Originally Posted At Strolling along the shores of the mainstream . . .
By Gonzalo Lira
August 23, 2010

Right now, we are in the middle of deflation. The Global Depression we are experiencing has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary drain.

To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate demand levels by way of fiscal “stimulus” spending—the classic Keynesian move, the same old prescription since donkey’s ears.

But the stimulus, apart from being slow and inefficient, has simply not been enough to offset the fall in consumer spending.

For its part, the Federal Reserve has been busy propping up all assets—including Treasuries—by way of “quantitative easing”.

The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity, leading to lower prices, leading to unemployment, leading to lower consumption, leading to still lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent this deflationary deep-freeze—and will continue to do so. After all, when your only tool is a hammer, every problem looks like a nail.

But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.

Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.

Therefore, the notion of talking about hyperinflation now, in this current macro-economic environment, would seem . . . well . . . crazy. Right?

Wrong: I would argue that the next step down in this world-historical Global Depression which we are experiencing will be hyperinflation.

Most people dismiss the very notion of hyperinflation occurring in the United States as something only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible people don’t even bother arguing the issue at all—everyone knows that only fools bother arguing with a bigger fool.

A minority, though—and God bless ’em—actually do go ahead and go through the motions of talking to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary environment—where commodity prices are more or less stable, there are downward pressures on wages, asset prices are falling, and credit markets are shrinking—inflation is impossible. Therefore, hyperinflation is even more impossible.

This outlook seems sensible—if we fall for the trap of thinking that hyperinflation is an extention of inflation. If we think that hyperinflation is simply inflation on steroids—inflation-plus—inflation with balls—then it would seem to be the case that, in our current deflationary economic environment, hyperinflation is not simply a long way off, but flat-out ridiculous.

But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation are two very distinct animals. They look the same—because in both cases, the currency loses its purchasing power—but they are not the same.

Inflation is when the economy overheats: It’s when an economy’s consumables (labor and commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment, that the consumables rise in price. This forces all goods and services to rise in price as well, so that producers can keep up with costs. It is essentially a demand-driven phenomena.

Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary environment just like in an inflationary environment, but they rise not because people want more money for their labor or for commodities, but because people are trying to get out of the currency. It’s not that they want more money—they want less of the currency: So they will pay anything for a good which is not the currency.

Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries, in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices, and thereby prevent further deflationary erosion. The Fed is calculating that either path—increase in aggregate demand levels or increase in aggregate asset values—leads to the same thing: A recovery in the economy.

This recovery is not going to happen—that’s the news we’ve been getting as of late. Amid all this hopeful talk about “avoiding a double-dip”, it turns out that we didn’t avoid a double-dip—we never really managed to claw our way out of the first dip. No matter all the stimulus, no matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that the economy has been—and is headed—down.

But both the Federal government and the Federal Reserve are hell-bent on using the same old tired tools to “fix the economy”—stimulus on the one hand, liquidity injections on the other. (See my discussion of The Deficit here.)

It’s those very fixes that are pulling us closer to the edge. Why? Because the economy is in no better shape than it was in September 2008—and both the Federal Reserve and the Federal government have shot their wad. They got nothin’ left, after trillions in stimulus and trillions more in balance sheet expansion—

—but they have accomplished one thing: They have undermined Treasuries. These policies have turned Treasuries into the spit-and-baling wire of the U.S. financial system—they are literally the only things holding the whole economy together.

In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they are overvalued, everyone knows their yields are absurd—yet everyone tiptoes around that truth as delicately as if it were a bomb. Which is actually what it is.

So this is how hyperinflation will happen:

One day—when nothing much is going on in the markets, but general nervousness is running like a low-grade fever (as has been the case for a while now)—there will be a commodities burp: A slight but sudden rise in the price of a necessary commodity, such as oil.

This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and go into the pressured commodity, in order to catch a profit. (Actually it won’t even be the asset managers—it will be their programmed trades.) These asset managers will sell Treasuries because, effectively, it’s become the principal asset they have to sell.

It won’t be the volume of the sell-off that will pique Bernanke and the drones at the Fed—it will be the timing. It’ll happen right before a largish Treasury auction. So Bernanke and the Fed will buy Treasuries, in an effort to counteract the sell-off and maintain low yields—they want to maintain low yields in order to discourage deflation. But they’ll also want to keep the Treasury cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world didn’t end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle in the bud.

The Fed’s buying of Treasuries will occur in such a way that it will encourage asset managers to dump even more Treasuries into the Fed’s waiting arms. This dumping of Treasuries won’t be out of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame Treasuries a bit cheaper down the line.

However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned to the bond markets’ fear that there’s a “Treasury bubble”. So the Fed will open its liquidity windows, and buy up every Treasury in sight, precisely so as to maintain “asset price stability” and “calm the markets”.

The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

But they don’t have to do what the Fed tells them, much less what the Treasury tells them. Since they weren’t really nationalized, they’re not under anyone’s thumb. They can do as they please—and they have boatloads of Treasuries on their balance sheets.

So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their own best interests: They will be among the first to step off Treasuries. They will be the bleeding edge of the wave.

Here the panic phase of the event begins: Asset managers—on seeing this massive Fed buy of Treasuries, and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury auction—will dump their own Treasuries en masse. They will be aware how precarious the U.S. economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt. They’re not stupid: Everyone is aware of the idea of a “Treasury bubble” making the rounds. A lot of people—myself included—think that the Fed, the Treasury and the American Zombies are colluding in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided to them by the Fed.

Whether it’s true or not is actually beside the point—there is the widespread perception that that is what’s going on. In a panic, widespread perception is your trading strategy.

So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers will all decide, “Time to get out of Dodge—now.”

Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries—those two countries will actually be left holding the bag. Rather, it will be American and (depending on the time of day when the event happens) European asset managers who get out of Treasuries first. It will be a flash panic—much like the flash-crash of last May. The events I describe above will happen in a very short span of time—less than an hour, probably. But unlike the event in May, there will be no rebound.

Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least initially. Why? Because the Fed, so determined to maintain “price stability”, will at first prevent yields from widening—which is precisely why so many will decide to sell into the panic: The Bernanke Backstop won’t soothe the markets—rather, it will make it too tempting not to sell.

The first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park their cash—obviously. Where will all this ready cash go?

Commodities.

By the end of that terrible day, commodites of all stripes—precious and industrial metals, oil, foodstuffs—will shoot the moon. But it will not be because ordinary citizens have lost faith in the dollar (that will happen in the days and weeks ahead)—it will happen because once Treasuries are not the sure store of value, where are all those money managers supposed to stick all these dollars? In a big old vault? Under the mattress? In euros?

Commodities: At the time of the panic, commodities will be perceived as the only sure store of value, if Treasuries are suddenly anathema to the market—just as Treasuries were perceived as the only sure store of value, once so many of the MBS’s and CMBS’s went sour in 2007 and 2008.

It won’t be commodity ETF’s, or derivatives—those will be dismissed (rightfully) as being even less safe than Treasuries. Unlike before the Fall of ’08, this go-around, people will pay attention to counterparty risk. So the run on commodities will be for actual, feel-it-’cause-it’s-there commodities. By the end of the day of this panic, commodities will have risen between 50% and 100%. By week’s end, we’re talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot up the most—to $100 an ounce within the week.)

Of course, once commodities start to balloon, that’s when ordinary citizens will get their first taste of hyperinflation. They’ll see it at the gas pumps.

If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week—perfectly possible, in the midst of a panic—the gallon of gasoline will go to, what: $10? $15? $20?

So what happens then? People—regular Main Street people—will be crazy to buy up commodities (heating oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable, rather than later, when that $15 gallon of gas shoots to $30 per gallon.

