Sunday, November 21, 2010

Chinese EMP Attack Prompts US Missile Strike

A new report circulating in the Kremlin today prepared for Prime Minister Putin by Director Anatoly Perminov of the Russian Federal Space Agency states that an Arkon-1 military satellite monitoring the western coastal regions of North America detected an “EMP anomalous event” occurring on November 8th at 0600 Pacific Standard Time (-8 hours GMT) that bore the “direct signature” of a YJ-62 subsonic anti-ship missile fired from a Chinese People’s Liberation Navy Type 041 submarine (NATO code name Yuan-Class) [photo 2nd left] known to be patrolling approximately 200 kilometers off United States coast.

Nearly 11 hours after this EMP “event”, this report further says, Arkon-1 then detected a BGM-109 (Tomahawk) subsonic cruise missile launched from a US Navy Ohio-Class submarine operating off the coast of California [photo bottom left] on a “training mission” from its home port located at US Navy’s Kitsap Base in Washington State and was enroute to the largest American Naval Base on the US west coast in San Diego, California.

Note: A Russian military intelligence (GRU) addendum to this report states that the “training mission” the Ohio-Class submarine was on is related to a new US law passed this year allowing for the first time in history for women to serve on US Navy subs and was an “operational exercise” testing female Naval Officers competence prior to their first “operational deployment”.

The “immediate effect” of the Chinese Navy’s firing of their EMP missile, this report continues, was the catastrophic crippling of the US based cruise ship Carnival Splendor [photo 3rd left] that stranded its nearly 4,500 passengers and crew in a “dead in the water” boat and prompting the Americans to send the US Navy’s Ronald Reagan aircraft carrier, warplanes, and supply aircraft to protect it from further attack after all of its electronic systems were destroyed.

An electromagnetic pulse (EMP) such as was used upon the Carnival Splendor is a burst of electromagnetic radiation that causes rapidly changing electric fields (or magnetic fields) that when coupling with electrical/electronic systems produces damaging current and voltage surges destroying all non-hardened electrical systems.

The US Naval Surface Warfare Center (NSWC) had previously warned that American ships were vulnerable to such attacks with EMP Assessment Group Leader of Blaise Corbett stating that “the consequences of failing to take appropriate precautions to protect fleet mission critical systems can ultimately prove catastrophic to the Navy’s mission.”

The purpose of this Chinese EMP upon an American ship, this report says, was twofold: 1.) A test of the EMP weapon itself that in a war against the Americans and would be used against their Naval Fleet and Marine Forces operating out of California and the west coast of the US, and 2.) A test of the response time for American retaliatory measures against any Chinese warship attacking the US and/or its interests in the Pacific.

The GRU further states that the timing of this attack was timed even more crucially due to China’s testing of America’s response time during a period when their President, as Commander In Chief of all US Military Forces, was out of the country, as Obama was as he was in India at the time.

The Americans response time of nearly 11 hours between the EMP attack on the Carnival Splendor and the US retaliatory strike, the GRU states, “virtually assured” that the Chinese submarine responsible for the attack escaped, but which they further point out may have been intended by the Americans so as not to escalate this crisis.

To the geo-political reason(s) for a Communist Chinese attack upon the Americans just days before the crucially important G-20 Summit in South Korea, which both President’s Hu and Obama will be attending, this report says was due to the United States, in essence, declaring total economic war upon the rest of the world by its printing of nearly $1 Trillion US Dollars in order to monetize its staggering debt and that China warned:

“If the United States can increase the volume of dollars and it can transmit inflation to other countries to lessen the pressure of debt, then it will bring about a catastrophic influence on the world.”

Typical of the United States propaganda media organs in telling their citizens about the true events relating to this crisis, it as if they have put themselves in total Cold War mode reminiscent of the 1940’s to the late 1980’s when they, likewise, failed to inform them of the many incidents or US Soldier deaths related to that conflict.

Most dangerous about the American people not being informed of the true and tragic state of our world today is their not being able to prepare for the much larger conflicts to come, especially in light of China’s Communists vowing that they won’t go down without a fight. A fight, mind you, that now appears not only a sure thing, but imminent.

CREDIT- http://www.whatdoesitmean.com/index1421.htm

AFTER READING THIS- THOUGHTS???

Just a little on the crazy side if you ask me..

What Could Trip Gold Up?

Can you visualize a possible scenario that could put a sudden end to the secular rise now underway in gold and silver?
In a recent conference call with the research team of The Casey Report, we once again collectively tried to imagine what situation… what scheme… what government manipulation… might finally put a stake through the heart of gold.
Setting the stage, I think it’s safe to assume that in order for the gold bull to decisively reverse direction, the following general conditions would have to be precedent in the economy:
  1. The financial crisis will have to have ended. Which is to say that…
    1. Unemployment would have to begin falling by significant numbers – with 300,000 jobs or more being added month after month, instead of being lost.
    1. The housing markets will be stabilizing. Foreclosure rates would have to fall to more normal levels (and not because banks are forced to postpone the process for legal reasons, which is the case now), and sales would have to accelerate in the right direction.
    1. Government deficits would have to be sharply curtailed and heading lower.
    1. All quantitative easing will have ended.
    1. GDP will have to be on sound footing and rise based on sustainable, private-sector growth – not based on the activities of government, which loom so large today in the calculation.
  1. Real interest rates – the yields you earn over the actual rate of inflation (not the fabricated numbers ginned up by the government) – will have to be solidly positive. Which, of course, is a big problem given the sheer magnitude of the outstanding debt. Rising rates will only beget more debt.
  1. The monetary base of the country will have to be contracting, not soaring as it has been in recent years. The following chart from The Casey Report a few months ago tells the story of runaway printing, and of why gold is so strong by comparison.

