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China Starts To Make A Power Move Against The U.S. Dollar

China Starts To Make A Power Move Against The U.S. Dollar.

By Michael Snyder, on February 20th, 2014 

US Dollars - Photo by selbstfotografiertIn order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates.  Of course the number one foreign nation that we depend on to participate in our system is China.  China accounts for more global trade than anyone else on the planet(including the United States), and most of that trade is conducted in U.S. dollars.  This keeps demand for our dollars very high, and it ensures that we can import massive quantities of goods from overseas at very low cost.  As a major exporting nation, China ends up with gigantic piles of our dollars.  They lend many of those dollars back to us at ridiculously low interest rates.  At this point, China owns more of our national debt than any other country does.  But if China was to decide to quit playing our game and started moving away from U.S. dollars and U.S. debt, our economic prosperity could disappear very rapidly.  Demand for the U.S. dollar would fall and prices would go up.  And interest rates on our debt and everything else in our financial system would go up to crippling levels.  So it is absolutely critical to our financial future that China continues to play our game.

Unfortunately, there are signs that China has now decided to start looking for a smooth exit from the game.  In November, I wrote about how the central bank of China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves”.  That means that the pile of U.S. dollars that China is sitting on is not going to get any higher.

In addition, China has signed a whole host of international currency agreements with other nations during the past couple of years which are going to result in less U.S. dollars being used in international trade.  You can read about many of these agreements in this article.

This week, we learned that China started to dump U.S. debt during the month of December.  Many have imagined that China would try to dump a flood of our debt on to the market all of a sudden once they decided to exit, but that simply does not make sense.  Instead, it makes sense for China to dump a bit of debt at a time so that the market will not panic and so that they can get close to full value for the paper that they are holding.

As Bloomberg reported the other day, China dumped nearly 50 billion dollars of U.S. debt during the month of December…

China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.

The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday.

This is how I would do it if I was China.  I would try to dump 30, 40 or 50 billion dollars a month.  I would try to make a smooth exit and try to get as much for my U.S. debt paper as I could.

So if China is not going to stockpile U.S. dollars or U.S. debt any longer, what is it going to stockpile?

It is going to stockpile gold of course.  In fact, China has been voraciously stockpiling gold for quite some time, and their hunger for gold appears to be growing.

According to Bloomberg, more than 80 percent of the gold that was exported from Switzerland last month went to Asia…

Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said today in an e-mailed report. It imported most from the U.K.

Hong Kong was the top destination at 44 percent on a value basis, with India at 14 percent, the Bern-based customs agency said in its first breakdown of the gold trade data since 1980. Singapore accounted for 8.6 percent of exports, the United Arab Emirates 7.9 percent and China 6.3 percent.

When China imports gold, most of it goes through Hong Kong.  We know that imports of gold from Hong Kong into China are at an all-time record high, but we don’t know exactly how much gold China has accumulated at this point because they quit reporting that to the rest of the world a number of years ago.

When it comes to global finance, China is playing chess and the United States is playing checkers.  China knows that gold is a universal currency that will hold value over the long-term.  As the paper currencies of the world race toward collapse, China could end up holding most of the real money and that would be a huge game changer when they finally reveal that fact…

The announcement of China’s new gold hoard will send shockwaves through the financial markets, and make China and the Chinese yuan (their national currency) even bigger players at the international table.

International banking expert James Rickards compared it to a game of Texas Hold ‘Em poker:

“You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes [metric tons] of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player.”

There are some really good points made in the quote above, but I do take exception with a couple of things.  First of all, I believe that China now has far more than 5,000 tons of gold.  Secondly, I seriously doubt that the U.S. still actually has 8,000 tons of gold or that Europe still actually has 10,000 tons of gold.

As China (and eventually the rest of the world) moves away from a U.S.-based financial system, the consequences are going to be dramatic.

For instance, right now the average rate of interest that the U.S. government pays on debt is just 2.477 percent.  That is ridiculously low and it is way below the real rate of inflation.  It is simply not rational for anyone to lend the U.S. government money so cheaply, and at some point we are going to see a dramatic shift.

When that day arrives, interest rates are going to rise dramatically.  And if the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.

Even more frightening is what a rapidly changing interest rate environment would mean for our banking system.  There are four large U.S. banks that each have exposure to derivatives in excess of 40trillion dollars.  You can find the identity of those banks right here.  Interest rate derivatives make up the biggest chunk of those derivatives contracts.  As John Embry told King World News just the other day, when that bubble bursts the carnage is going to be unprecedented…

“Stockman brought up a brilliant point, the fact that we have hundreds of trillions of dollars of interest rate swaps, which are polluting the world’s banking system. If we see growing volatility in interest rates, and I think that’s inevitable with what’s going on, that would cause spasms in the financial system. And if something goes wrong in the derivatives market, Heaven help us because the leverage that is imparted to the banking system through these derivatives is unholy.”

Unfortunately, very few of the “experts” will ever see this crash coming.

Very few of them saw it coming in 2000.

Very few of them saw it coming in 2008.

And very few of them will see it coming this time.

I really like what Paul B. Farrell had to say about this…

Early warnings of a crash are dismissed over and over (“just a temporary correction”). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard. Financial historian Niall Ferguson put it this way: Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash.

Till then, life just goes along quietly, hypnotizing us, making us vulnerable, till a shocker like Lehman Brothers upsets the balance. Then, says Ferguson, the crash is “accelerating suddenly, like a sports car … like a thief in the night.” It hits. Shocks us wide awake.

Don’t let the upcoming crash take you by surprise.

The warning signs are very clear.

Get ready while you still can.

Money - Photo by Pen Waggener

U.S. “Special Plans”: A History of Deception and Perception Management | Global Research

U.S. “Special Plans”: A History of Deception and Perception Management | Global Research.

Global Research, February 21, 2014
weapons_of_mass_deception-293x307

A major controversy during the administration of President George W. Bush concerned the use or misuse of intelligence with regard to Iraqi weapons of mass destruction programs and possible links between Iraq and al-Qaida. The best known elements of that controversy were Iraqi motivations behind the procurement of aluminum tubes, whether Iraq had sought to acquire uranium from Niger, if Iraq was seeking to reconstitute its nuclear weapons program, and whether it was producing and stockpiling chemical or biological weapons.

But another aspect of that controversy involved two components of the Under Secretary of Defense for Policy — the Office of Special Plans and the Policy Counterterrorism Evaluation Group (PCTEG). During the Bush administration, and after, there have been numerous accounts that either confused the functions of those offices or attributed actions to them that they never undertook.

Photo: Under Secretary of Defense Douglas Feith.

One potential cause for confusion is that the term “Special Plans” has been a euphemism for deception since World War II, and for ‘perception management’ (which included deception and ‘truth projection’) since at least the mid-1970s. And during the George W. Bush administration the term apparently had a dual use — as a traditional euphemism (for perception management) as well as a temporary title for planning with regard to Iraq, Iran, and counterterrorism.1

Clearing up the confusion requires an examination of four different classes of documents — those concerning deception and special plans prior to the Ronald Reagan administration, those focusing on special plans during the Reagan administration, those related to the Office of Special Plans under Under Secretary of Defense Douglas Feith, and others focusing on the PCTEG.

Deception & Special Plans, 1946-1980

As noted, the term Special Plans was used as a euphemism for deception going back to at least World War II. In March 1944, General Omar Bradley, commander of the U.S. 12th Army Group, established a Special Plans section to “prepare and implement deception and cover plans for all United States forces in the United Kingdom.” Post-war use of the term is illustrated by the existence, in December 1948, of the Special Plans Section of the Strategy Branch of Headquarters U.S. Air Force.2


Memorandum to the assistant chiefs of the Air Staff. Document 4.

Over two years earlier, in the summer of 1946, the absence of organizations to conduct cover and deception operations was the subject of several War Department memos. A Top Secret July 5, 1946 memo (Document 1)from the Office of the Chief of Staff assigned responsibility for the supervision of War Department cover and deception matters to the Director of Plans and Operations. Three days later, the department’s Adjutant General directed (Document 2) that the commanding general of the Army Ground Forces manage tactical deception activities — that is deception during battle, and those which might involve radio, sonic, or camouflage deception.

Two further memos from the same period of time addressed the issue of establishing a cover and deception organization for the Army Air Forces (AAF). A memo (Document 3) from the assistant chief of the air staff for intelligence notes the role of cover and deception in World War II, the absence of an organization to conduct such activities, and the need to establish one. He also suggests roles that the assorted AAF assistant chiefs might play in cover and deception operations. Another memo (Document 4) directed creation of an AAF cover and deception organization — although it is not clear what further action, if any, was taken.

A document from three decades later, a Secret September 28, 1976, memo (Document 5) from the director of naval intelligence to the acting chairman of the “United States Evaluation Board,” indicates that the board was involved in managing deception operations. The main subject of the memo was whether information requested by the board was “within the purview of the USEB.” Other parts of the memo note that the board was established for cover and deception purposes and that one of its roles was processing “feed material” — information or documents — to be transmitted to target nations via controlled foreign agents (CFAs) or double agents (DAs).

In August 1980 the Joint Chiefs of Staff (JCS) entry (Document 13) in the Department of Defense telephone directory indicated the existence of a Special Plans Branch within the Joint Staff’s Special Operation Division. A page from the 1980 JCS organization and functions manual (Document 6) indicated that the term “Special Plans” was equivalent to “perception management,” while not explaining that perception management consisted of two distinct and opposite activities — deception and ‘truth projection.’ Not surprisingly, consideration of various attempts at perception management were viewed as part of the U.S. response to the seizure of the U.S. Embassy in Tehran and its employees in November 1979.3

Examples of work concerning perception management with regard to Iran include a number of declassified memos or reports produced in 1980. One of those memos, “Perception Management: Iran” (Document 7), after stating its purpose and providing background, specifies its assumptions (e.g. “the principal decision makers who can authorize release of US citizens held in Iran are the Ayotallah Khomeini and/or the terrorists holding the prisoners”) and then goes on to specify 12 possible means of perception management. Those means included radio broadcasts using U.S.-owned transmitters, intrusion into Iranian radio communications frequencies, letter-writing campaigns, and the demonstration of military capabilities.

A more detailed product relating to the hostages (Document 8ADocument 8B), which emanated from the Army’s 4th Psychological Operations Group, examined the target audience and stated themes, assessed effectiveness, examined accessibility, and offered conclusions. Those conclusions asserted that the “most lucrative target audience” were Khomeini loyalists and other religious devotees. The most productive themes with respect to Khomeini and his followers would be those “emphasizing dangers posed to the Islamic revolution by prolongation of the embassy crisis.”

Work on perception management with regard to Iran also included production of a series of background option papers, including one (Document 10) on “interim non-violent options.” Those options included starting a rumor campaign that some hostages had been killed or kidnapped (as prelude to calling for accountability by the “IRC” — presumably the Iranian Revolutionary Council), dropping leaflets stating the case for release of hostages and restatement of U.S. military capability, interdiction of the Tehran power grid, probes of Iranian air space, and an overflight of Iran using the supersonic SR-71. The overflight might include “detonation of photo flash over selected Iranian military, government, and Industrial facilities.”

A June 1980 paper (Document 12) discussed possible psychological operations in support of Project SNOWBIRD — the planning and preparation by a joint task force for a second mission to rescue the U.S. hostages in Tehran. Included among the possible operations were deceptive “small actions and communications” to suggest that the United States was beginning to have second thoughts about employing military force. In addition, the memo stated that some of the proposed actions “are on very tenuous legal ground.”

Central Intelligence Agency, “DCI’s Schedule for Wednesday, 8 April 1981.” From Document 14.

Special Plans & Deception, 1981-1990

The DoD telephone directory and JCS organization and functions manual from 1980 provided documentary evidence that by the end of the administration of Jimmy Carter special plans was considered of sufficient importance to have a component of the Joint Staff dedicated to that activity. (According to one former officer in that division, a special plans branch had existed for several years when he joined the division in 1978.)

But the interest in strategic deception and special plans would be raised to another level in the administration of Carter’s successor, Ronald Reagan. One element of that concern was what the Soviet Union was doing to deceive or hide from U.S. intelligence — a concern that led to support for at least two satellite programs, a radar imagery program (LACROSSE) and a stealth imagery satellite (MISTY).4

Director of Central Intelligence (DCI) William J. Casey.

Very early in the Reagan administration, Director of Central Intelligence (DCI) William J. Casey was briefed on the “US strategic deception program” (Document 14). Among those briefing Casey were General Richard Stilwell, the deputy under secretary of defense for policy review, and Lt. Gen. Philip Gast, the director of operations for the Joint Staff. Possibly it was another briefing on the same subject later that month to acting CIA deputy director of operations John Stein, that led Stein to write Casey (Document 15) reporting that he had told Stilwell and General Eugene Tighe, director of the Defense Intelligence Agency, that he believed “the project worthwhile and long needed” and that he “offered to them full support from the directorate.”

A year later, in April 1982, Stein, who by then had had the ‘acting’ removed from his title, received a letter (Document 16) from Major General E.R. Thompson, former Army assistant chief of staff for intelligence. The letter indicated that Thompson was director of the Defense Special Plans Office (DSPO), and informed Stein that attached to the letter he would find the DSPO charter as well as an Operational Capabilities Tasking memorandum that Thompson had received from the DIA director. Beyond noting the enclosures, the letter informed Stein that the Senate Select Committee on Intelligence had reduced the office’s budget request to 20 persons and $1.6 million, which “will allow us to stay in business, but only in a planning mode.” Even worse for the future of the office, the House intelligence oversight committee had “zeroed out the request for FY 83″ — which Thompson attributed to the lack of a charter at the time and concern about the extent of CIA support for the effort. He also noted that the DCI would be receiving an appeal to support the SSCI recommendation at the Congressional authorization committee’s conference.

Photo right: General Richard G. Stilwell.

But whatever efforts the DoD and CIA made to ensure that DSPO continued in operation failed and failed fairly quickly — as indicated by the DoD’s response (Document 18) to a June 1983 Freedom of Information Act request for copies of “the organization chart and mission statement for the Defense Special Plans Office.” A letter from Charles Hinkle, the DoD’s director for Freedom of Information and Security Review, stated that “no record pertaining to [the] request was found and that ‘no such office’ exists.” He did attach a memorandum from DSPO sponsor Richard Stilwell to the director of the Washington Headquarters Service (WHS), which explained why there was “no such office.” It indicated that the DSPO charter had been the subject of two DoD Directives — one classified Confidential and the other classified Top Secret. Stilwell informed the WHS director that “the directives were charter documents establishing a DoD activity whose establishment subsequently was not authorized by Congress.” Stilwell recommended that “holders destroy them immediately.”

A second FOIA response (Document 19), received that fall by Scott Armstrong, then of theWashington Post, provided a bit of additional information about the sensitivity with which DoD viewed information about the office. Armstrong had submitted requests for records relating to the DSPO. Hinkle’s response stated that all relevant DoD documents relating to the office were classified. He also attached the same memo from Stilwell recommending that holders of the directives destroy them — as well as a somewhat more forceful cancellation notice from O.J. Williford, whose title was given as “Director, Correspondence and Directives.” Williford instructed, rather than recommended, with regard to the two DoD directives on DSPO, that receivers of the notice to “remove and destroy immediately all copies you have on file.”

Department of Defense Telephone Directory cover from document 20.

While DSPO did not survive into the winter of 1983, other Special Plans organizations in the Department of Defense continued to function. The department’s December 1983 telephone directory (Document 20) showed that, in addition to the previously noted Special Plans Branch in the Joint Staff Special Operations Division, there was a Special Plans Branch within the Human Resources Division of the Defense Intelligence Agency. Also telling is the fact that the two offices were located side-by-side in the Pentagon — in 2C840 (JCS) and 2C841 (DIA).5

Documents also allude to some of the product of the special plans effort in the Joint Staff — although in highly redacted form. In August 1985, the Joint Staff J-3 produced a Top Secret Report* by the J-3 to the Joint Chiefs of Staff on Special Plans Overview Guidance (Document 21). The only unredacted substantive portions from the original DoD FOIA response were several section titles indicating some of the objectives of possible perception management efforts, including “deterrence of US/Soviet Hostilities,” “crisis stability,”and “advantage in warfighting capability.” A recent request for a less-redacted copy of the document produced a ‘no records’ response.

