Ben Dyson explains how banks make 92% of their investments in non-productive businesses, like speculative property bubbles, which has led to the massive unemployment that we see and repetitive boom and bust cycles. 



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Uploaded by PositiveMoneyUK 

January 10, 2012



Ben Dyson gives clear answers to 3 Key Questions: 



1) Who creates money? 



2) How much money do they create? 



3) What do they do with the money they create?



He shares some very interesting and profoundly important facts and shows how far the reality of banking is away from the text-book model of banking and which major implications the current system has on our lives.



How do banks create money out of nothing? How do they create money as debt? Has money been privatized?



We recommend it as an educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system.



Presented at the Positive Money Conference in London.



More Information:



www.positivemoney.org.uk

Most oil sales throughout the world are denominated in United States dollars (USD). According to proponents of the petrodollar warfare hypothesis, because most countries rely on oil imports, they are forced to maintain large stockpiles of dollars in order to continue imports. This creates a consistent demand for USDs and upwards pressure on the USD's value, regardless of economic conditions in the United States. This in turn allegedly allows the US government to gain revenues through seignorage and by issuing bonds at lower interest rates than they otherwise would be able to. As a result the U.S. government can run higher budget deficits at a more sustainable level than can most other countries. A stronger USD also means that goods imported into the United States are relatively cheap.



Another component of the hypothesis is that the price of oil is more stable in the U.S. than anywhere else, since importers do not need to worry about exchange rate fluctuations. Since the U.S. imports a great deal of oil, its markets are heavily reliant on oil and its derivative products (jet fuel, diesel fuel, gasoline, etc.) for their energy needs. The price of oil can be an important political factor; U.S. administrations are quite sensitive to the price of oil.



Political enemies of the United States therefore have some interest in seeing oil prices denominated in pretty much anything but the US dollar.

 A little over a year ago on 1st November 2010 I wrote what I called “…a little bit of scurrilous speculation.”  In it I speculated that an unintended consequence of QE had been to spur several countries to think very seriously of how they could replace the dollar as their settlement currency for international deals. The Settlement Currency just means the currency both parties agree is stable, internationally trusted and accepted, and in plentiful supply. Which may not be the case for their own currencies . I wondered if doubts about the longer term stability of the dollar and of US debt levels, was combining with a political desire in China and perhaps other countries as well to challenge the US via the dollar with the eventual goal of creating an alternative reserve currency backed by gold rather than, as the dollar now is, by debt.

Various countries have been buying gold.  Russia, China, India have all bought a lot….Which brings me to my speculation.  The list of countries accumulating gold is similar to the list of countries that were reported to be talking about the need for a new reserve currency to replace the dollar.

I wonder if those who are seriously thinking of trying to unseat the dollar and create a currency which is backed by something other than debt and is not under the control of America’s corrupt banks and even more corrupt government, are investing in gold as a precursor to making a real bid for a new currency.

Later, in Making the New Sub Prime Part 2 I looked at the growing network of bilateral agreements in major trade deals gradually replacing the dollar as a settlement currency.

Being a ‘Settlement’ currency is not quite the same as being a ‘Reserve Currency’ like the dollar, but it a major step in that direction. It is, in fact, a very large step.  Which currency large international trades are done in matters. It is a fact that in 2000, Iraq signed an agreement to sell its oil, all its oil, in Euros. Iran was contemplating doing the same at around the same time. The Iraq decision involved the large French bank PNB-Paribas. France was not one of those who supported the war and Washington led a hate campaign vilifying the French.  The worry was that a switch from dollar to Euro settlement might gain momentum. Any major move away from dollar settlement would cripple the US.

In January of this year the India Times reported that India was talking to Iran about moving out of dollar settlements so as to be able to buy Iranian oil despite a US embargo.  India said it was discussing settling in Gold. Remember, India has just signed a settlement agreement with China to use the Yuan.

A very good summary of recent news by ZeroHedge suggests I may have been on the right track. And recently the pace has picked up.

China and Russia have been trading directly in their own currencies and using them both interchangeably for settlement for over a year. As the The China Daily article reports,

China is allowing greater use of its currency for cross-border transactions to reduce reliance on the US dollar, after Premier Wen Jiabao said in March he was “worried” about holdings of assets denominated in the greenback.

Then on 26th December 2011 Bloomberg reported,

Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

China is Japan’s largest trading partner. Japan will also start in 2012 buying Chinese debts. How much Dollar debt will either of them buy? They have both already been buying less.

Two days later (Dec.28th) the Iranain news service reported,

 Iran and China on Wednesday signed two agreements on expansion of trade ties and joint investments. 

These trades too will not be settled in Dollars or in Euros.

Three days after that The China Post reported that on the last day of 2011, US President Obama had signed a new law in which

U.S. imposes sanctions on banks dealing with Iran….Sanctioned institutions would be frozen out of U.S. financial markets.

Sounds tough. A bit like sending an aircraft carrier to the Straits of Hormuz. But as the article went on to report, with only barely concealed delight, the threat may be as hollow as the dollar itself. The law comes with exemptions which may eventually highlight America’s plight rather than its might.

The sanctions target both private and government-controlled banks – including central banks – and would take hold after a two- to six-month warning period, depending on the transactions, a senior Obama administration official said.

Under the law, the president can move to exempt institutions in a country that has significantly reduced its dealings with Iran and in situations where a waiver is in the U.S. national security interest or otherwise necessary for energy market stability. He would need to notify Congress and waivers would be temporary, but could be extended.

And as if to make the point, only a couple of days after this on Jan 7th, came the news that,

Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow.

So now almost none of Iran’s oil will be traded in Dollars.

India and Japan have also recently agreed  a 15 billion dollar currency exchange. This will tie their two currencies closer together.

The list of countries and trades no longer using the dollar for settlement for their trade is now considerable. How close are we to reaching the tipping-point where it no longer makes sense for nations to use dollars and makes more sense for them, both economically and politically,  to use the network of currencies tied to the Yuan? When we reach that point the Yuan becomes in reserve currency in all but name.

China, India, Russia and Iran are all large holders of physical gold and most of them are also large producers of it. None of them are firm allies of the US. They all have long term relations with each other.  All of them have expressed oncercern over US debts and printing. None of them will like QE3, nor Euro printing, when they both arrive later this year.

I think the stand-off with Iran in the Straits of Hormuz over sanctions is as much to do with the moves to replace the dollar as anything else.  The stand off is as much with China and its allies as it is specifically with Iran. The US is testing China’s nerve and the solidity of its network of bilateral currency settlement agreements.  We are seeing military power deployed to counter economic power. I think the US will lose.  Depending on the nature of its loss we could see a precipitate decline in the standing of the dollar as global reserve currency.

2012 could see the beginning of large scale defections from the dollar settlement currency. Which would in turn have massive, perhaps even catastrophic consequences for how the world perceives what is an acceptable level of debt for the US. What is acceptable when you have the global reserve currency is quite different from what is acceptable when you don’t.

And the reverse is also true. If  China can transform the netwrok of bilateral agreements which centre upon China and the Yuan, in to becoming accepted as a de facto reserve currency, then for those, like me, who wonder how China can possibly avoid a hard landing as its bad bank and property bubble deflates faster and faster, look no further.

There is no denying China has an absolutely massive bad debt crisis fermenting. Every one of its banks is gagging on bad loans made to every one of China’s regional governments. Trillions of Yuan worth of loans which will not be repaid, on property and land valued at hugely inflated but now defaulting prices. But if China can become a rival and rising reserve currency at the centre of a new and growing collection of  trading partners then  China can and will bury the debts in a a mass unmarked grave somewhere in its hinterland.

At the moment when America is seen as being no longer the pre-eminant reserve currency and its debt load is re-considered accordingly, China and its debt load will go the other way. America and its currency risk being seen as too rotted by debt to be trusted and it’s claims of economic growth seen as fake, empty, paper-based, accountancy-conjured growth. The Dollar and America itself risk being seen as the fiat currency and fiat nation par excellence .While China and the Yuan will be seen as backed by sold gold and real growth.

