Monday, August 11, 2008

Guantánamo trial sentence stuns Bush administration

Guantánamo trial sentence stuns Bush administration

By Patrick Martin

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A jury of six military officers sentenced Guantánamo prisoner Salim Hamdan to five and one-half years in prison, making him eligible for release before the end of this year, since he has been given credit for five years and one month already served. The decision clearly stunned military prosecutors, who had argued for a 30-year jail term.

The sentence represented a jury validation of the arguments made by defense attorneys, who said that the 40-year-old Yemeni was merely a menial employee of Osama bin Laden, not a member of Al Qaeda, let alone one of the leading terrorists—“the worst of the worst”—whom the Pentagon claims to have incarcerated in Guantánamo.

The jury had already given a rebuff to the Bush administration with its verdict, acquitting Hamdan of two conspiracy counts and finding him guilty only of the charge that the defendant essentially admitted in court—that he had worked as a driver for Osama bin Laden for several years before the 9/11 terrorist attacks.

Following the verdict, the trial judge, Navy Capt. Keith J. Allred, consolidated the five “specifications” of material support approved by the jury into a single count, and instructed them to determine the sentence accordingly, although they could still have imposed a life sentence. He also told the jurors that he would credit Hamdan with more than five years in Guantánamo since he was first charged.

The judge refused to credit Hamdan with the time served before he was charged—he was first seized by US military forces in Afghanistan in November 2001—and he postponed action on a defense request to give three to five months credit for every month Hamdan was held in solitary confinement or subjected to abusive interrogation.

The debate over that issue featured the Orwellian language that is characteristic of the Bush administration’s conduct in its bogus “war on terror.” A spokeswoman for the Navy command at Guantánamo said that Hamdan had never been in solitary confinement since there are no such cells at the base prison, only “single-occupancy cells.”

The sentencing hearing extended over Wednesday afternoon and Thursday after the guilty verdict was returned. Prosecutor John Murphy called Hamdan “a hardened Al Qaeda member” and appealed to the jurors—two colonels and three lieutenant-colonels from the Air Force and Army and a Navy captain—to deliver a punitive message to the world.

“You have found him guilty of offenses that have made our world extremely unsafe and dangerous,” he said. “The government asks you to deliver a sentence that will absolutely keep our society safe from him... Your sentence should say the United States will hunt you down and give you a harsh but appropriate sentence if you provide material support for terrorism.”

Showing graphic images of the 9/11 terrorist attacks and the 1998 attacks on US embassies in East Africa, he reminded the jurors of the victims of these Al Qaeda atrocities, concluding, “Your sentence will be their justice. Your work is our justice, and you shouldn’t flinch from it.”

In the context of such an appeal to raw vengeance, the sentence imposed by the jurors is all the more remarkable. One unidentified juror who spoke to the Wall Street Journal after the sentencing said that the evidence did not support the description of Hamdan as a hard-core terrorist.

Equally striking was the exchange between the trial judge and the defendant after the sentence was announced. Hamdan rose to make a statement in Arabic, repeating the apology to the victims of 9/11 which he had made earlier in the trial.

As he closed the hearing, Captain Allred said, “Godspeed, Mr. Hamdan. I hope the day comes that you are able to return to your wife and daughters and your country.”

Hamdan said, “Inshallah,” (“God willing,” in Arabic), and Allred responded, “Inshallah,” before the interpreter could give the English translation.

Hamdan’s fate now lies with the Pentagon and the White House, which could detain him in Guantánamo indefinitely as an “enemy combatant” once his current sentence expires in December. Navy commander Charles Swift, one of the defense team, said, “It was all for show if Mr. Hamdan does not go home in December.”

A Pentagon spokesman said that no decision had been made about whether to release Hamdan when his sentence expires. The jury verdict demonstrates that there is no validity to Hamdan’s classification as an “enemy combatant,” but the Bush administration claims that it has unlimited and unreviewable authority to make such a determination.

Another Hamdan lawyer, Joseph McMillan, argued out that an extension of Hamdan’s detention would violate “the notion of fundamental fairness,” and he compared the current case to the sentence imposed on Australian David Hicks, who was transferred to his home country and released after serving nine months, rather than held indefinitely.

The American press reported the sentence against Hamdan as “a stunning rebuke to prosecutors,” in the words of the Washington Post. In an editorial Sunday, the newspaper, a right-wing defender of the war in Iraq, urged the Bush administration to let Hamdan go in December—not so much because continuing to detain him would be unjust, but because it would further discredit US policy in the “war on terror.”

“To hold a man who has been judged to be of minimal risk to the country would make a mockery of the legal proceedings just completed,” the newspaper argued.

The Bush administration, for its part, plans to press ahead with the next trial scheduled at Guantánamo, in which the defendant is even further from the stereotype of terrorist mastermind than Hamdan. Omar Khadr, a Canadian citizen whose father brought him to Afghanistan as an adolescent, was captured by US forces at age 15. He faces charges of throwing a grenade that killed a US soldier there in 2002. Even if the charge were true, this would amount only to armed resistance to an invasion, not terrorism or war crimes.

Both the US and Canadian governments have refused to invoke international conventions that require that child soldiers are regarded as victims, not responsible for their actions in combat, and that bar treating them as though they were adults.

Military conflict between Russia and Georgia escalates

Military conflict between Russia and Georgia escalates

By Ann Talbot

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The war that erupted August 7 between Russia and the former Soviet republic of Georgia escalated over the weekend. Some 2,000 people are thought to have been killed, according to estimates given by both sides. Tens of thousands have been injured or driven from their homes by shelling and air attacks.

The US-backed regime in Tbilisi sent troops into South Ossetia last Thursday and carried out bombing attacks on the capital of Tskhinvali in an attempt to reassert Georgian control over the breakaway region, which has exercised de facto self-rule since the dissolution of the Soviet Union in 1991. Russia has deployed “peacekeeping” troops in the region, which is allied with Moscow against the government of Georgian President Mikheil Saakashvili.

In the face of a large-scale military response by Russia, Georgia claims to have withdrawn its forces from South Ossetia. Russian forces are now in control of Tskhinvali, the republic’s capital.

Underlying the military confrontation is US imperialism’s drive to isolate Russia and establish American hegemony over the energy resources of Central Asia and their transit routes through the Caucasus, utilizing the Saakashvili regime as its cat’s paw. The Russian ruling elite, for its part, is seeking to reassert its control over a region that was ruled by Moscow for two centuries before the break-up of the USSR.

Russian forces have carried out attacks beyond the borders of South Ossetia, including air attacks on the Georgian town of Gori that reportedly killed at least 60 civilians in two apartment blocks. There are reports that Russian jets bombed the Baku-Tbilisi-Ceyhan oil pipeline, but failed to damage it. The Russian Black Sea fleet has moved to blockade the Georgian port of Poti, which was attacked by Russian jets on Saturday. Tbilisi airport and military facilities near the airport have also come under air attack.

At least two Russian fighters have been shot down. The Georgians claim to have downed six Russian jets.

By Sunday the conflict threatened to extend to other parts of the Caucasus, as forces of Abkhazia, another Russian-backed breakaway republic, launched attacks on Georgian positions in the upper Kodori Gorge. Russian jets were reported to be supporting the Abkhaz ground troops.

“At this point we are particularly concerned that the conflict appears to be spreading beyond South Ossetia into Abkhazia,” the UN assistant secretary-general for peacekeeping, Edmond Mulet, said.

A war on three fronts seems to be opening up as the Abkhazian border, South Ossetia and the area of Gali and Zugdidi come under attack from Russian and Russian-backed forces. Georgian President Saakashvili has appealed for a ceasefire and for international help to open up corridors for the evacuation of wounded and trapped civilians.

Refugees fleeing into Russia described how Tskhinvali and surrounding villages came under heavy bombardment from Grad missiles and tanks as the Georgian forces advanced. There are claims of Georgian atrocities against the civilian population.

The outbreak of war between Russia and Georgia is the culmination of long-escalating tensions. It can be understood only in the context of US foreign policy in the former Soviet republics and the former Yugoslavia.

