Q2 ’08:   The Mother of All Messes

At the macro level, the same issues are dominating this quarter as were last. (1) Will our financial system be able to withstand the credit contraction following the bursting of the global credit bubble; (2) Will the dollar survive said contraction; and (3) Will George Bush attack Iran before he leaves office (or green light Israel to do so)?

The news on all fronts has been bad recently. More bank failures, more government bailouts, tighter credit and no end in sight to the housing slump. The stock market – a leading indicator — has decisively taken out its January lows, signaling that the worst is yet to come. My point & figure downside target remains at 10,000 for the Dow.

Technically, it is possible that the latest move down has put in the low for the year. The market is oversold, consumer sentiment is at a record low, and short interest is at an all-time high. The market is not likely to give all those short sellers a free ride down, so at a minimum we are due for a short covering rally. A strengthening dollar and moderating oil prices increase the odds for a rally.

Also in the plus column, the Presidential Cycle indicates that we should expect a rally, beginning either now or in September – October that should complete in March – April. After that, a resumption of the bear market is indicated. Richard Russell points out that the Dow Transports have not confirmed the new lows in the Industrials and S&P 500, a downside non-confirmation that sets up a possible Dow Theory buy signal. If this is the case, then the entire move down from the October highs has been a correction in the ongoing bull market begun in 2002, and new stock market highs will follow.


The contracting credit bubble is like a tsunami bearing down on the global economy. No-one is sure where the high watermark will be or whether monetary authorities have sufficient resources to stop its advance. Meanwhile the banks and large hedge funds are sitting on an interlocking network of some $60 trillion in credit default swaps that could be even more toxic than sub-prime. This is the fruit of the globalization of finance. If any major player in the network fails, the whole system will collapse and we will immediately enter into a global depression. This is why the Fed has been so aggressive in backstopping any collapsing financial entities. I think that Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson are doing a heroic job, but in the end they may not be able to hold the line without crashing the dollar.

Our economy has been so dependent for so long on artificial stimulants that, as with a drug habit, there comes a time when no amount of stimulus can bestow the desired high, and the only solution is to go cold turkey. Cleansing and healing, but very painful. The only thing I see on the horizon that could possibly provide an avenue for re-flating the bubble economy is alternative energy. Even this would only delay the day of reckoning, just as the credit bubble delayed the consequences of the bursting dot-com bubble, but at least an alternative energy boom would have many benefits other than simply delaying paying the piper. It might even buy enough time to for our “leaders” to put our fiscal house in order – then again, maybe pigs will learn to fly.


On the geopolitical front everything is as it was three months ago, only more so. The central issue on the geopolitical stage is Iran’s nuclear program. Whether Iran is really the threat that it is posing to be is debatable, but given repeated threats to Israel’s existence by Iranian President Ahmadinejad, Israel does not feel inclined to take the existential risk and simply will not tolerate a nuclear Iran.

After a period of saber rattling all around, recently the rhetoric in the Middle East has cooled noticeably. However, the stage is set, and if Iran doesn’t yield by election time, my perception is that Washington will give Israel the green light, and they will attack. The Israelis would rather go down now fighting a three front war with Iran, Hezbollah and Hamas than be vaporized by an Iranian nuke three years from now. See the New Yorker article “Preparing the Battlefield” by Seymour Hersh for an overview of the preparations being made for war in Iran. Also, a straightforward and rather grim assessment of the outcome if Iran doesn’t yield, “Using Bombs to Stave Off War” by Benny Morris in the July 19th New York Times.

Meanwhile, peacemaking efforts are urgently underway even as preparations for war are being made. The various Gulf States are attempting to negotiate an agreement to make the region a nuclear free zone. Israel is also in serious discussions with both Syria and West Bank Palestinians to create a realistic framework for peace. U.N. sponsored talks with Iran have been ongoing and in a surprise move, after years of refusing to participate, the U.S. recently sent an envoy to these talks.