If everyone decides at roughly the same time to exchange one good—currency—for another good—commodities—what happens to the relative price of one and the relative value of the other? Easy: One soars, the other collapses.

When people freak out and begin panic-buying basic commodities, their ordinary financial assets—equities, bonds, etc.—will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.

So immediately after the Treasury markets tank, equities will fall catastrophically, probably within the next few days following the Treasury panic. This collapse in equity prices will bring an equivalent burst in commodity prices—the second leg up, if you will.

This sell-off of assets in pursuit of commodities will be self-reinforcing: There won’t be anything to stop it. As it spills over into the everyday economy, regular people will panic and start unloading hard assets—durable goods, cars and trucks, houses—in order to get commodities, principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate or even hold their value, when the hyperinflation comes.

This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset prices don’t skyrocket—they collapse, both nominally and in relation to consumable commodities. A $300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver—because in a hyperinflationist episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.

Right now, I’m guessing that sensible people who’ve read this far are dismissing me as being full of shit—or at least victim of my own imagination. These sensible people, if they deign to engage in the scenario I’ve outlined above, will argue that the government—be it the Fed or the Treasury or a combination thereof—will find a way to stem the panic in Treasuries (if there ever is one), and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).

Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?

Let’s take the Fed: How could they stop a run on Treasuries? Answer: They can’t. See, the Fed has already been shoring up Treasuries—that was their strategy in 2008—’09: Buy up toxic assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what’s the Fed supposed to do? Bernanke long ago ran out of ammo: He’s just waving an empty gun around. If there’s a run on Treasuries, and he starts buying them to prop them up, it’ll only give incentive to other Treasury holders to get out now while the getting’s still good. If everyone decides to get out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They’re at the mercy of events—in fact, they have been for quite a while already. They just haven’t realized it.

Well if the Fed can’t stop this, how about the Federal government—surely they can stop this, right?

In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation, what exactly would the Federal government do to stop it? Implement price controls? That will only give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out more “stimulus”? Sure, pump even more currency into a rapidly hyperinflating everyday economy—right . . .

(BTW, I actually think that this last option is something the Federal government might be foolish enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing so as to “help all hard-working Americans”. And if they carried it out, this would bring us American-made images of people using bundles of dollars to feed their chimneys. I actually don’t think that politicians are so stupid as to actually start printing money to “fight rising prices”—but hey, when it comes to stupidity, you never know how far they can go.)

In fact, the only way the Federal government might be able to ameliorate the situation is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards of some sort, for basic staples—in other words, food rationing. This might prevent riots and protect the poor, the infirm and the old—it certainly won’t change the underlying problem, which will be hyperinflation.

“This is all bloody ridiculous,” I can practically hear the hyperinflation skeptics fume. “We’re just going through what the Japanese experienced: Just like the U.S., they went into massive government stimulus—hell, they invented quantitative easing—and look what’s happened to them: Stagnation, yes—hyperinflation, no.”

That’s right: The parallels with Japan are remarkably similar—except for one key difference. Japanese sovereign debt is infinitely more stable than America’s, because in Japan, the people are savers—they own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt. That’s why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.

That’s why I think there’ll be hyperinflation in America—that bubble’s soon to pop. I’m guessing if it doesn’t happen this fall, it’ll happen next fall, without question before the end of 2011.

The question for us now—ad portas to this hyperinflationary event—is, what to do?

Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real trick, however, is to prepare for after the end of the Apocalypse.

The first thing to realize, of course, is that hyperinflation might well happen—but it will end. It won’t be a never-ending situation—America won’t end up like in some post-Apocalyptic, Mad Max: Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it’s not gonna happen—that’s just survivalist daydreams.

Instead, after a spell of hyperinflation, America will end up pretty much like it is today—only with a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean out all the bad debts in the economy, the crap that the Fed and the Federal government refused to clean out when they had the chance in 2007–’09. It would break down and reset asset prices to more realistic levels—no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist catastrophe might in the long run be better for the health of the U.S. economy and the morale of the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won’t be surprising. But I digress.

Like Rothschild said, “Buy when there’s blood on the streets.” The thing to do to prepare for hyperinflation would be to invest in a diversified hard-metal basket before the event—no equities, no ETF’s, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really bad), take that hard-metal basket and—right in the teeth of the crisis—buy residential property, as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the most valuable assets will be dirt-cheap—especially equities—especially real estate.

I have no idea what will happen after we reach the point where $100 is no longer enough to buy a cup of coffee—but I do know that, after such a hyperinflationist period, there’ll be a “new dollar” or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a new normal. I have no idea the shape of that new normal. I wouldn’t be surprised if that new normal has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls—I’d say it’s likely, but for now that’s not relevant.

What is relevant is, the current situation cannot long continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it—stimulus is putting pressure on Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore, the smart money prepares for what it believes is going to happen next.

I think we’re going to have hyperinflation. I hope I have managed to explain why.

Originally Posted At Institute for Policy Analysis
By Dr. Merrill Matthews
August 31, 2010

President Lyndon Johnson's "War on Poverty" taught us what happens when well-meaning (to give them benefit of the doubt) politicians and bureaucrats create a welfare system that rewards those who shun work, while punishing those who try to take responsibility for themselves. Those perverse incentives create a cycle of welfare dependency that grips the poor and their offspring for decades.

So why don't we recognize that the same system, when directed at states rather than people, will also create a state cycle of dependency?

Washington has become little more than a sugar daddy to the states, handing out money for a whole range of needs -- health care, welfare, highways and other infrastructure needs, education, environmental concerns, and most recently bail out dollars. But those funds come with strings -- strings that give the feds indirect control over state policies.

For years the states were willing to embrace their sugar daddy to get the funds and accepted the conditions ... until recently. When President Obama came bearing stimulus funds, a handful of states-South Carolina, Texas, Mississippi and Louisiana -- pushed back, at least against part of the funds. Some were concerned that new federally imposed mandates on unemployment benefits would eventually cost the state more than it was receiving.

Now Washington has passed a $26 billion handout to the states for education and unemployment, and states are thrilled.

Ironically, the states' embrace of the handouts comes at a time when many of them are trying to reassert their rights and independence under the Tenth Amendment of the U.S. Constitution. They want Washington to quite bossing them around, even as governors plead for more federal assistance. The two can't co-exist.

It would take tremendous political courage at the state level, but we'd love to see a movement from the state legislatures that summarily rejected federal handouts, including the matching grants for Medicaid recipients.

Step up, states, and break that cycle of dependency.

And if Congress weren't handing money back to the states, it wouldn't need to extract those funds from taxpayers in the states. Less money from taxpayers and more independence for the states; a win-win for the states and the taxpayers.

Originally Posted At Foreign Policy
By Parag Khanna
September/October 2010

Beyond City Limits

The age of nations is over. The new urban age has begun.

The 21st century will not be dominated by America or China, Brazil or India, but by the city. In an age that appears increasingly unmanageable, cities rather than states are becoming the islands of governance on which the future world order will be built. This new world is not -- and will not be -- one global village, so much as a network of different ones.

Time, technology, and population growth have massively accelerated the advent of this new urbanized era. Already, more than half the world lives in cities, and the percentage is growing rapidly. But just 100 cities account for 30 percent of the world's economy, and almost all its innovation. Many are world capitals that have evolved and adapted through centuries of dominance: London, New York, Paris. New York City's economy alone is larger than 46 of sub-Saharan Africa's economies combined. Hong Kong receives more tourists annually than all of India. These cities are the engines of globalization, and their enduring vibrancy lies in money, knowledge, and stability. They are today's true Global Cities.

