Kontent Review

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.

Posted by kevin mckern at 10:56 AM | Permalink | TrackBacks (0)

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.

Posted by kevin mckern at 09:42 AM | Permalink | TrackBacks (0)

>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.

Posted by kevin mckern at 07:51 PM | Permalink | TrackBacks (0)

 

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

Posted by kevin mckern at 08:58 PM | Permalink | TrackBacks (0)

19.05.2006

Source:

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

Posted by kevin mckern at 06:11 PM | Permalink | TrackBacks (0)

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."

Posted by kevin mckern at 01:37 PM | Permalink | TrackBacks (0)

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.”

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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.

Posted by kevin mckern at 10:12 AM | Permalink | TrackBacks (0)

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.
----------------------------------------------------

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.

Posted by kevin mckern at 12:57 AM | Permalink | TrackBacks (0)

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