces.

With this additional data point, the world’s cumulative silver production is now the even more certain figure of 45.38 billion ounces.

This post is part of a multiple essay series

May 21, 2006

Why the United States invaded Iraq, and now is thinking about invading Iran

19.05.2006Source: URL: http://english.pravda.ru/opinion/feedback/80600-iran-0

On April 28th, IAEA released its report on Iran. IAEA reported that: “the Agency cannot make a judgment about, or reach a conclusion on, future compliance or intentions.” The report came as no surprise to those who have been following the ongoing dispute between Iran, United States and the IAEA.

The United States, for quite some time now, has been accusing Iran of trying to develop Nuclear weapons and Iran has been insisting that its intentions are peaceful and that it is only interested in peaceful use of the Nuclear energy. Iran, to allay the international community’s fear, froze its enrichment program and started a series of negotiations with U.K., Germany, and France. However, without the United States these negotiations were not going to produce any results, since it was only the United States that could address the Iranian’s national security concerns. Iranian seeing themselves surrounded by American forces wanted a security guarantee that United States would not invade Iran, something that United States was not prepared to give. So the negotiations with the European three failed and Iran resumed its enrichment program. Iran was threatened with Security Council and even invasion without any effect. Now once again there is talk of Security Council resolution under article 7 and continuous threats of invasion. There have even been talks of tactical nuclear strike on suspected Iranian nuclear facilities.

All these events are reminiscent of the negotiations and threats preceding the invasion of Iraq. The unfolding events are so similar that makes one wonder if the Iraq scenario is not being used as a template for Iran. And with what has come to light since the Iraq invasion, we have to assume that like Iraq, the decision to invade Iran has already been taken, and that the E.U. Three negotiations and IAEA are being used to prepare the public for that event. There are already reports of increased U.S. provocations along Iranian borders such as flying unmanned surveillance flight over Iran, and insertion of commandos into Iran for intelligence gathering and other activities. The talk of invasion is also accompanied with war games. For example on April 14th, ‘USA Today’ reported that “Amid rising tensions between the United States and Iran over the future of Iran's nuclear program, the Pentagon is planning a war game in July so officials can explore options for a crisis involving Iran.”

But this war game is not the first of its kind. According to William M. Arkin of Washington Post, “In early 2003, even as U.S. forces were on the brink of war with Iraq, the Army had already begun conducting an analysis for a full-scale war with Iran. The analysis, called TIRANNT, for "theatre Iran near term," was coupled with a mock scenario for a Marine Corps invasion and a simulation of the Iranian missile force. U.S. and British planners conducted a Caspian Sea war game around the same time. And Bush directed the U.S. Strategic Command to draw up a global strike war plan for an attack against Iranian weapons of mass destruction. All of this will ultimately feed into a new war plan for "major combat operations" against Iran that military sources confirm now exists in draft form.”

But why did United States attack Iraq and why is she so keen on attacking Iran now? We now know that from the beginning, this administration was looking for any excuse to invade Iraq. Washington has, over time, given a number of different reasons for invading Iraq: starting with Iraq’s developing Nuclear weapons, to war on terror, to spreading democracy in the Middle East. All these reasons have proven to be false. Iraq did not possess any Weapons of Mass Destruction (WMD); and did not have any link to Al Qaeda. And instead of democracy, Iraqis have had to endure Abu Gharib, car bombs, shortage of basic services such as electricity, clean water, and health care. None of the ministries are functioning properly and in addition Iraq has to deal with half a million displaced people. There is also talk of partitioning of Iraq. On top of all this, the Iraqis now face a possible bloody civil war.

After spending over 320 Billion dollars for Iraq war (officially so far) and with no end in sight, why is this administration insisting in starting another catastrophic war in the Middle East?

There have been a number of theories put forward by various groups and individuals. These theories include: crusade against Islam, control of oil reserve, checking the resurgence of Russia and rise of China, and furthering the interests of Israel.

The answer probably contains some of all of the above. However two theories stand out as more plausible.

Fight for oil reserves

The profits of five oil companies combined (American: ExxonMobil, Chevron, and Conoco, British: Shell and British Petroleum) in 2005 was 111 billion dollars. And these profits are about to go through the roof. The reason? Production can not keep-up with demand, and even if it could, there isn’t enough oil to satisfy all, at present prices. Oil companies’ valuations are based on those companies’ access to oil reserves. Iraq and Iran combined have over 20% of the world’s total proven oil reserves. Imagine what having access to those reserves will do for the valuation of American oil companies, not to mention their profits.

There is also the matter of consumption. United States consumes fully 25 percent of the world oil supplies. China and India are growing rapidly and their economies consume more and more oil. China currently consumes 8.2 percent of the world’s oil production. Soon it will increase to 10 or even 14 percent. Where is that oil going to come from? Is United States willing to reduce its share for China? It is highly improbable.

Recently, President Bush held a television conference where he assured the public that Americans’ dependence on Oil soon would be over. He spoke of great new technologies and fuel sources that were just around the corner. What he forgot to mention was that there are 600 million cars in the world today that run on petrol, and it is estimated that if the present trend continues, by 2030, the number of cars in the world will reach 1.2 billion.

Just to change the engines of the existing 600 million cars will take years, not to mention all the petrol stations and the support facilities that have to be modified for this to work. There is also more in a barrel of oil than petrol for our cars. We need such oil derivatives as jet fuel, Kerosene, lubricants, feedstock, asphalt, etc., for our industries to function.

Currently over 60% of the world’s oil reserves are in Middle East. Four countries in the region, Saudi Arabia, Iran, Iraq and Kuwait, have over half of the world’s proven oil reserves.

If we keep the world’s oil consumption at its current level then the Middle East can theoretically supply the world with oil, at its current production rate, for another 80 years.

But the fact is that in 15 years the North American and Asia Pacific oil reserves will be depleted. This will represent a marked reduction in oil supplies world wide. In other words within 15 years if we do not increase oil production drastically in the Middle East and elsewhere, world will face tremendous oil shortages. Increasing oil production is not that easy either. Each Oil field has an optimum production rate. If one tries to go beyond that rate and tries to sustain high production rate, one damages the oil field and thereby substantially reducing the amount of recoverable oil. This problem is well documented by the oil industry.

But what about the new oil discoveries? Well there have been very little new discoveries; the future doesn’t seem that bright either. According to Energy Information Administration’s (EIA) analysis of the long term world oil supply we can expect to discover only 10% more oil in the future. Even this 10% is disputed. The Association for the Study of Peak Oil and Gas (ASPO) which closely follows the development in the oil industry, Foundation of Economic Sustainability (FEASTA), and others see an alarming trend in the future oil discovery and production.

If one looks at the amount of oil discovered in the years from 1930 to the present one sees a clear downward trend in new discoveries; this in spite of using more money and better technologies.

In March 2005, HIS energy (an international oil consultancy firm) did a comprehensive analysis of the world oil supply and demand and reached the following conclusion: that even if one includes Natural Gas production and all other liquid fuels in our total available supplies, there will be a shortage anytime from 2011 to 2020.

Israel

There is no doubt that Israel has a powerful lobby in the United States. There are currently over 50 Jewish organisations that directly or indirectly lobby for Israel. The Israeli influence is well known, but few are willing to openly talk about it, especially in the United States and Europe. The Israeli dimension is particularly difficult to mention, for if one dares to state the obvious, one is branded as anti-Semite or a terrorist sympathiser. The Jewish lobby also can make life very unpleasant for those who dare to mention the extent of its influence in U.S. and other countries. There are still a few brave soles such as John Mearsheimer (Professor of Political Science and the co-director of the Program on International Security Policy at the University of Chicago) and Stephen Walt (Belfer Professor of International Relations and Academic Dean of Harvard University) in the U.S. that are willing to speak-out. In March 2006, they wrote an article titled “the Israel Lobby” in which they question the United States policies in the Middle East. Here is a section of their article:

“Israel receives about $3 billion in direct assistance each year, roughly one-fifth of the foreign aid budget, and worth about $500 a year for every Israeli. This largesse is especially striking since Israel is now a wealthy industrial state with a per capita income roughly equal to that of South Korea or Spain.

Other recipients get their money in quarterly instalments, but Israel receives its entire appropriation at the beginning of each fiscal year and can thus earn interest on it. Most recipients of aid given for military purposes are required to spend all of it in the US, but Israel is allowed to use roughly 25 per cent of its allocation to subsidise its own defence industry. It is the only recipient that does not have to account for how the aid is spent, which makes it virtually impossible to prevent the money from being used for purposes the US opposes, such as building settlements on the West Bank. Moreover, the US has provided Israel with nearly $3 billion to develop weapons systems, and given it access to such top-drawer weaponry as Blackhawk helicopters and F-16 jets. Finally, the US gives Israel access to intelligence it denies to its Nato allies and has turned a blind eye to Israel’s acquisition of nuclear weapons.”

The Israel Connection

John Mearsheimer and Stephen Walt are not anti-Semites nor are they uninformed individuals. What they are saying is that United States’ Middle Eastern policy is in the interest of Israel and counterproductive for the United States.

We now know that as soon as the Bush administration came to power, it started looking for an excuse to invade Iraq. It used every possible propaganda tool under the sun to get the UN to sanction the invasion of Iraq, and when it didn’t succeed, it went ahead and invaded Iraq anyway. The people in U.S. pushing for an invasion, the so called Neo-Cons were at the forefront of disseminating misinformation in anyway they could. But to understand part of their agenda we have to go back to 1996.

In 1996 the newly elected prime minister of Israel Benjamin Netanyahu commissioned a study group called ”Study Group on a New Israeli Strategy Toward 2000" to craft a strategy for Israel in the coming decades. The Institute for Advanced Strategic and Political Studies’ which included Richard Perle, James Colbert, Charles Fairbanks, Douglas Feith, Robert Loewenberg, David Wurmser, and Meyrav Wurmser, created the Israel’s strategy paper titled: “A Clean Break: A New Strategy for Securing the Realm”.

The paper contains six pages of recommendations for Benjamin Netanyahu and some of the more relevant suggestions are presented bellow:

We have for four years pursued peace based on a New Middle East. We in Israel cannot play innocents abroad in a world that is not innocent. Peace depends on the character and behaviour of our foes. We live in a dangerous neighbourhood, with fragile states and bitter rivalries. Displaying moral ambivalence between the effort to build a Jewish state and the desire to annihilate it by trading "land for peace" will not secure "peace now." Our claim to the land - to which we have clung for hope for 2000 years--is legitimate and noble. It is not within our own power, no matter how much we concede, to make peace unilaterally. Only the unconditional acceptance by Arabs of our rights, especially in their territorial dimension, "peace for peace," is a solid basis for the future.

Syria challenges Israel on Lebanese soil. An effective approach, and one with which American can sympathize, would be if Israel seized the strategic initiative along its northern borders by engaging Hezbollah, Syria, and Iran, as the principal agents of aggression in Lebanon, including by:

- striking Syria’s drug-money and counterfeiting infrastructure in Lebanon, all of which focuses on Razi Qanan.

- paralleling Syria’s behaviour by establishing the precedent that Syrian territory is not immune to attacks emanating from Lebanon by Israeli proxy forces.

- striking Syrian military targets in Lebanon, and should that prove insufficient, striking at select targets in Syria proper.

Work closely with Turkey and Jordan to contain, destabilize, and roll-back some of its most dangerous threats. This implies clean break from the slogan, "comprehensive peace" to a traditional concept of strategy based on balance of power.

Change the nature of its relations with the Palestinians, including upholding the right of hot pursuit for self defence into all Palestinian areas and nurturing alternatives to Arafat’s exclusive grip on Palestinian society.

Given the nature of the regime in Damascus, it is both natural and moral that Israel abandon the slogan "comprehensive peace" and move to contain Syria, drawing attention to its weapons of mass destruction program, and rejecting "land for peace" deals on the Golan Heights.

Israel can shape its strategic environment, in cooperation with Turkey and Jordan, by weakening, containing, and even rolling back Syria. This effort can focus on removing Saddam Hussein from power in Iraq — an important Israeli strategic objective in its own right — as a means of foiling Syria’s regional ambitions. Jordan has challenged Syria's regional ambitions recently by suggesting the restoration of the Hashemites in Iraq. This has triggered a Jordanian-Syrian rivalry to which Asad has responded by stepping up efforts to destabilize the Hashemite Kingdom, including using infiltrations. Syria recently signalled that it and Iran might prefer a weak, but barely surviving Saddam, if only to undermine and humiliate Jordan in its efforts to remove Saddam.

It is interesting to note that many of the co-authors of this strategy paper are Jewish Americans and not Israelis. Below you will find a very short description of a few co-authors.

Richard Perle has served in important government posts under various administrations. He was Secretary of Defence under Reagan administration and Chairman of the Defence policy Advisory Committee (2001-2003) under Bush Administration. He is also the signatory of Project for the New American Century, a think-tank institute and one of the main organisations pushing for invasion of Iran. Perle is currently a resident fellow at the conservative think-tank American Enterprise Institute for Public Policy Research. He sits also on the board of advisors of Jewish Institute for National Security Affairs (JINSA).

Douglas Faith served at Defense Department as Undersecretary of Defense for Policy, under Donald Rumsfeld and Paul Wolfowitz. Feith had previously served in the Reagan administration, starting off as Middle East specialist at the National Security Council (1981-82) and then transferring to the Defense Department where he spent two years as staff lawyer for Assistant Defense Secretary Richard Perle. He is the director of Foundation for Jewish Studies, and former advisor to Jewish Institute for National Security Affairs (JINSA).

David Wurmser, Dick Cheney's Middle East adviser, was the Special Adviser to Under Secretary of State for Arms Control and International Security (2001-2003). He is also member of Board of Directors of U.S. Committee for a Free Lebanon.

One can produce a very long list of influential people in United States (e.g., Paul Wolfowitz -current World Bank President and Undersecretary of Defence for Policy from1989-93) that work very hard to safeguard Israel’s interests.

To be continued

Dr. Abbas Bakhtiar

Abbas Bakhtiar lives in Norway and is currently writing a book about the reasons behind the United  States involvement in Iraq and Iran. He's a former associate professor of Nordland University, Norway. He can be contacted at: bakhtiarspace-articles@yahoo.no

Stagflationary Recession underway in US

The 2005 to 2007 inflationary recession has moved well beyond stagflation. Circumstances deteriorated markedly in the last month, and market perceptions of same have begun to surface, as exhibited by strong gold and a weak dollar. Moreover, the trouble is not confined to a weak economy and higher inflation. It also includes a foundering administration and increasing odds of a shift of power coming out of November's election.

"Signs that the economy is not doing too well abound. Housing starts appear ready to signal recession, and the housing sector has been one of very few bright spots in economic activity over the last six years or so. Aside from politically-gimmicked GDP reporting, most numbers, net of inflation, have been soft to down over the last month, including retail sales, purchasing managers new orders, help wanted advertising, narrow money growth, real earnings, consumer sentiment and even the employment report. Exceptions have included strong industrial production, volatile new orders for durable goods and an improved but still staggering trade deficit.