At the same time, a new category of megacities is emerging around the world, dwarfing anything that has come before. A massive influx of people has not only spurred the growth of existing cities, but created new ones virtually from scratch on a scale not previously imagined, from the factory towns in China's Guangdong province to the artificial "knowledge cities" rising in the Arabian desert. The defining feature of this new urban age will be megalopolises whose populations are measured in the tens of millions, with jagged skylines that stretch as far as the eye can see.

Many will pose challenges to the countries that give birth to them. For though no nation can succeed without at least one thriving urban anchor -- and even then, a functioning Kabul or Sarajevo is still no guarantee of national survival -- it's also true that globalization allows major cities to pull away from their home states, a reality captured by the massive and potentially dangerous wealth gap between city and countryside in second-world countries such as Brazil, China, India, and Turkey.

Neither 19th-century balance-of-power politics nor 20th-century power blocs are useful in understanding this new world. Instead, we have to look back nearly a thousand years, to the medieval age in which cities such as Cairo and Hangzhou were the centers of global gravity, expanding their influence confidently outward in a borderless world. When Marco Polo set forth from Venice along the emergent Silk Road, he extolled the virtues not of empires, but of the cities that made them great. He admired the vineyards of Kashgar and the material abundance of Xi'an, and even foretold -- correctly -- that no one would believe his account of Chengdu's merchant wealth. It's worth remembering that only in Europe were the Middle Ages dark -- they were the apogee of Arab, Muslim, and Chinese glory.

Now as then, cities are the real magnets of economies, the innovators of politics, and, increasingly, the drivers of diplomacy. Those that aren't capitals act like they are. Foreign policy seems to take place even among cities within the same country, whether it's New York and Washington feuding over financial regulation or Dubai and Abu Dhabi vying for leadership of the United Arab Emirates. This new world of cities won't obey the same rules as the old compact of nations; they will write their own opportunistic codes of conduct, animated by the need for efficiency, connectivity, and security above all else.

Western cities have dominated the ranks of leading urban centers since the Industrial Revolution, a testament to their educated workforces, strong legal systems, risk-taking entrepreneurs, and leading financial markets. New York and London together still represent 40 percent of global market capitalization. But look at the economic map today, and a major shift becomes apparent. Asia-Pacific financial hubs such as Hong Kong, Seoul, Shanghai, Sydney, and Tokyo are leveraging globalization to spur an accelerating Asianization. Money floods into these capitals from around the world but tends to stay within Asia. An Asian monetary fund now provides stability for the region's currencies, and trade within the Asian sphere has grown much larger than trade across the Pacific. Instead of long-haul flights, the story here is of low-cost carriers connecting planeloads of travelers from Ulan Bator to Kuala Lumpur to Melbourne.

Accelerating this shift toward new regional centers of gravity are port cities and entrepôts such as Dubai, the Venices of the 21st century: "free zones" where products are efficiently re-exported without the hassles of government red tape. Dubai's recent real-estate overreach notwithstanding, emerging city-states along the Persian Gulf are investing at breakneck speed in efficient downtown business districts, offering fast service and tax incentives to relocate. Look for them to use sovereign wealth funds to acquire the latest technology from the West, buy up tracts of agricultural land in Africa to grow their food, and protect their investments through private armies and intelligence services.

Alliances of these agile cities are already forming, reminiscent of that trading and military powerhouse of the late Middle Ages, the Hanseatic League along the Baltic Sea. Already, Hamburg and Dubai have forged a partnership to boost shipping links and life-sciences research, while Abu Dhabi and Singapore have developed into a new commercial axis. No one is waiting for permission from Washington to make deals. New pairings among global cities follow the markets: Witness the new Doha to Sao Paulo direct flight on Qatar Airways or the Buenos Aires to Johannesburg route on South African Airways. When traffic between New York and Dubai dried up due to the financial crisis, Emirates airlines rerouted its sleek Airbus A380 planes to Toronto, whose banking system survived the economic shake-up in better shape.

For these emerging global hubs, modernization does not equal Westernization. Asia's rising powers sell the West toys and oil and purchase world-class architecture and engineering in return. Western values like freedom of speech and religion are not part of the bargain.

This is very much the case in the monarchies of the Persian Gulf, where urban ambition is manifest in iconic new districts ordered up in the desert sands. Abu Dhabi is creating the solar-powered, car-free Masdar City -- meant to be the world's first carbon-neutral, no-waste city -- and colonizing its Saadiyat Island with architectural marvels to house new Guggenheim and Louvre collections in stunning new buildings by Frank Gehry and Jean Nouvel. The emirate has embraced a two-decade master plan to invest not only in new cities, but in smart ones that will take into account land use, sanitation, efficient transport, and community building, in hopes of making itself into a place where Westerners will flock for a better quality of life (certainly not because of the climate or its starring role in Sex and the City 2). Already the result in the Persian Gulf is something truly new, as a once-barren cultural zone features increasingly global melting pots like the Qatari capital of Doha, where residents hail from more than 150 countries and far outnumber the locals. If these new five-star hubs play it right, they could convince Westerners to give up their citizenship for permanent homes in a friendlier, tax-free environment.

Then there are the megacities, superpopulous urban zones that are worlds unto themselves but that -- for now -- still punch below their weight class economically: Think Lagos, Manila, or Mexico City. When Tokyo in 1980 became the first metropolitan area to reach a population of 20 million, the figure seemed almost unimaginable. Now we need to get used to the idea of nearly 100 million people clustered around Mumbai or Shanghai. Across India, more than 275 million people are projected to move into the country's teeming cities over the next two decades, a population nearly equivalent to that of the United States. During a recent trip to Jakarta, a minibus-clogged megalopolis of 24 million, it struck me that many if not most of the residents will never leave their city's expanding perimeter or know much of the outside world beyond the airplanes flying overhead. In just a few decades, Cairo's urban development has stretched so far from the city's core that it now encroaches directly on the pyramids 14 miles away, making them and the Sphinx commensurately less exotic than when my father was photographed there in the 1970s, with just the pyramids and a camel in view.

The millions of urban squatters pouring into megacities each year are not simply a new global migrant underclass, consigned to live in chaos and work in the shadow economy. Instead, they often form functional, self-organizing ecosystems that are "off the grid." But one result is an echo of the physical stratification of medieval cities; where knights and walls once protected the aristocracy from unwanted outsiders, now electrified gates and private security agencies do the same. Gurgaon, not long ago a sleepy farming village outside New Delhi, has become a high-rise, high-tech satellite of more than half a million people and was recently ranked India's best city to work in. It offers gated complexes, such as Windsor Court, with their own grocery stores, kindergartens, and social clubs all in one compound so that only working husbands ever have to face the real world of India's choking traffic and noxious pollution.

Indeed, economic inequality flourishes in these massive new urban clusters. Consider the skylines of Istanbul, Mumbai, and Sao Paulo, where stunning high-rises are surrounded by ungodly scenes of destitution and squalor. Indian billionaire Mukesh Ambani, the world's fourth-richest person, is reportedly spending close to $2 billion on the construction of his 27-story home -- complete with hanging gardens, a health center, and helipads -- all with a bird's-eye view of Mumbai's largest slum, Dharavi. Once, while jogging on a treadmill on the top floor of a Sao Paulo hotel, I tried to count the many helicopters buzzing by. The city has the highest rate of private helicopter use in the world -- a literal sign of what heights people will go to in order to avoid the realities of the world below.

Look at a satellite image of the Earth at night: It will reveal the shimmering lights of cities flickering below, but also an ominous pattern. Cities are spreading like a cancer on the planet's body. Zoom in and you can see good cells and bad cells at war for control. In Caracas, gang murders and kidnappings are a fact of life, and al Qaeda terrorists hide in plain sight in Karachi. Film director Shekhar Kapur is working on an epic titled Water Wars: It is set not in parched Africa or the fractious Middle East, but Mumbai. Anyone who traveled to South Africa for the 2010 World Cup might have noticed how private security forces outnumbered official police two to one, and gated communities protected elites from the vast townships where crime is rampant. Cities -- not so-called failed states like Afghanistan and Somalia -- are the true daily test of whether we can build a better future or are heading toward a dystopian nightmare.