One more question to ask in all this is – how far have the big banks and brokerages managed to turn even gold and silver (at least gold and silver  held in the West) in to another fiat currency? Gold and bullion bugs amoung you might argue the question makes no sense. But consider re-hypothecation. How much gold and silver has been pledged and re-pledged, hypothecated and re-hypothecated? How many more paper contracts for and claims upon gold and silver exist above and beyond the amount of actual physical gold and silver?  After all gold and silver are the ultimate in ‘good’ assets which counterparties will happily accept. So it seems likely to me that gold and silver (or contracts for them) will have been in demand in those repo and hypothecation markets. If so then I wonder how many conflicting and contesting claims will surround every ounce of gold and silver in the West when investors start demanding to see their ‘investment’.

I think the big old sterling silver coin may already have dropped for some investors. That is why prices for physical silver are surging above the price for paper claims on silver. I think some traders are getting nervous about buying paper claims on silver and now want only the metal itself. They suspect that in the end, if you have only a paper claim  or contract for, silver that is exaclty all you will ever have – the paper. Only those with the actual metal in their hands, will get what they paid for. I think there is a fiat, paper currency version of gold and silver floating around and parasitising the metals themselves. Those who own that paper stuff may get…well … stuffed.

Where Europe goes in all this is another story which I will try to say something about when I get back from filming. I am away for this week, back on Saturday and away again filming till the 20th.
 

David Malone is author of the "The Debt Generation". David has a career spanning nearly twenty years producing and directing documentaries for both the BBC and Channel4. His series Testing God was shortlisted for the Royal Television Society best documentary series and was described by The Times as "moving and startling – as close to poetry as television gets." For the last three years David has focused considerable attention on the financial system. His BBC documentary High Anxieties- The Mathematics of Chaos, first broadcast in September 2008, was one of the first films to be made about the financial crisis accurately anticipating the problems that were to unfold in the economy. The Debt Generation was published in November 2010.

The US has the world's biggest economy, the most influential culture, and the most potent military machine, with a budget that equals that of all other nations combined. It is the only power with a global project defended and supported by more aircraft carriers, Fortune 500 companies, and more successful media-tainment conglomerates than any other.

transcript for the Empire episode The decline of the American empire (Thursday, December 29, 2011)

Narrator

Its power is felt in every corner of the globe. Its military spending equals the rest of the world but has Washington finally over-reached with its debt sky-rocketing, its infrastructure crumbling and its competitors vying for influence?

The world is undergoing a profound and complicated transformation.

Economist

The developing economies will surpass the developing economies. 

Narrator

Is all the talk of American decline premature?

Barack Obama

Let's show the world once again why the United States of America remains the greatest nation on earth.

Narrator

Or is the sun finally setting on the American century? 

Marwan Bishara

This is Empire. 

Hello and welcome to Empire. I am Marwan Bishara. The United States has the world’s biggest economy, strongest military and the most influential culture. It’s the only power with a global project defended and supported by more aircraft carriers, Fortune 500 companies and most successful media-tainment conglomerates than any other. But America’s post-cold war optimism, following the collapse of the Soviet Union, has given way to pessimism, forecasting a declining power and more crucially, the end of an American era. The rise of new divisional and global powers, coupled with Washington’s recent war fiascos and financial crisis have worsened the outlook for America’s future. 

Countless books have gone beyond recent developments to illustrate a persistent decline with titles like Suicide of a Superpower, The Empire Has No Clothes, Taming American Power, Nemesis, The Last Days of the American Republic, Colossus, The Rise and Fall of The American Empire and Selling Out a Superpower.  But how serious are the Doomsday scenarios? Is this decline temporary or reversible and what does it mean to America and the rest of the world? Well joining me to answer these questions and more are Tom Engelhardt, editor of the American Empire Project and a popular website Tomdispatch, the author of the United States of Fear. Susan Glasser, editor-in-chief of Foreign Policy magazine, former editor at the Washington Post and co-author of Kremlin Rising Vladimir Putin’s Russia And The End of Revolution.  And Cynthia Enloe, professor of woman’s studies and international development at Clark University, the author of The Real State of America Atlas, Mapping the Myths and Truths of the United States and Bananas, Beaches and Bases, Making Feminist Sense of International Politics. Last, but not least, Stephen Walt, professor of International Affairs at Harvard University, the author of Taming American Power and co-author of the Israel Lobby. Our starting point is US strategic overstretch. 

Narrator

What exactly is the United States afraid of? This ship is part of what is called a carrier battle group, it consists of an aircraft carrier, cruisers, destroyers, scores of combat aircraft … and a multitude of long and short range missiles and other weapons. It is so large the entire thing requires roughly 10,000 military personnel to operate. The United States boasts a dozen carrier battle groups of this size. No other nation on earth has one. The question is why?

Professor Nicholas Burns – former US under-secretary of state  

We are absolutely keeping America safe. The world is so complex right now, there's so many threats and challenges to our national security. You can't meet them in Boston in Los Angeles, you have to go out to meet them to defend the country.

Narrator

But for many this idea of going out to meet these challenges is precisely the problem.

Professor Andrew Bacevich -  international relations, Boston University

If you look at the period since 1990, over 20 years now, it really is a period of enormous and continuing American military activism in all parts of the world for all kinds of purposes. I find that troubling.

Professor Nicholas Burns

If you were drawing back to the continental United States and saying we're no longer gonna be engaged in the world because it's too hard, or it’s too expensive, isolation is a recipe for failure in the 21st century.

Narrator

And yet another recipe for failure is economic calamity and that puts funding squarely in the spotlight. In the fiscal year 2012 the United States government has $1.34tr to play with. Currently, $553bn has been allocated to the defence budget. But as Washington has learnt the hard way, winning hearts and minds doesn't come cheap. In other words, is the money well spent?

Professor Andrew Bacevich

Heavens no, I mean absolutely not. I'm all for strong defence, I'm all for having a very capable, well resourced military that keeps America safe, that can prevent anything like 9/11. But the way we've gone about trying to prevent a recurrence of 9/11 is absurd.

Narrator

But what about challenges at home? The economic dimension cannot be ignored. The US military is a major domestic employer. The entire defence industry turns over billions upon billions of dollars every year and the link between the strength of the American economy and the strength of the American military cannot be ignored. And critics are quick to point out the perils of such a symbiotic relationship.

Professor Andrew Bacevich

There is in a sense, a partnership, probably goes too far to call it a conspiracy, 'cause it's wide open but there's a partnership between members of congress, the armed services and large scale defence contractors, all of whom benefit in different ways by maintaining very high levels of military spending.

Narrator

And that's why, during times of economic peril, politicians often resemble cheerleaders.

Joseh Biden – US vice president

You're the ones ensuring this alliance remains effective in meeting the challenges of the 21st century from countering North Korea's nuclear programme, to building up ties and trade and investment and generate jobs back home to promoting democracy and human rights. You do it all, you're the full package.

Narrator

And of course there's the matter of prestige, the projection of strength. Any drastic changes to American hard power will create a vacuum and it's impossible to predict, in today's world, how that will be filled or by whom.

Professor Nicholas Burns

We can't just retreat to fortress America you know and bring up the drawbridge and hope to defend our international security interests by bringing all the troops home.

Narrator

And thus the cycle is endlessly perpetuated. Wars need funding, funding creates jobs, jobs strengthen the economy. So perhaps the most important question of all, is whether geo-political instability is the excuse, rather than the justification. This is the essence of real politics.

Professor Andrew Bacevich

Not am Empire in the old fashioned sense, but I think that there was a clear desire and is a clear desire on the part of senior US officials to want to ensure that the regimes that are in place are relatively deferential to the United States, they will pursue policies that are consistent with our policies. Basically to put us in a position where we’re gonna be able to call the shots and that's a form of imperialism.

Narrator

Because with the global economy the way it is these days, imperialism is very good for business.

Marwan Bishara

Stephen you've written a lot about this whole overstretch, I mean overstretch could actually also be good for business, it's not only a burden, what do you think? 

Tom Engelhardt – editor, Tomdispatch  

I think we've had an enormous stimulus package abroad. We've been spending money like crazy, we put about 1.2 trillion a year, maybe that's conservative. I think it's proved to be a kind of squandering of resources and I think if you look at the United States and you look at, I mean you've got several things, you've got a kind of industrialisation, you had the financialization that led to 2007/2008 and you had this third thing which is our urge to kind of take the world, to create a pox Americana and I think it too, has been a factor that's squandered American treasure.

