Monday, June 30, 2008

Intervention Will Not Stop The Dollar’s Slide

Intervention Will Not Stop The Dollar’s Slide

Peter Schiff

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This week the Federal Reserve took a step closer to acknowledging reality. Unfortunately it didn’t let that admission move it from a policy course firmly guided by fantasy. In its policy statement, Bernanke & Co. took the important step in noting that inflation expectations had taken hold in the country at large. However, in asserting that it expects inflation to moderate this year and next, the Fed gave no indications that these heightened expectations are gaining traction within the Open market Committee itself. As a result, it signaled no likelihood that it was actually prepared to do something to fight a problem which it doesn’t really believe exists in the first place.

In fact, by indicating that they expect inflation to moderate, the Fed is saying that elevated expectations are unwarranted. In other words, Bernanke claims that despite the fact that so many people are carry umbrellas, he still believes it will be a sunny day. The takeaway from the statement is that no rate hike is forthcoming. The markets saw this position for what it is….capitulation to inflation and a weakening dollar. No surprise then that the gold responded with the biggest single day gain in more than 20 years!

With the ensuing carnage on Wall Street, many Thursday morning quarterbacks claimed the Fed missed an opportunity to reverse the dollar’s slide by either talking tougher or perhaps actually raising rates a quarter point. If the Fed really believed it could talk the dollar up, or that a small rate hike would do the trick, they would have given it a try. I believe they chose a dovish route because of a greater fear of having their hawkish stance casually disregarded. Imagine what would happen if the Fed raised rates and the dollar kept falling? It would be like one of those horror movies where someone holds a cross up to a vampire, and the Count tosses it aside with nary a cringe.

Others claim that now is the time for coordinated central bank intervention to reverse the dollar’s decline. Those who place their faith in such a plan, overlook the fact that Asian and Middle East central banks have been unsuccessfully intervening on the dollar’s behalf for years. Those nations maintaining dollar pegs must constantly intervene in the foreign exchange markets by buying dollars to keep their own currencies from rising in value. Over the past few years the scope of this intervention has been unprecedented, with foreign central banks accumulating trillions of excess dollar reserves. Yet despite these Herculean and misguided efforts, the dollar has fallen drastically.

Intervention advocates must believe that if the ECB and a few other central banks joined the fray, that a better outcome would be achieved. However any additional efforts to artificially prop up the ailing dollar will be equally ineffective. Even if ECB intervention could slow the dollar’s decent, what possible reason would they have for doing so? The ECB is already concerned about inflation and is preparing to raise rates as a result. Intervention to support the dollar will only worsen Europe’s inflation problem and run counter to these efforts. This is because to buy dollars the ECB must increase its own money supply. That is exactly what is happening in countries like China and Saudi Arabia, which is why inflation in those nations is already much higher than it is in Europe.

Further, since the ECB is asking Europeans to endure higher interest rates to fight their inflation battle, why should they have to make additional sacrifices to help Americans fight their own inflation? Especially when our own central bank has held interest rates at the ridiculously low level of 2%, and has effectively excused Americans from the conflict.

Since we can’t count on any help from our friends, the only option would be for the Treasury to intervene unilaterally. However, the U.S. government should think twice about bringing a knife to a gunfight. The Treasury only has about $75 billion in foreign currency reserves with which to intervene. The war chest is just a spit in the ocean. To put this number in perspective, Poland has $77 billion, Turkey has $78 billion, and Libya has $79 billion. On the other end of the spectrum, China has $1.7 trillion (not counting Honk Kong’s 150 billion) Japan has $1 trillion, Russia has $550 billion, India and Taiwan each have about $300 billion. Singapore, a nation with fewer than 5 million people, has $175 billion. In fact, the United States holds just about 1% of the world’s $7.6 trillion of foreign currency reserves, and our total position amounts to just 2.5% of the total daily volume of foreign exchange trading. Talk about Bambi vs. Godzilla! In other words, if the dollar is going to fall, the Treasury is completely powerless to do anything to stop it.

IMF Finally Knocks on Uncle Sam's Door

IMF Finally Knocks on Uncle Sam's Door

By David HIrst

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IMAGINE the Reserve Bank of Australia, concerned that its friends in the city of Sydney (but perhaps Melbourne) who, having wallowed in wealth all their adult lives, were no longer gainfully employable and their wildly extravagant lifestyles were in danger, and, having the powers to intervene in the market, decided to do just that on their behalf.

Imagine them offering to enter the market and buy shares that would prop up the foolish gambles of the bankers, gambles they had encouraged them, until recently, to take by providing them with cheap money.

On top of that, they told this group they would provide hundreds of billions of dollars in credits to these same profiteers on the grounds they were so big and important to the economy they were indeed too big to fail.

Then, imagine, despite pouring untold taxpayers money into stocks and allowing their cronies access to vast sums, the system continued to fail. So they announced they would need greater power and with it more secrecy.

For its growing band of critics has, perhaps unwittingly and in the interest of public good, this has become the principal function of the US Federal Reserve.

If this was to happen in Australia the International Monetary Fund would be hammering at the door of the Reserve Bank. But Australia does not have a President's Working Group on Financial Markets, commonly known as the Plunge Protection Team, that allows the US Government to prop up the markets by buying shares. But to imagine the IMF investigating the US financial system is unthinkable, or was. But, at the weekend, Der Spiegel reported that the IMF would conduct a full investigation into virtually every aspect of it.

Der Spiegel wrote that the IMF had "informed" Federal Reserve chairman Ben Bernanke of plans that would have been unheard of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the US.

This, Der Spiegel wrote, "is nothing less than an X-ray of the entire US financial system", adding that "no Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing".

The fact that the IMF is knocking on the very doors of its parents and waving legal papers about who lost the house, the car and the kids will, if the past is anything to go by, be buried in the US by pom-pom waving on CNBC telling all what a great time it is to buy.

But the news that the US Fed has now lost its last vestige of credibility did not end with the German report.

The Telegraph from London weighed in, following the Royal Bank of Scotland's statement last week (also lost on the US public) that it was time to head for the crags, and reported Barclays Capital's closely watched Global Outlook analysis that said US headline inflation would hit 5.5% by August and the Fed would have to raise interest rates six times by the end of next year to prevent a wage spiral.

If the Fed hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it," the report found. "They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility."

Der Spiegel reports that the IMF is threatening to seriously study the accounts of America, something President George Bush is determined to prevent at least while he is in the White House, informing the IMF that it can begin its investigation but cannot complete it until he leaves office.

But the reckoning will come and it will shine a light in places where light has been desperately wanted for all too long.

"As part of the assessment," Der Spiegel said, "the Fed, the Securities and Exchange Commission, the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests — worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar."

Under its by-laws, the IMF is charged with the supervision of the international monetary system. About two-thirds of IMF members — but never the US — have already endured this painful procedure.

Australian banks have been buffeted by the storms generated in the US, but strict standards enforced by a Reserve Bank that is independent of private banking interests has prevented such excesses, as vouched by their performance as compared with the broker-trader banks and the retail banks of the US. Shares in once-massive banks and brokerage firms have been stripped by as much as 70%, 80% and even almost 100%. We are taking a trim while US banks are getting a full haircut and shave.

Part of the problem is the US media, which has for so long pretended that all is or soon will be well, a bottom is near, a recovery awaits in the second half of the financial year that will sweep away all problems, sown over decades, in a new expansion, a cycle that is ordained to come. The latest fantasy is that with the quarter's end, new profit figures will invigorate the bull, which will seed fertility.

The next President will be handed at least two wars gone horrible wrong and, by then, an economy in similar shape. The bull will have to be a particularly fertile beast.

Der Spiegel reports: "When the final report on the risks of the US financial system is released in 2010 — and it is likely to cause a stir internationally — only one of the people in positions of responsibility today will still be in office: Ben Bernanke."

While Der Spiegel claims that IMF intervention (my expression) is a humiliation for the US, the real significance may be that this is another blow to American exceptionism.

While the examination is far reaching, and deeply intrusive, Canada, Britain, Italy, indeed two-thirds of IMF members, have participated in the program. The new President will soon discover the age of US exceptionism is over.

Meanwhile the US markets have entered bear territory, the economy has done likewise and we are at the beginning of a long and tortuous process before rebuilding can even commence.

David Hirst is a journalist, documentary maker, financial consultant and investor. His column, Planet Wall Street, is syndicated by News Bites, a Melbourne-based sharemarket and business news publisher.

We're Entering a Two Economy Society. There is No Force Opposing Financial Polarization

"We're Entering a Two Economy Society. There is No Force Opposing Financial Polarization":

Interview with Michael Hudson

By Mike Whitney

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"Our tax laws have shaped the marketplace to favor the debt-financed buying and selling of real estate, stocks and bonds rather than new direct investment. Advocates of this financialization of saving and investment depict it as a viable mode of wealth creation, but the effect is simply to de-industrialize the United States. And this is the tragedy of our economy today." Michael Hudson

Mike Whitney: Before John Kennedy took office, anyone making an income of over $200,000 was taxed at a rate of 93 per cent. Corporations also paid a much higher percentage of the total tax burden than they do today. The higher tax rates on the wealthy never hurt Gross Domestic Product (GDP) which was consistently over 4% during these years, and the middle class flourished in a way that was unprecedented in world history. Why don't we return to the "redistributive" policies which worked so well in the past? Do you think "progressive taxation" is crucial for maintaining democracy and establishing greater equity among the people?

Michael Hudson: I think you¹re framing the tax problem too narrowly. At issue is not simply the tax rate on the income that's being taxed ­ at present, mainly wages, followed by profits. Classical economists focused first and foremost on WHAT should be taxed. From the Physiocrats through Adam Smith and John Stuart Mill to socialists such as Ferdinand Lasalle and America's Progressive Era reformers, they concluded that the main source of taxation should be unearned income, defined as land rent, monopoly rent, other forms of economic rent (income extracted without playing a necessary role in production) and capital gains on these rent-yielding assets, mainly land sites.

As matters stand today, you could raise the income tax to 100% and still not capture the actual cash-flow revenue of real estate, monopolies, and multinationals who use transfer pricing to manipulate their income and expense statements to show no reportable taxable income at all. So the first concern should be what kind of revenue to tax. Owning a real estate rental property is like owning an oil well in the days of the depletion allowance. In addition to charging off interest as a tax-deductible expense (rather than a financing choice), owners pretend that their buildings are depreciating, despite the fact that property prices have risen almost steadily.

So in most years no taxable income is reported at all. Real estate owners don't even have to pay a tax on capital gains ­what Mill called the unearned increment if they plow back their sales proceeds into buying even more assets. And this is just what the great majority of wealth-holders do. They keep on trading and accumulating, tax-free. The situation is much the same with companies taken over by corporate raiders. Paying interest to junk bond holders absorbs what formerly were taxable earnings paid out as dividends. This is what really is crippling the U.S. tax system and de-industrializing the economy.