Following the break-up of the Soviet Union, Washington pursued a policy of weakening Russia by isolating it and curtailing its influence in the former Soviet spheres of influence in Central Asia and Eastern Europe. The dismemberment of Yugoslavia, encouraged by both the US and the Western European powers, was directed above all against Moscow, which had long considered Belgrade an important ally. This reached a culmination in the 1999 US-led NATO air war against Serbia, followed in 2000 by the toppling of the Milosevic regime in the first of the US-engineered “colour revolutions” of this decade.

Saakashvili was brought to power in Georgia by the so-called “Rose Revolution” of 2003. Like the “Orange Revolution” of 2005 in Ukraine, it was engineered by Washington to place a pro-American regime in power on Russia’s doorstep.

Georgian President Eduard Shevardnadze was forced to resign and was replaced by a group of younger Georgian politicians who had been among his protégés. Saakashvili was one of this group. A Harvard-educated lawyer, he presented himself as a suitable figure to act as the US point-man in the Caucasus, with a mission to introduce “free market” economic measures and protect the vital Baku-Tbilisi-Ceyhan oil and Baku-Tbilisi-Erzurum gas pipelines.

Since the US-engineered regime change in Georgia, Washington has flooded the country with military aid and deployed 160 military advisers to build up its armed forces.

US policy in Georgia is part of a strategy to incorporate former Soviet republics into NATO, create military bases and deploy anti-missile defence systems on Russia’s borders. The US has established military bases in former Soviet republics in Central Asia and the Baltic states.

President Bush promised Saakashvili NATO membership at the NATO summit earlier this year. Washington’s NATO allies in Western Europe, however, blocked any early admission of Georgia into NATO, seeing such a move as an unnecessary provocation against Russia, upon which they defend for energy supplies.

Tensions between Georgia and Russia over the status of South Ossetia and Abkhazia were exacerbated by Kosovo’s declaration of independence from Serbia last February. Washington was the prime mover behind Kosovo’s secession, which was carried out in violation of a number of international agreements. Russian President Vladimir Putin threatened at the time to use the precedent of Kosovo to support South Ossetian and Abkhazian demands for separation from Georgia, and soon after, Moscow granted Russian passports to citizens of the two nominally Georgian republics.

The eruption of military conflict between Russia and Georgia was all but inevitable given the highly aggressive and provocative character of US policy in the region and the nationalist and expansionist aims of the Putin regime in Moscow. There is little doubt that Washington gave Tbilisi the green light to attack South Ossetia. The Georgian offensive came only weeks after US Secretary of State Condoleezza Rice visited Tbilisi and held talks with Saakashvili. Rice denounced Russia during her visit and reiterated US backing for Georgian membership in NATO.

After the fighting erupted last week, the US agreed to fly home the 2,000 Georgian troops who make up the third largest contingent of “coalition” forces in Iraq.

The response of US and its Western allies to the conflict between Russia and Georgia has been thoroughly hypocritical. President Bush, who is in Beijing for the Olympic Games, on Saturday demanded “an end to the Russian bombing.” Backing Saakashvili’s call for a cease-fire, he declared, “Georgia is a sovereign nation and its territorial integrity must be respected.” He urged “a return by the parties to the status quo of August the 6th.”

Bush failed to square his concern for the sovereignty and territorial integrity of Georgia with the US invasions and occupations of Iraq and Afghanistan and its support for the secession of Kosovo from Serbia.

Senator Barack Obama, the Democratic candidate for the US presidency, responded in almost identical terms. “I condemn Russia’s aggressive actions and reiterate my call for an immediate ceasefire,” Obama said in a statement. He also demanded that Russia withdraw its ground forces from Georgia.

Republican presidential candidate John McCain likewise placed the entire blame for the war on Russia, saying, “For many years, I have warned against Russian actions that undermine the sovereignty of its neighbours.”

A statement from the European Union took a similar tone. It expressed “commitment to the sovereignty and the territorial integrity of Georgia” and urged Russia to respect Georgia’s borders.

It is widely recognized that the US and its Georgian client regime badly miscalculated in launching last week’s offensive against South Ossetia. Moscow’s rapid and massive military response evidently took them both by surprise. Russia has seized on the Georgian provocation to consolidate its control over the breakaway republics of South Ossetia and Abkhazia and demonstrate its ability and readiness to use military force to secure the interests of the nationalist regime in the Kremlin.

In a thinly veiled attack on the United States, Russian Foreign Minister Sergei Lavrov said on Saturday, “Those who have been supplying arms to Georgia, I believe they should feel part of the blame for the loss of life of civilians, including many Russian citizens and peacekeepers. I think those who have been appeasing Mr. Saakashvili’s aggressive intentions and who helped create a feeling of impunity among the Georgian leadership should think twice.”

The eruption of war in the Caucasus, containing the threat of a direct military confrontation between the US and Russia—the two biggest nuclear powers—reflects the extraordinarily tense and explosive state of international relations. The sharpening of conflicts between the major powers is itself a product of the deepening economic crisis of world capitalism, which finds its most concentrated expression in the decline in the global economic position of the United States. The reckless and provocative character of US foreign policy, and its increasing reliance on military violence, are bound up with the attempt of the American ruling elite to offset its economic decline by utilizing its continued military dominance.

The Russian ruling elite, for its part, wants to utilize its newfound oil wealth to promote its imperial ambitions in the former Soviet sphere of influence while whipping up Great Russian chauvinism within its own borders.

The conflict in the Caucasus contains the seeds of a far wider conflagration, raising the spectre of a new global eruption of imperialist war. Alluding to the events that followed the June, 1914 assassination of Archduke Ferdinand and culminated in the outbreak of World War I two months later, Dmitri Trenin, senior associate of the Carnegie Endowment for International Peace and deputy director of its Moscow centre, issued the following warning in a piece published on the Washington Post web site on Sunday:

“So far, each step in the Caucasus drama has put the conflict on a yet higher plane. The next step will no longer be just about the Caucasus, or even Europe. Remember the Guns of August.”

Halliburton's Hidden Treuhand

Halliburton's Hidden Treuhand

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Halliburton takes advantage of a European loophole that lets corporations hide beneficiaries and assets.

Little is known of a customary European legal practice that offers corporations and individuals an opportunity to profit from assets while maintaining complete anonymity of the beneficiary's identity. This practice is referred to as "Hidden Treuhand" in the English language. The practice of Hidden Treuhand submits to legal local customs in Austria, Germany, Liechtenstein, Luxemburg and Switzerland, but due to globalization, has moved beyond European borders via corporations and individuals, who put it to personal use.

The practice of Hidden Treuhand is relevant and unregulated. More and more, the relevant practice of Treuhand is used in hiding an asset owner's identity from the outside world. Assets, whether they are corporate shares or fixed assets, can be owned in secret. The personal income derived from these assets can also be kept secret from tax authorities. An example of how Hidden Treuhand facilitates tax evasion is part of the latest scandal where thousands of Germans evaded tax through the services of the LGT Treuhand Bank in Liechtenstein, using a combination of Treuhand and foundations to hide true owner identity of bank accounts.

Hidden Treuhands in Europe impact the lives of American citizens. Hidden Treuhands enable even American corporations to hide the identity of beneficiaries, assets and income. Halliburton has a Hidden Treuhand embedded in its Austrian subsidiary. It prevents transparency regarding corporate activities.

The lack of transparency creates special advantages for some, and consequences for others such as governments, competitors, stockholders and citizens. For example, a beneficiary can evade personal income tax, because the income derived from a hidden asset is not linked to the beneficiary. There is another advantage to Hidden Treuhands that borrows from the concept of a "trust." The "trust" concept allows for dividends to be removed. Money transferred to a subsidiary may be considered a dividend. By using a network of subsidiaries, favorable tax laws and banking secrecy, CEOs and insiders can profit without transparency. The Hidden Treuhand is an important aspect of what makes globalization so attractive to American and European corporations.