"Although purposely suppressed in the 'official' data (PPI and CPI), there is an inflation problem. It is driven by oil, and increasingly, it also is being driven by dollar woes. These are factors separate from strong economic activity that commonly is viewed as the source of inflation.

"In like manner, Fed tightening -- designed in theory to slow the economy in order to slow inflation -- will do little to cool the current problem, shy of Volckerish rate hikes aimed at triggering such a severe downturn that prices are pulled down along with business activity into a depression. Quite to the contrary, current Fed activity has been the reverse of the jawboned inflation fighting, aimed at stimulating liquidity, not killing it. While short-term interest rates have been increased, broad money growth also has been soaring, at least prior to its reporting cut-off. Excessive money growth tends to be an inflation stimulant, not a retardant.

"In general, the broad economic outlook has not changed. The 2005 to 2007 inflationary recession continues to deepen. Recession, inflation and risks of heavy dollar selling are upon us, gaining greater market credence, and they continue to offer a nightmarish environment for somewhat less Pollyannaish financial markets than were in place last month.

"The Shadow Government Statistics' Early Warning System (EWS) was activated in May 2005 and signaled the onset of a formal recession in July 2005. The EWS looks at historical growth patterns of key leading economic indicators in advance of major economic booms and busts and sets growth trigger points that generate warnings of major upturns or downturns when predetermined growth limits are breached. Since the beginning of 2005 a number of key indicators have been nearing or at their fail-safe points, with four indicators moving beyond those levels, signaling a recession. Once beyond their fail-safe points, these indicators have never sent out false alarms, either for an economic boom or bust. Housing starts appears ready to generate such a signal in the next month or so.

"With a resumed economic boom massaged into first-quarter GDP reporting, negative GDP growth is not likely to surface in regular government reporting until after the November 2006 election, given the rampant political manipulation of most key numbers. The National Bureau of Economic Research (NBER) should time the downturn to mid-2005 and announce same also sometime after the election, so as not to be deemed politically motivated in its timing.

"Whether or not there is a recession will be a hot topic in the popular financial media, with politics helping to fuel the debate as the election nears. Those Wall Street economists who act as shills for the market will keep up their 'strong growth is just around the corner' hype regardless of any and all evidence to the contrary."

May 20, 2006

Unusual wave of derivatives activity...

May 19 – Financial Times (Gillian Tett ):  “The recent sharp falls in stock markets appear to have been exacerbated by an unusual wave of derivatives activity on the part of hedge funds and big banks, traders yesterday indicated. In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.  This forced selling has hurt equity futures index prices on markets such as the London International Futures Exchange - and depressed the value of cash equities as well, some observers suggest.  ‘This is an incredibly sensitive topic but it looks as if some big investors are being forced into big moves because they need to hedge these [derivatives] positions,’ one senior trader said yesterday.  It is impossible to track this type of derivatives trading with accuracy, since the investors and banks engaged in these markets are extremely anxious to keep their positions private.”

May 18, 2006

Longer Bull Run = Bigger bubble: Marc Faber


Moneycontrol.com | May 10, 2006



Born in Zurich, Switzerland Mark Faber got his PhD in Economics by age 25. He has worked in all the major money centres of the world from New York to Hong Kong. CNBC-TV18 caught up with investing guru Marc Faber. Excerpts from an interview:

When you were growing up, you were a surgeon's son -- what propelled you to study economics?

Actually at that time I was skiing for the Swiss national team and I did not really know what to study, but I knew that Economics was a relatively easy thing to do. It took only four years.

What did they teach you - what was the world like in the 1960's - and how has your worldview changed through the lenses as an economist?

I think in the 1960s the world had far fewer opportunities; we still had the cold war, the Vietnam War was on and as an investor one couldn't invest in countries like China or India or Taiwan or Indonesia. So the world was much more limited in terms of investment opportunities and even the total credit take -- 3:32 was much lower as a per cent of the economy than it is today.

In other words, that time people had relatively high incomes but the asset values were relatively low. Today in real terms, in the western world, people have relatively low incomes and asset values are high measured by the Dow Jones or by housing prices.

How was the first impact of Asia on you? Being a disciplined Swiss -- was it chaotic, disorganised?

No, not really. I arrived in Hong Kong in the 1970 and Hong Kong Chinese were very hardworking but of course what strikes me today is, how poor Asia was in 1973; if one went to Taiwan, Korea or Singapore, these were very poor societies and if one looks back at the last 30 years -- the progress that has been achieved is just mind boggling.

All I can say is that history is accelerating in terms of speed of change. If one looks at how Bangalore has developed in the last 10 years or how Shanghai has developed in 10-20 years time, there will be changes in the world and in Asia that nobody can really comprehend today.

At that time steel and shipyards were the talk of Asia?

Yes, shipping was a big thing in the 70s. Everybody was building steel plants and cement but in the 1970s, very few people were interested in investing in Asia. Some American institutions had few investments in Japanese stocks (like the Templetons of the world) but aside form British institutions that bought some shares in Malaysia, Hong Kong and Singapore, there were practically no funds of flows out of America and Europe into Asia.

All the flow that time was from Asia into US stocks and also into gold, silver and other precious metals. Then in the late '80s the flow began into Asia from the western world.

There are great myths built about the market and you spent the better part of your life adding to the truths and destroying the myths - one of the great myths is that stock market always goes up in the long run?

That is very difficult to tell. One could argue that in the long run most things will appreciate in value, but the problem is that most companies live only 30 years and then they die. In other words, they go bankrupt.

So when people talk about stocks going up in the long run, one would have to constantly re-balance one's portfolio. One could also argue that stocks go up sometimes but they fall as a result of inflation adjusted or in other words against another currency or gold.

In the long run, it is also said that it is never different -- there is a myth that every bull market will say it is different this time -- is it right?

I think in every asset mania what then happens is that if asset price or a stock or real estate have gone up for a long time, one will find university professors who write books and say why real estate goes up or why stocks always appreciate and so on. The fact is simply that, markets move up and down and that will never change.

The myth that a bull market contains the seed of destruction to the next bear market.

I suppose the longer a bull market lasts, the more likely it is that it will end in a colossal bubble because if you consider that there are in this room several asset classes: real estate, stocks, bonds, commodities, etc.

And say stocks always go up more than commodities, then obviously all the money will move into stocks because they will outperform other assets and so once all the money moves into stocks, then obviously you will end with the whole room only owning stocks and thus the bubble.

And frightfully expensive P/E ratios?

Yes exactly, but the beauty of the bubble is because it attracts so much money, it will leave other asset prices depressed compared to the bubble sector. So if one looks at the 2000 bubble, we had the bubble in the TMT sector but we did not have a bubble in the steel stocks or commodity related shares such as oil companies and that is where the value was at that time.

So the great truth is that every crisis creates an opportunity?

Yes, that is for sure, but not necessarily where the crisis occurs. Every bubble also creates an opportunity because rise in one sector creates an undervaluation somewhere else. Since the year 2002 and since Mr Alan Greenspan embarked on this highly expansionary monetary policy; all asset prices have gone up, bond prices have rallied, commodity prices are up, stock prices are up and real estate is up and this is across the world.

Today it is difficult to find something that is distressed; I think there is only relative value at the present time.

You say in your books -- "don't listen to analysts; listen to markets" -- could you explain that?

I think analysts are frequently not very objective because they work for large investment banks and have a vested interest. It is very seldom in life to find someone who is in real estate who is negative about real estate or an art dealer who will tell you art prices will go down or a stock broker who will tell you stocks will go down.

I am sceptical about analysts that specialise in one sector because they have vested interest that that sector remains popular and actually attracts a lot of money. It is the same as a fund manager -- he cannot turn and tell his investor I don't think you should invest in India if he is an Indian fund because if his investors leave his fund, then he has no business left.

So these types of people with self-interest have a tendency, whether they are at heart optimistic or not, but at least to tell the public that they are optimistic.

You wrote a paper on life cycle of emerging markets. How relevant is that today and over the years what has been your experience of how the emerging markets behave?

I think all markets go through stages whether they are in a phase Zero which would be defined as a phase, where there is really no interest whatsoever in that asset class. It could be Latin American shares in the late 1980s after Latin America had gone through very high inflation rates, or it could have been Japanese shares, recently in 2003 after 14 years of bear market, there was very little interest in Japanese shares.

In India, we had several cycles and until three years ago, foreign investors have shown very little interest in Indian shares. Then there is usually a catalyst, which leads to some improvement in the economic conditions and financial conditions of that country, and then you have a bull market, which usually ends in a bubble.

Nobody knows whether in India, the bull market is ending now with this new high, or whether we will go to 15,000.

How would you judge the top?

I would say that frequently it is easier to identify a major low. When lows occur, you have very often have a lengthy base-building period during which a commodity, or a stock trades sideways for many years, and then there is a breakout on the upside.

With the market tops, a bubble is a bubble and you hardly know at what point it will break. If you take Nasdaq, it could have been broken at 4000 a year earlier, or at 5000 in March 2000, or at 7000, who knows, it was exaggerated any way. To identify tops is easier once the top has already occurred, than ahead of time.

A lot of people say that you get the trend right, but the timing wrong. Is it important to get both of them right?

I don't think I always have been pessimistic. I have been involved in fund management as a chairman of a variety of funds. I have written a lot about emerging markets and promoted emerging markets over the last 25 years.

Concerning the timing, I am the first one to admit that to press a button and say this is the low and press it again and say this is the peak, is very difficult. I am not sure if anyone has successfully managed to do that. I always look at what is the risk and what is the reward of an investment.

If you can find an asset class or stock market that is inexpensive I am prepared to wait until it moves. People criticized me in 1999, when I said buy gold now because it has gone down for 20 years, it may be an opportunity to buy it and it started to move in 2001. For two years you are sitting without any reward but then it went up significantly since then.

How important is it to understand the role of the Federal Reserve to understand the world economy?

I think it is very important to understand the fact that we have a central banking system where the central banks can indicate, theoretically drop dollar bills from Helicopters. You won't be able to do that because all American helicopters are in Iraq. But they can print money, that is a fact and they can flood the system with liquidity.

Then you have to find a measurement of inflation. We measure inflation by rise in money supply. It would be wrong to think that the inflation is just consumer price increases. Inflation is a loss of purchasing power of your currency, dollar or Rupee.

It can manifest itself by rise in consumer price but it can also manifest itself by a loss of purchasing power of money against real estate, or against stocks and real estate.

Americans have fewer passports than their mortgages, so clearly they don't care about dollar depreciating?

The difference between America and an emerging economy is that, the emerging economy usually borrows in a hard currency. They have difficulties in borrowing in local currencies. So they borrow in dollars or in yen.

So when the current account deficit balloons, it comes to a currency crisis and depreciation of currency and then an adjustment in the economy takes place with consumption slumping and then the current account balance will be retraced.

In the case of the US, they can print money as much as they like and keep current account deficit ballooning and also have a very negative net asset position and it doesn't hurt them because their borrowings are in dollars.

How long will the foreign governments, the Chinese, the Japanese continue to subsidies these huge deficits. What are the implications when they pull from the T-bill auctions?

It is conceivable that we have a dollar stand and dollar depreciates in value. Since the year 2000, the stock market has deprecated against the price of gold and dollar has depreciated against the price of gold.

The gold price has gone up in dollar terms and that could continue for quite some time. I think eventually the world will be very apprehensive to hold dollars and will rush into assets.

What is the public enemy No 1 in your book, would it be inflation, or deflation?

In my book public enemy No 1 are the central banks. I think the world will be much better off under a gold standard. Other than that, I think the asset inflation is much more dangerous than consumer price inflation because asset inflation is driven by a huge credit bubble. Then asset prices become very expensive and when asset prices go down it leads to recession.

So the Central Banks will support asset prices and see to it that they keep on going up. So they will inflate more and more and eventually you will come to an economic collapse.

Can the dollar fall alone, or would it be the dominos effect, which would take down other markets?

In my opinion, the dollar will depreciate mostly against the gold. In the long run, what you will see is the standard of living in America will decline very significantly compared to the standard of living in Asia.

And the stock market capitalization of US, which is now 52% of the world's stock market capitalization, which will decline to somewhere between 20% and 30% and the Asian stock market capitalization will rise to between 20% and 30%, possibly 50% of the world.

What are your thoughts on the kind of meltdown that has happened in the commodity space and what has brought it about?

Basically not much has changed but the markets became over-extended in the last ten days with some industrial commodities going up vertically. So the market was terribly overbought and now we have a setback but that is for the time being.

Most asset markets have kind of reached the peak and I would stay aside from the market because one never knows if this is just a correction in the last ten days or is it the beginning of something more serious.

I'm not sure but looking at the shape of the market we could have most markets including India headed for something like a 30% correction.

When would you like to take that call on commodity markets? When would you decide that it is not just a technical correction that we saw yesterday but also something more serious? What signals you would be looking for?

In principle, the commodity complex is still from a longer-term perspective, attractive because we had a bear market from 1980 to 2000 and then the bull market started in 2001 and now we are in 2006.

So the bull market is five years old and the upward or the downward phase in commodity prices lasted for about 22 to 30 years. In other words, from peak to peak or soft to soft, the commodity cycle lasts for 45 to 60 years. So I think we still have some room to run.

Having said that, if one looks at the last bull market in commodities from 1970-1980; then in 1973, sugar, wheat and corn peaked and thereafter they never hit a new high.

So one can have in commodity markets, like in stock markets, different groups peaking out at different times. And it would not surprise me if some industrial commodities have not made a major high and may not make a new high in the near future or ever again in this cycle.

Across assets classes though it's been a secular run whether it is equity, commodities or even real estate. Do you think it is going to be a case of who blinks first or will weakness in one asset class lead to weakness across the others?

That is a good point because in every asset class, we have genuine buyers. If someone says I want to own India and I am prepared to ride out the fluctuations in the Indian market if it goes down 30%, then I would be prepared to buy more because I believe in the fundamental story of India.

But at the same time we have hedge funds, a trillion dollar in the world that are leveraged. So if we are conservative, we are talking about a leverage of 2:1 or 3:1, so it is $2:3 trillion that's splashing around the world.

In addition to that, we have hedge funds similarly hazier because whether it is a Goldman Sachs or a Morgan Stanley, they are essentially paid on performance of traders.

So they behave like hedge funds; they go long in markets that have strong upward momentum and then they go short when the markets turn down. We can have big fluctuations on a given day and what we had in the last two years is unusually low volatility, which usually gives way to much higher volatility.

You said you see a 30% correction in markets including India. Is that across classes or is it only the equity markets that you see this correction in?

This correction is expected mostly in equities and commodities and I have to say 30% correction is nothing in a lifetime. If someone cannot take a 30% correction, he should not touch anything at all, 30% is a norm of movement in individual stocks in market trend.

When you say 30%, what period of time do you see this correction coming in?

In the Middle-East the markets were very overbought and the Middle-East is an interesting example because oil prices are still near a record, so one cannot say that liquidity has contracted and yet most Middle-Eastern stock markets are down between 30-50% from their peak.

