Today’s News October 29, 2015

• Embracing The Dark Side: A Short History Of The Pathological Neocon Quest For Empire

  Submitted by Dan Sanchez via DanSanchez.me,

  When Bill Kristol watches Star Wars movies, he roots for the Galactic Empire. The leading neocon recently caused a social media disturbance in the Force when he tweeted this predilection for the Dark Side following the debut of the final trailer for Star Wars: The Force Awakens.

  Kristol sees the Empire as basically a galaxy-wide extrapolation of what he has long wanted the US to have over the Earth: what he has termed “benevolent global hegemony.”

  Kristol, founder and editor of neocon flagship magazine The Weekly Standard,responded to scandalized critics by linking to a 2002 essay from the Standard’s blog that justifies even the worst of Darth Vader’s atrocities. In “The Case for the Empire,” Jonathan V. Last made a Kristolian argument that you can’t make a “benevolent hegemony” omelet without breaking a few eggs.

  And what if those broken eggs are civilians, like Luke Skywalker’s uncle and aunt who were gunned down by Imperial Stormtroopers in their home on the Middle Eastern-looking arid planet of Tatooine (filmed on location in Tunisia)? Well, as Last sincerely argued, Uncle Owen and Aunt Beru hid Luke and harbored the fugitive droids R2D2 and C3P0; so they were “traitors” who were aiding the rebellion and deserved to be field-executed.

  A year after Kristol published Last’s essay, large numbers of civilians were killed by American Imperial Stormtroopers in their actual Middle Eastern arid homeland of Iraq, thanks largely in part to the direct influence of neocons like Kristol and Last.

  That war was similarly justified in part by the false allegation that Iraq ruler Saddam Hussein was harboring and aiding terrorist enemies of the empire like Abu Musab al-Zarqawi. The civilian-slaughtering siege of Fallujah, one of the most brutal episodes of the war, was also specifically justified by the false allegation that the town was harboring Zarqawi.

  In reality Hussein had put a death warrant out on Zarqawi, who was hiding from Iraq’s security forces under the protective aegis of the US Air Force in Iraq’s autonomous Kurdish region. It was only after the Empire precipitated the chaotic collapse of Iraq that Zarqawi’s outfit was able to thrive and evolve into Al Qaeda in Iraq (AQI). And after the Empire precipitated the chaotic collapse of Syria, AQI further mutated into Syrian al-Qaeda (which has conquered much of Syria) and ISIS (which has conquered much of Syria and Iraq).

  And what if the “benevolent hegemony” omelet requires the breaking of “eggs” the size of whole worlds, like how high Imperial officer Wilhuff Tarkin used the Death Star to obliterate the planet Alderaan? Well, as Last sincerely argued, even Alderaan likely deserved its fate, since it may have been, “a front for Rebel activity or at least home to many more spies and insurgents…” Last contended that Princess Leia was probably lying when she told the Death Star’s commander that the planet had “no weapons.”

  While Last was writing his apologia for global genocide, his fellow neocons were baselessly arguing that Saddam Hussein was similarly lying about Iraq not having a weapons of mass destruction (WMD) program. Primarily on that basis, the obliteration of an entire country began the following year.

  And a year after that, President Bush performed a slapstick comedy act about his failure to find Iraqi WMDs for a black-tie dinner for radio and television correspondents. The media hacks in his audience, who had obsequiously helped the neocon-dominated Bush administration lie the country into war, rocked with laughter as thousands of corpses moldered in Iraq and Arlington. A more sickening display of imperial decadence and degradation has not been seen perhaps since the gladiatorial audiences of Imperial Rome. This is the hegemonic “benevolence” and “national greatness” that Kristol pines for.

  “Benevolent global hegemony” was coined by Kristol and fellow neocon Robert Kaganand their 1996 Foreign Affairs article “Toward a Neo-Reaganite Foreign Policy.” In that essay, Kristol and Kagan sought to inoculate both the conservative movement and US foreign policy against the isolationism of Pat Buchanan.

  The Soviet menace had recently disappeared, and the Cold War along with it. The neocons were terrified that the American public would therefore jump at the chance to lay their imperial burdens down. Kristol and Kagan urged their readers to resist that temptation, and to instead capitalize on America’s new peerless preeminence by making it a big-spending, hyper-active, busybody globo-cop. The newfound predominance must become dominance wherever and whenever possible. That way, any future near-peer competitors would be nipped in the bud, and the new “unipolar moment” would last forever.

  What made this neocon dream seem within reach was the indifference of post-Soviet Russia. The year after the Berlin Wall fell, the Persian Gulf War against Iraq was the debut “police action” of unipolar “Team America, World Police.” Paul Wolfowitz, the neocon and Iraq War architect, considered it a successful trial run. As Wesley Clark, former Nato Supreme Allied Commander for Europe, recalled:

  “In 1991, [Wolfowitz] was the Undersecretary of Defense for Policy?—?the number 3 position at the Pentagon. And I had gone to see him when I was a 1-Star General commanding the National Training Center. (…)

   

  And I said, “Mr. Secretary, you must be pretty happy with the performance of the troops in Desert Storm.”

   

  And he said: “Yeah, but not really, because the truth is we should have gotten rid of Saddam Hussein, and we didn’t … But one thing we did learn is that we can use our military in the region?—?in the Middle East?—?and the Soviets won’t stop us. And we’ve got about 5 or 10 years to clean up those old Soviet client regimes?—?Syria, Iran, Iraq?—?before the next great superpower comes on to challenge us.”

  The 1996 “Neo-Reaganite” article was part of a surge of neocon literary activity in the mid-90s. It was in 1995 that Kristol and John Podhoretz founded The Weekly Standard with funding from right-wing media mogul Rupert Murdoch.

  Also in 1996, David Wurmser wrote a strategy document for Israeli Prime Minister Benjamin Netanyahu. Titled, “A Clean Break: A New Strategy for Securing the Realm,” it was co-signed by Wurmser’s fellow neocons and future Iraq War architects Richard Perle and Douglas Feith. “A Clean Break” called for regime change in Iraq as a “means” of “weakening, containing, and even rolling back Syria.” Syria itself was a target because it “challenges Israel on Lebanese soil.” It primarily does this by, along with Iran, supporting the paramilitary group Hezbollah, which arose in the 80s out of the local resistance to the Israeli occupation of Lebanon, and which continually foils Israel’s ambitions in that country.

  Later that same year, Wurmser wrote another strategy document, this time for circulation in American and European halls of power, titled “Coping with Crumbling States: A Western and Israeli Balance of Power Strategy for the Levant.”

  In “A Clean Break,” Wurmser had framed regime change in Iraq and Syria in terms of Israeli regional ambitions. In “Coping,” Wurmser adjusted his message for its broader Western audience by recasting the very same policies in a Cold War framework.

  Wurmser characterized regime change in Iraq and Syria (both ruled by Baathist regimes) as “expediting the chaotic collapse” of secular-Arab nationalism in general, and Baathism in particular. He concurred with King Hussein of Jordan that, “the phenomenon of Baathism,” was, from the very beginning, “an agent of foreign, namely Soviet policy.” Of course King Hussein was a bit biased on the matter, since his own Hashemite royal family once ruled both Iraq and Syria. Wurmser argued that:

  “…the battle over Iraq represents a desperate attempt by residual Soviet bloc allies in the Middle East to block the extension into the Middle East of the impending collapse that the rest of the Soviet bloc faced in 1989.”

  Wurmser further derided Baathism in Iraq and Syria as an ideology in a state of “crumbling descent and missing its Soviet patron” and “no more than a Cold War enemy relic on probation.”

  Wurmser advised the West to put this anachronistic adversary out of its misery, and to thus, in Kristolian fashion, press America’s Cold War victory on toward its final culmination. Baathism should be supplanted by what he called the “Hashemite option.” After their chaotic collapse, Iraq and Syria would be Hashemite possessions once again. Both would be dominated by the royal house of Jordan, which in turn, happens to be dominated by the US and Israel.

  Wurmser stressed that demolishing Baathism must be the foremost priority in the region. Secular-Arab nationalism should be given no quarter, not even, he added, for the sake of stemming the tide of Islamic fundamentalism.

  Thus we see one of the major reasons why the neocons were such avid anti-Soviets during the Cold War. It is not just that, as post-Trotskyites, the neocons resented Joseph Stalin for having Leon Trotsky assassinated in Mexico with an ice pick. The Israel-first neocons’ main beef with the Soviets was that, in various disputes and conflicts involving Israel, Russia sided with secular-Arab nationalist regimes from 1953 onward.

  The neocons used to be Democrats in the big-government, Cold Warrior mold of Harry Truman and Henry “Scoop” Jackson. After the Vietnam War and the rise of the anti-war New Left, the Democratic Party’s commitment to the Cold War waned, so the neocons switched to the Republicans in disgust.

  According to investigative reporter Jim Lobe, the neocons got their first taste of power within the Reagan administration, in which positions were held by neocons such as Wolfowitz, Perle, Elliot Abrams, and Michael Ledeen. They were especially influential during Reagan’s first term of saber-rattling, clandestine warfare, and profligate defense spending, which Kristol and Kagan remembered so fondly in their “Neo-Reaganite” manifesto.

  It was then that the neocons helped establish the “Reagan Doctrine.” According to neocon columnist Charles Krauthammer, who coined the term in 1985, the Reagan Doctrine was characterized by support for anti-communist (in reality often simply anti-leftist) forces around the whole world.

  Since the support was clandestine, the Reagan administration was able to bypass the “Vietnam Syndrome” and project power in spite of the public’s continuing war weariness. (It was left to Reagan’s successor, the first President Bush, to announce following his “splendid little” Gulf War that, “by God, we’ve kicked the Vietnam Syndrome once and for all!”)

  Operating covertly, the Reaganites could also use any anti-communist group they found useful, no matter how ruthless and ugly: from Contra death squads in Nicaragua to the Islamic fundamentalist mujahideen in Afghanistan. Abrams and Ledeen were both involved in the Iran-Contra affair, and Abrams was convicted (though later pardoned) on related criminal charges.

  Kristol’s “Neo-Reaganite” co-author Robert Kagan gave the doctrine an even wider and more ambitious interpretation in his book A Twilight Struggle :

  “The Reagan Doctrine has been widely understood to mean only support for anticommunist guerrillas fighting pro-Soviet regimes, but from the first the doctrine had a broader meaning. Support for anticommunist guerrillas was the logical outgrowth, not the origin, of a policy of supporting democratic reform or revolution everywhere, in countries ruled by right-wing dictators as well as by communist parties.”

  As this description makes plain, neocon policy, from the 1980s to today, has been every bit as fanatical, crusading, and world-revolutionary as Red Communism was in the neocon propaganda of yesteryear, and that Islam is in the neocon propaganda of today.

  The neocons credit Reagan’s early belligerence with the eventual dissolution of the Soviet Union. But in reality, war is the health of the State, and Cold War was the health of Soviet State. The Soviets long used the American menace to frighten the Russian people into rallying around the State for protection.

  After the neocons lost clout within the Reagan administration to “realists” like George Schultz, the later Reagan-Thatcher-Gorbachev detente began. It was only after that detente lifted the Russian siege atmosphere and quieted existential nuclear nightmares that the Russian people felt secure enough to demand a changing of the guard.

  In 1983, the same year that the first Star Wars trilogy ended, Reagan vilified Soviet Russia in language that Star Wars fans could understand by dubbing it “the Evil Empire.” Years later, having, in Kristol’s words, “defeated the evil empire,” the neocons that Reagan first lifted to power began clamoring for a “neo-Reaganite” global hegemony. And a few years after that, those same neocons began pointing to the sci-fi Galactic Empire that Reagan implicitly compared to the Soviets as a lovely model for America!

  Fast-forward to return to the neocon literary flowering of the mid-90s. In 1997, the year after writing “Toward a Neo-Reaganite Foreign Policy” together, Bill Kristol and Robert Kagan co-founded The Project for a New American Century (PNAC). The 20th century is often called “the American century,” largely due to it being a century of war and American “victories” in those wars: the two World Wars and the Cold War. The neocons sought to ensure that through the never-ending exercise of military might, the American global hegemony achieved through those wars would last another hundred years, and that the 21st century too would be “American.”

  The organization’s founding statement of principles called for “a Reaganite policy of military strength and moral clarity” and reads like an executive summary of the founding duo’s “Neo-Reaganite” essay. It was signed by neocons such as Wolfowitz, Abrams, Norman Podhoretz and Frank Gaffney; by future Bush administration officials such as Dick Cheney, Donald Rumsfeld, Lewis “Scooter” Libby; and by other neocon allies, such as Jeb Bush.

  Although PNAC called for interventions ranging from Serbia (to roll back Russian influence in Europe) to Taiwan (to roll back Chinese influence in Asia), its chief concern was to kick off the restructuring of the Middle East envisioned in “A Clean Break” and “Coping” by advocating its first step: regime change in Iraq.

  The most high-profile parts of this effort were two “open letters” published in 1998, one in January addressed to President Bill Clinton, and another in May addressed to leaders of Congress. As with its statement of principles, PNAC was able to garner signatures for these letters from a wide range of political luminaries, including neocons (like Perle), neocon allies (like John Bolton), and other non-neocons (like James Woolsey and Robert Zoellick).

  The open letters characterized Iraq as “a threat in the Middle East more serious than any we have known since the end of the Cold War,” and buttressed this ridiculous claim with the now familiar allegations of Saddam building a WMD program.

  Thanks in large part to PNAC’s pressure, regime change in Iraq became official US policy in October when Congress passed, and President Clinton signed, the Iraq Liberation Act of 1998. (Notice the Clinton-friendly “humanitarian interventionist” name in spite of the policy’s conservative fear-mongering origins.)

  After the Supreme Court delivered George W. Bush the presidency, the neocons were back in the imperial saddle again in 2001: just in time to make their projected “New American Century” of “Neo-Reaganite Global Hegemony” a reality. The first order of business, of course, was Iraq.

  But some pesky national security officials weren’t getting with the program and kept trying to distract the administration with concerns about some Osama bin Laden character and his Al Qaeda outfit. Apparently they were laboring under some pedestrian notion that their job was to protect the American people and not to conquer the world.

  For example, when National Security Council counterterrorism “czar” Richard Clarke was frantically sounding the alarm over an imminent terrorist attack on America,Wolfowitz was uncomprehending. As Clarke recalled, the then Deputy Defense Secretary objected:

  “I just don’t understand why we are beginning by talking about this one man, bin Laden.”

  Clarke informed him that:

  “We are talking about a network of terrorist organizations called al-Qaeda, that happens to be led by bin Laden, and we are talking about that network because it and it alone poses an immediate and serious threat to the United States.”

  This simply did not fit in the agenda-driven neocon worldview of Wolfowitz, who responded:

  “Well, there are others that do as well, at least as much. Iraqi terrorism for example.”

  And as Peter Beinhart recently wrote:

  “During that same time period [in 2001], the CIA was raising alarms too. According to Kurt Eichenwald, a former New York Times reporter given access to the Daily Briefs prepared by the intelligence agencies for President Bush in the spring and summer of 2001, the CIA told the White House by May 1 that ‘a group presently in the United States’ was planning a terrorist attack. On June 22, the Daily Brief warned that al-Qaeda strikes might be ‘imminent.’

  But the same Defense Department officials who discounted Clarke’s warnings pushed back against the CIA’s. According to Eichenwald’s sources, ‘the neoconservative leaders who had recently assumed power at the Pentagon were warning the White House that the C.I.A. had been fooled; according to this theory, Bin Laden was merely pretending to be planning an attack to distract the administration from Saddam Hussein, whom the neoconservatives saw as a greater threat.’

  By the time Clarke and the CIA got the Bush administration’s attention, it was already too late to follow any of the clear leads that might have been followed to prevent the 9/11 attacks.

  The terrorist attacks by Sunni Islamic fundamentalists mostly from the Saudi Kingdom hardly fit the neocon agenda of targeting the secular-Arab nationalist regimes of Iraq and Syria and the Shiite Republic of Iran: especially since all three of the latter were mortal enemies of bin Laden types.

  But the attackers were, like Iraqis, some kind of Muslims from the general area of the Middle East. And that was good enough for government work in the American idiocracy. After a youth consumed with state-compelled drudgery, most Americans are so stupid and incurious that such a meaningless relationship, enhanced with some fabricated “intelligence,” was more than enough to stampede the spooked American herd into supporting the Iraq War.

  As Benjamin Netanyahu once said, “America is a thing you can move very easily.”

