Saturday, July 27, 2013
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One day before President Barack Obama kicked off a speaking tour aimed at presenting himself as the champion of a “thriving middle class,” White House Press Secretary Jay Carney made clear that the administration would provide no federal funds for the city of Detroit.
The city’s emergency manager, Kevyn Orr, threw the city into bankruptcy last week in order to shred city workers’ pensions and health benefits and dismantle basic public services. In reply to questions from the press, Carney on Tuesday declared that the administration “is absolutely not” planning to provide financial assistance to the city, adding that the question of Detroit’s debt obligations would have to be decided by “local leaders and creditors.”
Detroit’s “local leaders”—including Orr, Detroit Mayor David Bing and Michigan Governor Rick Snyder—have been in continual contact with the Obama administration to coordinate their offensive against the working class. The bankruptcy of the former auto capital of the world will be used as a precedent to mount similar attacks, using unelected officials such as Orr and the bankruptcy courts, against workers’ pensions and health benefits in cities across the country.
Carney’s statement underscores the duplicitous character of Obama’s “jobs” speaking tour, which begins Wednesday with an appearance in Galesburg, Illinois. The White House will use the tour to posture as a defender of the “middle class,” even as it carries out sweeping attacks on social programs and the pensions and health benefits of public-sector workers, and hundreds of thousands of federal workers begin to lose one day’s pay a week as a result of furloughs imposed as part of “sequester” spending cuts.
Obama’s renewed public focus on economic issues, like virtually every move the administration makes, is largely dictated by political calculations of the most cynical sort. The aim is to divert attention from the revelations of massive illegal spying by the government on the American people and the unpopular international manhunt and persecution of whistle-blower Edward Snowden.
Obama has adopted the catchphrase of “growing the economy from the middle out,” as opposed to the “winner-take-all approach” approach of the Republicans, as White House spokesman Jay Carney put it. With characteristic contempt for the intelligence of the public, Obama and his political handlers are seeking to conjure up vast differences in economic policy between the Democrats and Republicans, even as the two parties work hand in glove to impoverish the working class.
The administration’s insistence that it will not provide financial assistance to Detroit and its approval of Emergency Manager Kevyn Orr’s plans to slash the pensions and health benefits of Detroit city workers represent a continuation and escalation of a policy dictated by the corporate and financial elite.
The White House has already made clear that Obama will not advance any significant proposals to address mass unemployment and worsening poverty in his speech in Galesburg Wednesday. Instead, he will take the opportunity to praise his administration’s track record on the economy.
Any so-called “jobs” measures he does propose will be tailored to the interests of big business, including tax cuts and subsidies for corporations.
During Tuesday’s press conference, Carney bragged about the Obama administration having created 7 million jobs since the start of the economic “recovery.” This ignores the fact that the working age population has grown by 9.4 million during this time. The labor force participation rate has fallen every year of the Obama’s administration.
The Obama “recovery” has in four years failed to recoup the jobs lost since 2008 by some 2 million. The National Employment Law Project reported last year that while the majority of the jobs lost during the 2008 crash were middle-income, 58 percent of new jobs created during the “recovery” were low-wage, paying between $7.69 and $13.83.
But while the economic situation for millions of people remains disastrous, life has never been better for the social layer Obama really represents. The speculators, swindlers and Wall Street mafia are, thanks to Obama’s economic policies, enjoying record stock values and record profits. CEO pay is higher than ever, as is the chasm separating the rich and super-rich from everyone else. The incomes of the top 1 percent grew more than 11 percent between 2009 and 2011—the first two years of the Obama “recovery”—while the incomes of the bottom 99 percent actually shrank.
Meanwhile, Obama is pressing forward with his proposal, outlined in his budget for the next fiscal year, to slash $400 billion from Medicare and $130 billion from Social Security.
The goal of the Obama administration, working with the Republicans and local governments, is to roll back the living conditions of the vast majority of the population to levels not seen since the 19th century, prior to the advent of the eight-hour day, child labor laws, comprehensive public education, pensions, health benefits, workplace health and safety regulations, etc.
In response to the ruthless assault of the financial oligarchy, spearheaded by Obama, the working class must advance, no less ruthlessly, its own policy. The workers to take up the struggle to break the power of the corporate and financial elite and reorganize society on the basis of social need, not private profit.
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This week’s deployment of Blackhawk helicopters in Chicago is only the latest in a series of “urban warfare training” exercises that have become a familiar feature of American life.