The following year, press reports suggested two possible deception/perception management efforts by the United States. In October 1986, a front-page story in the Washington Post, written by Bob Woodward, stated that “in August the Reagan administration launched a secret and unusual campaign of deception designed to convince Libyan leader Moammar Gadhafi that he was about to be attacked again by U.S. bombers and perhaps be ousted in a coup.” The objective was to increase Gadhafi’s anxiety about his internal strength and U.S. military power with the expectation that he would be less likely to undertake acts of terrorism and be more likely to be toppled from power. Several months earlier, in March, Aviation Week & Space Technology reported that the “Defense Dept., in conjunction with the Central Intelligence Agency, has initiated a disinformation program that it is applying to a number of its aircraft and weapons development programs to impede the transfer of accurate technological information to the Soviet Union.” The effort was reported to cover 15-20 programs, including the B-2 bomber, the Navy’s A-12 Avenger, aircraft being tested at Area 51, and the Strategic Defense Initiative.6

The topic of perception management with regard to strategic defense was the subject of an April 1987 memorandum (Document 23) from the Joint Staff director of operations to 20 different individuals, including the JCS chairman, military service chiefs of staff, the commanders of the unified commands, and the directors of the DIA and National Security Agency. Titled Special Plans Guidance – Strategic Defense, its few unredacted portions defined strategic defense as “all military matter and operations pertaining to the defense of the North American region, including activities involving Canada, against attack by aircraft, missiles, or space vehicles.” It also notes twelve broad areas which possibly warranted additional review when considering [term deleted but likely ‘perception management’] support of Strategic Defense.” Included among those areas were: surveillance and detection, recovery and reconstitution, hardening and survivability, and Strategic Defense Initiative (SDI) resources.7

In 1994, the General Accounting Office (GAO) investigated whether a June 1984 Army ballistic missile defense test that had taken place after the establishment of SDI, had involved deception which may have suggested a more successful effort than had actually occurred. The GAO reported (Document 26) that there was a DoD deception program associated with the Homing Overlay Experiment — with the intention of affecting Soviet perceptions of U.S. ballistic missile defense capabilities and influencing arms negotiations and Soviet spending. However, the accounting office also reported that the secretary of defense said the planned deception (which would have involved the explosion of the target if the interceptor failed to hit it but passed sufficiently close to “support the appearance” of an interception) was cancelled prior to the test.

The Office of Special Plans, 2002 – 2003

Twenty years after the disestablishment of the nascent DSPO another special plans office would be at the center of controversy. This time it was the Office of Special Plans, established under Deputy Under Secretary of Defense for Policy Douglas Feith. In his memoir, War and Decision, Feith writes that in the summer of 2002, as “the President moved toward challenging Iraq in the United Nations, the Iraq-related workload in Policy became overwhelming.” The “Policy organization had only two staffers devoted full-time to Iraq,” but “this absurd situation was rectified with the creation of the team that became known as the Office of Special Plans.”8

Feith goes on to state that after he and William Luti, who headed the Near East and South Asia (NESA) office, had received permission to hire about an additional dozen people for that office, it became possible to create a distinct division in the office to handle northern Persian Gulf affairs. According to one account, the office was “given a nondescript name to purposely hide the fact that, although the administration was publicly emphasizing diplomacy at the United Nations, the Pentagon was actively engaged in war planning and postwar planning.”9

Feith, while agreeing on the desire to give the office an unrevealing name, explained the office’s title somewhat differently — “The President was emphasizing his desire for a diplomatic solution to the Iraq problem, but various journalists interpreted his intensified attention to Iraq as a sign that he had decided on war.” Bearing in mind a warning from Deputy National Security Adviser Stephen Hadley to administration officials “not to aggravate the problem” and since Feith and Luti “anticipated a flap” if the news media found out that the Pentagon had established a new Iraq office, they decided on an alternative designation for the new organization — Special Plans.10

Feith writes that “the Office of Special Plans was nothing more than a standard geographic office within the Policy organization, with the same kinds of responsibilities that every other geographic office in Policy had. It was simply the office of Northern Gulf Affairs — and indeed, after Saddam was overthrown, that became its name.” However, “although the name ‘Special Plans’ was intended to avert speculation, the two words eventually were taken by conspiracy theorists to imply deep and nefarious motives.”11

Douglas J. Feith, Undersecretary of Defense, For: Special Assistant to the Secretary of Defense for White House Liaison, Subject: Deputy Under Secretary of Defense for Special Plans and Near Eastern and South Asian Affairs (SP/NESA), August 23, 2002. Unclassified. Document 27.

Released documentation on the creation and disestablishment of the Office of Special Plans begins with an August 23, 2002 memo (Document 27) from Feith to an assistant to the secretary of defense. In the memo Feith notes his expansion of the responsibilities of the deputy assistant secretary of defense for Near East and South Asian affairs “as a result of September 11th,” that he had established a “new Directorate for Special Plans in NESA,” and had requested that Luti be promoted to deputy under secretary of defense for special plans and Near East and South Asian affairs (within the Office of International Security Affairs). The deputy secretary of defense approved the request via a September 13, 2002 memo (Document 28), and a month later the department’s director of administration and management followed suit (Document 29). That approval covered both the creation of the new position and Luti’s reassignment to that position.

A description of Luti’s responsibilities were part of an undated document (Document 31) that ran a little over two single-spaced pages. The description, in accord with the desire to avoid press reaction, never specifies what was meant by the term ‘special plans,’ and notes the incumbent’s responsibility to support the department’s policy and ISA’s “in developing U.S. strategy for a wide-range of contingencies and assessing the adequacy of U.S. campaign planning to carry out the strategy.” It also noted the deputy under secretary’s role in planning and policy direction on ISA programs concerning all nations in the Middle East and South Asia.

Another undated document (Document 32), consisting of a cover page and three charts, provides a clearer description of the changes. The cover itself indicates that the Office of Special Plans was actually the Office of Special Plans and Near East and South Asia Affairs and its expansion was motivated by a need to “deal with Iran, Iraq, and War on Terrorism.” A chart shows that within the office was a “Director, Special Plans,” who was formerly the “Director, Northern Gulf.”

Products of the office include two briefing papers. One, focused on the pros and cons of a provisional government for Iraq (Document 29). Another (Document 34) concerned “Iraqi Opposition Strategy.” Among its key points were that “U.S.-led coalition forces will have the lead in liberated Iraq,” and that “Iraqis will initially have only an advisory role.” It noted disagreement with the State Department’s view that the external opposition should be treated differently from “newly-liberated Iraqis.”

In July 2003, as Feith noted, in the aftermath of the fall of the Saddam Hussein regime, the office’s name and its components were changed (Document 35). The term ‘special plans’ was removed and Luti’s title reverted to deputy under secretary of defense for Near Eastern and South Asian affairs while the director of special plans became the director for Northern Gulf affairs.

As Feith also observed, the office’s existence and purpose became the subject of numerous articles and papers – attention which continued during and after the office’s demise. Two of the earliest examples of that attention include a response from the department’s public affairs office (Document 33) to a series of questions from journalist Seymour Hersh — who was researching an article for The New Yorker that would be published in the May 12, 2003 issue under the title “Selective Intelligence” — and a June 4, 2003, Department of Defense press briefing (Document 35).12


Answers 1 through 8 from the Department of Defense. Document 33.

The DoD public affairs response (Document 33) consisted of answers to the 20 questions posed byThe New Yorker. The information in the response related to personnel strength, its basic mission and reason for the office’s creation, its role (or lack of) in intelligence production, whether the office had disputes over the validity of intelligence data with the CIA and State Department, the activities of specific individuals believed to be associated with the Special Plans unit, and whether Special Plans employees referred to themselves as “The Cabal.”

The DoD briefing (Document 35), which included participation from Feith and Luti, followed The New Yorker article and disputed several of its statements (thus, repeating some of the comments made in the DoD response to The New Yorker‘s questions). Among the assertions disputed by Feith was that the Special Plans unit was responsible for reviewing intelligence concerning terrorist organizations and their state sponsors. He stated, “it’s a policy planning office.” He also asserted that “the reports that were obtained from the debriefings of these Iraqi defectors were disseminated in the same way that other intelligence reporting was disseminated, contrary to one particular journalist account who suggested that the Special Plans Office became a conduit for intelligence reports from the Iraqi National Congress to the White House,” adding, “That’s just flatly not true.”13

Policy Counterterrorism, 2002-2003 and Beyond

In the DoD briefing (Document 35), Feith did not dispute that he formed a team to review intelligence concerning terrorist groups and their sponsors — just that it was not the Office of Special Plans.

During the briefing he told his audience that after September 11, he “identified a requirement to think through what it means for the Defense Department to be at war with a terrorist network.” Thus, he asked some people “to review the large amount of intelligence on terrorist networks, and to think through how the various terrorist organizations relate to each other and how they relate to different groups that support them; in particular, state sponsors. And we set up a small team to help digest the intelligence that already existed on this very broad subject. And the so-called cell comprised two full-time people.” He added that “I think it’s almost comical that people think that this was set up as somehow an alternative … to the intelligence community or the CIA.”14


Douglas J. Feith, Under Secretary of Defense for Policy, Memorandum for Director, Defense Intelligence Agency, Subject: Request for Detail of Intelligence Analyst, December 5, 2001. Secret. Document 37.

As with the Office of Special Plans, there are a series of released memos depicting the origins of the intelligence review office. An apparently initial, undated (but no later than December 5, 2001), memorandum (Document 37) from Feith to Vice Adm. Thomas R. Wilson, the director of DIA, requested detail of an intelligence analyst. The memo noted that Feith had assigned “a number of intelligence-related duties to my Policy Support office,” that he had established “a small office … to assist in preparing specific sensitive intelligence requirements, and that the National Security Agency had supplied an intelligence specialist for a year. One anticipated aspect of the analyst’s duties, Feith notes, would be as “substantive liaison” to a DIA Iraqi “Red Cell.”15

That memo to Wilson did not assign a name to the “small office” — and referred to a two-person team established in October 2001 to examine the connections between terrorist groups and state sponsors. In his memoir, Feith wrote that “as the need for actionable intelligence became more apparent, I determined to get help in reviewing the intelligence that already existed on terrorist networks.” He further elaborated that “a vast quantity of intelligence reporting routinely landed on my desk, including ‘raw’ intelligence reports … It was my responsibility to make use of the reports and for this I needed staff assistance.” The two individuals Feith assigned to provide assistance were David Wurmser, a John Hopkins University Ph.D. and an intelligence officer in the Naval Reserve, and Michael Maloof, “a veteran Defense Department professional” who specialized in analyzing international criminal networks.16

The result of their work was a 154-slide presentation, Understanding the Strategic Threat of Terror Networks and their Sponsors — described in one account as a “sociometric diagram of the links between terrorist organizations and their supporters around the world.”17 Among the key observations, Feith informed Senator John Warner in June 2003 (Document 43A), was that “terrorist groups and their state sponsors often cooperated across ideological divides (secular vs. religious; Sunni vs. Shi’a) which some terrorism experts believed precluded cooperation.

By January 2002, both Wurmser and Maloof had left their positions. On January 22, Deputy Secretary of Defense Paul Wolfowitz sent a short memo to Feith titled “Iraqi Connections to Al Qaida,” that stated, “we don’t seem to be making much progress pulling together intelligence on links between Iraq and Al Qaida,” and added, “We owe SecDef some analysis of this subject.”18

On January 31, Peter W. Rodman, the assistant secretary of defense for international security, requested and received (Document 38) Feith’s approval — probably at Feith’s request — to establish a Policy Counter Terror Evaluation Group (PCTEG) “to conduct an independent analysis of the Al-Qaida terrorist network.”19 It specified four elements of PCTEG studies — studying al-Qaida’s worldwide organization (including its suppliers, its relations with States and with other terrorist organizations), identifying “chokepoints” in cooperation and coordination, identifying vulnerabilities, and recommending strategies to render the terrorist networks ineffective.

As recommended by Rodman, Feith signed a February 2, 2002, memo (Document 39) to DIA director Wilson informing him of the creation of a Policy Counter Terrorism Evaluation Group and what it would be doing. In addition, he asked for three individuals — two working for the DIA element that supported the Joint Staff – to be assigned to the group for 90 days. Approximately two weeks later, Wilson responded (Document 40), informing Feith that he could assign two of the three requested individuals to the evaluation group. While their names are deleted from Wilson’s response, numerous accounts identified one as Chris Carney, a naval reservist and subsequently a congressman (2007-2011).20

But even before Feith’s request for assistance, the PCTEG had produced an initial analysis of the links between al-Qaida and Iraq — according to a February 21, 2002, memo (Document 41) from Rodman to Feith. The memo told the deputy under secretary that a further analysis would follow in two weeks — and would include suggestions “on how to exploit the connection” between al-Qaida and Iraq and recommend strategies.


Douglas J. Feith, Under Secretary of Defense, to The Honorable John Warner, June 21, 2003. Unclassified. Document 43.

In a pair of June 21, 2003, letters (Document 43A,Document 43B) to Senate Armed Services Committee chairman John Warner and Rep. Jane Harman, Feith informed them that in the summer of 2002 the one remaining group member, along with an OSD staffer, produced a briefing, Assessing the Relationship between Iraq and al Qaida.21 It was first presented to the secretary of defense on August 8, and then, on August 15, DCI George Tenet and several other members of the CIA. A meeting between Feith’s representatives and Intelligence Community experts followed on August 20. In September, the briefing was presented to Stephen Hadley and I. Lewis Libby, chief of staff for the Office of the Vice President. Subsequently, Feith reported, the one-member team focused on “related issues, including work in support of the interrogation of al Qaida detainees,” until January 2003 when the final member of PCTEG departed.22

A “Key Questions” slide posed four questions which concerned the probability that there were contacts between Iraq and al Qaida; the probability that there was cooperation regarding such support functions as finances, expertise, training, and logistics; the probability that Iraq and al Qaida actually coordinated decisions or operations; and the probability that if a relationship existed, Iraq and al-Qaida could conceal its depth and characteristics from the United States.23

The only unclassified substantive slide from any of the briefings (Document 42) is titled “Fundamental Problems with How Intelligence Community is Assessing Information.” It identified three perceived problems — that the IC was applying a standard it would not normally employ, that there was a consistent underestimation of the importance Iraq and al-Qaeda would attach to concealing a relationship between the two, and that there was an assumption that secularists and Islamists will not cooperate, even when they have common interests.” That slide was not employed in the briefing to Tenet because, according to Feith, “it had a critical tone.”24

Another slide presented in the briefings was titled “What Would Each Side Want from a Relationship?” It identified one Iraqi objective — to obtain “an operational surrogate to continue war.” Another, titled “Summary of Known Iraq-al Qaida Contacts,1990-2002,” noted an alleged meeting between 9/11 hijacker Mohammed Atta and an Iraqi intelligence officer stationed in Prague. A slide that was employed in the September briefing, but not the others, was titled “Facilitation: Atta Meeting in Prague.” A slide titled “Findings” discussed alleged contacts, cooperation, and shared interests between Iraq and al-Qaida. It also contained a statement about coordination between Iraq and al-Qaida on 9/11 — with the exact wording differing from briefing to briefing. Five findings common to all the briefings were: “more than a decade of numerous contacts,” “multiple areas of cooperation,” “shared anti-US goals and common bellicose rhetoric — Unique in calling for killing of Americans and praising 9/11,” and “shared interest and pursuit of WMD,” and the “relationship would be compartmented by both sides, closely guarded secret, indications of excellent operational security by both parties.” The briefing for the secretary of defense asserted there was “one indication of Iraqi Coordination with al-Qaida,” while the briefing for Hadley and Libby stated there “were some indications of possible Iraqi coordination with al-Qaida.” In the briefing to Tenet, the slide claimed there was “one possible indication of Iraqi coordination with al-Qaida.”25

Feith’s efforts to dispell concern about the PCTEG continued , later that month, with a one-page “Fact Sheet on So-Called Intel Cell (or Policy Counter Terrorism Evaluation Group, PCTEG)” (Document 44). The fact sheet noted that the group’s focus was analysis of “the connections among terrorist groups and their government supporters in Iran, Syria, Iraq, Libya, Saudi Arabia, and the Palestinian Authority” — specifics not provided in earlier memos or statements. The fact sheet also reported that by April 2002 the PCTEG had decreased to one staffer, that it did not focus on the issue of weapons of mass destruction in Iraq, and that the Iraq-al-Qaida briefing grew out the PCTEG’s review of interconnections among terrorist groups and “the discovery by a staffer of some intelligence reports of particular interest.” The one-pager would not defuse the controversy over the organizations established under Feith’s tenure, with a number of articles continuing to repeat the disputed claims.26

In October 2004, Senator Carl Levin (D-Michigan) issued a 46-report (Document 45A), entitledReport of an Inquiry into the Alternative Analysis of the Issue of an Iraq-al-Qaeda Relationship, which consisted of two key parts. One focused on what Levin characterized as the development and dissemination of an “alternative” assessment of the relationship between Iraq and al-Qaida. That assessment, he argued, “went beyond the judgments of intelligence professionals in the [Intelligence Community], and … resulted in providing unreliable intelligence information about the Iraq-al-Qaeda relationship to policymakers.” Another presented Levin’s argument that the alternative analysis became the preferred view of the Bush administration concerning any Iraq – al Qaida connection, in contrast to the judgments reached by the Intelligence Community — which were more skeptical than those of Feith’s group.

A somewhat different, although overlapping, focus can be found in a report (Document 45B) issued by the Republican Policy Committee in February 2006. Among the issues it addressed was the organization and functions of the Office of Special Plans, the nature of the PCTEG, whether the PCTEG collected its own intelligence regarding an Iraq-al Qaida connection, whether the alternative work on the Iraq-al Qaida connection was hidden from the Intelligence Community, and whether it was wrong for staff from the Office of the Secretary of Defense to question Intelligence Community analysis. It also posed the question whether Senator Levin had evidence for “his allegations about deception of Congress?” — specifically the allegation that Feith inaccurately told congressional committees that DOD made CIA-requested changes to a document that DOD delivered to the committees. The policy committee claimed that “the CIA has confirmed in writing that DOD did, in fact, make all the CIA-requested changes.”