Taking the long view, the nuclear genie is already out of the bag. Many countries are pursuing nuclear technology, and even if the Iranian program is put down over the short run, it is only a matter of time before the world is going to have to confront the reality of ubiquitous nuclear weapons. And thanks to our geometrically expanding technological capabilities, nukes are now merely #1 on a growing list of potentially “civilization destroying” weapons. In the long run, the survival of human civilization demands that we evolve to a more co-operative global political culture that is not based on violence and the threat of violence.


Things have been relatively quiet since the Obama / Clinton smack-down was finally settled, but a recent flurry of activity has signaled an early start to the final run. Despite two candidates who would prefer to take the high road on principle, the pressures of modern American politics simply are not going to allow it. Obama is consistently ahead in the polls and McCain is carrying the burden of the Republican brand, which is radioactive after 8 years of corruption, incompetence and fiscal profligacy. Consequently, McCain took the first step to the dark side with a series of low-tide attack ads and Obama is sure to follow. This one is going to get really nasty, and will probably set the bar for negative politics even lower than it has been, if that is possible.


From time to time I come across an article that transcends the day-to-day cacophony of the chattering classes and puts current political events in broad perspective. The following article, written by Paul Craig Roberts, a card carrying conservative Republican, puts the impact of the recent era of Republican rule in perspective.

Paul Craig Roberts was Assistant Secretary of Treasury in the Reagan administration. He has also been Associate Editor of the Wall Street Journal editorial page as well as Contributing Editor of the National Review. Given the conservative credentials of the author, I feel that his article is an important statement and it deserves broad distribution.

The Mother of All Messes

By Paul Craig Roberts

Republicans are sending around the Internet a photo of a cute little boy whose T-shirt reads: “The mess in my pants is nothing compared to the mess Democrats will make of this country if they win Nov. 2nd.”

One can only wonder at the insouciance of this message. Are Republicans unaware of the amazing mess the Bush regime has made?

It is impossible to imagine a bigger mess. Republicans have us at war in two countries as a result of Republican lies and deceptions, and we might be in two more wars—Iran and Pakistan—by November. We have alienated the entire Muslim world and most of the rest.

The dollar has lost 60% of its value against the euro, and the once mighty dollar is losing its reserve currency role.

The Republicans’ policies have driven up the price of both oil and gold by 400%.

Inflation is in double digits. Employment is falling.

The Republican economy in the 21st century has been unable to create net new jobs for Americans except for low wage domestic services such as waitresses, bartenders, retail clerks and hospital orderlies.

Republican deregulation brought about fraud in mortgage lending and dangerous financial instruments which have collapsed the housing market, leaving a million or more homeowners facing foreclosure. The financial system is in disarray and might collapse from insolvency.

The trade and budget deficits have exploded. The US trade deficit is larger than the combined trade deficits of every deficit country in the world.

The US can no longer finance its wars or its own government and relies on foreign loans to function day to day. To pay for its consumption, the US sells its existing assets—companies, real estate, toll roads, whatever it can offer—to foreigners.

Republicans have run roughshod over the US Constitution, Congress, the courts and civil liberties. Republicans have made it perfectly clear that they believe that our civil liberties make us unsafe—precisely the opposite view of our Founding Fathers. Yet, Republicans regard themselves as the Patriotic Party.

The Republicans have violated the Nuremberg prohibitions against war crimes, and they have violated the Geneva Conventions against torture and abuse of prisoners. Republican disregard for human rights ranks with that of history’s great tyrants.

The Republicans have put in place the foundation for a police state.

I am confident that the Democrats, too, will make a mess. But can they beat this record?

We must get the Republicans totally out of power, or we will have no country left for the Democrats to mess up.