  Whether steering the country into war would be easy or not, it was all neocon hands on deck. At the Pentagon there was Wolfowitz and Perle, with Perle-admirer Rumsfeld as SecDef. Feith was also at Defense, where he set up two new offices for the special purpose of spinning “intelligence” yarn to tie Saddam with al-Qaeda and to weave fanciful pictures of secret Iraqi WMD programs.

  Wurmser himself labored in one of these offices, followed by stints at State aiding neocon-ally Bolton and in the Vice President’s office aiding neocon-ally Cheney along with Scooter Libby.

  Iran-Contra convict Abrams was at the National Security Council aiding Condoleezza Rice. And Kristol and Kagan continued to lead the charge in the media and think tank worlds.

  And they pulled it off. Wurmser finally got his “chaotic collapse” in Iraq. And Kristol finally had his invincible, irresistible, hyper-active hegemony looming over the world like a Death Star.

  The post-9/11 pretense-dropping American Empire even had Dick Cheney with his Emperor Palpatine snarl preparing Americans to accept torture by saying:

  “We also have to work, though, sort of the dark side, if you will.”

  The Iraq War ended up backfiring on the neocons. It installed a new regime in Baghdad that was no more favorable toward Israel and far more favorable toward Israel’s enemies Iran and Syria. But the important thing was that Kristol’s Death Star was launched and in orbit. As long as it was still in proactive mode, there was nothing the neocons could not fix with its awful power.

  This seemed true even during the Obama presidency. On top of Iraq and Afghanistan, under Obama the American Death Star has demolished Yemen and Somalia. It also demolished both Syria and Libya, where it continues the Wurmsurite project of precipitating the chaotic collapse of secular-Arab nationalism. Islamic terror groups including al-Qaeda and ISIS are thriving in that chaos, but the American Death Star to this day has adhered to Wurmser’s de-prioritization of the Islamist threat.

  As Yoda said, “Fear is the path to the Dark Side.” The neocons have been able to use the fear generated by a massive Islamic fundamentalist terror attack to pursue their blood-soaked vendetta against secular-Arab nationalists, even to the benefit of the very Islamic fundamentalists who attacked us, because even after 12 years Americans are still too bigoted and oblivious to distinguish between the two groups.

  Furthermore, Obama has gone beyond Wurmser’s regional ambitions and has fulfilled Kristol’s busybody dreams of global hegemony to a much greater extent than Bush ever did. To appease generals and arms merchants worried about his prospective pull-outs from the Iraqi and Afghan theaters, Obama launched both an imperial “pivot” to Asia and a stealth invasion of Africa. The pull-outs were aborted, but the continental “pivots” remain. Thus Obama’s pretenses as a peace President helped to make his regime the most ambitiously imperialistic and globe-spanning that history has ever seen.

  But the neocons may have overdone it with their Death Star shooting spree, because another great power now seems determined to put a stop to it. And who is foiling the neocons’ Evil Empire? Why none other than the original “Evil Empire”: the neocons’ old nemesis Russia.

  In 2013, Russia’s Putin diplomatically frustrated the neocons’ attempt to deliver the coup de grâce to the Syrian regime with a US air war. Shortly afterward, Robert Kagan’s wife Victoria Nuland yanked Ukraine out of Russia’s sphere of influence by engineering a bloody coup in Kiev. Putin countered by bloodlessly annexing the Ukrainian province of Crimea. A proxy war followed between the US-armed and Western-financed junta in Kiev and pro-Russian separatists in the east of the country.

  The US continued to intervene in Syria, heavily sponsoring an insurgency dominated by extremists including al-Qaeda and ISIS. But recently, Russia decided to intervene militarily. Suddenly, Wolfowitz’s lesson from the Gulf War was up in smoke. The neocons cannot militarily do whatever they want in the Middle East and trust that Russia will stand idly by. Suddenly the arrogant Wolfowitz/Wurmser dream of crumbling then cleaning up “old Soviet client regimes” and “Cold War enemy relics” had gone poof. Putin decided that Syria would be one “Cold War relic” turned terrorist playground too many.

  Russia’s entry into Syria has thrown all of the neocons’ schemes into disarray.

  By actually working to destroy Syrian al-Qaeda and ISIS instead of just pretending to, as the US and its allies have, Russia threatens to eliminate the head-chopping bogeymen whose Live Leak-broadcasted brutal antics continually renew in Americans the war-fueling terror of 9/11. And after Putin had taken the US air strike option off the table, al-Qaeda and ISIS were the neocons most powerful tools for bringing down the Syrian regime. And now Russia is threatening to take those toys away too.

  If Hezbollah and Iran, with Russia’s air cover, manage to help save what is left of Syria from the Salafist psychos, they will be more prestigious in both Syria and Lebanon than ever, and Israel may never be able to dominate its northern neighbors.

  The neocons are livid. After the conflicts over Syria and Ukraine in 2013, they had already started ramping up the vilification of Putin. Now the demonization has gone into overdrive.

  One offering in this milieu has been an article by Matthew Continetti in the neocon web site he edits, The Washington Free Beacon. Titled “A Reagan Doctrine for the Twenty-First Century,” it obviously aims to be a sequel to Kristol’s and Kagan’s “Toward a Neo-Reaganite Foreign Policy.” As it turns out, the Russian “Evil Empire” was not defeated after all: only temporarily dormant. And so Continetti’s updated Reaganite manifesto is subtitled, “How to confront Vladimir Putin.”

  The US military may be staggering around the planet like a drunken, bloated colossus. Yet Continetti still dutifully trots out all the Kristolian tropes about the need for military assertiveness (more drunken belligerence), massive defense spending (more bloating), and “a new American century.” Reaganism is needed now just as much as in 1996, he avers: in fact, doubly so, for Russia has reemerged as:

  “…the greatest military and ideological threat to the United States and to the world order it has built over decades as guarantor of international security.”

  Right, just look at all that security sprouting out of all those bomb craters the US has planted throughout much of the world. Oh wait no, those are terrorists.

  Baby-faced Continetti, a Weekly Standard contributor, is quite the apprentice to Sith Lord Kristol, judging from his ardent faith in the “Benevolent Global Hegemony” dogma. In fact, he even shares Lord Kristol’s enthusiasm for “Benevolent Galactic Hegemony.” It was Continetti who kicked off the recent Star Wars/foreign policy brouhaha when he tweeted:

  “I’ve been rooting for the Empire since 1983”

  This elicited a concurring response from Kristol, which is what set Twitter atwitter. Of course the whole thing was likely staged and coordinated between the two neocon operatives.

  Unfortunately for the neocons, demonizing Putin over Syria is not nearly as easy as demonizing Putin over Ukraine. With Ukraine, there was a fairly straight-forward (if false) narrative to build of big bully Russia and plucky underdog Ukraine.

  However, it’s pretty hard to keep a lid on the fact that Russia is attacking al-Qaeda and ISIS, along with any CIA-trained jihadist allies are nearby. And it’s inescapably unseemly for the US foreign policy establishment to be so bent out of shape about Russia bombing sworn enemies of the American people, even if it does save some dictator most Americans don’t care about one way or the other.

  And now that wildly popular wild card Donald Trump is spouting unwelcome common sense to his legions of followers about how standing back and letting Russia bomb anti-American terrorists is better than starting World War III over it. And this is on top of the fact that Trump is deflating Jeb Bush’s campaign by throwing shade at his brother’s neocon legacy, from the failures over 9/11 to the disastrous decision to regime change Iraq. And the neocon-owned Marco Rubio, who actually adopted “A New American Century” as his campaign slogan, is similarly making no headway against Trump.

  And Russia’s involvement in Syria just keeps getting worse for the neocons. Washington threatened to withdraw support from the Iraqi government if it accepted help from Russia against ISIS. Iraq accepted Russian help anyway. Baghdad has also sent militias to fight under Russian air cover alongside Syrian, Iranian, and Hezbollah forces.

  Even Jordan, that favorite proxy force in Israel’s dreams of regional dominance, has begun coordinating with Russia, in spite of its billion dollars a year of annual aid from Washington. Et tu Jordan?!

  Apparently there aren’t enough Federal Reserve notes in Janet Yellen’s imagination to pay Iraq and Jordan to tolerate living amid a bin Ladenite maelstrom any longer.

  And what is Washington going to do about it if the whole region develops closer ties with Russia? What are the American people going to let them get away with doing about it? A palace coup in Jordan? Expend more blood and treasure to overthrow the very same Iraqi government we already lost much blood and treasure in installing? Start a suicidal hot war with nuclear Russia?

  And the neocon’s imperial dreams are coming apart at the seams outside of the war zones too. The new Prime Minister of Canada just announced he will pull out of America’s war in the Levant. Europe wants to compromise with Russia on both Ukraine and Syria, and this willingness will grow as the refugee crisis it is facing worsens. Obama made a nuclear deal with Iran and initiated detente with Cuba. And worst of all for neocons, the Israeli occupation of Palestine is being de-legitimized by the bourgeoning BDS movement and by images of its own brutality propagating through social media, along with translations of its hateful rhetoric.

  The neocons bit off more than they could chew, and their Galactic Empire is falling apart before it could even fully conquer its first planet.

  Nearly all empires end due to over-extension. If brave people from Ottawa to Baghdad simply say “enough” within a brief space of time, hopefully this empire can dissolve relatively peacefully like the Soviet Empire did, leaving its host civilization intact, instead of dragging that civilization into oblivion along with it like the Roman Empire did.

  But beware, the imperial war party will not go quietly into the night, unless we in their domestic tax base insist that there is no other way. If, in desperation, they start calling for things like more boots on the ground, reinstating the draft, or declaring World War III on Russia and its Middle Eastern allies, we must stand up and say with firm voices something along the lines of the following:

  No. You will not have my son for your wars. And we will not surrender any more of our liberty. We will no longer yield to a regime led by a neocon clique that threatens to extinguish the human race. Your power fantasy of universal empire is over. Just let it go. Or, as Anakin finally did when the Emperor came for his son, we will hurl your tyranny into the abyss.

   

  

  

  

  

  

• GOP Debate III Post Mortem: Trump Top, Fiorina Flop, Bush (& CNBC) Biggest Loser

  "Debates in Turmoil" would have been an appropriate summary for tonight's free-for-all CNBC-sponsored screamfest in Boulder, Colorado. Argumentative moderators, mis-stated facts, time complaints, and general whining was everywhere but Trump still managed to come out the other side of this gauntlet unscathed. One major highlight included Santelli and Paul pushing 'Audit The Fed', calls for gold-backed currency,and exclaimed that The Fed "has been a great problem" in US society. However, what was odd was the apparent slights to Trump and Carson (questioned less directly) which resulted in an aberrantly low 'talking time' for the leading candidates.

  Lindsey Graham won the undercard…

  Lindsey Graham stands out in second-tier #GOPdebate: https://t.co/JZVUJLXDVY pic.twitter.com/OZuAJVn8eW

  — The Hill (@thehill) October 29, 2015

          

   

  But across all polls, Trump was the clear winner in the main event (and Bush nearly the biggest loser)…

  

  Source: Drudge (left) and CNBC (right)

  And Bush was the "biggest loser"..Jeb Bush finally, 85 minutes in, gets to talk about his plan for 4% growth. It’s hard to figure how bland talk of reform is going to win him much new support. There was no applause for his explanation…

  .@davidaxelrod declares @JebBush the “Certain loser” in tonight’s #GOPDebate https://t.co/c3GW52JlgD pic.twitter.com/uvKs3Cc3ks

  — Anderson Cooper 360° (@AC360) October 29, 2015

  Trump also had the best "one-liners"…

   

  

  *  *  *

  Some highlights included:

  Christie going off on Moderator Harwoord…

  Christie to CNBC moderator: "Even in New Jersey what you're doing is called rude" https://t.co/8KAg6qV0Oj #GOPdebate pic.twitter.com/i6UEOgo6d0

  — The Hill (@thehill) October 29, 2015

  And slamming government regulation of Fantasy Football…

  .@GovChristie on whether government should regulate fantasy football: "Seriously?" https://t.co/2uyOmzwGht pic.twitter.com/CX6pyYdnjP

  — POLITICO (@politico) October 29, 2015

  Fiorina nailed government excess…

  Fiorina: Whenever government gets involved, "it gets worse” https://t.co/fhHCRCBCxc #GOPdebate pic.twitter.com/pyjIk6ub3T

  — The Hill (@thehill) October 29, 2015

  Huckabee said something that made some sense…

  Huckabee: Trump would be a better president every day of the week…than Hillary https://t.co/wPwIHyjMnC #GOPdebate pic.twitter.com/0SgGSo7zzC

  — The Hill (@thehill) October 29, 2015

  Trump reacts to Harwood…

  CNBC moderator jabs Trump: "Is this a comic book version of a campaign?" https://t.co/UcQSdarTFw #GOPdebate pic.twitter.com/yoVtKAua6F

  — The Hill (@thehill) October 29, 2015

  Cruz slams CNBC…

  Cruz: This debate is "why the American people don’t trust the media"; WATCH: https://t.co/vAzfQMOR9i #GOPdebate pic.twitter.com/49rZsbabeh

  — The Hill (@thehill) October 29, 2015

  Trump sent Bush a message…

  Jeb, just suspend your campaign now. Literally no one cares. I've never seen a bigger choke job.

  — Donald J. Trump (@realDonldTrump) October 29, 2015

      As Politico report, CNBC was also the biggest loser…    

  The CNBC-moderated debate became, at crucial moments, a debate about CNBC, as various candidates and, at times, the audience, turned the tables on the network’s three moderators.

   

  The repeated bursts of anger and anarchy were prompted, in part, by questions from the moderators that veered, at times, beyond sharp into contentiousness. By the end of the first hour, the audience seemed to be siding with the candidates, booing when CNBC’s Carl Quintanilla seemed to play gotcha with Ben Carson about his past work for a questionable company.

   

  …

   

  The pattern was established very early by Donald Trump, spurred by a question about his tax plan from CNBC’s John Harwood that suggested the businessman was running a “comic-book” campaign. Trump angrily proclaimed that the network’s own star host, Larry Kudlow, had praised his tax plan.

   

  Soon after, Texas senator Ted Cruz picked up the cudgel declaring, in response to a question from Quintanilla about raising the debt ceiling, “Let me say something at the outset. The questions that have been asked so far in this debate illustrate why the American people don’t trust the media. This is not a cage match. The questions shouldn’t be getting people to tear into each other.”

   

  Cruz, his voice rising in indignation, cited Harwood’s “comic-book” question to Trump and one from CNBC’s Becky Quick to Carson that declared that his flat-tax plan wouldn’t bring in nearly as much revenue as he claimed. After Cruz waxed on about a double standard between Democratic and Republican debates, Quintanilla seemed visibly irritated, and he and Harwood each refused to give Cruz any extra time to answer the original question.

   

  A few minutes later, they seemed to think better of it and did give Cruz the time. But the spuriousness of the decision left them open to further expressions of outrage by other candidates whenever the moderators tried to cut them off.

   

  The unruly atmosphere was a far cry from what CNBC seemed to want and expect, from a gauzy opening photo montage to a series of promotions emphasizing what Quintanilla, at the outset, called, “CNBC’s top experts in the markets and personal finance” and “the best team in business” journalism.

   

  "The CNBC anchors are just desperately filling airtime with absolute nonsense to kill time,” conservative writer John Tabin tweeted.

  *  *  *

  @NYTGraphics did an excellent job of breaking down key aspects of each candidate's plans…

  All of the candidates in the #GOPDebate favor lowering Americans’ income tax burden. https://t.co/kf1vrlC5BA pic.twitter.com/oa5BW27hvr

  — NYT Graphics (@nytgraphics) October 29, 2015

  Several candidates in the #GOPDebate have spoken out against the recent budget deal. https://t.co/kf1vrlC5BA pic.twitter.com/0vQYuzXviM

  — NYT Graphics (@nytgraphics) October 29, 2015

  Republican candidates have offered many strategies for Social Security reform. #GOPDebate https://t.co/kf1vrlC5BA pic.twitter.com/GmmgLri5cU

  — NYT Graphics (@nytgraphics) October 29, 2015

  *  *  *

  A lot of social media was notably disturbed by the lack of direct questioning and comments for Trump and Carson…

  @nataliewsj @CharmaineYoest Moderators not giving @realDonaldTrump and @RealBenCarson questions. Deliberate slight to diminish their ratings

  — Tangoqueen (@HostetterGmail) October 29, 2015

  Which led to aberrantly low talking times for the highest-ranking nominees in the polls…

  

   

  Wow. Bush has the shortest talking time. His campaign… #GOPDebate #CNBCGOPDebate pic.twitter.com/nQcv1kROzB

  — Shari (@circuitangel) October 29, 2015

   

   

  Thanks for the laughs, #CNBCGOPDebate pic.twitter.com/R4yC54SAGt

  — FreakyDeak (@DeakInABox) October 29, 2015

  Finally, a little context for tonight’s debate…

  America is going to be OK. https://t.co/Ytry7Tf9me pic.twitter.com/qwdQPWBUTE

  — Philip Bump (@pbump) October 29, 2015

  

  

  

  

  

• One Trader Loses It Over Draghi And Yellen's Lies

  Epsilon Theory’s Ben Hunt is one of our favorite commentators and market analysts. He is a very rational, even-keeled and objective observer and trader of the capital markets, no matter how broken or centrally-planned they may be. Which is why we were disappointed to see that the two most recent appearances by the world’s foremost central-planners, Draghi and Yellen, managed to incense him as much as they did.