Taken together, the advent of global hubs and megacities forces us to rethink whether state sovereignty or economic might is the new prerequisite for participating in global diplomacy. The answer is of course both, but while sovereignty is eroding and shifting, cities are now competing for global influence alongside states.

Columbia University scholar Saskia Sassen has done the most to contribute to our thinking about how urban advantage translates into grand strategy. As she writes in The Global City, such places are uniquely suited to translate their productive power into "the practice of global control." Her academic work has traced how Europe's largely autonomous Renaissance cities such as Bruges and Antwerp innovated the legal frameworks that enabled the first transnational stock exchanges, setting the stage for international credit and the forerunners of today's trading networks. Then as now, nations and empires did not restrain cities; they were merely filters for cities' global ambitions. The supply chains and capital flows linking global cities today have similarly denationalized international relations. As Sassen argues, in cities we can't make trite divisions between the government and private sector; either they work together or the city doesn't work at all. Even massive national investments in telecommunications or other infrastructure don't equalize the balance of power between cities and the rest; they ultimately reinforce the power of cities to conduct their own "sovereign" diplomacy.

Consider how aggressively Chinese cities have now begun to bypass Beijing as they send delegates en masse to conferences and fairs where they can attract foreign investment. By 2025, China is expected to have 15 supercities with an average population of 25 million (Europe will have none). Many will try to emulate Hong Kong, which though once again a Chinese city rather than a British protectorate, still largely defines itself through its differences with the mainland. What if all China's supercities start acting that way? Or what if other areas of the country begin to demand the same privileges as Dalian, the northeastern tech center that has become among China's most liberal enclaves? Will Beijing really run China then? Or will we return to a fuzzier modern version of the "Warring States" period of Chinese history, in which many poles of power competed in ever-shifting alliances?

Think about it: Even today's most centralized empire-state could be undone by its cities. Gone are the days of Mao when peasant uprisings could collectively capture the nation. Today, controlling the cities, not the countryside, is the key to the Middle Kingdom. The same is very much the case in Africa's fragile post-colonial nations. Africa's urbanization rate is approaching China's, and the continent already has nearly as many cities with a population of 1 million or more as Europe does. But decades of despotism and civil wars haven't yielded governments that can hold together entire countries -- let alone Africa's two geographically largest nations, Sudan and the Democratic Republic of the Congo. Instead, these countries seem to be headed toward division, with the new borders following and surrounding the main cities that are their gravity points, like Juba in South Sudan and Kinshasa in Congo. Or perhaps borders don't need to change at all, but rather melt away, so long as locals have access to the nearest big city no matter what "country" it is in. This is, after all, how things really work on the ground, even if our maps don't always reflect this reality.

As our world order comes to be built on cities and their economies rather than nations and their armies, the United Nations becomes even more inadequate as a symbol of universal membership in our global polity. Another model could be built on the much less rigid World Economic Forum of Davos fame, which brings together anyone who's someone: prime ministers, governors, mayors, CEOs, heads of NGOs, labor union chiefs, prominent academics, and influential celebrities. Each of these players knows better than to rely on some ethereal "system" to provide global stability -- they move around obstacles and do what works.

The scope of urban ambition today ranges from new business districts to special economic zones to entirely new cities never before on the map. Sitting down recently at a construction site on the banks of the Elbe River, I spoke with Jürgen Bruns-Berentelg, CEO of Hamburg's bold new HafenCity project. A veteran of Berlin's futuristically redesigned Potsdamer Platz, he has resuscitated Hamburg's neglected industrial waterfront and turned it into an efficient, job- and family-friendly island, seamlessly integrated into this revitalized German city. "We've moved from arbitrary to curated urban design," he told me confidently. Just as Hamburg was once a powerful trading linchpin of the medieval Hanseatic League because of its proximity to the Baltic Sea, HafenCity's ample new port terminals look to capitalize on changing trade patterns to capture a larger slice of the massive global shipping market. But HafenCity is also designed to house 21st-century industries. Global companies such as Procter & Gamble have moved their regional headquarters into buildings that are so ecoefficient that their toilets don't use water. "For both businesses and residents," Bruns-Berentelg pointed out, "moving to HafenCity is more than a rental decision -- it's a lifestyle choice." Officials from Rotterdam, Toronto, and other forward-thinking cities are coming to learn from HafenCity, whose residents are in a way the pioneers of urban renewal for the Western world, which doesn't have the luxury of building cities from scratch.

Africa, however, does -- and that's precisely what Stanford University economist Paul Romer is pushing. His "Charter Cities" initiative aims to help poor countries leapfrog into the urban age by embracing an idea much like charter schools: Set aside a plot of land, give it special administrative status and flexibility (as China did in leasing Hong Kong to Britain), and then step out of the way and let experts run it. Romer is in discussions with countries in Africa to find a candidate willing to provide the land for a pilot project; his plan has the potential to transform an entire country's fortunes. Whether or not his utopian and, to some, neocolonial dream goes anywhere, some places have already successfully experimented on their own: China's Guangdong province has had special economic zones for decades, meant to cut out hidebound bureaucracies in favor of business-friendly parastatal governance. Enclaves from King Abdullah Economic City in Saudi Arabia to Binh Duong in Vietnam are now copying the model.

Charter cities are a poor man's version of South Korea's $40 billion Songdo project, which promises to stand in a class of its own upon completion in 2015. Touted as the most expensive private development in history, Songdo is more than a new business district or economic zone; it will be the world's first sentient city, using advanced communications technologies to make life seamlessly interactive, from homes to schools to hospitals. Each wave of new residential and commercial blocks that comes on the market sells out almost instantly in connectivity-crazed South Korea. It also represents Asia's chance to turn its demographic concentration and burgeoning consumption from a threat to the planet into a model that can be re-exported to the developing world. The estimated 300 new cities that China alone has planned are a huge market opportunity for green developers like Gale International, which leads the Songdo project, to deploy ecofriendly city plans.

Indeed, Songdo might well be the most prominent signal that we can -- and perhaps must -- alter the design of life. Cities are where we are most actively experimenting with efforts to save the planet from ourselves. Former U.S. President Bill Clinton has brought together mayors from 40 large cities to build a network of best practices for reducing greenhouse gas emissions. Vertical farming, long in vogue in Tokyo, is spreading to New York; the electric mass-transit system of Curitiba in Brazil is being copied in North America; Cisco is embedding sensors in Madrid's traffic signals to make the city traffic-free. The consulting firm McKinsey recently estimated that if India pursues urbanization in an ecoefficient manner, it will not only make the country a healthier place, but add an estimated 1 to 1.5 percentage points to its GDP growth rate.

In this way, a world of cities can spark a cycle of virtuous competition. As geographer Jared Diamond has explained, Europe's centuries of fragmentation meant that its many cities competed to gain an edge in innovation -- and today they share those advances, making Europe the most technologically developed transnational zone on the planet.

What happens in our cities, simply put, matters more than what happens anywhere else. Cities are the world's experimental laboratories and thus a metaphor for an uncertain age. They are both the cancer and the foundation of our networked world, both virus and antibody. From climate change to poverty and inequality, cities are the problem -- and the solution. Getting cities right might mean the difference between a bright future filled with HafenCitys and Songdos -- and a world that looks more like the darkest corners of Karachi and Mumbai.

Originally Posted At Sovereign Society
By Mark Nestmann
August 20, 2010

If you're like most Americans, you violate numerous laws each day, probably without even knowing it.