When Kennedy became president, one of the first things he did was to pass the Investment Tax Credit. This gave industrial companies a credit for making tangible capital investment. Real estate got in on the ride too, but the idea was to use the tax system as an incentive to spur investment and employment so as to keep industrializing America.

Fast forward to today. The tax system favors speculative gains and absentee ownership. Ironic as it may sound, really wealthy people prefer not to make any income at all. They prefer to focus on total returns, which they take in the form of capital gains. This is why hedge fund billionaires pay a much lower tax than their secretaries. Real estate is still our largest sector ­most of its market price consisting of the land's site value ­ rather than industry and other means of production. Given the existing loopholes, I would prefer not to tax corporate profits or even income at all, if the government could tax the free lunch of economic rent at its source. The discussion of WHAT to tax therefore should take precedence over how highly to tax the scant income that wealthy people are obliged to declare from the FIRE sector ­ finance, insurance and real estate.

Perhaps the best way to frame the issue is to call this a re-industrialization discussion. Obviously, the more regressive the tax system is, the more poverty and inequality there will be. And as Aristotle said, democracy is the political stage immediately preceding oligarchy. That's what the economy is now evolving into.

MW: Why are Democrats so squeamish about taxing the people who have benefited most from our system? Do you see any sign that liberals will join the fight against the far-right ideologues who have dominated the economic debate for 30 years?

Michael Hudson: The short explanation as to why Democrats haven't taxed wealth is the power of lobbyists whom the special interests hire and the public relations think tanks they employ to promote Junk Economics. Most wealth is gained by special tax privileges these days, and the financial sector is the largest contributor to political campaigns, followed by real estate. The Democrats traditionally have been based in the large cities. As Thorstein Veblen pointed out in Absentee Ownership, urban politics is essentially a real-estate promotion project.

A century ago the tax issue was at the forefront of American politics. Reformers fought hard to enact the income tax ­ just the opposite of today's attempt to abolish it. The reason was that the first income tax fell mainly on the wealthy, and specifically on real estate, mining and monopolies, which were the main sources of wealth then, just as they are today.

The deep problem is an absence of economic philosophy of how the economy works as an overall system. Without distinguishing what kind of investment and wealth-seeking we want, it's hard to define a fiscal policy. The idea of a flat tax, for instance, is that all income is equally worthwhile ­ except that the flat tax avoids taxing property or cash flow that FIRE-sector lobbyists have managed to get the IRS to counts as costs. So it is not only value-free, it is explicitly anti-labor. You can find it applied most purely in the former Soviet countries such as the Baltic States.

I don't see the tax issue being discussed by Congress, except by anti-government tax cutters. And I don't see a realistic discussion beginning until people define just what progressive taxation means. It has to start with defining some kinds of income and investment as more economically productive than others. This would end the tax subsidies for debt leveraging and financial speculation.

MW: How should Obama approach the issue of "debt relief" for the victims of the housing boondoggle who are now losing their homes in record numbers? African Americans were particularly hurt by the subprime fiasco. Is there a way to minimize the losses of people who were trapped in a banker's scam?

Michael Hudson: Foreclosures are an age-old problem, so there is a broad repertory of ways to deal with them. In my mind the most effective law is New York State's law of Fraudulent Conveyance. On the books back when New York was a colony, it was retained when New York joined the United States. The problem was that rapacious English creditors sought to grab New York's rich upstate farmland. Their ploy was to lend mortgage money to farmers who pledged their land as collateral. Then they would foreclose ­ sometimes before the crop was in and farmers simply lacked the liquidity to pay. Other lenders would lend too much for the borrowers to pay back when the loan was suddenly called in ­ as could be done back then. So New York passed a law ruling that if a creditor made a loan without having a realistic idea of how the debtor was to pay it back, the transaction would be deemed to be fraudulent and the debt would be declared null and void.

In the 1980s, companies brought this defense against corporate raiders using junk bonds as their weapon of choice. Targeted companies claimed that they would be forced to downsize radically or even have their assets stripped to the point of bankruptcy. I thought that Third World countries that borrowed from the large New York banks should have raised this defense, as the only way they could pay was by either borrowing the interest, or (as matters turned out) stripped their assets by privatizing their public domain to raise the dollars.

Today, fraudulent bank loans such as Countrywide is accused of making would be prime examples of junk mortgages that should be annulled. But the mayor of Cleveland went further. He brought public nuisance charges against banks whose mortgage lending has led to foreclosures leaving homes vacant. They're being stripped by robbers and used as crack houses. Junk mortgage lenders should be liable to pay the clean-up costs of the debt pollution they've created.

MW: That sounds pretty radical.

Michael Hudson: But that's where the law itself is moving. Just last week, on June 26 after attorneys general in California, Illinois and Connecticut brought fraud charges against Countrywide, the Wall Street Journal quoted a California law professor spelling out that if the states can persuade the courts to grant restitution, it could be a staggering blow against Countrywide, requiring it to give back its profit on all those loans and conceivably give back houses on which it has foreclosed. Financial fraud is a serious matter. The remedies have long been on the books.

MW: Is there a less radical way to keep people in homes which may be too expensive for their incomes or should we be looking for other alternatives?

Michael Hudson: The answer depends on how you define homes as being too expensive. If you're talking about the mortgage's interest-rate jumps and amortization payments being too high to be afforded, then one way to keep them there is a partial write-down of the mortgage loan. Treasury Secretary Paulson already has endorsed a step that remains market-based: to assess what a realistic market price for the property would be, and write down the mortgage to that price.

The problem comes from homes that are WAY too expensive. This might be the result of a sudden expensive health problem, in which case they probably will have to move, as the United States doesn't have European-style health insurance and prefers to blame the victim for having gotten sick or injured. But if the lender knowingly made a bad loan in the first place and the buyer does have to move because their income is insufficient to begin with, they should get some relocation compensation at the very least, and the full legal remedy for fraud at best.

MW: Is their a viable alternative to "free trade" or will American workers continue to face persistent job losses, lower living standards and a "race to the bottom?

Michael Hudson: The reason U.S. labor has lost its competitiveness is not simply a race to the bottom. To see why U.S. exports are being priced out of world markets, you need to look not only at the take-home pay of workers, but also at what employers are not investing to raise capital productivity, and what they don't get from government in the form of basic infrastructure support.

One reason why employers have not invested as much in raising the productivity of their plant and equipment is that they are saddled with having to pay out more of their cash flow as interest to bondholders and banks, and dividends to assuage shareholder activists, the new euphemism for financial raiders.

U.S. corporate philosophy has been more driven by knee-jerk ideology than by enlightened self-interest. General Motors has pointed out that it has to pay enormous health care costs that its foreign competitors don't. Some sixty years belatedly it's finally discovered that socialized medicine is more efficient that health care privatized by predatory financial and insurance operators. Government services don't build in interest rate costs, dividends, exorbitant management remuneration, stock options and legal fees. All this absorbs a big part of the corporate expense for its work force ­ without raising labor's living standards in the process.

Meanwhile, educating doctors, dentists and nurses is much less costly abroad. Here, they emerge from medical school with hundreds of thousands of dollars in debt, and then have to take on more debt to set up their offices, then they need to buy expensive liability insurance. Once they get on an HMO schedule, they usually have to wait for a year or so to actually get paid. Meanwhile, they have to hire their own full-time bookkeepers just to deal with the HMOs. Doctors, dentists and nurses are being put on rations.

Most of all, the price of labor reflects the high cost of housing here ­mainly the cost of carrying a home mortgage ­ plus non-mortgage debt. Labor doesn't benefit from these costs. And as matters have turned out, industry hasn't benefited either. It's the price the U.S. economy as a whole is paying for having become financialized and privatized in a dysfunctional way.

MW: You have said that the financial crisis is analogous to a "boa constrictor wrapping itself around the economy and slowly strangling it." Would you elaborate on that?

Michael hudson: I was referring to debt deflation. As the debt overhead grows exponentially, it siphons off more and more money from being spent on production and consumption. For the financial sector, this is applauded as being the miracle of compound interest. The volume of loans keeps on growing by purely mathematical principles, without much regard for the economy's ability (or inability) to generate a large enough surplus to pay. More and more wages, corporate profits and tax revenues have to be earmarked to pay creditors. These creditors then turn around and lend out their flow of debt service to yet new borrowers. This involves finding more and more risky markets, while the debt becomes heavier and heavier.

To pay the carrying charges on these debts, wage earners cut back consumption while debt-wracked companies cut back on new capital investment, research and development. State, local and federal governments also pay interest on their deficits by cutting back on spending to maintain infrastructure or improve services. These cutbacks shrink the domestic market, leading to lower investment and hiring. All this is applauded as the magic of the marketplace in allocating resources. But it's the financial sector that is doing the applauding, not industry.

MW: Does that mean that there will be sudden jolts to the system like a major bank--perhaps Citigroup or Merrill---keeling over and sending the stock market crashing?

Michael Hudson: The economy reaches a Ponzi stage where banks lend their customers the interest to keep payments current. More and more mortgage loans have been structured this way in recent years. When creditors stop making these loans, there's a break in the chain of payments and defaults spread, crashing markets.

MW: Is the dollar doomed, or can the US lower its dual-deficits (fiscal and trade deficits) and continue to attract foreign capital in the future? And if the recession takes hold, business slows and unemployment rises, would that strengthen the dollar?

Michael Hudson: I assume that by doom you mean that the dollar will continue to sink against foreign currencies, while price inflation eats away at what wages will buy. The idea that a worse economy will be self-curing is IMF anti-labor ideology and Chicago School propaganda. This is indeed what Nobel Economic Prizes are given for, I grant you. But it's Junk Economics. A falling dollar threatens to become self-reinforcing. For starters, dollar-denominated stocks, bonds and real estate are worth less and less in terms of euros, sterling or other harder and foreign currencies. This doesn't provide much incentive for foreigners to invest here. And if we go into a recession (not to speak of depression), there will be even fewer profitable opportunities to invest.

Meanwhile, U.S. import dependency will continue to rise as the economy de-industrializes ­ that is, as it is further financialized. U.S. overseas military spending will throw yet more dollars onto the world's foreign exchange markets. So a weak economy here does NOT mean that the dollar will strengthen; it means we have a bad investment climate! Austerity will make us more dependent on foreign countries. For a foretaste, just look at what has happened when the IMF has imposed austerity plans on Third World debtors. And remember, last time when Robert Rubin was given a free hand, in reforming Russia under Clinton, the result was industrial collapse and bankruptcy.