Photo right: Cover to Document 47.

The DoD Inspector General published a more detailed report in February 2007 (Document 47— Review of the Pre-Iraqi War Activities of the Office of the Under Secretary of Defense for Policy —many of whose key findings were presented in a briefing on the report (Document 46). The report was the result of requests by two senators. One was Senator Pat Roberts (R-Kansas), who at the time was chairman of the Senate Select Committee on Intelligence. On September 9, 2005, he requested a review of whether the Office of Special Plans “at any time conducted unauthorized, unlawful or inappropriate intelligence activities.” The other senator was Carl Levin, who about two weeks after the Roberts request, also asked the inspector general to review the activities of the under secretary of defense for policy, including the PCTEG and Policy Support Office, “to determine if any of the activities were either inappropriate or improper and if so, to provide recommendations for remedial actions.”27

Since, as the report noted, the “actual Office of Special Plans had no responsibility for and did not perform any of the activities examined in this review,” the report focused on the activities of the Policy Support Office and PCTEG. It defined its objective as being “to determine whether personnel assigned to the [Office of Special Plans, the Policy Counterterrorism Evaluation Group, and the Office of the Under Secretary of Defense for Policy] conducted unauthorized, unlawful, or inappropriate intelligence activities from September 2001 through June 2003.”28

The Inspector General’s primary conclusion was that the “Office of the Under Secretary of Defense for Policy … developed, produced, and then disseminated alternative intelligence assessments on the Iraq and al Qaida relationship, which included some conclusions that were inconsistent with the consensus of the Intelligence Community, to senior decision makers.” While such actions were not, in the inspector general’s opinion, “illegal or unauthorized, the actions were … inappropriate given that the products did not clearly show the variance with the consensus of the Intelligence Community and were, in some cases, shown as intelligence products.” In addition, the inspector general concluded that, as a result, Feith’s office “did not provide ‘the most accurate analysis of intelligence’ to senior decision makers.”29

The intelligence assessments the report referred to essentially constituted the briefing Assessing the Relationship between Iraq and al Qaida. With regard to the study on Understanding the Strategic Threat of Terror Networks and their Sponsors, the inspector general noted that it served as “an example of an appropriate application of intelligence information.” But with regard to the August/September briefings, it pointed to various CIA and DIA reports that, it judged, did not support some of the findings stated in the briefing. The CIA reports included a June 21, 2002, document titled Iraq and al-Qaida: Interpreting a Murky Relationship and an August 20, 2002, draft, Iraqi Support for Terrorism. DIA products cited by the report included a July 31, 2002, assessment, Iraq’s Inconclusive Ties to Al-Qaida and an August 9, 2002, memorandum by an analyst with the agency’s Joint Intelligence Task Force Combating Terrorism — “JITF-CT Commentary: Iraq and al-Qaida, Making the Case.” The latter was a response to a paper, “Iraq and al-Qaida, Making the Case,” that was reportedly the basis of the August and September briefings.30

By the time the Inspector General’s report was published, Feith had left government, so the official, 47-page, response came from his successor — Eric S. Edelman.31 The response, as published in the Inspector General’s report, consisted of the comments on the draft version of the report but serve as a response to the final report in the many areas where the two were the same.

Among the comments was the assertion that the briefing’s reference to a “cooperative” relationship between Iraq and al-Qaida “was consistent with the DCI’s own comments to Congress in 2002 and 2003.” In addition, Edelman argued that “senior decision-makers already had the IC’s reports and assessments on Iraq and al-Qaida,” thus they “already had ‘the most accurate intelligence’” — that is, he noted, “if one accepts, as the Draft Report seems to do, that the IC’s assessments are the ‘most accurate.’” He also objected that, since no laws were broken or DoD directives violated, there was no reason to characterize the work as inappropriate. In addition, “The Secretary, and by extension, the Deputy, unequivocally had the latitude to obtain an alternative, critical assessment of IC work on Iraq and al-Qaida from non-IC OSD staff members rather than from the DIA or the Assistant Secretary of Defense for C3I, without vetting such critique through any Intelligence Community process.”32

Conclusion

The term “special plans” was coined over seventy years ago as a euphemism for deception, and subsequently became a euphemism for perception management, one element of which was deception. Thus, confusing actual or potential enemies was always an objective of special plans activities. During the George W. Bush administration the term produced confusion of a different kind — including over attempts to sort out the activities of components of the Defense Department’s policy office.


THE DOCUMENTS

DECEPTION AND PERCEPTION MANAGEMENT, 1946-1980.

Document 1: Office of the Chief of Staff, War Department, Memorandum, Subject: Cover and Deception, July 5, 1946. Top Secret

Source: National Archives and Records Administration.

This memo assigns responsibility for the supervision of War Department cover and deception matters to the Director of Plans and Operations — including supervision and training as well as preparation of future military strategic cover and deception plans and policies. It also assigns the director responsibility for evaluating the results of World War II cover and deception activities.

Document 2: Office of the Adjutant General, War Department, Memorandum, Subject: Tactical Cover and Deception, July 8, 1946. Top Secret.

Source: National Archives and Records Administration.

Responsibility for tactical deception to be employed by ground forces is assigned, by this memo, to the Commanding General, Army Ground Forces. It identifies three specific types of units involved in tactical deception activities — radio, sonic, and camouflage.

Document 3: Maj. Gen. George C. McDonald, Assistant Chief of Air Staff -2, to Commanding General, Army Air Forces, Subject: Army Air Force Cover and Deception Organization, n.d., circa 1946. Top Secret.

Source: National Archives and Records Administration.

This memo, from an Air Force Assistant Chief of Staff to the commander of the Army Air Forces addresses the issue of an Army Air Force cover and deception organization. It notes use of cover and deception during World War II, the current absence of such an organization and need to establish one, as well as suggesting responsibilities for various Army Air Force officials and components in a cover and deception effort.

Document 4: Headquarters, Army Air Forces, Memorandum, Subject: Establishment of Headquarters, Army Air Forces Cover and Deception Organization, n.d. Top Secret.

Source: National Archives and Records Administration.

This memorandum, to the assistant chiefs of the Air Staff, following up General McDonald’s recommendation (Document 3), directs establishment of an Army Air Forces Cover and deception organization and assigns responsibilities to different assistant chiefs of staff. (It is not clear whether such an organization was ever established).

Document 5Office of the Chief of Naval Operations, Department of the Navy, Memorandum for the Acting Chairman, United States Evaluation Board, Subj: Rewrite of USEB Charter, September 28, 1976. Secret.

Source: National Archives and Records Administration.

This memo, from the Director of Naval Intelligence, is addressed to the Acting Chairman of the “United States Evaluation Board.” The memo notes that the board was established “for cover and deception purposes,”with counterintelligence agencies being responsible for CFAs/DAs (presumably ‘controlled foreign agents’ and ‘double agents’), and the role of the Evaluation Board in processing “feed material” — information or documents to be passed to foreign intelligence services via the CFAs/DAs.

Document 6Joint Chiefs of Staff, JCS Pub 4, Joint Chiefs of Staff Organization and Functions Manual, 1980 (Extract)

Source: Department of Defense Freedom of Information Act Release.

This extract from the Joint Chiefs of Staff 1980 organization and function manual discloses the existence of a Special Plans Branch within the Joint Staff and its responsibility to “provide guidance and instructions to appropriate agencies on the conduct of special planning (perception management) activities.”

Document 7: Joint Chiefs of Staff, “Perception Management: Iran,” 1980. Secret.

Source: DoD Freedom of Information Act Release.

This memo was written during the hostage crisis that began with the seizure of the U.S. Embassy in Tehran on November 4, 1979. Its purpose is stated as outlining a concept for employing psychological operations in support of resolving the “crisis in Iran on terms favorable to the interests of the United States.” It summarizes the situation, specifies assumptions, target groups, potential themes, and the concept — including both the organization and management of the effort as well as twelve possible measures.

Document 8A: Maj. Gen. Jack V. Mackmull, Commander, John F. Kennedy Center for Military Assistance, Subject: Psychological Operations Plan – Iranian Hostage Crisis, February 14, 1980. Secret.

Document 8B: Colonel Alfred H. Paddock Jr., Headquarters, 4th Psychological Operations Group, Subject: Psychological Operations Plan – Iranian Hostage Plan, February 13, 1980. Secret w/att: Statement of PSYOP Objective. Secret.

Source: Department of Defense Freedom of Information Act Release.

General Mackmull’s February 14 letter transmits the February 13 letter and attached document from Colonel Paddock of the 4th Psychological Operations Group. Paddock’s letter notes the specific objectives of expanding the National Strategic Psychological Operations Plan to address the “captors” responsible for the seizure of the U.S. embassy in Tehran. The attached plan provides a statement of PSYOP objectives, defines the target audience, states themes, assesses effectiveness, and offers conclusions.

Document 9: Lt. Col. [Deleted], Memorandum to JCS, Subject: Strategic Political [Deleted], March 6, 1980, Confidential. w/att: Memorandum for the Chairman Joint Chiefs of Staff, Subject: Strategic/Political [Deleted] RICE BOWL Ops, March 6, 1980. Top Secret.

Source: Department of Defense Freedom of Information Act Release.

This memo, whose title is partially redacted, concerns psychological operations to be conducted during Operation RICE BOWL — the planning phase of Operation EAGLE CLAW, the attempted U.S. mission to rescue American hostages in Tehran in April 1980.

Document 10: Joint Staff, Memorandum to Major General Vaught, Subject: Background Option Papers, May 16, 1980. Top Secret.

Source: Department of Defense Freedom of Information Act Release.

One of the background option papers prepared by the Joint Staff included one on “interim non-violent options.” Those included a rumor campaign, dropping of leaflets, interdiction of the Tehran power grid, a supersonic overflight by an SR-71 (accompanied by photo flash bombs), and periodic semi-overt probes of Iranian air space.

Document 11: Colonel [Deleted], Chief of Staff, Memorandum for Major General Vaught,Subject: “Backburner,” June 2, 1980. Secret.

Source: Department of Defense Freedom of Information Act Release.

This memo reveals the existence of a perception management effort designated “Backburner” but provides no specifics. It does recommend some actions in support of the plan — including withdrawal of the U.S. carrier task groups from the Indian Ocean and employing hostage families to create “an illusion of well being among the hostages.”

Document 12: Lt. Col. [Deleted], Memorandun for General Vaught, Subject: Psychological Operations Support for SNOWBIRD, June 2, 1980. Secret.

Source: Department of Defense Freedom of Information Act Release.

This memo discusses possible psychological operations in support of a second possible attempted mission to rescue U.S. hostages in Iran. Included among the possible operations were “small actions and communications” to indicate that the US was beginning to have second thoughts about employing military force. The memo also noted that some of the actions proposed “are on very tenuous legal ground.”

Document 13: Department of Defense, Department of Defense Telephone Directory, August 1980 Unclassified. (Extract)

Source: U.S. Government Printing Office.

These pages from the August 1980 issue of the Department of Defense’s telephone directory indicates the existence of a Special Plans Branch within the Joint Staff’s Special Operations Division.

PERCEPTION MANAGEMENT AND SPECIAL PLANS, 1981-1990

Document 14: Central Intelligence Agency, “DCI’s Schedule for Wednesday, 8 April 1981,” April 8, 1981. Secret.

Source: www.cia.gov/err

This page from DCI William Casey’s schedule includes an entry for a meeting on the Defense Department’s “strategic deception program” — a briefing given by Deputy Under Secretary of Defense for Policy Review Gen. Richard Stillwell as well Lt. Gen. Philip Gast, the chief of operations for the Joint Staff.

Document 15: John H. Stein, Acting Deputy Director for Operations, Memorandum for: Director of Central Intelligence, Subject: Briefing Provided Acting DDO by General Tighe and General Stillwell, April 24, 1981. Secret.

Source: CIA Records Search Tool (CREST).

This memorandum from the CIA’s acting deputy director of central intelligence for the Director of Central Intelligence reported on a briefing Stein received from General Stillwell (Document 14) and the director of the Defense Intelligence Agency “on their special project” — which may be a reference to the DoD perception management/deception program.

Document 16: Major General E. R. Thompson to Mr. John Stein, April 23, 1982. Top Secret.

Source: CREST.

This letter to CIA deputy director of operations John Stein is signed by Major General E. R. Thompson, who had served as the Army assistant chief for intelligence, and who the letter identifies as the director of the Defense Special Plans Office (DSPO). The letter focuses on the need for resources to operate the office. It also notes the existence of a charter for the DSPO and an Operational Capabilities Tasking memorandum (copies of which were attached to the letter but not released).

Document 17: Martin Hurwitz, Director, General Defense Intelligence Program, to Mr. James S. Wagenen, June 11, 1982. Secret.

Source: CREST.

This letter, from the director of the General Defense Intelligence Program, responds to a request from a staff member of the House Appropriations Committee for sources of funds, via realignment, for the Defense Special Plans Office.

Document 18: Charles W. Hinkle, Director, Freedom of Information and Security Review, Office of the Assistant Secretary of Defense, to Dr. Jeffrey Richelson, July 25, 1983. Unclassified w/att: General Richard G. Stilwell, Deputy Under Secretary of Defense, Memorandum for the Director, Washington Headquarters Services, Subject: Cancellation of DoD Directives TS-5155.2 and C-5155.1, February 2, 1983. Unclassified.

Source: Department of Defense Freedom of Information Act Release.

In response to a June 22, 1983 Freedom of Information Act for copy of the organization chart and mission statement for the Defense Special Plans Office, the DoD’s Director of Freedom of Information and Security Review stated that “no such office exists” and encloses a relevant memorandum. The memorandum explains that the office did exist and why it no longer did as of July 25, 1983.

Document 19: Charles W. Hinkle, Director, Freedom of Information and Security Review, Office of the Assistant Secretary of Defense, to Mr. R. Scott Armstrong, July 25, 1983.Unclassified.

Source: R. Scott Armstrong.

This DoD response to FOIA requests by Washington Post writer Scott Armstrong for records related to the Defense Special Plans Office states that the DoD copies of the directives were classified in their entirety — as were all other documents cited in the letter, including those related to the office’s creation and budget and accounting issues.

Document 20: Department of Defense, Department of Defense Telephone Directory, December 1983, Unclassified. (Extract)

Source: U.S. Government Printing Office.

While the DSPO no longer existed as of December 1983, the Special Plans units in the Special Operations Division and the Defense Intelligence Agency (created subsequent to August 1980) remained in existence — and occupied adjoining suites in the Pentagon — as indicated by this extract from the December 1983 Department of Defense Telephone Directory.

Document 21: Joint Chiefs of Staff, Report* by the J-3 to the Joint Chiefs of Staff on Special Plans Overview Guidance, August 9, 1985. Top Secret.

Source: Department of Defense Freedom of Information Act Release.

The title of this almost entirely redacted document indicates that, in 1985, the Joint Chiefs of Staff produced an overview guidance for special plans activities. (A recent request for the document produced a ‘no records’ response).

Document 22: John H. Fetterman, Jr. Deputy and Acting Chief of Staff, U.S. Atlantic Command, Subj: Deception Planning Organization, October 28, 1985, Confidential.

Source: Department of Defense Freedom of Information Act Release.

This Atlantic Command instruction illustrates the existence of deception planning organizations not only at the Defense Department and defense agency level but also at the unified commands. Among the topics discussed were planning considerations as well as ‘Special Means and Feed Material’ — that is use of agents of deception and the material to be fed to deception targets.

Document 23: Lt. Richard A. Burpee, Director of Operations, Joint Staff, SM-224-87, Subject: Special Plans Guidance – Strategic Defense, April 6, 1987. Top Secret.

Source: Department of Defense Freedom of Information Act Release.

A key element of the Reagan administration’s defense policy was strategic defense, which included the Strategic Defense Initiative (SDI), better known as ‘Star Wars.’ This document, most which has been redacted, focuses on special plans related to U.S. strategic defense programs. It notes a number of areas that “may warrant additional review when considering [perception management] support of Strategic Defense.”

Document 24: Joint Chiefs of Staff, JCS Admin Pub 1.1, Organization and Functions of the Joint Staff, October 1, 1988. Unclassified. (Extract)

Source: Department of Defense Freedom of Information Act Release

This extract from the Joint Chiefs of Staff organization and functions manual shows the structure of the J-3 (Operations) directorate of the Joint Staff and the locus of Special Plans management for the JCS in the directorate’s Operations Planning and Analysis Division. It also reveals the existence of an “Interdepartmental Special Plans Working Group.”

Document 25: United States Central Command, Regulation 525-3, Military Deception Policy and Guidance, August 11, 1990. Secret.

Source: Central Command Freedom of Information Act Release.

As did the 1985 Atlantic Command instruction (Document 22) this document concerns military deception activity at the unified command level. It notes that US military deceptions “shall not be designed to influence the actions of US citizens or agencies, and they will not violate US law, nor intentionally mislead the American public, US Congress, or the media.”