Given these attributes, it is alarming when a Hidden Treuhand is discovered in a subsidiary that is fully owned by Halliburton USA. Halliburton's Hidden Treuhand is evident in the firm's corporate records. Halliburton International GmbH was created in Austria in June of 1992, although another subsidiary, at the same address, was in existence in Austria since 1958. The new subsidiary, Halliburton International GmbH, has no apparent reasons for existing other than to house a Hidden Treuhand in its corporate structure, receive dividends from other subsidiaries and acquire other subsidiaries. This firm has no employees. It creates no income. Another company, Halliburton Company Austria GmbH, at the same address, could have equally performed whatever function this subsidiary has, but it has no Hidden Treuhand. The obvious conclusion is Halliburton USA needed a subsidiary with a Hidden Treuhand.

The Hidden Treuhand easily accomplishes tax evasion because dividends transferred to a subsidiary with a Hidden Treuhand can be anonymously distributed or used to purchase other holdings. For example, Halliburton International GmbH has acquired acquisitions in Russia and Kazakhstan that later disappear from the corporate records.

Halliburton attracts a certain limelight in connection with any Treuhand activities because of its link to a highly controversial war and Vice President Dick Cheney's earlier association with Halliburton. We would have expected all ties to his former employer to be have been severed when he took office to avoid a conflict of interest. The impenetrability of the Hidden Treuhand makes it impossible to know who else is involved beyond the CEOs listed on Halliburton International GmbH historic corporate data.

Dick Cheney claims to no longer own stock in Halliburton, but he was its chairman and CEO for five years, and either hired or promoted many of the executives now running Halliburton, or formerly involved with the subsidiary with the Hidden Treuhand in Austria. It is highly unlikely the chief executive officer, Dick Cheney, would be unaware of the Austrian subsidiary's existence, originally headed by the executive vice president and chief legal officer, Lester L. Coleman, of Halliburton International USA. But it is an absolute certainty Lester L. Coleman and all the other CEOs listed on Halliburton International GmbH corporate historic records do know of the subsidiaries existence and its Hidden Treuhand. It was the intention of these CEOs to set up a secret subsidiary in 1992 with a Hidden Treuhand embedded.

Perhaps more importantly, Halliburton's CEOs, listed in the corporate historic records of Halliburton International GmbH in Austria, should know Hidden Treuhands could be used to undermine American security by providing a means for financing terrorists. Currently, one of the strongest arguments the US and the OECD are using against banks, lawyers and Treuhand activities in Europe to combat tax evasion and money laundering is how these activities can be used to fund terrorism. The Iraq War is one portion of the overall strategy of the 'War on Terror' that also includes preventing any funding for terrorism. It takes little imagination to see the huge potential Treuhands facilitate: creating a means for terrorists and criminal organizations to conceal their true identities and motives and yet work openly in the capitalist system.

Halliburton's CEOs must be aware of the potential misuse of Hidden Treuhands, as they have not been particularly open about their own use of Hidden Treuhands to date. Halliburton simultaneously contracts to fight a "war on terror," while utilizing the same nontransparent mechanisms concerned authorities seek to prevent access to by terrorists. Faced with a conflict of interest, Halliburton CEOs demonstrate with their silence a willingness to protect their own interests, and doing so while we are at war with an enemy that works in the shadows.

The noncompetitive contract awarded Halliburton was orchestrated by Vice President Dick Cheney and backed by the Bush administration. This contract has afforded an estimated US$1.4 trillion to US$3 trillion of US taxpayer money to flow through the coffers of Halliburton, virtually unmonitored and fraught with accounting irregularities. The receiver of much of this US taxpayer money is Halliburton USA, its affiliates and subsidiaries. One of the subsidiaries, the Austrian subsidiary, is capable of dispersing any money sent to it to unknown persons, without a hint of transparency.

The Hidden Treuhand is more than just a means of profiting without transparency; it is a national security threat, whether wielded by al-Qaeda or Halliburton. If Americans were brought into a war based on a profit motive while we were supposed to be focused on alleviating the threat of terrorism, it could amount to treason. This risk should be given some credence and investigated. For this reason, Halliburton's corporate records were given to the US Internal Revenue Service. Maybe they will find something illegal, tax evasion for example, or maybe they will come back and say they found nothing illegal: The Hidden Treuhand is just a little bit naughty.

There is no transparency to a Hidden Treuhand, and, therefore, no means to identify the real benefactors. But the most important factor concerning a Treuhand contract is this: If a Treuhand contract is embedded in the corporate structure, then its sole purpose is to prevent the public from knowing the identity of the real stockholders. Who is calling the shots and who is benefiting is kept secret.

The "True Hands," the true benefactors' identity, is hidden from public knowledge; they remain anonymous and nameless in transactions, and that is the sole incentive for creating a Hidden Treuhand.


Shelley Stark is the author of a forthcoming book, "The Hidden Treuhand: How Europe Offers US Corporations and Individuals an Opportunity to Hide Assets, Identity, and Income."

U.S. Surges $11 Billion in Arms Sales to Iraq

U.S. Surges $11 Billion in Arms Sales to Iraq

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For related analysis, see:

Total Iraq and Afghanistan Supplemental War Funding To Date
U.S. Arms Sales Agreements with the Middle East, 1999-2006
U.S. Arms Sales Agreements Worldwide, 1999-2006
As Substitute for Diplomacy, $20 Billion U.S. Arms Deal Falls Short

During the last week of July, the Department of Defense notified Congress about the proposed sale of $10.9 billion in U.S. military equipment and support to Iraq through the Foreign Military Sales program. Besides the eye-catching price tag – which, at $10.9 billion, is greater than the value of all other U.S. arms sales to Iraq since 2005 combined – the equipment included in the proposed agreement represents a potential watershed in the development of Iraq’s military capabilities. The sale not only carries implications for the balance of power in the region, but also raises important questions about oversight, accountability, and transparency in a country riddled with internal violence.


The Defense Security Cooperation Agency (DSCA) manages the U.S. Foreign Military Sales program. In its notification about the proposed sale to Iraq, the Agency reiterated that the ultimate goal was “to improve the security of a friendly country.” DSCA spokesman Charles Taylor toldBloomberg that Iraq will pay for the equipment with its own funds.

Congress must receive 30-day advance written notification of the intended sale of weapons, equipment, and services to another country if the total value is over $50 million. Congress may enact a joint resolution to stop an arms deal, but if no action is taken in 30 days, the deal is almost certain to go forward as planned. With Congress in recess throughout August, the sale will assuredly go through. Few members of Congress would oppose it anyway.

Under the proposal, Iraq would receive numerous defense articles and services, including:

• 140 M1A1 Abrams main battle tanks upgraded to the M1A1M configuration
• 6 C-130J-30 Hercules transport aircraft
• 160 M1117 Guardian armored security vehicles
• 24 helicopters (either Bell Armed 407 or Boeing AH-6 Little Bird), with AGM-114M Hellfire missiles and launchers
• 392 light armored vehicles
• 26 M72 light anti-tank weapons
• U.S. Army Corps of Engineers support for building facilities for Iraqi Security Forces

The DSCA claimed in its notification that the $10.9 billion weapons package “will not affect the basic military balance in the region.” However, a number of experts expressed skepticism about this claim, arguing that some equipment included in the package would start the process of transforming the Iraqi Army from a force focused on counterinsurgency and enforcing internal order to a force capable of counterbalancing other countries in the region.

Anthony Cordesman, a defense analyst at the Center for Strategic and International Studies, remarked that the DSCA’s claim that the sale will not affect the regional military balance is true only “if one factors in the American presence in Iraq. If the Americans are removed from the equation, however, this purchase crosses a Rubicon.”

The proposed sale foreshadows a time when U.S. forces will no longer be responsible for protecting Iraq from external threats. The 140 Abrams tanks and 392 light armored vehicles would equip between two and four mechanized brigades. In a defensive role, these tanks and vehicles “would present very formidable mobile opposition against even numerically superior foes,” notedDefense Industry Daily. “The Abrams’ battlefield performance against enemy T-72s and other Russian stock would have to give neighbors like Iran and Syria pause, if a North Vietnam-style armored invasion were ever contemplated.”