As elsewhere, this exercise was sprung unannounced on a startled civilian population. Conducted in secrecy, apparently with the collusion of local police agencies and elected officials, Democrats and Republicans alike, the ostensible purpose of these exercises is to give US troops experience in what Pentagon doctrine refers to as “Military Operations on Urban Terrain.”
Such operations are unquestionably of central importance to the US military. Over the past decade, its primary mission, as evidenced in Afghanistan and Iraq, has been the invasion and occupation of relatively powerless countries and the subjugation of their resisting populations, often in house-to-house fighting in urban centers.
The Army operates a 1,000 acre Urban Training Center in south-central Indiana that boasts over 1,500 “training structures” designed to simulate houses, schools, hospitals and factories. The center’s web site states that it “can be tailored to replicate both foreign and domestic scenarios.”
What does flying Blackhawks low over Chicago apartment buildings or rolling armored military convoys through the streets of St. Louis accomplish that cannot be achieved through the sprawling training center’s simulations? Last year alone, there were at least seven such exercises, including in Los Angeles, Chicago, Miami, Tampa, St. Louis, Minneapolis and Creeds, Virginia.
The most obvious answer is that these exercises accustom troops to operating in US cities, while desensitizing the American people to the domestic deployment of US military might.
Preparations for such deployments are already far advanced. Over the past decade, under the pretext of prosecuting a “global war on terror,” Washington has enacted a raft of repressive legislation and created a vast new bureaucracy of state control under the Department of Homeland Security. Under the Obama administration, the White House has claimed the power to throw enemies of the state into indefinite military detention or even assassinate them on US soil by means of drone strikes, while radically expanding electronic spying on the American population.
Part of this process has been the ceaseless growth of the power of the US military and its increasing intervention into domestic affairs. In 2002, the creation of the US Northern Command for the first time dedicated a military command to operations within the US itself.
Just last May, the Pentagon announced the implementation of new rules of engagement for US military forces operating on American soil to provide “support” to “civilian law enforcement authorities, including responses to civil disturbances.”
The document declares sweeping and unprecedented military powers under a section entitled “Emergency Authority.” It asserts the authority of a “federal military commander” in “extraordinary emergency circumstances where prior authorization by the president is impossible and duly constituted local authorities are unable to control the situation, to engage temporarily in activities that are necessary to quell large-scale, unexpected civil disturbances.” In other words, the Pentagon brass claims the unilateral authority to impose martial law.
These powers are not being asserted for the purpose of defending the US population against terrorism or to counter some hypothetical emergency. The US military command is quite conscious of where the danger lies.
In a recent article, a senior instructor at the Fort Leavenworth Command and General Staff College and former director of the Army’s School of Advanced Military Studies laid out a telling scenario for a situation in which the military could intervene.
“The Great Recession of the early twenty-first century lasts far longer than anyone anticipated. After a change in control of the White House and Congress in 2012, the governing party cuts off all funding that had been dedicated to boosting the economy or toward relief. The United States economy has flatlined, much like Japan’s in the 1990s, for the better part of a decade. By 2016, the economy shows signs of reawakening, but the middle and lower-middle classes have yet to experience much in the way of job growth or pay raises. Unemployment continues to hover perilously close to double digits …”
In other words, the Pentagon sees these conditions—which differ little from what exists in the US today—producing social upheavals that can be quelled only by means of military force.
What is being upended, behind the scenes and with virtually no media coverage, much less public debate, are constitutional principles dating back centuries that bar the use of the military in civilian law enforcement. In the Declaration of Independence itself, the indictment justifying revolution against King George included the charge that he had “affected to render the Military independent of and superior to the Civil power.”
Side by side with the rising domestic power of the military, the supposedly civilian police have been militarized. An article published by the Wall Street Journal last weekend entitled “The Rise of the Warrior Cop” graphically described this process:
“Driven by martial rhetoric and the availability of military-style equipment—from bayonets and M-16 rifles to armored personnel carriers—American police forces have often adopted a mind-set previously reserved for the battlefield. The war on drugs and, more recently, post-9/11 antiterrorism efforts have created a new figure on the US scene: the warrior cop—armed to the teeth, ready to deal harshly with targeted wrongdoers, and a growing threat to familiar American liberties.”
The article describes the vast proliferation of SWAT (Special Weapons and Tactics) units to virtually every town in America, fueled by some $35 billion in grants from the Department of Homeland Security, “with much of the money going to purchase military gear such as armored personnel carriers.”