As I wrote in a blog entry nearly three years ago, in New Jersey, you can be arrested for driving by your own home. In Florida, a man was sentenced to six years in prison for carrying cash. In Pennsylvania, a woman faces prison for yelling obscenities at her clogged toilet. You can even be imprisoned for the crime of withdrawing lawfully earned currency from your own bank account.

Over the past three years, the trend toward what I call "criminalization" of everyday conduct has only intensified. (Criminalization is the conversion of conduct that was once considered a contractual dispute, or merely socially stigmatized, into a criminal offense.)

Now, according to federal prosecutors in New Jersey, violating a Web site's "terms of service" constitutes a crime. Under this interpretation, if you disregard – or simply fail to read (or understand) the lengthy and legalistic service agreement of any Web site, you risk imprisonment!

The defendants in this case purchased tickets in bulk from an online ticket reselling business, Wiseguy Tickets. They stand accused of reselling the tickets at a higher price, in violation of Wiseguy's terms of service. Prosecutors also brought hacking charges against the defendants for bypassing technical measures to prevent bulk purchases. But it's the criminalization of violating a Web site's terms of service that concerns me the most.

Most Web sites say they can change their terms of service anytime. To avoid prosecution under this theory, you'd need to read a multiple pages of legalese every time you log in to your favorite Web site. Even entering a fake name on a social networking Web site may be a crime! Federal prosecutors in Los Angeles indicted a woman because she violated a social network's terms of service. Fortunately, the trial judge threw out the case.

And there's no reason why this trend is limited to the online world. Imagine that you purchase a new car from your local dealer. You drive it for a few months, never bothering to read the terms of service in the back of the manual. One day you get pulled over for a traffic ticket. The cop asks you where you buy your gas. "From wherever it's cheapest," you reply. "Wrong answer," says the cop, as he puts you in handcuffs. It turns out that the terms of service stipulate that you must purchase all your gas from a specific gas station recommended by the dealer. If you don't, under the DOJ's latest pet theory of criminalization, you'd be committing a crime.

Naturally, there's no way that police can arrest you every time you knowingly or unknowingly violate the terms of service for an online – or offline – product or service. But the potential for arrest is always there, giving prosecutors wide discretion in pursuing the most visible – or more likely, the most politically viable – of such "crimes."

The trend won't reverse itself until we convince lawmakers that criminal sanctions aren't necessarily the best way to deal with moral, social, or political problems and disputes. Let's hope that time comes soon – although I'm not holding my breath!

Mark Nestmann is a journalist with more than 20 years of investigative experience and is a charter member of The Sovereign Society’s Council of Experts. He has authored over a dozen books and many additional reports on wealth preservation, privacy and offshore investing. Mark serves as president of his own international consulting firm, The Nestmann Group, Ltd. The Nestmann Group provides international wealth preservation services for high-net worth individuals. Mark is an Associate Member of the American Bar Association (member of subcommittee on Foreign Activities of U.S. Taxpayers, Committee on Taxation) and member of the Society of Professional Journalists. In 2005, he was awarded a Masters of Laws (LL.M) degree in international tax law at the Vienna (Austria) University of Economics and Business Administration.

Originally Posted At The Wall Street Journal
By Ralph Nader
August 17, 2010

Anticorporatist views are becoming more and more common.

Earlier this year, Barney Frank and Ron Paul convened the Sustainable Defense Task Force, consisting of experts "spanning the ideological spectrum." They recommended a 10-year, $1 trillion reduction in Pentagon spending that disturbed some in the military-industrial complex.

Other members of Congress were surprised by this improbable combination of lawmakers taking on such a taboo subject. But the spiral of bloated, wasteful military expenditures documented by newspapers has reached the point where opposites on the political-ideological spectrum were willing to make common cause.

A convergence of liberal-progressives with conservative-libertarians centering on the autocratic, corporate-dominated nature of our government may be growing. To be sure, there are obstacles to a synthesis of anticorporatist views becoming a political movement.

One is over-concern with labels and abstractions by both political factions. Yet once they take up the daily injustices—credit-card ripoffs, unsafe drugs and contaminated food—affecting people everywhere, common ground can be found. Another obstacle is that the concentrated power of big money and lobbies have so overtaken both political parties and controlled the parameters of political conversation that progressives and libertarians fail to recognize their similar, deep aversions to concentrated power of any kind. Finally, the anticorporatists in both camps are reluctant to collaborate in principled action because they have battled over issues for so long where they do not agree.

Yet this reluctance may be fading as abuses of corporate power, especially when supplemented by state power, become more plain to all. The multitrillion dollar bailout of an avariciously reckless Wall Street rammed through Washington, without any input from an angry public, epitomized shared outrage.

This perceived feeling of being excluded, disrespected and then taxed for the crimes and abuses of big business has been building for years. The loss of both sovereignty and jobs have produced a lasting resentment toward the antidemocratic North American Free Trade Agreement, the World Trade Organization (WTO) and unpatriotic U.S. corporations that hollow out communities as they shift industries to China and other repressive regimes.

I have received earfuls on these matters during my three nationwide presidential campaigns from both workers and taxpayers who call themselves conservatives or progressives. The Main Street versus Wall Street figures of speech bespeak a deep sense of loss of control over just about everything that matters to people's lives. In their daily discourse they know that big government beats to the drums of big business or, to use the elegant words of conservative philosopher Russell Kirk, "a host of squalid oligarchs."

Because corporatists falsely assume the mantle of conservatism, they keep agendas that the left and right would agree on—such as cracking down on corporate crime, fraud and abuse against consumers, taxpayers and investors—from being heard and talked about and acted upon. The issues that don't get nearly the attention they deserve include opposition to the arbitrary erosion of privacy by the Patriot Act and to the daily collection and storage of personal consumer information in corporate databases; resistance to tax-funded sports stadiums, the Federal Reserve's out-of-control powers, unconstitutional wars and monopolistic practices against small business, and to the swarm of corporate welfare subsidies, tax havens, handouts, giveaways and bailouts.

Corporate abuse is recognized by elements in our society that might surprise you. Some years ago, at a sizable gathering of evangelical Christians, I denounced the rampant direct marketing to children of junk food and violent programming, undermining parental authority and furthering childhood obesity and mental coarseness. As people of faith, as parents and citizens, the audience responded enthusiastically.

No matter how often corporatists call themselves conservatives, the two hail from very different moral, historical and intellectual antecedents.

The powerful nuclear power industry discovered this difference in 1983, when a tight coalition of conservative, environmental and taxpayer groups defeated the deficit-ridden Clinch River Breeder Reactor in Tennessee. More recently, in 2008, demands coming from both the left and right that Congress ban genetic discrimination by health insurers overcame the corporatist lobby.

In several polls, including ones by Businessweek and Gallup, a sizable majority of Americans say that corporations have too much control over their lives, that both major parties are failing and that America is going in the wrong direction.

Once this slowly awakening giant of American reform shucks off the corporatists who divide, distort and deny many common identities, a dynamic civic force for freedom, fairness and prosperity will define and advance its own political and electoral agendas.

Mr. Nader is a consumer advocate and the author of "Only the Super-Rich Can Save Us" (Seven Stories Press, 2009).

Originally Posted At GaryNorth.com
By Gary North
August 16, 2010

Eight Unbreakable Rules for Hard-Core Tea Party Activists (or Any Other Special-Interest Coalition)

I joined the conservative movement in 1956 when I joined Fred Schwarz's Christian Anti-Communism Crusade. I wrote an anti-FDR high school term paper in 1958. I supported the Goldwater for Vice President movement in 1960. I voted for Goldwater for President in 1964. I voted for Reagan's Republican primary gubernatorial challenger in 1966, William Penn Patrick, because I thought Reagan was too liberal. (I was right; he imposed income tax withholding in his first term as governor.) I was Ron Paul's first research assistant in 1976.