Document 26: General Accounting Office, GAO/NSIAD-94-219, Ballistic Missile Defense: Records Indicate Deception Program Did Not Affect 1984 Test Results, July 1994. Unclassified.

Source: http://gao.gov

This GAO report was produced in response to a request by a member of Congress that the office investigate claims made in 1993 of DoD deception in its June 1984 ballistic missile defense test – Homing Overlay Experiment 4 (HOE 4). It reports on DoD’s acknowledgment of a deception program associated with the HOE, that there was no evidence that DoD deceived Congress about HOE 4 intercepting its target (although the department did not disclose how it made interception easier), and that plans for a deceptive explosion was dropped prior to the test in the event of a near miss.

SPECIAL PLANS, 2002 – 2003

Document 27: Douglas J. Feith, Undersecretary of Defense, For: Special Assistant to the Secretary of Defense for White House Liaison, Subject: Deputy Under Secretary of Defense for Special Plans and Near Eastern and South Asian Affairs (SP/NESA), August 23, 2002. Unclassified.

Source: Department of Defense Freedom of Information Act Release

This memo, from Under Secretary of Defense for Policy Douglas Feith, announces his plans to create a Directorate of Special Plans within the office of the Deputy Under Secretary of Defense for Near Eastern and South Asian Affairs. The directorate, Feith explained, was to assume responsibility within his office for the war on terrorism. Feith requests approval of his nominee to head the new office.

Document 28: Jacqueline G. Arends, Special Assistant to the Secretary for White House Liaison, For: Deputy Secretary of Defense, Subject: Candidate Approval Position Adjustment – Liu, September 13, 2002. Unclassified w/att: Douglas J. Feith, Under Secretary of Defense, For: Special Assistant to the Secretary of Defense for White House Liaison, Subject; Deputy Under Secretary of Defense for Special Plans and Near Eastern and South Asian Affairs (SP/NESA), August 23, 2002. Unclassified.

Source: Department of Defense Freedom of Information Act Release.

This memo from the special assistant to the Secretary of Defense for White House Liaison to the Deputy Secretary of Defense requests approval to establish the office proposed by Feith in his August 23 memorandum (Document 27) as well as to appoint William Luti to the position.

Document 29: OSD/SP/NESA, “Pros and Cons of a Provisional Government,” October 10, 2002, Secret/Noforn.

Source: Department of Defense Freedom of Information Act Release.

The organizational authorship attributed to this memo concerning the formation of a provisional Iraqi government — “OSD/SP/NESA” — indicates the memo is a product of the Special Plans component of the Office of the Secretary of Defense.

Document 30: Assistant Director for Executive and Political Personnel, To: Director, Personnel and Security, Director of Administration and Management, Subject: Establishment of the SES General Position of Deputy Under Secretary of Defense (Special Plans & Near Eastern and South Asian Affairs) and Noncareer Reassignment of William J. Luti, October 13, 2002. Unclassified w/att: Approval/certification, October 21, 2002. Unclassified.

Source: Department of Defense Freedom of Information Act Release

This memo follows up on the earlier memos from Feith (Document 27) and Arends (Document 28) on creation of the position of Deputy Under Secretary of Defense (Special Plans & Near Eastern and South Asian Affairs). It describes the position as advising and exercising “responsibility for all policy matters of Defense interest pertaining to special plans and the defense policy on the countries of the Middle East and South Asia.” It recommends approval of the proposed position and nominee — recommendations which the last page indicates were accepted.

Document 31: Department of Defense, Deputy Under Secretary of Defense Special Plans and Near Eastern and South Asian Affairs, n.d. Unclassified.

Source: Department of Defense Freedom of Information Act Release.

This document describes, inter alia, the nature and purpose of the position of the Deputy Under Secretary of Defense Special Plans and Near Eastern and South Asian Affairs.

Document 32: Department of Defense, Office of Special Plans and Near East and South Asian Affairs: Expansion to Deal with Iran, Iraq, and the War on Terrorism, circa late 2002- 2003.

Source: www.waranddecision.com

These briefing slides, intended to describe the expansion of the Office of Special Plans and Near East and South Asian Affairs, includes a organization chart for the Under Secretary of Defense for Policy, a description of the organization prior to October 2002, and a depiction of the post-October 2002 reorganization. The last chart indicates that the Director, Special Plans was responsible for “Iran, Iraq, War on Terrorism.”

Document 33: Office of Public Affairs, Department of Defense, Answers to Questions Posed by Seymour Hersh/The New Yorker, circa 2003.

Source: Department of Defense Freedom of Information Act Release.

This document, consists of questions posed by The New Yorker/Seymour Hersh for a story being researched as well as the answers provided by the Department of Defense. The questions concerned the personnel strength, personnel histories, mission, and activities of the Office of Special Plans.

Document 34: Office of the Secretary of Defense/Special Plans/Near Eastern and South Asian Affairs, “Iraqi Opposition Strategy,” January 30, 2003, Secret.

Source: www.dod.mil/pubs/foi

This paper, prepared by the office of William Luti, Deputy Under Secretary of Defense for Special Plans and Near Eastern and South Asian Affairs, focused on the strategy of the Iraqi opposition. Its states the office’s opposition to the State Department position with regard to the treatment of the external opposition to Saddam’s regime and discusses a number of specific issues (including the Judicial Council, Consultative Council, and Census).

Document 35: Department of Defense, News Transcript, DoD Briefing on Policy and Intelligence Matters, June 4, 2003. Unclassified.

Source: www.defenselink.mil

The briefing covered in this transcript involved participation by Under Secretary of Defense for Policy Douglas J. Feith and Deputy Under Secretary of Defense for Special Plans and Near East and South Asian Affairs William J. Luti. Among the topics to be discussed, Feith noted at the beginning of the briefing was the “so-called, or alleged intelligence cell and its relation to the Special Plans Office.”

Document 36: William J. Luti, Deputy Under Secretary of Defense, Memorandum for: Principal Director, Organizational Management, and Support OUSDP, Subject: Office Redesignations, July 14, 2003. Unclassified.

Source: Department of Defense Freedom of Information Act Release.

This memo from William J. Luti requests that his office designation be changed to Deputy Under Secretary of Defense for Near Eastern and South Asian Affairs and that the title of Director for Special Plans be changed to Director for Northern Gulf Affairs.

POLICY COUNTERTERRORISM EVALUATION GROUP, 2002 – 2008

Document 37: Douglas J. Feith, Under Secretary of Defense for Policy, Memorandum for Director, Defense Intelligence Agency, Subject: Request for Detail of Intelligence Analyst, December 5, 2001. Secret.

Source: www.dod.gov/pubs/foi

In this memorandum to the Director of the Defense Intelligence Agency, Under Secretary of Defense for Policy Douglas Feith notes that he had “assigned a number of intelligence-related duties to my Policy Support office,” requests that a DIA analyst be detailed for a year to help carried out those duties, and notes that the National Security Agency had responded favorably to a similar request. Feith’s memo also reveals the existence of a Defense Special Plans Program, in a context which suggests that Special Plans was being used as a euphemism for perception management.

Document 38: Peter W. Rodman, Assistant Secretary of Defense International Security Affairs, to Under Secretary of Defense (Policy), Subject: Policy Evaluation Group (PCTEG), January 31, 2002 Secret.

Source: Department of Defense Freedom of Information Act Release

This memo, from the assistant secretary of defense for international security affairs, to deputy under secretary Feith, requests his approval to established a Policy Counter Terror Evaluation Group “to conduct an independent analysis of the Al-Qaida terrorist network.” It goes on to specify what subjects the group would focus on. Feith indicates his approval at the end of the memo.

Document 39: Douglas J. Feith, Memorandum for Director, Defense Intelligence Agency, Subject: Request for Support, February 2, 2002. Secret.

Source: www.dod.gov/pubs/foi

Similar to his memorandum of December 5, 2001 (Document 37) to the DIA director, deputy under secretary Feith requests the detail of three DIA analysts (by name) to become part of the Policy Counter Terrorism Evaluation Group — although he asks only for 90-day deployments. The memo also describes the focus of the group’s planned analytical effort.

Document 40: Vice Adm. Thomas R. Wilson, Director, Defense Intelligence Agency, to Under Secretary of Defense for Policy, Subject: Request for Support, February 15, 2002,. Confidential.

Source: www.dod.gov/pubs/foi

In his response to Feith’s request (Document 39), DIA director Thomas Wilson agrees to provide two of the request analysts to the PCTEG, who would serve with the group as U.S. Navy reservists.

Document 41: Peter W. Rodman, Assistant Secretary of Defense, International Security Affairs, to Deputy Secretary of Defense, Subject: Links between Al-Qaida and Iraq, February 21, 2002. Secret.

Source: www.waranddecision.com

This memo from international security affairs chief Rodman to Feith notes that the PCTEG had provided the results of their initial work on links between Al-Qaida and Iraq and restated the four components of the group’s analytical focus. It also promises to provide further analysis along with suggestions “on how to exploit the connection and recommend strategies.”

Document 42: Office of the Secretary of Defense, Assessing the Relationship Between Iraq and Al Qaida, n.d., August 2002. Classification Not Available.

Source: www.levin.senate.gov

The forerunner to the PCTEG produced a 154-page report on links between terrorist organizations and state sponsors of terrorism. A follow-up effort, focusing on links between al-Qaeda and Iraq, resulted in briefings to several briefings, including one to DCI George Tenet. The single substantive slide that has been released is one that was briefed to the Department of Defense, but not to the DCI.

Document 43A: Douglas J. Feith, Under Secretary of Defense, to The Honorable John Warner, June 21, 2003. Unclassified.

Document 43B: Douglas J. Feith, Under Secretary of Defense, to The Honorable Jane Harman, June 21, 2013. Unclassified.

Source: www.dod.gov/pubs/foi

These letters from Feith to chairman of the Senate Armed Services Committee and Representative Jane Harman concerns the “so-called ‘DoD intelligence cell.’” He writes that “we set up a small team to help digest the intelligence that already existed” on links between terrorist networks and state sponsors and that after April 2002 “the team was down to one full-time person.” He also addresses the work on the team member after April 2002 and the identification of the team with the Office of Special Plans.

Document 44Under Secretary of Defense, Policy, Draft, “Fact Sheet on So-Called Intell Cell (or Policy Counterterrorism Evaluation Group, PCTEG), “February 3, 2004. Unclassified.

Source: www.dod.gov/pubs/foi

As with the letters to John Warner and Jane Harman (Document 43ADocument 43B) this document focuses on the “so-called Intell Cell” — the Policy Counter Terrorism Evaluation Group. This one-page fact sheet discusses the reason for establishing the group, the focus of its research, its product, and the size of the group.

Document 45A: Senator Carl Levin, Report of an Inquiry into the Alternative Analysis of the Issue of an Iraq-al Qaeda Relationship, October 21, 2004. Unclassified.

Document 45B: Republican Policy Committee, The Department of Defense, the Office of Special Plans and Iraq Pre-War Intelligence, February 7, 2006. Not classified.

Sources: www.levin.senate.govwww.dougfeith.com

These two reports, from differing political perspectives address the interrelated issues of the analysis of the Iraq- al-Qaeda relationship produced by the PCTEG, the mission of the Office of Special Plans, and various reports about the Special Plans office’s activities.

Document 46Inspector General, Department of Defense Report on Review of the Pre-Iraqi War Activities of the Office of the Under Secretary of Defense for Policy (Report No. 07-INTEL-04), February 9, 2007. Unclassified.

Source: www.dodig.mil

These briefing slides summarize the purpose and results of the Department of Defense Inspector General’s report on the activities of the Office of Special Plans and PCTEG. It notes separate requests from Sen. Pat Roberts, a Republican, and Carl Levin (Document 45A) to review the activities of either the OSP or the PCTEG and Policy Support Office, states review objectives, the scope of the review, and findings. The final five slides provide answers to questions posed by Senator Levin.

Document 47: Inspector General, Department of Defense, 07-INTEL-04, Review of the Pre-Iraqi War Activities of the Office of the Under Secretary of Defense for Policy, February 9, 2007. Secret/Noforn.

Source: www.dodig.mil

This report, whose origins and reports are summarized in briefing slides released the same day (Document 46) was released in redacted form by the DoD Inspector General’s Office. It provides background to its origins, describes its results, and presents its evaluation — which includes the statement that “The assessments produced evolved from policy to intelligence products, which were then disseminated” and that such actions “were inappropriate because a policy office was producing intelligence products and was not clearly conveying to senior decision-makers the variance with the consensus of the Intelligence Community.”

Document 48: U.S. Senate, Select Committee on Intelligence, Intelligence Activities Relating to Iraq Conducted by the Policy Counterterrorism Evaluation Group and the Office of Special Plans Within the Office of the Under Secretary of Defense for Policy , June 2008. Unclassified.

Source: www.senate.gov

Despite its title, this report largely focuses on one particular incident – a meeting in Rome that occurred between December 10 and December 13, 2001. The meeting involved a number of DoD officials, including one who subsequently became a member of the Office of Special Plans, and Iranian exiles.


NOTES

[1] On the multiple forms of deception and the components of perception management see, Joseph W. Caddell, Deception 101 – Primer on Deception, December 2004, available at: http://www.fas.org/irp/eprint/deception.pdf; Jeffrey T. Richelson, “Planning to Deceive,” Bulletin of the Atomic Scientists, Mach/April 2003, pp. 64-69.

[2] Michael Howard, British Intelligence in the Second World War, Volume 5: StrategicDeception (London: Her Majesty’s Stationary Office, 1990), p. 110; Thaddeus Holt, TheDeceivers: Allied Military Deception in the Second World War (New York: Skyhore Publishing 2007), p. 795. The book, originally published in 1975, that first popularized the history of World War II deception is Anthony Cave Brown, Bodyguard of Lies: The Extraordinary True StoryBehind D-Day (Guilford, Ct.: The Lyons Press, 2002).

[3] Richelson, “Planning to Deceive.”

[4] On LACROSSE and MISTY, see Jeffrey T. Richelson, The Wizards of Langley: Inside theCIA’s Directorate of Science and Technology (Boulder, Co.: Westview, 2001), pp. 247-249. On the Reagan administration’s concern with Soviet denial and deception, see Ronald Reagan, National Security Decision Directive 108, “Soviet Camouflage, Concealment and Deception,” October 12, 1983.

[5] In the same time period special plans units could found at both the service and command levels. Examples included the Special Plans Division of the Directorate of Plans of the Air Force office of the Deputy Chief of Staff, Plans & Operations; a Special Plans component of the Tactical Air Command; and the CINCPAC Special Plans Committee.

[6] Bob Woodward, “Gadhafi Target of Secret U.S. Deception Plan,” Washington Post , October 2, 1986, pp. A1, A12-A13; David M. North, “U.S. Using Disinformation Policy To Impede Technical Data Flow,” Aviation Week & Space Technology, March 17, 1986, pp. 16-17; “A Bodyguard of Lies,” Newsweek, October 13, 1986, pp. 43-46.

[7] The most recent known official document related to deception is: Department of Defense Instruction S-3604.01, “Department of Defense Military Deception,” March 11, 2013. (It is still classified.)

[8] Douglas J. Feith, War and Decision: Inside the Pentagon at the Dawn of the War onTerrorism (New York: Harper 2008), p. 293.

[9] Dana Priest, “Pentagon Shadow Loses Some Mystique,” Washington Post, March 13, 2004, p. A11.

[10] Feith, War and Decision , pp. 293-294.

[11] Ibid., p. 294.

[12] Seymour Hersh, “Selective Intelligence,” The New Yorker , May 12, 2003, pp. 44-51.

[13] See Ibid., pp. 44-45. The New Yorker article reportedly resulted in a letter to the magazine’s editor, David Remnick, from a senior DoD public affairs official in which the official complained that “There are more inaccuracies that can be addressed in this letter, and it is particularly disappointing given the time and effort taken by my staff to ensure The New Yorker has its facts straight prior to publication.” See, Bill Gertz and Rowan Scarborough, “Inside the Ring,” The Washington Times, May 21, 2004. A FOIA request for the letter produced a “no records” response from DoD.

[14] On the creation of this group — the Policy Counterterrorism Evaluation Group (PCTEG) — also see Feith, War and Decision, pp. 116-117.

[15] The memo also suggested that the term Special Plans continued, in some instances, to have its traditional association with deception/perception management — since it stated that Feith directed a number of activities that required sensitive intelligence support, including the “Defense Special Plans Program.”

[16] Feith, War and Decision, p. 117.

[17] Inspector General, Department of Defense, Report 07-INTEL-04, Review of the Pre-IraqiWar Activities of the Office of the Under Secretary of Defense for Policy , February 9, 2007, p.12; Priest, “Pentagon Shadow Loses Some Mystique.” Another examination of the activities of PCTEG and its untitled predecessor is by James Risen, “How Pair’s Finding on Terror Led To Clash on Shaping Intelligence,” New York Times, April 28, 2004, pp. A1, A19.