This armed force was on full display in April when what amounted to a state of siege was imposed on the city of Boston, ostensibly to capture one teenage suspect. The entire population of a major American city was locked in their homes as combat-equipped police, virtually indistinguishable from troops, occupied the streets and conducted warrantless house-to-house searches.
Underlying this unprecedented militarization of US society are two parallel processes. The immense widening of the social chasm separating the billionaires and multi-millionaires who control economic and political life from American working people, the great majority of the population, is fundamentally incompatible with democracy and requires other forms of rule. At the same time, the turn to militarism as the principal instrument of US foreign policy has vastly increased the power of the military within the US state apparatus.
Both America’s ruling oligarchy and the Pentagon command recognize that profound social polarization and deepening economic crisis must give rise to social upheavals. They are preparing accordingly.
The working class must draw the appropriate conclusions and make its own political preparations for the inevitable confrontations to come.
Tuesday, July 23, 2013
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Most people have no idea that the U.S. financial system is on the brink of utter disaster. If interest rates continue to rise rapidly, the U.S. economy is going to be facing an economic crisis far greater than the one that erupted back in 2008. At this point, the economic paradigm that the Federal Reserve has constructedonly works if interest rates remain super low. If they rise, everything falls apart. Much higher interest rates would mean crippling interest payments on the national debt, much higher borrowing costs for state and local governments, trillions of dollars of losses for bond investors, another devastating real estate crash and the possibility of a multi-trillion dollar derivatives meltdown. Everything depends on interest rates staying low. Unfortunately for the Fed, it only has a certain amount of control over long-term interest rates, and that control appears to be slipping. The yield on 10 year U.S. Treasuries has soared in recent weeks. So have mortgage rates. Fortunately, rates have leveled off for the moment, but if they resume their upward march we could be dealing with a nightmare scenario very, very quickly.
In particular, the yield on 10 year U.S. Treasuries is a very important number to watch. So much else in our financial system depends on that number as CNN recently explained...
Indeed, since May, just before Bernanke announced a probable end to QE3, the yield on 10-year Treasuries has jumped around almost one percentage point, to 2.6%, wiping out more than two years of interest payments. The markets clearly fear that far higher long-term rates are lurking in the absence of exceptional policies to rein them in.That's a crucial issue, because those rates are highly influential in determining the future performance of stocks, bonds, and real estate. Investors grant equities higher multiples when long-term rates are lower; both longer-maturity Treasuries and corporate bonds jump when rates decline; and developers pocket more cash flow from their projects when they borrow cheaply, raising the values of office and apartment buildings. When rates reverse course, so do all of those prices the Fed has been endeavoring to swell as a tonic for the economy.
Even though the yield on 10 year U.S. Treasuries has risen substantially, it is still very low. It has a lot more room to go up. In fact, as the chart posted below demonstrates, the yield on 10 year U.S. Treasuries was above 6 percent back in the year 2000...
And the yield on 10 year U.S. Treasuries should rise substantially. It simply is not rational to lend the U.S. government money at less than 3 percent when the real rate of inflation is about 8 percent, the Federal Reserve is rapidly debasing the currency by wildly printing money and the federal government has been piling up debt as if there is no tomorrow...
Anyone that lends the U.S. government money at current rates is being very foolish. You will end up getting back money that has much less purchasing power than you originally invested.
Why would anyone do that?
But if interest rates rise, the U.S. government could be looking at some very hairy interest payments very rapidly. For example, if the average rate of interest on U.S. government debt just gets back to 6 percent (and it has been far higher than that in the past), the federal government will be shelling out a trillion dollars a year just in interest on the national debt.
State and local governments all over the nation could also very rapidly be facing a nightmare scenario.
Detroit is already on the verge of formally declaring the largest municipal bankruptcy in the history of the United States, and there are many other state and local governments from coast to coast that are rapidly heading toward financial disaster even though borrowing costs are super low right now.
If interest rates start rising dramatically, it would cause a huge wave of municipal financial disasters, and municipal bond investors would lose massive amounts of money...
"Muni bond investors are in for the shock of their lives," said financial advisor Ric Edelman. "For the past 30 years there hasn't been interest rate risk."That risk can be extreme. A one-point rise in the interest rate could cut 10 percent of the value of a municipal bond with a longer duration, he said.Many retail buyers, though, are not ready for the change and "when it starts, it will be too late for them to react," he said, adding that he was encouraging investors to look at their portfolio allocation and make changes to protect themselves from interest rate risks now.
In fact, bond investors of all types could be facing monstrous losses if interest rates go up dramatically.