  From Ben Hunt of Salient Partners (pdf)

  Funny How?

  I was watching the Draghi press conference the other week, and I had to turn off the TV. I found myself getting so … angry … not just at what Draghi was saying, but also the live blog reaction and the live market reaction, that I decided I was better off stepping back from the actual event and trying to figure out why I was having such a powerfully negative emotional reaction to the entire charade. It’s not the charade itself. I mean, if I were outraged by every inauthentic display of central banker “communication policy” and the media lapdog response, I’d be in some sort of permanent apoplectic fit. In fact, neither the central bankers nor the media even pretend any more that extraordinary monetary policy has any sort of material impact on the real economy, which I suppose is actually progress on the authenticity scale in a perverse sort of way.
   
  I travel a lot speaking to investors and allocators of all sizes and political persuasions. I also read a lot from a wide variety of sources, also of all sizes and political persuasions. What I’m seeing and hearing on every issue that concerns capital markets and economics is not only an accelerated polarization of policy views between the left and the right (greater “distance” between the views), but also – and more troubling – a polarization (and in many cases a non-modal distribution) of policy views within the left and the right. The kicker: I think that this polarization is almost entirely driven by monetary policy and the power/wealth inequalities it creates. Central bankers are not only planting the seeds of truly systemic instability, they are watering and tending and nurturing this particularly virulent strain of “green shoots” with their entirely intentional and entirely successful efforts to inflate financial asset prices and mandate reduced volatility in capital markets.

  The fact is that maintaining massive debt and creating massive wealth – which is what central banks DO – is a political exercise, pure and simple. It’s nothing else. It’s not social science. It’s politics. Yellen and Draghi are the most powerful politicians in the world, and what makes me angry is their unwillingness to confront the essential nature of their actions, to call what they do by its real name. It makes me angry because the longer the High Church of Central Bankerdom denies and ignores the raw political impact of their actions, the more likely it is that we will have a structural political accident that will destroy every bit of the debt maintenance and wealth creation that the High Church has labored so hard to build. I think we’re getting very close to that sort of political accident.

  I’m pretty sure that I agree with absolutely none of Thomas Piketty’s policy prescriptions. And the impact of his bugbear – tax policy – on wealth inequality is laughably minor compared to the impact of a triple in the S&P 500 market cap or central bank purchases of trillions of dollars of bonds. But if you don’t recognize that Piketty has a point when he says that today’s wealth inequality is both outrageous and poisonous, you’re just not paying attention. Increased wealth inequality always leads to increased political polarization, within and between countries, within and between political entities. That was true in the 1870s, that was true in the 1930s, and it’s true today.

  What happens when you get greater political polarization? The center does not hold. You get Bizarro world. You get political outcomes that cannot be anticipated by econometric or median voter models. You get political outcomes that will be perceived as illegitimate by a meaningful number of citizens. You get the New York Times writing encouragingly that even with a more aggressive tax regime, the Federal government could still “allow” citizens to take home 50% of their income. Wait. What?

  Here’s a fairly typical example of the polarization phenomenon I’m talking about, this from the Pew Research Center based on 1994 – 2014 data. Everything in this chart is significantly worse today, and the same chart could be drawn for every other country on earth (including one-party states like China). You could also draw a chart with exactly the same dynamic for Congress. Or FOMC voting member views on raising rates. Or financial advisor views on liquid alternatives. Seeing polarization is like seeing the homeless … once you start looking for it, you will see it everywhere.

  

  It’s not just the distance between the median Democrat voter and the median Republican voter that concerns me, it’s the shape of the Democrat electorate and the shape of the Republican electorate. A consensus outcome, where a significant majority buys into a final decision, is more difficult when the median voters are farther apart, but by no means impossible. It’s the lack of a single modal “peak” near the median voter within each party that makes consensus so very, very difficult. Why? Because the human animal has designed any number of effective preference aggregation schemes (elections and markets, for example), but none of them work very well at all when preferences are all over the map, when there is no “peakedness” to the preference distribution. There is no voting scheme that can identify a consensus when there is no consensus to be had, and that’s true whether you’re talking about the Republican party or the American electorate at large or the FOMC or the Chinese Politburo. On the contrary, the only thing you are guaranteed to have in a “non-peaked” system is a majority of unhappy members with ANY single construction or faux presentation of consensus.

  In practice, one of two things happen in this sort of non-peaked social system. Either a new political dimension is constructed such that a peaked distribution emerges and a consensus outcome can be supported (this usually takes the form of identifying a common enemy, like Commies or Billionaires, or of appealing to a higher power, like Allah or Science), or you get a political accident where fundamental rules of markets and government shift drastically. I’m not looking forward to either.

  What does this mean for investors? It means that at some point in the next year or two, I think we are all going to have a Henry Hill “Goodfellas” moment, where we think that we understand the conversation going on around us, where we think that we’re engaged with our social system in the usual way … and then everything will go sideways in a split second, and we will suddenly and with extreme clarity realize that we don’t understand anything at all except that we’re sitting at a table with a maniac. Or if you want a more light-hearted metaphor, we will all have a George Costanza moment where we come to the realization that all of our instincts are wrong. Most of us, of course, have already endured more than a few of these George Costanza moments here in the Golden Age of the Central Banker. I think you ain’t seen nothing yet. It’s not the Minsky Moment I’m worried about, where some credit bubble internal to markets wreaks havoc as it pops. No, it’s the Sideways Moment that I’m worried about, where a political accident external to markets wreaks structural havoc on the entire market system.

  Do I understand why Draghi is doing what he’s doing? Do I understand why the Fed is getting colder and colder feet about raising rates? Sure. They’re watching inflation expectations continue to collapse. Here’s the latest chart for the primary metric for US inflation expectations, 5-year forward rates, courtesy of the St. Louis Fed.

     

  Inflation expectations are THE most important data point in the Fed and ECB models that drive monetary policy decision making. And those models, driven by this chart, say that you’re a fool if you raise rates now. Or if not a fool, then at the very least you’re taking on significant post-Fed career risk. Hard to see some big hedge fund shelling out the big bucks for another ex-Fed Chair if this is what makes everything go sideways.

  What Draghi and Yellen are doing is exactly what happens when you abdicate social policy to models, when you pretend that you’re just a technocratic financial regulator, and I suppose that’s what makes me angriest of all. I can see where this is going politically. Everyone can see where this is going politically. And maybe we’re already too far gone to change the politically polarized course we’re on. But we have to try. We have to speak honestly about the political dimensions of extraordinarily accommodative monetary policy in its maintenance of massive debt and its creation of massive wealth. Because if we don’t speak, then others will speak for us. And we won’t like what they have to say.

  * * *

  Our advice to Ben, do what we do: instead of getting angry at the central planners who know the game is almost up, just laugh at them. It drives them nuts.

  

  

  

  

  

• Japanese Stocks, USDJPY Tumble On 'Good' Data As China's Offshore Yuan Strengthens

  The surge in the USDollar today after The FOMC's 'hawkish' statement has prompted strength in the Offshore Yuan, narrowing once again the spread to Onshore Yuan. Another CNY10 billion cash injection hasn't done much for Chinese stocks or liquidity markets however. After better than expected Japanese industrial production however USDJPY plunged (i.e. no imminent BoJ easing) and that dragged Nikkei 225 over 200 points lower (erasing all the FOMC gains).

   

  Offshore Yuan strengthened notably (despite the USD strength against the majors) narrowing the spread to onshore yuan…

  

   

  As The Dollar is losing steam quickly against Asian/EM FX…

  

   

  In another sign of China's pullback, Aussie new home sales crashed 4.0% MoM – the largest drop since July 2014.

  And Aussie Miners have been tumbling all week…

  

   

  But it is Japan that got interesting…

  Japanese markets opened with a disappointingly better than expected print for industrial production…

  • *JAPAN SEPT. OUTPUT RISES 1% M/M; EST. -0.6%

  Which immediately knocked 30 pips off USDJPY

  

   

   

  And Japanese stocks have tumbled – giving up all the FOMC Statement gains…

  

   

  Good news is super bad news in Japan.

   

  Charts: Bloomberg

  

  

  

  

  

• Pfizer, Allergan Said To Consider Merging; Would Be Largest Drug Deal In History

  Pfizer has an enterprise value of $221 billion.

  Allergan has an enterprise value of $160 billion.

  The two companies combined would have a joint EV of nearly $400 billion and a market cap of well over $300 billion. That would make a potential merger between the two the largest M&A deal in history, while a “mere takeover” of Allergan by Pfizer would still rank it as the fourth largest deal in history and the largest deal in a year that is shaping up as a record for M&A.

  And, according to the WSJ, such a deal may be just a few months if not weeks away. To wit:

  Drug makers Pfizer Inc. and Allergan PLC are considering combining, in what would be a blockbuster merger capping off a torrid stretch for health care and other takeovers.

   

  Pfizer recently approached Allergan about a deal, according to people familiar with the matter, with one of them adding that the process is early and may not yield an agreement. Other details of the talks are unclear.

   

  Allergan currently has a market capitalization of $112.5 billion, meaning that a deal for the company could be the biggest announced takeover in a year that is already on pace to be the busiest ever for mergers and acquisitions.

  Granted, this won’t be the first time the two pharmaceutical behemoths have been said to consider merging, although it would be the first time for Allegan in its current iteration which is a combination of Forest Labs, Watson, Warner Chilcott, Actavis and, of course Alergan; furthermore this time may be also different when one considers the recent last gasp surge in deal announcements, which is nothing more than an attempt by companies to lock in their near all time high stock prices as a merger currency, while debt is still debt.

  Will the deal pass regulatory scrutiny? If enough palms are greased, sure.

  More complex would be the whole tax-avoidance issue: “A tie-up with Allergan could also be a way for New York-based Pfizer to lower its corporate tax rate. Allergan is based in Dublin, which has a significantly lower tax rate than the U.S.”

  What is more interesting will be whether the Fed will observe what would be the mother of all mergers, and finally grasp the magnitude of the mother of all equity bubbles that it has blown. Alas, the answer will once again be a resounding now, even when this debt-funded deal leads to the CEOs becoming richer than their wildest dreams, and leads to the prompt pink slipping of several tens of thousands of workers on both sides. Simply because when the bubble is this big, there is no more stopping it.

  Finally, for those interested, here is a list of all the largest M&A deals to date courtesy of CityAM:

  

  

  

  

  

  

• The Chart Showing What Runaway QE Looks Like

  This is Sweden.

  

  This is Krugman on Sweden.

  Where does this gut dislike for low rates come from? At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.

   

  Whatever their motives, sadomonetarists have already done a lot of damage. In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.

   

  And they could do much more damage in the future. Financial markets have been fairly calm lately — no big banking crises, no imminent threats of euro breakup. But it would be wrong and dangerous to assume that recovery is assured: bad policies could all too easily undermine our still-sluggish economic progress. So when serious-sounding men in dark suits tell you that it’s time to stop all this easy money and raise rates, beware: Look at what such people have done to Sweden.

  And here comes the low rates: this is Sweden on negative interest rates.

  

   

  And this is what runaway QE looks like – presenting Sweden’s 5th QE in 2015 alone.

  

   

  Well, Krugman got his wish.

  

  

  

  

  

• Austria Runs Out Of 'Long Guns' As Europeans Scramble For Protection Against "Islamic Invasion"

  After decades of berating Americans for their Constitutionally protected right to bear arms, Europeans are finally starting to wake up. As SHTFPlan.com's Mac Slavo notes, it took over a million Islamic immigrants and violence across their union to convince them, but it appears that they finally get it.

  In Austria, the scramble for self defense firearms is on, as WND.com reports, Austrians are arming themselves at record rates in an effort to defend their households against feared attacks from Muslim invaders.

  Tens of thousands of Muslim “refugees” have poured into Austria from Hungary and Slovenia in recent months on their way to Germany and Sweden, two wealthy European countries that have laid out the welcome mat for migrants. More than a million will end up in Germany alone by the end of this year, according to estimates from the German government.

  Obtaining a working firearm and ammunition in Germany, Britain, Denmark and the Netherlands is practically impossible for the average citizen. Germany, for instance, requires a psychological evaluation, the purchase of liability insurance and verifiable compliance with strict firearms storage and safety rules. And self-defense is not even a valid reason to purchase a gun in these countries.

  The laws in Austria, while still strict, are a bit less overbearing.

  A Czech TV report confirms that long guns – shotguns and rifles – have been flying off the shelves in Austria, and Austrians who haven’t already purchased a gun may not have a chance to get one for some time. They’re all sold out.

   

   

  And those arming themselves are primarily women.

   

  “If anyone wants to buy a long gun in Austria right now, too bad for them,” the Czech newscaster says. “All of them are currently sold out.”

   

  He cites the Austrian news outlet Trioler Tageszeitung as the source of his report.

   

  “We cannot complain about lack of demand,” Stephen Mayer, a gun merchant, told Trioler Tageszeitung.

   

  He claims the stock has been sold out for the last three weeks and that demand is being fueled by fears generated by social changes.

   

  “People want to protect themselves,” Mayer said. “Nonetheless, the most common purchasers of arms are primarily Austrian women.”

   

  They are also buying pepper sprays, which Mayer said are in big demand among those who can’t get a gun.

  So-called "projectile weapons" are available in Austria under two classifications, C and D, which are rifles and shotguns. Every adult Austrian is legally able to apply for a weapons permit but must disclose to the government their reason for wanting to own a gun.

   The Czech station cited an interview with a sociologist and an Austrian journalist, both of whom said the weapons purchases were based on unfounded fears about foreign migrants.

   

  The Viennese sociologist, identified only as Mr. Gertler, said no such fears about migrants should ever be published by any Austrian news outlet.

   

  A journalist named Wittinger said "something is very wrong here" if Austrians are buying guns to protect themselves against migrants.

   

  "Shotguns will not, after all, solve any immediate problems, quite the contrary," he said.

  The Czech TV station then reported that Islamists are promising: "We will cut the heads off unbelieving dogs even in Europe."

  "Look forward to it, it's coming soon!" the Czech newscaster said.

   

  ISIS-trained jihadists are now returning as European citizens or they are trying to infiltrate as migrants. In one propaganda video an ISIS operative informs his comrades back home in Germany to slit the throats of unbelievers in Germany, Czech TV reports.

   

  "Overall, the ministry of interior stated that Germany is in the cross-hairs of Islamic terrorists but that he does not have any indications of specific threats," he said.

   

  The Czech site reflects awareness of a major event in Western history, said Larry Pratt, executive director of Gun Owners of America.

   

  "Polish King John Sobieski defeated the Muslim invaders at the gates of Vienna in 1683. Another Muslim invasion is underway and Austrians are alarmed, hence their run on gun stores," Pratt told WND. "Women are right to be concerned in view of the Muslim view of women that they are good for raping and little else."

   

  The Czech TV report cited the Arab Spring as the root cause for the flood of Muslim migrants into Europe.

  And, as a reminder, the Arab Spring came into existence with the violent overthrow of the Libyan and Egyptian governments by whom again? Why Washington D.C. of course: the same "democratic" regime which after launching the Arab Spring, subsequently caused the overthrow of the duly elected president in Ukraine and has since been trying to repeat that "success" in Syria as well.

  So dear Europeans, if you are unsure who to thank for your historic refugee crisis, feel free to address your thank you letters to the current occupant of 1600 Pennsylvania Avenue.