Inherent in the list just above are other conditions that will have to be precedent for gold’s run to end.
For example, politicians around the world will have to find the uncharacteristic courage to act in ways that are deeply unpopular with the very voters that brought them to office. Namely by slashing the scale and cost of government, with all the many cutbacks in subsidies and services that such a Great Downsizing must entail. And this rare new breed of politician would have to retain their jobs long enough to see through the reduction in government that must occur if stability is to be regained.
Of course, for the politicians to retain their jobs despite voting in deeply unpopular cuts to government spending will require that the voting public adopts a long forgotten stoicism and becomes willing to take their licks without running to the government for relief.
Very much not the case with the students in London who last week started tearing things up over a proposed reduction in tuition subsidies. Video here.
In addition, the world’s governments will have to step back from the brink of the full-scale currency wars now darkening the horizon and move to restore confidence by tossing their fiat monetary systems over the side in favor of something more limiting. Absent a return to some semblance of monetary sanity, the purchasing medium that gold has compared so favorably to in recent years will continue to weaken, and gold will continue to rise.
Then there is the matter of energy. Civilization’s ascent into relative prosperity is tightly related to the widespread availability of cheap energy. In the current context – as opposed to the perfect-world vision of a green energy future – we need the dirty stuff, and lots of it, if we are going to avoid serious economic pressure that in turn keeps the Treasury and the Fed throwing money into the furnace.
Like them or not, there’s no denying that coal, oil, and nuclear are the proven sources of base load power. Sure, implement the latest technologies to mitigate negative side effects, but don’t let that stop us from fully embracing their development and production. Which means the government needs to stick the many new “green” regulations back on the shelf for a day in the future when we can actually afford them. With oil stubbornly pushing back toward $100 per bbl, now is not that time.
Even that incomplete list of the hurdles to be climbed before the crisis can end, and before gold’s run ends as well, begins to communicate the challenge in finding a scenario where the world’s governments don’t opt for currency debasement. Or, put another way, where governments turn their backs on the default practice of using counterfeit money to buy their way through the next day, the next month, and the next election.
That’s the “easy” way out… versus the really, really hard work required to essentially turn back the clock on decades of expanding government and the currency debasement that expansion has required.
And so, as hard as we try – and we try very hard – we inevitably come back to the conclusion that the government is now tightly caught between a rock and a hard place. And that, as a result, the loss of confidence in government and its fiat money, which is now evident in gold’s rise, is very likely to continue and grow even more extreme.
This scenario is not a pretty one, and even those of us who have taken measures to protect our assets won’t like what the world looks like once gold hits $3,000 an ounce… or who knows how much.
Germany’s hyperinflation, even after burning out, helped set the stage for Hitler’s rise. In other words, anything is possible.
So, What Could Make Gold Go Down?
In the late 1970s, then Fed Chairman Paul Volcker, wielding an ax made up of high interest rates, lopped the head off the gold bull. Leading up to Volcker’s draconian solution, I can well remember the broadly held impression that gold could only go higher. His extreme actions changed that impression almost overnight.
That scares me, because there is a similar – albeit not nearly so widespread – meme going around today.
Let me share with you a couple of “out of the box” ideas for how the U.S. government might torpedo gold’s further advance today, in the same way that Volcker did back then. (As for the rest of the world’s governments – sorry, but it’s everyone for themselves at this point.)

  • Overt debt default. In this scenario, Uncle Sam rolls out of bed one morning and announces that Treasury debt will henceforth be redeemed at only pennies on the dollar. To lessen the domestic political blowback, perhaps he announces a process whereby domestic holders are redeemed at a higher rate than foreigners… or maybe he most disadvantages debt held by those foreigners labeled as currency manipulators. There is much historic precedent for this extreme action – and, other than some negative consequences over a relatively short initial period of time, countries that have defaulted have suffered no lasting effect. Case in point, both Russia and Argentina now have debt-to-GDP ratios well under 10% – among the lowest in the world. In concert with resolving the debt, the government could promise a new regime of austerity, as well as issue a new dollar with at least some limited backing. Change-o, presto, problems solved, and gold heads into the tank.
  • Tired of dealing with the “gold vigilantes,” Uncle Sam simply outlaws gold ownership. Hey, it’s happened before. But what about the price of gold in this scenario? Our own Terry Coxon comments…

Prohibition would force U.S. holders to sell, which by itself would tend to depress the price. However, I’d bet on the price going up because the prohibition would be a signal to the rest of the world that the dollar’s sponsor had gone completely off the rails.

Still, who knows, maybe an international consortium of nations could agree to ban gold – kind of like how they all now ban heroin? Unlikely, but desperate times call for desperate measures.

  • The U.S. adopts a gold standard. In this scenario, Uncle Sam, his back against the wall, agrees to henceforth link the dollar to gold at some fixed price. With concerns over unlimited government spending capped, gold might hold at the fixed price while awaiting further signals. Of course, what that fixed price might be is anyone’s guess – although it would almost certainly be a lot higher than it is today.

    Our own Marin Katusa has identified one possible sleight of hand that could be deployed should the U.S. decide to return to a gold standard – and that would be to nationalize all the nation’s gold deposits, then use the inferred resources in the ground as backing for the currency. An interesting thought, as it would greatly reduce the price of gold necessary to reach full backing of the dollar.

While each of those three scenarios carries further implications, they may just pass the test of being politically feasible – which, in this government-dominated world of ours, is all-important.
Unfortunately, only the first – overt default – would actually make a dent in solving the gargantuan overhang of debt that now torments the global economy. As such, only overt default mitigates the need for the government to continue its insane deficit spending or the debt monetization required to support that spending.
In the end, it’s hard to imagine that there’s a way the government could get out of this situation without the country – and the world – going through a crash for the history books.
[David, Doug Casey, and the other editors of The Casey Report spend a lot of time analyzing the economic status quo and envisioning potential scenarios for the near future. This big-picture view of world politics and the global economy enables them to find profit opportunities for their subscribers… even in the midst of a once-in-a-generation crisis. Learn more about prudent crisis investing here.]

Tent Cities, Homelessness And Soul-Crushing Despair: The Legacy Of Decades Of Government Debt And Mismanagement Of The Economy

For decades, our politicians have been deeply addicted to government debt, they have stood idly by as millions of our jobs have been shipped overseas and they have passed countless business-crushing regulations and they never thought that it would catch up with us. Well, it has. America has been living in the biggest debt bubble in the history of the world, and now that bubble is starting to pop. There has never been such an extended period of unemployment in the United States since the Great Depression, and millions of Americans are losing their homes. Homelessness is skyrocketing, tent cities are popping up everywhere and countless numbers of American families are experiencing the soul-crushing despair that comes from desperately trying to hang on for month after month after month.

Now, because of the horrific hole that our politicians have dug for us, we are faced with some heartbreaking choices. For example, right now the U.S. Congress is deciding whether or not to extend long-term unemployment benefits for the nation's jobless.

Extending those benefits through the end of February would add another $12.5 billion to the U.S. national debt. But not doing it would cut off the only lifeline that many Americans have just in time for the holidays.

The extension of jobless benefits that was passed last summer expires on December 1st. If these long-term benefits are not renewed, approximately 2 million unemployed Americans will lose their checks.

But what can the U.S. Congress do? Just keep going into endless amounts of debt? As I have written about previously, the United States is never going to see another balanced budget ever again under the current system. The U.S. government is flat out broke. Somehow our politicians desperately need to find a way for the federal budget to stop hemorrhaging red ink.

There is no more "extra money" to spend. The U.S. government has piled up the biggest mountain of debt in the history of the world and we are headed for a complete and total economic disaster because of it.

But what are we going to do? Are we going to let millions of Americans starve in the streets?

It's not just the rapidly rising number of homeless Americans that is the problem. Millions of Americans are not going to be able to heat their homes this winter. Millions of others are going to have to choose between buying medicine and buying food because they will not be able to afford both.

How would you like to be at a point where you could not go to the doctor because you knew that you could not pay the deductible?

How would you like to be at a point where you had to decide whether to buy diabetes medicine or to buy macaroni and cheese to feed your family?

More than 42 million Americans are now on food stamps, and that number keeps going up month after month after month.

Just think about that.

42 million Americans would not be able to eat if the U.S. government did not give them handouts.

The safety net is getting awfully crowded.