MW: Wouldn't it be better for the world if there were no "reserve currency" at all and the value of money was simply dependent on economic strength and balanced budgets? As long as there is an "international currency," like the dollar, there will be an Empire, because the paper money of one country (US) dominates all others. Is democracy really possible without greater parity between the world's currencies?

Michael Hudson: Exchange rates are independent of political systems. That being said, oligarchic economies tend to go bust as a result of shifting the tax burden off real estate, monopolized and privatized infrastructure, and onto labor and industry. This makes them uncompetitive. For instance, the military-industrial complex operates on a cost-plus basis rather than a cost-minimizing basis. The question therefore is whether they can extort foreign tribute from other countries by enough to compensate. Spain couldn't do this from the New World after 1492, and Rome earlier simply destroyed Asia Minor and other imperial appendages.

Can the United States succeed better today? Dollar hegemony looks like the only way it can pull it off. By definition, a reserve currency is a loan from one government to another. This ends up becoming taxation without representation. It's inherently inequitable.

There are two reasons for central banks to hold dollars. One is for stabilization purposes to prevent currency raids such as occurred in Asia in 1997. The other is that keeping dollar receipts in the form of dollar-loans back to the United States holds down the price of their own currencies, and hence the price of their exports. This effect also could be achieved by imposing a floating tariff against imports from countries whose currencies are depreciating, with the money provided as a subsidy to exporters. But foreign countries aren't yet ready for this great a quantum political leap out of the American financial empire.

Regarding tax policy, there's not really a need for balanced budgets. Starting with the greenbacks during the Civil War years, the United States has demonstrated that governments don't have to raise taxes to spend money. They can simply print it. That's what the commercial banking system does, after all. In either case, the money is created spontaneously. The Treasury and Federal Reserve created $1 trillion in bailout credit for the financial sector in April alone ­ while making the hypocritical asymmetrical claim that Social Security will be broke in 40 years because of ITS trillion-dollar deficit. Iraq added another trillion or so.

The moral is that economic strength consists of the ability to create credit that fuels economic growth. But the privatized banking sector is crippling this strength in the United States these days. Instead of creating credit to fund industrial capital formation, the banking system is lending to bail out bad financial pyramiding.

MW: Do you see the growth of the financial sector as a positive development, or not?

Michael Hudson: Its behavior has become antithetical to the development of industrial capitalism. 19th century reformers inspired by Henri St. Simon in France sought to reorganize finance from debt financing to equity financing. But today's economy is going in just the opposite direction. It's replacing stocks with bonds and loans by banks and buyout funds, creating debt that is not being used to build up the productive capacity to pay back this debt with its interest charges. The result is what classical economists called unproductive debt.

MW: The financial sector seems less inclined to lend to develop useful products and enterprises. It prefers to repackage other people's debt (like mortgage-backed securities) and market them to gullible investors. Are the investment banks responsible for the massive expansion of credit and debt presently destroying the middle class and ruining the country?

Michael Hudson: That's what's happening. But a major reason why savings are flowing into these banks because the tax laws make it more profitable to debt leverage than to invest in industrial capital. The tax system has shaped a market where it pays more to speculate than to invest in building up new means of production. The financial sector has been deregulated on the logic that whatever makes the most money is the most efficient. The product that banks are selling is debt, and help in corporate takeovers, mergers and acquisition. Credit is a product that's almost free to create. Its main cost of production is the lobbying expense to buy Congressional support.

MW: So we're back to politics. What do you know about Barack Obama's economics advisors? Should we expect a repeat of Bill Clinton's "Rubinomics", where Wall Street got everything they asked for and American workers got NAFTA, currency deregulation, the repeal of Glass Steagall and other "trickle down" policies? Is there any hope that Obama may chart a new coarse and move in a progressive direction? What policies should President Obama enact to rekindle the American dream and breath some life into the battered middle class?

Michael Hudson: I'm not in any position to speak about what Mr. Obama will do. As for, economic advisors, their role in a political campaign usually is not so much to shape policy as to mobilize their constituency to support the candidate. The role of Mr. Rubin and his associates, at least at present, is therefore to round up Wall Street support. What influence such advisors will have after next January is yet to be seen. It probably will depend on the circumstances.

I can only hope that Mr. Obama will not pull a Tony Blair New Labor turnabout and revert to Clinton's pro-Wall Street, anti-labor type of policy. If that really were to happen, it would cause such disillusionment that it could fracture the Democratic Party irreparably.

I hope the opposite will happen, and I¹m doing what I can to help bring that about. But regarding politicians, I can only speak for my friend Dennis Kucinich. He has asked me to organize a Roosevelt-type Brains Trust of economic and political advisors to develop a program to re-industrialize America and save it from succumbing to the kind of polarization that was known as the Spanish Syndrome after the 16th century, and the Roman Empire syndrome before that: an economy where the wealthy magnates made themselves tax-free, shifted the burden onto labor and industry, and withdrew into their estates as economies lapsed back into localized subsistence production.

So all this has happened before, again and again. There is no automatic guarantee of progress. It has to be steered. Right now the only parties steering it are the large financial institutions on behalf of their wealthy clients. Hardly by surprise, their attitude is anti-labor.

I think economic circumstances will help impel Mr. Obama to make a swing back toward more classically progressive economic and tax policies. And I can't think of any other candidate who is in as good a position to force Congress to go along with his reforms. He can come out and back candidates willing to oppose the more recalcitrant Democratic Congressmen and Senators.

MW: On CBS "60 Minutes", Alan Greenspan admitted that he supported the invasion of Iraq. That's hardly surprising, since it is difficult to imagine that a nation can trudge off to war without the support of the banking establishment. How much of a role do the major financial institutions and corporate giants actually play in determining foreign policy? Is there something particular to our economic system (or our financial institutions?) that drives us to war over and over again?

Michael Hudson: I don't think the invasion of Iraq was a result of a financial sector decision. As for Mr. Greenspan, he's a public relations specialist, not a global strategist. I think that banks just try to maneuver as best they can in any given political system. But as a sector, they rarely support wars.

When I was at Chase Manhattan in the mid-1960s, Wall Street was not pushing the Vietnam War. Chase's CEO, George Champion, said it was fiscally irresponsible. It set in motion an inflation that led to a steady 35-year downturn in the bond market.

Think of it. Thirty-five years of rising interest rates, from
1945 to 1980, pushing down bond prices. Bonds always have been the key more than stocks. The rise in interest rates meant that the price of existing, lower-rate bonds went down steadily. And that was the result of the war's balance-of-payments deficit and Pres. Johnson's guns and butter approach encouraged by Junk Economics at the hands of faux-Keynesians such as Gardner Ackley, Johnson's Chairman of the Council of Economic Advisors.

The moral is that you can't really have a grab for empire ­and the wars that go with it ­and at the same time have a booming economy.

Something has to give, as we're seeing now. The remarkable thing is that people are not relating America's attempt to create a unipolar empire with the spreading economic polarization and financial squeeze that's going on. Industry for its part is losing out to finance, but simply has sought to make money by financializing itself.

MW: Paul Harris wrote a terrific article in the UK Guardian, "Welcome to Richistan, USA" in which he discusses the huge wealth-disparity in America today. He says:

"America's super-rich have returned to the days of the Roaring Twenties. As the rest of the country struggles to get by, a huge bubble of multi-millionaires lives almost in a parallel world. The rich now live in their own world of private education, private health care and gated mansions. They have their own schools and their own banks. They even travel apart - creating a booming industry of private jets and yachts. Their world now has a name, thanks to a new book by Wall Street Journal reporter Robert Frank which has dubbed it 'Richistan'.

In 1985 there were just 13 US billionaires. Now there are more than
1,000. In 2005 the US saw 227,000 new millionaires being created. One survey showed that the wealth of all US millionaires was $30 trillion, more than the GDPs of China, Japan, Brazil, Russia and the EU combined. The rich have now created their own economy for their needs, at a time when the average worker's wage rises will merely match inflation and where 36 million people live below the poverty line."

So here's my question: The middle class is being squeezed like never before while the chasm between rich and poor gets bigger and bigger. Do you think we are we approaching a crisis phase in this inequality gap, or am I being an alarmist?

Michael Hudson: For a crisis to occur, there needs to be at least two opposing forces or trends. The worst problem about America's present quandary is that there seems to be no force opposing financial polarization. Without a counterforce, without an opposition to the financial Counter-Enlightenment that's taking place, economic horizons will continue to shrink here.

We're indeed entering a Two Economy society. John Edwards picked up the theme and almost the same wording that British Prime Minister Benjamin Disraeli made popular in the late 19th century. He created Britain's Conservative Party in its modern form, recruiting compassionate conservatives known as Young England. Much like the socialists decrying the unfairness of the market economy in the brutal form it took in Britain. Their dream was to make industrialization compatible with a more socially minded morality. Disraeli's major political adversary was not socialism but liberal free-market ideals that urged nations to compete by lowering their wages ­ what today is called a race to the bottom. His welfare legislation was highlighted by the public health system introduced from 1874 to 1881 and promoted under his motto Sanitas sanitatum, Health, all is health. Compare that to today's conservatives!

In 1845, three years before the Communist Manifesto and the revolutions that swept across Europe in 1848, he addressed the horrors of unbridled laissez faire in a novel, Sybil, or The Two Nations. The subtitle referred to the rich and the poor, two nations between whom there is no intercourse and no sympathy, and Š who are not governed by the same laws. Although Disraeli placed his hopes in a morally regenerate aristocracy, he assigned the loftiest ideals to Sybil, the daughter of a factory worker. And when the novel's protagonist, Egremont, asks about conditions in British cities, a young stranger, dressed modestly in black, explains that although

In 1845, three years before the Communist Manifesto and the revolutions that swept across the European continent in 1848, he addressed the horrors of unbridled laissez faire in a novel, Sybil, or The Two Nations. The subtitle referred to the rich and the poor, “two nations between whom there is no intercourse and no sympathy, and . . . who are not governed by the same laws.” Although Disraeli placed his hopes in a morally regenerate aristocracy, he assigned the loftiest ideals to Sybil, the daughter of a factory worker. In the following passage the novel’s protagonist, Egremont, asks about conditions in Britain’s cities. A young stranger, dressed modestly in black, explains that although

"men may be drawn into contiguity, they still continue virtually isolated. . . . In great cities men are brought together by the desire of gain. They are not in a state of co-operation, but of isolation, as to the making of fortunes. . . Christianity teaches us to love our neighbour as ourself; modern society acknowledges no neighbour.’

‘Well, we live in strange times . . . society may be in its infancy,’ said Egremont . . . ‘but, say what you like, our Queen reigns over the greatest nation that ever existed.’

‘Which nation?’ asked the younger stranger, ‘for she reigns over two. . . . Two nations; between whom there is no intercourse and no sympathy; who are as ignorant of each others habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets; who are formed by a different breeding, are fed by a different food, are ordered by different manners, and are not governed by the same laws.’