[18] Peter Spiegel, “Investigation fills in blanks on how war groundwork was laid,” Los AngelesTimes , April 6, 2007, p. A10.

[19] Feith, War and Decision , p. 118.

[20] Ibid., pp. 118, 264; Priest, “Pentagon Shadow Loses Some Mystique.”

[21] The one PCTEG member (Chris Carney) plus two OSD staffers (veteran DIA analyst Christina Shelton and James Thomas) produced and presented the briefing — as Feith noted in War and Decision , pp. 265-266.

[22] Inspector General, Department of Defense, Report 07-INTEL-04, Review of the Pre-IraqiWar Activities of the Office of the Under Secretary of Defense for Policy , February 9, 2007, p.10; Feith, War and Decision, p.119n; Senator Carl Levin, Report of an Inquiry into the Alternative Analysis of the Issue of an Iraq-al Qaeda Relationship , October 21, 2004, pp. 14, 16. What Tenet said and thought about the briefing has been a subject of controversy — See Priest, “Pentagon Shadow Loses Some Mystique”; Feith, War and Decision, pp. 266-267; George J. Tenet with Bill Harlow, At the Center of the Storm: My Years at the CIA (New York: Harper Collins, 2007), pp. 346-348. The briefing and related issues are discussed at length in U.S. Congress, Senate Committee on Armed Services, Briefing on the Department of Defense Inspector General’s Report on the Activities of the Office of Special Plans Prior to the War inIraq (Washington, D.C.: U.S. Government Printing Office, 2008).

[23] Inspector General, Department of Defense, Report 07-INTEL-04, Review of the Pre-IraqiWar Activities of the Office of the Under Secretary of Defense for Policy , p. 72

[24] Ibid., p. 9.

[25] Ibid., pp. 7, 11, 32, 73-75.

[26] See Jason Leopold, “CIA Probe Finds Secret Pentagon Group Manipulated Intelligence on Iraqi Threat,”www.Antiwar.com, July 25, 2003; Robert Dreyfuss and Jason Vest, “The Lie Factory,”Mother Jones, January/February 2004; Karen Kwiatowski, “The new Pentagon papers,” www.salon.com, March 10, 2004; James Bamford, A Pretext for War: 9/11, Iraq, andthe Abuse of America’s Intelligence Agencies (New York: Doubleday, 2004), pp. 307-308, 314-316, 318-320, 324; Peter Eisner and Knute Royce, The Italian Letter: How the Bush Administration Used a Fake Letter to Build the Case for War in Iraq (New York: Rodale, 2007), pp. 58-63.

[27] Inspector General, Department of Defense, Report 07-INTEL-04, Review of the Pre-IraqiWar Activities of the Office of the Under Secretary of Defense for Policy , p. ii.

[28] Ibid., p. 3.

[29] Ibid., p.4.

[30] Ibid., pp.7-9, 12, 14, 29. Declassified versions of the two CIA reports can be found at:http://www.fas.org/irp/congress/2005_cr/levin041505.html. The topic of Iraqi – al Qaida links is also the subject of Kevin M. Woods with James Lacey, Institute for Defense Analyses, Saddamand Terrorism: Emerging Insights from Captured Iraqi Documents, Volume 1 (Redacted), November 2007.

[31] Feith’s reaction appeared in War and Decision , pp. 270-271 as well as on his website — http://www.dougfeith.com

[32] Inspector General, Department of Defense, Report 07-INTEL-04, Review of the Pre-IraqiWar Activities of the Office of the Under Secretary of Defense for Policy , pp. 56-58, 79.

Cheap Gasoline: Why Venezuela Is Doomed To Collapse – Forbes

Cheap Gasoline: Why Venezuela Is Doomed To Collapse – Forbes.

Christopher HelmanChristopher HelmanForbes Staff

Riots in the streets. Killings of protesters. Shortages of consumer staples liketoilet paper and flour. Power outages. Confiscations of private property. Capital flight. Inflation running at more than 50%. The highest murder rate in the world.

The situation in Venezuela has grown so terrible that we could very well be witnessing the waning days of the Chavez-Maduro regime.

But don’t hold your breath. Despots propped up by revenues from natural resources have had a surprisingly robust track record over the past 100 years. Saddam Hussein survived through ruthlessness and handouts to Baath party loyalists. Khadafi perfected the same model in Libya. The Saudis and other Gulf sultanates and emirates have survived by paying off tribe members. Zimbabwe’s Robert Mugabe is still around thanks to his trade in blood diamonds.

In each case, the big boss keeps his head by paying off everyone who matters.

Hugo Chavez appeared to have the same kind of staying power. But with a difference. Rather than just focusing on lining the nests his generals and ministers and doers, Chavez, and Nicolas Maduro after him, found a different way to squander Venezuela’s great oil wealth. They could have created a mechanism by which the people of Venezuela could leverage oil wealth to finance investment and capital formation (like, say, Norway). Instead they’ve simply given it all away.

Indeed, it might not happen this month or this year, but Venezuela is ultimately doomed to collapse because of cheap gasoline.

Befitting Venezuela’s position as holder of the world’s biggest oil reserves, Chavez set the price of gasoline at the official equivalent of 5 U.S. cents per gallon. Using the more realistic black market exchange rate, a gallon of gas in Venezuela costs less than one penny. You can fill up an SUV for less than the price of a candy bar.

It’s one thing for a dictator to curry favor among his subjects by handing out cash. You can trade cash for goods today. You can save it up and buy something bigger tomorrow. And vitally, you can invest cash and create capital. Cash has unsurpassed option value.

But in Venezuela, cheap gasoline doesn’t. Sure, some enterprising Venezuelans would fill up their tanks, drive to Colombia, siphon it out and sell it for a profit. But most just take it for granted, like breathable air. You can’t trade it, can’t sell it, can’t store it up.

Over time, when a government continually gives its people a non-tradable subsidy, they will come to consider it a right, not a privilege. When that happens it will no longer occur to them to be thankful toward their generous president for the handout. When that take-it-for-granted moment occurs, the handout no longer retains any political capital for the ruler who presides over it. On the contrary, once the populous sees the subsidy as a right, it necessarily become a political liability for the leader — tying his hands and preventing the implementation of a more reasonable policy.

Grant people a right and they will thank you, for a little while. Try to take away that right and they will revolt. The last time Venezuela tried to hike gas prices, in 1989, there were riots in the streets.

Cheap gasoline is why the government of President Nicolas Maduro is doomed to collapse. He can’t raise gas prices meaningfully without setting off an even greater populist uprising than the one already wracking the capital. But without change, the Venezuelan economy and its state-run oil company Petroleos Venezuela (PDVSA) cannot last long.

Let’s work through the numbers to see how bad it is:

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Pres. Maduro with PDVSA workers. (Credit: AP)

Venezuela produces about 2.5 million barrels of oil per day, about the same as Iraq.

About 800,000 barrels per day of gasoline and diesel is consumed domestically for which PDVSA doesn’t make a dime. That’s about 290 million barrels per year in subsidy oil.

What’s that cost PDVSA? Oil minister Rafael Ramirez has said that the breakeven cost to supply refined gasoline to the masses is $1.62 per gallon, or about $70 per barrel. But because Venezuela’s refineries can’t even make enough fuel to meet demand, PDVSA also has to import about 80,000 bpd of refined products (for which they must pay the far higher market price in excess of $2.50 per gallon). All told, the subsidized fuel costs PDVSA about $50 billion a year — that’s at least $25 billion a year in fuel subsidies plus another $20 billion or so in foregone revenue that PDVSA desperately needs to reinvest into its oil fields. Even a well managed company would have trouble climbing out of such a big hole.

Deducting that 800,000 bpd of domestic consumption from the 2.5 million bpd total leaves a subtotal of 1.7 million bpd that Venezuela can sell into the world market.

But we have more deductions. In order to finance fuel subsidies and other social spending, PDVSA has borrowed massively. According to PDVSA’s statements, its debt has increased from $15.5 billion in 2008 to $43 billion now. Venezuela’s biggest creditor is China, which has reportedly loaned the country $50 billion since 2007. China is not interested in getting Venezuelan bolivars; it insists on being paid back in oil — about 300,000 bpd worth of oil.

Paying China its oil knocks PDVSA’s saleable supply down to 1.4 million bpd.

We’re not done yet. Chavez was not just generous to his own people. In an effort to make friends with his neighbors, he forged a pact called Petrocaribe, through which PDVSA delivers deeply subsidized oil to the likes of Cuba, Jamaica, Haiti and Nicaragua. Though shipments at peak were more than 200,000 bpd, including 100,000 bpd to Cuba, there’sevidence that PDVSA has cut the volumes. No wonder, when the Dominican Republic has reportedly been paying back PDVSA in black beans. Cuba sends doctors and athletic trainers. (Jamaicaputs its PetroCaribe debt to Venezuela at $2.5 billion.)

As if that weren’t enough, PDVSA, through its U.S. refining arm Citgo has even donated more than $400 million worth of heating oil to poor people in the United States. That’s about 4 million barrels over nine years.

So all that largesse knocks off another 200,000 bpd or so, bringing PDVSA’s marketable supply down to 1.3 million bpd.

Over the course of a year, selling that 1.3 million bpd of oil brings in about $50 billion in hard currency (assuming about $100 per barrel). This contrasts with PDVSA’s reported revenues of $125 billion, most of which is not in dollars, but bolivars, of uncertain worth.

That $50 billion might seem like a tidy sum, but keep in mind that this represents more than 95% of Venezuela’s foreign earnings. And that’s not enough for a country of 40 million to live on.

Because no one in their right mind would want to exchange goods for bolivars, it’s out of this pile of greenbacks that Venezuela has to pay for all its imports as well as about $5 billion a year in dollar-denominated interest payments. Venezuela’s foreign currency reserves have plunged from $30 billion at the end of 2012 to about $20 billion today.

Newspapers have closed because they can’t import paper. Toyota has stoppedmaking cars because it can’t get dollars to import parts. Shortages of sugar, milk and butter are common. The CEO of Empresas Polar, a big food manufacturer, has rejected Maduro’s criticisms that his company is to blame for shortages, insisting that because the government holds all the country’s dollars he can’t get the hard currency he needs to import raw materials.

Venezuela’s official exchange rate stands at about 6 bolivar to the dollar. But on the black market one greenback will fetch 87 bolivars or more.

If you’re an entrepreneur or a business owner in Venezuela, you’re not likely to keep throwing good money after bad there, especially if you’re a retailer like Daka. Last November Maduro ordered soldiers to occupy Daka’s five stores and forced managers to sell electronics at lower prices. In some cases looters just helped themselves.

Reuters reported that Maduro was outraged at a store selling a washing machine for 54,000 bolivars — $8,600 at the official rate. That might seem high until you hear from a business owner: “Because they don’t allow me to buy dollars at the official rate of 6.3, I have to buy goods with black market dollars at about 60 bolivars, so how can I be expected to sell things at a loss? Can my children eat with that?” said the businessman, who asked Reuters not to identify him.

When the president of the country speaks to the merchant class saying, “The ones who have looted Venezuela are you, bourgeois parasites,” that’s a sign to any entrepreneur that it’s time to round up whatever dollars you can and get out.

Venezuela is more likely past the point where it can grow out of its problems. Oil production is believed to have fallen as much as 400,000 bpd in the past year due to natural decline rates from mature fields. PDVSA says it is on track to invest more than $20 billion in its operations this year — but are those official dollars or black market dollars? Western oil companies are wary about putting their capital into the fields, considering that Chavez has famously nationalized assets of ExxonMobil, ConocoPhillips , Harvest National Resources, Exterran and others. PDVSA says it owes oil company partners and contractors $15 billion.

Some partners, like Chevron CVX -1.68%, Repsol, Eni, Rosneft and Total, have pledged to invest in increasing production and even to extend more loans to PDVSA. But like China they want to get paid back in oil. Not much is likely to come of these ventures: 10,000 barrels here and 10,000 barrels there is not going solve the problem. What’s needed is a real plan. The analysts at oil consultancy WoodMackenzie tell me that Venezuela’s best bets for growing production lie in the ultra heavy oil deposits of the Orinoco Basin. There, to increase output by 1.5 million bpd will require investment of $100 billion to drill enough wells and build enough “upgraders” to take the heavy oil and transform it into something readily exportable. So far PDVSA hasn’t gotten any interest in this plan.

The oil is there, but the oil companies are in no hurry to get at it. They have plenty of opportunities to drill in the United States, and are looking forward to the first exploration contracts to be awarded in Mexico. They know someday Venezuela will again become a safe place to invest.

That day may be approaching. Venezuela’s credit default swaps are at five-year highs. According to Reuters, prices for some of its debt issues have fallen to 63 cents on the dollar. Some short term issues are yielding 20%. These are the kind of sovereign yields that presage defaults.

The sad thing for Venezuela is that (barring an explosive rise in oil prices) it’s hard to imagine the situation not getting worse before it gets better. In time the government will simply run out of the dollar reserves it needs to pay its debts and import goods. Trading partners will refuse to ship. Oil companies will refuse to invest. Those tankers of cheap PetroCaribe oil will stop arriving in Havana. Chavez’s daughters will be kicked out of their presidential party palace. And the people of Venezuela will some day be forced to pay more than a dollar to fill up their SUVs.

Activist Post: Human Rights group calls on World Bank to acknowledge role in the mass killing of one million Indonesians

Activist Post: Human Rights group calls on World Bank to acknowledge role in the mass killing of one million Indonesians.

Activist Post

The Oscar-nominated documentary THE ACT OF KILLING was projected on the World Bank headquarters in Washington, D.C. Thursday in an action by the East Timor and Indonesian Action Network. The group is calling on the World Bank to acknowledge its role in the 1965 military coup in Indonesia that lead to the massacre of an estimated one million civilians. The World Bank helped prop up the corrupt government of Suharto, the general who lead the coup and ordered the mass killings. The Bank sent the Suharto regime $30 billion in development aid over the course of three decades despite knowing $10 billion had been looted by the government.

“THE ACT OF KILLING powerfully highlights the ongoing impunity within Indonesia for the 1965 mass murders,” said John M. Miller of the East Timor and Indonesian Action Network. “Tonight we highlight the World Bank’s support for the Suharto regime, which knowingly backed his corrupt government while his post-coup body count climbed. We urge the World Bank to acknowledge its role in Suharto’s many crimes and to apologize and provide reparations to the survivors. Institutions like the World Bank must also be held accountable for their financial assistance to the murderers and decades of support as they continued to violate human rights.”

“The World Bank gave $30 billion dollars to a dictator who killed an estimated one million of his own citizens,” said THE ACT OF KILLING filmmaker Joshua Oppenheimer. “The murderers spent years profiting off of their heinous crimes with the World Bank and other global financial institutions footing the bill.”

THE ACT OF KILLING, currently Oscar-nominated for Best Documentary feature, has been recognized as one of the best films of 2014. The film has received over 60 awards including Best Documentary from the British Academy of Film and Television Arts (BAFTA). While the mass killings of 1965 are an open secret in Indonesia, the government has never acknowledged or apologized for sponsoring the murders. THE ACT OF KILLING, which has been shown in thousands of private screenings and is available free online throughout Indonesia, is empowering victims’ families to demand reparations from the government for the first time.

About East Timor and Indonesian Action Network

The East Timor and Indonesia Action Network (ETAN) advocates for democracy, justice and human rights for Timor-Leste, West Papua and Indonesia. In 2012, the government of the Democratic Republic Timor-Leste awarded ETAN the Order of Timor (Ordem Timor) for its role in the liberation of the country. More information about ETAN can be found at: http://www.etan.org

About THE ACT OF KILLING

In THE ACT OF KILLING, directed by Joshua Oppenheimer and executive produced by Errol Morris and Werner Herzog, the filmmakers expose a corrupt regime that celebrates death squad leaders as heroes.

When the Indonesian government was overthrown in 1965, small-time gangster Anwar Congo and his friends went from selling movie tickets on the black market to leading death squads in the mass murder of over a million opponents of the new military dictatorship. Anwar boasts of killing hundreds with his own hands, but he’s enjoyed impunity ever since, and has been celebrated by the Indonesian government as a national hero. When approached to make a film about their role in the genocide, Anwar and his friends eagerly comply—but their idea of being in a movie is not to provide reflective testimony. Instead, they re-create their real-life killings as they dance their way through musical sequences, twist arms in film noir gangster scenes, and gallop across prairies as Western cowboys. Through this filmmaking process, the moral reality of the act of killing begins to haunt Anwar and his friends with varying degrees of acknowledgment, justification and denial. More information about the film can be found at http://actofkilling.com/.

Activist Post: 4 Things the ‘Powers-That-Be’ Don’t Want You to Know About Anarchy

Activist Post: 4 Things the ‘Powers-That-Be’ Don’t Want You to Know About Anarchy.

“None are more enslaved than those who believe they are free.” – Johann Wolfgang von Goethe

Gary ‘Z’ McGee
Activist Post

There are few subjects as controversial and taboo as the concept of anarchy. It mostly leaves a bad taste in people’s mouth due in no small part to years of psychological conditioning, backwards reasoning, and smoke & mirror political propaganda. But, as Voltaire ingeniously suggested, “To learn who rules over you, simply find out who you are not allowed to criticize.” By explaining what anarchy truly is, we indirectly end up criticizing the powers-that-be, revealing the emperor is not only naked, but insecure and weak at the prospect of free men and women. Here then are four things the powers-that-be don’t want you to know about anarchy.