Marwan Bishara

But it's good for business, pox Americana.

Professor Stephen M. Walt – international affairs, Harvard University

I think that's a mistake. Whenever the defence budget comes under pressure you hear the argument that this is necessary to keep the American economy rolling. Most economists will tell you however, that Pentagon spending is actually not the best way to stimulate the American economy. But almost everyone would see that there are other ways to invest the same amount of money that would create a much bigger economic payoff here at home. Building infrastructure, whether it's roads and bridges or internet networks, things that would actually enhance the productivity of the American economy. So the excessive expenditure, it has actually been a drag on the United States and we see that now when we're trying to get a budget deal, right everyone understands that in order to get the American federal budget back on a sort of stable course, we’re gonna have to raise some taxes, gonna have to cut some entitlements and we're gonna have to cut some defence spending. None of these dramatically, but all of them enough to make it all work. And that hasn't happened for political reasons, but not because cutting defence would actually harm the American economy in a big way.

Marwan Bishara

But at the end of the day the defence budget as it it, 600 and some billion dollars, it's less than 5 per cent of the American GDP, it's not a huge percent of the American economy. 

Professor Susan Glasser – editor-in-chief, Foreign Policy

It's something around four per cent,  just under four per cent of GDP, so it's something that whether you support it or not, we can afford it and that's part of the reason why it's continue to grow, because the United States has been so extraordinarily rich and successful, we’ve been able to finance this astonishing expansion of the military and associated, you know sort of complex budget. If you look at the numbers, peoples' jaws always drop when they hear this, but the truth is that US national security spending, right now, represents awful close to 50 per cent of all of the world's military expenditures combined. And I think when people hear that, they are just astonished, the scale and scope of the militarisation of America's footprint in the world is something that Americans here at home actually are astonishingly unaware of. That said, I have to say, I have to comment on your sort of report that you had, there’s no bad guys in there, the only conversation you know that we’ve been framed to have is a conversation about American imperial over-stretch as if we were the Roman empire sort of conquering territories. And I think …

Marwan Bishara

You're actually far more vast than the Roman empire. Aren't you? I mean how many bases are there around the world?  

Professor Susan Glasser

It's a different model, right. 

Marwan Bishara

1,000? 

Tom Engelhardt

It's approximately 1,000 if you don’t count for instance the 400 odd that we built in Afghanistan or those 505 that we’ve just given up in Iraq etc.

Marwan Bishara

So if this is not an imperial outreach, I don't know what is.

Professor Cynthia Enloe – international development, Clark University

One of the problems of this kind of militarisation of security, that is convincing Americans that in fact the only way that they can feel secure is to have a fortress and a outreach, you know global fortress. And I think actually, there's a new discussion in the United States now and I think actually not far from this studio is one of the occupied Wall Street camps, and I think that's a discussion about well so what do you mean by security? Right, whose security? How solid is that security? How resilient is that security? And I think one of the things a lot of us are, well some of us have been long convinced of this, but others are really beginning to understand, that that kind of American popular culture, of militarised security, is really very shallow and it's not really secure.

Marwan Bishara

Let's take a look at the states with American bases in them. I mean certainly you’re more likely to accept an American oil deal or American business deal of some sort if there's an American base in your country, no?

Professor Stephen M. Walt

I think it depends very much on a case by case basis. I mean there are a number of countries around the world who I think are actually very dependent upon American protection and grateful for it.

Marwan Bishara

Grateful meaning? 

Professor Stephen M. Walt

Grateful that they appreciate it. 

Marwan Bishara

They do business with it. 

Professor Stephen M. Walt

Well not just 'cause they do business, South Korea likes having American protection there because they have a bad relationship with North Korea. Right, Japan likes having American protection because they are worried about security.  But I guess the point I'd make is this, it's often viewed as a false choice between complete isolationism and the United States taking over the world. The United States is not gonna disengage from the entire world, we're not going back to fortress America. The question is what are the places where the United States should use its power and how should the United States use its power in a constructive way? The problem with the last ten years or so is that we've increasingly used our power in some foolish ways that have been bad for the United States and not particularly good for the places we've been using it.

Marwan Bishara

So you don't mind very much if they use power to get business contracts?

Professor Stephen M. Walt

No.

Marwan Bishara

Unfortunately is when they’re useless.

Professor Susan Glasser

But I think that’s a pretty, I mean to say that the exercise of American power is invalid, you know forcing people to make business details at the barrel of a gun.

Marwan Bishara

Why forcing, enticing?

Professor Susan Glasser

Right I think that's a pretty nuanced view of the world. I don't think that Americans are in Afghanistan to make business deals and the truth is, you know who's in Afghanistan to make business deals, it's the Chinese.

Tom Engelhardt

I think it would be hard to argue that when the Bush administration went out into the world they weren't thinking about energy flows, they were thinking about breaking OPEC, they were thinking about doing a lot of things and they were thinking about basing us, a kind of a South Korean model, 30,000 troops maybe, in the heart of the oil lands of the planet forever. Now the thing is sometimes you go out with guns to get your contracts and it doesn't work out that way.

Professor Cynthia Enloe

I wanna bring the scale down a bit here and not talk about China and Japan and the US, but actually talk about people who live around US bases. There was such an effective anti-bases movement in the Philippines that they Philippines senate, much against their earlier inclinations, voted to end the basing agreement with the United States. It causes a lot of disruption of social life.

Marwan Bishara

It certainly was the justification for getting the American bases out of Saudi Arabia after the first Gulf War. 

Professor Stephen M. Walt

It's quite clear that part of the reason why al-Qaeda turned its attention to attacking the United States directly was their perception that infidels were now on sacred Islamic territory. It was not the only thing they were upset by, but that was clearly one of them. So our strategy of leaving five to 10,000 troops in Saudi Arabia as part of dual containment in the 1990s was one of the things that helped lead to that. Now among other things, that doesn't tell you the United States should come home entirely, but it does tell you that having large, on the ground, military presences in various parts of the world can have, what Chalmers Johnson used to call blow-back effects, on the United States itself, which is why we got to be rather careful about where we deploy forces and try to minimise the American military footprint as much as we can.

Marwan Bishara

So you’re in favour of deployment around the world, except you want it to be intelligent deployment?

Professor Stephen M. Walt

Absolutely.

Marwan Bishara

So you are for empire except that you want to be downsized? 

Professor Susan Glasser

Do you think that deployment and empire are synonyms? 

Marwan Bishara

Deployment around the world in 1,000 bases.

Professor Susan Glasser

Empire.

Marwan Bishara

Who else around the world does that?

Professor Susan Glasser

No are deployment and empire synonyms?

Marwan Bishara

I mean do the Chinese have bases around the world?  Do the Russians, do they have such bases with the Indians, the Brazilians, the Turks?  

Professor Stephen M. Walt

Certainly the Soviet Union had bases all over the world, not as many as we did.

Marwan Bishara

A smaller empire? 

Professor Stephen M. Walt

And we called it the Soviet Empire. 

Professor Cynthia Enloe

Yeah one should remember that every base is negotiated and I don't mean amongst equals, it's definitely not amongst equals and one of the things that is so irritating to South Koreans, many of whom are nervous about the North, but are still appalled at the inequality and injustice of the basing agreement and they're called …

Marwan Bishara

SOFAS.

Professor Cynthia Enloe

SOFAS, Status Of Forces Agreement. 

Marwan Bishara

That's Iraqis …

Professor Cynthia Enloe

Yes and they are, for the most part, they are classified, which means I got a call from people in an unidentified south Asian county, asking me if I knew the small print in the SOFA agreement between their government and the United States because it was not available to local citizens. So that what you have is you have every base is negotiated to reinforce the message that one your citizens don't matter, 'cause they're not gonna find out what we've just given away.  And two, that you are not really secure in your own citizen rights because of this basin agreement. So these SOFAs are not just burrs under the saddle, they really destroy a sense of civic culture, in every country they're in. 

Professor Susan Glasser

I think you did make a very important point about the fact that these are negotiated with governments, that there are reasons that these occur. It's not you know an invasion force suddenly swoops down, lands on your territory and says you know here's my Kalashnikov, you know I’d like to have a base on your territory.