If you really want to see some soul-crushing desperation, go check out the flood tunnels under the city of Las Vegas. But do not do this alone - it is very dangerous down there. Today, there are hordes of "tunnel people" who call those dark tunnels home. Nobody knows for sure how many people are down there (some people say that it is well into the thousands), but everyone agrees that the number is rapidly growing.

But in many major U.S. cities there are no flood tunnels to go to. Instead, in many areas of the United States huge tent cities have sprouted. The following is a video news report from the BBC about the tent cities that are popping up all over America....

But it is not just "drug addicts" and the "mentally ill" that are going to these tent cities. One anonymous unemployed woman identified only as "Kaynonymous" is a highly educated professional who figures that she will end up in a tent city soon....

"I'm a 99er too. 53, female, single and once on track with an IT career. No one in their right mind would consider me for an IT position after being gone from the field for over 2 years. I have officially been a 99er since May 2010. In Aug. 2010 all of my savings and retirement funds were finally depleted--not only can I no longer make my mortgage payment, I can no longer afford utilities either. I'm just not sure that the 99ers ever had a voice outside of union organizers and even with them it was too little too late. Guess I'll be seeing ya'll in the soup kitchens and tent cities. I do still have my tent..."

So we should just extend the long-term unemployment benefits, right? Well, according to a recent poll commissioned by the National Employment Law Project, 73 percent of Americans want Congress to continue paying out extended unemployment benefits.

But it is not just that simple.

America is broke.

The entire financial system is dying.

The U.S. government desperately needs to stop spending so much money.

But how can we turn our backs on people who are desperately hurting?

There are millions of Americans that have just about reached the end of their ropes. For example, one 43-year-old woman named Jacqueline recently expressed some of the extreme frustration that she is experiencing on her blog....

I am one of the 6 million poor, unemployed middle-aged Americans struggling without any safety net or income other than food stamps. I have resorted to salvaging scrap metal just to survive while keeping up an increasingly hopeless job search. On May 4th, 2010 just three weeks before my 43rd birthday ago I got slapped with a diagnosis of very early stage glaucoma when I had a six year long overdue optical exam for badly needed new glasses. Without treatment — including ophthalmologist’s glaucoma monitoring exams — I will end up blind and permanently disabled. It’s not a matter of “if”, it’s a matter of when.

As a society, we will be judged by how we treat those who are the most vulnerable. It can seem easy to bash those who have lost everything, but someday you might end up in that position. In the following video, police in St. Petersburg, Florida are seen using box cutters to slice up the tents that the homeless were sleeping in....

Hopefully you were deeply disturbed by that video.

We have gotten ourselves into a giant mess, and things are only going to get worse.

Unfortunately, some extremely painful decisions are going to have to be made.

The truth is that we are so deeply in debt that the U.S. government just cannot be spending any extra money right now.

However, we also cannot turn our backs on millions of American families that are going to lose their homes and go hungry if we do not help them.

So what do we do?

What hurting Americans need most of all are not handouts - what they really need are good jobs.

But good jobs are being shipped overseas at a breathtaking pace. The United States has lost approximately 42,400 factories since 2001. The greatest economic machine in the history of the world is literally having its guts ripped out, and most of you kept voting in jokers who supported all of this deindustrialization.

For decades, our politicians kept telling us how wonderful globalization would be for America. We didn't listen when Ross Perot warned us about "the great sucking sound" that these "free trade" agreements would bring about.

Well, look how all of that turned out. In 1985, the U.S. trade deficit with China was 6 million dollars for the entire year. In the month of August alone, the U.S. trade deficit with China was over 28 billion dollars.

In case you can't figure it out, that means that 28 billion dollars of our national wealth was transferred to China in just one month.

This is happening month after month after month.

And yet Barack Obama continues to get up and tell us how wonderful globalism is. During his recent trip to India, Barack Obama made the following statement....

"This will keep America on its toes. America is going to have to compete. There is going to be a tug-of-war within the US between those who see globalization as a threat and those who accept we live in a open integrated world, which has challenges and opportunities."

Yes, globalization is a threat. We should have never merged our economy with the economy of China where workers make less than a tenth of what an American worker makes.

Jobs are flooding out of the U.S. and they are flooding into places like India and China where labor is far, far cheaper.

But without good jobs, how in the world are average Americans going to pay the bills?

The answer is that an increasing number of them are not. 1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008.

Incomes are going down. According to the U.S. Census Bureau, median household income in the United States fell from $51,726 in 2008 to $50,221 in 2009.

Things are getting worse instead of getting better.

And things are going to continue to get worse because the U.S. government goes into more debt every single month, most state and local governments go into more debt every single month, and thanks to America's exploding trade deficit, tens of billions of our national wealth gets transferred out of the United States every single month.

The U.S. economy is dying. There are going to be even more tent cities and even more hungry Americans. The scale of the economic nightmare that we are facing in the years ahead is going to be unimaginable.

So if you get to enjoy a warm dinner and you get to sleep in a warm bed tonight, please consider yourself to be very fortunate. Someday soon you also may find those things cruelly stripped away from you.

San Francisco plans tolls between Peninsula and the city

Peninsula residents are upset about a proposal to charge commuters $6 each weekday to enter and exit San Francisco to the south, calling the plan "a slap in the face," "a crazy idea" and "ridiculous."

Already dealing with some of the nation's highest gas prices and, in some cases, hefty parking fees, drivers crossing the San Mateo County-San Francisco border would pay rush hour tolls to fund local transportation upgrades and, in theory, reduce traffic jams, under a proposal by San Francisco officials.

Officials said they would spend $60 million to $100 million to set up the electronic system, coupled with local transit improvements, starting in 2015. It would be the first local "congestion pricing" system in the country and could begin as a 6-to-12-month pilot program that, if successful, could become permanent.

Under the plan, drivers leaving or entering San Francisco at the southern border would pay $3 from 6:30 to 9:30 a.m. and another $3 from 3:30 to 6:30 p.m. on weekdays, with a daily cap of $6. Commuters would pay up to $130 per month, or $1,500 in a year, if the tolls last that long.

"That would cover all my utility bills. It would be a new bill that I cannot afford," said Loraine Lee, 28, who lives in Daly City two blocks from the San Francisco border and commutes to a property management company on Treasure Island. She said because of the hours of her job and lack of transit options, she'd have no choice but to pay the toll.

"I think this whole toll is ridiculous."

And non-commuters like Daly City's Annie Lyn and Mary Tevis, who travel to San Francisco daily for shopping and other trips, would have to change their lifestyles to avoid the toll times.

Daly City Councilman David Canepa said he thought the worst part of the plan was that it was being done "under the guise of trying to get people to take public transportation."

"It's absolutely nonsensical," said Canepa, who also called the plan terrible, atrocious and egregious. "It's a slap in all of our faces. They're trying to make San Mateo County residents pay a tax because over the years they haven't made proper investments in their infrastructure."

Locals also wondered why San Francisco would be getting all the money even though the border is shared by both counties, and what would stop other cities from copying them.