‘You speak of—’ said Egremont, hesitatingly.

‘THE Rich and THE Poor.’"

Disraeli depicted financial interests as the villain (popularizing the myth of the Jewish banker). His major political adversary was not socialism but liberal free-market ideals that urged nations to compete by lowering their wages – what today is called a race to the bottom. The Conservative Party’s economic compassion, however, was limited by the fact that it also was the party of landowners, above all those in the House of Lords who blocked the Liberal attempt to tax groundrent in 1909.

The dichotomy is not merely between an elite and the masses, or between the vested interests and the downtrodden, the cultured and the great unwashed. It is something much more specific. These two nations, two cities, actually are two economies – Economy #1 (production and consumption) vs. financial and property-based Economy #2 which controls the economic surplus in the form of savings and investment. And the different characteristics of these two economies go far beyond the merely economic dimension.

I cite this example to show what a true compassionate conservatism might be. It would be a good framework in which Pres. Obama
might present his policies in ways that would maximize support from groups that used to be called liberal Republicans. Much of the business community might come on board if he balances his program well. In fact, it was a British Conservative banker, Geoffrey Gardiner, who drew my attention to Disraeli's novel.

Charles Dickens Tale of Two Cities expressed the same idea of cities divided between the idle rich and those who had to work for a living. It is hard to imagine any politician writing such a novel today, although the socialist Michael Harrington popularized the theme in the 1960s in The Other America, and Democratic Vice-Presidential candidate Edwards campaigned in 2004 on the two Americas theme.

What is missing today is a specific critique of the financial interests which Disraeli depicted as the villain (popularizing the myth of the Jewish banker). The dichotomy is not merely between an elite and the masses, or between the vested interests and the downtrodden, the cultured and the great unwashed. It is more specific. These two nations, two cities, are indeed two economies ­ Economy #1 (production and consumption) vs. financial and property-based Economy #2 which controls the economic surplus in the form of savings and investment. And the different characteristics of these two economies go far beyond the merely economic dimension.

MW: How do we turn this trend around and push for changes to strengthen the middle class while providing a safety net for those who have slipped through the cracks? Do we need to rethink how we deal with people who are stuck in a cycle of grinding, unrelenting poverty?

Michael Hudson: The left wing focuses on people who have slipped through the cracks, the poor and the homeless, and ethnic and racial minorities. But the most serious problem lies at the economic core. Failure to restructure it and take control of finance will lead to excluding more and more people from participating in what you call a middle-class life.

As the Roman Empire polarized, the economy and its political wrapping were beyond saving. All that Christianity was able to do was provide charity on an individual basis. It could deal only with symptoms, not root causes. When the point has been reached where you can deal only with people who have slipped through the cracks, the long-term game is lost.

The problem is that the economic system as such is broken. So we're back to the beginning of this interview: What is needed is an alternative to the post-classical economics of the Chicago Boys and their fellow financial lobbyists.

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website,

Bush's top general quashed torture dissent

Bush's top general quashed torture dissent

New evidence shows that despite warnings from across the military, former Gen. Richard Myers shut down legal scrutiny of brutal interrogation tactics.

By Mark Benjamin

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The former Air Force general and chairman of the Joint Chiefs of Staff, Richard Myers, helped quash dissent from across the U.S. military as the Bush administration first set up a brutal interrogation regime for terrorism suspects, according to newly public documents and testimony from an ongoing Senate probe.

In late 2002, documents show, officials from the Army, Navy, Air Force and Marine Corps all complained that harsh interrogation tactics under consideration for use at the prison in Guantánamo Bay might be against the law. Those military officials called for further legal scrutiny of the tactics. The chief of the Army's international law division, for example, said in a memo that some of the tactics, such as stress positions and sensory deprivation, "cross the line of 'humane treatment'" and "may violate the torture statute."

Myers, however, agreed to scuttle a plan for further legal review of the tactics, in response to pressure from a top Pentagon attorney helping to set up the interrogation program for then-Secretary of Defense Donald Rumsfeld.

The documents unearthed by the Senate Armed Services Committee, along with testimony from a recent hearing, shed new light on the role played by the man who was the nation's highest-ranking military officer and who acted, by law, as the top military advisor to President Bush. Until now, it was unclear how Myers handled those duties during the genesis of the military's harsh-interrogation program.

"He is rarely referenced as one of the usual suspects," noted Jonathan Turley, a professor at George Washington Law School who is following the continuing Senate investigation. "He did play a much more central role" than previously known, Turley said. "The minute the military lawyers expressed concern, they were shut down."

The chain of events involving Myers began in late 2002. Rumsfeld was considering the approval of three categories of interrogation techniques for use at Guantánamo. The list included some brutal tactics, including stress positions, exploitation of phobias, forced nudity, hooding, isolation, sensory deprivation, exposure to cold and waterboarding, or simulated drowning.

According to written correspondence that came to light during a Senate Armed Services Committee hearing June 17, various military leaders balked at the plans in a series of memos produced during the first week of November 2002. In addition to the criticisms raised by the Army, the Air Force leadership cited "serious concerns regarding the legality" of the list of proposed techniques. The Navy also called for further legal review, and the Marine Corps stated that the techniques "arguably violate federal law."

Because of these concerns, Myers' legal counsel, Rear Adm. Jane Dalton, began a fresh evaluation of the legality of the interrogation tactics. "My recollection is that all four of the [military services] suggested that there needed to be further legal and policy review," Dalton testified. The legal review, she told the committee, would have included further input from the military services and provided for a full airing of their concerns.

But such an analysis threatened to undermine Rumsfeld's agenda -- and that's when Myers stepped in. Dalton testified that Myers ordered her to stop that review because of a request from Pentagon general counsel William Haynes. Haynes was spearheading Rumsfeld's efforts to set up a harsh-interrogation program at the Pentagon. "The best of my recollection as to how this occurred is that the chairman called me aside and indicated to me that Mr. Haynes did not want this broad-based review to take place," Dalton testified. "When I learned that Mr. Haynes did not want that broad-based legal and policy review to take place, then I stood down from the plans."

Dalton said Myers was aware that the military services believed the interrogation techniques might be against the law. "It is my recollection that he was aware of these concerns and that I made him aware of those concerns," she said.

Rumsfeld signed off on almost all of the techniques on Dec. 2, 2002. At the time, the military's interrogation of the so-called 20th hijacker, Mohammed al-Khatani, had recently begun at Guantánamo -- an interrogation in which Rumsfeld was personally involved. Al-Khatani was stripped naked, isolated, given intravenous fluids and forced to urinate on himself, exercised to exhaustion, called a homosexual, forced to wear a mask and dance, leashed and made to perform dog tricks. His interrogations lasted 18 to 20 hours a day for 48 of 54 days.

Myers has never been forced to answer many questions about his role in the interrogation program. When a reporter gathering information for a May 2008 Vanity Fair article showed him a copy of the December 2002 memo signed by Rumsfeld, Myers responded, "You don't see my initials on this."

In a telephone call, Salon provided Myers' office with a detailed description of this Salon article. He declined an interview request. A source close to Myers said he expects to be called in front of the Senate committee to answer questions about his role in the interrogation program.

In addition to Myers' role, the testimony and documents from the Senate investigation show that in 2002 Rumsfeld raced to start the interrogation program -- duplicating harsh tactics already being used by the CIA -- in part because of a bureaucratic turf war between the Pentagon and the intelligence agency. "You actually have agencies trying to outrun each other to create a torture program," Turley said, noting the odd nature of that battle. "It was like there was a debate over who would have jurisdiction over interstate highways."

As Bush's Secretary of Defense, Rumsfeld was known across Washington for jealously guarding and seeking to expand his control over U.S. national security policy and operations, particularly when it came to intelligence activities. He often duplicated CIA capabilities by setting up separate operations at the Pentagon.

Rumsfeld's decision to create an undersecretary of defense for military intelligence in late 2002, for example, was widely seen as a snub at the CIA. He reportedly sought to end the Pentagon's "near total dependence on the CIA," as he put it, by creating a new espionage arm, the Strategic Support Branch, specifically to bring some activities traditionally carried out by the CIA under his own control. Interrogations became a key part of that fight.

Richard Shiffren, a former deputy counsel in the Department of Defense, told the Senate committee that Rumsfeld was adamant about expanding the Defense Department's reach. "The secretary was very jealous of other agencies," Shiffren said, "specifically, with respect to DOD's inherent capabilities." He said that because of Rumsfeld's competitive spirit, when it came to interrogations, the defense secretary "ended up, sort of, building a capability that mirrored the CIA."

In March 2002, the CIA asked the Department of Justice about the legal limits for interrogating suspected al-Qaida member Abu Zubaydah, who had been captured by American and Pakistani agents on March 28, 2002. After that request, the Justice Department produced on Aug. 1, 2002, the infamous "Bybee memo," which defined torture as treatment "equivalent in intensity to the pain accompanying serious physical injury, such as organ failure, impairment of bodily function, or even death." This was the start of the CIA's brutal interrogations at so-called black sites, or secret overseas prisons. Zubaydah's interrogation included waterboarding.

John Yoo, one of the Justice Department attorneys who helped draft that memo, told the House Judiciary Committee last Thursday that after the CIA had asked for a memo on the limits of interrogation, a similar request soon arrived from the Pentagon. Yoo said in written testimony that the Justice Department "gave substantially the same advice to both agencies." All the wheels were now in motion to implement the interrogation plan.

To develop the CIA interrogation program, the agency turned to two psychologists, James Mitchell and Bruce Jessen, hired as contractors. The two were formerly involved with the military's secretive Survival, Evasion, Resistance and Escape program, which trains U.S. soldiers to resist torture if they're captured, by exposing them to brutal treatment. The psychologists helped the agency to "reverse-engineer" the techniques -- originally meant to help protect U.S. soldiers from enemies who disregarded the Geneva Conventions -- for use in prisoner interrogations by the United States.

The Senate Armed Services Committee hearing earlier this month further elucidated Pentagon efforts to do the same thing. Top Pentagon attorneys were requesting information from the military's SERE school in July 2002. Officials there supplied information on a range of harsh tactics. In September 2002, military interrogators from Guantánamo Bay traveled to SERE school for training.

In the preface of a recent report on U.S. abuse of detainees by Physicians for Human Rights, retired Maj. Gen. Tony Taguba, the man the Army enlisted to conduct an initial investigation into the abuse at Abu Ghraib, railed against the Bush administration. "The Commander-in-Chief and those under him authorized a systematic regime of torture," Taguba wrote. "After years of disclosures by government investigations, media accounts, and reports from human rights organizations, there is no longer any doubt as to whether the current administration has committed war crimes. The only question is whether those who ordered the use of torture will be held to account."