Tom Engelhardt

Sometimes it happens like that, but you're right.

Professor Stephen M. Walt

It's also worth noting that the United States was unable to negotiate the kind of status of forces agreement that it wanted to get in Iraq and one of the reasons that the American ground force presence is now leaving, completely is …

Tom Engelhardt

It's called defeat.

Professor Stephen M. Walt

Well and by the way it reminds us of something else that's important. Some of these very one sided agreements in the past were negotiated between the United States, what were essentially military dictatorships, as countries become more democratic, as they have to pay more attention to what their populations feel, the balance of political power and negotiating those arrangements begins to change and I think that’s what we're seeing in Iraq. However imperfect the Iraqi government may be, they felt they could not negotiate a one-sided agreement, they actually wanted the United States out or either staying on Iraqi terms or out.

Professor Cynthia Enloe

Untenable.

Tom Engelhardt

There's a kind of a madness to the situation which we're discussing very rationally in a way, and that is this, I mean in the Cold War, a genuine major enemy, a giant nuclear arsenal, the Soviet Union, a giant army, an imperial power, that was that moment. Now, the Soviet Union disappears one day and the resulting period we end up with a national security state, a Pentagon budget, a military intelligence bureaucracy, a national security state that’s staggeringly bigger in a world in which, at most, there are a few thousand scattered terrorists who wanna do something to us. We're dealing with unsuccessfully with a couple of minority insurgencies in the greater Middle East. I mean its extraordinary to imagine that somehow we ended up with this gigantic, call it what you will, imperial …

Professor Cynthia Enloe

Behemoth.

Tom Engelhardt

Behemoth. 

Marwan Bishara

Who else in the world has a world project? No-one has a world project but the United States and who is there to protect that world project? Call it free trade, call it capitalism, call it neoliberalism, whatever name you would like to attach to it, but who's to defend it? It's the US and NATO.

Professor Cynthia Enloe

But our biggest trading partners are Canada and Europe and you know I mean they're not the countries…

Professor Susan Glasser

They're not forced at the barrel of a gun, most of trading relationships are you know…

Professor Cynthia Enloe

Or even by the wire of a base.

Marwan Bishara

Well didn’t just the Americans tell the Chinese pay attention we are a pacific power? 

Professor Stephen M. Walt

Right but that has, I think, almost nothing to do with American economic interests in the short or medium term. I think that is a concern over rising Chinese power, possibilities that China will attempt to, either push us out or establish its own sphere of influence, not immediately but down the road. But it's not because we are depending upon the US navy to get us markets in Vietnam, or get us markets in Singapore.

Marwan Bishara

Okay.

Professor Susan Glasser

It's opportunistic as well, right? I mean there's a sense that you know in the regional competition for power between China and India, China and Japan, that the US has an opportunity to forge closer relationships with some of those countries that are anxious in their own region about the rise of China.

Marwan Bishara

this is actually a problem and that should take us to our second half of the show. But before we go to a news break we will take a look at America's soft power and perhaps American prestigious universities are a good case in point. Let's watch.

Narrator

America's education system is broken. If children are a country's future, then the US appears to be squandering it. It has one of the most unequal education systems in the developed world.

And yet some American universities and colleges continue to shine. America boasts 17 of the world's top 20 universities and this is according to the Chinese rankings.   

It has seven of the top 10 most influential think tanks over all fields.

And 70 per cent of the world’s Nobel Prize winners are employed by American universities.   

And they're not just ivory towers. With close links to industry, elite universities in the US are the essential cogs in the economic engine. Facebook was born in Harvard. And Stanford was the midwife to Cisco, Hewlett Packard and Google. However, whilst it might be good at the top, many schools remain under funded and critics say that they turn out under skilled graduates.

Barack Obama – US president

We know beyond a shadow of a doubt that countries that out-educate us today, they will out-compete us tomorrow.

Narrator

And to maintain its advantage the US attracts the best professors and students to its top schools.

There are 700,000 foreign students studying the America way.  

Foreign Student

This kind of environment is better for my like development.

Narrator

And it's a symbiotic relationship. Overseas students not only bring $20bn worth of foreign reserves, but their ideas help fuel Uncle Sam’s most competitive high-tech industries.

52 per cent of Silicon Valley start-ups were founded by immigrants. And foreigners account for 25 per cent of American patent applications.

But it is definitely a two-way street. Foreigners educated in America help to spread the gospel of US capitalism when they return home.

Foreign Student

If we learn some knowledge here and we can bring it back to China, in that way we are make benefit to our country.

Narrator

And America is determined to maintain the upper hand when it comes to soft power. It spends twice as much as Europeans and four times as much as China on research and development. So chances are, that the next Mark Zuckerberg or Bill Gates will still be American for a little while longer.

Marwan Bishara

Welcome back. The collapse of the Soviet Union has the most threatened viability and durability of a super power lies in the strength of its economy, not its military. With its share of the world economy shrinking over the last half a century from half to a quarter of the total many claim that America's skyrocketing debt, dwindling productivity, exhausted middle class and decaying infrastructure do not bode well for a 21st century super power. And yet, there is much the world's foremost start-up nation can boast about. 

Narrator

America is the engine of the global economy. It boasts a GDP on nearly $15tr and it's home to the world’s reserve currency. 

Scott Lucas

In America there is a chant that you always hear "USA, USA we're number one, we’re number one". 

Narrator

But many are starting to question that belief.

Scott Lucas – American Studies, Birmingham University  

When it doesn't quite pan out that way, when you have economic problems at home, when you're challenged internationally in a political crisis, you still want to believe we're number one. 

Narrator

And they're certainly being challenged right now.

Martin Wolf – chief economist, Financial Times

This is the first really big financial crisis, when it all goes into reverse then you get a crash. Because this was a super boom, the crash element is very, very, very bad.

Professor Scott Lucas

Certainly there was a shift in power relations because of the economic changes at the end of 2008, but the first thing to say is this isn't new. 

But just because we have a power shift, doesn't mean you have all of a sudden American decline and new superpowers. 

Professor Linda Yueh – economist, Oxford University  

The US is ten times richer than China, it’s still the leader in lots of things but it has to get used to the fact that lots of countries around the world could look to Beijing as well as to Washington. It has to get used to the fact it won’t be the only driver of global growth.

Narrator

But the American president is not quite ready to concede the point.

Barack Obama – US president

Let's meet the moment, let's get to work and let's show the world once again why the United States of America remains the greatest nation on earth.

Martin Wolf

The country itself has huge assets but you can't say that the domestic policy agenda looks positive. The really big question is can the US get its own house in order?

Narrator

Over the last four years American household income has declined by almost 10 per cent. One in ten adults is unemployed and one in six is living on food stamps.

The recent occupy protests are just the latest to question the American dream.  

Protestor

We rattled their cage and now they're cracking down.

We go into the Middle East, be like hey we're gonna spread democracy and here we are, our government's suppressing democracy, it's just like how much hypocritical can that get?

Narrator

But while America Inc. may have lost it’s AAA rating, American brands still dominate the globe. Coca Cola has a global revenue of $35bn per annum, Microsoft, $69bn and Apple a whopping $100bn.

Kate Bulkley – technology analyst

Rumours of the collapse of the US tech sector innovation is let’s say overblown.  I think that there’s a lot of innovation still in Silicon Valley, there’s a lot of innovation in America full stop.  You can’t count out the companies like Google, Microsoft, Facebook, you know they just keep coming.

But even this dominance is falling away. In 2007, the top five global corporations were American. Today there are only two and the world is catching up fast.

Kate Bulkley

I don’t think that that means that innovation is over in the United States. It just means that there is you know growth happening in a different way and at a different magnitude in some of these other markets, particularly in Asia.

Narrator

But whether it's the decline of the west or the rise of the west, the dollar is still seen as the safest bet, giving economists some reason for optimism.

Martin Wolf

At the moment the US dollar wins the ugliness parade. As long as the Americans do not completely mess up the domestic situation, I think the dollar survives as the global reserve currency because there simply isn't anything else.

So, it's a mixed balance sheet. Since the middle of the 20^th century no other country has come close to rivaling America’s economy and yet it’s decline, however long it takes, now seems almost inevitable.