"We could do the same thing; it'd be a nightmare," warned Assemblyman Jerry Hill, D-San Mateo, of a toll at the same border to fund Peninsula projects, or tolls at each of the borders of all the local cities. "It sounds like another crazy idea. Where do you stop nickel and diming people? You should be able to travel from city to city without paying a toll."

Taxis and emergency vehicles would be exempt while some other drivers, such as low-income residents or those that already crossed a toll bridge that day, could receive discounts. Tolls would be collected electronically, via Fastrak and cameras, for those crossing the border on highways and major arterial streets. There are also dozens of local residential streets that cross the border, although there are no plans to charge tolls there.

The San Francisco County Transportation Authority said the pilot program could take place either at the southern border or in the northeast part of the city.

Tilly Chang, a deputy director at the agency, argued the toll would decrease traffic because people would alter their commute times and take transit to save money. The authority predicts traffic at the city's southern border would drop 20 percent during commute times after tolling.

"The cost of anything needs to be taken in context," Chang said. "It's not free right now. People are paying in time and having to pad their trip."

Nearly half a million drivers cross from San Mateo County into San Francisco each day on one of five highways, Caltrans data shows. By contrast, only about 20,000 people ride BART between the Peninsula and San Francisco each weekday, and another 10,000 take Caltrain, according to those agencies' records.

Chang said the toll would generate $60 million to $80 million in profits each year and would be spread out on projects to improve roads, transit, and bicycle and pedestrian networks.

The authority's board could approve further study at its meeting next month and the city's supervisors would need to endorse the finished plan. The state would also have to pass legislation allowing it, and it's even possible voters would need to approve the charges.

Another hurdle is the upfront cost, although the federal government previously offered New York City $350 million in hopes of persuading that city to launch the nation's first congestion tolling program. That plan died. Similar tolls are used abroad in Stockholm, London and Rome.

Mike Rosenberg covers San Mateo, Burlingame, Belmont and transportation. Contact him at 650-348-4324.

US Mint Reports Soaring November Month-To-Date Silver Coin Sales Surpass 2010 High Following Massive Rush Into Precious Metal

Is Max Keiser's attempt to put JP Morgan out of business working following the mother of all silver physical squeezes? The price of silver has been stable in the past few days, but if the US official precious metal seller is to be trusted, this will not last long. According to the US Mint, sales of 1-ounce American Eagle silver coins are headed for the strongest month since at least May, Bloomberg reports. And according to our update, the May total has not only been passed, but the November MTD total is already the highest in 2010. More details: a record 3,775,000 silver coins have been sold this month, compared with 3,636,500 in May, according to data on the Mint website. Silver futures in New York touched a 30-year high of $29.34 an ounce on Nov. 9. American Eagle coins also are available in gold and platinum. The Mint said 62,500 ounces of gold Eagles have been sold in November. What is interesting is that sales of the coins continue at an astronomic pace despite the nearly 10% premium one has to pay over spot. What is more interesting, is that the Mint has not run out yet. Yet the refreshing thing, is that instead of buying paper certficates promising that one's presumed purchases of gold is held by the DTCC, Americans are once again going straight into physical. Here is hoping Keiser's plan ultimately unravels whatever the RICO suit against JPM and HSBC leaves untouched.

From the Mint:

2010 Silver Sales Totals
(in ounces / number of coins)
Month One
( oz. / #coins )
January 3,592,500
3,592,500
February 2,050,000
2,050,000
March 3,381,000
3,381,000
April 2,507,500
2,507,500
May 3,636,500
3,636,500
June 3,001,000
3,001,000
July 2,981,000
2,981,000
August 2,451,000
2,451,000
September 1,880,000
1,880,000
October 3,150,000
3,150,000
November 3,775,000
3,775,000
Total 32,405,500
32,405,500

For Cluster Bomb Survivors, War Far From Over

VIENTIANE, Laos – Eighteen-year-old Phongsavath Manithong rubbed his eyes with the back of his arms as he described how his life changed forever.

He was not even born yet when U.S. military pilots dropped millions of tiny explosives onto Laos. But almost four decades after war ended for this South-east Asian nation, it is people like him who still suffer.

Three years ago, Phongsavath stumbled onto a small, metallic sphere buried in the ground near his school.

He had heard stories about the planes that rumbled overhead decades before, dropping fire from the sky. But he had never before seen a bomb, or held one in his hands. "I didn’t know what it was. I didn’t think it would be dangerous. So I tried to open it," Phongsavath recalled.

That decision changed his life forever. Phongsavath remembers only seeing a flash of light before his world fell dark. When he awoke in a hospital, he was blind. The bomb had robbed him of his eyesight and ripped away both his hands.

The weapon was part of a decades-old cluster bomb that had been dropped on Laos during the U.S. military’s secretive operations in Indochina between 1964 and 1973. The goal of the air strikes had been to destroy the crucial North Vietnamese Army supply line that snaked its way through Laos and Cambodia on its way to the south. By the time the war was over, those aerial campaigns entrenched Laos as the most heavily bombed country in history.

But today, it is people like Phongsavath who are paying the price for that conflict. Since the war ended, more than 20,000 people in this country have been killed or injured by leftover explosives.

Critics take particular aim at so-called cluster bombs – large explosives dropped from the sky, which contain hundreds of smaller submunitions, or ‘bombies’, as they are referred to in Laos – because they are especially deadly to civilians long after military hostilities have ended.

Estimates suggest more than 270 million individual bombies were scattered over Laos. With a failure rate estimated at around 30 percent, these deadly weapons litter the Lao countryside.

But advocates hope that 2010 represents a turning point in a long-running campaign to eradicate cluster bombs. In August, a treaty banning the use of cluster bombs came into effect. Starting Nov. 9 here in Vientiane, delegates from more than 100 countries are taking part in the first high- level meeting of signatory nations since then, aiming to hammer out a plan to implement the landmark accord.

"The horrifying thing is there may be up to 80 million of these bombs scattered around the countryside, in farmers’ fields, next to schools, beside roads," said Thomas Nash, coordinator for the Cluster Munition Coalition, a broad group of civil society organizations who have pushed for the wide-reaching ban. "So there’s a huge amount of work to be done to clear this country of the deadly legacy from a war that ended over 35 years ago."

Laos is seen, per capita, as the most heavily affected country by such munitions. But cluster bombs have riddled conflict-ridden countries around the globe, from Angola to Zambia and Lebanon to Libya.

The 108 nations that have signed on to the Convention on Cluster Munitions have committed to banning the use of the weapons and the eventual destruction of existing stockpiles. They have also made broad pledges to clear contaminated land and provide adequate aid to victims of cluster bombs.

But while heavily affected countries like Laos have ratified the treaty, major military players that still stockpile the weapons – the United States, China and Russia, for example – have not.

Advocates like Nash, however, are hoping the convention will serve to stigmatize the weapons enough so that their use is considered untenable – something he believes has already been accomplished with landmines.

The United States, for example, has not signed on to the Ottawa Treaty, which banned the use of landmines and came into effect more than a decade ago. But it is believed that the U.S. military has not deployed the weapons since the first Gulf War.