May 15, 2006

Iranian nukes not the real issue


By Gareth Porter

WASHINGTON - In pushing for a showdown over Iran's nuclear program in the United Nations Security Council, the administration of US President George W Bush has presented the issue as a matter of global security - an Iranian nuclear threat in defiance of the international community.

But the history of the conflict and the private strategic thinking of both sides reveal that the dispute is really about the Bush administration's drive for greater dominance in the Middle East and Iran's demand for recognition as a regional power.

It is now known that the Iranian leadership, which was convinced that Bush was planning to move against Iran after toppling Saddam Hussein in Iraq, proposed in April 2003 to negotiate with the United States on the very issues that the US administration had claimed were the basis for its hostile posture toward Tehran: its nuclear program, its support for Hezbollah and other anti-Israeli armed groups, and its hostility to Israel's existence.

Tehran offered concrete, substantive concessions on those issues. But on the advice of Vice President Dick Cheney and Secretary of Defense Donald Rumsfeld, Bush refused to respond to the proposal for negotiation. Nuclear weapons were not, therefore, the primary US concern. In the hierarchy of the US administration's interests, the denial of legitimacy to the Islamic Republic trumped a deal that could have provided assurances against an Iranian nuclear weapon.

For insight into the real aims of the Bush administration in pushing the issue of Iranian access to nuclear technology to a crisis point, one can turn to Tom Donnelly of the American Enterprise Institute, a neo-conservative think-tank. Donnelly was the deputy executive director of the Project for the New American Century from 1999 to 2002, and was the main author of "Rebuilding America's Defenses".

That paper was written for Cheney and Rumsfeld during the transition following Bush's election and had the participation of four prominent figures who later took positions in the administration: Stephen Cambone, Lewis Libby, Paul Wolfowitz and John Bolton.

Donnelly's analysis of the issue of Iran and nuclear weapons, published last October in the book Getting Ready for a Nuclear-Ready Iran, makes it clear that the real objection to Iran's becoming a nuclear power is that it would impede the larger US ambitions in the Middle East - what Donnelly calls the Bush administration's "project of transforming the Middle East".

Contrary to the official line depicting Iran as a radical state threatening to plunge the region into war, Donnelly refers to Iran as "more the status quo power" in the region in relation to the United States. Iran, he explains, "stands directly athwart this project of regional transformation". Up to now, he observes, the Iranian regime has been "incapable of stemming the seeping US presence in the Persian Gulf and in the broader region". And the invasion of Iraq "completed the near-encirclement of Iran by US military forces".

Donnelly writes that a "nuclear Iran" is a problem not so much because Tehran would employ those weapons or pass them on to terrorist groups, but mainly because of "the constraining effect it threatens to impose upon US strategy for the greater Middle East".

The "greatest danger", according to Donnelly, is that the "realists" would "pursue a 'balance of power' approach with a nuclear Iran, undercutting the Bush 'liberation strategy'". Although Donnelly doesn't say so explicitly, it would undercut that strategy primarily by ruling out a US attack on Iran as part of a "regime change" strategy.

Instead, in Donnelly's scenario, a nuclear capability would incline those outside the neo-conservative priesthood to negotiate a "detente" with Iran, which would bring the plan for the extension of US political-military dominance in the Middle East to a halt.

What is really at stake in the confrontation with Iran from the Bush administration's perspective, according to this authority on neo-conservative strategy, is the opportunity to reorder the power hierarchy in the Middle East even further in favor of the United States by overthrowing the Islamic Republic of Iran.

Iran's position
Meanwhile, Iran has not acknowledged its real interest in pushing its position on nuclear-fuel enrichment to the point of confrontation with the United States, either. Instead, it has focused in public pronouncements on the enormously popular position that Iran will not give up its right to have civilian nuclear power.

According to observers familiar with their thinking, senior Iranian national-security officials have long been saying privately that Iran should try to reach an agreement with the United States that would normalize relations and acknowledge officially Iran's legitimate role in the security of the Persian Gulf.

Trita Parsi, a specialist on Iran's foreign policy at the Johns Hopkins School of Advanced International Studies, who conducted extensive interviews with senior Iranian national-security officials in 2004, said Iran "is now primarily trying to become rehabilitated in the political order of the region".

Najmeh Bozorgmehr, an Iranian journalist now at the Brookings Institution as a visiting scholar, agrees. Based on several years of covering Iran's national-security policy, she said, "Iran wants to bargain with the United States on Iran's regional role," as well as on removal of sanctions and assurances against US attack. Tehran has been looking for any source of leverage with which to bargain with the United States on those issues, she said, and "enrichment has become a big bargaining chip".

Bozorgmehr said the Iranians have become convinced that they have to do something to show the United States "we can give you a hard time" to induce the Bush administration to negotiate. And Parsi said the prevailing view among Iranian officials after the 2003 US rejection of diplomacy was that they had to have the capability to inflict some pain on the United States to get its attention.

According to Parsi, that rejection confirmed Iranian suspicions that the US problem is not with Iran's policies but with its power. That Iranian conclusion precisely parallels Donnelly's insider analysis of the Bush administration's aims.

But what the Iranians really want, according to these observers of Iranian national-security thinking, is not nuclear weapons but the recognition of Iran's status in the power hierarchy of the Persian Gulf region. The Iranian demand for regional status can only be achieved through a broad diplomatic agreement with the United States.

The Bush administration's insistence on extending its dominance in the Middle East even further can only be achieved, however, by the threat of force and, if that fails, war against Iran.
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Gareth Porter is a historian and national-security policy analyst. His latest book, Perils of Dominance: Imbalance of Power and the Road to War in Vietnam, was published last June.

Trouble, Trouble, Debt, and Bubble

William K. Tabb 

The questions regarding U.S. macroeconomic policy these days come down to whether the country can keep borrowing. Can consumers keep spending by increasing their debt level? Can the federal government keep running a large budget deficit without serious problems developing? Can the U.S. current account deficit keep growing? Will foreigners keep buying government bonds to cover this growing debt? If the answer is no to such questions, we can expect serious trouble and not just for the United States but for the rest of the world, which has grown used to the United States as the consumer of last resort. The United States buys 50 percent more than it sells overseas, enough to sink any other economy. In another economy, such a deficit would lead to a severe devaluation of the currency, sharply inflating the price of imports and forcing the monetary authorities to push interest rates up considerably.

The United States started to run annual trade deficits in 1976 and has done so every year since. In 1985, this country became a net debtor nation, owing more to the rest of the world than is owed to it. By 1987, it became the world’s largest net debtor nation. The debt has grown and grown since, to the point where economists Nouriel Roubini and Brad Setser suggest that “The current account deficit will continue to grow on the back of higher and higher payments of U.S. foreign debt even if the trade deficit stabilizes. That is why sustained trade deficits will set off the kind of explosive debt dynamics that will lead to financial crises.”

However it also seems to be in everybody’s interest to keep the game going. Asian countries, especially China, want to continue exporting to the United States and keep their currencies from strengthening, preferring to export to Americans and then to loan the money back to them so that they can buy more. Much of the foreign savings go into U.S. government bonds, keeping U.S. interest rates down (currently half of U.S. Treasury bonds are owned by foreigners). The cost of this debt seems manageable, in part because there is slower growth in most of the world’s countries, and so there is plenty of finance capital looking for a safe place to get positive returns. And the low interest rates allow American households to borrow more cheaply, using home equity loans on the seemingly ever-rising value of their homes.

The problem is, as Herbert Stein, Nixon’s economic adviser, famously said, “Things that can’t go on forever, don’t.” Surely a reckoning is coming. U.S. household debt has reached $11.5 billion, an amount equal to an unprecedented 127 percent of annual disposable income. The most recent figures by the Federal Reserve show the cost of debt servicing nearing a record high of 14 percent of disposable income—and interest rates are going up. How long will Asians and others hold U.S. debt when the dollar finally starts to fall and they take losses on their holdings?

Ah, but we have the equally famous retort from Mr. Nixon’s Treasury Secretary, John Connally, “It’s our currency, but it’s your problem.” America’s creditors can’t let the dollar fall too far without serious costs to themselves (their dollar holdings will buy less the lower the exchange value of the dollar). They will be drawn to keep lending. And sure enough, recently the dollar has defied expectations and strengthened, not weakened.

The bubbles and all the debt are serious economic problems and will have political consequences. However, people have been waiting for the dollar to collapse for a while; if it does, will all the unsustainable debt really be unsustainable? Will the dollar fall this year or next? Maybe. But it is possible to argue, and many do, that in an era of financial globalization, in which productivity growth in the United States continues to outpace that in other advanced economies, the United States will continue to be the destination for investment capital. As foreigners diversify out of their own economies, the United States continues to look good. Why shouldn’t foreign investment exceed 100 percent of the U.S. GDP? Why would this be a problem? Why would anyone want their money back if returns are competitive? Why then should the dollar fall? In any case, the big buyers of U.S. treasuries are foreign governments. They are not motivated simply by financial returns. Political pressure can be exerted by Washington should their view of their own self interest change. But why should it change? As for the federal deficit, why shouldn’t the Republicans keep enlarging the national debt? This “starves the beast.” It prevents public spending they don’t want on other grounds.

Is there support for such a Panglossian perspective? The “know-how” that U.S. transnationals export when they invest abroad is a major and uncounted (in the U.S. international financial accounts) export which seems to be responsible for the higher return on foreign investment enjoyed by U.S. investors compared to the return on foreign investment made in the United States. Michael Mandel, Business Week’s economics editor, argues that the United States is really doing far better than the trade and capital flow accounts indicate because of what is going on in the knowledge economy. Intangibles such as research and development (R&D) and the export of knowledge are poorly tracked by the federal government’s outmoded statistical gatherers, who still use industrial era categories. According to Business Week calculations, the ten biggest U.S. companies that report their R&D spending—firms such as ExxonMobil, General Electric, Microsoft, and Intel—have boosted R&D spending by 42 percent from 2000 to 2005, while over these years their capital spending only increased by 2 percent. What looks like less investment is really less investment in plant and equipment but not in intangible investments calculated to improve profits. America’s “knowledge-adjusted” GDP is moving right along, and that is why profits stay high. The decline in nominal investment also reflects the fact that capital goods are becoming less expensive because of productivity growth in the capital goods sector, capital deepening, and the enhanced efficiency due to improved information technology.

Even conceding that investment in the United States may be somewhat higher than official data show, it is not doing much to help the United States become more competitive. The nation’s problems are more severe, upsetting not only to its working people but to some unexpected establishment ideologues who have long celebrated globalization. Thomas Friedman, the New York Times columnist, argues that Bush is not good for America. He writes that the country “faces a huge set of challenges if it is going to retain its competitive edge. As a nation, we have a mounting educational deficit, energy deficit, budget deficit, health care deficit and ambition deficit. The administration is in denial on this, and Congress is off on Mars.” Friedman asks where are the American corporate leaders who would benefit from a serious effort to address these deficits. He can point to G.M.’s interest in health care since its benefit costs have made it noncompetitive and asks if there is any corporation in America that should not be protesting Bush’s cuts in federally sponsored basic research, a key source of innovation. But he also answers with a different voice noting that many key U.S.-based industries get most of their profits and increasingly their best talent from abroad. They are less motivated than in the past to deal with a Congress “catering to people who think ‘intelligent design’ is something done by God and not by Intel.”

There is, however, another way of looking at this. Consider that part of the higher return enjoyed by American investors results from the power of the U.S. imperial state, power that insures against bad treatment. U.S. power sets the rules on debt repayment, intellectual property rights, investor security, market access, and so on, things that no other state can insure for its investors, at least not to the same degree. The difference in the rate of return exists because foreigners are interested in a safe return and the security of their principal, while Americans investing in risky assets have some assurance that the global state economic governance institutions such as the World Bank and the International Monetary Fund, or if needed the U.S. Marines or threats by the State Department, will enforce debt collection so that their debts will be collected. U.S.-based firms charge exorbitantly for intellectual property and collect intellectual property rents, enforced by the World Trade Organization and the U.S. government, but these go to the bottom line of the companies in question. This is surely good news for those who own those U.S. assets abroad.

Sadly, working-class Americans, who are experiencing stagnant or falling real wages, do not share this satisfaction. For them, wages, shrinking benefits, and deteriorating job quality matter more than the external balance position of the United States. In the United States in which they live, income inequality grows dramatically, health care costs rise beyond the means of families, and secure retirement is a vanishing prospect. These are the real deficits for most Americans, serious shortfalls from what they have been led to expect. They are now told that to be competitive, their country must sacrifice its working people’s legitimate hopes.

In the United States where the president talks of creating an ownership society in which workers would “own” their own health care and retirement through privatized individual accounts, defined-benefit pensions, which guarantee a fixed amount of money after retirement, are replaced by defined-contribution plans, in which benefits depend upon what a worker can put in and the uncertainty of the equity market. The basic idea of social insurance, where all contribute and receive based on need, is canceled as those who can afford more not only get more but receive favored tax treatment for each dollar they set aside for their own welfare.

As part of the program, there are reductions in income tax (paid disproportionately by the rich), in taxation of corporations, and in capital gains and inheritance taxation that overwhelmingly benefit the rich. Government deficits created by these regressive tax cuts are partially offset by increases in payroll taxes, and proposals pour forth in support of consumption and flat-tax ideas—all new tax burdens for workers, with capital exempt.

Instead of unemployment benefits, there are to be personal reemployment and training accounts of limited size. Instead of well-funded public education, there are unfunded mandated testing and school vouchers. Consumers hurt by defective products and such are limited in their right to sue, and people who are bankrupted by personal tragedy can no longer seek bankruptcy relief as they have in the past. Government regulations to protect consumers are seen as inefficient because they increase the costs of doing business and are repealed or go unenforced, or are enforced by former industry partisans. Devolution of responsibilities from federal to state government undermines promised benefit levels, since states cannot afford such burdens and federal help is reduced.

This is the Ownership Society as envisioned by George W. Bush and those around him. It is a package of policies attacking the idea of citizenship rights and follows Margaret Thatcher’s principle that there is no such thing as society, only individuals. It stands in contrast to the principle unifying working-class movements everywhere—and at all times—solidarity. The deficits the Bush administration have created are undermining American society as we have known it. They are, however, in the narrow interests of the capitalist class.

While experts debate how long things can go on without a serious crisis, there is a structural issue of great importance to consider, namely the lack of significant domestic investment by U.S.-based transnationals and the continued expansion of their investment elsewhere. While U.S.-based corporations are earning record profits, they are investing little in the United States. For 2005, the Standard and Poor’s 500 U.S. corporations set new records, spending half a trillion dollars both to buy back their own stock and to pay dividends. Even the fund managers who profit in the short run worry that companies are underinvesting in their businesses. While profits were in many cases setting records, firms were not increasing investment; instead they were retrenching. Their profits were in fact coming from cost-cutting. This is not to say consumption was not rising. It did increase. But the majority of the increased spending was funded through debt creation, most of this due to the wealth effect of the increased value of real estate. Between 2000 and 2005, U.S. house prices increased by more than 60 percent. The market value of real estate in 2006 is about 200 percent of personal disposable income, and mortgage related assets are equal to over 60 percent of bank lending compared to 25 percent in 1970. As one investment analyst has written, “George W. Bush was re-elected president during 2004 because he presided over more housing inflation than any other American president.” That, and by scaring voters. The single-minded war on terrorism obscures stagnant and falling living standards for most of the U.S. working class.