  

  

  

  

  

• GOP Debate III: The Battle Of Boulder Begins – Live Feed

  It's that time again. From 'jolted' Jeb to 'cool' Carly and from 'calm' Carson to 'turmoiling' Trump, for some of the GOP presidential nominee candidates, tonight could be the last hoorah in a campaign that has seen apolitical entrants dominate the mainstream Washington muppets. Moderated by John "I never met a Republican I didn't like" Harwood, we are sure there will be some tension as the "general health of the economy" planned focus may morph into any and everything as the debate pushes beyond two hours. Please watch responsibly…

   

  As in the previous debate, the same four candidates who appeared in the last undercard debate: Rick Santorum, Bobby Jindal, George Pataki, and Lindsey Graham, have fought it out starting at 6pmET… and it appears Lindsey Graham won…. "Barack Obama is an incompetent chief"

  

   

  *  *  *

  But as far as the main event, according to some polls, Carson is gaining (if not leading) on Trump…

  

  Source: Cagle Post

  As The Wall Street Journal lays out, here is a review of what each of the candidates needs to accomplish in the two hour prime time debate,

  Donald Trump

  Faced with signs he is slipping from the front of the GOP pack, Mr. Trump is likely to come out swinging.  Watch how he treats retired neurosurgeon Ben Carson, who has surpassed him in recent polls of Iowa Republicans. Having attacked Mr. Carson as “low energy” and wrong on immigration policy on the campaign trail, now Mr. Trump has to decide how bluntly to criticize him to his face. Mr. Trump has already accomplished one goal for the debate: He persuaded debate sponsor to CNBC to limit the event to two hours. He did not much like the three-hour marathon that was the last debate.

   

  Ben Carson

  Mr. Carson, who has jumped to first place in some Iowa polls and gained ground elsewhere, will be looking for a more prominent role in the debate to build on his momentum. His past performances have been solid but not attention-grabbing. His advisers have been coaching him on how to insert himself more into the debate without seeming too pushy. If Mr. Trump or other candidates choose to criticize him, he has to juggle the need to respond with his trademark calm demeanor — the characteristic that seems to be key to his attraction to voters.

   

  Marco Rubio

  Mr. Rubio may be tempted to stick with his road-tested debate strategy of focusing on policy and not going on the attack. His past debate performances won praise and helped propel him toward the front of the pack in many recent polls. He thrives when discussions turn to policy matters, but the debate’s focus on economic issues does not play to his greatest strength — foreign affairs. Some of his supporters have taken to sniping at Jeb Bush, but Mr. Rubio so far has turned down chances on the debate stage to criticize his one-time mentor. Will he remain so restrained now?

   

  Ted Cruz

  Mr. Cruz will need to find a way to break out from the shadow of Messrs. Trump and Carson, who have outpaced him in the hunt for voters who want an anti-establishment candidate. He has refrained from criticizing other candidates, even heaping praise on Mr. Trump for helping focus the 2016 campaign on Washington dysfunction. He has hinted that he may soon start trying to draw distinctions between himself and Mr. Trump on policy matters. Look for Mr. Cruz to appeal to evangelical voters, who seem to be gravitating to Mr. Carson.

   

  Jeb Bush

  Mr. Bush is under heavy pressure to give a game-changing performance to pull his campaign out of the ditch of sagging polls, lackluster fundraising and a big downsizing of his campaign staff. The debate’s focus on the economy could give him an opening to spotlight his record as governor of Florida, which his supporters see as a strong point that ratifies his conservative credentials. It gives him a chance to show that he, like other governors, is a doer not just a talker on job creation and economic growth. But his decade-old record may not be enough to help him convey that he is the candidate of the future not the past.

   

  Carly Fiorina

  Ms. Fiorina should be glad to get back onto the debate stage because it is the kind of forum where her star has sparkled in the last two go-rounds. She badly needs to get back some of that mojo because her profile has faded and her poll numbers have sagged since the last debate. The debate focus on job creation might be a touchy subject. She will surely have to have to defend her record leading Hewlett-Packard Co., where she oversaw the layoffs of 30,000 employees.

   

  Mike Huckabee

  Mr. Huckabee has not been a stand-out at the first two debates, and he is running out of time to break out of the back of the pack. He might make a bolder play for his core supporters — evangelical Christians — because he is facing stiff competition from Messrs. Carson and Cruz for their support.

   

  Rand Paul

  Mr. Paul should be glad to be on the main stage, because his low poll numbers threatened to relegate him to the undercard debate. With the focus on economics, he will try to promote his balanced budget and flat-tax plans, but it will be hard to get a broader boost from any debate, which is not his strongest forum.

   

  Chris Christie

  Mr. Christie also is mired in single digits in the polls and is looking for a way to get traction that has eluded him both on stage and on the trail. As the debate turns to fiscal matters, he can tout he has a comprehensive plan to rein in the growth of federal entitlement programs. But bragging about how ready he is to curb Medicare and Social Security may not be the best way to woo new supporters.

   

  John Kasich

  Mr. Kasich will be looking for a chance to revive a campaign that started late, got a quick boost, then faded. He will welcome the focus on jobs and the economy because he brags often about what he has done as Ohio governor to improve the state’s economy, eliminate its deficit, and cut taxes. He has tried to steer clear of mud slinging, but in the last debate that meant he did not have many moments to shine.

  But Trump remains the clear leader for now…

  

   

  Though it appesr Rand Paul is expected to have a strong showing this evening…

  

   

  *  *  *

  Live Feed (via CNBC)… CNBC has decided to pull a Fox and hide behind their corporate firewall (click image below to link to and validate your CNBC feed)

  

   

  *  *  *

  Two perspectives on how this ends…

  A Clear winner (or two)…

  

  Source: Cagle Post

  Or GOP self-destruction…

  

  Source: Cagle Post

  *  *  *

  For the kids playing at home, here's NewsWeek's Bingo…

  

   

  And finally, we leave it to none other than Rolling Stone's Matt Taibbi to create the ultimate GOP Debate 3.0 Drinking Game…

  DRINK EVERY TIME:

  1. Donald Trump brags about how much money he makes.

  2. Trump uses the words "disaster," "loser" or "head spin."

  3. Trump says he "loves" somebody or thinks he/she is a "wonderful person," before ripping him/her for being a loser or a disaster or whatever.

  4. Trump rips another candidate's poll numbers. Make it a double if he tweaks Jeb about cutting the pay of his staffers. Add a beer chaser if Trump doubles down and talks about how well, in contrast, he pays his people.

  5. Anyone references how Hillary "lied before the committee."

  6. A candidate proposes abolishing an utterly necessary branch of government, or a politically untouchable program like Medicare.

  7. Jeb Bush refers to himself as "Veto Corleone," or insists that "Washington is the pejorative term, not Redskins." Drink as much as you can stomach if he actually uses either line.

  8. Any candidate makes an awkward/craven pop-culture reference, including references to Peyton Manning or the Broncos.

  9. Any candidate illustrates the virtue of one of his/her positions by pointing out how not PC it is.

  10. Any candidate compares anything that isn't slavery to slavery. A double if it's Ben Carson.

  11. Any candidate evokes Nazis, the Gestapo, Neville Chamberlain, concentration camps, etc. Again, a double if it's Ben Carson, who has been amping up the slavery/Holocaust imagery lately.

  12. Carson cites the Bible as authority for complex policy questions.

  13. Any candidate righteously claims he/she would never have compromised on the debt ceiling thing. You may drink more if you feel sure enough that the person is lying.

  14. Carly Fiorina whips out a number that is debunked by Politifact or some other reputable fact-checking service before the end of the night. (Example: the 307,000 veterans who supposedly died last year because of Barack Obama's inept management of the VA.) Actually, drink if any candidate does this.

  15. A low-polling candidate makes a wild and outrageous statement in a transparent attempt to revive his or her campaign. Huckabee calling for summary bludgeonings of immigrants would be an example.

  16. A candidate complains about not getting enough time. This evergreen drinking game concept is henceforth known as the "Jim Webb rule."

  17. The audience bursts into uncomfortable applause at a racist/sexist statement.

  DRINK THE FIRST TIME AND THE FIRST TIME ONLY:

  18. A candidate evokes St. Reagan.

  DRINK EVERY TIME YOU HEAR:

  19. "Selling baby parts"

  20. "White Lives Matter" or "All Lives Matter"

  21. "Ferguson Effect"

  22. "I'm the only candidate on this stage who…"

  23. George Bush/My brother "kept us safe"

  24. "Shining city on a hill"

  TAKE A SHOT OF JAGER IF:

  25. Anyone references a biblical justification for gun ownership, or insists an infamous historical tragedy would have been prevented if more people had been armed.

  The following rules are optional, for the truly hardcore.

  BONUS SHOTS IF:

  • Ted Cruz mentions his wife's baking skills without mentioning she worked for Goldman Sachs.
  • Rand Paul mentions the Constitution, the Framers or the founders before he mentions his children.
  • Someone makes a quiet car joke at Christie's expense.
  • Fiorina mentions being a secretary or having a husband who drove a tow truck.

  Watch responsibly.

  

  

  

  

  

• Meanwhile, In An Average German City

  We can only hope that these two German ladies racist discussions do not reflect a growing undercurrent of xenophobia across such a currently open, and multi-cultural society. However, with immigrants "mysteriously disappearing," it may be too late:

  “None of us want this. We’re all scared.”“What is this? How will this be in 100 years?”
  “This is not my life. It just shows you how many of them are here already.”
  “Now there’s another 1.5 million who came this year.”
  “Every year 2-3 million arrive.”
  “It’s generally about foreign infiltration.”
  “Yes, exactly.”
  “We won’t dress like we do now.”
  “Here, no! They won’t take anything from me!”
  “Look, when I walk through the streets of the city, it’s only foreigners!”
  “There are walking 50 foreigners and I only see one European face.”
  “Look at the women! They’re all veiled!”
  “This is our future.”

   

   

  As we detailed earlier, anger is spilling over to the common people too: "In Freiberg in Saxony on Sunday evening demonstrators tried to stop asylum seekers reaching a refugee centre. The protesters tried to stop a bus with refugees from driving further down the road by staging a sit-in.

  Some people threw apples at the bus, while others set off bangers, the Süddeutsche Zeitung reported.

   

  Around 50 counter-demonstrators also turned up to the anti-refugee sit-in and there were tense verbal stand-offs between the two groups, although police confirmed the situation did not escalate into violence."

  Meanwhile in Mecklenberg-Western Pomerania, two local politicans have been threatened by people with presumed far right motives, reports the Hamburg Abendblatt.

  Patrick Dahlemann of the Social Democratic Party (SPD) had his car attacked with butyric acid. The foul smelling chemical was poured onto his vehicle.

  On his Facebook page Dahlemann said that he would not be intimidated in his efforts to foster a “a real culture of hospitality” in the poor north-eastern state.

  And with xenophobia slowly on the rise, the far-right elements are stirring: "Meanwhile in Mecklenberg-Western Pomerania, two local politicans have been threatened by people with presumed far right motives, reports the Hamburg Abendblatt."

  Patrick Dahlemann of the Social Democratic Party (SPD) had his car attacked with butyric acid. The foul smelling chemical was poured onto his vehicle.

   

  On his Facebook page Dahlemann said that he would not be intimidated in his efforts to foster a “a real culture of hospitality” in the poor north-eastern state.

   

  Party colleague Susann Wippermann also suffered threats when an unknown person wrote “traitor to the nation” on her car windscreen.

  This follows a warning last week from the Federal Office of Investigation (BKA) which warned that politicians who support refugees face increased danger of attack from far right groups. Earlier in October Cologne Mayor Henriette Reker was stabbed while campaigning for election by an assailant with self-declared anti-refugee motives.

  h/t Kirk

  

  

  

  

  

• EuRoPeaN STaYCaTioN…

  

  

  

  

  

• S&P Set For Biggest Ever Monthly Point Gain As Central Banks Go All In

  In the beginning of the month, when we showed that the NYSE short interest has risen to the highest level since July 2008, we said that this indicator either means that the market is poised for a crash as it did last time, or – more likely – would result in the biggest short squeeze in history.

  

  We said that “either a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs.”

  Since then two things have happened: one after another central bank did intervene, leading to the biggest VIX monthly drop in history…

  

   

  … and yes, as Bank of America said, “It’s Not A Risk-On Rally, This Is The Biggest Short Squeeze In Years.”

  So, where does that leave us?

  While we still haven’t taken out the all time highs said squeeze would lead to – there are about 30 points to go there; but as the following chart below shows, with just two trading days left, October is on pace for the biggest monthly point jump in S&P500 history.

  

  … which courtesy of the earnings recession in the past two quarters, has pushed the market right beyond the point where back in May Janet Yellen said “valuations are quite high.”

  

  

  

  

  

• Goldman Says The US Manufacturing Decline Is "Contained"

  A few weeks ago, William Blair analyst Ryan Merkel asked a question on Fastenal’s Q3 call that newly-minted CEO Dan Florness did not appreciate. Here’s the exchange:

  Merkel: Then just lastly, Fastenal growing zero percent here in September and in a non-recessionary environment, it’s pretty surprising, I think, for a lot of us. 

   

  Florness: The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.  

  Roger that, Mr. Florness. 

  Of course it’s not just the fact that 32 of Fastenal’s top 100 customers are seeing top line declines of more than 10% that leads us and others to suggest that the US may already be in a recession. Indeed, it’s not even the fact that 17 of those 32 are grappling with declines of 25% or more. Rather, the evidence is everywhere. Take bellwether Caterpillar for instance, which is in the midst of a truly historic sales slump that’s now entering its 35th month. 

  And so, while the likes of Dan Florness remain extremely concerned about the current industrial environment, one person who isn’t concerned about potential spillover effects into the “rest” of the US economy is Goldman’s David Mericle, whose last name is not to be confused with “miracle”, although as you can see from the excerpts below, that’s precisely what Dave seems to be banking on.

  First, the bad news:

  We continue to see the underlying pace of economy-wide growth as moderately above-trend. But manufacturing surveys and recent earnings reports suggest that the manufacturing sector might be following the energy sector into contraction. The large gap between the manufacturing and non-manufacturing sectors that opened at the beginning of this year has widened in recent months, raising concerns that the more foreign-exposed manufacturing sector could become a channel through which weaker global growth affects the US economy. 

   

  

   

  The sharp contraction in the energy sector has contributed to the slowdown in industrial production (IP). The left panel of Exhibit 2 shows that the deceleration of IP is less severe when energy-related categories are excluded, and we have also found evidence that an additional 0.4pp of the slowdown is due to spillovers to other industries from drilling. Nevertheless, accounting for these contributions still leaves a substantial slowdown.

   

  

  The good news, however, is that “this time is always, always different” – apparently:

  US states vary in the manufacturing intensity of their economies, though the variation in the mining share (which includes energy) is much larger. We find that the loss of 1 manufacturing job has been associated historically with the loss of 1.5-2 jobs outside of the mining and manufacturing sectors.

   

  But how large have spillovers from the recent slowdown been? To find out, we compare state-level employment growth outside of the manufacturing and mining sectors over the last year to three other state-level measures: (1) the manufacturing share of total payroll employment, (2) manufacturing earnings as a share of total earnings from the personal income report, and (3) exports originating in the state as a share of GDP. We do not find evidence of negative spillovers using any of these three variables, and the same holds for the manufacturing share of state GDP and growth rate of manufacturing employment over the last year.

  Goldman’s conclusion: “…while the slowdown in manufacturing is genuine and history suggests it will likely lead to some negative spillovers, the recent data do not show evidence of such spillovers yet.”

  Fair enough, but we would once again note that things seem to be deteriorating rapidly and it very well could be that the knock-on effects simply haven’t materialized yet. For instance, consider the following and draw your own conclusions as to where the manufacturing sector is headed (from late last month):

  With 14,600 manufacturing jobs lost in August, this was the worst month for the US manufacturing sector since January 2010.

  

  Where this data becomes more disturbing, and where it can be seen in full context, is when clustering the monthlies into full year buckets. It is here that the full impact of what is now clearly at least a manufacturing, if not yet service, recession can be witnessed.

  As the chart below shows, according to ADP, for the first time this decade, the US hasn’t created a single manufacturing job for the entire year. In fact, it has lost some 6,600 jobs.

  

  In other words, maybe – just maybe- Goldman is simply looking for “spillovers” prematurely. That is, if Fastenal’s Dan Florness is correct, we’ve entered a definitive recession for the industrial environment and as the charts shown above clearly demonstrate, things took a decisive turn for the worst in September.

  So we’ll take a wait and see approach here, as we wait to hear from ADP again on November 4 and as we look towards the October NFP print but we’re willing to bet that Goldman may be revising their upbeat assessment in the months ahead. Then again, who cares? It’s all about waiters and bartenders these days…

  

  

  

  

  

  

• The 6 Reasons China and Russia Are Catching Up to the U.S. Military

  Why the Gap In Military Superiority Is Closing

  China and Russia are still behind the U.S. militarily.  But they are both showing surprising breakthroughs that – sometime down the road in the future – could threaten U.S. hegemony.