"Anti-personnel mines have been eradicated from most military arsenals and we believe the same will happen with cluster munitions," Nash said.

"You cannot win a political war if you kill civilians, and that’s what cluster bombs do. So I think the message to countries … that haven’t signed is that we believe we have established a standard by which all countries are judged, whether they sign the treaty or not," he added.

For many who are already scarred by cluster bombs, however, life remains a daily struggle.

Thirty-nine-year-old Ta Doangchom lost both his arms and the sight in his right eye when he triggered a bombie while foraging for food nine years ago. "I can’t support my family," he said. "All of my children had to leave school because we were so poor. I feel like a burden on my wife and on my family."

Like Ta, Phongsavath now advocates on behalf of other survivors, urging an end to the use of the weapons that devastated their lives. But he is also still learning to cope with what happened to him.

"I never saw the war with my own eyes," Phongsavath said. "But I now know that the bombs were dropped on my country. And they didn’t just kill soldiers. They killed men, women and children."

(Inter Press Service)

US unemployment may rise: Fed chief

US Federal Reserve Chairman Ben Bernanke
US Federal Reserve Chairman Ben Bernanke has defended the Fed's $600 billion stimulus plan, saying it's needed to boost the economy and reduce unemployment, but added that joblessness might rise in the near future.


Speaking at a banking conference in Frankfurt on Friday, Bernanke said the move was taken due to concerns over unemployment, lack of jobs for young workers entering the market, and the slow pace of economic recovery, ABC reported.

"Of some 8.4 million U.S. jobs lost between the peak of the expansion and the end of 2009, only about 900,000 have been restored thus far," Bernanke said.

"Of course, the jobs gap is presumably even larger when one takes into account the natural increase in the size of the working age population over the past few years," he added.

Bernanke also raised concern over the people unemployed for a period of more than six months.

"Long-term unemployment not only imposes extreme hardship on jobless people and their families but by eroding these workers' skills and weakening their attachment to the labor force, it may also convert what might otherwise be temporary cyclical unemployment into much more intractable long-term structural unemployment," he stated.

Bernanke expects the struggling US economy to improve but said the country should be prepared if unemployment rises in the future.

"We cannot rule out the possibility that unemployment might rise further in the near term, creating added risk to the recovery," Bernanke noted.

HS/HGL

U.S. in Vast Insider Trading Probe

Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter.

The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.


Among the expert networks whose consultants are being examined, the people say, is Primary Global Research LLC, a Mountain View, Calif., firm that connects experts with investors seeking information in the technology, health-care and other industries.

"I have no comment on that," said Phani Kumar Saripella, Primary Global's chief operating officer.

Primary's chief executive and chief operating officers previously worked at Intel Corp., according to its website.

In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment.

Independent analysts and research boutiques also are being examined. John Kinnucan, a principal at Broadband Research LLC in Portland, Ore., sent an email on Oct. 26 to roughly 20 hedge-fund and mutual-fund clients telling of a visit by the Federal Bureau of Investigation.

"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."

The email, which Mr. Kinnucan confirms writing, was addressed to traders at, among others: hedge-fund firms SAC Capital Advisors LP and Citadel Asset Management, and mutual-fund firms Janus Capital Group, Wellington Management Co. and MFS Investment Management.

SAC, Wellington and MFS declined to comment; Janus and Citadel didn't immediately comment. It isn't known whether clients are under investigation for their business with Mr. Kinnucan.

The investigations have been conducted by federal prosecutors in New York, the FBI and the Securities and Exchange Commission. Representatives of the Manhattan U.S. Attorney's office, the FBI and the SEC declined to comment.

Another aspect of the probe is an examination of whether traders at a number of hedge funds and trading firms, including First New York Securities LLC, improperly gained nonpublic information about pending health-care, technology and other merger deals, according to the people familiar with the matter.

Some traders at First New York, a 250-person trading firm, profited by anticipating health-care and other mergers unveiled in 2009, people familiar with the firm say.

A First New York spokesman said: "We are one of more than three dozen firms that have been asked by regulators to provide general information in a widespread inquiry; we have cooperated fully." He added: "We stand behind our traders and our systems and policies in place that ensure full regulatory compliance."

Key parts of the probes are at a late stage. A federal grand jury in New York has heard evidence, say people familiar with the matter. But as with all investigations that aren't completed, it is unclear what specific charges, if any, might be brought.

[PROBEjump]

The action is an outgrowth of a focus on insider trading by Preet Bharara, the Manhattan U.S. Attorney. In an October speech, Mr. Bharara said the area is a "top criminal priority" for his office, adding: "Illegal insider trading is rampant and may even be on the rise." Mr. Bharara declined to comment.

Expert-network firms hire current or former company employees, as well as doctors and other specialists, to be consultants to funds making investment decisions. More than a third of institutional investment-management firms use expert networks, according to a late 2009 survey by Integrity Research Associates in New York.

The consultants typically earn several hundred dollars an hour for their services, which can include meetings or phone calls with traders to discuss developments in their company or industry. The expert-network companies say internal policies bar their consultants from disclosing confidential information.

Generally, inside traders profit by buying stocks of acquisition targets before deals are announced and selling after the targets' shares rise in value.

The SEC has been investigating potential leaks on takeover deals going back to at least 2007 amid an explosion of deals leading up to the financial crisis. The SEC sent subpoenas last autumn to more than 30 hedge funds and other investors.

Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information.... We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web. John Kinnucan, of Broadband Research, in an Oct. 26 email to clients

Some subpoenas were related to trading in Schering-Plough Corp. stock before its takeover by Merck & Co. in 2009, say people familiar with the matter. Schering-Plough stock rose 8% the trading day before the deal plan was announced and 14% the day of the announcement.

Merck said it "has a long-standing practice of fully cooperating with any regulatory inquiries and has explicit policies prohibiting the sharing of confidential information about the company and its potential partners."

Transactions being focused on include MedImmune Inc.'s takeover by AstraZeneca PLC in 2007, the people say. MedImmune shares jumped 18% on April 23, 2007, the day the deal was announced. A spokesman for AstraZeneca and its MedImmune unit declined to comment.

Investigators are also examining the role of Goldman bankers in trading in shares of Advanced Medical Optics Inc., which was taken over by Abbott Laboratories in 2009, according to the people familiar with the matter. Advanced Medical Optics's shares jumped 143% on Jan. 12, 2009, the day the deal was announced. Goldman advised MedImmune and Advanced Medical Optics on the deals.

A spokesman for AstraZeneca and its MedImmune unit declined to comment.

In subpoenas, the SEC has sought information about communications—related to Schering-Plough and other deals—with Ziff Brothers, Jana Partners LLC, TPG-Axon Capital Management, Prudential Financial Inc.'s Jennison Associates asset-management unit, UBS AG's UBS Financial Services Inc. unit, and Deutsche Bank AG, according to subpoenas and the people familiar with the matter.

Representatives of Ziff Brothers, Jana, TPG-Axon, Jennison, UBS and Deutsche Bank declined to comment.