The six C-130J-30 Hercules transport aircraft and 24 helicopters are noteworthy upgrades for the Iraqi Air Force, which already is set to double in size by 2009. Adding six C-130s will triple Iraq’s inventory of the aircraft, which the DSCA said Iraq intends to use “for intra-theater support for its troops.” But, with a range of approximately 2,000 miles, C-130J-30s flying out of Iraq would be able to complete round-trip sorties to all the major cities in Saudi Arabia, Iran, Syria, Turkey, and Israel. This would expand the regional power projection capabilities of the Iraqi Air Force.

As for the helicopters, which will likely perform scout missions and close air support, the DSCA noted that they “will be used to develop new Iraqi Air Force (IAF) squadrons and/or wings.” While the Bell Armed 407 or Boeing AH-6 Little Bird are not out-and-out attack helicopters, the mounting of laser-guided Hellfire missiles with blast-fragmentation warheads would give the post-Saddam Iraqi Air Force airborne weaponry it “has not really had to this point,” notedDefense Industry Daily. DJ Elliott, an analyst at The Long War Journal, suggested that these helicopters may be destined for Iraqi Special Operations support.


The United States has rapidly increased its arms sales to Iraq over the last several years. With the $10.9 billion deal announced in July, the United States has completed approximately $20 billion in arms sales agreements with Iraq since 2005. This total includes $132 million in 2005, $2.3 billion in 2006, $4.5 billion in 2007, and $12.7 billion (thus far) in 2008. Since the United States averaged only $15.4 billion per year in global arms agreements from 1999 to 2006, Iraq is receiving an increasingly significant proportion of total U.S. worldwide sales.

Separate from these Foreign Military Sales, the United States also provided $17.9 billion in military-related aid since 2005 through the Iraq Security Forces Fund, according to the Special Inspector General for Iraq Reconstruction’s latest July 2008 report.

The United States is already the unparalleled leader in arms sales agreements to the Middle East. As a March 2008 analysis by the Center for Arms Control and Non-Proliferation detailed, the United States was responsible for 56% of all arms sales agreements with Middle Eastern countries from 1999 to 2006. This was nearly five times greater than Russia's share, the second highest supplier, and over eighteen times greater than China's. Blocking Russia and China’s influence in Middle Eastern arms markets is considered an important foreign policy goal by many U.S. defense officials.

The recent surge of sales to Iraq has supplanted other Middle Eastern countries’ long-standing status as the preferred destination for U.S. weapons. Since 2005, the United States averaged $4.9 billion per year in arms sales with Iraq. This places Iraq far ahead of other U.S. allies like Egypt and Israel, which averaged $1.2 billion and $1.1 billion, respectively, in arms sales with the United States from 1999 to 2006.


The New York Timesrevealed in April 2008 that 22 high-ranking Iraqi officials secretly negotiated an $833 million arms agreement with Serbia. When the secret deal was exposed, Iraqis and Americans were quick to criticize both the process used and the quality of the equipment provided. However, Iraqi officials involved with the arrangement argued that the inadequacies of the U.S. Foreign Military Sales (FMS) program justified seeking an alternative supplier. “The problem with FMS is that it didn’t deliver on time,” one senior Iraqi official said. “This [secret deal] was used by some in government to say, ‘Look, this is deliberate. The U.S. is trying to keep us unarmed so that we’ll always be in need of the Americans.’ ”

A chasm is growing between U.S. arms sales procedures – designed for accountability and standardization, not speed or flexibility – and Iraq’s purported need for better military equipment. As Ahmed Mahmoud, a lieutenant in the Iraqi Army, asked a New York Times reporter August 6, “In your opinion, do you think I could fight an army with those trucks?” One fifth of the vehicles in Mahmoud’s battalion were rotting and bomb-demolished, but they were still considered operational for bureaucratic reasons.

Of course, rapidly surging weapons into Iraq carries significant risks. A November 2007 audit by the Department of Defense Inspector General concluded that Multi-National Security Transition Command-Iraq (MNSTC-I) “was not able to demonstrate proper accountability for and management of the Iraq Security Forces Fund and could not always demonstrate that the delivery of services, equipment, and construction was properly made to the Iraq Security Forces.” The audit also revealed that in 2005, MNSTC-I could not verify that Iraqi Security Forces received 12,712 of 13,508 light weapons. This expanded upon previous Government Accountability Office reporting that the United States couldn’t account for 30% of the weapons provided to Iraq since 2004.

Providing Iraqi Security Forces with the equipment they need to achieve their objectives will help increase Iraqi soldiers’ confidence and effectiveness as the United States begins commencing troop withdrawals. However, Iraqi oversight of military equipment coming into the country must be bolstered. If weapons are channeled toward dangerous insurgents, and away from the legitimate development of Iraqi Security Forces, the security environment in Iraq could take another perilous turn for the worse.

The American Military Crisis

The American Military Crisis

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All you really need to know is that, at Robert Gates's Pentagon, they're still high on the term "the Long War." It's a phrase that first crept into our official vocabulary back in 2002, but was popularized by CENTCOM commander John Abizaid, in 2004 -- already a fairly long(-war-)time ago. Now, Secretary of Defense Gates himself is plugging the term, as he did in April at the U.S. Military Academy at West Point, quoting no less an authority than Leon Trotsky:

"What has been called the Long War is likely to be many years of persistent, engaged combat all around the world in differing degrees of size and intensity. This generational campaign cannot be wished away or put on a timetable. There are no exit strategies. To paraphrase the Bolshevik Leon Trotsky, we may not be interested in the Long War, but the Long War is interested in us."

The Long War has also made it front and center in the new "national defense strategy," which is essentially a call to prepare for a future of two, three, many Afghanistans. ("For the foreseeable future, winning the Long War against violent extremist movements will be the central objective of the U.S.") If you thought for a moment that in the next presidency some portion of those many billions of dollars now being sucked into the black holes of Iraq and Afghanistan was about to go into rebuilding American infrastructure or some other frivolous task, think again. Just read between the lines of that new national defense strategy document where funding for future conventional wars against "rising powers" is to be maintained, while funding for "irregular warfare" is to rise. The Pentagonization of the U.S., in other words, shows no sign of slowing down. Here, by the way, is the emphasis in the new Gates Doctrine -- from a recent Pentagon briefing by the secretary of defense -- that should make us all worry. "The principal challenge, therefore, is how to ensure that the capabilities gained and counterinsurgency lessons learned from Iraq and Afghanistan, as well as the lessons re-learned from other places where we have engaged in irregular warfare over the last two decades, are institutionalized within the defense establishment." Back to the future?

And here's a riddle for our moment: How long is a Long War, when you've been there before (as were, in the case of Afghanistan, Alexander the Great, the imperial Brits, and the Soviets)? On the illusions of victory and the many miscalculations of the Bush administration when it came to the nature of American military power, no one in recent years has been more incisive than Andrew Bacevich, who experienced an earlier version of the Long War firsthand in Vietnam. His new book, The Limits of Power: The End of American Exceptionalism, has just been published. Short, sharp, to the point, it should be the book of the election season, if only anyone in power, or who might come to power, were listening. (The following piece, the first of two parts this week at Tomdispatch, is adapted from section three of that book, "The Military Crisis.") But if you want the measure of our strange, dystopian moment, Barack Obama reportedly has a team of 300 foreign policy advisers -- just about everyone ever found, however brain-dead, in a Democratic presidential rolodex -- and yet Bacevich's name isn't among them. What else do we need to know? Tom

Illusions of Victory

How the United States Did Not Reinvent War… But Thought It Did
By Andrew Bacevich

"War is the great auditor of institutions," the historian Corelli Barnett once observed. Since 9/11, the United States has undergone such an audit and been found wanting. That adverse judgment applies in full to America's armed forces.

Valor does not offer the measure of an army's greatness, nor does fortitude, nor durability, nor technological sophistication. A great army is one that accomplishes its assigned mission. Since George W. Bush inaugurated his global war on terror, the armed forces of the United States have failed to meet that standard.

In the aftermath of September 11, 2001, Bush conceived of a bold, offensive strategy, vowing to "take the battle to the enemy, disrupt his plans, and confront the worst threats before they emerge." The military offered the principal means for undertaking this offensive, and U.S. forces soon found themselves engaged on several fronts.