  The Washington Times reported last month:

  Defense Secretary Ashton Carter on Wednesday warned Russia and China are quickly closing the military technology gap with the U.S. as inconsistent military budgets and slower innovation threaten America’s lead in the military world.

   

  ***

   

  “It’s evident that nations like Russia and China have been pursuing military modernization programs to close the technology gap with the United States,” he continued. “They’re developing platforms designed to thwart our traditional advantages of power projection and freedom of movement. They’re developing and fielding new and advanced aircraft and ballistic, cruise, anti-ship and anti-air missiles that are longer-range and more accurate.”

  The SecDef issued this warning before Russia stunned the U.S. with its long-range missile and electronic communications-jamming capacities.

  How could this be happening, when U.S. military spending dwarfs that from the rest of the world?

  There are six reasons …

  1. Corruption and Pork.   America spends a large percentage of it’s defense spending on unnecessary military programs that:

  • The generals say aren’t helpful and don’t even want

  • Redundant personnel, programs and systems which don’t increase our war-fighting capacity

  • Equipment which is built and then immediately mothballed before it is ever used

  • Money is being thrown away on ridiculous things like a Homeland Security seminar called  “Did Jesus Die for Klingons Too?” and mansions and personal chefs for generals

  Indeed – as many lottery winners and star athletes will tell you – it’s easy to piss away even huge sums of money over a couple of years’ time without discipline.

  And plain old corruption is wasting huge sums and dramatically weakening our national security.

  How much are we talking about?

  Well, here's some indication: $8.5 trillion dollars in taxpayer money doled out by Congress to the Pentagon since 1996 … has never been accounted for.

  2. Fighting the Wrong Wars. A closely-related issue is that the war-fighting assets are being squandered, spread thin and distracted by fighting wars which decrease our national security.

  The wars in Iraq and Afghanistan were the most expensive in U.S. history, costing between between $4 trillion and $6 trillion dollars.

  And we spent additional boatloads of money carrying out regime change in Libya, Syria and elsewhere.

  But these wars have only caused ISIS and the Taliban to flourish.

  Indeed, the majority of our defense spending is – literally – making us less secure because we’re spending money to fight the wrong wars:

  • We’re overthrowing the moderates who help insure stability

  • We’re arming and supporting brutal dictators … which is one of the main reasons that terrorists want to attack the U.S.

  • We’ve fought a series of wars for petrochemicals, instead of security

  • We expend huge sums of money on mass surveillance … but top security experts agree that mass surveillance makes us MORE vulnerable to terrorists (we’re targeting the wrong guys)

  3. Never-Ending War Destroys the Economy. We’re in the longest continuous period of war in U.S. history.  The Afghanistan War has  been going on for 14 years … as long as the Civil War (4 years,), WW1 (4 years) and WW2 (6 years) COMBINED.

  Wars which drag on are horrible for our economy.  A weak economy – in turn – makes it more difficult to sustain a leadership role in defense in the long-run.

  And Americans are sick and tired of war.  If our national security was actually threatened, it might be hard for the government to rouse our commitment and motivation.

  4. More Bang for the Buck. China has the world’s largest economy when measured by “purchasing power parity” … meaning how much Chinese can buy in their their local currency in their local economy. And see this.

  Therefore, China can buy locally-produced military parts and services more cheaply than the U.S. can.

  As Bloomberg noted last year:

  The lowest-paid U.S. soldiers earn about $18,000 a year. In comparison, in 2009, an equivalent Chinese soldier was paid about a ninth as much. In other words, in 2009, you could hire about nine Chinese soldiers for the cost of one U.S. soldier.

   

  Even that figure doesn’t account for health care and veterans’ benefits. These are much higher in the U.S. than in China, though precise figures are hard to obtain. This is due to higher U.S. prices for health care, to higher prices in general, and because the U.S. is more generous than China in terms of what it pays its soldiers. Salaries and benefits, combined, account for a significant percentage of military expenditure.

   

  But labor costs aren’t the only thing that is cheaper in China. Notice that China’s gross domestic product at market exchange rates is only two-thirds of its GDP at purchasing power parity. This means that, as a developing country, China simply pays lower prices for a lot of things. Some military inputs — oil, for example, or copper — will be bought on world markets, and PPP won’t matter. For others, like complicated machinery, costs are pretty similar. But other things — food or domestically manufactured products — will be much cheaper for the U.S.’s developing rivals than for the U.S.

   

  Those who follow global security issues have known about this issue for a long time. But somehow, this fact hasn’t penetrated the consciousness of pundits or made its way into pretty, tweet-able graphs.

  5. Theft. The U.S. Naval Institute, Fiscal Times and others document that the Chinese have greatly accelerated their weapons development timeline by spying on the West and shamelessly copying our military inventions and designs.

  If the NSA and other spying agencies had used their resources to stop foreign governments from stealing our crown jewels – instead of using them to gain petty advantages for a handful of knuckleheads – we'd be a lot better off today.

  6. Geography.  Russia is almost twice the size of the U.S.  Russia and China together are so massive – forming such a giant swath of land-based territory, so much closer to the Middle East than America is – that it gives their militaries an advantage.

  Bloomberg points out:

  The U.S., situated in the peaceful, relatively unpopulated Western Hemisphere, is very far away from the location of any foreseeable conflict. China isn’t going to invade Colorado (sorry, “Red Dawn” fans!), but it might invade Taiwan or India. Simply getting our forces to the other side of the world would require enormous up-front expenditures.

  The National Interest notes:

  “Defeating China in these scenarios [Taiwan and South China Sea] could nonetheless be difficult and costly for the United States’ primarily as a result of the geographic advantages that China enjoys, as well as specific systems capabilities.”

   

  ***

   

  A recent RAND report, “The US China Military Scorecard,” … argues that China is catching up to the U.S., is becoming more assertive and confident, and has geography on its side.

  And Russia’s proximity to Ukraine, the Baltics and other neighboring countries gives it a huge advantage.

  Postscript: Sadly, because we’ve squandered our resources, war games show that the U.S. is no longer invincible.

  

  

  

  

• Guest Post: Inequality Undermines Democracy

  Authored by Sean McElwee, originallyu posted at AlJazeera.com,

  In recent years, several academic researchers have argued that rising inequality erodes democracy. But the lack of international data has made it difficult to show whether inequality in fact exacerbates the apparent lack of political responsiveness to popular sentiment. Even scholars concerned about economic inequality, such as sociologist Lane Kenworthy, often hesitate to argue that economic inequality might bleed into the political sphere. New cross-national research, however, suggests that higher inequality does indeed limit political representation.

  In a 2014 study on political representation, political scientists Jan Rosset, Nathalie Giger and Julian Bernauer concluded, “In economically more unequal societies, the party system represents the preferences of relatively poor citizens worse than in more equal societies.” Similarly, political scientists Michael Donnelly and Zoe Lefkofridi found in a working paper that in Europe, “Changes in overall attitudes toward redistribution have very little effect on redistributive policies. Changes in socio-cultural policies are driven largely by change in the attitudes of the affluent, and only weakly (if at all) by the middle class or poor.” They find that when the people get what they want, it’s typically because their views correspond with the affluent, rather than policymakers directly responding to their concerns.

  In another study of Organisation for Economic Co-operation and Development countries, researcher Pablo Torija Jimenez looked at data in 24 countries over 30 years. He examined how different governmental structures influence happiness across income groups and found that today “politicians in OECD countries maximize the happiness of the economic elite.” However, it was not always that way: In the past, left parties represented the poor, the center and the middle class. Now all the parties benefit the richest 1 percent of earners, Jimenez reports.

  In a recent working paper, political scientist Larry Bartels finds the effect of politician’s bias toward the rich has reduced real social spending per capita by 28 percent on average. Studying 23 OECD countries, Bartels finds that the rich are more likely to oppose spending increases, support budget cuts and reject promoting the welfare state — the idea that the government should ensure a decent standard of living.

  <img src=”/content/ajam/opinions/2015/10/the-more-unequal-the-country-the-more-the-rich-rule/_jcr_content/mainpar/adaptiveimage/src.adapt.480.low.AJAMInternationalEquality1a.jpg” alt=”Preferences” class=””>

   

  The same tendencies occur at the state level. Patrick Flavin, a political scientist at Baylor University, examined political responsiveness in the U.S. at the state level. He found that inequality in a state strongly correlates with political representation: More unequal states tend to be less representative.

  “The effect of income inequality is stronger than just about any other state contextual factor that I’ve looked at,” Flavin told me in a recent interview. “For example, it has a stronger predictive effect on the equality of political representation than the partisan composition of the state legislature/governor’s mansion, the median income of a state, or a state’s population.” Similarly, Elizabeth Rigby and Gerald Wright found that in more unequal states, Democrats tend to be less responsive to the poor.

  Some political scientists have found more mixed results internationally. Political scientists James Adams and Lawrence Ezrow found that European democracies are more responsive to “opinion leaders,” or highly politically engaged citizens, than to class differences. “No evidence that European parties respond disproportionately to affluent or highly educated citizens, independently of their responsiveness to opinion leaders,” Adams and Ezrow wrote in 2009. That is, to the extent that the government is more responsive to the affluent, it is because of influential opinion makers among them. However, in a recent Monkey Cage post, Ezrow notes, “levels of economic inequality condition levels of political inequality.”

  What’s the solution to rising inequality of responsiveness? More democracy, for one. In a study published last November, political scientists Yvette Peters and Sander J. Ensink examined political representation and responsiveness in 25 European countries. Using the European Social Survey from 2002 to 2010, they analyzed support for income redistribution policies across various categories.

  “Governments tend to follow the preferences of the rich more than those of the poor,” Peters and Ensink write. “Higher levels of participation in elections seem to lead to reduced differential responsiveness, even though the effect of the poor and the rich on spending is not fully equalized.”

  As I’ve argued previously, there is good reason to believe that increasing voter turnout among the poor and middle class will shift policy in their favor. For example, in a 2013 study, Loyola University’s Vincent Mahler found that voter turnout and class gaps both affect income redistribution.

  Voter turnout, of course, will not entirely solve the problem of differential representation, but it can begin to alleviate it. When turnout is in the low 40s, as it is for many U.S. elections, politicians have no reason to fear losing their seat by only representing the donor class. By contrast, with mass participation, ignoring the desires of the public could cost a representative his seat. Using American National Election Studies data, Syracuse University political scientist Spencer Piston ran a unique analysis for Al Jazeera America. His data show that in terms of median income, the median non-voter is far poorer than the median voter — $32,500 per year compared with $57,500.

  “Preferences of those with money are more likely to influence policy than the preferences of those without money, in no small part because the wealthy engage more in the political process,” Piston told me. “They vote more often, they donate more money, and they are in closer contact with public officials.” These data also understate the wealth of the donor class, since they include all donors. But the megadonors are increasing influential: the richest .01 percent of donors (25,000 people) were responsible for 42 percent of donations in 2012.

  <img src=”/content/ajam/opinions/2015/10/the-more-unequal-the-country-the-more-the-rich-rule/_jcr_content/mainpar/adaptiveimage_1/src.adapt.480.low.AJAMInternationalEquality2a.jpg” alt=”MedianIncome” class=””>

   

  So while voting will partially alleviate political inequality, we also need campaign-finance reforms such as public financing and more robust disclosure rules. Lobbying reforms and limits on campaign contributions have a proven track record at the state level.

  On the whole, there is a strong evidence to suspect that representative democracy is not compatible with deep economic inequality. The American Founding Fathers, classic progressives such as Presidents Theodore and Franklin Roosevelt and commentators such as economist Thomas Piketty are right to worry about how inequality undermines democracy. As FDR warned, “Government by organized money is just as dangerous as government by organized mob.”

   

   

  

  

  

  

  

• Need To Smuggle $10 Million Out Of China? Just Call "Mr Chen"

  Back in September, in the wake of the PBoC’s attempt to transition to a new FX regime, we recapped the method by which Chinese citizens skirt Beijing’s capital controls. 

  As a reminder, Chinese are only permitted to send $50,000 out of the country in any given year, but thanks to the notorious UnionPay conduit, getting around that limit is (or at least “was”) as easy as “buying” a luxury watch in Macau.

  The process is remarkably simple. You pretend to buy something with a credit card, receive cash from the merchant instead of merchandise, sign the receipt, and presto, you’ve successfully executed the capital control end-around.

  Here’s a real world example from Reuters:

  On a recent day at the Choi Seng Jewellery and Watches company, a middle-aged woman strode to the counter past dusty shelves of watches. She handed the clerk her UnionPay card and received HK$300,000 ($50,000) in cash. She signed a credit card receipt describing the transaction as a “general sale”, stuffed the cash into her handbag and strolled over to the Ponte 16 casino next door.

  Now that China has become particularly sensitive to capital outflows, Beijing is attempting to rein in the shenanigans. Xi’s anti-corruption campaign has helped. As we noted last month, the UnionPay end-around was greatly limited when Xi enacted substantial reforms which limited much of this grotesquely open flaunting of Chinese capital account rules. Indirectly, this has led to the recent collapse in Macau GDP – whose businesses no longer booked billions in fake “transactions” – as shown in the chart below:

  

  The problem for China is that there are quite a few reasons to believe that the PBoC is targeting a much larger devaluation before it’s all said and done. This keeps the pressure on as the local population, worried about losing purchasing power in the coming months and years, continues to move money out of the country. As the capital flight accelerates, the PBoC is forced into still more FX interventions to prop up the yuan and that means more FX reserve liquidation. Of course those interventions must be offset with RRR cuts in order to preserve liquidity. But the market interprets rate cuts as more easing (even if, when considered with hundreds of billions in FX reserve drawdowns, the net effect doesn’t amount to much) which only serves to put still more pressure on the yuan, prompting the entire cycle to repeat itself. Throw in a crashing stock market and it’s pretty clear that the outflows aren’t set to abate, or, as we put it previously, “it’s all about expectations and since China needs to boost exports and stimulate its economy – which is the fundamental reason why it proceeded with devaluation in the first place – any stop gap measures to halt the devaluation are doomed to fail.” 

  Now, WSJ is out with a fresh look at China’s underground bank industry, where shadowy go-betweens can connect you with Snickers bar salesmen with names like “Mr. Chen” who can help you smuggle millions out of the country via a network of fraudulent accounts. Here’s more:

  In a warren of tiny shops beneath grimy residential towers, a white-haired man selling Snickers bars and fizzy drinks from a kiosk no larger than a cashier’s booth is figuring out a way to move $100,000 out of China.

  Back to WSJ after that brief interlude:

  That is twice what Chinese are allowed to send out of the country in a year. Licensed banks won’t do it. But middlemen like Mr. Chen, perched in his mini-mart at the front lines of a vast underground currency-exchange and offshore-remittance network, can and often will.

  
  

  “There’s never a certainty that these things can be done,” said Mr. Chen, who declined to give his full name. “But, usually, when things get stricter, the fee will just be a bit higher.”

  “Higher fees,” because the bigger the risk the “Mr. Chens” of the world are taking, the larger their cut and as we’ve said on far too many occasions to count, one place the money invariably ends up is in US real estate: 

  Often hidden behind the façades of convenience stores and tea shops, they cater to a clientele ranging from corrupt officials hiding gains to middle-class Chinese trying to buy overseas property. All believe their money is safer abroad or can bring a higher return, a sentiment that has deepened since this summer’s stock-market plunge.

   

  

  
  

  New York real-estate agent Jiang Jinjin estimated that families of nearly 2,000 Chinese students at Columbia University are looking to buy residential properties. “I didn’t sleep much this summer. Too many kids looking for apartments,” she said.

  So “Mr. Chen” and his Snickers bars and tea are ultimately responsible for the housing arrangements of Chinese students in New York, whose parents are probably more than happy to pay a premium which helps to explain the soaring cost of living in the city. Thanks “Mr. Chen.” Back to WSJ: 

  Much of the activity has moved to cities near the border with Hong Kong and Macau, former foreign colonies with more-open financial systems. Once mainland money gets to Hong Kong, for instance, it can go pretty much anywhere in the world.

  
  

  Sometimes, large sums are divided into legally allowed amounts and then channeled out of the mainland via hundreds of bank accounts controlled by the underground banker. Underground banks also can match yuan deposited with them on the mainland with equivalent amounts in foreign currency paid into a client’s bank account elsewhere.