It is being projected that if U.S. Treasury yields rise by an average of 3 percentage points, it will cause bond investors to lose a trillion dollars.
And already we have started to see a race for the exits in the bond market. A total of 80 billion dollars was pulled out of bond funds during the month of June alone. If you want a visual of the flow of money out of the bond market, just check out the chart in this article.
We are witnessing things happen in the financial markets that have not happened in a very, very long time.
And junk bonds will be hit particularly hard. About a decade ago, the average yield on junk bonds was about twice what it is right now. When the junk bond crash comes, there is going to be mass carnage on Wall Street.
But of much greater importance to most Americans is what is happening to mortgage rates. As mortgage rates rise, it becomes much more difficult to sell a house and much more expensive to buy a house.
According to CNBC, there is an increasing amount of concern that the rise in mortgage rates that we are witnessing could throw the real estate market into absolute turmoil...
The housing recovery is in for a major pause due to higher mortgage rates. It is not in the numbers now, and it won't be for a few months, but it is coming, according to one noted analyst. The market has seen rising rates before, but never so far so fast; there is no precedent for a 45 percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before rates go higher, but that will be short term. Home sales and home prices will both come down if rates don't return to their lows, and the expectation is that they will not.
We have seen the number of mortgage applications fall for four weeks in a row, and at this point mortgage applications have declined by 28 percent over the past month.
That is an absolutely stunning decline, but it just shows the power of interest rates.
Let's try to put this into real world terms.
A year ago, the 30 year rate was sitting at 3.66 percent. The monthly payment on a 30 year, $300,000 mortgage at that rate would be$1374.07.
If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage at that rate would be $2201.29.
Does 8 percent sound crazy to you?
It shouldn't. 8 percent was considered to be normal back in the year 2000...
This is what we are talking about when we talk about the "bubbles" that the Federal Reserve has created. The housing market is now completely and totally dependent on these artificially low mortgage rates. If rates go back to "normal", the results would be absolutely devastating.
But of course the biggest problem with rapidly rising interest rates is the potential for a derivatives crisis.
There are several major U.S. banks that have tens of trillions of dollars of exposure to derivatives. The following is from one of my previous articles entitled "The Coming Derivatives Panic That Will Destroy Global Financial Markets"...
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)
Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)
Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars - yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)
That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.
The largest chunk of those derivatives contracts is made up of interest rate derivatives.
I have mentioned this so many times before, but it bears repeating that there are approximately 441 trillion dollars worth of interest rate derivatives sitting out there.
If rapidly rising interest rates suddenly cause trillions of dollars of those bets to start going bad, we could potentially see several of the "too big to fail" banks collapse at the same time.
So what would happen then?
Would the federal government and the Federal Reserve somehow come up with trillions of dollars (or potentially even tens of trillions of dollars) to bail them out?
The Federal Reserve has created a giant mess, and when this current low interest rate bubble ends our financial system is going to slam very violently into a very solid brick wall.
As Graham Summers recently pointed out, entrusting Federal Reserve Chairman Ben Bernanke with control of our financial system is like putting a madman behind the wheel of a speeding vehicle...
Imagine if you were in the car with a driver who was going 85 MPH down a road with a speed limit of 35 MPH (this isn’t a bad metaphor as there is absolutely no evidence that QE creates jobs or GDP growth so there is no reason for the Fed to be doing it in the first place).The guy is obviously out of control. The dangers of driving this fast are myriad (crashing, running someone over, etc.) while the benefits (you might get where you want to go a little faster assuming you don’t crash) are minimal.Now imagine that the driver turned to you and said, “I’m thinking about slowing down.” Seems like a great idea doesn’t it? But then a mere two minutes later he says “ we need to continue at 85 MPH for the foreseeable future.”At this point any sane person would scream, “STOP.” The driver is clearly a madman and shouldn’t be let anywhere near the driver’s seat. Moreover, he’s totally lost all credibility and isn’t to be trusted.That’s our Fed Chairman.
Sadly, most Americans do not understand any of this.
Most Americans have no idea about the immense economic pain that is going to hit us when interest rates go back to normal levels.
All of this could have been avoided, but instead the American people let the central planners over at the Federal Reserve run wild.
When the bubble finally bursts, the official unemployment rate is going to rocket well up into the double digits, millions of families will lose their homes and America will find itself in the middle of the worst economic crisis in modern U.S. history.
Please share this article with as many people as you can. We need to help people understand what is coming so that they will not be blindsided by it.