Two of those fronts --- Afghanistan and Iraq -- commanded priority attention. In each case, the assigned task was to deliver a knockout blow, leading to a quick, decisive, economical, politically meaningful victory. In each case, despite impressive displays of valor, fortitude, durability, and technological sophistication, America's military came up short. The problem lay not with the level of exertion but with the results achieved.

In Afghanistan, U.S. forces failed to eliminate the leadership of Al Qaeda. Although they toppled the Taliban regime that had ruled most of that country, they failed to eliminate the Taliban movement, which soon began to claw its way back. Intended as a brief campaign, the Afghan War became a protracted one. Nearly seven years after it began, there is no end in sight. If anything, America's adversaries are gaining strength. The outcome remains much in doubt.

In Iraq, events followed a similar pattern, with the appearance of easy success belied by subsequent developments. The U.S. invasion began on March 19, 2003. Six weeks later, against the backdrop of a White House-produced banner proclaiming "Mission Accomplished," President Bush declared that "major combat operations in Iraq have ended." This claim proved illusory.

Writing shortly after the fall of Baghdad, the influential neoconservatives David Frum and Richard Perle declared Operation Iraqi Freedom "a vivid and compelling demonstration of America's ability to win swift and total victory." General Tommy Franks, commanding the force that invaded Iraq, modestly characterized the results of his handiwork as "unequalled in its excellence by anything in the annals of war." In retrospect, such judgments -- and they were legion -- can only be considered risible. A war thought to have ended on April 9, 2003, in Baghdad's al-Firdos Square was only just beginning. Fighting dragged on for years, exacting a cruel toll. Iraq became a reprise of Vietnam, although in some respects at least on a blessedly smaller scale.

A New American Way of War?

It wasn't supposed to be this way. Just a few short years ago, observers were proclaiming that the United States possessed military power such as the world had never seen. Here was the nation's strong suit. "The troops" appeared unbeatable. Writing in 2002, for example, Max Boot, a well-known commentator on military matters, attributed to the United States a level of martial excellence "that far surpasses the capabilities of such previous would-be hegemons as Rome, Britain, and Napoleonic France." With U.S. forces enjoying "unparalleled strength in every facet of warfare," allies, he wrote, had become an encumbrance: "We just don't need anyone else's help very much."

Boot dubbed this the Doctrine of the Big Enchilada. Within a year, after U.S. troops had occupied Baghdad, he went further: America's army even outclassed Germany's Wehrmacht. The mastery displayed in knocking off Saddam, Boot gushed, made "fabled generals such as Erwin Rommel and Heinz Guderian seem positively incompetent by comparison."

All of this turned out to be hot air. If the global war on terror has produced one undeniable conclusion, it is this: Estimates of U.S. military capabilities have turned out to be wildly overstated. The Bush administration's misplaced confidence in the efficacy of American arms represents a strategic misjudgment that has cost the country dearly. Even in an age of stealth, precision weapons, and instant communications, armed force is not a panacea. Even in a supposedly unipolar era, American military power turns out to be quite limited.

How did it happen that Americans so utterly overappraised the utility of military power? The answer to that question lies at the intersection of three great illusions.

According to the first illusion, the United States during the 1980s and 1990s had succeeded in reinventing armed conflict. The result was to make force more precise, more discriminating, and potentially more humane. The Pentagon had devised a new American Way of War, investing its forces with capabilities unlike any the world had ever seen. As President Bush exuberantly declared shortly after the fall of Baghdad in April 2003, "We've applied the new powers of technology… to strike an enemy force with speed and incredible precision. By a combination of creative strategies and advanced technologies, we are redefining war on our terms. In this new era of warfare, we can target a regime, not a nation."

The distinction between regime and nation was a crucial one. By employing these new military techniques, the United States could eliminate an obstreperous foreign leader and his cronies, while sparing the population over which that leader ruled. Putting a missile through the roof of a presidential palace made it unnecessary to incinerate an entire capital city, endowing force with hitherto undreamed-of political utility and easing ancient moral inhibitions on the use of force. Force had been a club; it now became a scalpel. By the time the president spoke, such sentiments had already become commonplace among many (although by no means all) military officers and national security experts.

Here lay a formula for certain victory. Confidence in military prowess both reflected and reinforced a post-Cold War confidence in the universality of American values. Harnessed together, they made a seemingly unstoppable one-two punch.

With that combination came expanded ambitions. In the 1990s, the very purpose of the Department of Defense changed. Sustaining American global preeminence, rather than mere national security, became its explicit function. In the most comprehensive articulation of this new American Way of War, the Joint Chiefs of Staff committed the armed services to achieving what they called "full spectrum dominance" -- unambiguous supremacy in all forms of warfare, to be achieved by tapping the potential of two "enablers" -- "technological innovation and information superiority."

Full spectrum dominance stood in relation to military affairs as the political scientist Francis Fukuyama's well-known proclamation of "the end of history" stood in relation to ideology: Each claimed to have unlocked ultimate truths. According to Fukuyama, democratic capitalism represented the final stage in political economic evolution. According to the proponents of full spectrum dominance, that concept represented the final stage in the evolution of modern warfare. In their first days and weeks, the successive invasions of Afghanistan and Iraq both seemed to affirm such claims.

How Not to "Support the Troops"

According to the second illusion, American civilian and military leaders subscribed to a common set of principles for employing their now-dominant forces. Adherence to these principles promised to prevent any recurrence of the sort of disaster that had befallen the nation in Vietnam. If politicians went off half-cocked, as President Lyndon Johnson and Secretary of Defense Robert McNamara had back in the 1960s, generals who had correctly discerned and assimilated the lessons of modern war could be counted on to rein them in.

These principles found authoritative expression in the Weinberger-Powell Doctrine, which specified criteria for deciding when and how to use force. Caspar Weinberger, secretary of defense during most of the Reagan era, first articulated these principles in 1984. General Colin Powell, chairman of the Joint Chiefs of Staff during the early 1990s, expanded on them. Yet the doctrine's real authors were the members of the post-Vietnam officer corps. The Weinberger-Powell principles expressed the military's own lessons taken from that war. Those principles also expressed the determination of senior officers to prevent any recurrence of Vietnam.

Henceforth, according to Weinberger and Powell, the United States would fight only when genuinely vital interests were at stake. It would do so in pursuit of concrete and attainable objectives. It would mobilize the necessary resources -- political and moral as well as material -- to win promptly and decisively. It would end conflicts expeditiously and then get out, leaving no loose ends. The spirit of the Weinberger-Powell Doctrine was not permissive; its purpose was to curb the reckless or imprudent inclinations of bellicose civilians.

According to the third illusion, the military and American society had successfully patched up the differences that produced something akin to divorce during the divisive Vietnam years. By the 1990s, a reconciliation of sorts was under way. In the wake of Operation Desert Storm, "the American people fell in love again with their armed forces." So, at least, General Colin Powell, one of that war's great heroes, believed. Out of this love affair a new civil-military compact had evolved, one based on the confidence that, in times of duress, Americans could be counted on to "support the troops." Never again would the nation abandon its soldiers.

The All-Volunteer Force (AVF) -- despite its name, a professional military establishment -- represented the chief manifestation of this new compact. By the 1990s, Americans were celebrating the AVF as the one component of the federal government that actually worked as advertised. The AVF embodied the nation's claim to the status of sole superpower; it was "America's Team." In the wake of the Cold War, the AVF sustained the global Pax Americana without interfering with the average American's pursuit of life, liberty, and happiness. What was not to like?

Events since 9/11 have exposed these three illusions for what they were. When tested, the new American Way of War yielded more glitter than gold. The generals and admirals who touted the wonders of full spectrum dominance were guilty of flagrant professional malpractice, if not outright fraud. To judge by the record of the past twenty years, U.S. forces win decisively only when the enemy obligingly fights on American terms -- and Saddam Hussein's demise has drastically reduced the likelihood of finding such accommodating adversaries in the future. As for loose ends, from Somalia to the Balkans, from Central Asia to the Persian Gulf, they have been endemic.