#1. Anarchy ≠ Chaos

“Anarchy doesn’t mean out of control; it means out of their control.” – Jim Dodge

Anarchy does not equal chaos. Anarchy has been the natural order of human beings since time immemorial. There’s a reason why tribal and nature-based societies have survived the trials and tribulations of millions of years of evolution, because they governed themselves in a healthy way: through natural anarchy. It’s actually hierarchal and state-run society’s that equal chaos. It all comes down to a matter of power.

Here’s how: hierarchal and state-run societies have centralized institutions with the monopoly on the use of violence. This large concentration of power attracts a particular type of leader: politicians who crave power. And since “power tends to corrupt and absolute power corrupts absolutely” then such power almost always leads to war. Such wars naturally lead to more power, and so the vicious cycle continues, while keeping the powers-that-be continuously in power.

This is not to say that anarchic societies don’t have hierarchy, they just have considerably less hierarchy. But even anarchic societies with hierarchies are less likely to monopolize power, because they are engineered in such a way that groups never get to the point of concentrated centers of power. They are engineered so that brutes, or even groups of brutes, cannot rise to power. The checks and balances inherent within the anarchic system, along with the polarizing effect of self-governance, maintains a healthy equilibrium within a society.

When it comes down to it, anarchists are peaceful people who just want to govern themselves. Anarchism does not imply nihilism. Anarchism implies only adherence to, and respect for, the natural order of things: a healthy respect for the unpredictability and improbability of the cosmos, the interconnectedness of nature and the immense diversity of the biosphere, and the holistic inclusion of mankind as a social being with great powers that, thereby, requires an even greater amount of responsibility. To say that anarchy only ever leads to chaos is not only ignorance of the natural world, but ignorance of the nature of the human condition itself.

#2. Anarchy = Freedom

“You don’t become completely free by just avoiding being a slave; you also need to avoid becoming a master.” -Naseem Nicholas Taleb

Simply put, anarchy prefers dangerous freedom over peaceful slavery. It prefers uncomfortable truth over comfortable lies. It prefers the pain of knowledge over the bliss of ignorance. As was written in the Bhagavadgita:

“Better to live on beggar’s bread with those who love alive. Than taste their blood in rich feasts spread and guiltily survive.”

A common argument against anarchy is that there is no governance. But a society without a government isn’t necessarily a society without governance. Really, there is no such thing as a society without governance. A society with no sense of order is oxymoronic; it isn’t a “society” at all. A society (a group of people who agree to live among each other) that allows its people to govern themselves is an anarchic society. A group of people allowed to govern themselves is a free society (anarchy). A group of people who are not allowed to govern themselves is an unfree society (tyranny). The question is what type of order is preferable: liberty or tyranny. Most reasonable people will choose liberty. And liberty is, by nature, anarchic. As H.L. Mencken wrote, “I believe that any man who takes the liberty of another into his keeping is bound to become a tyrant, and that any man who yields up his liberty, in however slight the measure, is bound to become a slave.”

#3. Anarchy ≠ Slavery

“If I want the slave to become conscious of his servitude, it is both in order not to be a tyrant myself and in order that new possibilities might be opened to the liberated slave and through him to all men. To want existence, to want to disclose the world, and to want men to be free are one and the same will.” -Simone De Beauvoir

The Confederacy of Dunces is always ballyhooing, “But, but, but don’t we need leaders” implying that an anarchic system of governance would be leaderless. But what these dunces fail to realize is that they are confusing domination with leadership, in the first place. Raised, as these dunces are, under the tyranny of the state, they cannot see that they are subordinate it. They are under the false notion that the state is a benign institution which satisfies their need for leadership. When, actually, the state is nothing more than a malignant institution of coercive authority that is satisfying its own need for power. This is domination, not leadership. The fact that these dunces vote is just smoke and mirrors, the illusion of freedom, but is not actually freedom itself. It’s important to note that anarchists do not reject all authority, only that which is unhealthy or unjust. They don’t have a problem with rules, but with rulers. Like Simone De Beauvoir wrote, “A freedom that is interested only in denying freedom must be denied.”

If human beings are the most intelligent animal on the planet then why do we need to pay other people to think for us while we slave away for them? No other animal is stupid enough to do this, probably because no other animal is stupid enough to invent such a thing as money. That aside, the current economic slavery perpetuated by the state is unprecedented in the history of mankind. We live in an authoritarian society that most of us are not even aware of because we’ve been conditioned to except it. We are daily being preached to by propagandized advertisements on the one side and polarizing bipartisan politics on the other: conform, buy this, be afraid of “the other,” you must be approved of by others, be less than you are. It turns out that the best slaves are the ones that don’t even know they’re slaves. As Naseem Nicholas Taleb wrote, “Those who do not think that employment is systematic slavery are either blind or employed.”

#4. Anarchy = Harmony

“Our species needs, and deserves, a citizenry with minds wide awake and a basic understanding of how the world works.” –Carl Sagan

If, as Nietzsche wrote, “The Übermensch is the meaning of the earth… I beseech you, my brothers, remain faithful to the earth, and do not believe those who speak to you of otherworldly hopes” then it stands to reason that since anarchy is the way the earth governs itself, then it’s also the way that mankind ought to govern itself. This is the power of Nietzsche’s Übermensch: responsibility to the earth and to the natural order of things. And so it should also be the duty of the anarchist to subsume such power. The only thing preventing the anarchist from his/her responsibility to the earth is the smoke and mirrors of the state.

The state perpetuates the psyche-cosmos split. It aggrandizes mankind over nature itself. It dissociates us from the natural order of things so that it can maintain its power over us. One of the ways the state does this is by claiming that human nature is inherently corrupt and therefore must be governed. But human nature is not fixed. It changes according to its environment. The idea that humans are naturally evil and greedy creatures by default is a complete farce. If we live in an environment that perpetuates militarization, violence, greed and power, then we will behave in militarized, violent, greedy and power-mongering ways. If we live in an environment of compassion, empathy, love and prestige, then we will behave in compassionate, empathic, loving, prestigious ways. It really is that simple. This has been proven time and time again by nature-based cultures the world over.

The difficult part is seeing through the mess of it all. To be truly free is both very easy and very difficult. But if we can keep our moral compass focused on the principles of liberty, peace, love, and the ethics of reciprocity, then it will point the way, True North, toward a truly free society. It will reveal a society that preserves the moral Golden Mean and the middle-way, as opposed to the immoral, suffocating greed of state politics. It will uncover a society that exemplifies the Golden Ratio of nature, as opposed to the state’s expropriation of nature and nature-based cultures. It will bring to light a society that realizes that by hanging the “greater villain,” in the first place, neither man nor woman would ever have to steal the goose from off the common.

“They hang the man and flog the woman who steals the goose from off the common, but leave the greater villain loose who steals the common from under the goose.” -Anonymous

This article first appeared at WakingTimes.com

Gary ‘Z’ McGee, a former Navy Intelligence Specialist turned philosopher, is the author of Birthday Suit of God and The Looking Glass Man. His works are inspired by the great philosophers of the ages and his wide awake view of the modern world.

Central Bankers: Inflation is God’s Work – Ludwig von Mises Institute Canada

Central Bankers: Inflation is God’s Work – Ludwig von Mises Institute Canada.

Friday, February 21st, 2014 by  posted in Uncategorized.

Inflation is always somebody else’s fault. Ludwig von Mises called out finger pointing central bankers and politicians decades ago in his book, Economic Policy. “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.”

In the fall of 2007, Gideon Gono blamed his country’s inflation rate of 4,500 percent on “the differences that Zimbabwe has had with its former colonial master, the UK,” and added, “we are busy laying the foundations for a serious deceleration programme.” Deceleration? A year later inflation was 231 million percent.

Money printing didn’t have anything to do with it according to the central banker. Droughts began to be more frequent in the 2000’s and Gono believed  ”there is a positive correlation between the drought and inflation.” Dry weather, he told New African magazine, has, “got a serious bearing on our inflation level.”

In Gono’s dilluded mind,inflation was about the weather, lack of support from other nations, and political sanctions. He had nothing to do with the hyperinflation in his country. “No other [central-bank] governor has had to deal with the kind of inflation levels that I deal with,” Gono told Newsweek. “[The people at] my bank [are] at the cutting edge of the country.”

These days in Argentina its not the weather and political sanctions causing prices to rise, its businesses engaging in commerce. President Cristina Fernández de Kirchner is urging her people to work “elbow-to-elbow” with her government to stop companies from looting the people with high prices. Two weeks ago the government devalued the peso by 20 percent but it is private businesses that are stealing from working people with price increases.

Posters of retail executives have been plastered around Buenos Aires. For instance, Wal-Mart Argentina’s president Horacio Barbeito has his mug on a poster with the caption, “Get to know them, these are the people who steal your salary.”

Kirchner’s cabinet chief Jorge Capitanich calls economists who point to government policies as inflation’s culprit “undercover agents.”  He implies that these economists are the tools of business. “Argentines should know that independent, objective economists don’t exist,” Capitanich claims. “I want to say emphatically that when unscrupulous businessmen raise prices it has absolutely nothing to do with macroeconomic variables.”

In 2012 the president of Argentina’s central bank, Yale-educated Mercedes Marcó del Pont, said in an interview, “it is totally false to say that printing more money generates inflation, price increases are generated by other phenomena like supply and external sector’s behaviour.”

So while its central bank prints, the Kirchner government has enlisted the citizenry to work undercover in the fight against rising prices. A free smartphone application is encouraging Argentines to be citizen-cops while they shop.

The app is a bigger hit than “Candy Crush” and “Instagram.” President Kirchner wants “people to feel empowered when they shop.” And, they do. “You can go checking the prices,” marveled Analia Becherini, who learned of the app on Twitter. “You don’t even have to make any phone calls. If you want to file a complaint, you can do it online, in real time.”

“Argentina’s government blames escalating inflation on speculators and greedy businesses,” reports Paul Byrne for the Associated Press, “and has pressured leading supermarket chains to keep selling more than 80 key products at fixed prices.”

However, businesses aren’t eager to lose money selling goods. Fernando Aguirre told Chris Martenson that with price inflation running rampant, “Lots of stores don’t want to be selling stuff until they get updated prices. Suppliers holding on, waiting to see how things go, which is something that we are familiar with because that happened back in 2001 when everything went down as we know it did.”

In his Peak Prosperity podcast with Aguirre, Martenson makes the ironic point that when governments print excessive amounts of money, goods disappear from store shelves. In a hyper-inflation the demand for money drops to zero as people buy whatever they can get their hands on. Inflation destroys the calculus of profit and loss, destroying business, and undoing the division of labor.

Aguirre reinforced Martenson’s point. Describing shelves as “halfway empty,” in Argentina he said,  “The government is always trying to muscle its way through these kind of problems, just trying to force companies to stock back products and such, but they just keep holding on. For example, gas has gone up 12% these last few days. And there is really nothing they can do about it. If they don’t increase prices, companies just are not willing to sell. It is a pretty tricky situation to be in.”

Tricky indeed.  “It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption,” Mises wrote in Human Action. “One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits.”

Inflation is also rampant at the other end of South America.  Venezuela inflations is clocking in at 56 percent. Comparing the two countries, Leonardo Vera, a Caracas-based economist told the FT, “Argentina still has some ammunition to fight the current situation, while Venezuela is running out of bullets.”

Fast money growth has also led to shortages such as “newsprint to car parts and ceremonial wine to celebrate mass,” reports the FT.

Venezuelan president Nicolás Maduro is using the government’s heavy hand to introduce a law capping company profits at 30 percent. Heavy prison sentences await anyone found hoarding, overcharging, or “destabilising the economy.”  Hundreds of inspectors have been deployed to enforce the mandates.

The results will be predictable. “With every new control, the parallel, or black market, dollar will keep going up, and so will the price and scarcity of milk, oil, and toilet paper,” says Humberto García, an economist with the Central University of Venezuela.

Don’t expect the printing to stop any time soon. Central bankers believe they are doing God’s work. “To ensure that my people survive, I had to print money,” Gideon Gono toldNewsweek. “I found myself doing extraordinary things that aren’t in the textbooks. Then the IMF asked the U.S. to please print money. The whole world is now practicing what they have been saying I should not. I decided that God had been on my side and had come to vindicate me.”

It seems disasters wrought by inflationary policies must be experienced again and again, as “Inflation is the true opium of the people,” Mises explained, “administered to them by anticapitalist governments.”

The practice of central banking is the same around the world. The only difference is in degree. Before he destroyed the Zimbabwean dollar Gono looked to America for inspiration. “Look at the bridges across the many rivers in New York and elsewhere,” Gono told New African, “and the other infrastructure in the country that were built with high budget deficits.”

The Zimbabwe, Argentina, and Venezuela inflations may seem to be something that happens to somebody else. But Mr. Aguirre makes a point when asked about 2001, when banks in Argentina, after a bank holiday, converted dollar accounts into the same number of pesos. A massive theft.

“Those banks that did that are the same banks that are found all over the world,” Aguirre says. “They are not like strange South American, Argentinean banks–they are the same banks. If they are willing to steal from people in one place, don’t be surprised if they are willing to do it in other places as well.”

 

Douglas E. French is a Director of the Ludwig von Mises Institute of Canada. Additionally, he writes for Casey Research and is the author of three books; Early Speculative Bubbles and Increases in the Supply of Money, The Failure of Common Knowledge, and Walk Away: The Rise and Fall of the Home-Owenrship Myth. French is the former president of the Ludwig von Mises Institute in Auburn, Alabama.

China Faces “Vicious Circle” As Commodity Collateral Collapses | Zero Hedge

China Faces “Vicious Circle” As Commodity Collateral Collapses | Zero Hedge.

As we warned last week, stockpiles of iron-ore have reached record levels in China as end-demand slumps but, as Bloomberg notes, this is potentially creating massive dislocations in other markets. Record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market. A stunning 40 percent of the iron ore at China’s ports are part of finance deals (having replaced copper after China’s last shadow-banking crackdown) and with the glut, prices drop (driving down the value of collateral on loans) and “borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle.”

As we noted last week, Bloomberg reports China’s record imports of iron ore and copper, driven by traders who use them as loan collateral, risk repeating the vicious cycle of repayment difficulties and falling prices already seen in the steel-trading market.

Iron Ore stockpiles ar record highs…

But Lenders seeking repayment are finding irregularities, including the same pile of materials used as collateral for multiple borrowings, China International Capital Corp. said.

Xiao Jiashou, known as the “steel-trading king” in Shanghai, had his assets frozen as China Minsheng Banking Corp. sues for money owed.

About 40 percent of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.

“The risk comes when metal prices fall by a large magnitude within a short time, driving down the value of the collateral,” Yang Changhua, a researcher with Beijing Antaike Information Development Co., said in a Feb. 19 interview. “Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle.”

And those prices are tumbling:

Steel reinforcement-bar futures in Shanghai have fallen 19 percent in the past year, while iron ore delivered to China’s Tianjin port dropped 22 percent

And non-performing loans are therefore – exploding (as we noted here)…

Traders began having trouble repaying loans when steel prices in China slumped 38 percent in the seven months through August 2012 as the economy slowed. In the southern city of Foshan alone, local banks have given 100 billion yuan in credit to steel traders, Caijing magazine reported this week, citing a local banker it didn’t name. Loans to the sector helped drive non-performing loans in Yunnan province to 5.86 percent as of November 2013…

At China Citic Bank Corp., bad assets surged from 2011 to 2013 mainly because of non-performing loans to the steel-trade industry, Moneyweek magazine reported on Feb. 17, citing bank President Zhu Xiaohuang. The lender said on Dec. 12 that it plans to write off 5.2 billion yuan of bad debt for 2013.

At least a third of China’s 200,000 steel-trading firms will collapse as part of the credit crisis which started at the end of 2011, the official Xinhua news agency said Feb. 7, citing industry estimates. Nanjing Iron & Steel Co. said last month its 2018 bonds may stop trading due to losses.

Everyone should also know that like a metastatic cancer, the amount of non-performing, bad loans within the Chinese financial system is growing at an exponential pace.

But no matter how much the PBOC cracks down, only one thing matters:

Those cash-starved steel mills or trading firms don’t care whether steel or iron-ore prices are falling,” said Zhang Jizhou, a trader at Ningbo Future Import & Export Co. “Their priority is to get cash flow so they can survive.”

So the shadow-banking system filled the gap as prime lenders disappeared…

Which means, howevere well intended, the PBOC is exacerbating the situation that many have drawn ugly comaprisons to the subprime-lending bubble in the US.

Simply put, the ‘clever’ people in China – having had their copper financind taken away, have shifted to steel – as the following diagram explains (just replace Copper warrants with Iron Ore…)

Which will end just as disastrously… unless of course, China once again unleashes the ghost cities building spree. Which it inevitably will: after all it has become all too clear that not one nation – neither Developing nor Emerging – will dare deviate from the current status quo course of unsustainable, superglued house of cards “muddle-through” until external, and internal, instability finally forces events into a world where everyone now has their head in the proverbial sand.