Investment in residential construction is not the sort of investment that provides a surplus to repay foreign debt. The sectors which are growing in the United States, like health care, produce for the most part nontraded goods and services. It is only the growth of financial services, some specialized high-tech exports, and foreign investment that are showing high returns, and the firms controlling these are moving more activity offshore, following manufacturing’s lead and leaving the domestic service economy to create jobs—many low paying, temporary, and without benefits.

U.S. foreign borrowing is not significantly being used for investment to increase the productive capacity necessary to pay back the debt but for consumption, tax cuts, and military spending. From a ruling-class perspective (or at least some fraction of it), it could be argued, military spending is investment in the capacity of the U.S. state to intimidate others into accepting U.S. rules and to obtain control over valuable resources such as oil. From such a perspective, this is money well spent. However, the cost of imperialist adventure is going up and is not matched by success, so the cost/benefit ratio as seen by most ordinary Americans is not looking very good. The Persian Gulf War under the first Bush cost about $61 billion. Eighty percent of the total was paid for by American allies—Saudi Arabia, Kuwait, the United Arab Emirates, Germany, Japan, and South Korea, leaving the dollar cost of that war at only $7 billion for the United States (Japan alone contributed $13 billion). The Iraq invasion and occupation is a very different story. The United States is paying in lives and treasure, and it will continue to pay. The inflationary impact of such spending is hidden by low interest costs and the willingness of lenders to finance American profligacy.

What about the countries that are lending the United States all this money? Much of the so-called savings glut is coming from Asia. It is not the result of increased saving by households or private corporations. Rather it is fed by public sector saving as governments have cut back and increased their surpluses. Since the 1997 Asian financial crisis, which the Asian governments understand to have been a liquidity crisis, they have taken precautionary steps to dramatically increase their reserves to prevent a replay. Between 1996 and 2003, developing countries as a whole moved from a collective deficit of $88 billion to a surplus of $205 billion, a net change of $293 billion, a vast increase in global savings. The Federal Reserve estimates that this surplus increased by $60 billion in 2004. Figures for 2005 will show further increase. It is also the case that since the crisis, investment rates have fallen in the region (except for China) by more than 10 percent from the mid-1990s peak, as excess capacity is still being worked off and adjusted to the China impact. Because all of this saving is not being absorbed in productive investment, interest rates have fallen. Low interest rates have fueled the real estate bubble in the United States and some other places and allowed the cashing-out of the home equity loans that have fueled U.S. consumer spending.

Government-generated liquidity is also the engine of the other great motor of the contemporary global economy, China. China’s incredible investment rate, about 45 percent of its GDP, is also being driven by liquidity and not necessarily by expected profitability, raising the potential that China is growing too fast for its own good. State-owned banks are lending money to state-owned companies. In the case of enterprises owned by provincial authorities, borrowing and investment often seem to be uncorrelated with profitability, but rather are politically driven. Saving rates in China remain high in part because of an aging population worried about life in a free-market economy in which the provision of pensions, housing, education, and health care are not provided as a right by the state. At the same time, the significance of the U.S. current account deficit with China is complicated by a number of factors. First, most of China’s exports are controlled by foreign companies. These companies receive the profit when, say, a Barbie doll made for thirty-five cents in China sells for twenty dollars in a rich country’s market. Second, many of the products exported from China are not made there but assembled there from high-value components produced elsewhere. China’s value added is a fraction of the value of exports.

In 2005, China was the dominant Asian exporter, while exports from Asia as a whole were 36 percent of all world exports. In 1990, when Japan was the dominant exporter and we worried about Korea, Taiwan, Singapore, and Hong Kong, total exports from Asia were 38 percent of world exports. Much of what comes from China used to come from someplace else in Asia. Today Sony, Toshiba, and Panasonic, among others, send their products to the United States from China. Korea’s Samsung has twenty-three factories in China employing 50,000 workers. Taiwan may still control the market for computer components, but they are assembled in China by low-wage workers. Locals get only a small part of the profits generated. So while it is true that the U.S. deficit with China rose by 25 percent (to over $200 billion in 2005, and this is the largest debt the United States has ever run with any country), it is also the case that China’s deficit with the rest of Asia was more than two-thirds the size of its surplus with the United States. All together, the U.S. deficit with Asia has changed very little in recent years. It is the total value of oil and other energy sources that has been rising dramatically, thanks to the demand of a United States which refuses to conserve energy, causing it to run an increasingly large deficit when oil prices rise.

Importantly, on a global scale, saving and investment rates have both gone down, trends mainly reflecting developments in the industrial countries where both saving and investment have been trending downward since the 1970s even as saving has been increasing in the oil-producing countries and in Asia. The industrial countries still account for 70 percent of world saving, but this is down from 85 percent in 1970. Together, global savings and investment are near historic lows, having fallen markedly since the late 1990s. The even more telling figure is for the rate of growth of the global economy, which has been falling since the 1960s, when it was 5.4 percent to 4.1 percent in the 1970s, to 3.0 percent in the 1980s, to 2.3 percent in the 1990s. While mainstream economists dismiss any idea of a race to the bottom, there is an unquestionable slowing of growth and an emergent underconsumptionist, or rather overaccumulationist, trend. While global growth has slowed, the reach of transnational capital has dramatically increased, and its power to seek out lower costs and play workers in one place against workers elsewhere has grown. What we are seeing is a process of redistributional growth, in which over the ups and downs of the business cycle, capital’s share of the social product is increasing and labor’s share is diminishing.

There is a clear thread that connects domestic developments in the U.S. income distribution, debt-funded growth, the increased dominance of the rentier capitalists who profit from these developments, and global ambitions and the projection of imperial dominance. A century ago John A. Hobson argued that as the power of rentiers grows and taxation becomes more dramatically regressive, a hegemonic power (then Great Britain) is tempted to engage in imperialism. Hobson urged higher taxation of incomes generated as a result of financial speculation and government favoritism to produce a more equal distribution of income and higher working-class and middle-income spending, which would encourage domestic investment and make imperialism less attractive. He wrote,
The issue in a word, is between external expansion of markets and of territory on the one hand, and internal social and industrial reforms upon the other; between a militant imperialism animated by the lust for quantitative growth as a means by which the governing and possessing classes may retain their monopoly of political power and industrial supremacy, and a peaceful democracy engaged upon the development of its national resources in order to secure for all members the conditions of improved comfort, security, and leisure essential for a worthy national life. (John A. Hobson, “Free Trade and Foreign Policy,” Contemporary Review 64 [1898]: 179, quoted in Leonard Seabrooke, “The Economic Taproot of US Imperialism: The Bush Rentier Shift,” International Politics 41, no. 3 (September 2004): 293–318.

Today the “rentier shift” produces the very conditions Hobson warned of in the context of Great Britain a century ago. The growth of the rentier economy and the drive for external expansion long evident in U.S. history (and surely under both Clinton and Bush, albeit with a different policy mix) has been fed by an investor politics that has favored the very rich disproportionately in both taxation and government spending priorities. The dramatic increases in the upward redistribution of income have contributed to driving the investor class to look for opportunities abroad as the slower growth, and indeed saturation, of domestic markets pushes them to do. And this is taking place even as their increased class dominance—with trade unions and working-class power weakening, and real wages stagnating—allows them to push for a greater degree of regressive taxation and less progressive redistributive state spending.

Along Hobsonian lines, Arjay Kapur, a Citigroup strategist, argues that the rich are responsible for the low saving rate in Anglo-Saxon economies, which he describes as “plutonomies”—economies driven primarily by the wealthy as compared to the more egalitarian Japanese and European economies. In the plutonomies, above all the United States, it makes little sense to speak of the average consumer, since the top one percent of all households has 20 percent of the income, about the same as the bottom 60 percent.

Spending in the United States is driven by the asset inflation of the equity and real estate holdings of the top 10 percent of the income distribution. The wealth effect of such holdings allows debt- financed spending and results in the negative saving rate. Kapur finds that throughout our history there has been a strong negative correlation between the share of U.S. income going to the top 1 percent and the overall saving rate—the higher the share, the lower the saving rate. Economies with low saving rates tend to show current account deficits and the need for foreign borrowing.

To this analysis one might add that the power of the United States to command foreign credit depends in some measure on the power of the U.S. state, the continued use of the dollar as the reserve currency, and other factors which ultimately rest on U.S. imperial power. This relation is two-way. Harvard’s Linda Bilmes and Columbia’s Joseph Stiglitz estimate that the eventual cost of the war in Iraq will be more than a trillion dollars and possibly closer to two trillion dollars. So far the Bush administration has borrowed the money and underestimated the cost, but its policies raise the specter of imperial overstretch and the need for further coercion to keep the American economy afloat.

Past empires have followed the path that the United States seems to be going down, a movement from manufacturing production as the core activity to financialization and rentier income, and then finally bankruptcy from a loss of competitiveness and the cost of maintaining empire. For the elite there seems no better alternative, even if this is finally a negative-sum result. Any more positive strategy from the perspective of a democratic majority would require policies that would weaken the power of the ruling elite. It appears to this elite that it is better to continue to get rich and maintain power through the period of national decline. To the extent that this class can obtain rents from the familiar sources of state handouts, corrupt dealings, and tax policies, it stands to gain.

In conclusion, the concern over debt levels and bubbles is certainly appropriate. What is essentially a regional and sectoral disproportionality crisis leading to imbalance in capital flows and the high debt position of the United States is deserving of the attention it is receiving from all points on the ideological compass. What must be central to such discussions, however, is the class dimension of the accompanying redistribution of wealth and power and the resultant impact on members of the world’s working classes. Disproportionalities are more than matters of technical economics. They are manifestations of class struggle. Understood in this way, analysis enables more clear-sighted mobilization addressed at real enemies and demands for real solutions. Imperialist adventurism today serves the U.S. ruling class. It comes at the expense of working people everywhere.

May 12, 2006

Gold Bugs

 

By Peter McKay

The Wall Street Journal

Thursday, May 11, 2006

Investing pros have begun pondering the possibility that gold will

hit a record over $800 a troy ounce soon. This means that the gold

bugs -- that patchwork of sometimes offbeat investors who love the

shiny stuff -- are happier, and louder, than ever.

Gold futures for May delivery have risen this week 3.2%, or $21.50,

to a 25-year high of $703.70 per troy ounce. In the past two years,

prices have soared 86%.

"We all said what was going to happen and why," says Bill Murphy, an

ex-professional football player and trader who heads up a group that

goes by the name Gold Anti-Trust Action Committee, or GATA.

There are lots of reasons behind the move: For one, the dollar has

weakened, and seems headed lower. When people lose confidence in

paper currency some turn to gold, which is still seen in some parts

of the world as an alternative store of value, despite many years in

disfavor. This reputation as a store of financial value means it is

also seen as a hedge against inflation, which shows signs of picking

up, and against political turmoil, like say, turmoil in Venezuela,

Iran and Iraq.

For some gold bugs, though, it's rarely that simple. Back in 1999,

when gold was at multiyear lows around $250, GATA argued the metal's

price was being artificially suppressed by a cartel of large private

banks selling borrowed gold, much of it on loan from powerful

central banks. The latest stage of the rally, Mr. Murphy says, is

because Russia has become a heavy buyer, helping to squeeze the

alleged cartel.

"They're a little conspiratorial, for me even," says money manager

Peter Schiff, an outspoken gold bug himself. "I don't know if there

was any real orchestrated event."

Whatever the case, the gold bugs aren't alone anymore. The

investment audience for the precious metal is broadening as hedge

funds and others seek alternatives to stocks and bonds. Because the

gold market is relatively small, in terms of physical metal

available and the number of investors who have traditionally

participated, even a small increase in mass appetite for the metal

can result in more price increases.

Pick your reason. Gold seems headed higher still.

May 11, 2006

Copper Commision Report bullish

Copper nominal price reached on Friday a new historical high of 354,256 ¢/lb., growing by 8% with
respect to last Friday. Stocks registered with metal exchanges closed at 159,630 MT, falling by
2.6% (-4.3 thousand MT), showing current market shortage.

Copper price increase was due to the influence of different factors such as the present stocks
decreasing trend, optimistic reports regarding copper market future issued by some important
market agents such as BHP Billiton, and the US dollar weakness encouraging investors’ entrance
to the market. All occurred during a week in which holidays in China and Japan have moderated
market activity.

News of this week related to supply show the appointment of an arbitrator in the negotiations
between workers and Lomas Bayas (property of Falconbridge), which if no agreement is reached, it
could mean that strike would come into effect next Monday. On the other hand, paralyzation at La
Caridad mine in Mexico –it started last 24 March– continues. Besides, comments of BHP-Billiton’s
marketing director regarding prices will remain high until stocks increase from their current low
levels, strongly impacted as the current market bullish view was reaffirmed by one of the world’s
main copper producers.

Regarding demand information, different economic indicators show good future outlooks. In the US,
the leader indicators of industrial activity, ISM, and the factory orders surpassed market
expectations. On the other hand, the European leading industrial indicator grew with respect to last
month. There exists an historical positive correlation between both indexes and copper demand,
thus allowing anticipating that it would continue as dynamic as scheduled.

Demand dynamism, within a low copper availability context, explains part of spot premiums growth
in Europe, currently averaging US$ 165 per MT, with respect to US$ 135 per MT in April. It must be
considered that premiums correspond to the paid value on copper price and reflect physical market
trends. Besides, concentrates market information is confirming the expected lower availability. The
Germany refinery Norddeutsche Affinerie informed that raw material shortage would last until next
year, thus allowing anticipating strong mid-year negotiations between mining companies and
smelters in defining supply treatment charges. These have already established a strong downtrend
placed in values near 100/10 (and even lower) from 140/14 previously registered in the spot market.

The American currency fell by 0.5% until Thursday with respect to the previous Friday, and
surpassing 1.27 US$/€, at similar values as those of May 2005. A weak dollar has a positive effect
on commodities, which is reflected in the LME metals price index, which as of yesterday grew by
6.9% with respect to the previous Friday, due to strong rises of zinc and copper. Precious metals
were also influenced by the US dollar weakness, closing gold today at 682 US$/ounce (London
Initial) and silver at 14.070 US$/ounce (London Spot), growing by 6.9% and 12.1%, respectively.

Copper price, whose bullish trend has not changed, will continue to be determined by the evolution of the
pending labor issues (Grupo México, Lomas Bayas), as well as by any other new information mainly related
to supply. Besides, the US dollar evolution could continue influencing on commodities’ price.