Professor Linda Yueh

If you thought the US economy was going to rebound quickly, like after recession, you'd be sorely disappointed.  

Professor Scott Lucas

For all the problems that the United States has had, whether we talk about economically or politically, there's always a point from which you can start again, rebuild, grow. Other countries don’t have that luxury. So yes, America, for all the talk of decline, is not going to implode.

Marwan Bishara

Susan, we've heard this before, right? American decline, decline of American economic power, you were in Moscow after the collapse so soon and is America facing anything similar? Is America really collapsing economically?

Professor Susan Glasser – editor-in-chief, Foreign Policy

Well you know that's an interesting comparison. Russia, after the collapse the Soviet Union was facing an existential crisis of the sort that is certainly not yet upon us, but it is certainly a conversation that Washington pundits are having, that you know TV talk shows are having. That you know there's a whole book shelf you could fill up, you know if you're so inclined this holiday season, there's about 20 books you could buy about the decline of America. How quickly is it happening? Has China actually already overtaken the US economically? Or what's the date when that's gonna happen?  This is a robust debate that's occurring, we have a future decline watch on our site and in part it's to make fun a little bit of the media's obsession with this.

Marwan Bishara

Seriously? 

Professor Susan Glasser

You know but in part it's also a serious conversation that we're having and you know I would say the sort of polite conventional wisdom in the centre here has really centred around the debate of is this a period of relative decline that the United States is embarking in, in which we basically keep the same international order but expand it to fill those of rising powers, particularly democratic powers such as Brazil and Turkey, which while we have occasionally friction with them, are after all very close American allies and do share a set of values. Or is this a kind of implosion? It's hard to see you know that there's a moment where we're gonna fall off the cliff, like in one of those cartoons.

Marwan Bishara

Is it a soft landing or is it falling over the cliff?

Tom Engelhardt – author, The United States of Fear  

Well the pay off, I mean it wouldn't have to be anything but a soft landing, I mean I think decline seems obvious to me at some level, but I think the answer is that we are still an immensely rich country, we have a lot of resources, there's no reason that we should go over a cliff. However, there's not reason but the path looks eerily cliff-like. I mean just politically in the United States I see no reason to believe any 2012 election results, no matter what they are, favouring what party, could lead to anything but more of a country, you know we used to talk about ourselves as a can do country. As a kind of a can do country through 2016. I just don't see, I mean Stephen was talking about rebuilding infrastructure, which is of course an absolute necessity, the Soviet Union went down partially because it's infrastructure tattered while it was in a war in Afghanistan and pouring money into it's military. But there’s no evidence that there's any way say between now and 2016 that the US is gonna put real money into its infrastructure, no matter what happens. So I say hard landing.

Marwan Bishara

Before we do yes we can, no we can’t, is that an American problem or is just the world rising way beyond America’s capabilities as well

Professor Stephen M. Walt – author, Taming American Power

Well I think that first of all this concern American decline has been perennial, right? You see it in the fifties, you see it in the sixties, you see it in the seventies and the eighties, Japan was gonna take over and that didn’t transpire. The United States' relative position has declined from World War II, when we had half the world's economy, but that was inevitable.   We've had roughly a quarter for 20 or 30 years so the decline is very …

Marwan Bishara

I tell you Stephen, China is not Japan.

Professor Stephen M. Walt

No, no I understand that but China will face many problems of its own in the years to come as well, an aging population, some significant internal adjustments, real problems with pollution and infrastructure of their own. So it's not gonna be easy for China and that gets to your main point is, I think if you wanna be worried it's not so much about decline in the United States, it's rather that virtually every part of the world now is facing real challenges. Europe is in, I think, a real crisis condition with the future of the Euro is very much in doubt and untangling that mess is gonna be very difficult, there's virtually no prospect of rapid economic growth in Europe any time soon, right? The Middle East has been convulsed by the Arab Spring, that's gonna I think continue to be an issue for many Middle Eastern countries for many years to come as well. China, as I just said, will face real problems of its own. Japan has been in an economic slump for 20 years now, really. 

Marwan Bishara

So America is living the honeymoon then?

Professor Stephen M. Walt

So there's good news and bad news. If all you care about is America's relative position, I suppose that’s good news that other places are having problems. But if you care about American prosperity, if you care about the ability of Americans to trade and invest and do well themselves, then you do have to worry that we are in a period of history, which may last a decade or more, where many parts of the world are troubled and all of them essentially hold each other back. And the problem there is that the politics then, when you have Japan, Europe, United States, maybe some other parts in a prolonged slump, the politics start to turn very ugly and that I think is really worrisome over time.

Professor Cynthia Enloe – author, The Real State of America

I think really this setting up the world as if it were a hockey match, complete with the enforcers, is really not a very useful way to try and think about it, that is thinking about America decline. I mean one of the things that has really fed American popular culture is this kind of anxiety about not being number one. Whereas, if you talk to the Dutch, they're not worried about not being number one, I mean maybe they were after the 1600s but …

Marwan Bishara

Let along being liked or not by the rest of the world.

Professor Cynthia Enloe

Yeah right, but it really has corrupted American public culture, it means that we can't talk about things reasonably and one of the things that happening and we're about to have a major discussion about what do you think of public life?    What do you think of public investment? And that means government as well. But that has to happen across the whole country in order to not only just build bridges, but to re-establish a much more realistic sense of America in the world. 

Professor Susan Glasser

Well I think you've made a really important point about the status anxiety of being number one and it’s interesting because so far the conversation is oh Barack Obama, the triumphalist, we saw him speaking to the State of the Union address and saying hey we're still at number one. But actually, his republican challengers are pretty much united only in one thing right now, which is to beat up on Barack Obama as somehow being an apologist for the United States that they are very much having a discussion about whether Obama and the Democratic Party are sufficient believers in American greatness. Back in 2009, Barack Obama said well I believe in American exceptionalism, just like I'm sure the Brits believed in British exceptionalism and the Greeks believed in Greek exceptionalism. 

Marwan Bishara

That didn't go down well. 

Professor Susan Glasser

That didn't go down well, to say the least, but you know that, I think it's a very important and revealing conversation for your viewers around the world to understand that belief in this notion of America's special destiny, the idea that there is something powering our unique history and yeah it has in fact in a very unusual history. We had a very, very fast rise to that number one status. We have benefits of being on a continent surrounded by and protected by two oceans. We have this economic engine and the benefits of you know the sort of post-World War II international order being shaped around American economic institutions. So we have a lot of assets in a fast changing world.

Professor Stephen M. Walt

And part of the debate that really does need to happen is what are the best ways to measure or see American greatness? 

Professor Cynthia Enloe

Small g, not big g!

Professor Stephen M. Walt

Yes this show began by showing American aircraft carriers steaming around and that's a very easy way for Americans to think well we must be number one, look at this large military footprint we have. But the point is there is an entirely different way to look at America’s role in the world and American influence and that would be the influence that we have by creating a society here, in the United States that others want to emulate.  Not in every way.

Marwan Bishara

But Stephen let's talk about the society.

Professor Stephen M. Walt

Okay.

Marwan Bishara

It used to be the society about hard work, it used to be the society of the community, is it becoming more of a society of entitlement? Lower taxes, bigger for government, we wanna have it all, consume it all, invest little in infrastructure and so on. Is this the problem here now?

Professor Stephen M. Walt

That's I think a problem for a very small fragment of Americans. Americans actually, if you look compared to most industrialised countries, work longer hours, work more weekends, take fewer vacations, we're still a society where people work extraordinarily hard. Whether we are making other decisions, for example on who should pay taxes and what share of them to balance America's budgets? Or whether or not we have too much …

Marwan Bishara

Because the budget is going up and the taxes are going down which creates deficit, I mean as everyone would know.

Professor Stephen M. Walt

Exactly right and whether or not we've allowed the wealthiest American’s to not just have too much money but also have too much political influence through that money, that’s a genuine debate. But it's not about Americans suddenly becoming lazy and just wanting to sit around the house and watch television.

Professor Cynthia Enloe

No, in fact one of the big problems for so many Americans is they're working longer hours and having less economic security.