When it came to the Weinberger-Powell Doctrine, civilian willingness to conform to its provisions proved to be highly contingent. Confronting Powell in 1993, Madeleine Albright famously demanded to know, "What's the point of having this superb military that you're always talking about, if we can't use it?" Mesmerized by the prospects of putting American soldiers to work to alleviate the world's ills, Albright soon enough got her way. An odd alliance that combined left-leaning do-gooders with jingoistic politicians and pundits succeeded in chipping away at constraints on the use of force. "Humanitarian intervention" became all the rage. Whatever restraining influence the generals exercised during the 1990s did not survive that decade. Lessons of Vietnam that had once seemed indelible were forgotten.

Meanwhile, the reconciliation of the people and the army turned out to be a chimera. When the chips were down, "supporting the troops" elicited plenty of posturing but little by way of binding commitments. Far from producing a stampede of eager recruits keen to don a uniform, the events of 9/11 reaffirmed a widespread popular preference for hiring someone else's kid to chase terrorists, spread democracy, and ensure access to the world's energy reserves.

In the midst of a global war of ostensibly earthshaking importance, Americans demonstrated a greater affinity for their hometown sports heroes than for the soldiers defending the distant precincts of the American imperium. Tom Brady makes millions playing quarterback in the NFL and rakes in millions more from endorsements. Pat Tillman quit professional football to become an army ranger and was killed in Afghanistan. Yet, of the two, Brady more fully embodies the contemporary understanding of the term patriot.

Demolishing the Doctrine of the Big Enchilada

While they persisted, however, these three illusions fostered gaudy expectations about the efficacy of American military might. Every president since Ronald Reagan has endorsed these expectations. Every president since Reagan has exploited his role as commander in chief to expand on the imperial prerogatives of his office. Each has also relied on military power to conceal or manage problems that stemmed from the nation's habits of profligacy.

In the wake of 9/11, these puerile expectations -- that armed force wielded by a strong-willed chief executive could do just about anything -- reached an apotheosis of sorts. Having manifestly failed to anticipate or prevent a devastating attack on American soil, President Bush proceeded to use his ensuing global war on terror as a pretext for advancing grandiose new military ambitions married to claims of unbounded executive authority -- all under the guise of keeping Americans "safe."

With the president denying any connection between the events of September 11th and past U.S. policies, his declaration of a global war nipped in the bud whatever inclination the public might have entertained to reconsider those policies. In essence, Bush counted on war both to concentrate greater power in his own hands and to divert attention from the political, economic, and cultural bind in which the United States found itself as a result of its own past behavior.

As long as U.S. forces sustained their reputation for invincibility, it remained possible to pretend that the constitutional order and the American way of life were in good health. The concept of waging an open-ended global campaign to eliminate terrorism retained a modicum of plausibility. After all, how could anyone or anything stop the unstoppable American soldier?

Call that reputation into question, however, and everything else unravels. This is what occurred when the Iraq War went sour. The ills afflicting our political system, including a deeply irresponsible Congress, broken national security institutions, and above all an imperial commander in chief not up to the job, became all but impossible to ignore. So, too, did the self-destructive elements inherent in the American way of life -- especially an increasingly costly addiction to foreign oil, universally deplored and almost as universally indulged. More noteworthy still, the prospect of waging war on a global scale for decades, if not generations, became preposterous.

To anyone with eyes to see, the events of the past seven years have demolished the Doctrine of the Big Enchilada. A gung-ho journalist like Robert Kaplan might still believe that, with the dawn of the twenty-first century, the Pentagon had "appropriated the entire earth, and was ready to flood the most obscure areas of it with troops at a moment's notice," that planet Earth in its entirety had become "battle space for the American military." Yet any buck sergeant of even middling intelligence knew better than to buy such claptrap.

With the Afghanistan War well into its seventh year and the Iraq War marking its fifth anniversary, a commentator like Michael Barone might express absolute certainty that "just about no mission is impossible for the United States military." But Barone was not facing the prospect of being ordered back to the war zone for his second or third combat tour.

Between what President Bush called upon America's soldiers to do and what they were capable of doing loomed a huge gap that defines the military crisis besetting the United States today. For a nation accustomed to seeing military power as its trump card, the implications of that gap are monumental.

Andrew Bacevich, professor of history and international relations at Boston University, retired from the U.S. Army with the rank of colonel. This piece is adapted from his new book, The Limits of Power: The End of American Exceptionalism (Metropolitan Books, 2008). He is also the author of The New American Militarism, among other books. His writing has appeared in Foreign Affairs, the Atlantic Monthly, the Nation, the New York Times, the Los Angeles Times, and the Wall Street Journal. A TomDispatch interview with him can be read by clicking here, and then here.

Hot Commodities, Stuffed Markets, and Empty Bellies

Hot Commodities, Stuffed Markets, and Empty Bellies

What's behind higher food prices?

By Ben Collins

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Since 2003, prices of basic agricultural commodities such as corn, wheat, soybeans, and rice have skyrocketed worldwide, threatening to further impoverish hundreds of millions of the world's poor.

Shifts in fundamental supply and demand factors for food grains have undoubtedly contributed to higher food prices. Prominent among these shifts are the increasing diversion of food crops for biofuel production in the United States and Europe; sustained drought and water scarcity in Australia's wheat-growing regions; flooding in the U.S. grain belt; rising prices for oil and fertilizer worldwide; and the adoption of European and American meat-rich diets by the growing middle classes throughout Asia.

On top of these recent developments, long-term threats to worldwide agricultural output have eroded the world food system's resilience in the face of changing supply and demand. Although decades in the making, a loss of agricultural capacity worldwide caused by soil depletion, climate change, water scarcity, and urbanization has begun to take its toll on food production. Moreover, half a century of import restrictions and cheap agricultural exports by wealthy countries has devastated domestic food production capacity in poorer countries, forcing many countries that were once self-sufficient to rely on imported food from the world market.

At the same time, however, the growing presence of buy-and-hold investors in commodity markets has prompted heated debate among commodity traders, economists, and politicians over other possible causes of higher commodity prices apart from supply and demand shifts. Since 2001, the declining value of the U.S. dollar, low U.S. interest rates, weak stock market returns, and accelerating inflation have drawn investment dollars away from stocks and into non-traditional investments such as commodities. This flight to perceived safety in commodity markets turned into a stampede in 2007 and early 2008, as a credit-induced financial crisis in the United States compounded these existing stresses on global financial markets.

Rising commodity prices and financial speculation on food are not new phenomena. The 1970s saw a similar rise in commodity prices in the United States, and in the 1920s, U.S. investors formed commodity pools to bet on commodity price movements. But the quantity and liquidity of money flowing through today's global markets is unprecedented in human history. The current commodities boom could be a sign of looming agricultural scarcity, or it may prove to be a short-lived speculative bubble that will deflate over the next few months or years. But regardless of where agricultural commodity prices are headed, the boom has already begun to transform how food is financed, grown, and sold, and may dramatically change how people around the world eat (or don't).

Commodity investment goes retail

Commodity exchanges exist as a mechanism for the producers and consumers of grains, energy, and livestock to transfer risk to financial institutions and other traders. For example, wheat farmers might seek to reduce the risk of price fluctuations by selling a contract for the future delivery of their wheat crop on a commodity exchange. This futures contract will guarantee a price for the farmer selling the contract, enabling them to pay for their planting costs, and avoid the risk that the price of wheat may decrease between the date they sell the contract and the date they agree to deliver the wheat. Food giants such as Kraft and Nabisco, as well as smaller bakers and grain consumers, typically purchase commodity futures contracts to avoid the opposite risk—that the price of their raw materials may increase in the future. (Commodity markets also trade "spot" contracts, which entitle the purchaser to the immediate delivery of a commodity.)

Because producers and consumers seek to reduce risk, they function as so-called hedgers in commodity markets. In contrast, commercial trading firms and other speculators bet on the price of a commodity rising or falling, buying and selling futures contracts frequently in order to profit from short-term changes in their prices.