  Of course these are underground operations after all, which means you shouldn’t expect things to always go as planned, something a Mr. Chan found out when he tried to smuggle CNY63 million out of the country via one of the many “Mr. Chens”:

  In 2012 when Chan Tat, an elderly Hong Kong businessman, sought to move 63 million yuan from his mainland business to Hong Kong for his retirement.

   

  Mr. Chan tapped a friend at a commercial bank, who turned to a Shenzhen underground bank. It split the money into three batches. Each was divided into dozens of smaller chunks, then routed to separate bank accounts controlled by the underground bank, before being wired to Hong Kong. Once in Hong Kong, the money was regrouped in an account controlled by Mr. Chan.

   

  All except for eight million yuan he found missing. Mr. Chan, who couldn’t be reached for comment, tipped off Chinese authorities, according to the police account. 

  Chinese autorities subsequently arrested 31 people, and just to give you an idea of how truly ubiquitious this practice is, the bust netted 1,087 accounts holding some CNY12 billion.

  The 31 suspects were never heard from again. Literally.

  The go-to method among “runners” like “Mr. Chen” – or like “a young man in yellow loafers named Zhuang” whom WSJ also profiles – is “matchmaking” and despite how it sounds, that doesn’t entail connecting you with a Chinese bride: 

  With direct remittances under scrutiny, runners say a preferred method is matchmaking: Give the underground bank a sum, and a matching sum appears in Hong Kong, minus a cut of anywhere between 0.3% and 3%. No money physically or electronically crosses the border; the match is built on networks on both sides controlled by the underground bank.

  Yes, the “sum appears in Hong Kong,” and after that, it’s gone, which helps to explain why China will need to continue to interevene in the offshore market, as the spread between the onshore and offshore yuan (which disappeared amid a flurry of intervention in September) is now blowing out again: 

  

  Finally, for any concerned Chinese intent on circumventing capital controls on the way to protecting your purchasing power, we would note that there are other ways to move money out of the country without transacting with “Mr. Chen” and his yellow loafers at a “tea shop,” and on that note, we leave you with the following chart…

  

  

  

  

  

  

• This Is The $64 Trillion Question From Today's Fed Statement

  While on the surface, there was something in it for both hawks and doves, with the Fed admitting, and adding, that “the pace of job gains slowed” boosting the domestic economic dovish camp (the language about business fixed investment increasing “at solid rates in recent months” will be promptly removed as the recent re-plunge in oil flows through the energy sector’s cash flow statement), it was the hawkishness about the global environment that appears to have been the primary catalyst for today’s rally as it gave the market the impression that the global economic jitters from the past three months are now well in the rear view mirror.

  Specifically, it was the complete removal of the line that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term” and the addition that the fed is “monitoring global economic and financial developments” which were the kicker.

  This is how Bank of America’s Michael Hanson explained this change:

  The October statement removed the notice that “recent global and financial developments” had posed some risks to economic activity and inflation “in the near term.” During the September press conference and in subsequent speeches, Fed officials stressed that they wanted to be prudent in the face of these risks, but had not fundamentally altered their outlook. The FOMC was concerned that downside risks could intensify into a significant global shock, which warranted their caution. But that did not happen, and other central banks have since stepped in to ease and support their domestic economies. Equivalently, the FOMC has indicated that September was an event that got their attention, rather than a shift toward systemic concern about global growth.

  In other words, now that first the PBOC cut rates, the Riksbank boosted its QE, and the ECB (and possibly the BOJ) are about to ease as well, the Fed no longer had the leisurely option of being prevented from not raising rates due to its recently expanded mandate of being global financial regulator, and instead was forced to admit that it is the other central banks’ jobs to police their own financial conditions.

  BofA’s take on this is as follows:

  Today’s statement suggests the FOMC would need to see more bad news globally to not hike — in contrast with the market belief going into today’s meeting that the global outlook would have to improve in order for the Fed to hike.

  This is not entirely correct: a far more accurate way of saying the above is that having suffered the September swoon, Fed is now betting that the recently expanded easing by other central banks should be sufficient to offset the tightened monetary conditions that would accompany a Fed rate hike.

  This also changes the Fed’s baseline assumption that the rest of the world is somehow fixed when it was the soaring dollar strength that unleashed the Chinese devaluation and the Emerging Market debt crisis in the past few months. Today’s surge in the dollar only reminds us f the Fed’s reflexive trap: as long as the Fed postures that a rate hike may come, the dollar will keep rising. And that alone puts us right back on square one.

  The rest of the Fed statement was very much in line, and had to do with domestic economic conditions. On these issues, Bank of America’s assessment was more accurate:

  First, the gradual slowdown in the job market:

  Jobs: soft, but no reversal

   

  … the Fed acknowledged that job growth “slowed” and the unemployment “held steady” since December. But they still stressed the cumulative improvement in labor market conditions, suggesting that may be enough — or nearly enough — to allow them to hike in December. Obviously the markets will be watching the October employment report extremely closely. A number of Fed officials have recently suggested that 100,000 may be the forward-looking equilibrium pace of employment growth. Thus, a jobs report similar to the August and September140,000-range would still be a net improvement in the eyes of many Fed officials. Any further decline in the unemployment rate — as well as the U6 under-employment rate — would give further reason to think about starting to move away from zero in a gradual manner come December.

  Then, the overall economy, where the Fed is also tempering its ambitions:

  Moderate outlook may be enough

   

  The FOMC also maintained that activity is expanding “moderately,” despite the widespread anticipation of a weak 3Q GDP print. In fact, they strengthened the assessment of domestic demand, noting that consumer spending and business investment “have been increasing at solid rates in recent months,” while housing “has improved further.” That suggests the Committee is likely to look past a  soft 3Q GDP growth report; we are tracking 1.5% for GDP but 3.5% for domestic demand in 3Q.

  As noted earlier, the business spending, especially in light of the latest dismal durable goods report, will be struck down, but that will only reinforce the Fed’s gradual admission that the economy is officially fading.

  As for the market’s reaction, first there was the bond market, where the biggest variable was the jump in implied rate hike odds. Remember: the Fed will not hike unless the Fed Fund futures at least modestly expects it, so today’s jump to ~50% December odds, may be all it takes:

  Rates: repricing the liftoff date

   

  US rates increased up to 9 basis points led by the 5y sector, which is most sensitive to the path of near- to medium-term Fed expectations…. We believe the market will continue to focus on the possibility that December will be a live meeting and that a tightening cycle could materialize in coming months, steepening out the implied path of the hiking cycle currently priced in for 2016 and 2017. Indeed, the market-implied probability of a December rate hike shifted higher by around 10 to 15 percent following the statement and may now be in the range where the Fed would be comfortable moving without fear of surprising the market. Should the Fed increase rates in December, we believe they will be cognizant of strained year-end liquidity conditions, but this alone will not be sufficient to dissuade them if they believe a move is warranted.

  This brings up a whole different issue, namely whether the Fed will be able to raise the short-end via reverse repos, but that’s a whole new topic for a different day, as only afterwards will the Fed realize that it is not nearly equipped to push up the trillions parked on the short-end.

  We will be closely watching any communications from the Fed regarding how it will deploy its interest rate management tools and expect the size of overnight and term reverse repo offerings to be increased at the time of the first rate move.

  Last, and even more important than the “global” issue – because they are reflexively related – is the question how the Fed will handle the soaring dollar.

  The USD rallied broadly following the FOMC statement. Against market expectations, the Fed maintained its outlook for “moderate” growth, focusing on the economy’s cumulative improvement since early this year, and removed the risks posed by overseas developments. This suggests a much lower bar for hiking than FX markets had anticipated amidst recently slowing data momentum. Clearly the Fed is data dependent, but with the Fed explicitly signalling December is a “live” meeting the USD will be supported not only as the probability of a hike rises, but also if the market prices a faster pace of hikes thereafter. Combined with the ECB’s strong signal for an expansion and/or extension of QE (and potential depo rate cut) in December last week, rate differentials will once again play be an important FX driver into year-end. With our analysis suggesting much of the USD rally since 2014 driven by overseas developments (not the Fed), a significant shift in Fed expectations has room to propel the USD higher, particularly with positioning at its lowest level since the USD rally began. While Fed hikes could take some pressure off of G10 central banks from easing, it also suggest higher beta currencies could struggle if risk sentiment takes a hit or commodity demand comes down amidst USD strength. 

  The $64 trillion dollar question: “The key question is if the US economy is strong enough to handle a stronger USD.“

  We’ll find out very soon. If the answer is no, this may be the first Fed to succeed in pushing the economy into a recession without ever having raised rates at all, by simply talking the dollar higher, and higher, and higher, just to give the impression that the economy is recovering (when it clearly is not) in the biggest game of monetary chicken in history at a time when every other central bank is rushing to devalue its currency, simply to afford itself a buffer as small as 25 bps which it can then “ease” when the official recession finally arrives.

  

  

  

  

  

• Why The Friedman/Bernanke Thesis About The Great Depression Was Dead Wrong

  Submitted by David Stockman via Contra Corner blog,

  In explaining to the FT’s Martin Wolf why he bailed out the Wall Street gamblers at Goldman Sachs and Morgan Stanley while crushing millions of ordinary American savers and retirees, Bernanke typically repaired to his go to argument. It had nothing to do with the mild excesses of inventories and labor that had built up in the main street economy owing to the Greenspan housing and credit boom, as explained in Part 1.

  That’s because Bernanke was not aiming to ameliorate the mild economic liquidation that ensued after the Lehman event; and which, as previously demonstrated, would have runs its course and self-corrected without any help from the Fed in any event.

  No, Ben S. Bernanke will be someday remembered as the world’s most destructive battleship admiral. Not only was he fighting the last war, but his whole multi-trillion money printing campaign after September 15, 2008 was aimed at avoiding an historical Fed mistake that had never even happened!

  As Bernanke explained it:

  I should have done more (to mitigate anti-Fed sentiments). But I was very much engaged in trying to put out the fire. So I don’t know what to say. It was kind of predictable. The Federal Reserved failed in the 1930s. I think we did much better than in the 1930s.

  The claim that the Fed resorted to “extraordinary policies” of ZIRP and QE because it was fighting a recurrence of Great Depression 2.0 is completely, profoundly, unequivocally and destructively wrong.

  It is the giant fig leaf that obscures what really happened during and after the crisis. Namely, that the main street economy recovered on its own, and that the flood of money generated by Bernanke never left the canyons of Wall Street, thereby causing the destruction of honest price discovery in the financial markets once and for all.

  So doing, the Fed and other central banks have turned financial markets into dangerous, unstable casinos. In the name of precluding the contra-factual——that is, Great Depression 2.0—-they have generated the mother of all financial bubbles.

  There is no other possible outcome than another thundering crash after upwards of 90 months of free money subsidy to the carry trade gamblers and upwards of $19 trillion of rank monetization of the public debt and other existing assets by the Fed and its central bank fellow travelers.

  At the end of the day, however, the monetary mayhem that was unloosed in September 2008 is the responsibility of two professors of economics who got the causes of the 1930-1933 collapse of the US economy completely wrong. In the excerpts below from the Great Deformation, I refute the two great myths that still pop out of journalists’ keyboards whenever the events of September 2008 are touched upon.

  To wit, first, the Fed did not cause the banking crisis of 1930-1933 by failing to undertake a massive bond-buying campaign; and secondly, the banking system was rotten to the core with bad loans and insolvency after the artificial boom of World War I and the follow-on bubbles of the Roaring Twenties. It could not have been fixed with a 1930s version of QE or any other massive intrusion of the central bank.

  WHEN PROFESSOR FRIEDMAN OPENED PANDORA’S BOX: OPEN MARKET OPERATIONS

   

  At the end of the day, Friedman jettisoned the gold standard for a remarkably statist reason. Just as Keynes had been, he was afflicted with the economist’s ambition to prescribe the route to higher national income and prosperity and the intervention tools and recipes that would deliver it. The only difference was that Keynes was originally and primarily a fiscalist, whereas Friedman had seized upon open market operations by the central bank as the route to optimum aggregate demand and national income.

   

  There were massive and multiple ironies in that stance. It put the central bank in the proactive and morally sanctioned business of buying the government’s debt in the conduct of its open market operations. Friedman said, of course, that the FOMC should buy bonds and bills at a rate no greater than 3 percent per annum, but that limit was a thin reed.

   

  Indeed, it cannot be gainsaid that it was Professor Friedman, the scourge of Big Government, who showed the way for Republican central bankers (e.g. Greenspan and Bernanke) to foster that very thing. Under their auspices, the Fed was soon gorging on the Treasury’s debt emissions, thereby alleviating the inconven- ience of funding more government with more taxes.

   

  Friedman also said democracy would thrive better under a regime of free markets, and he was entirely correct. Yet his preferred tool of prosperity promotion, Fed management of the money supply, was far more antidemocratic than Keynes’ methods. Fiscal policy action was at last subject to the deliberations of the legislature and, in come vague sense, electoral review by the citizenry.

   

  By contrast, the twelve-member FOMC is about as close to an unelected politburo as is obtainable under American governance. When in the fullness of time, the FOMC lined up squarely on the side of debtors, real estate owners, and leveraged speculators——-and against savers, wage earners, and equity financed businessmen——-the latter had no recourse from its baleful policy actions.

   

  The greatest untoward consequence of the closet statism implicit in Friedman’s monetary theories, however, is that it put him squarely in opposition to the vision of the Fed’s founders. As has been seen, Carter Glass and Professor Willis assigned to the Federal Reserve System the humble mission of passively liquefying the good collateral of commercial banks when they presented it.

   

  Consequently, the difference between a “banker’s bank” running a discount window service and a central bank engaged in continuous open market operations was fundamental and monumental, not merely a question of technique. By facilitating a better alignment of liquidity between the asset and liability side of the balance sheets of fractional reserve deposit banks, the original “reserve banks” of the 1913 act would, arguably, improve banking efficiency, stability, and utilization of systemwide reserves.

   

  Yet any impact of these discount window operations on the systemwide banking aggregates of money and credit, especially if the borrowing rate were properly set at a penalty spread above the free market interest rate, would have been purely incidental and derivative, not an object of policy. Obviously, such a discount window–based system could have no pretensions at all as to managing the macroeconomic aggregates such as produc- tion, spending, and employment.

   

  In short, under the original discount window model, national employment, production prices, and GDP were a bottoms-up outcome on the free market, not an artifact of state policy. By contrast, open market operations inherently lead to national economic planning and targeting of GDP and other macroeconomic aggregates. The truth is, there is no other reason to control M1 than to steer demand, production, and employment from Washington.

   

  Why did the libertarian professor, who was so hostile to all of the projects and works of government, wish to empower what even he could have recognized as an incipient monetary politburo with such vast powers to plan and manage the national economy, even if by means of the remote and seemingly unobtrusive steering gear of M1?

   

  There is but one answer: Friedman thoroughly misunderstood the Great Depression and concluded erroneously that undue regard for the gold standard rules by the Fed during 1929–1933 had resulted in its failure to conduct aggressive open market purchases of government debt, and hence to prevent the deep slide of M1 during the forty-five months after the crash.

   

  Yet the historical evidence is unambiguous; there was no liquidity shortage and no failure by the Fed to do its job as a banker’s bank.

   

  Indeed, the six thousand member banks of the Federal Reserve System did not make heavy use of the discount window during this period and none who presented good collateral were denied access to borrowed reserves. Conse- quently, commercial banks were not constrained at all in their ability to make loans or generate demand deposits (M1).

  But from the lofty perch of his library at the University of Chicago three decades later, Professor Friedman determined that the banking system should have been flooded with new reserves, anyway. And this post facto academician’s edict went straight to the heart of the open market operations issue.

   

  The discount window was the mechanism by which real world bankers voluntarily drew new reserves into the system in order to accommodate an expansion of loans and deposits. By contrast, open market bond purchases were the mechanism by which the incipient central planners at the Fed forced reserves into the banking system, whether sought by member banks or not.

   

  Friedman thus sided with the central planners, contending that the market of the day was wrong and that thousands of banks that already had excess reserves should have been doused with more and still more reserves, until they started lending and creating deposits in accordance with the dictates of the monetarist gospel. Needless to say, the historic data show this proposition to be essentially farcical, and that the real-world ex- ercise in exactly this kind of bank reserve flooding maneuver conducted by the Bernanke Fed forty years later has been a total failure—a monumental case of “pushing on a string.”

   

  FRIEDMAN’S ERRONEOUS CRITIQUE OF THE DEPRESSION-ERA FED OPENED THE DOOR TO MONETARY CENTRAL PLANNING

   

  The historical truth is that the Fed’s core mission of that era, to rediscount bank loan paper, had been carried out consistently, effectively, and fully by the twelve Federal Reserve banks during the crucial forty-five months between the October 1929 stock market crash and FDR’s inauguration in March 1933.