May 10, 2006

Text of Ahmadinejad's letter to Bush

Mr George Bush, President of the United States of America For sometime now I have been thinking, how one can justify the undeniable contradictions that exist in the international arena - which are being constantly debated, especially in political forums and amongst university students. Many questions remain unanswered. These have prompted me to discuss some of the contradictions and questions, in the hopes that it might bring about an opportunity to redress them. Can one be a follower of Jesus Christ (PBUH), the great Messenger of God, Feel obliged to respect human rights, Present liberalism as a civilisation model, Announce one's opposition to the proliferation of nuclear weapons and WMDs, Make "War and Terror" his slogan, And finally, Work towards the establishment of a unified international community - a community which Christ and the virtuous of the Earth will one day govern, But at the same time, Have countries attacked. The lives, reputations and possessions of people destroyed and on the slight chance of the presence of a few criminals in a village, city or convoy for example, the entire village, city or convoy set ablaze. Or because of the possibility of the existence of WMDs in one country, it is occupied, around one hundred thousand people killed, its water sources, agriculture and industry destroyed, close to 180,000 foreign troops put on the ground, sanctity of private homes of citizens broken, and the country pushed back perhaps fifty years. At what price? Hundreds of billions of dollars spent from the treasury of one country and certain other countries and tens of thousands of young men and women - as occupation troops - put in harms way, taken away from family and loved ones, their hands stained with the blood of others, subjected to so much psychological pressure that everyday some commit suicide and those returning home suffer depression, become sickly and grapple with all sorts of aliments; while some are killed and their bodies handed to their families. On the pretext of the existence of WMDs, this great tragedy came to engulf both the peoples of the occupied and the occupying country. Later it was revealed that no WMDs existed to begin with. Of course Saddam was a murderous dictator. But the war was not waged to topple him, the announced goal of the war was to find and destroy weapons of mass destruction. He was toppled along the way towards another goal; nevertheless the people of the region are happy about it. I point out that throughout the many years of the imposed war on Iran Saddam was supported by the West. Mr President, You might know that I am a teacher. My students ask me how can theses actions be reconciled with the values outlined at the beginning of this letter and duty to the tradition of Jesus Christ (PBUH), the Messenger of peace and forgiveness? There are prisoners in Guantanamo Bay that have not been tried, have no legal representation, their families cannot see them and are obviously kept in a strange land outside their own country. There is no international monitoring of their conditions and fate. No one knows whether they are prisoners, POWs, accused or criminals. European investigators have confirmed the existence of secret prisons in Europe too. I could not correlate the abduction of a person, and him or her being kept in secret prisons, with the provisions of any judicial system. For that matter, I fail to understand how such actions correspond to the values outlined in the beginning of this letter, i.e. the teachings of Jesus Christ (PBUH), human rights and liberal values. Young people, university students, and ordinary people have many questions about the phenomenon of Israel. I am sure you are familiar with some of them. Throughout history many countries have been occupied, but I think the establishment of a new country with a new people, is a new phenomenon that is exclusive to our times. Students are saying that sixty years ago such a country did not exist. They show old documents and globes and say try as we have, we have not been able to find a country named Israel. I tell them to study the history of WWI and II. One of my students told me that during WWII, which more than tens of millions of people perished in, news about the war, was quickly disseminated by the warring parties. Each touted their victories and the most recent battlefront defeat of the other party. After the war they claimed that six million Jews had been killed. Six million people that were surely related to at least two million families. Again let us assume that these events are true. Does that logically translate into the establishment of the state of Israel in the Middle East or support for such a state? How can this phenomenon be rationalized or explained? Mr President, I am sure you know how - and at what cost - Israel was established: * Many thousands were killed in the process. * Millions of indigenous people were made refugees. * Hundreds of thousands of hectares of farmland, olive plantations, towns and villages were destroyed. This tragedy is not exclusive to the time of establishment; unfortunately it has been ongoing for sixty years now. A regime has been established which does not show mercy even to kids, destroys houses while the occupants are still in them, announces beforehand its list and plans to assassinate Palestinian figures, and keeps thousands of Palestinians in prison. Such a phenomenon is unique - or at the very least extremely rare - in recent memory. Another big question asked by the people is "why is this regime being supported?" Is support for this regime in line with the teachings of Jesus Christ (PBUH) or Moses (PBUH) or liberal values? Or are we to understand that allowing the original inhabitants of these lands - inside and outside Palestine - whether they are Christian, Muslim or Jew, to determine their fate, runs contrary to principles of democracy, human rights and the teachings of prophets? If not, why is there so much opposition to a referendum? The newly elected Palestinian administration recently took office. All independent (observers) have confirmed that this government represents the electorate. Unbelievingly, they have put the elected government under pressure and have advised it to recognise the Israeli regime, abandon the struggle and follow the programs of the previous government. If the current Palestinian government had run on the above platform, would the Palestinian people have voted for it? Again, can such position taken in opposition to the Palestinian government be reconciled with the values outlined earlier? The people are also saying "why are all UNSC (UN Security Council) resolutions in condemnation of Israel vetoed?" Mr President, As you are well aware, I live amongst the people and am in constant contact with them - many people from around the Middle East manage to contact me as well. They do not have faith in these dubious policies either. There is evidence that the people of the region are becoming increasingly angry with such policies. It is not my intention to pose too many questions, but I need to refer to other points as well. Why is it that any technological and scientific achievement reached in the Middle East region is translated into and portrayed as a threat to the Zionist regime? Is not scientific R and D one of the basic rights of nations? You are familiar with history. Aside from the Middle Ages, in what other point in history has scientific and technical progress been a crime? Can the possibility of scientific achievements being utilized for military purposes be reason enough to oppose science and technology altogether? If such a supposition is true, then all scientific disciplines, including physics, chemistry, mathematics, medicine, engineering, etc. must be opposed. Lies were told in the Iraqi matter. What was the result? I have no doubt that telling lies is reprehensible in any culture, and you do not like to be lied to. Mr President, Don't Latin Americans have the right to ask why their elected governments are being opposed and coup leaders supported? Or, Why must they constantly be threatened and live in fear? The people of Africa are hardworking, creative and talented. They can play an important and valuable role in providing for the needs of humanity and contribute to its material and spiritual progress. Poverty and hardship in large parts of Africa are preventing this from happening. Don't they have the right to ask why their enormous wealth - including minerals - is being looted, despite the fact that they need it more than others? Again, do such actions correspond to the teachings of Christ and the tenets of human rights? The brave and faithful people of Iran too have many questions and grievances, including: the coup d'etat of 1953 and the subsequent toppling of the legal government of the day, opposition to the Islamic revolution, transformation of an Embassy into a headquarters supporting, the activities of those opposing the Islamic Republic (many thousands of pages of documents corroborate this claim), support for Saddam in the war waged against Iran, the shooting down of the Iranian passenger plane, freezing the assets of the Iranian nation, increasing threats, anger and displeasure vis-a-vis the scientific and nuclear progress of the Iranian nation (just when all Iranians are jubilant and celebrating their country's progress), and many other grievances that I will not refer to in this letter. Mr President, September Eleven was a horrendous incident. The killing of innocents is deplorable and appalling in any part of the world. Our government immediately declared its disgust with the perpetrators and offered its condolences to the bereaved and expressed its sympathies. All governments have a duty to protect the lives, property and good standing of their citizens. Reportedly your government employs extensive security, protection and intelligence systems - and even hunts its opponents abroad. September Eleven was not a simple operation. Could it be planned and executed without coordination with intelligence and security services - or their extensive infiltration? Of course this is just an educated guess. Why have the various aspects of the attacks been kept secret? Why are we not told who botched their responsibilities? And, why aren't those responsible and the guilty parties identified and put on trial? All governments have a duty to provide security and peace of mind for their citizens. For some years now, the people of your country and neighbours of world trouble spots do not have peace of mind. After 9/11, instead of healing and tending to the emotional wounds of the survivors and the American people - who had been immensely traumatised by the attacks - some Western media only intensified the climates of fear and insecurity - some constantly talked about the possibility of new terror attacks and kept the people in fear. Is that service to the American people? Is it possible to calculate the damages incurred from fear and panic? American citizens lived in constant fear of fresh attacks that could come at any moment and in any place. They felt insecure in the streets, in their place of work and at home. Who would be happy with this situation? Why was the media, instead of conveying a feeling of security and providing peace of mind, giving rise to a feeling of insecurity? Some believe that the hype paved the way - and was the justification - for an attack on Afghanistan. Again I need to refer to the role of media. In media charters, correct dissemination of information and honest reporting of a story are established tenets. I express my deep regret about the disregard shown by certain Western media for these principles. The main pretext for an attack on Iraq was the existence of WMDs. This was repeated incessantly - for the public to finally believe - and the ground set for an attack on Iraq. Will the truth not be lost in a contrived and deceptive climate? Again, if the truth is allowed to be lost, how can that be reconciled with the earlier mentioned values? Is the truth known to the Almighty lost as well? Mr President, In countries around the world, citizens provide for the expenses of governments so that their governments in turn are able to serve them. The question here is "what has the hundreds of billions of dollars, spent every year to pay for the Iraqi campaign, produced for the citizens?" As your Excellency is aware, in some states of your country, people are living in poverty. Many thousands are homeless and unemployment is a huge problem. Of course these problems exist - to a larger or lesser extent - in other countries as well. With these conditions in mind, can the gargantuan expenses of the campaign - paid from the public treasury - be explained and be consistent with the aforementioned principles? What has been said are some of the grievances of the people around the world, in our region and in your country. But my main contention - which I am hoping you will agree to some of it - is: Those in power have a specific time in office and do not rule indefinitely, but their names will be recorded in history and will be constantly judged in the immediate and distant futures. The people will scrutinise our presidencies. Did we (manage) to bring peace, security and prosperity for the people or insecurity and unemployment? Did we intend to establish justice or just supported (special) interest groups, and by forcing many people to live in poverty and hardship, made a few people rich and powerful - thus trading the approval of the people and the Almighty with theirs? Did we defend the rights of the underprivileged or ignore them? Did we defend the rights of all people around the world or imposed wars on them, interfered illegally in their affairs, established hellish prisons and incarcerated some of them? Did we bring the world peace and security or raised the spectre of intimidation and threats? Did we tell the truth to our nation and others around the world or presented an inverted version of it? Were we on the side of people or the occupiers and oppressors? Did our administrations set out to promote rational behaviour, logic, ethics, peace, fulfilling obligations, justice, service to the people, prosperity, progress and respect for human dignity or the force of guns, Intimidation, insecurity, disregard for the people, delaying the progress and excellence of other nations, and trample on people's rights? And finally, they will judge us on whether we remained true to our oath of office - to serve the people, which is our main task, and the traditions of the prophets - or not? Mr President, How much longer can the world tolerate this situation? Where will this trend lead the world to? How long must the people of the world pay for the incorrect decisions of some rulers? How much longer will the spectre of insecurity - raised from the stockpiles of weapons of mass destruction - hunt the people of the world? How much longer will the blood of the innocent men, women and children be spilled on the streets, and people's houses destroyed over their heads? Are you pleased with the current condition of the world? Do you think present policies can continue? If billions of dollars spent on security, military campaigns and troop movement were instead spent on investment and assistance for poor countries, promotion of health, combating different diseases, education and improvement of mental and physical fitness, assistance to the victims of natural disasters, creation of employment opportunities and production, development projects and poverty alleviation, establishment of peace, mediation between disputing states, and distinguishing the flames of racial, ethnic and other conflicts, (where) would the world be today? Would not your government and people be justifiably proud? Would not your administration's political and economic standing have been stronger? And I am most sorry to say, would there have been an ever increasing global hatred of the American government? Mr President, it is not my intention to distress anyone. If Prophet Abraham, Isaac, Jacob, Ishmael, Joseph, or Jesus Christ (PBUH) were with us today, how would they have judged such behavior? Will we be given a role to play in the promised world, where justice will become universal and Jesus Christ (PBUH) will be present? Will they even accept us? My basic question is this: Is there no better way to interact with the rest of the world? Today there are hundreds of millions of Christians, hundreds of millions of Moslems and millions of people who follow the teachings of Moses (PBUH). All divine religions share and respect one word and that is "monotheism" or belief in a single God and no other in the world. The Holy Quran stresses this common word and calls on all followers of divine religions and says: (3.64) Say: O followers of the Book! Come to an equitable proposition between us and you that we shall not serve any but Allah and (that) we shall not associate aught with Him and (that) some of us shall not take others for lords besides Allah; but if they turn back, then say: Bear witness that we are Muslims. (The Family of Imran) Mr President, According to divine verses, we have all been called upon to worship one God and follow the teachings of divine Prophets. "To worship a God which is above all powers in the world and can do all He pleases." "The Lord which knows that which is hidden and visible, the past and the future, knows what goes on in the Hearts of His servants and records their deeds." "The Lord who is the possessor of the heavens and the earth and all universe is His court" "Planning for the universe is done by His hands, and gives His servants the glad tidings of mercy and forgiveness of sins" "He is the companion of the oppressed and the enemy of oppressors" "He is the Compassionate, the Merciful" "He is the recourse of the faithful and guides them towards the light from darkness" "He is witness to the actions of His servants" "He calls on servants to be faithful and do good deeds, and asks them to stay on the path of righteousness and remain steadfast" "Calls on servants to heed His prophets and He is a witness to their deeds" "A bad ending belongs only to those who have chosen the life of this world and disobey Him and oppress His servants" and "A good end and eternal paradise belong to those servants who fear His majesty and do not follow their lascivious selves." We believe a return to the teachings of the divine prophets is the only road leading to salvation. I have been told that Your Excellency follows the teachings of Jesus (PBUH) and believes in the divine promise of the rule of the righteous on Earth. We also believe that Jesus Christ (PBUH) was one of the great prophets of the Almighty. He has been repeatedly praised in the Quran. Jesus (PBUH) has been quoted in Quran as well: (19.36) And surely Allah is my Lord and your Lord, therefore serve Him; this is the right path. (Mariam) Service to and obedience of the Almighty is the credo of all divine messengers. The God of all people in Europe, Asia, Africa, America, the Pacific and the rest of the world is one. He is the Almighty who wants to guide and give dignity to all His servants. He has given greatness to Humans. We again read in the Holy Book: "The Almighty God sent His prophets with miracles and clear signs to guide the people and show them divine signs and purify them from sins and pollutions. And He sent the Book and the balance so that the people display justice and avoid the rebellious." All of the above verses can be seen, one way or the other, in the Good Book as well. Divine prophets have promised: The day will come when all humans will congregate before the court of the Almighty, so that their deeds are examined. The good will be directed towards (Heaven) and evildoers will meet divine retribution. I trust both of us believe in such a day, but it will not be easy to calculate the actions of rulers, because we must be answerable to our nations and all others whose lives have been directly or indirectly affected by our actions. All prophets speak of peace and tranquillity for man - based on monotheism, justice and respect for human dignity. Do you not think that if all of us come to believe in and abide by these principles, that is, monotheism, worship of God, justice, respect for the dignity of man, belief in the Last Day, we can overcome the present problems of the world - that are the result of disobedience to the Almighty and the teachings of prophets - and improve our performance? Do you not think that belief in these principles promotes and guarantees peace, friendship and justice? Do you not think that the aforementioned written or unwritten principles are universally respected? Will you not accept this invitation? That is, a genuine return to the teachings of prophets, to monotheism and justice, to preserve human dignity and obedience to the Almighty and His prophets? Mr President, History tells us that repressive and cruel governments do not survive. God has entrusted the fate of men to them. The Almighty has not left the universe and humanity to their own devices. Many things have happened contrary to the wishes and plans of governments. These tell us that there is a higher power at work and all events are determined by Him. Can one deny the signs of change in the world today? Is the situation of the world today comparable to that of ten years ago? Changes happen fast and come at a furious pace. The people of the world are not happy with the status quo and pay little heed to the promises and comments made by a number of influential world leaders. Many people around the world feel insecure and oppose the spreading of insecurity and war and do not approve of and accept dubious policies. The people are protesting the increasing gap between the haves and the have-nots and the rich and poor countries. The people are disgusted with increasing corruption. The people of many countries are angry about the attacks on their cultural foundations and the disintegration of families. They are equally dismayed with the fading of care and compassion. The people of the world have no faith in international organisations, because their rights are not advocated by these organizations. Liberalism and Western style democracy have not been able to help realize the ideals of humanity. Today these two concepts have failed. Those with insight can already hear the sounds of the shattering and fall of the ideology and thoughts of the Liberal democratic systems. We increasingly see that people around the world are flocking towards a main focal point - that is the Almighty God. Undoubtedly through faith in God and the teachings of the prophets, the people will conquer their problems. My question for you is: "Do you not want to join them?" Mr President, Whether we like it or not, the world is gravitating towards faith in the Almighty and justice and the will of God will prevail over all things. Vasalam Ala Man Ataba'al hoda Mahmood Ahmadi-Nejad President of the Islamic Republic of Iran -- AFP

Someone big wants in to the Gold Market

Gold has surged to $700 an ounce for the first time in 26 years after Chinese economists suggested the country should quadruple its bullion reserves to protect against a falling dollar.Speculators have been alert to any sign that Beijing may be planning to switch a portion of its massive $875bn reserves into gold, a move that would electrify the market.