I say this as a person who has done as much for the Republican Party as anyone. I helped to devise and to get implemented an economic policy that cured stagflation and that brought Republicans back into political competition after Watergate. If I could have looked into a crystal ball and seen that under a free trade banner, Republicans would enable corporate executives to pay themselves millions of dollars in “performance pay” for deserting their American work forces and hiring foreigners in their place, thus destroying the aspirations and careers of millions of Americans, I never would have helped the Republicans. If a crystal ball had revealed that a neoconned Republican Party would launch wars of naked aggression against countries that posed no threat to the United States, I would have shouted my warnings even earlier.

The neoconned Republican Party is the greatest threat America has ever faced. Let me tell you why.

How many Republicans can you name who respect and honor the Constitution? There are Ron Paul, Bob Barr, and who? The ranks of Republican constitutional supporters quickly grow thin.

The reason is that Republicans view the Constitution as a coddling device for criminals and terrorists. Republicans think the Constitution can be set aside for evil-doers and kept in place for everyone else. But without the Constitution we only have the government’s word as to who is an evil-doer.

This would be the word of the same infallible government that told us that Saddam Hussein possessed weapons of mass destruction that were on the verge of being used against America, the same infallible government that told us that Guantanamo prison held “770 of the most dangerous persons alive” and then, after stealing 5 years of their lives, quietly released 500 of them as mistaken identities.

Republicans think the United States is the salt of the earth and that American hegemony over the rest of the world is not only justified by our great virtue but necessary to our safety. People this full of hubris are incapable of judgment. People incapable of judgment should never be given power.

Republicans have no sympathy for anyone but their own kind. How many Republicans do you know who care a hoot about the plight of the poor, the jobless, the medically uninsured? The government programs that Republicans are always adamant to cut are the ones that help people who need help.

I have yet to hear any of my Republican friends express any concern whatsoever for the 1.2 million Iraqis who have died, and the 4 million who have been displaced, as a result of Bush’s gratuitous invasion. Many tell me that the five- and six-year long wars in Iraq and Afghanistan are due to wimpy Americans “who don’t have the balls it takes” to win. Killing and displacing a quarter of the Iraqi population is just a wimpy result of a population that lacks testosterone. Real Americans would have killed them all by now.

Macho patriotic Republicans are perfectly content for US foreign policy to be controlled by Israel. Republican evangelical “christian” churches teach their congregations that America’s purpose in the world is to serve Israel. And these are the flag-wavers.

Those of us who think America is the Constitution, and that loyalty means loyalty to the Constitution, not to office holders or to a political party or to a foreign country, are regarded by Republicans as “anti-American.”

Neoconservatives, such as Billy Kristol, insist that loyalty to the country means loyalty to the government. Thus, criticizing the government for launching wars of aggression and for violating constitutionally protected civil liberties is, according to neoconservatives, a disloyal act.

In the neoconservative view, there is no place for the voices of citizens: the government makes the decisions, and loyal citizens support the government’s decisions.

In the neocon political system there is no liberty, no democracy, no debate. Dissenters are traitors.

The neoconservative magazine, Commentary, wants the New York Times indicted for telling Americans that the Bush regime was caught violating US law, specifically the Foreign Intelligence Surveillance Act, by spying on Americans without obtaining warrants as required by law. Note that neoconservatives think it is a criminal act for a newspaper to tell its readers that their government is spying on them illegally.

Judging by their behavior, a number of Democrats go along with the neocon view. Thus, the Democrats don’t offer a greatly different profile. They went along with the views that corporate profits and the war on terror take precedence over everything else. They have not used the congressional power that the electorate gave them in the 2006 elections.

However, Democrats, or at least some of them, do care about the Constitution. If it were not for Democratic appointees to the federal courts and the ACLU (essentially a Democratic organization), the Bush regime would have completely destroyed our civil liberties.

Some Democrats are “bleeding hearts,” who actually care about suffering people they don’t know, and who think that we have obligations to others. Have you ever heard of a bleeding heart Republican?

Traditionally, Democrats objected whenever policies resulted in a handful of rich people capturing all of the income gains from the economy. There might still be a few such Democrats left.

Looking at the Republican mess, I doubt that Democrats, try as they may, can equal it.