Among hedge-fund managers whose trading in takeovers is a focus of the criminal probe is Todd Deutsch, a top Wall Street trader who left Galleon Group in 2008 to go out on his own, the people close to the situation say. A spokesman for Mr. Deutsch, who has specialized in health-care and technology stocks, declined to comment.

Prosecutors also are investigating whether some hedge-fund traders received inside information about Advanced Micro Devices Inc., which figured prominently in the government's insider-trading case last year against Galleon Group hedge fund founder Raj Rajaratnam and 22 other defendants.

Fourteen defendants have pleaded guilty in the Galleon case; Mr. Rajaratnam has pleaded not guilty and is expected to go to trial in early 2011.

Among those whose AMD transactions have been scrutinized is hedge-fund manager Richard Grodin. Mr. Grodin, who received a subpoena last autumn, didn't return calls. An AMD spokesman declined to comment.

Who fed the tiger?

Missiles fired from the Chinese mainland could destroy five of the six major U.S. air bases in the Far East. So states a new report of the U.S.-China Economic and Security Review Commission, adding:

"Saturation missile strikes could destroy U.S. air defenses, runways, parked aircraft, and fuel and maintenance facilities. Complicating this scenario is the future deployment of China's anti-ship ballistic missile, which could hold U.S. aircraft carriers at bay outside their normal operating range."

Opposite Taiwan, China's missile force has reached 1,600.

Beijing is also building rockets, submarines and surface fleets to extend her dominance out to the third chain of islands, enabling the People's Liberation Army to strike U.S. carriers and bases as far away as Guam.

Since the demise of the blue-water navy of Russian Adm. Sergei Gorshkov, the Pacific has been an American lake. No more.

China lays claim to all the Paracel and Spratly islands of the South China Sea, all the Senkakus in the East China Sea, and all the oil and gas beneath and around those islets and reefs.

America's offer to mediate these claims, which involve half a dozen other anxious Asian nations, has been rudely rebuffed by Beijing.

At the G20 gathering in Seoul, South Korea, Barack Obama got an earful from China about the Fed sinking the dollar and learned that Beijing would not be revaluing its currency to help with our chronic trade deficits.

As China holds a huge share of U.S. debt, Obama is not about to get sassy with our banker, who might just cut off the credit America, running a budget deficit of 10 percent of gross domestic product, desperately needs.

Napoleon said of the Middle Kingdom, "Let (China) sleep, for when she wakes, she will shake the world." The shaking has begun.

So the question arises: Who put us in this predicament? Who awakened, fed and nurtured this tiger to where she is growling at all Asia and baring her teeth at the United States? Answer: the free trade uber alles Republicans.

Richard Nixon opened China. His 1972 Shanghai communique pointed inexorably to what Jimmy Carter did in 1979: break relations and abrogate our security pact with Taiwan, and recognize the People's Republic as the sole legitimate government of China.

In 1982, the Ronald Reagan White House signed on to a communique with Deng Xiaoping's China by which we agreed to reduce and eventually end all arms sales to Taiwan as tensions in the strait diminished.

Under George H.W. Bush, Beijing's crushing of the Tiananmen Square protest with tanks was not allowed to interfere with business.

Repeatedly, Republicans voted to extend most-favored-nation status to China. Dissenters were castigated as "isolationists and protectionists."

Under Bush II, the GOP made MFN permanent and sponsored Beijing's entry into the World Trade Organization, despite China's downing of a U.S. surveillance plane and incarceration of its American crew on Hainan Island. Colin Powell was forced to apologize.

For decades, corporate America championed investing in China and trade with China, though the massive transfer of U.S. factories, technologies and jobs was clearly empowering China and weakening America.

Now, with U.S. political, military, industrial and strategic decline vis a vis China manifest to the world, we hear the wails of American businessmen that they are not being treated fairly by the Chinese. And the politicians responsible for building up China are now talking tough about confronting and containing China.

Sorry, but that cat cannot be walked back.

Review commission chair Dan Slane says his members have concluded that "China is adopting a highly discriminatory policy of favoring domestic producers over foreign manufacturers. Under the guise of fostering 'indigenous innovation' ... the government of China appears determined to exclude foreigners from bidding on government contracts at the central, provincial and local levels."

Imagine that! The Chinese are ignoring WTO rules and putting China first. Don't they understand how the Global Economy works? You're not supposed to tilt the field in favor of the home team.

One knows not whether to laugh or cry.

The policy the Chinese are pursuing, economic nationalism, was virtually invented by the Republican Party. Protectionism was the declared policy of the GOP from the day its first president took office in 1861 to the day Calvin Coolidge left in 1929.

Free trade was the policy of a Great Britain whose clocks those generations of Americans cleaned, even as the Chinese are cleaning ours.

As for a U.S. policy of containment, we have no vital interest in China's border dispute with India, or Beijing's claims to islands in the South and East China seas, or in China's claims against Russia dating to the ninth century.

Time for our Asians friends to take responsibility for defending their own claims. As LBJ said in 1964, "We are not about to send Americans boys 9 or 10 thousand miles away from home to do what Asian boys ought to be doing for themselves." This time, let's mean it.

The day of the globalist has come and gone.

Bernanke Calls On Congress To Help The Economy -- For At Least The Fourth Time In Five Months

NEW YORK -- For at least the fourth time since June, Federal Reserve Chairman Ben Bernanke publicly urged Congress to combat the lackluster recovery by increasing government spending, a recommendation that has gone unheeded by lawmakers.

In a speech at a conference of central bankers in Frankfurt, Bernanke once again said the Fed cannot save the economy on its own. The Fed's recent move to add to its ballooning balance sheet by committing to buy up to $600 billion of government debt faces "limits" to its effectiveness, Bernanke said. The rest of the government, the chairman added, could aid the Fed's efforts by hammering out a plan for stimulative spending. The right kind of spending, he noted, could help reduce the budget deficit over the long-term by first boosting economic growth.

"[I]n general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve," Bernanke said Friday, according to his written remarks.

The fiscal policy recommendation came directly after Bernanke acknowledged it isn't his job to make such policy proposals. "The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs," the chairman noted.

The official parameters of his job, though, have not stopped Bernanke from engaging in backseat driving. At least four times since June -- on June 9, July 21, July 22 and now Friday -- he has urged lawmakers to increase spending to jumpstart the lagging economy.

But policy makers have proved to be unable to agree upon such a plan -- or even propose one that's viable. The rest of the nation has suffered as a result, as near-10 percent unemployment continues to hobble the economy. Democrats recently lost control of the House of Representatives, and a substantial part of their majority in the Senate. Voters said the dismal economy was their top concern.

To combat an ineffectual Washington establishment, the Fed has taken matters into its own hands. By buying up to $600 billion of government debt, the central bank hopes to increase the flow of money through the economy. Critics of the program, which is intended to lower interest rates and encourage corporate spending, have said the cheap money will not convince businesses to create jobs.

Companies are already sitting on about $1.8 trillion in cash and other liquid assets, according to the most recent quarterly data from the Fed. Only an increase in consumer demand and business confidence, critics say, will spur a robust recovery.