They seized on comments yesterday by Liu Shanen, an official at the Beijing Gold Economy Development Research Centre, who said China should raise the portion of gold in its reserves from 1.3 percent today to between 3 and 5 percent. Such a move would entail the purchase of 1,900 tonnes of gold, equivalent to gobbling up nine months of global mine production.

Washington's cold response to Iran's move to defuse nuclear tension also helped fuel yesterday's rally. "No one is buying Iran's overtures," said Frank McGhee, a metals trader at Integrated Brokerage Services. "This is a purely geo-political move for gold. We've been here before. The difference is that this time, there are nukes involved."

June gold futures jumped $20.10 an ounce in New York, briefly touching the $700 line before falling back slightly.Tan Yaling, an economist at the Bank of China, backed the call for higher gold reserves to "help the government prevent risks and handle emergencies in case of future possible turbulence in the

international political and economic situation".John Reade, a UBS analyst, said neither economist had any official role but hints were enough to drive prices in the current climate. "This is an investor frenzy, and China has become the
biggest rumour in the gold world right now," he said.Mr Reade said gold had changed stride since the middle of last year, the key moment when it broke out against all major currencies and began to attract investment from the big money brigade.
"Speculative and investment interest has replaced jewellery demand. The last time that happened was in 1979 to 1980," he said.He said it was likely that Middle Eastern investors were switching
petrodollars into gold after burning their fingers in local stock markets.

Ross Norman, director of the BullionDesk.com, said China may already be a silent buyer on the open market.Central banks are supposed to record their gold purchases with the IMF promptly, but they have been known to move stealthily for months before declaring.

"This market has been bouncing back so quickly after each bout of profit-taking that it looks as if somebody big is trying to get in. It's too darn hot for my liking," Norman said.Mr Norman said there was a fair chance that gold mining equities would start to play "catch-up."

Special report from The Privateer - A newsletter I recommend.

As you will know by now, spot future Gold rose $US 21.60 to hit $US 701.50 at the close on Tuesday, May 9. This event was reported on CNNMoney.com under the headline: $700 Gold: Want in? Think Twice. On the surface, this is the normal type of stuff that the US mainstream financial media comes up with. They have to report it because it's news, but they structure the story in a way that they hope will dissuade most people from diving into the Gold market.

As we said, "normal", at least on the surface. But check out this story from exactly the same source, posted just under a month ago on April 11: $600 Gold: Want in? Think Twice. We strongly suggest that you print both these stories out and compare them. You will find that practically nothing but the numbers ($600 vs $700 as a Gold price) has changed. Clearly, the author of the two reports simply used the $600 Gold report as "boiler plate", substituted $700 for $600 in the $700 Gold report, and left the rest completely unchanged.

Please note that our Gold This Week commentary for April 14 - "Gold's Great - But Not For "Individuals" was based on this $600 Gold report from CNNMoney. What we said in that report goes double or triple for this new report, published less than a month later and with Gold $US 100 or 16.7% higher. This is very sloppy work indeed from the mainstream media. It will be interesting to see if they do it again at $US 800 Gold.

A Nation of Waitresses and Bartenders

The Bureau of Labor Statistics payroll jobs report released May 5 says the economy created 131,000 private sector jobs in April. Construction added 10,000 jobs, natural resources, mining and logging added 8,000 jobs, and manufacturing added 19,000. Despite this unusual gain, the economy has 10,000 fewer manufacturing jobs than a year ago.

Most of the April job gain --72%--is in domestic services, with education and health services (primarily health care and social assistance) and waitresses and bartenders accounting for 55,000 jobs or 42% of the total job gain. Financial activities added 26,000 jobs and professional and business services added 28,000. Retail trade lost 36,000 jobs.

During 2001 and 2002 the US economy lost 2,298,000 jobs. These lost jobs were not regained until early in February 2005. From February 2005 through April 2006, the economy has gained 2,584 jobs (mainly in domestic services).

The total job gain for the 64 month period from January 2001 through April 2006 is 7,000,000 jobs less than the 9,600,000 jobs necessary to stay even with population growth during that period. The unemployment rate is low because millions of discouraged workers have dropped out of the work force and are not counted as unemployed.

In 2005 the US had a current account deficit in excess of $800 billion. That means Americans consumed $800 billion more goods and services than they produced. A significant percentage of this figure is offshore production by US companies for American markets.

The US current account deficit as a percent of Gross Domestic Product is unprecedented. As more jobs and manufacturing are moved offshore, Americans become more dependent on foreign made goods. This year the deficit could reach $1 trillion.

The US pays its current account deficit by giving up ownership of its existing assets or wealth. Foreigners don't simply hold the $800 billion in cash. They use it to acquire US equities, real estate, bonds, and entire companies.

The federal budget is also in the red to the tune of about $400 billion. As Americans have ceased to save, the federal government is dependent on foreigners to lend it the money to operate and to wage war in the Middle East.

American consumers are heavily indebted. The growth of consumer debt is what has been fueling the economy. Social Security and Medicare are in financial trouble, as are many company pension plans. Decide for yourself--is this the economic picture of a superpower that can dictate to the world, or is it the picture of a second-rate country dependent on foreigners to finance its consumption and the operation of its government?

No-think economists make rhetorical arguments that the decline of US manufacturing employment reflects higher productivity from technological improvements and not a decline in US manufacturing per se. George Mason University economist Walter Williams recently ridiculed the claim that US manufacturing jobs are moving to China. Williams asks how the US could be losing manufacturing jobs to China when the Chinese are losing jobs faster than the US: "Since, 2000, China has lost 4.5 million manufacturing jobs, compared with the loss of 3.1 million in the U.S."

The 4.5 million figure comes from a Conference Board report that is misleading. The report that counts was written by Judith Banister under contract to the U.S. Department of Labor, Bureau of Labor Statistics, and published in November 2005 (www.bls.gov/fls/chinareport.pdf). Banister's report was peer reviewed both within the BLS and externally by persons with expert knowledge of China.

Chinese manufacturing employment has been growing strongly since the 1980s except for a short period in the late 1990s when layoffs resulted from the restructuring and privatization of inefficient state owned and collective owned factories. To equate temporary layoffs from a massive restructuring within manufacturing with US long-term manufacturing job loss indicates extreme carelessness or incompetence.

Banister concludes: "In recent decades, China has become a manufacturing powerhouse. The country's official data showed 83 million manufacturing employees in 2002, but that figure is likely to be understated; the actual number was probably closer to 109 million. By contrast, in 2002, the Group of Seven (G7) major industrialized countries had a total of 53 million manufacturing workers."

The G7 is the US and Europe. In contrast to China's 109,000,000 manufacturing workers, the US has 14,000,000.

When I was Assistant Secretary of the Treasury in the Reagan administration, the US did not have a trade deficit in manufactured goods. Today the US has a $500 billion annual deficit in manufactured goods. If the US is doing as well in manufacturing as no-think economists claim, where did an annual trade deficit in manufactured goods of one-half trillion dollars come from?

If the US is the high-tech leader of the world, why does the US have a trade deficit in advanced technology products with China?

There was a time when American economists were empirical and paid attention to facts. Today American economists are merely the handmaidens of offshore producers. Apparently, they follow President Bush's lead and do not read newspapers--thus, their ignorance of countless stories of US manufacturers moving entire plants and many thousands of US engineering jobs to China.

Chinese firms, including state owned firms, have numerous reasons, tax and otherwise, to understate their employment. Banister's report gives the details.

Banister points out that the excess supply of labor in China is about five to six times the size of the total US work force. As a result, there is no shortage of workers in China, nor will there be in the foreseeable future.

The huge excess supply of labor means extremely low Chinese wages. The average Chinese wage is $0.57 per hour, a mere 3% of the average US manufacturing worker's wage. With first world technology, capital, and business knowhow crowding into China, virtually free Chinese labor is as productive as US labor. This should make it obvious to anyone who claims to be an economist that offshore production of goods and services is an example of capital seeking absolute advantage in lowest factor cost, not a case of free trade based on comparative advantage.

American economists have failed their country as badly as have the Republican and Democratic parties. The sad fact is that there is no leader in sight capable of reversing the rapid decline of the United States of America.

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: paulcraigroberts@yahoo.com

 

May 08, 2006

Mirages of Western Gold Bugs:


 

I think that this piece reflects my position to a significant degree... 

The Islamic Gold Dinar, the Iranian Oil Bourse and the Gold Standard

Dr. Eckart Woertz
Dubai, UAE
May 8, 3006

For many Western gold bugs, the precious metal is not an investment but a religion. Not surprisingly, the styles of their writings often resemble apocalyptic judgment sermons rather than sober investment analysis. The ideological importance they attribute to gold is rivaled only by the one the Communist Manifesto used to have for a different tribe. If gold is salvation, there needs to be a devil taking the other side. For die-hard gold bugs, this is the paper dollar and its various sinister manifestations reaching from big government to Wall Street, and the freemasons. Everything that is supposedly against such evil mongers has to be blown out of proportion and the farther away the country of origin the more outlandish the exaggerations become. Two perfect examples are the Islamic gold dinar and the Iranian euro-denominated oil bourse. Living in the Middle East, I have repeatedly been astonished by the huge gap that exists between web-based gold bug perceptions on the one hand and actual reality on the other hand.

The Islamic gold dinar was supposed to be used to settle bilateral trade between Muslim countries. By randomly surfing the Internet during the height of Islamic Dinar advertisements in 2002 and 2003, one could have gained the impression that the Islamic world was on the verge of skipping any payments in dollars or other paper money and switching to a gold standard like that of the good old 19th century. Unfortunately, off the web, in Middle Eastern reality the gold dinar was a non-issue. Yes, the initiator, Malaysia, had talks with Iran, Saudi-Arabia, and some other countries, but that was pretty much it. Even specialized central bankers in the region who were supposed to make the gold dinar a reality didn't have a clue about the idea. Thus, nothing has happened, Iran has not engaged in a settlement of bilateral trade with Malaysia using gold dinars, and the Gulf countries, which offered some polite interest, have quietly withdrawn, and are more inclined to discuss diversification into the Euro. A possible explanation for this failure is the trade surplus of Malaysia, which would have sucked the tiny gold reserves of the Gulf countries dry in no time, as an adjustment mechanism between the gold dinar as a trade currency and the money supply of the participating countries was not intended. Even more importantly, this hints to the simple fact that Islamic governments also love some expansionary monetary policies every once in a while. With the retirement of the main gold dinar proponent, former Malaysian Prime Minister Mahathir, the insight has dawned on many that the idea is dead. Even hard core gold bugs who are reporting from the "occupied South" or roaming the forests of Montana with their militia buddies should have grasped this in the meantime. But that's no problem as there is a new kid on the block: the planned Iranian oil bourse, which will offer euro-dominated oil contracts and will thus bring about the fall of the dollar.

The oil bourse as well has not really been a topic in Iranian newspapers. The Iranians do not seem to attribute the historical 'dollar-killer role' to the idea like gold bugs do. On May 6, Mohammad Javad Asemipour, advisor to Iran's oil minister and head of the bourse project, dismissed such notions as "propaganda." The project was not intended to rival marketplaces in New York, London, and Dubai, he said. Its goal was simply to increase liquidity in local energy markets, and in the beginning there was not to be any trading in crude oil, only in petrochemical products. The real bombshell for gold bugs, however, was that he said that pricing in euros was not intended! Anyway, after some postponements, the Iranian oil bourse is supposed to be set up this month on Kish, a small island free trade zone in the Arabian Gulf. The island is sleepy, and in the middle of nowhere. Along an empty road outside the city center there is a concrete desert of run-down hotels where workers from Dubai dwell. When their UAE visas are up for renewal, their employers send them to Kish for a visa roundtrip. But sometimes the paperwork does not arrive for weeks due to red tape and deliberate delays and they get stuck - cost-efficiently 'stored' without pay.

If you told one of these desperate souls that the lost island they are on will be the center stage of the coming dollar collapse, they would probably think you are crazy. It is not really a place where a highly paid oil trader from London, New York, or Singapore would like to relocate. It is as far from a functioning financial infrastructure as Pyongyang or the Antarctic. Back office facilities, settlement procedures, trading infrastructures, legal frameworks, debt markets, you name it. Need some credit to finance a major transaction? No problem, fill out a form and send it to one of the government-owned banks in Teheran, and in the meantime relax and enjoy the sunny climate. Pricing oil in euros would certainly be a nightmare for the dollar, but it will not happen to any meaningful extent because of the Iranian oil bourse. Like the Islamic gold dinar, it is a mirage of Western gold bugs - they see it from far away, on the web, but if they took the pain to apply for a passport and travel a bit, they would see it disappear.