Since 2001, commodity funds have gained in popularity as a mechanism for institutions and individuals to profit from increases in commodity prices. These funds purchase commodity futures contracts in order to simulate ownership of a commodity. By periodically rolling over commodity futures contracts prior to their maturity date and reinvesting the proceeds in new contracts, the funds allow investors to gain investment returns equivalent to the change in price of a single commodity, or an "index" of several commodities (hence the name "index investor").

Investors in these commodity index funds include public pension funds, university endowments, and even individual investors, through mutual funds, for example. Although these investors are similar to traditional commodity speculators in that both seek to profit from changes in price, traditional speculators zero in on short-term price shifts, while index investors are almost exclusively long-term buyers betting on higher commodity prices in the future.

A Lexicon of Commodity Markets

  • Hedger—An individual or institution who buys or sells an asset to avoid the risk that the price of the asset may change over time. In agricultural commodity markets, hedgers are typically farmers and end-users of grains.
  • Speculator—An individual or institution who buys or sells an asset to profit from fluctuations in its price, but takes on the risk of an unfavorable change in the asset's price. In agricultural markets, speculators are typically large financial institutions, but since 2003 a growing number of "index investors" have speculated on the continued rise of commodity prices.
  • Futures—Tradable financial contracts used to buy or sell an asset at a certain date in the future, at a specified price.
  • Spot Contract/Spot Market—A contract for the immediate delivery of the commodity. Also called the "cash market" or "physical market," the spot markets determine the current price of a commodity.
  • Over-the-Counter—Any contract or security traded outside of a regulated exchange. Over-the-counter trading can take place directly between two traders, or on unregulated exchanges or informal dealer networks.
  • Position Limits—In commodity markets, the maximum number of futures contracts a trader or institution is allowed to hold for a given commodity.

—Tillman Clark and Ben Collins

Some observers have argued that index investors themselves may have pushed already-high prices of commodities even higher. Hedge fund manager Michael Masters testified to the U.S. Senate that the total holdings of commodity index investors on regulated U.S. exchanges have increased from $13 billion in 2003 to nearly $260 billion as of March 2008. And as of April 2008, index investors owned approximately 35% of all corn futures contracts on regulated exchanges in the United States, 42% of all soybean contracts, and 64% of all wheat contracts, compared to minimal holdings in 2001. As Masters emphasized, these are immense commodity holdings. The wheat contracts, for example, are good for the delivery of 1.3 billion bushels of wheat, equivalent to twice the United States' annual wheat consumption.

Index fund managers have defended against charges that commodity index investment contributes to higher prices, arguing that because index funds never take delivery on their futures contracts, they simulate commodity price shifts for their investors without affecting the price of the underlying commodity. Some economists have also expressed skepticism that investment demand has driven commodity prices higher. Paul Krugman of Princeton University has noted that there is no evidence of "the usual telltale signs of a speculative price boom" such as physical hoarding of commodities. Furthermore, Krugman and others have pointed to non-exchange traded commodities such as iron ore that have also experienced rapid price increases during recent years, arguing that fundamental supply and demand factors, not investors, are to blame for higher commodity prices.

Other economists and commodity market observers have argued that despite price increases in non-exchange traded commodities, and an absence of physical hoarding, the recent flood of money into commodity markets has altered the balance between speculators and hedgers, leading to higher prices and greater price volatility. Mack Frankfurter, a commodities trading advisor at Cervino Capital Management, suggests that the influx of commodity index investors has transformed commodity futures from tools for risk management to long-term investments, "causing a self-perpetuating feedback loop of ever higher prices." One reason the precise impact of index investors on commodity prices is difficult to determine is that the U.S. commodity trading regulator, the Commodity Futures Trading Commission (CFTC), does not collect data on so-called "over-the-counter" commodity trading—that is, trading on unregulated markets—even though the agency estimated that 85% of commodity index investment takes place on these markets. Because Masters's data on the holdings of commodity index investors only include the 15% of index investor contracts that are held on CFTC-regulated exchanges, total commodity index investor holdings may be much higher than his estimates.

In testimony that warned of the influence of these unregulated markets on commodity prices, Michael Greenberger, the former head of the CFTC's Division of Trading and Markets, estimated that if unregulated trading of energy and agricultural commodities were eliminated, the price of oil would drop by 25% to 50% "overnight." If Greenberger is correct, the effect on food commodity prices would likely be similar. However, index investment is just one of many avenues through which money can enter commodity markets, making it difficult to assess the impact of index investors without taking into account the recent deregulation of U.S. commodity markets that has facilitated the current boom in food and energy investments.

Commodity Trading Regulation, Enron-Style

Commodity index investment is deeply intertwined with the growth of unregulated commodity trading authorized by the Commodity Futures Modernization Act of 2000. Before 2000, U.S. commodity futures contracts were traded exclusively on regulated exchanges under the oversight of the CFTC. Traders were required to disclose their holdings of each commodity and adhere to strict position limits, which set a maximum number of futures contracts that an individual institution could hold. These regulations were intended to prevent market manipulation by traders who might otherwise attempt to build up concentrated holdings of futures contracts in order to manipulate the price of a commodity.

The 2000 law effectively deregulated commodity trading in the United States by exempting over-the-counter commodity trading outside of regulated exchanges from CFTC oversight. Soon after the bill was passed, several unregulated commodity exchanges opened for trading, allowing investors, hedge funds, and investment banks to trade commodities futures contracts without any position limits, disclosure requirements, or regulatory oversight. Since then, unregulated over-thecounter commodity trading has grown exponentially. The total value of all over-the- counter commodity contracts was estimated to be $9 trillion at the end of 2007, or nearly twice the value of the $4.78 trillion in commodity contracts traded on regulated U.S. exchanges. Once these unregulated commodity markets were created, energy traders and hedge funds began to use them to place massive bets on commodity prices. Enron famously exploited deregulated electricity markets in 2001, when the firm managed to generate unheard-of profits by using its trading operations to effectively withhold electricity and charge extortionate rates from power grids in California and other western states.

Although Enron went bankrupt later that year, the hedge fund Amaranth later exploited unregulated natural gas markets prior to its 2006 collapse. The fund had been heavily invested in complicated bets on the price of natural gas, borrowing eight times its assets to trade natural gas futures, and lost $6.5 billion when natural gas prices moved in the wrong direction. One month prior to Amaranth's collapse, the New York Mercantile Exchange (NYMEX), which is regulated by the CFTC, asked Amaranth to reduce its huge natural gas position. Amaranth reduced its position at NYMEX's request, but purchased identical positions on the unregulated InterContinental Exchange, where its transactions were invisible to regulators until the fund finally collapsed. Amaranth's implosion demonstrated the ineffectiveness of regulating some commodity exchanges but not others. Thanks to the Commodity Futures Modernization Act, traders could flout position limits and disclosure rules with impunity, simply by re-routing trades to unregulated exchanges. Although index investment in commodities does not typically involve white-knuckle, leveraged bets on a single commodity's short-term performance, index investment was made possible by the same deregulated environment exploited by Amaranth and Enron. Like Amaranth, commodity index investors commonly purchase futures contracts on unregulated markets when they exceed CFTC position limits on futures contracts for a particular commodity. And other financial actors such as investment banks, hedge funds, or even the sovereign wealth funds of other countries may also be heavily invested in these over-the-counter commodity contracts, but since this trading is unregulated and unreported, the holders of these $9 trillion worth of contracts remain anonymous.

This year, the CFTC has faced intense scrutiny from investors, politicians, farmers, and agricultural traders over the unprecedented volatility and price increases of several agricultural and energy commodities traded on U.S. exchanges. A lively CFTC roundtable on commodity markets in April appeared to confirm arguments made by Frankfurter, Greenberger, Masters, and other critics of commodity index investment. Representatives for farmers, grain elevator operators, and commercial bankers at the hearing repeatedly stressed that commodity markets were "broken," while the only pleas for calm came from CFTC economists and representatives for index investors and the financial industry. Unlike index investors, farmers have not benefited greatly from higher commodity prices, because extremely high levels of market volatility have made it difficult for some farmers to finance crop planting. National Farmers Union president Tom Buis sounded a particularly dire warning about the consequences of tight commodity supplies and burgeoning index investment demand: "We've got a train wreck coming in agriculture that's bigger than anything else we've seen."