Professor Susan Glasser

But the question of an opportunity society, 'cause we haven't really touched on this at all, but what is the role of a political system as imperfect as the one we have is, versus anywhere else in the world? And you know the question of soft power as it were, largely resides, you know historically has resided in the fact that people around the world, this is where they want to come to. That extraordinary influx of immigrants, the fact that at least in previous generations, Americans have shown they can rise from nothing to extraordinary wealth and influence.

Marwan Bishara

You think this is still the case?

Professor Susan Glasser

There's no question it’s still the case.

Tom Engelhardt

I would argue that the set of protests that we've seen in the last couple of years, I mean 2007/2008 hit the meltdown, there was a kind of a silence and then there have been two waves of protest so far, here as part of a kind of a global protest really, the first was the tea party, looked like a right wing, older, retired white people. And then the second one, which is young and someone more diverse, but I think both of them visibly from their different points of view are protestors in mourning over the loss of the world that I grew up in, they know they have a deep feeling that the world that they thought they were gonna get, that they were promised, that I grew up in, that you grew up in, that you grew up in, is not going to come back. 

Marwan Bishara

So what is that? Is that just some nostalgia for the past?

Professor Cynthia Enloe

They didn't think they were gonna get it as an entitlement.

Tom Engelhardt

Not as an entitlement no. 

Professor Cynthia Enloe

They thought if they worked as hard as everybody else they would have opportunity.

Marwan Bishara

But Cynthia is there as least, okay so let's look at the culture of lack of fairness. It seems a lot of people in the United States feel nowadays, that big bankers can get away with billions and small people, unemployed and so on and so forth can't get away with just a few.

Professor Cynthia Enloe

The top three countries in terms of inequality of income, amongst the developed world, that's the OECD right, the top three are Mexico, Turkey and the third is the United States. 

Marwan Bishara

So what does that tell you?

Professor Cynthia Enloe

That tells you that a lot of the people who are now protesting really think there's some basic unfairness going on here as well as lack of public investment.

Professor Stephen M. Walt

I think there are two phenomena here and they can both be correct. There is a widespread sense in the country that a small segment of people have managed, essentially write the rules or some of the rules, in their own favour and that’s the protest against essentially the financial industry. And moreover that this group of increasingly unregulated people caused enormous damage to American society and got away with it. I think that's basically correct. So there is this anger at a sense of unfairness. At the same time, it can also be the case that if the American economy is working reasonably well there are greater opportunities for everyone here.

Marwan Bishara

Do you think the 99 would be happy if just the economy's doing better?

Professor Stephen M. Walt

No they would still dislike the unfairness, but it is still a very dynamic economy and the thing that worries people is whether or not the government will manage to get the American economy moving again to the point that then all that dynamism can come out again.

Marwan Bishara

Which takes us back to your point there Susan, this part of, this aspect of the American system is not exactly attractive to the outside world when you can see people getting away, the way people did get away with major economic crimes if you will, the last two years. None of them's gonna be prosecuted or anything.

Professor Cynthia Enloe

Nor in Ireland, nor in Iceland.

Professor Susan Glasser

Well I mean, right there is a global crisis of capitalism which has been unfolding over the last several years and that's why you see literally protests and you know serious assaults to political leadership across the globe, in every continent and in every way, shape and form. What’s interesting to me about this conversation is to what extent has the United States lost its allure as a haven, a magnet for the kind of immigrants, the kind of people who have powered this extraordinarily diverse and really many faceted, not just economic but its part of the political system too. And you know do you see a lot of people saying well gee China is you know so successful in powering a making this incredible accomplishment right over the last decade of lifting hundreds of millions of people out of poverty. It's an incredible accomplishment, nobody sees it as a city on a hill, nobody sees it as like you know give me your tired, your poor, your huddled masses and let's go to China where they’re making jobs for people. You know it is about the political system, as flawed as it is too and the question that I have is as we come through this crisis, what is it gonna look like on the other side for people?

Tom Engelhardt

You know I think there's one factor we really haven't brought up here, when you talk about American decline, you probably should be talking about decline but everybody can say there’s nothing new under the sun but in fact we're at a historical moment where there is something new under the sun. The actual planet is under pressure at this point. Global warming is no small thing, by the end of this century, if things don't change, we could have an 11 degree rise in the globe's temperature.

Marwan Bishara

So you simply don't want to globalise the American model because consumers and the way it happens here, the way they burn energy, if the Chinese will do it?

Tom Engelhardt

I don't think it's like the US is going down and you're gonna get a Chinese empire rising. I think you've got a planet in crisis and we're just barely beginning to feel it. 

Marwan Bishara

The question is, is there an alternative to the American model? Is there an alternative for the American leadership?

Professor Cynthia Enloe

There's an alternative within the United States, I mean that's why there's a debate in the United States now, actually and there have always been alternatives within the United States. But the question is, and this will be electoral politics but also will be cultural politics, to really kind of give that, well legs if you will and I think to think about the alternative American model, which would be a fairer model, which would be a model that had a culture of public life, that would be a model that didn't shout USA number one, but rather you know looked at world problems and tried to take part in the solution of world problems. That’s a really alternative model.

Marwan Bishara

Stephen this is it, do we need to downsize the empire in all its forms and aspirations in order to save the republic?

Professor Stephen M. Walt

I will go out on a limb, I don't know if we'll get as far as Cynthia is hoping, perhaps, but I think that as a consequence of changes that are happening in the world, the rise of a number of other powers, as has been mentioned, as a result of the fiscal pressure the United States is under here at home, not a disaster but very serious, needs to be responded to. As a result of all of these things you're going to see a downsizing of the United States, we're gonna be out of Iraq, we're gonna be out of Afghanistan, we're not gonna do projects like that again any time soon. We're already downsized in Europe, we are shifting attention to Asia, so that's gonna stay there but I would argue that 20 years from now there’ll be a much more modest American presence. It will not disappear but it will be more modest and I believe, and this is where I'm crossing my fingers, I believe there will be a greater effort to try and rebuild the United States, you know nation building at home as many people said.

Marwan Bishara

Not in Iraq or Afghanistan.

Professor Stephen M. Walt

Right and the only asterisk I'll put on that is if Tom is right about climate change and its potential global effects, this discussion may seem like a very minor issue 20 or 30 or 40 years from now, even for the United States. 

Marwan Bishara

Tom, I'll give you the last word, do you think America's adventure or America's interventionist instinct could be put in check?

Tom Engelhardt

I think it is in check. I mean that is I think it's the nature of our world right now that you know I mean Afghanistan, they're still talking about you know bases after 2014, 25,000 troops to 2020, whatever it might be, I think it's gonna turn out to be something of a fantasy. I mean we won't sustain this, whatever we say, I mean agree.

Marwan Bishara

Base in Australia, the Russians are complaining you're intervening in their affairs, Iran exposed some kind of drone over their space. Enlargement in Africa…

Tom Engelhardt

Yes, yes, no, all of this is happening, there's still the urge to surge somewhere in there for some people, but I think realistically speaking we're just gonna come up against limits.

Professor Cynthia Enloe

And we'll be healthier for it.

Tom Engelhardt

Yeah, three cheers. 

Marwan Bishara

Well that's a positive note that we could end on.

Tom Engelhardt

One and a half cheers.

Marwan Bishara

Gentlemen, Susan, Cynthia, thank you for joining Empire.

Professor Stephen M. Walt

Thank you.

Professor Cynthia Enloe

Thank you.

Marwan Bishara

I will be back for the last thoughts.

Marwan Bishara

America's national emblem and the symbol of its strength, the bald eagle, might be fierce and majestic but it's the funny Mickey Mouse that rules with his red shorts, yellow shoes and white gloves. The Pentagon wastes hundreds of billions on expensive weapons and distant military bases every year but all too frequently, fails to win wars or achieve US strategic objectives. On the other hand, Walt Disney, like it or not, generates tens of billions of dollars annually and in the process has captured the attention and imagination of countless young people around the world though a distinctly American cultural narrative. In reality, America continues to gain more influence through the attraction of its soft power than through the destruction of its hard power. Many people have been killed because of the latter, but I have yet to hear about anyone dying under Mickey's watch. And that’s the way it goes, write to me with your suggestions to empire@aljazeera.net. Until next time. 

Forget monetary policy. Re-examining the cause of the Great Depression—the revolution in agriculture that threw millions out of work—the author argues that the U.S. is now facing and must manage a similar shift in the “real” economy, from industry to service, or risk a tragic replay of 80 years ago.