For a variety of complicated political and legal reasons, few in Washington think any high-level Bush administration officials will ever face a judge because of their actions. "It is not likely there are going to be prosecutions," said Tom Malinowski, Washington advocacy director for Human Rights Watch. But he hopes that one day there will be a fact-finding commission that will expose the full truth. "There is definitely a story that needs to be told," he said.

Richard Myers retired from service on Oct. 1, 2005. Bush awarded Myers with the Presidential Medal of Freedom the following month. Myers was elected to the boards of two major U.S. defense contractors, United Technologies and Northrop Grumman, in 2006.

Congress to Bush and Cheney: Do What You Want in Iran

Congress to Bush and Cheney: Do What You Want in Iran

David Bromwich

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Seymour Hersh's "Preparing the Battlefield," in the July 7 New Yorker, will bediscussed in the coming weeks by everyone interested in our foreign policy andthe future of the American constitution. The complete failure of congressionaloversight, to which the article points, is a larger subject that will be withus until the election and beyond. For if the vice president and hisneoconservative advisers have their way -- and they remain, in spite of setbacks,the most active, energetic, and ambitious faction within the Bushadministration -- the U.S. will be at war with Iran or on the way to war byJanuary 2009. And if that is so, it will matter less than we think who iselected in November. The momentum will be there; the country will be committed.

In late 2007, after winning an election whose central issue was a more prudent and rational policy in the Middle East, congressional Democrats, obedient to the wishes of a Presidential Finding, signed away $400 million for secret operations against Iran. A more craven act of submission would be hard to imagine; and they did this in the glow of victory, in direct contradiction of their mandate. What were they signing for? Sabotage, assassination, covert support for political clients and "destabilization" generally are predictable parts of such a design; but the Democrats, in the months between their capitulation and Hersh's article, made no mention of dissatisfactions at having been cut off from oversight. The truth seems to be that in this area, as in so many others, only the Office of the Vice President oversees the Office of the President. "The process is broken," one of Seymour Hersh's informants told him, "and thisis dangerous stuff we're authorizing." Yet the Democrats in the "Gang of Eight"whom the president consults on classified programs -- Reid, Pelosi, Rockefeller,Reyes -- may prefer to have things broken. What they don't know, can't hurt themat the polls, or so they seem to believe. It is the same passive obedience thatled the Democrats to close the debate early for the authorization of the Iraqwar in 2002, so they could clear the decks for the election; to banish all useof the words Abu Ghraib and Guantanamo, in late 2004, so they could clear thedecks for the election; and to confine themselves to flawless platitudes aboutIraq in 2008, so they can clear the decks for the election. The desertion ofprinciple is exceeded only by the evasion of responsibility.

Still, what were they risking when they let the administration go ahead in Iranwithout accountability? The answer was given by Secretary of Defense Gates whenhe met with a group of Democrats late last year. Gates told the Democrats thatif the U.S. made a preemptive strike against Iran, "We'll create generations ofjihadists, and our grandchildren will be battling our enemies here in America."Now, what Democrat, in 2007 or 2008, has spoken as if he heard that warningfrom the Secretary of Defense?

To the extent that we have sidestepped a war with Iran, the notable resistancehas been mounted so far by persons within the armed forces like Admiral Mullenand Admiral Fallon -- the latter of whom (according Hersh's informant) got alongfine with President Bush but crossed Vice President Cheney by wanting to knowabout the secret operations officially under his command. Had Fallon consultedthe Democrats, they might have shown him how to hold onto his job by followingtheir pattern of uninformed consent.

The stifling of free discussion within Congress about the American provocationsin Iran, is both a cause and a symptom of the one-sidedness of the treatment ofthe issue in the mainstream media. It is handled as if Iran's nuclear researchwere the sole danger in the case; and as if it were a foregone conclusion thatin this matter, the fears of some Israelis are bound to be closer to the truththan the National Intelligence Estimate of 2007.

Why has House Concurrent Resolution 362 -- a device promoted by AIPAC that commitsits supporters to press for a naval blockade of Iran, which would be an act ofwar -- received so little public attention and debate? AIPAC has denied that ablockade is intended, but the language of its resolution leaves no doubt; itgoes for "imposing stringent inspection requirements on all persons, vehicles,ships, planes, trains, and cargo entering or departing Iran; and prohibitingthe international movement of all Iranian officials not involved in negotiatingthe suspension of Iran's nuclear program." Nothing except a blockade couldpossibly accomplish the enumerated tasks of interdiction and inspection.

The whole purpose of such a resolution is to herd the Democratic Congress intothe Office of the Vice President until the two spaces are indistinguishable. Avote for the resolution amounts to a vow of silence regarding anything the U.S.chooses to do against Iran. The vice president believed that he had war withinhis grasp when an incident almost erupted in January 2007 between Iranianpatrol boats and American ships in the Strait of Hormuz. There were no cheersof relief in the OVP when the navy stayed calm and the fever went down. A fewweeks later, Hersh reports, the vice president held a meeting. "The subject,"said a former official of the administration, "was how to create a casus bellibetween Tehran and Washington."

Vice President Cheney learned long ago that he can outplay the Democrats in thegame of power, because he is willing to use power. The Democrats, by contrast,don't even want to be responsible for the power that they have. In early 2007,when most voters believed the result of the 2006 election signified a policy ofwithdrawal from Iraq, nobody was surer than Dick Cheney that a plan to withdrawwould never be brought forward. If the Democrats were serious, Cheney said,they would vote against appropriations. He was right. They didn't have thenerve, and they did not mean to withdraw. Instead, they rewarded theadministration, whose venality and recklessness were a matter of internationalembarrassment, with an exorbitant donation of public money to subsidize newacts of violence.

Thanks to Seymour Hersh's reporting, today they are under the glare of publicexposure; and, unlike the vice president, they can hardly invoke a new-modelinterpretation of "inherent powers" or a "theory of the unitary executive" toscreen them from public questioning. Nancy Pelosi, Jay Rockefeller, Harry Reid,Sylvestre Reyes, John Murtha, David Obey and all the bewildered and negligentDemocrats (to say nothing of the Republicans, who claim nothing for themselvesbut a perfect dependency on the president) -- all may fairly be asked if they arehappy with the Cheney-Bush secret operations in Iran. Are they even interestedin knowing what the operations are? They did not care much about oversight, butnow we are watching them.

The Paradoxes of Latin American Development

The Paradoxes of Latin American Development

By Prof. James Petras

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Latin American development presents us with a rich array of paradoxes, which befuddle the predictions, prescriptions, and commentaries of writers and academics from the right and left. Abrupt changes and shifts in the political correlation of forces is matched by striking structural continuities. Political advances alternate with sharp reversals as popular movements compete for power with resurgent ruling class-directed mass mobilizations. Breakdowns in the financial and productive systems, the flight of capital and the demise of ruling class regimes are followed by strong capitalist-led economic recovery, the resurgence of business-led movements and the restoration of capitalist hegemony over the petit bourgeoisie. Horizontal class anchored movements and trade unions, which overcome ethnic, regional and local divisions to challenge the capitalist state are displaced by vertical divisions in which mass-based regional and sectoral capitalist organizations compete over profits. Hegemonic leadership over vast sectors of the lower middle class, urban and rural poor oscillates between the downwardly mobile proletariat, organized public employees, peasantry, and in some cases, the urban unemployed, and organized agro-export elites, financial and mineral-based multinationals led by big business backed radical right wing middle class demagogues. Economic recovery and sustained and substantial growth rates strengthen the political and social power of the ruling class which contributes to extending and deepening inequalities which exceed those preceding the economic crisis. The political pendulum shifts from radical left influence 'in the streets', to center-left institutional power, to a resurgence of right-wing 'street' and institutional power. Mass social movements, which occupy and organize failing factories and unproductive landed estates, are replaced by the restoration of the previous factory bosses and the forcible displacement of peasants and the vast expansion of agricultural export commodities.

As US hegemony in Latin America becomes less profound and pervasive, Latin America's local brand of neo-liberalism expands and goes global. The onset of the US recession and financial crisis has little or no effect in slowing Latin America's export boom, demonstrating the growing de-coupling of the two regions' economies, rendering obsolete the long-standing cliché…"When the US sneezes, Latin America catches pneumonia."

The Class Dynamics of the Resurgent Right

One of the key factors driving the resurgence of the right, the weakening of the self-styled 'center-left' regimes and the isolation and decline of the radical social movements in the first decade of the new millennium, is the 'primarization' of the economies. The primary economic sector, namely agriculture and mining, is dominated by big national and foreign agro-mineral corporations who also lead 'peak' business and financial institutions and exercise hegemony over local and regional governments and their employees. Favorable world prices and the opening of new dynamic overseas markets as well as large inflows of foreign investments into the primary sectors have vastly increased the role of agro-mineral elites in the economy and increased their demands for greater influence over national economic policy. The growing centrality of agro-mineral sectors and its 'satellite' industries (finance, commerce, farm machines, infrastructure and construction) has shifted the axes of political power from center-left alliances of urban middle class-working class and rural/urban poor to agro-mineral led mass power-bloc embracing urban small business, professional organizations, rural middle and even small farmers, disaffected urban consumers and fixed salaried employees suffering the ravages of high inflation.

The right wing-led primary sector elites are the foremost exponents of 'free market' policies, independently of the decline of influence of the IMF and World Bank, as their basic strategic goal is unrestrained access to overseas markets and importation of capital and consumer goods at the lowest competitive prices. Domestically the agro-mineral elites and their collaborators among the financial, commercial sectors demand the end of government regulation, lowering or elimination of export tariffs, an end of revenue sharing with the national government and the reinvestment of trade surplus in infrastructure projects facilitating exports and earnings.

The shift in power from the radical left to the center left to the right follows closely the fortunes of capital. The radical-left dominated the street and exercised a virtual veto on economic policy and influenced 'regime change' at the height of the economic and political crises and breakdown of neo-liberalism at the turn of the 20th century. The center-left emerged from the stalemate between the social movements and the ruling class during the crises: The radical left was able to block capital rule but unable or unwilling to replace it and the ruling class occupied the strategic positions in the economy but was unable to rule. The 'center-left' was essentially a 'transitional regime' born in the aftermath of the crises and breakdown but only able to survive if and when it was able to adapt to the demands of agro-mineral elites emerging out of the economic boom of the post-crisis period. The 'center-left' regimes' pursuit of policy adjustments and structural continuities created its 'grave-diggers' on the right. Secure in their support from the privatized strategic financial, agro-mineral and industrial sectors, the center-left implemented a series of fiscal, monetary and labor policies which 'force-fed' the re-launching of capitalist growth. Favorable world market conditions biases the center-left regimes to adopt the primary sector's growth strategy, independent of the fact that their electoral base was opposed to the leading elites in the primary sector. The center-left operated with a static view of the post-crisis balance of power between the mobilized poor and resurgent bourgeoisie: They envisioned a 'productive alliance' where they could harness wealth and revenues generated by a 'free market' primary sector to social welfare payments pacifying their mass base. The strategy fell apart from the moment the primary sector boom took off and the resurgent agro-mineral elites flexed their political muscles based on record high profits. The right-wing primary sector elites refused to play along with the 'productive' alliance and 'share the wealth' policies of the center-left regime. Unable to put the genie back in the bottle, the center-left became a political captive to the resurgent right, back tracking on promises to its mass base and unwilling and unable to protect its supporters, let along mobilize them against the institutional and street violence of the primary sector's right-wing shock troops.