I guess the political correctness squads of the gold bug community are already on their way to flood my mailbox. But wait a minute - I like gold, I am heavily invested because I think it will go much further, especially in dollar terms. Yes, the US twin deficit has gone out of control, and yes, Helicopter Ben is likely to choose inflation over deflation as a 'solution' to the debt problem. But at the same time, this debt is the only thing that keeps the world economy running, as every gold bug accurately observes. The US housing and consumer markets that goes without saying, but the Japanese love it as well, as the yen carry trade has enabled them to stabilize their shaky financial system with a zero interest rate policy and without inflation. China and Southeast Asia still have no alternatives developed for their export-oriented industrialization, and the Europeans have not exactly invented balanced budgets - they are content to sail in the geopolitical and economic wake of the US as well.

Of course, there will be continued diversification out of the dollar via the currency markets, and the euro and gold are obvious candidates. Norwegian plans to set up a euro-denominated oil bourse are much more likely to be a success than Iranian ones, and bilateral trade agreements like the $70 billion gas deal between China and Iran are already taking away liquidity from dollar-denominated open markets. Such deals might even use the euro as a pricing unit some day. But that will not change the nature of the game; the virtual reality of financial growth has become paramount. It seems like capitalism cannot expand in the real world anymore because geographically, it colonized all the non-commodified virgin lands a long time ago, and the inward expansion of new products and new markets got stuck in a stillborn microelectronic Kondratieff cycle. New products and markets still emerge, but do not absorb enough labor anymore because of the huge rationalization potentials the microelectronic revolution has set free. That leaves as the last frontier of growth the deceivingly limitless realm of numbers and financial engineering. If you think that's bad, be sure the deflationary shock of a gold standard would be worse.

What leads us to the ultimate mirage of Western gold bugs: the reintroduction of the gold standard. This is neither feasible nor desirable. Forget that the much-hailed age of the gold standard was not as cosy and peaceful as gold bugs perceive. After all, child labor was rampant and Western governments divided their time between policing the poor at home and killing and colonizing natives on foreign shores. Once they had consolidated their nation-states, imperialist competition between them got really ugly and finally ushered in World War I. Hardly a proof that a simple metal makes better societies; but there was low inflation, and gold bugs celebrate the period as 'freedom.' However, the main flaw in the gold bugs' view of history is that the homo oeconomicus who has expressed all his needs, relationships, and wishes in monetary quanta from time immemorial is a fiction. So is the conviction that in capitalism money is used to fulfill needs, instead of being an end in itself. These are axiomatic beliefs invented by neoclassical economists, Austrians, and other flat earthers of economic history.

Capitalist societies in the 19th century were still in a nascent stadium of development, and hardly comparable to the completely commodified ones we face nowadays. They comprised various forms of non-capitalist production (e.g. household work, agriculture), and the cold logic of accumulating abstract wealth in the "disembedded" spheres of market and state (Karl Polyani) was not yet generalized. It is hardly conceivable that capitalist societies could fit again into the tight golden corset in which they once flourished for a while when they were little babies. Thus, the gold bug's state of mind - affirming capitalism by evoking a harmonious picture of peaceful market communities and the whole 'honest money for honest work' charade - alludes to a past that never was and a future that will never be. The only thing that saved capitalism after 1929 was state intervention and monetary expansion, and the only thing that saved it after 1971 was even more monetary expansion and the advent of a brave new world of financial engineering. So let's hope that the music will continue to play for a while, because it will be difficult to grab a chair once it stops. And be careful what you wish for - or which gold bug is ready to tell the last GM worker to go home without knowing how to feed his family?

Best regards from Dubai, Eckart

-Dr. Eckart Woertz
Program Manager Economics
Gulf Research Center
P.O.Box 80758
187 Oud Metha Tower, 11th Floor
303 Sheikh Rashid Road
Dubai, UAE

What Ails Americans

Does George Bush get you down?

Does your mind go numb when you read another story about another GOP-legislated atrocity?

Do you feel that you just can’t take any more of it? That you just are too tired to care?

You could be suffering from outrage fatigue. In which case, you are not alone.

The other day an editor here groaned, “Not another torture story.” A colleague snapped back, “That’s a win for them.”

The Web has been abuzz with discussions about “outrage fatigue” and its debilitating effects. Consider the following thoughts on the syndrome, gleaned from postings over the past couple years.

There is despair:

“I’m sorry guys, with so many things to be outraged about I’m worn down. It’s partly because it feels like nothing you do with the outrage has any effect,” writes Spocko.

“There has been so much to be outraged about from the Republicans the past six years and yet they have never been held to account. It is easy to just feel powerless and give up. It hurts too much to care about the state of the country,” writes Erik.

There is resignation:

“I just can’t get too outraged anymore since every day brings a new outrage. Law of diminishing returns and all that jazz I guess,” writes Cursed Pirate Monkey.

“It used to be I’d have opinions on the latest scary news of the government and all that shizzle, but over time, U.S. political shit has ended up provoking more a ‘meh’ reaction than anything else. … Just how mad can any single thing make a dude? The answer is that each drumbeat of the march in the wrong national direction reduces the capacity for outrage. Hence outrage muthafuckin’ fatigue, yo. My friend Bill is one of those lefty dudes who sends tons of e-mails like, ‘Man, can you believe this shit?’ Sorry Bill, but the muthafuckin’ truth hurts: I usually glance at your forward, think to myself, ‘Yes, that does kinda suck,’ then instantly trash the e-mail and go back to Fark,” writes Pat in Politics.

There is fear:

“The effect of outrage fatigue is actually scary—things that should be considered very damaging by the American voter just get slipped under the rug with very little notice. … The Bush White House has successfully recalibrated outrage meters so dramatically that we, and the American public, can hardly remember how we used to react to various kinds of events,” writes Frankly0.

There is backlash:

“As to outrage: What matters is getting Bush out of office. … The Bushies could care less how outraged you are. It’s the rope-a-dope defense. By November, all of our outrage reservoirs will be completely empty and we won’t even have the energy to vote,” writes Cleek.

“There’s this new chic meme out there in the blogosphere that people are calling ‘outrage fatigue.’ I dislike the term immensely. I actually think there’s this kind of spiritual battle between the concept of ‘standing up for what’s right’ and the concepts of cynicism, snarkiness and bitchy hopelessness. Referring to ‘outrage fatigue’ is just another way to make it okay to lose hope,” writes Curt. To which Cat, in despair mode, responds: “When you say ‘Outrage Fatigue,’ I interpret it as that awful feeling when you just have to stop reading the news for a while. When you fear that if you hear one more crappy thing, you’ll just crawl under your bed and die slowly.”

While Suzanne Marshall had this to say: “Even though I know how seriously messed-up the situation is in Iraq, I’ve became inured to all but the most extreme levels of wrongdoing. For months, no amount of civilian bombing could get me mad. Then those amazing photos of the tortured Iraqi prisoners hit the streets, and I got that old rush of overwhelming disgust with my government. Then more photos came out, and more officials were implicated, and now—I don’t know. It’s like a switch in my head turned off again.” Whoops, that last quote was from the Onion, playing off the zeitgeist.

Like its cousins—combat fatigue, donor fatigue, compassion fatigue, chronic fatigue, metal fatigue—outrage fatigue has yet to be recognized, or even noted, by the American Psychological Association. That could change as it begins to turn up in therapists’ caseloads. Jon Carroll reports in the San Francisco Chronicle, “A therapist I know says that more and more people are showing up at her door with a nonspecific anxiety disorder, which turns out to be shame and confusion about the state of the nation.”

So what’s the cure?

Outrage is a little bit like anger. Therapist Margaret Paul observes, “Anger that comes from an adult, rational place can be called outrage. Outrage is the feeling we have when confronted with injustice. Outrage mobilizes us to take appropriate action when harm is being done to ourselves, others and the planet.”

And like anger, when we don’t express our outrage, we repress it and turn that outrage in on ourselves.

That can have bad effects according to Ease@Work, a company that advises businesses on how to treat employees. “Repressed anger is unexpressed anger. Some people can internalize anger so that they fool others, and sometimes themselves, into believing they are not angry. The problem with repressed anger is that it is turned back inside the person, leading to health problems such as hypertension, stroke, and heart disease. … Bottling up this powerful emotion can make some people withdraw and lose interest in others and in activities, common signs of depression.”

In the case of a person grappling with outrage fatigue, the easiest solution is to protect yourself from bad news and learn not to care. Another solution is to do something about your outrage. Nurture it. Express it.

Bang a pot. In December 2001 in Argentina, pot bangers led a popular revolt against IMF-imposed economic austerity measures and toppled the government.

That has been tried here. As the Washington Times reported earlier this year, “Liberal activists—among them graying leftovers from the Vietnam-era antiwar movement—plan to gather near the Capitol tonight, banging pots and pans to drown out President Bush’s State of the Union address.” Maybe it didn’t work, but it no doubt felt good.

Managing Terror

While the American Psychological Association has not begun to address the needs of our brothers and sisters suffering outrage fatigue, it has worked closely with the White House in the war on terror. Heeding a call following 9/11 from Presidential Science Advisor John Marburger, the APA asked its members “for examples of research vignettes that might inform (directly or indirectly) strategies to deal with the aftermath of the nations terrorist attacks.”

One of the problems the APA addressed: “What can be done to help people cope with the ongoing threat of terrorism?”

What is known as Terror Management Theory (TMT) has the answer. According to the APA, “From the perspective of TMT, the recent terrorist attacks provided Americans with a massive reminder of death and the fragility of life, coupled with an attack on the psychological structures that normally protect us from fears of death and vulnerability.”

Indeed the public reaction to the attacks is very similar to what psychologists had previously discovered in more than 150 experiments on how people responded to reminders of death and threats to their cultural worldview. According to the APA, these responses include:

  • People respond more negatively to those who criticize one’s country and behaviorally distance themselves from such individuals.
  • People respond more positively to those who praise one’s country and behaviorally approach such persons.
  • People have increased attraction to heroes and greater reverence for cultural icons, such as American flags or crucifixes.
  • People have an increased desire for punishment of moral transgressors.
  • People experience a shift toward desires for security and away from desires for freedom.

No wonder we have outrage fatigue.

Postscript

As I was writing this, I was also working with Kurt Vonnegut on something he is writing for In These Times. That is, until I received a fax from him that said: “Forget it. I don’t want to fight any more.”

I faxed back, “Do you think you are suffering from outrage fatigue?” Adding that, if he was, did he have any thoughts about the condition?

The next day I received this fax: “About Outrage Fatigue: I knew what it was like to lose a battle. Now I know what it was like to lose a war.”

Fatigued, perhaps. But I am not going to let that get me down. I prefer to ponder the last joke Kurt told me: “George Bush is so dumb it wouldn’t surprise me if he thought Peter Pan was a wash basin in a whorehouse.”

Faber -Dollar is doomed!

Gold price to kick into full gear: Faber

Date : 07/05/2006

Reporter: Alan Kohler

ALAN KOHLER: Well, the death of the Greenback, gold at $US6,000 an ounce with commodity and energy prices rising vertically, spurred on by growing international tensions and war - no, that's not the background to the latest sci-fi pot boiler, but the tentative vision of one of the world's most respected contrarian economic forecasters, Marc Faber. Dr Faber must be taken seriously though because of his record in predicting, among other things, the global stock market crash of 87, Japan's collapse in 1990 and the Asian meltdown of 1997 - forecasts that earned him the moniker Dr Doom. He's also the editor and publisher of the influential The Gloom, Boom and Doom Report. And, as you'll hear, he has some very interesting views on the relative merits of the Australian and US central banks. I spoke to Marc Faber from New York this week.

Marc Faber, just to put this week's interest rate increase in Australia into a global perspective, do you think the developed world in general is in a process of increasing interest rates and reducing liquidity that has a way to run yet?

MARC FABER, 'THE GLOOM, BOOM AND DOOM REPORT': Yes, I think so because we have a global boom and interest rate increases have been very slow. In other words, in the US, we went from 1 per cent on the Fed fund rate in June 2004 to 4.75 per cent, but I think that inflation is higher than 4.75 per cent. And if you look at long growth in the US and credit market growth, then we haven't had tight money yet because if money was tight, then asset markets wouldn't rally as they do at the present time.

ALAN KOHLER: There is a lot of debate in the financial markets about whether the US will have a pause in its interest rate tightening cycle. What do you think?

MARC FABER: Well, I basically think that Mr Bernanke is a money printer and it's interesting to see that since he was appointed Fed chairman, the price of gold has risen by 42 per cent so the market is not very happy with his bias towards money printing.

ALAN KOHLER: Do you think that Mr Bernanke is losing control of the situation, in fact? I mean, I notice the markets are testing him now.

MARC FABER: I think that on his recent comments that the Fed might pause, immediately the US dollar became very weak, the bond market sold off and gold prices shot up another $20, $30, so that is a lesson for him that the market begins to see through his inflationary monetary policies.

ALAN KOHLER: What do you think of the Australian central bank and its decision this week to increase interest rates?

MARC FABER: I think actually that the Australian central bank is probably relatively better than others in the sense that they have further tightened monetary policies and so we have in Australia an interesting situation. The economy is kind of weakening, but there are some inflationary pressures and the Australian Reserve Bank has increased interest rates so I find it is actually quite courageous.

ALAN KOHLER: What do you think it means for the Australian dollar?

MARC FABER: Actually what has happened, the Australian dollar along with the New Zealand dollar was weakening recently but in the last, say, two weeks the Australian dollar has again strengthened from 70 cents to 76 cents, so I would say the Australian dollar is supported by relatively high interest rates.

ALAN KOHLER: What do you think about the length of the current commodities boom? You've written recently about firstly how the long wave of commodities could last for another 15 to 20 years and you've also talked about the impact of India on commodities, so where do you see prices of commodities going from here?

MARC FABER: Basically we had a bear market in commodities between 1980 and 2001, or 1998 and 2001, so we had more than 20 years bear market in commodities. By the late 1990s in real terms, in other words inflation-adjusted, commodity prices were at the lowest level in the history of capitalism in the last 200 years and now they have risen substantially - the price of copper from around 60 cents to over $3 a pound, the price of gold has more than doubled. But in real terms, commodities are still relatively low compared to equities and therefore, also given the length of the cycle - the cycle for commodities lasts usually 45 to 60 years peak to peak or trough to trough - in other words the upward wave in commodities lasts around 22 to 30 years and we are now in year 2006. The bull market started in 2001 so we are five years into the bull market. I do concede that the markets are overbought and there is a lot of speculation and I expect a correction but I think longer term from here onwards commodities will outperform the Dow Jones and financial assets.

ALAN KOHLER: You've been reported as predicting that the price of gold will rise to $US6,000 per ounce. Is that correct - is that what you said?

MARC FABER: What I said is that if Mr Bernanke prints money, it is entirely conceivable that the Dow Jones goes to 33,000 or 40,000 or 100,000 or 1 million. All I am saying is if the Dow Jones here goes up three times because of money printing by Mr Bernanke and we have examples in financial history where a central bank printed money and everything went up, but in this instance I think that gold would significantly outperform the Dow Jones. So if someone says to me the Dow will go to 33,000, I say yes, it's possible but it will decline against the price of gold which will go up to $US5,000, $US6,000 an ounce.