It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.



We knew the crisis was serious back in 2008. And we thought we knew who the “bad guys” were—the nation’s big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn’t do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.



The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing.



Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.



The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.



The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.



Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.



Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.



Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.



For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.



At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.



What this transition meant, however, is that jobs and livelihoods on the farm were being destroyed. Because of accelerating productivity, output was increasing faster than demand, and prices fell sharply. It was this, more than anything else, that led to rapidly declining incomes. Farmers then (like workers now) borrowed heavily to sustain living standards and production. Because neither the farmers nor their bankers anticipated the steepness of the price declines, a credit crunch quickly ensued. Farmers simply couldn’t pay back what they owed. The financial sector was swept into the vortex of declining farm incomes.



The cities weren’t spared—far from it. As rural incomes fell, farmers had less and less money to buy goods produced in factories. Manufacturers had to lay off workers, which further diminished demand for agricultural produce, driving down prices even more. Before long, this vicious circle affected the entire national economy.



The value of assets (such as homes) often declines when incomes do. Farmers got trapped in their declining sector and in their depressed locales. Diminished income and wealth made migration to the cities more difficult; high urban unemployment made migration less attractive. Throughout the 1930s, in spite of the massive drop in farm income, there was little overall out-migration. Meanwhile, the farmers continued to produce, sometimes working even harder to make up for lower prices. Individually, that made sense; collectively, it didn’t, as any increased output kept forcing prices down.



Given the magnitude of the decline in farm income, it’s no wonder that the New Deal itself could not bring the country out of crisis. The programs were too small, and many were soon abandoned. By 1937, F.D.R., giving way to the deficit hawks, had cut back on stimulus efforts—a disastrous error. Meanwhile, hard-pressed states and localities were being forced to let employees go, just as they are now. The banking crisis undoubtedly compounded all these problems, and extended and deepened the downturn. But any analysis of financial disruption has to begin with what started off the chain reaction.



The Agriculture Adjustment Act, F.D.R.’s farm program, which was designed to raise prices by cutting back on production, may have eased the situation somewhat, at the margins. But it was not until government spending soared in preparation for global war that America started to emerge from the Depression. It is important to grasp this simple truth: it was government spending—a Keynesian stimulus, not any correction of monetary policy or any revival of the banking system—that brought about recovery. The long-run prospects for the economy would, of course, have been even better if more of the money had been spent on investments in education, technology, and infrastructure rather than munitions, but even so, the strong public spending more than offset the weaknesses in private spending.



Government spending unintentionally solved the economy’s underlying problem: it completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing. Americans tend to be allergic to terms like “industrial policy,” but that’s what war spending was—a policy that permanently changed the nature of the economy. Massive job creation in the urban sector—in manufacturing—succeeded in moving people out of farming. The supply of food and the demand for it came into balance again: farm prices started to rise. The new migrants to the cities got training in urban life and factory skills, and after the war the G.I. Bill ensured that returning veterans would be equipped to thrive in a modern industrial society. Meanwhile, the vast pool of labor trapped on farms had all but disappeared. The process had been long and very painful, but the source of economic distress was gone.



The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers.



The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor.



Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further.



Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be.



Two conclusions can be drawn from this brief history. The first is that the economy will not bounce back on its own, at least not in a time frame that matters to ordinary people. Yes, all those foreclosed homes will eventually find someone to live in them, or be torn down. Prices will at some point stabilize and even start to rise. Americans will also adjust to a lower standard of living—not just living within their means but living beneath their means as they struggle to pay off a mountain of debt. But the damage will be enormous. America’s conception of itself as a land of opportunity is already badly eroded. Unemployed young people are alienated. It will be harder and harder to get some large proportion of them onto a productive track. They will be scarred for life by what is happening today. Drive through the industrial river valleys of the Midwest or the small towns of the Plains or the factory hubs of the South, and you will see a picture of irreversible decay.



Monetary policy is not going to help us out of this mess. Ben Bernanke has, belatedly, admitted as much. The Fed played an important role in creating the current conditions—by encouraging the bubble that led to unsustainable consumption—but there is now little it can do to mitigate the consequences. I can understand that its members may feel some degree of guilt. But anyone who believes that monetary policy is going to resuscitate the economy will be sorely disappointed. That idea is a distraction, and a dangerous one.



What we need to do instead is embark on a massive investment program—as we did, virtually by accident, 80 years ago—that will increase our productivity for years to come, and will also increase employment now. This public investment, and the resultant restoration in G.D.P., increases the returns to private investment. Public investments could be directed at improving the quality of life and real productivity—unlike the private-sector investments in financial innovations, which turned out to be more akin to financial weapons of mass destruction.



Can we actually bring ourselves to do this, in the absence of mobilization for global war? Maybe not. The good news (in a sense) is that the United States has under-invested in infrastructure, technology, and education for decades, so the return on additional investment is high, while the cost of capital is at an unprecedented low. If we borrow today to finance high-return investments, our debt-to-G.D.P. ratio—the usual measure of debt sustainability—will be markedly improved. If we simultaneously increased taxes—for instance, on the top 1 percent of all households, measured by income—our debt sustainability would be improved even more.



The private sector by itself won’t, and can’t, undertake structural transformation of the magnitude needed—even if the Fed were to keep interest rates at zero for years to come. The only way it will happen is through a government stimulus designed not to preserve the old economy but to focus instead on creating a new one. We have to transition out of manufacturing and into services that people want—into productive activities that increase living standards, not those that increase risk and inequality. To that end, there are many high-return investments we can make. Education is a crucial one—a highly educated population is a fundamental driver of economic growth. Support is needed for basic research. Government investment in earlier decades—for instance, to develop the Internet and biotechnology—helped fuel economic growth. Without investment in basic research, what will fuel the next spurt of innovation? Meanwhile, the states could certainly use federal help in closing budget shortfalls. Long-term economic growth at our current rates of resource consumption is impossible, so funding research, skilled technicians, and initiatives for cleaner and more efficient energy production will not only help us out of the recession but also build a robust economy for decades. Finally, our decaying infrastructure, from roads and railroads to levees and power plants, is a prime target for profitable investment.



The second conclusion is this: If we expect to maintain any semblance of “normality,” we must fix the financial system. As noted, the implosion of the financial sector may not have been the underlying cause of our current crisis—but it has made it worse, and it’s an obstacle to long-term recovery. Small and medium-size companies, especially new ones, are disproportionately the source of job creation in any economy, and they have been especially hard-hit. What’s needed is to get banks out of the dangerous business of speculating and back into the boring business of lending. But we have not fixed the financial system. Rather, we have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.



That we should tolerate such a confusion of ends and means says something deeply disturbing about where our economy and our society have been heading. Americans in general are coming to understand what has happened. Protesters around the country, galvanized by the Occupy Wall Street movement, already know.

Joseph E. Stiglitz is University Professor at Columbia University, a Nobel laureate in economics, and the author of Freefall: Free Markets and the Sinking of the Global Economy.

There are more than 300 Islamic Financial Institutions (IFIs) globally managing more than US$1 trillion, a figure expected to reach US$4 trillion by 2012. Industry experts maintain that the industry is growing at a rate of 10% to 15% per annum across borders even in non- Muslims countries. 

IFIs must create a robust IT platform of solutions to deliver technology driven innovative products and services to their clientele. There are more than 35 global and regional vendors that offer Islamic Banking System (IBS) services for Islamic banks & IFIs. Efforts to computerize the IT system in accordance with Shariah tend to be developed in-house in the initial stages, directly under the supervision of Shariah scholars and Islamic banking experts. 

Alternatively, global vendors can build a competitive edge by getting their software endorsed by independent Islamic finance institutions namely Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and such. Islamic banking IT solutions can be resolved either by implementing a new system or installing only the relevant functional system or modules from existing core banking systems. 

This system implementation is a pivotal transition which comes with some major risks. To date, a number of banks have gone through this transition since there is no complete ‘off the shelf’ product. It will not be an easy task to implement the system successfully without an excellent project management process, and without a team inclusive of technical experts, Shariah scholars and banking specialists, consultants and such. 