Bernanke, too, has said the Fed's actions won't be enough. While its actions determine interest rates and the money supply, in order to be effective, Bernanke has said, it must be combined with expansionary fiscal policy. In other words, the government has to ramp up spending.

By law, the Federal Reserve's function is to "maintain long run growth of the monetary and credit aggregates" in order to promote "maximum employment, stable prices, and moderate long-term interest rates."

As Rep. Scott Garrett (R-N.J.) reminded Bernanke during a July hearing, "it would be an unconstitutional role for the Fed to engage in fiscal policy."

The central banker has not publicly supported actual bills pending in Congress. But over the past year, he hasn't been shy about giving his opinion, and nudging Congress along:

  • June 9, before the House Committee on the Budget: "Achieving long-term fiscal sustainability will be difficult. But unless we as a nation make a strong commitment to fiscal responsibility, in the longer run, we will have neither financial stability nor healthy economic growth." And he went on: "Right now I don't think is the time -- this very moment is not the time -- to radically reduce our spending or raise our taxes because the economy is still in recovery mode and needs that support." Fiscal stimulus, he said, is necessary. "I think, you know, right now we have a broadly stimulative fiscal policy which, at the moment, is helping, is needed, that includes lower taxes and probably higher spending as well."
  • July 21, before the Senate Banking Committee: "At the current moment the large deficits, as unattractive as they are, are important for supporting economic activity."
  • July 22, before the House Financial Services Committee: "More generally, certainly both the Fed, the Treasury, the Congress and everyone should try to focus on growth-oriented policies. It's important to take steps, including control the fiscal deficit, that will support longer-term growth, which will increase confidence in the present, and to do what we can to reduce uncertainty, about policies and about the economy. ... [I]n general, as I said, I think that maintaining the current level of fiscal support is important because the economy is still quite weak."
  • Bernanke, though, also wants Congress to get a handle on the federal government's ballooning yearly deficits and overall debt. A growing chorus of experts believe that the government's bulging debt endangers long-term growth. Among Bernanke's statements:

  • April 7, Dallas, Tex.: "Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term."
  • April 14, before the Joint Economic Committee: "In other words, addressing the country's fiscal problems will require difficult choices, but postponing them will only make them more difficult."
  • April 27, at the National Commission on Fiscal Responsibility and Reform: "Thus, the reality is that the Congress, the Administration, and the American people will have to choose among making modifications to entitlement programs such as Medicare and Social Security, restraining federal spending on everything else, accepting higher taxes, or some combination thereof. "
  • August 2, Charleston, S.C.: "Thus, state governments may wish to revisit their criteria for accumulating fiscal reserves. Building a rainy-day fund during good times may not be politically popular, but it can pay off during the bad times." He continued, "The states have the opportunity to serve as role models for effective long-term fiscal planning."
  • October 4, Providence, R.I.: "What we do know, however, is that the threat to our economy is real and growing, which should be sufficient reason for fiscal policy makers to put in place a credible plan for bringing deficits down to sustainable levels over the medium term."
  • The Republican economist appears to believe that the best way to encourage economic growth and reduce the near-record unemployment rate is to increase government spending in the short-term; create a credible plan to tackle record deficits in the medium-term; and deploy that plan (and stick to it) over the long-term.

    Whether the White House and Congress can formulate such a plan -- and agree to it -- is a matter beyond Bernanke's control.


    *************************

    What's Really Behind Quantitative Easing QE2? The Looming Threat of a Crippling Debt Service

    The deficit hawks are circling, hovering over QE2, calling it just another inflationary bank bailout. But unlike QE1, QE2 is not about saving the banks. It’s about funding the federal deficit without increasing the interest tab, something that may be necessary in this gridlocked political climate just to keep the government functioning.

    On November 15, the Wall Street Journal published an open letter to Fed Chairman Ben Bernanke from 23 noted economists, professors and fund managers, urging him to abandon his new “quantitative easing” policy called QE2. The letter said:

    We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. . . . The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

    The Pragmatic Capitalist (Cullen Roche) remarked:

    Many of the people on this list have been warning about bond vigilantes while also comparing the USA to Greece for several years now. Of course, they’ve been terribly wrong and it is entirely due to the fact that they do not understand how the US monetary system works. . . . What’s unfortunate is that these are many of our best minds. These are the people driving the economic bus.

    The deficit hawks say QE is massively inflationary; that it is responsible for soaring commodity prices here and abroad; that QE2 won’t work any better than an earlier scheme called QE1, which was less about stimulating the economy than about saving the banks; and that QE has caused the devaluation of the dollar, which is hurting foreign currencies and driving up prices abroad.

    None of these contentions is true, as will be shown. They arise from a failure either to understand modern monetary mechanics (see links at The Pragmatic Capitalist and here) or to understand QE2, which is a different animal from QE1. QE2 is not about saving the banks, or devaluing the dollar, or saving the housing market. It is about saving the government from having to raise taxes or cut programs, and saving Americans from the austerity measures crippling the Irish and the Greeks; and for that, it may well be the most effective tool currently available. QE2 promotes employment by keeping the government in business. The government can then work on adding jobs.

    The Looming Threat of a Crippling Debt Service

    The federal debt has increased by more than 50% since 2006, due to a collapsed economy and the highly controversial decision to bail out the banks. By the end of 2009, the debt was up to $12.3 trillion; but the interest paid on it ($383 billion) was actually less than in 2006 ($406 billion), because interest rates had been pushed to extremely low levels. Interest now eats up nearly half the government’s income tax receipts, which are estimated at $899 billion for FY 2010. Of this, $414 billion will go to interest on the federal debt. If interest rates were to rise just a couple of percentage points, servicing the federal debt would consume over 100% of current income tax receipts, and taxes might have to be doubled.

    As for the surging commodity and currency prices abroad, they are not the result of QE. They are largely the result of the U.S. dollar carry trade, which is the result of pressure to keep interest rates artificially low. Banks that can borrow at the very low fed funds rate (now 0.2%) can turn around and speculate abroad, reaping much higher returns.

    Interest rates cannot be raised again to reasonable levels until the cost of servicing the federal debt is reduced; and today that can be done most expeditiously through QE2 -- “monetizing” the debt through the Federal Reserve, essentially interest-free. Alone among the government’s creditors, the Fed rebates the interest to the government after deducting its costs. In 2008, the Fed reported that it rebated 85% of its profits to the government. The interest rate on the 10-year government bonds the Fed is planning to buy is now 2.66%. Fifteen percent of 2.66% is the equivalent of a 0.4% interest rate, the best deal in town on long-term bonds.

    A Reluctant Fed Steps Up to the Plate

    The Fed was strong-armed into rebating its profits to the government in the 1960s, when Wright Patman, Chairman of the House Banking and Currency Committee, pushed to have the Fed nationalized. According to Congressman Jerry Voorhis in The Strange Case of Richard Milhous Nixon (1973):

    As a direct result of logical and relentless agitation by members of Congress, led by Congressman Wright Patman as well as by other competent monetary experts, the Federal Reserve began to pay to the U.S. Treasury a considerable part of its earnings from interest on government securities. This was done without public notice and few people, even today, know that it is being done. It was done, quite obviously, as acknowledgment that the Federal Reserve Banks were acting on the one hand as a national bank of issue, creating the nation’s money, but on the other hand charging the nation interest on its own credit – which no true national bank of issue could conceivably, or with any show of justice, dare to do.