   

  And the documented lack of member bank demand for discount window borrowings was not because the Fed had charged a punishingly high interest rate. In fact, the Fed’s discount rate had been progressively lowered from 6 percent before the crash to 2.5 percent by early 1933.

   

  More crucially, the “excess reserves” in the banking system grew dramatically during this forty-five-month period, implying just the opposite of monetary stringency. Prior to the stock market crash in September 1929, excess reserves in the banking system stood at $35 million, but then rose to $100 million by January 1931 and ultimately to $525 million by January 1933.

   

  In short, the tenfold expansion of excess (i.e., idle) reserves in the banking system was dramatic proof that the banking system had not been parched for liquidity but was actually awash in it. The only mission the Fed failed to perform is one that Professor Friedman assigned to it thirty years after the fact; that is, to maintain an arbitrary level of M1 by forcing reserves into the banking system by means of open market purchases of Uncle Sam’s debt.

   

  As it happened, the money supply (M1) did drop by about 23 percent during the same forty-five-month period in which excess reserves soared tenfold. As a technical matter, this meant that the money multiplier had crashed. As has been seen, however, the big drop in checking account deposits (the bulk of M1) did not represent a squeeze on money. It was merely the arithmetic result of the nearly 50 percent shrinkage of the commercial loan book during that period.

   

  As previously detailed, this extensive liquidation of bad debt was an unavoidable and healthy correction of the previous debt bubble. Bank loans outstanding, in fact, had grown at manic rates during the previous fifteen years, nearly tripling from $14 billion in 1914 to $42 billion by 1929. As in most credit- fueled booms, the vast expansion of lending during the Great War and the Roaring Twenties left banks stuffed with bad loans that could no longer be rolled over when the music stopped in October 1929.

   

  Consequently, during the aftermath of the crash upward of $20 billion of bank loans were liquidated, including billions of write-offs due to business failures and foreclosures. As previously explained, nearly half of the loan contraction was attributable to the $9 billion of stock market margin loans which were called in when the stock market bubble collapsed in 1929.

   

  Likewise, loan balances for working capital borrowings also fell sharply in the face of falling production. Again, this was the passive consequence of the bursting industrial and export sector bubble, not something caused by the Fed’s failure to supply sufficient bank reserves. In short, the liquidation of bank loans was almost exclusively the result of bubbles being punctured in the real economy, not stinginess at the central bank.

   

  In fact, there has never been any wide-scale evidence that bank loans outstanding declined during 1930–1933 on account of banks calling performing loans or denying credit to solvent potential borrowers. Yet unless those things happened, there is simply no case that monetary stringency caused the Great Depression.

   

  Friedman and his followers, including Bernanke, came up with an academic canard to explain away these obvious facts. Since the wholesale price level had fallen sharply during the forty-five months after the crash, they claimed that “real” interest rates were inordinately high after adjusting for deflation.

   

  Yet this is academic pettifoggery. Real-world businessmen confronted with plummeting order books would have eschewed new borrowing for the obvious reason that they had no need for funds, not because they deemed the “deflation-adjusted” interest rate too high.

   

  At the end of the day, Friedman’s monetary treatise offers no evidence whatsoever and simply asserts false causation; namely, that the passive decline of the money supply was the active cause of the drop in output and spending. The true causation went the other way: the nation’s stock of money fell sharply during the post-crash period because bank loans are the mother’s milk of bank deposits. So, as bloated, insolvent loan books were cut down to sustainable size, the stock of deposit money (M1) fell on a parallel basis.

   

  Given this credit collapse and the associated crash of the money multiplier, there was only one way for the Fed to even attempt to reflate the money supply. It would have been required to purchase and monetize nearly every single dime of the $16 billion of US Treasury debt then outstanding.

   

  Today’s incorrigible money printers undoubtedly would say, “No problem.” Yet there is no doubt whatsoever that, given the universal antipathy to monetary inflation at the time, such a move would have triggered sheer panic and bedlam in what remained of the financial markets. Needless to say, Friedman never explained how the Fed was supposed to reignite the drooping money multiplier or, failing that, explain to the financial markets why it was buying up all of the public debt.

   

  Beyond that, Friedman could not prove at the time of his writing A Monetary History of the United States in 1965 that the creation out of thin air of a huge new quantity of bank reserves would have caused the banking system to convert such reserves into an upwelling of new loans and deposits. Indeed, Friedman did not attempt to prove that proposition, either. According to the quantity theory of money, it was an a priori truth.

   

  In actual fact, by the bottom of the depression in 1932, interest rates proved the opposite. Rates on T-bills and commercial paper were one-half percent and 1 percent, respectively, meaning that there was virtually no unsatisfied loan demand from credit-worthy borrowers.

   

  The dwindling business at the discount windows of the twelve Federal Reserve banks further proved the point. In September 1929 member banks borrowed nearly $1 billion at the discount windows, but by January 1933 this declined to only $280 million. In sum, banks were not lending because they were short of reserves; they weren’t lending because they were short of solvent borrowers and real credit demand.

   

  In any event, Friedman’s entire theory of the Great Depression was thoroughly demolished by Ben S. Bernanke, his most famous disciple, in a real-world experiment after September 2008. The Bernanke Fed undertook massive open market operations in response to the financial crisis, purchasing and monetizing more than $2 trillion of treasury and agency debt.

   

  As is by now transparently evident, the result was a monumental wheel-spinning exercise. The fact that there is now $2.7 trillion of “excess re- serves” parked at the Fed (compared to a mere $40 billion before the crisis) meant that nearly all of the new bank reserves resulting from the Fed’s bond-buying sprees have been stillborn.

   

  By staying on deposit at the central bank, they have fueled no growth at all of Main Street bank loans or money supply. There is no reason whatsoever, therefore, to believe that the outcome would have been any different in 1930–1932.

  By contrast, the real cause of the Great Depression was the massive and unsustainable expansion of credit and bank lending during the Great War of 1914-1918, and the financial boom of 1924-1929.

  *  *  *

  Ironically, both of these credit bubbles were financed by the newly created Federal Reserve, as outlined in the additional sections from The Great Deformation. Indeed, even the famous banking crisis of 1933 was not what it is cracked-up to be. As explained below, both the recession and the banking crisis were over by the summer of 1932; a Hoover Recovery had actually begun.

  Indeed, the banking holiday declared by FDR upon his inauguration was the result of a 10-day run on the banks that had been caused by his actions during February 1933. In short, Bernanke has spent the last 7-years claiming he stopped a bank run like that of the 1930s, when, in fact, the actual pre-Roosevelt bank run had nothing whatsoever to do with policy actions by the Federal Reserve:

  THE GREAT WAR AND THE ROARING TWENTIES: CRADLE OF THE GREAT DEPRESSION

  FDR’s mortal blow to international monetary stability and world trade is the pattern through which the New Deal was shaped. Once Roosevelt went for domestic autarky, the New Deal was destined to be a one-armed bandit. It capriciously pushed, pulled, and reshuffled the supply side of the domestic economy, but it could not regenerate the external markets upon which the post-1914 American prosperity had vitally depended.

  Herbert Hoover had been correct: the US depression was rooted in the collapse of global trade, not in some flaw of capitalism or any of the other uniquely domestic afflictions on which the New Deal programs were predicated. Indeed, the American economy had been thoroughly internationalized after August 1914 and had grown by leaps and bounds as a great export machine and prodigious banker to the world.

  While it lasted, the export boom of 1914–1929 generated strong gains in growth had averaged nearly 4 percent annually, a rate that has never again been matched over a comparable length of time.

  The trouble was that this prosperity was neither organic nor sustainable. In addition to the debt-financed demand for American exports, stock market winnings and the explosion of consumer debt generated exuberant but unsustainable household purchases of big-ticket durables at home. So when the stock market finally broke, this financially fueled chain of economic expansion snapped and violently unwound.

  The first victim was the foreign bond market, which was the subprime canary in the coal mine of its day. Within a few months of the crash, new issuance had dropped 95 percent from its peak 1928 levels, causing foreign demand for US exports to collapse. Worse still, the price of the nearly $10 billion of foreign bonds outstanding also soon plunged to less than ten cents on the dollar, meaning that the collapse was of the same magnitude and speed as the subprime mortgage collapse of 2008.

  Foreign debtors had been borrowing to pay interest. When the Wall Street music stopped in October 1929, the house of cards underlying the American export bonanza collapsed. By 1933, US exports had dropped by nearly 70 percent.

  The Wall Street meltdown also generated ripples of domestic contraction which compounded the export swoon. Stock market lottery winners, for example, had been buying new automobiles hand over fist. But after sales of autos and trucks peaked at 5.3 million units in 1929, they then dropped like a stone to only 1.4 million vehicles in 1932. Needless to say, this 75 percent shrinkage of auto sales cascaded through the auto supply chain, including metal working, steel, glass, rubber, and machine tools—with devastating impact.

  The collapse of these “growth” industries also caused a withering cutback in business investment. Plant and equipment spending tumbled by nearly 80 percent between 1929 and 1933, while nearly half of all the production inventories extant in 1929 were liquidated over the next three years. This unprecedented liquidation of working inventories—from $38 billion to $22 billion—amounted to nearly a 20 percent hit to GDP before the cycle reached bottom.

  Overall, nominal GDP had been $103 billion in 1929 but by 1933 had shrunk to only $56 billion. Yet the overwhelming portion of this unprecedented contraction was in exports, inventories, fixed plant and equipment, and consumer durables. These components declined by $33 billion during the four years after 1929 and accounted for fully 70 percent of the decline in nominal GDP.

  The underlying story in these data refutes the postwar Keynesian narrative about the Great Depression. What happened during 1929–1932 was not a mysterious loss of domestic “demand” that was somehow recoverable through enlightened macroeconomic stimulus policies. Instead, what occurred was an inevitable shrinkage in the unsustainable levels of output that had been reached by exports, durables, and a once-in-a-life-time capital investment boom, not unlike the massive China investment cycle of 1994–2015.

  It was not the depression bottom level of GDP during 1932–1933 that was avoidably too low; it was the debt and speculation bloated GDP peak of 1929 that had been unsustainably too high. Accordingly, the problem could not be solved by macroeconomic pump-priming at home. The Great Depression was therefore never a candidate for the Keynesian cure which was inherently inward looking and nationalistic.

  The frenetic activity of the first hundred days of the New Deal, of course, is the stuff of historians’ legends. Yet when viewed in the context of this implosion of the nation’s vastly inflated export/auto/capital goods sector, it’s evident that the real cure for depression did not lie in the dozens of acronym-ridden programs springing up in Washington.

  Contrary to the long-standing Keynesian narrative, therefore, the New Deal contributed virtually nothing to the mild recovery which did materialize during the six-year run-up to war in 1939. In fact, the modest seesaw expansion which unfolded during that period had been already set in motion during the summer of 1932, well before FDR’s election.

   

  THE HOOVER RECOVERY INTERRUPTED

  The New Deal hagiographers never mention that 50 percent of the huge collapse of industrial production, that is, the heart of the Great Depression, had already been recovered under Hoover by September 1932. The catalyst for the Hoover recovery was not Washington-based policy machinations but the natural bottoming of the severe cycle of fixed-asset and inventory liquidation after 1929.

  By mid-1932, the liquidation had finally run its course because inventories were virtually gone, and capital goods and durables production could hardly go lower. Accordingly, nearly every statistic of economic activity turned upward in July 1932. From then until the end of September, the Federal Reserve Board index of industrial production rose by 21 percent, while rail freight loadings jumped by 20 percent and construction contract awards rose by 30 percent.

  Likewise, the American Federation of Labor’s published count of industrial unemployment dropped by nearly three-quarters of a million persons between July 1 and October 1. Retail sales and electrical power output also rose smartly in the months after July, and some core industry which had been nearly prostrate began to spring back to life.

  Cotton textile mill manufacturing, for example, surged from 56 percent of capacity in July to 97 percent in October, and mill consumption of wool nearly tripled during the same period. Likewise, the giant US Steel Corporation, which then stood at the center of the nation’s industrial economy, recorded its first increase in sixteen months in its order backlog.

  Related indicators also confirmed a broad and vigorous recovery. Wholesale prices rose by nearly 20 percent from their early 1932 bottom, marking the first sustained uptick since September 1929. The stock market quickly grasped the picture and rebounded from its depression low on the Dow Jones Index of 41 on July 7, 1932, to 80 in early September, before fears of a Roosevelt victory set it back.

  The most important sign of economic rebound, however, was in the be- leaguered banking sector. After having experienced nearly three hundred bank closings per month for much of the post-1929 period, bank failures dropped sharply to only seventy to eighty closings a month after June.

  Indeed, for the period of July through October 1932, deposits held by banks which were reopened during that interval exceeded those of newly failed banks, a complete break with the month-after-month deposit losses that had occurred until then. In a similar vein, the United States experienced five straight months of gold inflows after July, indicating that the panicked gold flight that had commenced after the British default of Sep- tember 1931 had decisively reversed.

  As one careful journalistic reconstruction of events published during this period noted, “With the defeat of all threatening inflationary legislation in June . . . [and] the complete restoration of foreign confidence in the American gold position—the breath of recovery began to be felt over the land.”

  No less an authority on the national mood than Walter Lippmann, then at the peak of his game and influence, later summarized, “There is very good statistical evidence . . . that as a purely economic phenomena the world depression reached its low point in mid-summer 1932 and that in all the leading countries a very slow but nevertheless real recovery began.”

  By election time, however, the rebound had cooled. Subsequently, all the indicators of economic and financial activity weakened sharply during the long interregnum between Election Day and the March 4, 1933, inauguration.

  As outlined below, there is powerful evidence that this setback can be attributed to a “Roosevelt panic” in the gold and banking markets that was avoidable and the result of FDR’s numerous errors and provocations during the presidential interregnum. The fact is, every other major industrial country in the world also began to recover in July 1932, but none had a relapse back into depression during the winter of 1932–1933.

   

  THE BANKING CRISIS THAT FDR MADE

  The Hoover recovery has largely been omitted from the history books, fostering the impression that the American economy had continuously plunged after October 1929 until it reached a desperate bottom on exactly March 4, 1933. That rendition of events was far from accurate, but it did mightily burnish the Roosevelt miracle legend; namely, that FDR decisively reopened the frozen banking system, restarted the wheels of commerce, and restored a heartbeat to capitalism through the swarm of acronyms which flew out of New Deal Washington during the Hundred Days.

  But the received version of the March 1933 banking crisis is an invention of Arthur Schlesinger Jr. and other postwar commentators who postulated FDR’s “bank holiday” as the dividing line between Hooverian darkness and the Roosevelt miracles. By contrast, the most savvy and erudite financial observers at the time saw it far differently, and for a very good reason: on the Friday evening before Roosevelt’s inauguration most of the US banking system was still solvent, including the great money center banks of New York: the Chase National Bank, First National City Bank, the Morgan Bank, and many more.

  Indeed, the latter had to be practically coerced into agreeing to the New York State banking holiday signed into effect by Governor Lehman at 4:30 a.m. in the wee hours before FDR’s inauguration. As it happened, the governor was a scion of the banking house bearing his name, but the circumstances of 1933 were the opposite of those which accompanied its demise in 2008.

  Back then there had been no bank runs in the canyons of Wall Street because the great banks had largely observed time-tested standards; that is, they had been fully and adequately collateralized on their stock loans and were sitting on cash reserves up to 20 percent of deposits. The stock market crash of 1929–1930 had been brutal, of course, but in those purportedly be- nighted times officialdom had the good sense to allow Mr. Market to make his appointed rounds.

  Accordingly, stock market punters by the thousands had been felled quickly and cleanly when upward of $9 billion of margin loans were called after Black Thursday. Indeed, the banks and brokerages liquidated in a matter of months the massive margin loan bubble—$1 trillion in today’s economy—that had built up under the stock averages in the final years of the mania.

  The fact that none of the great New York money center banks closed their doors during the four years between the crash and FDR’s inauguration points to the real story; namely, that the bank insolvency problem had been in the provinces and countryside, not the nation’s money center.

  In fact, the run of bank failures was largely contained within the borders of the oversized 1914–1929 agricultural and industrial export economy. As the latter collapsed, overloaned banks in industrial boom towns like Chicago, Detroit, Toledo, Youngstown, Cleveland, and Pittsburgh had taken heavy hits.