Following these warnings from farmers and food producers about the presence of index investors in commodity markets, the CFTC's acting chair publicly acknowledged the ongoing debate over "whether the massive amount of money coming into the markets is overwhelming the system." Despite this admission, Greenberger, the former CFTC official, remains skeptical of the agency's capacity and willingness to regulate commodity markets effectively. He urged Congress and the Federal Trade Commission to circumvent the CFTC's authority and eliminate unregulated over-the-counter commodity trading. Recently, faced with strong criticism from Congress, the CFTC retreated further from its claim that commodity markets are functioning normally. A CFTC commissioner admitted: "We didn't have the data that we needed to make the statements that we made, and the data we did have didn't support our declarative statements. If we were so right, why the heck are we doing a study now?"

The Consequences of Financializing Food

Facing political pressure by constituents over high oil and food prices, several members of Congress have sponsored legislation that would bar index investors from commodity markets. One bill proposed by Sen. Joseph Lieberman (Ind- Conn.) would prohibit public and private pension funds with more than $500 million in assets from trading in commodity futures, and other bills would limit the maximum number of futures contracts an index investor could hold. These bills may stem the flood of money from index investors into commodities, but comprehensive reform is needed to reverse the Commodity Futures Modernization Act's authorization of over-the-counter commodity trading. Absent an outright repeal of this so-called "Enron loophole," energy and agricultural commodities will continue to be traded outside the reach of government regulation, making future Enron- and Amaranth-style market disruptions inevitable.

Ultimately, eliminating unregulated commodity trading cannot address the fundamental causes of higher agricultural prices. Even if speculative buying is curtailed, supply and demand factors such as falling crop yields, destructive trade policies, and the growing use of biofuels have likely brought the age of cheap food to an end. However, if the critics of commodity index investment are correct, then these investors have amplified recent food price shocks and are needlessly contributing to the impoverishment of the world's poorest citizens. Even though commodity market transparency and regulatory oversight will not solve the global food crisis, eliminating unregulated commodity trading can help resolve the debate over the effects of index investors on commodity prices and restore the accountability of commodity markets to the social interests they were originally established to serve.

Ben Collins is a member of the Dollars & Sense collective and a research analyst at KLD Research & Analytics, a sustainable investment research company.

Sources: Michael Masters, Testimony before the Committee on Homeland Security and Government Affairs, United States Senate, May 20, 2008; Daniel P. Collins, CFTC to up spec limits, Futures, May 1, 2005; Paul Krugman, Fuels on the Hill, New York Times, June 27, 2008; Michael Frankfurter, The Mysterious Case of the Commodity Conundrum, Securitization of Commodities, and Systemic Concerns, Parts 1-3; Michael Frankfurter and Davide Accomazzo, Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures, December 31, 2007, Graziadio Business Report; Regulator Commits to Futures Tracking Volatility, Associated Press, June 4, 2008; Commodity Futures Trading Commission, CFTC Announces Agricultural Market Initiatives, June 3, 2008; Michael Greenberger, Testimony before the Committee on Commerce, Science, and Transportation, United States Senate, June 3, 2008; Sinclair Stewart and Paul Waldie, Who is responsible for the global food crisis? Globe and Mail, May 30, 2008; Commodity Futures Trading Commission, Agricultural Markets Roundtable, April 22, 2008; Ann Davis, "Commodities Regulator Under Fire—CFTC Scrutinized As Congress Looks Into Oil-Price Jump," Wall Street Journal, July 7, 2008; Ed Wallace, ICE, ICE, Baby, Houston Chronicle, May 19, 2008; Laura Mandaro, Lieberman plans would bar funds from commodities, Marketwatch, June 18, 2008; Our Confusing Economy, Explained, Fresh Air, April 3, 2008.

Slump in U.S. to Worsen as Consumers Get 'Squeezed'

Slump in U.S. to Worsen as Consumers Get ‘Squeezed'

By Timothy R. Homan and Alex Tanzi

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The U.S. economic slump will extend into 2009 as the longest expansion in consumer spending on record comes to an end, according to a Bloomberg News survey.

The world's largest economy will grow at an average 0.7 percent annual pace from July through December, half the gain in the first six months of the year, according to the median forecast of 50 economists surveyed from Aug. 1 to Aug. 8.

Household spending, which has grown every quarter since 1992, is projected to stall in the last three months of the year as the impact of tax rebates fades, wages fail to keep up with inflation and property values fall. The IND' ))">jobless rate, now at 5.7 percent, will reach a five-year high of 6 percent in early 2009.

‘‘The consumer is very much squeezed,'' said John Lonski, chief economist at Moody's Investors Service Inc. in New York. ‘‘The downside risks swamp whatever the economy's upside potential would be.''

Spending is likely to grow at a 0.6 percent annual pace from July through September, down from a 1.5 percent pace in the previous three months when the arrival of almost $78 billion in tax rebates helped Americans overcome the surge in fuel and food prices. Most of the remaining rebate checks were sent out by mid July.

Analysts say the impact of the rebates, part of a $168 billion economic stimulus plan President George W. Bush signed in February, will be gone by the fourth quarter.

‘Lower Spending'

‘‘What's it going to look like once that stimulus runs out?'' said Jonathan Basile, an economist at Credit Suisse Holdings USA Inc. in New York. ‘‘The profile that we think consumers are going to follow over the remainder of the year is one of lower spending.''

Economists anticipate economic growth will keep slowing next year, with gross domestic product expanding 1.5 percent compared with the 1.6 percent projected for 2008. Last month, economists said the economy would grow 1.7 percent in 2009.

The odds of a recession occurring within the next 12 months are 51 percent, little changed from last month's projection, after climbing as high as 70 percent in the April survey.

Slower growth may ease inflation concerns. Consumer prices will rise 4.3 percent this year, the most since 1990, before drifting down to 2.5 percent by the end of the third quarter of 2009, the survey showed.

‘‘The inflation rate is going to come down,'' said Michael Hanson, a senior economist at Lehman Brothers Holdings Inc. in New York. ‘‘The rapid increases in the oil price that we saw earlier in the year are not likely to continue.''

Less Inflation

A survey out today of 25 bond fund managers controlling $1.41 trillion of assets found that 79 percent expect inflation ‘‘to moderate late this year into 2009,'' according to Jersey City, New Jersey-based Ried, Thunberg & Co.

Household incomes will suffer as salaries fail to keep up with inflation. The Labor Department last month said wages in June decreased IND' ))">0.9 percent after adjusting for inflation, the biggest drop since September 2005, and were down 2.4 percent over the last 12 months.

The decline in buying power is one reason economists forecast spending will slow.

Retailers are feeling the pinch as consumers spend a greater share of their income on food and fuel. Sales at U.S. stores open more than a year grew 2.6 percent last month, the smallest gain since March, the International Council of Shopping Centers said Aug. 7.

Wal-Mart Stores Inc., the world's largest retailer, last week said August sales won't grow as quickly as July's. The company's stock fell the most since 2002 following the announcement.

Rising Unemployment

A weakening labor market also is weighing on consumers. The survey indicates that after rising to 6 percent in early 2009, the unemployment rate will remain at that level through the first nine months of the year. Economists last month forecast unemployment would peak at 5.8 percent.

Payrolls dropped in July for a seventh month, for a total of 463,000 jobs lost so far this year.

The increase in the jobless rate will not prevent Federal Reserve policy makers from raising the benchmark interest rate, economists said.

‘‘The unemployment rate will probably drift upwards, but if it doesn't accelerate, the Fed will probably feel like it can begin safely raising rates,'' said Tom Fullerton, professor of economics at The University of Texas at El Paso. ‘‘It would be surprising if the Fed did not raise short-term interest rates.''

The Fed will keep its benchmark interest rate at 2 percent through March 2009 and then raise it by three-quarters of a percentage point by the end of September, according to the survey. That forecast is unchanged from last month's survey.