    Voorhis went on, “But this is only part of the story. And the less discouraging part, at that. For where the commercial banks are concerned, there is no such repayment of the people’s money.” Commercial banks do not rebate the interest, said Voorhis, although they also “‘buy’ the bonds with newly created demand deposit entries on their books – nothing more.”

    After the 1960s, the policy was to fund government bonds through commercial banks (which could collect interest) rather than through the central bank (which could not). This was true not just in the U.S. but in other countries, after a quadrupling of oil prices combined with abandonment of the gold standard produced “stagflation” that was erroneously blamed on governments “printing money.”

    Consistent with that longstanding policy, Chairman Bernanke initially resisted funding the federal deficit. In January 2010, he admonished Congress:

    "We're not going to monetize the debt. It is very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position."

    His concern, according to The Washington Times, was that “the impasse in Congress over tough spending cuts and tax increases needed to bring down deficits will eventually force the Fed to accommodate deficits by printing money and buying Treasury bonds.”

    That impasse crystallized on November 3, 2010, when Republicans swept the House. There would be no raising of taxes on the rich, and the gridlock in Congress meant there would be no budget cuts either. Compounding the problem was that over the last six months, China has stopped buying U.S. debt, reducing inflows by about $50 billion per month.

    QE2 Is Not QE1

    In QE1, the Fed bought $1.2 trillion in toxic mortgage-backed securities off the books of the banks. QE1 mirrored TARP, the government’s Troubled Asset Relief Program, except that TARP was funded by the government with $700 billion in taxpayer money. QE1 was funded by the Federal Reserve with computer keystrokes, simply by crediting the banks’ reserve accounts at the Fed.

    Pundits were predicting that QE2 would be more of the same, but it turned out to be something quite different. Immediately after the election, Bernanke announced that the Fed would be using its power to purchase assets to buy federal securities on the secondary market -- from banks, bond investors and hedge funds. (In the EU, the European Central Bank began a similar policy when it bought Greek bonds on the secondary market.) The bond dealers would then be likely to use the money to buy more Treasuries, increasing overall Treasury sales.

    The bankers who applauded QE1 were generally critical of QE2, probably because they would get nothing out of it. They would have to give up their interest-bearing bonds for additional cash reserves, something they already have more of than they can use. Unlike QE1, QE2 was designed, not to help the banks, but to relieve the pressure on the federal budget.

    Bernanke said the Fed would buy $600 billion in long-term government bonds at the rate of $75 billion per month, filling the hole left by China. An estimated $275 billion would also be rolled over into Treasuries from the mortgage-backed securities the Fed bought during QE1, which are now reaching maturity. More QE was possible, he said, if unemployment stayed high and inflation stayed low (measured by the core Consumer Price Index).

    Addison Wiggin noted in his November 4 Five Minute Forecast that this essentially meant the Fed planned to monetize the whole deficit for the next eight months. He quoted Agora Financial’s Bill Bonner:

    “If this were Greece or Ireland, the government would be forced to cut back. With quantitative easing ready, there is no need to face the music.”

    That was meant as a criticism, but you could also see it as a very good deal. Why pay interest to foreign central banks when you can get the money nearly interest-free from your own central bank? In eight months, the Fed will own more Treasuries than China and Japan combined, making it the largest holder of government securities outside the government itself.

    The Overrated Hazard of Inflation

    The objection of the deficit hawks, of course, is that this will be massively inflationary, diluting the value of the dollar; but a close look at the data indicates that these fears are unfounded.

    Adding money to the money supply is obviously not hazardous when the money supply is shrinking, and it is shrinking now. Financial commentator Charles Hugh Smith estimates that the economy faces $15 trillion in writedowns in collateral and credit, based on projections from the latest Fed Flow of Funds. The Fed's $2 trillion in new credit/liquidity is therefore insufficient to trigger either inflation or another speculative bubble.

    In any case, Chairman Bernanke maintains that QE involves no printing of new money. It is just an asset swap on the balance sheets of the bondholders. The bondholders are no richer than before and have no more money to spend than before.

    Professor Warren Mosler explains that the bondholders hold the bonds in accounts at the Fed. He says, “U.S. Treasury securities are accounted much like savings accounts at a normal commercial bank.” They pay interest and are considered part of the federal debt. When the debt is “paid” by repurchasing the bonds, all that happens is that the sums are moved from the bondholder’s savings account into its checking account at the Fed, where the entries are no longer considered part of the national debt. The chief difference is that one account bears interest and the other doesn’t.

    What About the Inflation in Commodities?

    Despite surging commodity prices, the overall inflation rate remains very low, because housing has to be factored in. The housing market is recovering in some areas, but housing prices overall have dropped 28% from their peak. Main Street hasn’t been flooded with money; the money has just shifted around. Businesses are still having trouble getting reasonable loans, and so are prospective homeowners.

    As for the obvious price inflation in commodities -- notably gold, silver, oil and food -- what is driving these prices up cannot be an inflated U.S. money supply, since the money supply is actually shrinking. Rather, it is a combination of factors including (a) heavy competition for these scarce goods from developing countries, whose economies are growing much faster than ours; (b) the flight of “hot money” from the real estate market, which has nowhere else to go; (c) in the case of soaring food prices, disastrous weather patterns; and (d) speculation, which is fanning the flames.

    Feeding it all are the extremely low interest rates maintained by the Fed, allowing banks and their investor clients to borrow very cheaply and invest where they can get a much better return than on risky domestic loans. This carry trade will continue until something is done about the interest tab on the federal debt.

    The ideal alternative would be for a transparent and accountable government to issue the money it needs outright, a function the Constitution reserves to Congress; but an interest-free loan from the Federal Reserve rolled over indefinitely is the next best thing.

    A Bold Precedent

    QE2 is not a “helicopter drop” of money on the banks or on Main Street. It is the Fed funding the government virtually interest-free, allowing the government to do what it needs to do without driving up the interest bill on the federal debt – an interest bill that need not have existed in the first place. As Thomas Edison said, “If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also.”

    The Fed failed to revive the economy with QE1, but it could redeem itself with QE2, a bold precedent that might inspire other countries to break the chains of debt peonage in the same way. QE2 is the functional equivalent of what many countries did very successfully before the 1970s, when they funded their governments with interest-free loans from their own central banks.

    Countries everywhere are now suffering from debt deflation. They could all use a good dose of their own interest-free national credit, beginning with Ireland and Greece.

    by Ellen Brown

    Ellen Brown is an attorney and the author of eleven books. In Web of Debt: The Shocking Truth About Our Money System, she shows how the Federal Reserve and "the money trust" have usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are webofdebt.com, ellenbrown.com, and public-banking.com.