I am hard core. I have been hard core for a long time.

I am writing this for those of you who are equally hard core.

Here are ten facts of American national politics that you must understand to get meaningful change.

1. You can't beat something with nothing.
2. 80% of politicians respond only to two things: (1) fear; (2) pain.
3. Bureaucrats (tenured) respond only to one thing: budget cuts.
4. Political reform never comes as long as the tax money flows in.
5. The #1 goal is to reduce the government's funds, not re-direct them.
6. Congress's club system sucks in 80% of new members by term #2.
7. Politicians listen to their peers, not to their constituents.
8. Money from the government buys off most voters.
9. Most citizens care little about politics and know less.
10. This gives influence to organized swing-vote blocs.

The political system was summed up a generation ago by the man I regard as the elder statesman of the hard-core wing of the American conservative movement, M. Stanton Evans: "Evans's Law of Political Perfidy."

When our friends get into power, they aren't our friends any more.
To this, I add North's Law of Partisan Politics:

When a movement is in either political party's hip pocket, it will be sat on.
If you do not believe this, then you are a sheep for the shearing -- and then, after several shearings, the roasting. You are on some politician's menu.

THE RULES OF ENGAGEMENT

These are eight basic rules of engagement. There may be others, but these are fundamental. If you do not believe these, you are headed for disappointment.

1. Vote for a hard-core challenger on the other side against a squishy incumbent. This rule separates the hard core members from the soft core members. It has a corollary: A first-term incumbent next election is easier to beat than a squishy incumbent this election. It is always hard to defeat an incumbent. Do what you can to defeat any incumbent, no matter which party he belongs to, if he is squishy on the issue you regard as fundamental. Why is this so important? Incumbents must become deathly afraid of your movement. Take out a few dozen of them in the next election and the one that follows, and many others will cooperate. As Sen. Everett Dirksen put it so long ago, "When we feel the heat, we see the light." In short, you do not settle for the lesser of two evils. You eliminate them both, one election at a time: first the softie, then the newbie.

2. Hold your newly elected politician's feet to the fire the first time he breaks ranks on a key vote. He is like a puppy. When he leaves a mess on the carpet, get out the switch. "Bad dog! Bad dog!" Let him remember that switch. Let him fear that switch. The second time he does it, warm up the car. You and he will be taking a trip to the pound. You are his voter only for as long as he is your representative. Politicians respond to only two things: fear and pain.

3. Get him to sign a resignation letter. Before you work for him, make sure he has signed a resignation letter. This letter says the following:

To the voters of [district, state]:

I am making this public. If I ever vote for [whatever], I will turn in my letter of resignation to the [government body] within 24 hours.

If I fail to do this, I expect voters to vote against me at the next election, since I clearly cannot be trusted.

I expect my opponent in the primary to defeat me next time, and if he doesn't, my opponent in the general election will. And should.

Very truly yours,

Name Candidate for [whatever]

This is a political suicide letter. You will see who is serious about your #1 issue and who is not by means of a signed resignation letter. Post it online. If he refuses to sign it, start working to undermine him after he defeats the squishy incumbent. Above all, do not trust him.

No candidate will sign more than a few of these. Any candidate who will not sign at least one is just another glory-seeking, power-seeking, retirement bonanza-seeking political hack. Like a drone bee who is useful only once in his life, he is useful for only one thing: defeating a squishy incumbent.

You say he refuses to sign? Don't donate any money or time to his campaign. You should vote for him against a squishy incumbent, but you will immediately start working to replace him.

4. Track all of his votes on your #1 issue, and post them online. The Congress deliberately seeks to conceal voting results. Your committee must keep track of every vote related to your interest. This means that someone must follow the voting schedule. If there is no record of his vote, call his office. Ask for an email with his vote recorded. My suggestion: make sure he has an assistant send an email to your committee after every vote in this area, explaining it. Post all of this without alteration. If he breaks ranks, make sure you have a clear statement of why this was a bad vote.

This is boring. This is time-consuming. This is vital. You must see if there is a pattern in his voting on your issue.

I wish there were watchdog sites that cover every vote. Be sure there is one for your special interest.

WordPress is free (www.WordPress.org). A domain name costs $10 a year to register. A multi-site hosting service like Hostgator is $10 a month or less. Have a separate site for every candidate and elected official.

This would make a great civics project for home schoolers: track a candidate for the school year. Then turn the task over to a new student. Have the committee run the sites, but students can do the grunt work. It is good practice.

5. Find out who his largest campaign donors are. This will tell you who will have the most clout when he takes office. Investigate the PACs. Investigate the donors who send in the maximum donation allowed. Are they members of one group? Post this information on the site that you set up to monitor his votes.

6. Instill fear. This is your #1 task, once he takes office.

7. Inflict pain. This is the basis of #6.

8. Trust, but verify. If your group refuses to verify, it should not trust.

CONCLUSION

Politics is not based on love, because civil government is based on coercion. Do not impose "tough love" on a politician. He is not to love you. He is to obey you. You are not to love him. You are to monitor him. Impose negative sanctions and positive sanctions wisely.

Politicians surround themselves with young men and young women who serve as staffers, plus a few old-timers who have survived in the staffing system and who are unimpressed with their bosses, but are even less impressed with the boss's constituents. Politicians spend time in each other's company. They are not much impressed with their colleagues, but they are very impressed with themselves. They are not impressed by their constituents. Finally, they spend time raising money. So, they have to spend time with lobbyists.

I shall now end my little lesson on politics with a verbatim citation from one of the great masters of state-wide politics, Jesse Unruh. He was the Speaker of the California Assembly in the late 1960s. He was known as Big Daddy. He ran against Ronald Reagan in 1970 and lost. But he later was elected state Treasurer. Here is what he said about the proper attitude toward lobbyists:

"If you can't eat their food, drink their booze, screw their women, and still vote against them, you have no business being up here."
So committed was he to this philosophy of life that he chose to die of prostate cancer at age 65 rather than have his prostate surgically removed, because he would not risk the sexual impotence that might result from surgical removal.

He loved dealing with lobbyists.

We are dealing with dedicated people. We are dealing with power-seeking, often ruthless people. Don't try to buy them off. Don't try to sweet-talk them. If they don't vote the way you want them to vote, defeat them. This, they understand. This, they fear.

Either they are on your menu, or you are on theirs. I suggest the former.

Originally Posted At RealClearMarkets.com
By Bill Frezza
August 16, 2010

The debate rages over whether our country can afford to extend the Bush tax cuts for the rich. Progressives argue that the ballooning Federal debt is a legacy of these tax cuts.

There is one unreported flaw in this argument. As data from the IRS show, George Bush did not cut income taxes. He increased them. In fact, Bush increased income taxes not only for the rich but for at least half of all tax filers. Only the poor paid less income tax under George Bush than under Bill Clinton.

WHAT?

Go to the IRS website and add up the numbers for yourself. During the eight years of the Clinton Administration the Federal government collected a total of $5.66 trillion dollars in individual income taxes. During the eight years of the Bush Administration the Federal government collected approximately $7.45 trillion dollars in individual income taxes. The rich - that is, the top 1% of taxpayers - not only forked over a trillion dollars more to Uncle Sam under Bush than under Clinton, their share of the income tax burden increased from 33% to 38%.

But wait, there's more.

During the eight years of the Clinton Administration the rich paid income taxes at a blended rate of 20.6%. During the eight years of the Bush Administration the rich paid income taxes at a blended tax rate of 21.3%. Yes, the actual tax rate that matters when you fill out the bottom line of your tax return went up for the rich under George Bush.

How can this be?