Constant growth in the number of IFIs and Islamic banks require that IT systems are in place to compete with both new entrants and existing market players, whether conventional or Islamic. Advanced technology will reduce cost significantly, as well as manual workload, inefficiencies, transaction processing time and so on while enhancing customer satisfaction with sophisticated facilities. 

This Shariah-compliant system involves an out-of-the-box implementation which disturbs the existing IT system by requiring various customizations to the traditional core banking solution. Sometimes this layer sits on top of this Islamic finance functional application layer or else integration will not support other applications. Hence there may be a need for another middleware. Flexibility, timing and affordability become a question mark at this point. 

The acquisition of ready-made, plug and play modern components can be integrated smoothly either by interfacing directly to the core banking software (or through an establishment of middleware). Today, Information System Strategy is at the heart of the banking sector and it will determine the success of the business. 

The IT team especially cannot enjoy the liberty of implementing IT systems like in conventional banks. In IBS each and every matter has to go through a Shariah Supervisory Board (SSB) to obtain the necessary approvals. Furthermore, Islamic banking systems require more information disclosure. This transition or system implementation in an Islamic bank will easily consume a minimum of six months and above depending on the complexity of the implementation project. 

Core issues 

Conventional core banking software have been developed based on interest which is fixed and defined calculation methods. Once the formula is fixed the interest rates will be credited into the relevant accounts as per the command.

But in the case of IFIs and IBs, the profit is unknown until the maturity date of the business contract / investment made. In addition, the sharing of profit can vary according to Mudarib — Rab al Mal sharing percentages, types of accounts, tenor period, risk ratios, utilization percentages and profit equalization ratios. This may vary in different jurisdictions and between banks too. 

Since profit distribution is one of the main differences between Islamic banks and conventional banks, profit distribution methodology should be thoroughly tested from Shariah to Accounting. IFIs require much matured profit distribution system, despite the increase in the number of global core banking system vendors incorporating the Islamic banking support to their product offerings. 

From a technical point of view, Islamic banking IT solutions and software must be flexible, user friendly, accessible, scalable, compatible (able to run in different platforms and operating systems), highly secure with preventive features and have automated implementation with modern and reliable database technology. 

With the latest developments in technology, Islamic banking software should be able to swiftly migrate or adapt to the advanced technology as and when necessary while constantly taking into consideration global best practices and processes. The system can be developed and installed as a browser platform / web based system or MS platform / desktop platform with advance programming languages. Even now the interest has been shifting to open source system for implementation. 

Many software systems for the banks were developed with heavy development costs, after a number of years of research and development with equal amounts of testing. The Islamic finance industry is seeing everyday a new IFI. New start-up institutions will find it difficult to afford this strategic investment at the initial stages in order to build a robust IT platform with rich functionality. 

On the other hand, the Islamic finance industry requires trained professionals with in-depth knowledge about Islamic finance and field expertise in this emerging sector in order to provide quality, uninterrupted service to clients. 

Another important area to focus on is IBS training to bank staff, as well as translating the Islamic banking concepts, workflows and consequences to the technical experts so that they can develop and strategically fit a system to the IBs business strategy requirements. 

Finally, customizations of conventional banking software have been overshadowed by the demand from IBs for IT platforms to develop their own competitive edge over others. Many software systems were developed for conventional banks. When Islamic banks request for a software system, conventional ones are generally customized to suit some of the IB’s needs. Many are either customized to suit the IB’s requirements, or come with worked solutions to expel in-built conventional parameters, including terminology and such. With just one core banking software available in the market for Islamic banking that is in line with the AAOIFI and IFSB regulations and that complies with international and Islamic regulations, the Islamic finance industry is projected to adopt competent banking systems satisfying its distinctive needs and requirements. 

‘This article was first published in IFN Volume 7 Issue 19 dated the 12th May 2010’ 

http://www.sheikhmubarak.com/ib_articles/A_Glimpse_into_Islamic_Banking_Software_Systems.pdf. 

Gerald Celente talks to Lew Rockwell about his top trend forecast for 2012.

Posted November 30, 2011

In mid 2008 the world plunged into an economic recession with devastating consequences throughout the world. The crisis apparently started in the USA. It was a man-made crisis and it came apparently without a prior warning. Surprisingly, even the economists world over, who are engaged in the day to day affairs of global finances could not foresee the event. In fact, even a few months before the turmoil the IMF was said to be predicting an optimistic picture of the world economy.

Not all countries, however, were affected to the same extent by the downturn. The most affected were in fact the industrialised economies like the USA and the Euro Zone. The irony is that these are also the countries that hold a monopoly of the world’s leading economists. In fact, practically all of the world’s Nobel Prize winners in economics since the early 1960s hail from the USA. In contrast the so-called BRICKS countries which constitute the emerging economies were the least affected by the events.

The causes that led to the crisis have not yet been fully identified. In the USA the blame was placed squarely on greedy CEOs, a corrupt Wall Street, short – sighted mortgage banks, incompetent banking systems, lack of regulatory measures, speculation and more. But then, none of these is new, they have always been part and parcel of the country’s financial system for decades. In the boom days none of them were taken as serious issues anyway. Interestingly also, up to now no criminal charges have been placed on any of the Corporate Officers of the institutions allegedly involved in triggering the turmoil.

When the causes are not well defined, as in the present situation it becomes a lot harder to offer meaningful solutions to the problem. This was evident by the desperate actions taken by various governments to contain the recession. Billions of tax dollars were spent on bailouts to the broken manufacturing sector and banks. Then there were the stimulus packages where huge sums of public money were poured into infrastructure projects, education and health, these in addition to the already existing low corporate taxes. Despite all these efforts the US economy still remains disoriented, as are the political leaders and the economists. Some European countries are already broke and at the moment the USA is struggling to avoid a debt induced fiscal collapse. The unemployment rate in the USA is currently around 9 to 10 percent (official figures) and among the youth it is as high as 25 percent, and it looks like these numbers have come to stay for a long time.

These ongoing events seem to suggest that the economics profession is out of step with the fast moving global developments. Not only did the economists fail to detect in advance the onset of the crisis, they also seem to have run out of ideas to remedy the situation. It appears that the predictive models used by economists are inadequate and do not have the capabilities to make reliable forecasts. The theories of unemployment so amply discussed by economists do not seem to work in reality. Present day economics tend to rely heavily on mathematics, especially statistics and probability theory. Statistical models are basically empirical relationships or at the best semi-empirical. The accuracy of these models depends largely on the ability to precisely identify and quantify the input variables and the interactions between them. This is not a straightforward task considering the complexity and dynamics of today’s globalised economy. It is not surprising, therefore, as is often seen, to obtain economic projections associated with high marginal errors and low confidence levels. These uncertainties may easily lead to erroneous conclusions. This perhaps explains why there is so much divergence of opinion between economists or financial experts for that matter on a given economic issue.
Some financial experts in the USA have firmly declared that the crisis has now stabilised itself and that the economy is on track to slow recovery, while at the same time there are other analysts who are even predicting a double dip for the country’s economy. Conflicting statements of this nature tend to confuse the public and moreover, damage the credibility of the economics profession. The public conception though is that the crisis is far from over yet. Some economists even offer mind boggling (to the layperson) correlations to explain certain observed trends as did a Chief Economist of a leading US bank recently. This economist was convinced that the current high unemployment rates in the USA are a result of the tornadoes in the US mid-west, the tsunami in Japan and the sluggish recovery of the auto sector.

Policymakers often rely on formal economic studies for backup information on various social issues. Laypersons too can have economic sense on most matters that affect day to day life. Their input is also crucial to any decision making process. In a statement in January this year the UN had reported of an imminent hike in food prices in the world. This is nothing new to house wives who have been complaining of this problem long before the report was released. It appears that even the IMF has failed to keep pace with the economic changes in the world. The IMF is essentially a money lender. It gives bailout loans to failing economies, usually the developing countries. IMF loans usually come with a predictable set of terms and conditions (strings) attached: privatisation, devaluation of local currency, austerity measures and more, all of which go to help the rich donor members leaving behind very little to the loan receiver.
Economic experts must realise that they are treading on uncertain territory with unreliable instruments in hand. It is important that they identify their limitations and not overstep the boundaries. Otherwise there is the danger that economic projections may turn into mere crystal gazing.

source dailymirror online