The big question is then, does China re-ignite huge inflation in an attempt to save its vicious-circle-facing economy or does the “pig in the python” get expelled first as fast-money carry leaves en masse and crushes collateral values

Emerging Markets Crisis – It’s Not Over Yet |

Emerging Markets Crisis – It’s Not Over Yet |

February 20, 2014 | Author 

Economic and Political Quagmires

We want to briefly take another look at the situation in four of the emerging market countries that have recently been the focus of considerable market upheaval. The countries concerned are Turkey, Venezuela, Argentina and South Africa. There are considerable differences between these countries. The only thing that unites them is a worrisome trend in their trade and/or current account balances and the recent massive swoon in their currencies as foreign investors have exited their markets (this in turn has pressured the prices of securities). There is currently an economic and political crisis in three of the four countries, with  South Africa the sole exception.

However, even South Africa is feeling the heat from the fact that it has a large current account deficit and the ongoing exodus of foreign investors from emerging markets. However, the country is actually used to experiencing vast fluctuations in foreign investment flows in short time periods and has the potential to relatively quickly turn its balance of payments position around. Of the four countries in question, it seems to us to be the most flexible one in this respect.

Argentina and Venezuela

Argentina and Venezuela are special cases in that their trade resp. current account positions are actually comparatively stronger, but the economic policies pursued by their governments are so utterly harebrained and repressive that everybody tries to get their money out as quickly as possible. The immediate problem is that both countries are being drained of foreign exchange reserves at an accelerating clip, inter alia a result of trying to keep their exchange rates artificially high. This is actually quite astonishing considering their considerable latent export prowess.

Both countries have governments that steadfastly deny the existence of economic laws and apparently genuinely believe that their absurd repressive decrees can ‘fix’ their economies. The markets regard Argentina as the slightly greater credit risk, as it is still fighting the so-called ‘hold-outs’ from its 2001 default. However, Venezuela is lately catching up, in spite of its vast oil wealth. The two countries currently have the dubious distinction of being the nations with the highest probability of sovereign debt default in the world – not even the crisis-ridden Ukraine comes remotely close (see chart of CDS spreads further below for details).

We have recently discussed the deteriorating situation in Venezuela in some detail and a more in-depth update on Argentina is in the works. Let us just note here that Argentina (the government of which is incidentally the fiercest supporter of Venezuela’s president Maduro at the moment) seems to be where Venezuela was about a year or so ago. Both countries are on the same path of inflationism and growing economic and financial repression.


argentina-balance-of-trade

Argentina’s balance of trade remains positive – click to enlarge.


argentina-current-accountHowever, the current account balance has begun to deteriorate. The country’s foreign exchange reserves have collapsed due to a doomed attempt to defend the exchange rate – click to enlarge.


venezuela-balance-of-tradeVenezuela is a big oil exporter, but needs to import 70% of the consumer goods sold in the country. Its balance of trade is therefore deeply negative, especially as the state-run (‘very, very red’) PDVSA is being run into the ground and produces less and less oil – click to enlarge.


venezuela-current-accountIn spite of reporting a positive current account balance, Venezuela is losing foreign exchange reserves fast, due to trying to maintain an artificially high exchange rate even in the face of soaring inflation – click to enlarge.


In Venezuela’s and Argentina’s case, the markets are rightly worried that the situation will probably deteriorate further. The intransigence of their governments with regard to pursuing economic policies that demonstrably don’t work and the resultant growing political risks conspire to create a highly unstable backdrop. As in all such cases, one must expect knock-on effects to emerge elsewhere.

Turkey

Turkey has been hailed as a shining example of how an emerging economy should grow, but as is so often the case, it has in the meantime become evident that what it has mainly done was to engage in a massive credit-financed boom, displaying all the associated bubble activities, malinvestment of capital and overconsumption. This unsustainable boom was exacerbated by the fact that the Erdogan government pressured the central bank to keep rates extremely low. Even while prices were obviously misbehaving, with the rate of change of CPI oscillating between about 6.2% and nearly 11% and the stock market rising in parabolic fashion, the central bank kept its repo rate in the low single digits (this has only very recently changed).

With his country in the middle of a serious economic crisis, Erdogan has come under fire politically because his government has turned out to be a den of corruption to boot. So what does he do? He is taking a leaf from what the Western nations have demonstrated to be de rigeur these days, since don’t you know, we’re all surrounded by evil terrorists hiding in caves in the Hindu Kush somewhere. In short, he is moving toward increasingly authoritarian rule. Just take a look at this recent press report:

“Battling a corruption scandal, Turkish Prime Minister Tayyip Erdogan is seeking broader powers for his intelligence agency, including more scope for eavesdropping and legal immunity for its top agent, according to a draft law seen by Reuters.

The proposals submitted by Erdogan’s AK Party late on Wednesday are the latest in what his opponents see as an authoritarian backlash against the graft inquiry, after parliament passed laws tightening government control over the Internet and the courts this month.

The bill gives the National Intelligence Organisation (MIT) the authority to conduct operations abroad and tap pay phones and international calls. It also introduces jail terms of up to 12 years for the publication of leaked classified documents. It stipulates that only a top appeals court could try the head of the agency with the prime minister’s permission, and would require private companies as well as state institutions to hand over consumer data and technical equipment when requested.

“This bill will bring the MIT in line with the necessities of the era, grant it the capabilities of other intelligence agencies, and increase its methods and capacity for individual and technical intelligence,” the draft document said.

(emphasis added)

The ‘necessities of the era‘ – we couldn’t have put it in a more Orwellian fashion. And guess what? The vaunted ‘defenders of freedom’ in the West probably aren’t going to object for even a millisecond.

Turkey’s economy is a shambles right now, and Erdogan wants to cling to power by any means possible – that is what the ‘necessities of the era’ are really all about. For a long time it was held that the world as a whole was moving toward more, rather than less freedom. We regret to inform you that this trend has reversed more than a decade ago, on the day the WTC towers crumbled.

Meanwhile, what is now also crumbling is Turkey’s economy. However, we would argue that Turkey’s economic situation isn’t ‘unfixable’ if the proper policies are implemented quickly. After all, there has been a very successful period of economic liberalization under Erdogan’s government as well, which has left the economy more flexible and thus better able to deal with adverse developments. A wrenching adjustment is nevertheless unavoidable at this point.


turkey-current-accountTurkey has a large current account deficit. The fact that foreign investment inflows have now dried up is putting enormous strain on the economy. Consumer confidence has plunged, as has the currency – click to enlarge.


turkey-inflation-cpiDuring a time when inflation remained stubbornly high, the central bank left its repo rate at 4% – click to enlarge.


As one analyst sagely remarked:

“From 2009 to 2013, Turkey was considered by many to be a rising star among the emerging markets, but currently it may be the triggering force for worsening the emerging-market outlook globally in 2014.”

South Africa

South Africa’s case is in many ways comparable to Turkey’s – the country also sports a large current account and trade deficit for example. However, while South Africa’s CPI ‘inflation’ rate has always been high by developed country standards, it has on average been much lower and less volatile than Turkey’s, fluctuating between 5% and 6.4% in recent years. Contrary to Turkey’s central bank, South Africa’s central bank is fiercely independent and focused solely on keeping CPI in check. In fact, it may well be one of the world’s most conservative central banks. It also refuses to intervene in the currency market and allows the Rand to go to wherever market forces push it. This non-intervention policy was actually quite difficult to defend while the Rand was among the world’s strongest currencies during the emerging markets boom of the 2000d’s. A plethora of special interests in South Africa were pleading with the central bank to do something to weaken the Rand, but it remained steadfast.

While the current account deficit means that more currency weakness is probably in store, South Africa does have a vibrant export sector. During the apartheid years, it had a perennial trade surplus, partly a result of being forced to conserve foreign exchange reserves in the face of economic sanctions. Similar to Turkey, South Africa imports all the oil it uses, which is a key vulnerability of both countries. However, the weakening of the Rand already has an effect: the trade balance has recently turned positive for the first time since 2010.


south-africa-current-account

South Africa’s current account is still deeply in the red – click to enlarge.


south-africa-balance-of-trade

However, a trade surplus has begun to emerge on the back of the weaker Rand – click to enlarge.


Investors in emerging markets like to use the Rand as a hedge for EM currency exposure, due to its relatively good liquidity and the fact that the central bank isn’t going to intervene directly. At times this fact probably exacerbates the moves in the Rand.

The political situation in South Africa is almost always somewhat dubious, and the  Zuma presidency is no exception to that rule. There is a lot of corruption and quite a few economic policy decisions appear to us to be misguided. One must keep in mind in this context that the ANC government is continually under pressure to deliver an improvement in living standards to the formerly oppressed parts of the population, which often leads to the adoption of populist positions that are not economically sensible.

However, there exist also many misconceptions about SA and the ANC’s political legacy in the West. In spite of being formally allied with the communists (SACP) and the trade union umbrella body COSATU, the ANC has for instance privatized many of the companies that used to be state-owned under the national-socialist regime of the National Party (NP) that ruled the country during the apartheid years (a funny aside to this: the NP has dissolved itself and has been amalgamated with the ANC a few years ago). One slightly worrisome development is that the government deficit has grown sharply since 2010. While the government previously ran an almost balanced budget, the annual deficit amounted to more than 5% of GDP over the past four years. Nevertheless, due to the tight fiscal policy implemented previously, the public debt-GDP ratio is still below 40% – a number most developed countries can only dream of.

Sovereign Credit Risk


CDS Turkey, Argentina, Venezuela, SA5 year CDS spreads on the sovereign debt of Argentina, Venezuela, South Africa and Turkey. Keep in mind that the scaling is different for each of the data series – click to enlarge.


As can be seen above, the markets consider Turkey the second-smallest sovereign credit  risk among the four nations at the moment.  Its debt-to-GDP ratio is very similar to South Africa’s, at just 36%. The budget deficit has fluctuated between 2.8% and 5.5% of GDP over the past four years. Both data points are however what we would term ‘remnants of the bubble’, as the government’s tax revenues soared along with the economic boom. With the boom faltering, a sharp deterioration in these data points should be expected.

South Africa is actually in a slightly better position in this regard, as it has not experienced comparable boom conditions. Consequently the fact that the CDS spread on its sovereign debt is actually slightly below that of Turkey makes sense.

Argentina is currently considered the worst sovereign credit risk in the world – not least due to the fact that its foreign exchange reserves have declined dramatically and the trend is ongoing.


argentina forex reservesArgentina’s reserves are falling sharply – click to enlarge.


This throws more and more doubt on the country’s ability to service its foreign debt, which in the light of the 2001 default and its aftermath has made the markets wary. 5 year CDS spreads at 2,206 basis points reflect a great deal of risk (this represents an annual default probability of roughly 17% at an assumed 40% recovery rate).

Venezuela is lately catching up – its 5 year sovereign CDS spreads have soared to  almost 1,700 basis points from less than 1,200 at the end of last year. This is testament to the fact that the economy has begun to implode under the Maduro government. While Maduro himself is just as bad as Chavez was in terms of economic policy, it should be pointed out that Chavez’ policies are what laid the foundations for current events. It has taken a while for this South America-style goulash-socialism to fail, as it allowed a remnant of the market economy to operate most of the time. However, the impositions on the private sector have simply become too onerous and galloping inflation has delivered the coup de grace, as economic calculation has become extremely distorted, if not nigh impossible.

Conclusion:

The crisis in emerging market economies vulnerable to capital flight is unlikely to be over. Note that we have picked merely four cases, but there are several other developing countries that are currently in various states of political and economic crisis as well (e.g. India, Thailand, Brazil, to name a few). We have looked the two worst cases here, one of medium severity (Turkey) and one of the better cases (South Africa) in order to present as broad an overview as possible. The fate of Argentina and Venezuela is up in the air – it will require massive political change to alter their prospects.

However, other emerging market economies are bound to eventually bounce back and exhibit strong economic growth again. The imbalances can all be overcome, but the adjustments required are liable to play out in the form of economic and financial market crises of varying severity.

One must not forget in this context that Japan continues to pursue a mercantilist currency policy, which redounds on its competitors in Asia, which in turn affects their main suppliers. We continue to believe that Japan’s decision to weaken the yen has been a major contributor to recent currency turmoil elsewhere (of course, this does not mean that many of the countries concerned have not been wanting in terms of their own policies).

Moreover, China is hanging over the proceedings like the proverbial Sword of Damocles. HSBC has just reported its latest flash estimate on China’s manufacturing PMI (pdf), which was quite weak at 48.3, a seven month low  indicating a worsening contraction. In view of the enormous credit bubble which China has embarked on since 2008 (about $15 trillion in additional debt have been created since then), the danger of a larger setback being set in motion by a sharp slowdown or even recession in China cannot be dismissed.

Charts by: Tradingeconomics, Reuters, Bloomberg

oftwominds-Charles Hugh Smith: Why Banks Are Doomed: Technology and Risk

oftwominds-Charles Hugh Smith: Why Banks Are Doomed: Technology and Risk.

It’s not just that banks are no longer needed–they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.

The entire banking sector is based on two illusions:

1. Thanks to modern portfolio management, bank debt is now riskless.

2. Technology only enhances banks’ tools to skim profits; it does not undermine the fundamental role of banks.

The global financial meltdown of 2008-09 definitively proved riskless bank debt is an illusion. If you want to understand why risk cannot eliminated, please read Benoit Mandelbrot’s book The (Mis)Behavior of Markets.

Technology does not just enable high-frequency trading; it enables capital and borrowers to bypass banks entirely. I addressed this yesterday in Banks Are Obsolete: The Entire Parasitic Sector Can Be Eliminated.

Unfortunately for banks, higher education, buggy whip manufacturers, etc., monopoly and propaganda are no match for technology. Just because a system worked in the past in a specific set of technological constraints does not mean it continues to be a practical solution when those technological constraints dissolve.

The current banking system is essentially based on two 19th century legacies. In that bygone era, banks were a repository of accounting expertise (keeping track of multitudes of accounts, interest, etc.) and risk assessment/management expertise (choosing the lowest-risk borrowers).

Both of these functions are now automated. The funny thing about technology is that those threatened by fundamental improvements in technology attempt to harness it to save their industry from extinction. For example, overpriced colleges now charge thousands of dollars for nearly costless massively open online courses (MOOCs) because they retain a monopoly on accreditation (diplomas). Once students are accredited directly–an advancement enabled by technology–colleges’ monopoly disappears and so does their raison d’etre.

The same is true of banks. Now that accounting and risk assessment are automated, and borrowers and owners of capital can exchange funds in transparent digital marketplaces, there is no need for banks. But according to banks, only they have the expertise to create riskless debt.

It’s not just that banks are no longer needed–they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.

Moral hazard is what happens when people who make bad decisions suffer no consequences. Once decision-makers offload consequence onto others, they are free to make increasingly risky bets, knowing that they will personally suffer no losses if the bets go bad.

The current banking system is defined by moral hazard. “Too big to fail” also means “too big to jail:” no matter how criminal or risky the bank managements’ decisions, the decision-makers not only suffered no consequences, they walked away from the smouldering ruins with tens of millions of dollars in personal wealth.
Absent any consequence, the system created perverse incentives to pyramid risky bets and derivatives to increase profits–a substantial share of which flowed directly into the personal accounts of the managers.

The perfection of moral hazard in the current banking system can be illustrated by what happened to the last CEO of Lehman Brother, Richard Fuld: he walked away from the wreckage with $222 million. This is not an outlier; it is the direct result of a system based on moral hazard, too-big-to-jail and perverse incentives to increase systemic risk for personal gain.

And who picked up all the losses? The American taxpayer. Privatize profits, socialize losses: that’s the heart of moral hazard.

Concentrating the ability to leverage stupendous systemic bets in a few hands leads to a concentration of risk. Just before America’s financial sector imploded, banks had pyramided $2.5 trillion in dodgy mortgages into derivatives and exotic financial instruments with a face value of $35 trillion–14 times the underlying collateral and more than double the size of the U.S. economy.

In a web-enabled transparent exchange of borrowers bidding for capital, the risk is intrinsically dispersed over millions of participants. Not only is risk dispersed, but the consequences of bad decisions and bad bets fall solely to those who made the decision and the bet. This is the foundation of a sound, stable, fair financial system.

In a transparent marketplace of millions of participants, a handful of participants will be unable to acquire enough profit to capture the political process. The present banking system is not just a financial threat to the nation, it is a political threat because its outsized profits enable bankers to capture the regulatory and governance machinery.

chart courtesy of Market Daily Briefing

The problem with concentrating leverage and moral hazard is that risk is also concentrated. And when risk is concentrated rather than dispersed, it inevitably breaks out of the “riskless” corral. This is the foundation of my aphorism: Central planning perfects the power of threats to bypass the system’s defenses.

We can understand this dynamic with an analogy to bacteria and antibiotics. By attempting to eliminate the risk of infection by flooding the system with antibiotics, central planning actually perfects the search for bacteria that are immune to the antibiotics. These few bacteria will bypass the system’s defenses and destroy the system from within.