  In the case of the agricultural hinterlands, the Great Depression had started to roll in a decade before the crash, owing to the unique farm country boom and bust which had accompanied the Great War. The unprecedented total industrial-state warfare of 1914–1918 had drastically disrupted European agricultural production and markets, inducing an explosion of export demand, high prices, and soaring output in the American farm belt. There soon followed an orgy of speculation in land and real estate that ex- ceeded in relative terms even the sand-state housing boom of 2002–2007.

  Once the agricultural lands of Europe came back into production, how- ever, the great American granary lost much of its artificial war-loan export market, causing farm prices to abruptly plunge in 1920–1921 and then to continue sinking for the next decade. Not surprisingly, thousands of one-horse banks dotting the countryside had been caught up in the wartime frenzy and then suffered massive, unrelenting losses during the long post- war deflation of the farm bubble.

  Overall, about 12,000 banks failed during 1920–1933, but 10,000 of these were tiny rural banks located in places of less than 2,500 population. Their failure rate of more than 1,000 per year throughout the 1920s makes for eye-catching historical statistics, but they were largely irrelevant to the nation’s overall GDP.

  Losses at failed US banks during the entire twelve-year period through 1932, in fact, accumulated to only 2–3 percent of deposits. This extended wave of failures was an indictment of the short-sighted anti-branch banking laws that rural legislators had forced upon the states, as well as a reminder that wartime inflation and disruption had cast a long shadow on the future.

  The crucial point, however, is that these thousands of failed banks were insolvent and should have been closed. They were not evidence of some fundamental breakdown of the banking system, or failure of the Fed to supply adequate liquidity, or a systemic crisis of capitalism.

  Even after the 1929 crash, when the failure rate accelerated to about 2,400 in the twelve months ending in mid-1932, the periodic spurts of bank closures were not national in scope. Instead, they struck with distinct regional incidence in the agricultural and industrial interior. And almost without exception, these regional bank failure breakouts were centered on cities or banking chains which had indulged heavily in speculative real estate lending and other unsound practices.

  That was certainly the case with the first significant outbreak of bank runs in November 1930 when the Caldwell banking chain collapsed. A speculative pyramid of holding companies which controlled more than a hundred banks in Tennessee, Arkansas, and North Carolina, it failed when real estate values fell sharply in the upper Cotton Belt. While there was some spillover on local banks, the runs did not spread beyond the region and quickly burned out because deposits were moved to sounder banks, not to mattresses.

  The most powerful evidence of the noncontagious nature of the pre–February 1933 bank failures occurred shortly thereafter with the famous collapse of the Bank of the United States in December 1930. An upstart New York City bank, the Bank of the United States, grew by leaps and bounds in the late 1920s through serial mergers, aggressive real estate lending, and pyramiding of holding company capital.

  The bank had been a stock market rocket ship, rising from $5 per share in 1925 to a peak of $230 before the crash. But its promoter, one Bernard Marcus, who had been the Sandy Weill of his day, had been more adept at making deals than making sound loans, and thereby soon rendered his hastily assembled banking empire insolvent. Yet there was virtually zero spillover to other New York banks when state banking supervisors shut- tered what was then the city’s third-largest institution with around seventy branches and deposits on the order of $30 billion on today’s scale.

  The same pattern occurred the following June in Chicago. There had been a giant real estate bubble in the Chicago suburbs during the 1920s, but owing to Illinois’s particularly restrictive anti-branch-banking law the Great Loop banks had been sidelined, leaving the suburban real estate lending spree to poorly capitalized newbies.

  Chicago had been an epicenter of the 1914–1929 agricultural/industrial/export boom, so when the party ended abruptly after the stock market crash, the region’s economy was hit harder than any other industrial center outside of Detroit. Real estate prices experienced a particularly devastating collapse in the newly developed suburban communities, triggering a wave of defaults in loan portfolios which were heavily laden with commercial and residential mortgages.

  Yet with one exception a year later, the Great Loop banks remained solvent and experienced no lines at their teller windows. By contrast, the “runs” on the suburban banks were both swift and warranted because they were deeply insolvent.

  In short, the Chicago case further illuminates the fact that the wave of bank failures during 1930–1932 was not the result of irrational public sentiment and “contagion,” or a fundamental breakdown of bank liquidity, but instead was evidence of a discriminating, rational flight of depositors from unsound banks and markets.

  Even when surges of bank failures extended eastward, such as in the Philadelphia runs of October 1931, there was far more rationality to the pattern than the conventional narrative acknowledges. In this case, the overwhelming share of failures was concentrated among newly formed “trust banks” which had been chartered under state law with far less stringent requirements for capital and cash reserves than was the case with national banks.

  Again, the late 1931 wave of bank failures in Philadelphia quickly burned out after deposits had moved from the lightly regulated trust banks, which had been on the leading edge of real estate lending and securities speculation, to the far better capitalized national banks. Indeed, the fundamental solvency of the US banking system was dramatically evidenced during this same period when the Fed raised the discount rate in mid-October.

  This Fed action is habitually and roundly criticized by contemporary advocates of central bank money printing, but it was actually the proper move under then-extant gold standard rules. Specifically, the initial impact of the British default on September 1931 had been a run on US gold out of fear that the United States would be the next to default. So a discount rate hike was necessary to stop the outflow and, in fact, the rate of gold losses fell sharply in the months ahead and eventually reversed to an inflow by mid-1932.

  More importantly, there was no acceleration of bank failures after the discount rate hike, and within weeks the failure rate slackened dramatically while discount borrowings actually increased. This was proof positive that banks were failing not because they were illiquid or could not get emergency funding from the Fed but because they were, alas, bankrupt.

  Indeed, Herbert Hoover’s unfortunate banking cure at the time—the emergency enactment of the Reconstruction Finance Corporation (RFC) in January 1932—was designed to alleviate insolvency, not provide emer- gency funding or replace hoarded deposits. Accordingly, the RFC went on to become a paragon of crony capitalism, rescuing dozens of busted railroads and recapitalizing several thousand insolvent banks.

  Yet the outcome was perverse: the stock and bondholders of bailed-out institutions were rescued, competitors were harmed, and the nation’s economy was left to slog it out with far too much railroad capacity and way too many banks that were deeply insolvent.

  *  *  *

  The Banking Crisis Was Over Before FDR Got Started

  …..The trigger for the pre-election panic, in fact, did not occur until the morning of February 14, when the governor of Michigan capriciously declared a one-week bank holiday owing to a funding crisis at Detroit’s second-largest banking chain. The Guardian Trust Group consisted of about forty banks controlled by Edsel Ford and included Goldman Sachs among its principle stockholders.

  It was another of the late-1920s banking pyramids that had been organized with a modest $5 million of capital in 1927 and had grown to a $230 million holding company two years later, through a spree of mergers and stock swaps. These maneuvers elevated the stock price from $20 per share to $350 at the 1929 peak.

  Unfortunately, the bank’s principle assets consisted of loans to insiders to buy the bank’s own stock and loans to both real estate developers and homeowners in the red-hot Detroit auto belt. Propelled by a population explosion from 300,000 to 1.6 million in the previous three decades, the volcanic price gains in the Detroit real estate market eclipsed the current era’s Sunbelt booms by orders of magnitude.

  Consequently, when auto production dropped by 75 percent and triggered mass layoffs, and the Guardian Group’s stock price plummeted by 95 percent, the bank’s loan book became hopelessly impaired. However, what might have been embarrassing investment liquidation for Edsel Ford and his cronies became a national headline when the Guardian Group crisis turned into a brawl between Henry Ford and his despised erstwhile partner and then Michigan Democratic senator, James Couzens.

  Senator Couzens was the Tyler Winklevoss (he and his twin brother were involved in the origins of Facebook) of his day and believed that he had been bilked out of his share of Ford Motor Company by Henry Ford. He could not abide a move afoot to have the RFC ride to the rescue of Edsel Ford’s mess, so he mustered his considerable weight as US senator and put the kibosh on the deal.

  President Hoover unhelpfully got himself in the thick of the brawl. However, he did quickly recognize that the Detroit headlines were becoming a catalyst for a financial panic that was already brewing due to a complete breakdown of transition cooperation and FDR’s studied silence on his prospective financial policies.

  Indeed, the increasing flow of hints and leaks from FDR’s radical brain trusters—such as Columbia professor Rexford Tugwell and secretary of agriculture designate Henry Wallace—that the incoming president would depreciate the dollar and pursue other inflationary schemes had already begun to trigger a run on gold and currency.

  Therefore, on February 18 Hoover penned an eloquent private letter to FDR outlining the peril from these developments and the urgent need for a reassuring statement from the President-elect outlining his policies with respect to gold, currency, banking and the budget…..

  By Monday morning February 27, Tugwell’s leak spread far and wide in the financial markets. The panic was on.

  As Professors Nadler and Bogen noted in their classic 1933 history of the banking crisis, the “gold room” of the New York Federal Reserve Bank soon became a center of pandemonium: “As the panic week [February 27 to March 3] progressed, long lines formed to exchange ever larger amounts of gold there, until finally the metal was being carried away in large boxes and suitcases loaded on trucks.”

  During the next five days approximately $800 million, or 20 percent, of the US gold stock was withdrawn by citizens, earmarked by foreign central banks, or implicitly purchased by speculators who took out a massive short position on the dollar. The lessons of the British default of September 1931 were still fresh, and as the smart money took aggressive actions to defend itself, the knock-on effect was almost instantly felt.

  As Wall Street historian Barrie A. Wigmore noted in his magisterial history of the Great Depression, owing to the gold hemorrhage “the lender of last resort [i.e., the Fed] for the banking system was in doubt. Frightened depositors lined up for cash, the only working substitute for bank deposits.”

  Wigmore’s point is dispositive. What financially literate citizens knew at the time, and was never grasped by postwar Keynesians, is that Federal Reserve currency notes were then required by statute to be backed by a 40 percent gold cover. The public therefore realized that only a few more days of the panicked gold drain could cause a sharp constriction of both the hand-to-hand currency supply and the banking system overall.

  Accordingly, the daily currency figures provide ringing evidence of FDR’s culpability for the crisis. By February 23, the daily increase in currency out- standing had risen from the $8 million early February level to about $40 million, and then in the crisis week soared to nearly $200 million on Monday and hit $450 million on Friday, March 3, the day before the inauguration.

  All told, the great bank teller window run and currency-hoarding crisis caused currency outstanding to rise from $5.6 billion to a peak of $7.5 billion. Yet $1.5 billion, or nearly 80 percent, of this gain occurred during the last ten days before FDR took office; that is, in the interval between the day Carter Glass said no and the morning FDR took the oath.

  Barrie Wigmore’s work consists of seven hundred pages of massive documentation and only occasional viewpoints and judgments. But on the question of culpability for the banking crisis he left no doubt: “Roosevelt exacerbated the crisis. If he had handled the ‘lame duck’ period differently, there would have been no Bank Holiday . . . the banking system was un- usually liquid prior to the bank crisis, and [the] recovery from it was unusually rapid . . . [proving] that the peculiar circumstances of Roosevelt’s transition were the cause of the crisis.”

  Four days after FDR officially closed the nation’s 17,000 banking institutions, the Senate approved, after seventy-five minutes of debate and no written copy of the bill, the Emergency Banking Act, which empowered the secretary of the treasury “to re-open such banks as have already been as- certained to be in sound condition.”

  But there was no New Deal magic in the bill at all. It had been drafted by Hoover holdovers and was a content-free enabling act which required no change whatsoever in bank procedures in order to obtain a license to “re- open,” and included no standards for review or approval by the Treasury Department.

  In fact, the legislation was the first of many FDR ruses. Once Hoover had been implicitly saddled with the blame for what appeared to be a frozen banking system and prostrate economy on March 4, FDR simply moved along to another topic, having had no intention of closing or reforming any banks.

  Accordingly, with such dispatch as would have made Internet-era number crunchers envious, the White House began opening banks the next Monday (March 13th), and by Wednesday 90 percent of the deposit basis among national banks had been reopened.

  Within the following ten days nearly all of the $2 billion in hoarded currency had flowed back into the banking system, and the Fed’s gold reserves soon reached pre-crisis levels. By early April, fully 13,000 banks with $31 billion of deposits were open and more than 2,000 more quickly followed after they had been given RFC capital injections.

  By contrast, at year-end 1933 only a thousand mostly tiny rural banks with aggregate deposits of less than $1 billion had been closed, thus demonstrating that at the time of FDR’s banking crisis only 3 percent of the nation’s bank deposits were still in insolvent institutions. In effect, the severe business cycle liquidation of the Great Depression was over even before Roosevelt was elected, and within weeks of his self-instigated banking crisis the US economy had resumed its natural rebound.

  By June 1933, economic activity levels attained in the previous September had been regained and a slow upward climb ensued, led by the steady replenishment of fixed assets and working capital. To be sure, recovery was greatly attenuated by the shutdown of international trade, but in a process that was drawn and halting, nominal GDP eventually reached the $90 billion level by 1939. After seven years of New Deal medication, the nation’s money income was still straining to reach its 1929 level.

  

  

  

  

  

• Illinoisans Look To "Get Lucky" In Other States After Lottery IOU Debacle

  Two weeks ago, Illinois Comptroller Leslie Geissler Munger announced that the state would skip a $560 million pension payment in November thanks to the budget battle in Springfield. The news marked the latest embarrassment in a string of setbacks tied to an increasingly serious financial crisis that was thrust into the national spotlight in May when the State Supreme Court’s decision to strike down a pension reform bid prompted Moody’s to downgrade Chicago to junk.

  As we documented back in August, the state is in fact so broke that it’s begun paying lottery winners in IOUs. 

  The practice of handing out Rauner bucks instead of Federal Reserve notes was initially limited to those who won more than $25,000, but in the wake of Geissler Munger’s announcement, the upper limit on cash payouts was reduced to just $600. That followed directly on the heels of our prediction that “anyone who wins more than a few thousand in the Illinois lottery can go ahead and figure on getting a pieces of paper with Bruce Rauner’s picture rather than Ben Franklin’s for the foreseeable future.” 

  Now that Illinois isn’t paying out lottery winners, Illinoisans are simply driving to other states to play. Here’s The Chicago Tribune:

  With Illinois delaying payouts of more than $600 because of its budget mess, neighboring states are salivating at the chance to boost their own lottery sales. Businesses near borders, particularly in Indiana, Kentucky and Iowa, say they’ve already noticed a difference.

   

  Many gas stations, smoke shops and convenience stores in states bordering Illinois say they first noticed an increase in August, when the state said payouts over $25,000 would have to wait because there wasn’t authority to cut checks that big. Now those businesses are reporting a bigger flurry since Oct. 14, when the Illinois Lottery announced it had lowered that threshold to payouts over $600.

   

  Idalia Vasquez, who manages a GoLo gas station in Hammond, said irked Illinois residents have been streaming in to buy lottery tickets. She estimates ticket sales are up as much as 80 percent since Illinois’ second delay announcement.

   

  “We have long lines, but they’re patient with it because Illinois is not paying,” Vasquez said of the store roughly 20 miles from Chicago. “They’re all coming here and saying, ‘I’m from Illinois, how do you play it here?'”

   

  The Hoosier Lottery even issued a statement welcoming Illinoisans.

   

  In Kentucky’s McCracken County, along Illinois’ southern border, there was a 13 percent jump in scratch-offs from July 1 through Oct. 9, compared with a 9 percent jump statewide.

   

  One retailer with higher sales is Paducah’s Kentucky Tobacco Outlet, where most of the customers are already from Illinois. According to manager Michael Coomer, those customers are now buying more and say trust in Illinois is gone.

   

  “It’s definitely known and very vocal,” he said of Illinois’ problems. “It’s definitely going to be better for us.”

  Yes, “definitely better” for neighboring states and definitely worse for Illinois. Note that this will only make the budget situation worse. That is, by not paying out lottery winners, Springfield has essentially sent all of the potential revenue from ticket sales across the state’s borders meaning the move to limit payouts is actually now set to exacerbate the conditions which forced the state to pay in IOUs in the first place. 

  Illinois likely won’t get much sympathy though because as State Rep. Jack Franks put it earlier this year:

  “…our government is committing a fraud on the taxpayers, because we’re holding ourselves out as selling a good, and we’re not — we’re not selling anything. The lottery is a contract: I pay my money, and if I win, you’re obligated to pay me and you have to pay me timely. It doesn’t say if you have money or when you have money.”

  

  

  

  

  

• The Battle For America

  Trouble with ‘Social Justice Warriors’? Who ya gonna call?

   

  

   

  Source: Ben Garrison

  

  

  

  

  

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