The explanation for this apparent paradox is simple. The problem is that no one wants to hear it. Not the pundits. Not the press. Certainly not the leaders of the Democratic Party. Oddly enough, even the Republicans are oblivious.

George Bush cut the marginal tax rates paid by the rich, and everyone else for that matter. These are the tax cuts that are about to expire. The marginal tax rate is the rate you pay on the last dollars you earn. The blended tax rate is the effective rate you end up paying across all of your income. The total amount of tax you pay equals your blended tax rate times your taxable income. And it's the total amount of tax collected that finances the government.

As hard as this is for some people to accept, the rich change their behavior when their marginal tax rates are reduced. The working rich work harder and longer. They expand their businesses, creating jobs. The idle rich shift investments from lower yield tax-free government bonds into higher-return taxable investments, the kind of investments that finance companies that create jobs. Exactly the opposite happens when marginal tax rates go up, as they are scheduled to do unless Congress acts.

The rich do not get richer because they are stupid. Being rational people, they are usually happy to pay more taxes if at the same time they also take home more after-tax dollars. And that's exactly what they did under George Bush. The math works because the pie gets bigger.

So if social justice is your goal, go ahead and raise marginal tax rates for the rich. Making the rich poorer will certainly reduce inequality. Why should you care if the total amount of taxes paid by the rich goes down, economic growth goes down, fewer jobs get created, and the government falls deeper into debt? In fact, this is a perfect way to create a permanent crisis that never goes to waste. As a full throated Progressive you can run for Congress claiming that you are looking out for the little guy because you are sticking it to the rich.

Meanwhile, when you asleep-at-the-switch Republicans finally learn how to tell the difference between nominal tax rates and actual tax collections, please fess up to the real source of the ballooning national debt. Your guy George Bush was the biggest spender in American history, at least until his incompetent presidency delivered Barack Obama to the Oval Office. Bush spent $5 trillion dollars more of our money than Bill Clinton. Had Bush frozen the federal budget when he came into office he would have left Obama a surplus. One of the saddest things about our broken two-party system is that every time Republicans gain power they spend like Democrats. Understand now why the Tea Party wants nothing to do with your incumbents?

Do these facts surprise you? Is this the first time you've heard that George Bush was the biggest tax collector in American history? Were you aware that the rich paid a higher blended tax rate under Bush than under Clinton? Since reporters seem more willing to parrot talking points than dig up facts, spend a little time on www.irs.gov and see for yourself. You can also ponder what this selective national blindness says about our dysfunctional politico-pundit complex and its handmaidens in the media.

Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.

Originally Published At Campaign for Liberty
By Chuck Baldwin
August 8, 2010

The GOP is frantically searching for the person who will lead them to the Promised Land (translate: White House) in 2012. Barack Obama is leaving a death stench so heavy that even most of the political allies in his own party are asking him to stay away from their reelection campaigns. You gotta give it to Obama: he has done in one term what most Presidents cannot accomplish until their second (lame duck) term. The problem is, the GOP just can't seem to find their Moses (or even their Ronald Reagan). That means, as far fetched as it sounds now, Obama has a good chance of being reelected. And, once again, when any Democrat candidate for President wins, the GOP will have no one to blame but themselves. 2012 could be another example.

You see, the GOP (including their lackeys at Fox News) either really don't know what a constitutional conservative looks like, or they do know what he or she looks like and don't want them leading the party. I believe the answer is the latter, but in either case, the GOP continually does nothing to groom constitutionalist conservatives for leadership. Just the opposite: such people are routinely ignored, shunned, besmirched, or impugned. (Can anyone say, "Ron Paul"?) Is it any wonder that by the time the general election comes around, the GOP candidate for President is usually nothing more than a Democrat-lite, or a "Democrat in Drag" to borrow from Steve Farrell.

That brings me to one of the people that the talking heads at Fox News and other GOP propaganda centers are routinely discussing as their 2012 Presidential hopeful: former Speaker of the House, Newt Gingrich.

According to Reuters News, "Republican former House of Representatives Speaker Newt Gingrich said on Sunday [July 25th] he will decide after November's congressional elections whether he will make a run for the White House in 2012."

Here's what Gingrich is looking at: he wants to see if the GOP makes significant gains in both houses of Congress in the November elections. If the GOP wins one house (especially if enough real conservatives win), I predict Gingrich will enter the race. So he can ride a conservative wave into the White House in 2012? No! So he can derail any potential conservative momentum that the Tea Parties might be able to create in this year's November elections. You see, Newt Gingrich is the Grinch Who Stole Conservatism from the GOP.

Some of us are old enough to remember Newt Gingrich's "Contract with America" that produced huge Republican victories in both houses of Congress back in 1994. However, what did that "Conservative Revolution" (as it was called then) actually produce? The answer: NOTHING! Newt's promise of smaller government was immediately forgotten. Instead, Gingrich, along with Senate Majority Leader Trent Lott, facilitated and helped orchestrate further expansion of the federal government. The "less government" theme that swept house freshmen such as Joe Scarborough, Steve Largent, Sonny Bono, Bob Barr, Helen Chenoweth, John Shadegg, and J.C. Watts into Congress quickly evaporated and this new neocon Republican Party was born.

Mark it down, if Newt Gingrich is the Republican Party's Presidential nominee in 2012, he will do to whatever grassroots conservative momentum is brought about by this year's congressional victories what he did to the "Conservative Revolution" in 1994: DESTROY IT!

Newt's track record is there for anyone to see. So, why does Fox News continue to promote him as a leader of smaller government or constitutionalism? Does Fox News even have a clue as to what limited government really means? Apparently not.

Remember, Newt Gingrich is a long-standing member of the Council on Foreign Relations (CFR), which is a notorious proponent of globalism and archenemy of national independence, State sovereignty, and limited government. Does anyone at Fox News recall what Admiral Chester Ward said about the CFR? (Plus, how many of the Big Shots at Fox News are themselves members of the CFR?)

Rear Admiral Chester Ward, who was the Judge Advocate General of the Navy from 1956 to 1960 and a former member of the CFR who pulled out after realizing what they were all about, warned the American people about the dangers of this and similar organizations (such as the Trilateral Commission). He said, "The most powerful clique in these elitist groups have one objective in common—they want to bring about the surrender of the sovereignty and the national independence of the United States. A second clique of international members in the CFR . . . comprises the Wall Street international bankers and their key agents. Primarily, they want the world banking monopoly from whatever power ends up in the control of global government."

Admiral Ward also said, "The main purpose of the Council on Foreign Relations is promoting the disarmament of U.S. sovereignty and national independence and submergence into an all powerful, one world government."

Accordingly, as a loyal CFR elitist, Gingrich has supported Big Government programs and policies all of his political life. Gingrich is also an ardent disciple of Alvin Toffler, who is the guru of "The Third Wave" politics. That's why Gingrich refers to himself as a "conservative futurist."

Webster's (1992) Dictionary defines "Futurism" as: "Study of, and interest in, forecasting or anticipating the future, or theorizing on how to IMPOSE CONTROLS ON EVENTS." (Emphasis added.)

Steve Farrell rightly notes that "futurism is a head-in-the-clouds political philosophy, complete with theories and forecasts, which envisions the use of force to insure that those theories and forecasts come to pass." Farrell summarizes "conservative futurism" as "communism with economic vision."

This is why Gingrich went along with Clinton's Big Government agenda, and supported the unconstitutional faith-based subsidies, public-private "partnerships," etc. Gingrich's brand of "conservatism" spawned another Big Government neocon's (Karl Rove—another favorite son at Fox News) "Compassionate Conservative" movement of the G.W. Bush White House, which at the time led to the biggest expansion of the federal government since Lyndon Johnson.