The Resurgence of Free-Market 'Neo-Liberalism' and the Decline of Social Movements

The ascendancy of the kingpins of the primary sector-driven economy has had important repercussions over the macro-economic and political map.
First and foremost, the right has captured political power in the dynamic agro-mineral regions, and with the windfall profits and local tax revenues, have been able to fund local welfare projects, which mobilize the great majority of the local population in support of their 'regionalist' agenda. In so doing the have been able, to a great extent, to turn class conflict into sectoral/regional conflict.

Secondly, regional leverage and the increasingly strategic role of the rightist-dominated regions in the national economy has resulted in greater political influence on national politics. In particular, important economic elites in the capital cities, particularly in the finance and commercial (export-import activities) sectors have joined forces to undermine the center-left regimes. The result has been the increasing 'bending' of the vulnerable center-left regimes to the more radical deregulatory demands of the agro-mineral sector. The problem facing the center-left regimes is that the resurgence of the Right takes place at a time when inflationary pressures are forcing organized labor to demand greater salary increases, especially in light of the past 5 years of rapid growth and growing inequality. The result is a three-cornered conflict in which the center-left regimes face opposition from its former popular base, and have been abandoned by the provincial and capital city middle class.

The regulatory measures, which the center-left introduced in the face of the crisis earlier in the decade, are now being eroded. Their weak efforts to ameliorate extreme poverty and to finance urban employment are being undermined by a self-confident and assertive agro-mineral right, which correctly sees itself as the dynamic center of the center-left export-led development strategy. The dependence of the center-left on the primary sector and its failure to introduce structural changes in land tenure, mineral and energy control were crucial to the powerful resurgence of the Right. The center-left's refusal to re-nationalize the strategic economic sectors privatized during the previous decade and its strategy of political demobilization of the popular movements have dramatically shifted the balance of political power to the right.

The Demise of the Peasant and Indian Movement

By the turn of the millennium peasant and indigenous movements were playing a major role in some countries in Latin America. In Bolivia, Ecuador, Colombia, Mexico, Peru, Brazil, Central America and Paraguay, peasant and Indian movements played a major role in either overthrowing neo-liberal regimes, building powerful regionally-based movements with an impact on national policy, helping elect center-left presidents and, in a few case, providing mass support for guerrilla movements. Most of these social movements were effective 'veto groups' in the making of a national political agenda. As important political actors, these movements were much sought after allies by self-declared center-left electoral politicians and parties to counter-act the patronage politics of right-wing agro-mineral elites. The moment of triumph of the movements, their recognition as central actors in national politics, as potential makers and breakers of the electoral fortunes of urban-led political parties and leaders, was also the beginning of the end of their role as representative agents of the mass base.

Peasant and Indian leaders succumbed to blandishments or political favors, government jobs, EU/North American-funded NGOs and micro-loans administered by international overseas banks. Movements and leaders witnessed their center-left political allies turn to the right, embracing the agro-mineral export strategy and abandoning promises of land reform, food security and funding for cooperative agriculture. The result was the visible loss of political initiative, internal divisions and mass defections and, in some cases, the transformation of the movements into transmission belts of official policies leading to partial demobilization and the loss of 'street power'. Above all the turn and emphasis on 'autonomy' and ethnic politics, promoted by the NGOs and their EU and North American funding agencies caused the Indian movements to move away from class politics in favor of regionalist/separatist politics. This shift to identity politics isolated them from the trade unions, miners and urban working class and provided the powerful regional agro-mineral elites with a pretext to seize control over the most productive and rich regions of the country, containing the most fertile soil and concentrations of minerals and major gas and oil fields.

Despite the advance state of decay and disarray of the peasant and especially Indian movements and their increasingly isolated and marginal role in national politics, an army of leftist and progressive journalists, NGOers, academics, and writers continued to prattle on about 'Latin America's powerful social movements', a 'pink tide', the 'advance of the Left' and so on. As the agro-mineral Right in Bolivia passed separatist referendums in provinces which they dominated, and peasants and Indian supporters of the central government were savagely beaten by neo-fascist thugs backed by the provincial separatist regimes, the Morales-Linares regime abandoned any pretext of defending the physical security of its followers while making every effort to placate the agro-mineral elite. In Ecuador, subsequent to the Indian movement CONAIE's disastrous (2003) electoral alliance with pseudo-populist-turned rightist President Lucio Gutierrez, the movement declined, divided and demoralized its mass base, reaching its nadir in the 2007 vote for the constituent assembly where it secured 2% of the vote for its candidates. The Zapatista Indian movement self-marginalized itself by refusing to support multi-million person protest movement against the presidential fraud of 2006, and by giving minimum token support to the mass urban-rural uprising in the Mexican state of Oaxaca which lasted 6 months under severe state repression.

Social Movement Retreat from National to Local Actors

In the latter third of the present decade, in the face of the ebbing of the Left movements and the demise of the center-left regimes and the resurgence of the hard right agro-mineral elite, the rural social movements have retreated toward local, sectoral struggles, the urban trade unions and movements toward economic-salary struggles and the Indian movements to defensive survival struggle against the dynamic expansion of soya plantations, timber exporters, and mineral and oil multinational corporations. The leading rural movements, like the MST in Brazil, have experienced as many government evictions of land squatters as land occupations. The CONAIE in Ecuador, and the Indians of Chiapas have seen many more of their supporters abandon their ancestral lands, their farms and even the country than have joined the movements. The peasant and Indian federations of Bolivia have witnessed the vast expansion and enrichment of the agro-business export elites, while poverty levels persist at over 65%, forcing massive outward migration overseas.

The dual reality today is the retreat of the Indian and peasant movement and the resurgence of the agro-mineral ruling elites, both reflecting the enormous impetus given to this economic polarity by the center-left's promotion of primarization of the economy.

Latin American Paradoxes: Leftist Electoral Victories and Rightwing Power

Contemporary Latin America can best be understood by examining its most salient paradoxes and identifying the basic contrast between the proclaimed appearances and the empirical realities. Over the past three years the most powerful and organized civil society movements are organized by right-wing urban big business, agro-business elites backed by substantial numbers of the private sector middle class, small farmers, retailers, civic associations, transport owners and professional organizations. In contrast the rural and urban social movements of the poor organized by the left are in retreat, immobilized or in a 'defensive mode'. The resurgence of the right takes place in the context of left-center regimes whose policies have demobilized the movements via co-option, stimulated an economic recovery which has in turn raised expectations and demand from the right for greater 'autonomy', regional power, more lucrative concessions and lower taxes.

A brief survey of Latin American in 2008 of all the major countries confirms the new paradigm of a resurgent right.

Bolivia: By the end of June 2008, the right-wing fully controlled the governments in 5 provinces, ran and won referendums in 4 provinces, dominated the 'streets' and plazas through aggressive 'civic organizations', periodically engaged in violent attacks on assemblies of Indians, trade unions and had the power to call effective general strikes and lockouts closing down the economy. Led by the agro-business oligarchy of Santa Cruz, they set up a parallel government to negotiate tax collection, foreign economic policy and to force the national army and police to abide with its policies. The result is that the Rightist regions now control over 85% of the gas and oil exports and reserves, 80% of agro-exports and most of the financial and commercial institutions. Popular left organizations have been manipulated and divided by the Morales-Garcia Linera regime, undermining their capacity to counter the rightist resurgence. In June, the mining federation - or at least a majority of its delegates voted for a general strike to be held in July against the resurgent Right and the impotent Morales regime.

Argentina: Throughout the first half of 2008, the leading agro-business enterprises with strong support from the provincial bourgeoisie, small and medium farmers organized massive and sustained lockouts, a multitudinous demonstration of 200,000 in Rosario and forced the Cristina Kirchner government to renegotiate a tariff tax on the windfall profits of grain and soya exports. The right-wing leaders of the boycott succeeded in weakening the popularity of the 'center-left' regime, calling into question its authority and ability to govern, while building political alliances with the urban financial and commercial sectors. Equally important, the scarcity of food (meat and grains) led to price rises, fueling inflation and provoking widespread discontent among the urban poor. There was little backing from the popular urban movements either in support of the 'center-left' regime or opposition to the rightist road blockages and boycott, except among sectors of the truckers unions. Clearly the rightwing agro-export-led hegemonized rural movement has replaced the unemployed workers movements as the dynamic sector of extra-parliamentary politics. As a consequence of the weakening of the center-left, the right-wing orthodox neo-liberals are likely to become the electoral beneficiaries.

Brazil: During the first six years of the Lula Da Silva presidency, right-wing business and banking leaders and advisers have dominated all the strategic economic positions in the government. The major 'movements' in the country-side have been totally dominated by the soya, timber, sugar-ethanol elite who have dispossessed small farmers, Indians and subsistence peasant in expanding their production of bio-fuel crops and other agricultural exports. The Rural Landless Workers Movement (MST) has seen its social actions criminalized, tens of thousands of their organized land squatters evicted, their makeshift shacks burned and crops uprooted by military, municipal and state police and private armies of agro-exporters. One of the driving forces of the agro-export boom has been large-scale, long-term foreign investment in millions of acres of fertile lands, food processing plants, ethanol refineries and storage and shipping facilities. Under Lula Da Silva millions of acres of the Amazon region have been stripped of the tree cover and thousands of indigenous people and poor land settlers have been evicted. At best the MST has been engaged in defensive struggles, declining land occupations and symbolic protests against biotech agriculture and ecological destruction. In contrast to the dynamic expansion of the capitalist-led land takeover movement receiving powerful financial and police support from the Lula regime, the popular movements are in retreat, under vigilance and subject to 'heavy' repression , incarceration and assassination if and when they engage in 'direct action'. The Lula regime, which came to office with the powerful backing of the trade unions, the MST, public sector unions and popular social movements, has become the leader of the resurgent, elite-led agro-export movement. Lula has eliminated the MST and trade unions' political options and opened the way for the reaffirmation of ruling class hegemony.