The banking/financial sector claims to be eliminating risk, but what it’s actually doing is perfecting the threats that will destroy the system from within. Another way to understand this is to look at what happened to home mortgages in the runup to the meltdown of 2008: the “safest” part of the financial sector ended up triggering the collapse of the entire pyramid of risk.

Once we concentrate risk and impose perverse incentives and moral hazard as the foundations of our financial/banking system, then we guarantee the risk will explode out of whatever sector is considered “safe.”

Once you eliminate the “risk” of weak bacteria, you perfect the threat that will kill the host.

The banking sector cannot be reformed, for its very nature is to concentrate systemic risk and moral hazard into breeding grounds of systemic collapse. The only way to eliminate the threat posed by banks is to eliminate the banks and replace them with transparent exchanges where borrowers and owners of capital openly bid for yield (interest rates) and capital.

Bankers (and their fellow financial parasites) will claim they are essential and the nation will collapse without them. But this is precisely opposite of reality: the very existence of banks threatens the nation and democracy.

One last happy thought: technology cannot be put back in the bottle. The financial/banking sector wants to use technology to increase its middleman skim, but the technology that is already out of the bottle will dismantle the sector as a function of what technology enables: faster, better, cheaper, with greater transparency, fairness and the proper distribution of risk.

There may well be a place for credit unions and community banks in the spectrum of exchanges, but these localized, decentralized enterprises would be unable to amass dangerous concentrations of risk and political influence in a truly transparent and decentralized system of exchanges.

Of related interest:

Certainty, Complex Systems, and Unintended Consequences (February 14, 2014)

Our Middleman-Skimming Economy (February 11, 2014)

Washington’s Blog | Liberal Politicians Launched the Idea of “Free Trade Agreements” In the 1960s to Strip Nations of Sovereignty and Hand Power Over to Global Corporations

Washington’s Blog |

Liberal Politicians Launched the Idea of “Free Trade Agreements” In the 1960s to Strip Nations of Sovereignty and Hand Power Over to Global Corporations

 

It’s Not Only Conservative Politicians Backing Giant Multinational Corporations Over National Sovereignty

Preface: Liberals might assume that it is Republicans who are cheerleaders for global corporations at the expense of government.  But, as shown below, liberal politicians have been just as bad … or worse.

Matt Stoller – who writes for Salon and has contributed to Politico, Alternet, Salon, The Nation and Reuters – knows his way around Washington.

Stoller – a prominent liberal – has scoured the Congressional Record to unearth hidden historical facts.  For example, Stoller has previously shown that the U.S. government push for a “New World Order” is no wacky conspiracy theory, but extensively documented in the Congressional Record.

Now, Stoller uses the Congressional Record to show that “free trade” pacts were always aboutweakening nation-states to promote rule by multinationals:

Political officials (liberal ones, actually) engaged in an actual campaign to get rid of countries with their pesky parochial interests, and have the whole world managed by global corporations. Yup, this actually was explicit in the 1960s, as opposed to today’s passive aggressive arguments which amount to the same thing.

***

Liberal internationalists, including people like Chase CEO David Rockefeller and former Undersecretary of State and an architect of 1960s American trade policies George Ball, began pressing for reductions in non-tariff barriers, which they perceived as the next set of trade impediments to pull down. But the idea behind getting rid of these barriers wasn’t about free trade, it was about reorganizing the world so that corporations could manage resources for “the benefit of mankind”. It was a weird utopian vision that you can hear today in the current United States Trade Representative Michael Froman’s speeches. I’ve spoken with Froman about this history, and Froman himself does not seem to know much about it. But he is captive of these ideas, nonetheless, as is much of the elite class. They do not know the original ideology behind what is now just bureaucratic true believer-ism, they just know that free trade is good and right and true.

But back to the 1967 hearing. In the opening statement, before a legion of impressive Senators and Congressmen, Ball attacks the very notion of sovereignty. He goes after the idea that “business decisions” could be “frustrated by a multiplicity of different restrictions by relatively small nation states that are based on parochial considerations,” and lauds the multinational corporation as the most perfect structure devised for the benefit of mankind. He also foreshadows our modern world by suggesting that commercial, monetary, and antitrust policies should just be and will inevitably be handled by supranational organizations. [Background.]

Here’s just some of that statement. It really is worth reading, I’ve bolded the surprising parts.

“For the widespread development of the multinational corporation is one of our major accomplishments in the years since the war, though its meaning and importance have not been generally understood. For the first time in history man has at his command an instrument that enables him to employ resource flexibility to meet the needs of peopels all over the world. Today a corporate management in Detroit or New York or London or Dusseldorf may decide that it can best serve the market of country Z by combining the resources of country X with labor and plan facilities in country Y – and it may alter that decision 6 months from now if changes occur in costs or price or transport. It is the ability to look out over the world and freely survey all possible sources of production… that is enabling man to employ the world’s finite stock of resources with a new degree of efficiency for the benefit of all mandkind.

But to fulfill its full potential the multinational corporation must be able to operate with little regard for national boundaries – or, in other words, for restrictions imposed by individual national governments.

To achieve such a free trading environment we must do far more than merely reduce or eliminate tariffs. We must move in the direction of common fiscal concepts, a common monetary policy, and common ideas of commercial responsibility. Already the economically advanced nations have made some progress in all of these areas through such agencies as the OECD and the committees it has sponsored, the Group of Ten, and the IMF, but we still have a long way to go. In my view, we could steer a faster and more direct course… by agreeing that what we seek at the end of the voyage is the full realization of the benefits of a world economy.

Implied in this, of course, is a considerable erosion of the rigid concepts of national sovereignty, but that erosion is taking place every day as national economies grow increasingly interdependent, and I think it desirable that this process be consciously continued. What I am recommending is nothing so unreal and idealistic as a world government, since I have spent too many years in the guerrilla warfare of practical diplomacy to be bemused by utopian visions. But it seems beyond question that modern business – sustained and reinforced by modern technology – has outgrown the constrictive limits of the antiquated political structures in which most of the world is organized, and that itself is a political fact which cannot be ignored. For the explosion of business beyond national borders will tend to create needs and pressures that can help alter political structures to fit the requirements of modern man far more adequately than the present crazy quilt of small national states. And meanwhile, commercial, monetary, and antitrust policies – and even the domiciliary supervision of earth-straddling corporations – will have to be increasingly entrusted to supranational institutions….

We will never be able to put the world’s resources to use with full efficiency so long as business decisions are frustrated by a multiplicity of different restrictions by relatively small nation states that are based on parochial considerations, reflect no common philosophy, and are keyed to no common goal.” ***

These [“free trade”] agreements are not and never have been about trade. You simply cannot disentangle colonialism, the American effort to create the European Union, and American trade efforts. After their opening statements, Ball and Rockefeller go on on to talk about how European states need to be wedged into a common monetary union with our trade efforts and that Latin America needs to be managed into prosperity by the US and Africa by Europe. Through such efforts, they thought that the US could put together a global economy over the next thirty years. Thirty years later was 1997, which was exactly when NAFTA was being implemented and China was nearing its entry into the WTO. Impeccable predictions, gents.

***

I guess it turns out that the conspiracy theorists who believe in UN-controlled black helicopters aren’t as wrong as you might think about trade policy, and not just because United Technologies, which actually makes black helicopters, has endorsed the Trans-Pacific Partnership.

***

These agreements are about getting rid of national sovereignty, and the people who first pressed for NAFTA were explicit about it. They really did want a global government for corporations.

***

Ball in particular expressed his idea of a government by the corporations, for the corporations, in order to benefit all mankind. Keep that in mind when you think you’re being paranoid.

The full hearing can be downloaded here, though it is a big file.

The bottom line is not that liberals – or conservatives – are evil.

It’s that neither the Democratic or Republican parties reflect the true values of the American people (and see this).

Indeed, a scripted psuedo-war between the parties is often used by the powers-that-be as a way to divide and conquer the American people, so that we are too distracted to stand up to reclaim our power from the idiots in both parties who are only governing for their own profit … and a small handful of their buddies. See thisthisthisthisthisthisthisthisthis and this.

Why Banks Are Doomed: Technology and Risk

It’s not just that banks are no longer needed–they pose a needless and potentially catastrophic risk to the nation. To understand why, we need to understand the key characteristics of risk.

The entire banking sector is based on two illusions:

1. Thanks to modern portfolio management, bank debt is now riskless.

2. Technology only enhances banks’ tools to skim profits; it does not undermine the fundamental role of banks.

The global financial meltdown of 2008-09 definitively proved riskless bank debt is an illusion. If you want to understand why risk cannot eliminated, please read Benoit Mandelbrot’s book The (Mis)Behavior of Markets.

Technology does not just enable high-frequency trading; it enables capital and borrowers to bypass banks entirely. I addressed this yesterday in Banks Are Obsolete: The Entire Parasitic Sector Can Be Eliminated.

Unfortunately for banks, higher education, buggy whip manufacturers, etc., monopoly and propaganda are no match for technology. Just because a system worked in the past in a specific set of technological constraints does not mean it continues to be a practical solution when those technological constraints dissolve.

Continue reading →

Banks Are Obsolete: The Entire Parasitic Sector Can Be Eliminated

What else can we do with the $1.25 trillion we’ll save by eliminating these obsolete financial middleman parasites? A lot.

Technology has leapfrogged the banking sector, rendering it as obsolete as buggy whips. So why are we devoting 9% of our economy to an obsolete parasite?Financial sector profits now total a staggering 4.5% of GDP (gross domestic product), while the expenses generated by financial churning account for another 4.5% of the economy.

Continue reading →

Operation Nazification

Annie Jacobsen’s new book is called Operation Paperclip: The Secret Intelligence Program That Brought Nazi Scientists to America.  It isn’t terribly secret anymore, of course, and it was never very intelligent.  Jacobsen has added some details, and the U.S. government is still hiding many more.  But the basic facts have been available; they’re just left out of most U.S. history books, movies, and television programs.

After World War II, the U.S. military hired sixteen hundred former Nazi scientists and doctors, including some of Adolf Hitler’s closest collaborators, including men responsible for murder, slavery, and human experimentation, including men convicted of war crimes, men acquitted of war crimes, and men who never stood trial.  Some of the Nazis tried at Nuremberg had already been working for the U.S. in either Germany or the U.S. prior to the trials.  Some were protected from their past by the U.S. government for years, as they lived and worked in Boston Harbor, Long Island, Maryland, Ohio, Texas, Alabama, and elsewhere, or were flown by the U.S. government to Argentina to protect them from prosecution.  Some trial transcripts were classified in their entirety to avoid exposing the pasts of important U.S. scientists. Some of the Nazis brought over were frauds who had passed themselves off as scientists, some of whom subsequently learned their fields while working for the U.S. military.

The U.S. occupiers of Germany after World War II declared that all military research in Germany was to cease, as part of the process of denazification.  Yet that research went on and expanded in secret, under U.S. authority, both in Germany and in the United States, as part of a process that it’s possible to view as nazification.  Not only scientists were hired. Former Nazi spies, most of them former S.S., were hired by the U.S. in post-war Germany to spy on — and torture — Soviets.

The U.S. military shifted in numerous ways when former Nazis were put into prominent positions. It was Nazi rocket scientists who proposed placing nuclear bombs on rockets and began developing the intercontinental ballistic missile.  It was Nazi engineers who had designed Hitler’s bunker beneath Berlin, who now designed underground fortresses for the U.S. government in the Catoctin and Blue Ridge Mountains.  Known Nazi liars were employed by the U.S. military to draft classified intelligence briefs falsely hyping the Soviet menace. Nazi scientists developed U.S. chemical and biological weapons programs, bringing over their knowledge of tabun and sarin, not to mention thalidomide — and their eagerness for human experimentation, which the U.S. military and the newly created CIA readily engaged in on a major scale.  Every bizarre and gruesome notion of how a person might be assassinated or an army immobilized was of interest to their research. New weapons were developed, including VX and Agent Orange.  A new drive to visit and weaponize outerspace was created, and former Nazis were put in charge of a new agency called NASA.

Permanent war thinking, limitless war thinking, and creative war thinking in which science and technology overshadowed death and suffering, all went mainstream.  When a former Nazi spoke to a women’s luncheon at the Rochester Junior Chamber of Commerce in 1953, the event’s headline was “Buzz Bomb Mastermind to Address Jaycees Today.”  That doesn’t sound terribly odd to us, but might have shocked anyone living in the United States anytime prior to World War II.  Watch this Walt Disney television program featuring a former Nazi who worked slaves to death in a cave building rockets.  Before long, President Dwight Eisenhower would be lamenting that “the total influence — economic, political, even spiritual — is felt in every city, every State house, every office of the Federal government.” Eisenhower was not referring to Nazism but to the power of the military-industrial complex.  Yet, when asked whom he had in mind in remarking in the same speech that “public policy could itself become the captive of a scientific-technological elite,” Eisenhower named two scientists, one of them the former Nazi in the Disney video linked above.

The decision to inject 1,600 of Hitler’s scientific-technological elite into the U.S. military was driven by fears of the USSR, both reasonable and the result of fraudulent fear mongering.  The decision evolved over time and was the product of many misguided minds. But the buck stopped with President Harry S Truman.  Henry Wallace, Truman’s predecessor as vice-president who we like to imagine would have guided the world in a better direction than Truman did as president, actually pushed Truman to hire the Nazis as a jobs program.  It would be good for American industry, said our progressive hero.  Truman’s subordinates debated, but Truman decided.  As bits of Operation Paperclip became known, the American Federation of Scientists, Albert Einstein, and others urged Truman to end it. Nuclear physicist Hans Bethe and his colleague Henri Sack asked Truman:

“Did the fact that the Germans might save the nation millions of dollars imply that permanent residence and citizenship could be bought? Could the United States count on [the German scientists] to work for peace when their indoctrinated hatred against the Russians might contribute to increase the divergence between the great powers? Had the war been fought to allow Nazi ideology to creep into our educational and scientific institutions by the back door? Do we want science at any price?”

In 1947 Operation Paperclip, still rather small, was in danger of being terminated. Instead, Truman transformed the U.S. military with the National Security Act, and created the best ally that Operation Paperclip could want: the CIA. Now the program took off, intentionally and willfully, with the full knowledge and understanding of the same U.S. President who had declared as a senator that if the Russians were winning the U.S. should help the Germans, and vice versa, to ensure that the most people possible died, the same president who viciously and pointlessly dropped two nuclear bombs on Japanese cities, the same president who brought us the war on Korea, the war without declaration, the secret wars, the permanent expanded empire of bases, the military secrecy in all matters, the imperial presidency, and the military-industrial complex.  The U.S. Chemical Warfare Service took up the study of German chemical weapons at the end of the war as a means to continue in existence.  George Merck both diagnosed biological weapons threats for the military and sold the military vaccines to handle them.  War was business and business was going to be good for a long time to come.

But how big a change did the United States go through after World War II, and how much of it can be credited to Operation Paperclip?  Isn’t a government that would give immunity to both Nazi and Japanese war criminals in order to learn their criminal ways already in a bad place?  As one of the defendants argued in trial at Nuremberg, the U.S. had already engaged in its own experiments on humans using almost identical justifications to those offered by the Nazis.  If that defendant had been aware, he could have pointed out that the U.S. was in that very moment engaged in such experiments in Guatemala.  The Nazis had learned some of their eugenics and other nasty inclinations from Americans.  Some of the Paperclip scientists had worked in the U.S. before the war, as many Americans had worked in Germany.  These were not isolated worlds.

Looking beyond the secondary, scandalous, and sadistic crimes of war, what about the crime of war itself?  We picture the United States as less guilty because it maneuvered the Japanese into the first attack, and because it did prosecute some of the war’s losers.  But an impartial trial would have prosecuted Americans too.  Bombs dropped on civilians killed and injured and destroyed more than any concentration camps — camps that in Germany had been modeled in part after U.S. camps for native Americans.  Is it possible that Nazi scientists blended into the U.S. military so well because an institution that had already done what it had done to the Philippines was not in all that much need of nazification?

Yet, somehow, we think of the firebombing of Japanese cities and the complete leveling of German cities as less offensive that the hiring of Nazi scientists.  But what is it that offends us about Nazi scientists?  I don’t think it should be that they engaged in mass-murder for the wrong side, an error balanced out in some minds but their later work for mass-murder by the right side.  And I don’t think it should be entirely that they engaged in sick human experimentation and forced labor.  I do think those actions should offend us.  But so should the construction of rockets that take thousands of lives.  And it should offend us whomever it’s done for.

It’s curious to imagine a civilized society somewhere on earth some years from now. Would an immigrant with a past in the U.S. military be able to find a job? Would a review be needed? Had they tortured prisoners? Had they drone-struck children? Had they leveled houses or shot up civilians in any number of countries? Had they used cluster bombs? Depleted uranium? White phosphorous? Had they ever worked in the U.S. prison system? Immigrant detention system? Death row? How thorough a review would be needed? Would there be some level of just-following-orders behavior that would be deemed acceptable? Would it matter, not just what the person had done, but how they thought about the world?

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