ALAN KOHLER: Did you notice that Steven Roach, the chief economist of Morgan Stanley, who has been a bear for a very long time, seems to have changed his tune now, saying he's feeling better about the world than for a long time. Do you think that the fact that Steve Roach has kind of thrown in the towel is a sell signal or do you think he's onto something?

MARC FABER: Well, Steve is a good friend of mine and he gave already a sell signal two years ago. He suddenly turned bullish about bonds and since then the bond market has been weak. And I agree with him that we are in a global boom but it doesn't change the fact that it is an imbalanced boom and it's driven largely by credit creation in the US, leading to overconsumption, leading to a growing trade deficit, current account deficit, the accumulation of reserves in Asia and a global boom. But it is nevertheless an imbalanced boom and one day there will be a problem, certainly with the US dollar. The US dollar is a doomed currency. Doomed? Doomed. Will be worthless. Actually each one of your listeners should buy one US Treasury bond and frame it - put it on the wall so they can show their grandchildren how the US dollar and how US dollar bonds became worthless as a result of monetary inflation.

ALAN KOHLER: You made at least three great calls - you warned of the 87 crash just before it happened, you warned investors to get out of Japan in 1990 and out of Asia in general in 1997. So what specifically is your call right now?

MARC FABER: I think we are in a bear market for financial assets. There's a bear market where the Dow Jones, say, would go from here - 11,000 to 33,000. It would go up in dollar terms but the dollar would collapse against, say gold or foreign currencies. That's what I think will happen with Mr Bernanke at the Fed because he has written papers and he has pronounced speeches in which he clearly says that the danger for the economy would be to have not deflation in the price of a fax machine or PC, but deflation in asset prices. And so I believe that he is a money printer. If I had been a university professor, I would not have let him pass his exams to become an economist. I would have said, "Learn an apprenticeship as a money printer."

ALAN KOHLER: (Laughs) So, a big mistake putting him in charge of the Fed then?

MARC FABER: I think it's very dangerous, very dangerous.

ALAN KOHLER: You've talked in the past about the links between the commodity price cycles and political tensions in the world and you've pointed out that when the Soviet Union collapsed, commodity prices were weak and you've said that rising commodity prices leads to the conditions for war. Now that we're in a commodities boom - which you now say is going to go for a long time - do you think that we're in for a period of rising political tension as well?

MARC FABER: Basically the way we economists have business cycles theories, the historians have war cycles theories and I don't want to go into all of them, but when commodity prices decline, countries are not concerned about getting supplies of vital commodities, whereas when commodity prices go up, it's a symptom of shortages. America needs oil for consumption and China and increasingly India need oil for their economic growth. If you are growing your industries at a production of 15 per cent per annum, as China, you need increasing quantities of oil and China was self-sufficient until 1994 and today they are the largest consumer of oil and import most of it from the Middle East. So the tensions of course arise and I can see that some people have become very powerful whereas the balance of power in the 80s and 90s shifted to the industrialised countries of the West that consume a lot of oil, now the balance of power has shifted to people like Evo Morales, Hugo Chavez in Venezuela, Mr Putin - Mr Putin is the most powerful man in the world, it's not Mr Bush because Mr Putin controls a production of oil of 10 million barrels, plus he controls all the pipelines going to Europe. And it has also shifted to Mr Ahmadinejad. Mr Ahmadinejad of Iran would be very quiet, as well as Mr Chavez, if oil prices were at $12. But at $70 they have a lot of leverage and so the tensions have also increased. It doesn't mean that it comes to war but the conditions for war have improved and I think that eventually this commodity cycle will last so long until there is a major war and during war times, the best hedge is to be low in commodities, then commodities really go up vertically.

ALAN KOHLER: Bit of a grim way to make money, I suppose?

MARC FABER: Hedge funds make money anyway. It doesn't - morals are not the most important issue.

ALAN KOHLER: Well, on that note we'll have to leave it there. Thanks very much, Marc Faber.

MARC FABER: It is my pleasure

Watch Faber

May 03, 2006

Commodity Prices High? Don't make me laugh!

((In 2001, adjusted for inflation, commodites sold for less than they did in the depts of the Great Depression. All the excitement over the high price of commodities is nothing compared to whats coming. The industrialisation and urbanisation of India and China will mean a massive increase in demand and prices will no doubt reach new highs in real terms...we have a little ways to go there....as this missive from an old geezer in Canada demonstrates))

 We all keep hearing about new highs that the commodities are making. Lets take a look at some of them to see where the prices have been and where they are going.

What does one use as a measurement as the purchasing power of the dollar keeps dropping, how can you measure something when the yardstick keeps changing? The government numbers on inflation are taken from Alice in Wonderland or maybe from Disney World, I am not sure but they are not of the real world which most of us have to live in.

In 1973 a gallon of gas cost about 60 – 65 cents, today in Canada it is over $5.00. I bought a new pick-up for $4000.00 in 1973. My truck last year was $52,000.00 MSRP.

In 1973 I was selling starter homes for $18,000.00, today they sell for just about $200,000.00.

To keep things simple lets multiply 1973 prices for commodities by ten as most things have gone up by a factor of ten. Also remember there is a lot less of these commodities available today as compared to 1973, as we consume them [especially silver].

Link to commodity prices http://minerals.usgs.gov/ds/2005/140/

Aluminum in 1973 was $582.00 per m/t or $.26 per pound
  
Aluminum in 2006 is about  $1.24 per pound
 Needs to double
 
A new high for Aluminum would be about $2.70 per pound   
 
 


 
Cobalt in 1973 was $6480.00 per m/t or $2.95 per pound.
 
 
Cobalt in 2006 is about $16.00 per pound.   
 Needs to double
 
A new high for cobalt would be about $30.00 per pound   
 
 


 
Copper in 1973 was $1312.00 per m/t or about 59 cents a pound
 
 
Copper in 2006 hit $3.25 per pound. 
 Needs to double
 
A new high for copper would have to be over $6.00 per pound.
 
 


 
Gold in 1973 was $3,150,000.00 per m/t or $98.00 per ounce
 
 
Gold in 2006 was up to $640.00 per ounce
 
 
A new high for gold would be about $990.00 per ounce.   
 Will be there shortly
 


 
Lead in 1973 was $359.00 per m/t or about 16 cents a pound
 
 
Lead in 2006 is about 55 cents a pound.
 Needs to triple
 
A new high for lead would have to be over $1.60 per pound.
 
 


 
Moly in 1973 was $3985.00 per m/t or about $1.81 per pound.
 
 
Moly in 2006 is about $24.00 per pound
 
 
Moly has made a new high by exceeding $18.00 per pound.
 
 


 
Nickel in 1973 was $3370.00 per m/t or about $1.54 per pound.
 
 
Nickel in 2006 is about $8.75 per pound.
 Needs to double
 
A new high for nickel would have to be over $16.00 per pound.
 
 


 
Silver in 1973 was $82,310.00 per m/t or about $2.55 per ounce.
 
 
Silver in 2006 was about $14.79 per ounce.
 Needs to double
 
A new high for silver would have to be over $26.00 per ounce.
 
 


 
Tin in 1973 was $5018.00 per m/t or about $2.28 per pound.
 
 
Tin in 2006 is about $9320.00 per m/t or about $4.23 per pound.
 A long way to go
 
A new high for Tin would have to be over $23.00 per pound.
 
 


 
Zinc in 1973 was $456.00 per m/t or about $.21 per pound.
 
 
Zinc in 2006 is about $3360.00 per m/t or about $1.52 per pound.
 
 
A new high for Zinc would have to be over $2.15 per pound.
 
 

Most commodities are a long way off from making new highs; I would say all that is happening is they are playing catch up. Or maybe they are losing control and the commodities are not as manipulated as they once were. When one sector of society can create money at will, while others have to trade their labor for it, how can we have free markets?

My main focus is silver, where is the price of silver heading? Higher way higher or as Bill at www.LeMetropoleCafe.com says TO THE MOON.

The reason silver is heading higher is supply and demand. Read Ted Butlers work at www.butlerresearch.com/archive_free.html  or Jason’s at www.silverstockreport.com/

Silver is precious, not for the price but for what it is.

The next big thing in medical research will be silver; they will rediscover all the things silver was capable of doing before the big drug companies came along.

Silver one day will be priced as high or higher than gold, because we consume silver and we store gold, so silver will become rare in the future [50 years?]. There is only so much silver in the earth’s crust.  By keeping the price low they have discouraged doing research to look for alternatives for silver.

Draw a yearly silver chart of the prices for the last 35 years with inflation factored in and the price has not moved.  All that has happened is that the purchasing power of the dollar has dropped.

If one cut a little off a yard stick each year the same as what the dollar has lost in purchasing power  we would have about a 2 inch yardstick.  Would anyone use it?  Would anyone draw a chart using a yard as a standard of measurement? No. Then why compare past dollars to today’s dollar. It is useless information.

New high’s or new lows. Where are all the new highs in the commodities??????

In 1964 one could buy a gallon of gas for 50 cents, I can still buy a gallon of gas for the same 50 cents.

The reason is that the 50 cents was silver, which in our funny money today is worth about $5.00, the cost of a gallon of gas today. Real money maintains its purchasing power.

Wm. J. [Bill] Murray
President
Silver Phoenix Resources Inc.

www.minersmanual.com

Make Way for the Monkeys...

Yeah, go Monkey Go!

May 02, 2006

Embry Sees Trouble for Paper Money;

Embry Sees Trouble for Paper Money;
Gold Headed for US$1,000, Sprott Strategist Says

By Levi Folk 
National Post, Toronto
Monday, May 1, 2006

We are "in the early throes of paper money getting seriously
debased," warns John Embry of Sprott Asset Management, and the price
of gold is headed to US$700 this year and US$1,000
conceivably "within two to three years -- maybe quicker."

This story is finally gaining traction because of the remarkable
deterioration in the financial position of the United States, he
says. Confidence in U.S. paper money is starting to ebb, "and, boy,
when it really starts to move, you'll be shocked, I think, at how
fast the prices will move."

"I think what you've got here is a perfect storm," he concludes. The
United States has shown "very little interest in any fiscal
responsibility," and has created, in the face of declining
savings, "an enormous debt pyramid" that can be sustained only by
ever-greater credit expansion, he explains.

The supply of money is ever expanding, whereas the supply of gold is
relatively scarce, hence the "perfect storm." Insufficient
exploration for at least the last five years suggests "at best a
flat production profile" for gold, says Embry -- this in a situation
where demand already outstrips supply by roughly 1,500 tons/year.

Behind this "perfect storm" is a conspiracy theory advanced by Embry
that points to the U.S. Federal Reserve Bank doing whatever it can
to hide the truth about its debased currency. To give one subtle
example, the Fed recently stopped publishing a broad measure of the
money supply (M3) because it suggests that the money supply remains
accommodative despite the rate hikes in the United States. To take
another, central banks have been selling gold over the past decade
to make their currencies appear stronger.

The problem with conspiracy theories is that they can be used to
dismiss any evidence that does not corroborate one's view of the
markets.

For example, inflation is the smoking gun that Embry cannot find. In
fact, expected inflation, which can be calculated as the difference
between current yields on real-return bonds (Treasury Inflation-
Protected Securities in the United States) and nominal bonds,
remains muted. Embry explains this conflicting evidence by
suggesting that the bond market is also being manipulated, this time
by the U.S. Treasury.

Conspiracies aside, the fundamentals for gold and silver are strong.

"The fund has been managed on the premise that gold and silver were
going materially higher in price, and that they're going to go far
beyond what most people think is possible." Investors simply do not
understand the "upside magnitude" implied by the supply-and-demand
gap.

Other factors are kicking in to bolster gold stocks, otherwise a
high-beta play on the actual commodity. For instance, the gold
sector is witnessing a spurt in merger and acquisition activity as
the majors are snapping up juniors with proven finds.

In addition to hedge funds and futures markets fuelling speculation
in precious metals, there are also now mainstream investment
vehicles like exchange-traded funds (ETFs) that are whetting the
appetite of investors. ETFs are providing a much easier mechanism
for people to invest in precious metals, he says, potentially "a
huge positive."

Barclays Global Investors iShares Silver Trust ETF (SLV on the
American Stock Exchange) came to market Friday. Silver had been
climbing for months in anticipation of the fund's launch.

Silver, in Embry's view, is the much more interesting story. True,
there is no central-bank silver reserve, but the supply-and-demand
equation is also working in favour of silver, as the enormous above-
ground inventory has been largely depleted and new sources of demand
mushroom (e.g., in the health sciences).

For these reasons, Embry thinks we'll see silver at US$20 in the not-
too-distant future. Accordingly, the fund has a 10% allocation to
silver bullion, and a relatively high exposure to pure silver plays
such as Silver Wheaton, Western Silver and Bear Creek Mining.
Meridian Gold should be included here too, he adds, because of the
high silver content in their ore.

Beyond the above-average exposure to silver, the fund is also
characterized by an emphasis on juniors over seniors.

"The way I've made my money through the years has been to put
considerable emphasis on juniors: emerging companies, exploration
vehicles." The juniors have "much more leverage to the upside," he
explains. "They're still relatively well-priced as per ounce in the
ground" -- but that will change, he adds.

Embry also sees value in gold producers in strong-currency countries
like Canada.

"I like small producers who have really struggled to survive:
They're lean and mean to the extent they can be; and now they're in
a position to benefit, and their stock prices don't reflect it,
because they're still not making much money." This has become a
secondary theme in his stock selection.

The emphasis on juniors, however, translates into higher risk,
especially in light of today's price volatility. Embry manages this
risk by maintaining a diversified portfolio of 70 names with an
emphasis on careful selection of juniors. Among his juniors,
Southwestern Resources and Greystar Resources have consistently
played a prominent role.

Oxiana Still Favoured


 - May 02 2006

Opinion at Tolhurst Noall may be that investors should look
elsewhere for exposure to surging copper and gold prices, but
the general market view seems to be that it is stillokay to
hold a few shares of Oxiana Resources (OXR) in one's
investment portfolio.
Oxiana's shares fell dramatically on Friday, when the market
experienced a good old fright following the surprise Chinese
interest rate hike, but they bounced back swiftly on Monday.
Moreover, if UBS's latest assessments are anything to go by,
Oxiana shareholders should be in for ongoing rock'n'roll in
the medium term.
UBS raised its commodities prices forecasts substantially on
Monday and among the results of that exercise is a target
increase for Oxiana to $4.20 from $3.00. As the shares were
only rated Neutral, they obviously went up to Buy.
As the average target price ha snow climbed to $3.29
(including UBS's contribution) the obvious question that comes
to mind is: is the rest of the market going to catch up?
Oxiana shares have been trading persistently above the
experts' target price for many weeks, closing at $3.64
yesterday.
The UBS upgrade lifts the stock's reading on FN Arena's Market
Sentiment Indicator to 0.4. Apart from UBS, GSJB Were,
Macquarie, Credit Suisse, ABN Amro and Deutsche Bank all rate
it a Buy.
Citigroup, Merrill Lynch and JP Morgan don't want to go
further than a Neutral. Aspect Huntley has a negative rating
for many resources stocks at the moment, and Oxiana is no
exception.