Venezuela: After the Venezuelan right suffered a series of severe setbacks, namely the defeat of the military coup of April 2002, the bosses' lockout of December 2002-February 2003, the referendum of 2004 and the presidential elections of 2006, they returned to the streets in 2007 and secured the defeat of the Chavez referendum in December 2007 by the narrowest of margins (less than 1%). The right-wing in Venezuela has, over the past decade, retained a mass extra-parliamentary presence and a well-funded network of NGO's which train and engage in wide ranging street demonstrations, aided by US overseas agencies. The Venezuelan Right has combined electoral and extra-parliamentary action, violent terrorist and non-violent mass protest, alternating according to circumstances and opportunities. Taking advantage of concessions from the government, including regime amnesty of the coup participants, rising inflation and opposition-induced shortages, the right is aiming to win local and state elections scheduled for November 2008, where they hope to win a significant minority of state and municipal elections. Coming off from their leadership in the elite-dominated public and private university student movements and their solid business-agro elite base, the right hopes to repeat their first electoral success in the 2007 referendum. The government and its new mass party, PSUV (United Socialist Party of Venezuela), faces a rejuvenated right, strengthened by the Colombia-US sponsored infiltrators and agitators in the poor neighborhoods capable of violent disturbances and promoting separatist movements, especially in the oil-rich state of Zulia.

Ecuador: The popular uprising of 2005 ousting right-wing President Lucio Gutierrez, the subsequent election of Rafael Correa and the twin victories in the referendum for a new constitution and the constitutional convention delegates (October 2007) all but eliminated the traditional right-wing parties. Having decisively lost their electoral bastions in the legislature and Presidency, the political right launched a large-scale regionalist-separatist 'autonomy' movement based in Guayaquil led by its major. In early 2008, they mobilized 200,000 rightist loyalists in an effort to pressure the constitutional assembly. Even more seriously, the military and its intelligence agencies, working closely with the CIA and the Colombian military, withheld information from President Correa regarding Colombian President Uribe's violent intervention and bombing of Ecuador's frontier region in pursuit of FARC guerrillas. In response Correa fired his Defense Minister and the head of military intelligence as well as replacing the head of the armed forces. The key to the resurgence of the right in Ecuador is the fact that the powerful coastal banks, industrial and financial groups have remained intact, as well as the major foreign-owned petroleum multi-nationals, which control 56% of oil production. The major private mass media allied with the Right dominate the airwaves in the absence of any major government media outlet. While Correa correctly eliminated the most egregious pro-imperialist military officials, the civil and military institutions of the state continue to be honeycombed with appointees from the previous right-wing regimes. If Correa currently dominates the executive and legislature, the Right has demonstrated its capacity to launch a powerful regional-based civil society movement and retain ties to key military sectors. The growth of the Right in civil society occurs at a time when the principal left civil society movements (the Indian movement CONAIE and the petroleum workers trade unions) have been weakened and neglected or marginalized by the Correa regime, making it vulnerable to extra-parliamentary attack.

Colombia: Colombia is a country where the extreme right has made its greatest gains both within the government, civil society, the class struggle, and in relation to its neighbors. With the election of Alvaro Uribe, Colombia witnesses the systematic extension of death squad activity linked to a mass urban middle class movement and the forcible recruitment of tens of thousands of rural informers under threat of torture and death. Backed by over $6 billion dollars in US military aid, thousands of North American advisers, and the latest in electronic detection technology from the US and Israel, the regime has driven over 2 million peasants out of the countryside into urban slums or over the border. The re-election of Uribe was accompanied by an increase in the armed forces to 250,000. The center-left mayors and congress-people of the Polo Democratico are totally impotent to prevent weekly massacres and are unable to block the enactment of a proposed bilateral free trade agreement with the US. The regime has militarized most of the countryside, isolating and destroying peasant and trade union organizations.

By 2005 the Colombian right was infiltrating paramilitary forces into Venezuela to destabilize the Chavez regime. They organized the kidnapping of a FARC spokesperson in downtown Caracas. The culmination of Colombia's projection of regional power was the bombing of a FARC encampment in Ecuador, identified by the US and Colombia in the course of international negotiations over hostages and prisoners brokered by Chavez. As a result, Chavez bent to Uribe's pressure and publicly attacked the FARC calling on it to disarm and unconditionally submit to the terms dictated by the Colombian government. Today Uribe mobilizes 1.5 million supporters while the center-left can count on 200,000, while the left popular movements are in retreat.
Far from a period of left advance, Latin America is in the midst of a resurgent right, in civil society and in the electoral arena, in large part thanks to the economic boom, which (together with the consolidation and promotion of their economic backers in agro-business, finance and mining) now threatens to displace the center-left regimes. The growing 'white-tide' has laid the groundwork for a new form of joint imperial-oligarchic hegemony if and when the US recovers from its recession, financial crisis and the military quagmire in the Middle East.

The Paradox of Autonomy

The second paradox is located in the leftist or center-left proposal for 'autonomy', which has strengthened the right and the regional economic elite and weakened the central government and national popular movements. What started as a leftist-indigenous demand for a pluri-ethnic state based on 'regional autonomy' has evolved into the platform of the rejuvenated right - demanding regional autonomy in order to exclusively control and exploit agro-mineral rich regions. The slogan for 'autonomy' raised originally by Indian-led movements and backed by US and European-funded NGO's envisioned local ethnic self-government free of central government tutelage. The problem is that the most prosperous, revenue and resource rich areas are precisely the regions where the Indian communities do not dominate and in which wage labor and commercial relations have largely dissolved traditional indigenous 'reciprocal relations'. With the ascendancy of Left-center government the issue was capturing additional revenue from the resource-rich, white oligarch-controlled regions in order to finance the development of the poorer regions where Indians predominate and to resettle poor and landless Indians on to fertile lands and to provide them employment in productive industries and mines. Instead, regional autonomy has essentially confined the Indians to their infertile and remote mountain regions to administer their own misery and receive little state aid generated by the enormous profits from mining and agro-exports. In contrast, once having lost influence or direct control over the central government, the rich regions dominated by the agro-mineral and financial elites have seized upon the Indian rhetoric of 'autonomy' to move toward de fact secession and monopolize locally generated wealth and revenues against any federal revenue sharing.

The vagueness of the entire 'autonomy' and 'local government' rhetoric failed to analyze the classes, which would benefit from the devolution of power and resources. Moreover the uneven development of regions and unequal distribution of wealth precluded any possibility of an equitable policy favoring the least developed and low-income regions. Regional autonomy, which first appeared (or was discussed) by the NGO community as a way of redressing historical injustices among the Indians, had the opposite effect of denying a majority the fruits of its achievement of national power. The divorce of poverty-stricken Indians from regions of high growth and fertile lands and rich mines was a result of their historical dispossession by big landowners and mine owners; and even earlier the flight from colonial predators in search of indigenous people for forced labor. The progressive demand is not to 'empower' the poor in their impoverished regions but to demand the devolution of lands via an agrarian reform and the expropriation of mines as real mechanisms to create class empowerment. The center-left regimes refuse to expropriate, resettle and empower the poor; instead their policy of 'autonomy' preserves existing elites and property historically cleansed of indigenous peoples and encloses the Indians in their unproductive mountain enclaves and slums. Worst of all, regime autonomy rhetoric played to the hand of the Right, allowing them to seize political control over their prosperous regions at the expense of the federal government.

The Paradox of Popular Electoral Support of the Rightist Resurgence

There is no doubt about the leftist appeals of the center-left politicians and regimes. Studies of the electoral results demonstrate conclusively that their main base of support came from the rural and urban poor, the lower middle class and the organized social movements and trade unions. The driving force of political regime change from the neo-liberal right to the center-left was the deep economic crises precipitated by the unregulated market, wild financial speculation and great concentrations of wealth in the midst of a systemic crisis. Yet it is precisely the popular electoral base of the center-left regimes, which have benefited least from the economic recovery, the commodities boom, and the relatively high growth rate. It is the formerly discredited economic elite, which has recovered its high rates of profits and managed to consolidate its possession of dubiously privatized assets. The center-left regimes have 'closed the cycle', which began with the end of the 90's crises of neo-liberalism, leading to the discrediting of the rightist regimes and the decline of profits. This led to the emergence of powerful social movements, serving as the trampoline for the ascendancy of the center-left to power, the recovery, growth and now resurgence of the Right in both its economic and political expressions. All of this has taken place in less than a decade and far from the accounts of the myopic leftist commentators who still claim the 'end of US hegemony'.

Paradox of Profits

The highest rates of private profits, growth rates, foreign exchange reserves and fiscal austerity have occurred under popularly elected center-left regimes of the 2000's, not the neo-liberal rightist regimes of the 1990's. In part this is because of the high world prices of agro-mineral exports, but it is also because of the political stability, economic incentives and fiscal policies of the center-left regimes. The center-left's demobilization of the popular insurgency and the channeling of politics into established institutional channels has been viewed positively by both foreign and domestic investors, leading to the repatriation of capital. The regimes imposition of moderate wage increases at a time of expanding capital gains has increased profits and income inequalities. Equally important, the center-left regimes have reduced large-scale, long-term pillage of the economy and massive corruption, forcing capital to invest for profit rather than to rob the treasury. Corruption of politicians is now largely a means of greasing the wheels of investment. The greater growth of capitalism under the putative 'center-left' rather than under the neo-liberal right is partly the result of the turn form plundering existing resources to investing in 'normal' capitalism. In that sense the difference between neo-liberal right and the center-left is not over capitalism or 'free markets' - it is between capitalism that engaged in income from state 'rents' and a capitalism that grows via market transactions.

The Paradox of Center-Left Prioritizing Debt Obligations over Social Programs

The hard right prioritized its relations with the international lending agencies, depending in large part on debt financing for many of its investments in unproductive financial sector growth. The right-wing's pillage of banks and destruction of savers' confidence led to constant resort to the IMF and World Bank for bailouts, in the process subjecting the economy to onerous conditions limiting growth especially in the real economy. Rhetorically the center-left waged ideological warfare against the IMF and especially its conditionality and onerous debt payments, which it argued impoverished the working class. Once in power, the center-left moved quickly and decisively to pay down the official debt (in fact paying down the debt to the IMF and World Bank), claiming it was limiting their influence. In fact the center-left regimes increased their total private internal and external debt, loyally followed IMF-WB tight fiscal policies and programs on budget surpluses and retained 'central bank' links to the financial sector - calling this arrangement 'autonomy'.

None of the center-left banks placed any restriction on debt payments - none gave priority to the 'social debt' over paying bondholders or creditors. The center-left were as prompt and punctual in meeting debt payments as the right had been - once payments were agreed. Argentina, which initially agreed to reduce the debt payments following the financial crises, followed up by agreeing to add or increase payment in accordance with its growth rate. In the subsequent 5 years of 8% growth, its foreign and domestic debt holders more than recovered what was initially deducted. Growth in debt payments and increases in foreign reserves far exceeded incremental increases in the minimum wage in all center-left regimes, making them attractive markets for overseas investors in their stock markets.

The Paradox of Declining Labor Militancy and Greater Dispossession Under Center-Left

There has been a decline in labor militancy and an increase in displacement of urban and rural workers under the Center-left regimes. The center-left with its influence over and cooption of trade unions and peasant leaders oversaw the decline of general strikes and robust politically motivated mobilizations for structural change, which characterized the earlier period of rightist rule. Factory occupations by unemployed workers came to an end in Argentina. Unemployed workers organizations ceased to block major highways. Employers filed claims to repossess occupied plants, and in many cases won judgments in their favor. Capitalist property was protected and functioned with fewer strikes and work stoppages. Land occupations by peasants were replaced by land dispossession by land speculators and agro-business investors. The commodity boom was accompanied by a real estate boom, leading to 'urban development' via the displacement of the urban poor from the shantytowns and the building of upscale high security apartments, shopping malls and business complexes. Under the slogans of 'modernization' and 'development' and easy credit, the center-left converted class-consciousness into consumer-consciousness especially for the organized better-paid unionized sectors of labor.

Paradox of Popular Classes Winning Elections and Losing Social Power

The election of center-left personalities led to the substitution of traditional politicians for grass roots social movement leaders and in some cases the social movement leaders were converted into establishment politicians. In either case, in political office the center-left politicians became apostles of the dogma of 'representing all classes' diluting their commitment to their original constituency and substituting Presidential decrees for popular consultations and downgrading the relevance of social power in the streets. The more sweeping the victory of the center-left, the less dependent on social movements, the further it drifted from the programmatic demands of the social movements. The popular organizations were badly compromised, having harnessed their followers to the center-left, were left with a disillusioned constituency with no alternative on the horizon, confined to extracting minor concessions.

Paradoxes of Economy: As Markets Grow - US Influence Declines

Latin American capitalism has become more 'free trade', more deeply integrated into the global market and exhibited higher growth rates at a time when US capitalism enters into recession and experiences stagflation. The old cliché: 'When the US catches a cold, Latin America suffers pneumonia', no longer holds. Latin America is increasingly 'decoupling' from the US economy in three directions: Increasing market ties with Asian and the European Union; expanding regional trade and deepening its domestic market. Given the commodity boom, 'going global' means higher profits, better market access and fewer restraints on achieving higher negotiated prices. As a consequence the declining centrality of the US market and political leverage means Latin American exporters can avoid non-reciprocal trade agreements with the US in which US quotas, tariffs and subsidies limit North-South free trade.

As the Influence of the IMF and World Bank Decline - Free Markets Grow

The huge trade surpluses accruing to Latin American agro-mineral exporters grow, the need to finance via the IMF and World Bank declines. Given the harsh conditions imposed by the IFI, Latin American governments can seek commercial financing or draw on local public and private self-financing. The greater domestic and international liquidity had facilitated increased financing of investment in the agro-mineral export sector, which in turn has stimulated more free trade agreements within Latin America and between the region and rub-region and the EU and Asia. The fact that trade barriers are falling as IMF-WB influence wanes, demonstrates that the 'free market' policies are endogenously designed and not 'imposed' from outside institutions. The ascendancy of the agro-mineral and financial ruling classes in Latin America and the higher profits accruing from wider unrestrained access to overseas markets are necessary and sufficient reasons for their embracing the free market policies, even as the IMF-WB experiences a decline in macro-economic influence.

Anti-Neo-Liberalism as Prelude to Virulent Growth of Neo-Liberalism

Practically all the regimes ruling Latin America from the center-left onward have attacked 'neo-liberalism' as the source of 'mis-development' in the run-up to elections. Once in power and confronted with the growth of world demand for export commodities and windfall profits, the 'post-neo-liberals' have embraced with greater fervor the turn to primary goods exports, the pursuit of reciprocal free trade agreements and the massive importation of finished goods - the typical pattern of the neo-liberal model.

Anti-neo-liberalism became a ritualized demonic icon as a past associated with discredited politicians and corrupted parties. Its invocation however serves to mystify the 'faithful' to the fact that the current regimes have taken the neo-liberal prescription further along the non-regulatory path. While castigating 'old style' neo-liberalism, the current regimes gain the political capital to promote the new dynamic contemporary version.

The Paradox of Growth and Hunger

The greater the agricultural growth , the greater the export earnings, the worse the inflation, the greater decline in food consumption, the greater the generalized discontent. The enormous increase in demand from the dynamic newly industrializing and mineral rich countries as well as the demand for ethanol from the imperialist West, the greater the growth in agricultural exports. The massive inflows of revenue and the decline of domestic food production as land is converted to soya, sugar and grass for foreign markets, the greater the disequilibrium between local food demand and supply, resulting in inflationary pressures. Inflation outruns wage increases, leading to greater social malaise, food riots, strikes and road blockages. Inflation polarized civil society in multiple directions pitting agro-exporters, transport, consumers, fixed economy pensioners, wage and salaried workers, weakening the leverage of the central government over the economy and eroding its popular and ruling class support.

The Greater the Call for Regional Integration, the Greater the Integration into the World Market

While there are numerous calls for 'regional integration', especially Venezuela's projected ALBA, the principal direction of Latin American trade is toward the dynamic centers of world trade. Increasingly major economic enclaves in specific dynamic economic sectors and regions of Latin America have linked up with fast-growing Asian, European and Middle Eastern regions - far surpassing the rate of growth in intra-regional trade. US proposed regional trade agreement, ALCA, never got off the ground; the Andean union is in tatters as Colombia and Peru seek bilateral agreements with the US; Venezuela's proposed ALBA includes only the marginal economies of Cuba, Nicaragua, Dominica and Bolivia, and most of the flows are from Venezuela to its weaker associates, and its principle trading parties still include the US and now Asia, the Middle East and Russia. Ecuador, ostensibly a potential member of ALBA, prefers to maintain its ties with the US, a major buyer of its petroleum exports.

Social Paradoxes

The principal sites of Indian slave labor on haciendas in Latin America are identified to be Bolivia and Brazil: one country led by an 'Indian' president and the other, the former leader of a major trade union confederation. The most flagrant abuse of indigenous citizens protesting economic contamination and elite abuse is in the three 'center-left' regimes of Ecuador (mining centers), Bolivia (especially Santa Cruz) and Chile (scores of Mapuches in the South have been jailed by the 'Socialist' President). The more successful the economic recovery of the center-left regimes, the less support they receive from the middle class, the stronger the elite demands for greater concentration of wealth and the weaker the counter-response of the popular social movements. The center-left regimes have presided over dynamic growth and greater social polarities, which have dramatically shifted the balance of power to the hard right and hastened the demise of center-left political hegemony.

Hypothesis to Explain the Paradoxes

The contrast between the hopes and illusions and dismay resulting from left and right projection of Latin America's 'left turn' break will neo-liberalism and dynamic growth of popular social movements requires severe interpellation and raises important questions:

1. What accounts for capitalist recovery and expansion, booming exports, political demobilization of popular Indian, peasant and unemployed workers movements and political stability?
2. What accounts for large-scale flows of private investment and global integration at the expense of labor's share of income and regional integration?
3. What accounts for decline of US influence and the demise of ALCA even as neo-liberalism deepens and free market policies increase the contribution in foreign trade to CNP?
4. What accounts for the abrupt changes, in less than a decade (1998-2008), from what appeared the terminal crises of neo-liberalism, massive popular upheavals, center-left stabilization, economic recovery and dynamic growth under the aegis of free trade policies and the resurgence of rightist power? What accounts for the shifts in the axis of growth within the ruling class from finance and industry to primary sector exports as the driving force of the economy and the marginalization of urban-led social movements and middle class reformers?
5. What has class struggle politics declined in the face of the resurgence of patronage politics, backed and supported by many of the same formerly militant social movement leaders?
6. Why have vertical elite-led coalitions replaced horizontal intra-class alliances, in which cooption has undermined dissent?
7. Why has easy credit and high rates of consumerism blunted class conflict and emerged unchallenged from traditional trade union leaders?

Tentative Answers to Contemporary Latin American Paradoxes

Schematic form

Social How formal-symbolic power (institutional) leas to loss of substance/informal power for social movements ('recognition' but not substantive benefits or power to set government agenda or make legislation.

Why the 'crisis' of neo-liberalism in the late 1990's and early 2000 did not lead to a decline, let alone demise, of the ruling elite - difference between policy or regime failures and continuation of structural underpinnings.

'Crisis' political outcomes led to regime changes which adapted new 'anti-neo-liberal' rhetoric to policy adjustments within the structural paradigms and institutional setting established by previous neo-liberal regimes.

Post-crisis regimes combined (some carry-over) neo-liberals in crucial economic, financial ministries and central bank with new faces in social ministries administering policies targeting politically active social movements, their leaders and destitute mass constituencies.

The socio-economic result of this 'post-crisis' new policy configuration and political division of labor were favored by high world market prices and expanding markets and the relative weak bargaining power of newly incorporated workers to the largely contingent work force.

Strong prices and world demand for exports, the absorption of under-utilized capacity and the weak bargaining position of labor led to substantial economic growth, and the perpetuation and even increase in social inequalities.

Growth was financed by the capital-intensive agro-mineral export sector and the fuller utilization of existing productive capacity and partial re-investment of profits - not by any large-scale new private or public investment.

New horizontal and especially vertical divisions emerged as a result of the growth/inequality gar and the uneven growth of agro-mineral/urban service-industrial geo-economic sectors.

The right growth/social clientele model, high profit-stagnant wages model, led to increased socio-economic conflicts with organized labor over wages and mass popular consumer protests over inflation, high food and other basic prices.

The economic recovery and growth model powered by the agro-mineral export elite increased their economic weight in the economy and led to demands for greater political power in setting the terms for the distribution of profits between the agro-mineral sectors and the urban service/industrial financial sector.

The centrality of the agro-mineral sector in the post-crisis period found expression in 'regionalist' and in some cases 'separatist' or 'autonomist' movements, in order to monopolize high export earnings. A small percentage of the new windfall profits and the general income gains accrued to small and medium mine owners and farmers, facilitating the hegemony of the big agro-mineral corporate leaders and their political leaders in regional civic organizations and government.

The vertical divisions between rival center-city service-based elites and the agro-mineral rural elites, found expression outside of the constitutional, institutional and electoral framework.

The post-crisis regimes having overcome 'systemic' challenges from below, now face severe challenges from within the system over the distribution of wealth and power from regional-based power.

The richest and economically dynamic agro-mineral elites lead a 'rebellion' to gain hegemony over the urban-service partners in ruling over the entire country.

Struggles over decentralization and regional/sectoral conflicts are transitional steps toward reconfiguration and concentration of national power in the hands of the rich agro-mineral elites.