Gingrich's infatuation with "conservative futurism" also helps explain his support for NAFTA, GATT, the WTO, and virtually every other policy promoting globalism and interdependence. It also helps explain why Gingrich and former Vice President Al Gore have worked so closely together in globalist organizations such as the now-defunct Congressional Clearing House on the Future (once chaired by Gore).

See Steve Farrell's column at:

http://tinyurl.com/gingrich-toffler-gore

Gingrich was also a major proponent of the federal Department of Education, continually supports unconstitutional foreign aid, even to the Soviets and other unfriendly governments, through the Export-Import Bank. In one year (1994-1995) Gingrich voted for nearly $45 billion in foreign aid. He also helped push through federal loan guarantees to Communist China.

Gingrich was the Grand Old Pal of President Bill Clinton. He supported Clinton's unconstitutional wars (as he did Bush's); he supported Clinton's welfare programs, education programs, labor programs, and environmental programs, as well as most of his foreign affairs programs. Gingrich supported spending $30 billion for the Violent Crime and Law Enforcement Act of 1994 that shackled gun owners with new restrictions, federalized a number of crimes, and handed the feds police powers that the Constitution reserves to the states. (I guess the NRA forgot all about that, too.)

Gingrich voted to give billions of dollars to United Nations "peacekeeping" operations; he supported the National Endowment for the Arts; he supports giving illegal aliens amnesty; and he has continually supported increased federal spending and higher taxes.

Campaign for Liberty has an excellent exposé on Newt Gingrich that I encourage everyone to read. See it at:

http://www.campaignforliberty.com/blog.php?view=36799

Also, John McManus has an outstanding video exposing Newt Gingrich as a traitor to conservatism and constitutional government that everyone should watch. See it at:

http://vimeo.com/6445068

In spite of overwhelming evidence that Newt Gingrich is a scheming, double-talking, duplicitous Big-Government globalist of the highest order, many conservatives continue to listen to pro-Gingrich propaganda coming from Fox News and other "conservative" outlets.

If true conservatism has any chance of reemerging within the sheepfold of what is known as the national Republican Party, that fox, Newt Gingrich, must not be allowed to be anywhere near it. Unfortunately, thanks to Fox News (pun too easy to pass up), Gingrich is prowling around the barnyard and doubtless licking his chops at the prospect of having another opportunity to feast on the flesh of unsuspecting conservative sheep that foolishly believe him to be one of them.

Originally Posted At The Wall Street Journal
Review and Comment
August 11, 2010

The latest bailout for public unions and spendthrift states.

To treat Washington's spending addiction, the November elections are the taxpayer's best chance to stage an intervention. But until then, President Obama and the Democratic Congress are determined to keep pushing strung-out state governments to take one more fix.

Witness yesterday's 247-161 largely party-line House vote to approve a Senate bill shovelling another $26.1 billion out to state education and Medicaid programs. The White House has promoted the bill as emergency assistance for strained state budgets. But this unique brand of therapy drives states to spend more, not less. The "assistance" is so expensive that several governors were begging for relief even before Mr. Obama signed it into law.

Standing with teachers yesterday in the White House Rose Garden, Mr. Obama said, "We can't stand by and do nothing while pink slips are given to the men and women who educate our children or keep our communities safe." Maintaining the salaries and generous benefit plans for members of teachers unions is indeed a top Democratic priority. That's why $10 billion of the bill's funding is allocated to education, and the money comes with strings that will multiply the benefits for this core Obama constituency.

Specifically, the bill stipulates that federal funds must supplement, not replace, state spending on education. Also, in each state, next year's spending on elementary and secondary education as a percentage of total state revenues must be equal to or greater than the previous year's level.

Governor Haley Barbour of Mississippi did the math and figured out his state will be worse off. Mr. Barbour says the bill will force his state "to rewrite its current year [fiscal 2011] budget. Preliminary estimates of the Mississippi Department of Finance and Administration show that we will now have to spend between $50-100 million of state funds—funds that must be taken away from public safety, human services, mental health and other state priorities and given to education—in order for an additional $98 million of federal funds to be granted to education. There is no justification for the federal government hijacking state budgets, but that is exactly what Congress has done."

For Texas, and only Texas, this funding rule will be in place through 2013. This is a form of punishment because the Beltway crowd believes the Lone Star State didn't spend enough of its 2009 stimulus money. Apparently Texas politicians have been clinging to the quaint notion that the government should try to live within its means.

Texans also seem to have an old-fashioned appreciation for the rule of law. On Friday, 22 GOP Members of the state's Congressional delegation sent a letter to House Speaker Nancy Pelosi. "This provision would have Texas violate her own State Constitution," they wrote. "The Texas Legislature has sole authority to determine State appropriations. Moreover, one Legislature cannot bind a future Legislature. Requiring the State to assure that a future Texas Legislature would commit to spend funds in accordance with these provisions would violate the Texas Constitution."

Texas Governor Rick Perry is also opposed to this new "assistance" from the federal government. He understands that one-time payments that force permanently higher state obligations are a windfall for government employees. But if given the choice, taxpayers would just say no.

That's because taxpayers are figuring out that these state bailouts are only making unions more reluctant to share their sacrifice. While Mr. Obama quotes the union figure of 160,000 potential lost teacher jobs, those don't have to come out of the classroom. According to research by Eric Hanushek of Stanford University, student enrollment grew by 22% from 1990 to 2007, but teacher employment grew by 41%. Since 2000, enrollment has grown by 5% but teacher employment by 10%.

The unions themselves could have prevented some layoffs had they been willing to adjust their rich benefits. In Milwaukee, for example, nearly all of the 500 teacher layoffs announced earlier this year could have been avoided if the unions had agreed to change health plans that cost $23,000 per teacher per year for family coverage. They could have accepted a still-rich $17,000 plan. The unions chose the layoffs, betting (correctly) that Democrats in Washington would come to their rescue.

Keep in mind that this teacher bailout also amounts to a huge contribution by Democrats to their own election campaigns. The National Right to Work Committee estimates that two of every three teachers belong to unions. The average union dues payment varies, but a reasonable estimate is that between 1% and 1.5% of teacher salaries goes to dues. The National Education Association and other unions will thus get as much as $100 million in additional dues from this bill, much of which will flow immediately to endangered Democratic candidates in competitive House and Senate races this year.

***

So in the name of still another "stimulus," Democrats are rewarding their own political funders, putting the most fiscally responsible states into even greater distress, and postponing the day of reckoning for spendthrift states. Oh, and Mr. Obama rushed to sign the bill Tuesday, violating his campaign pledge to give the public five days to read legislation online. As we say, the only way for voters to stop such fiscal abuse is to run this crowd out of town.

Originally Posted at RealClearMarkets.com
By Louis Woodhill
August 11, 2010

On July 11, Erskine Bowles, co-chairman of President Obama's Debt and Deficit Commission, made the following statement in a speech to the National Governors' Association annual meeting in Boston:

"We can't grow our way out of this. We could have decades of double-digit growth and not grow our way out of this enormous debt problem."

Mr. Bowles' assertion was widely reported. If you Google it, you get 2430 hits. The mainstream media treated it as a statement of the obvious, something that no reasonable person could disagree with. No one in the elite media said, "This is utter nonsense. Mr. Bowles should resign from the Debt Commission and devote his time to the study of arithmetic"-although this is, in fact, the logical response to Bowles' preposterous assertion.

Mr. Bowles' statement was almost certainly a reaction to the "Long Term Budget Outlook" (LTBO) released by the CBO on June 30. In the CBO's "Alternate Fiscal Scenario" (AFS) case (which they represented as being more realistic than their "Extended Baseline Scenario"), Federal debt as a percent of GDP rises from 62% in 2010 to 100% by 2023, and then to 146% in 2030. At the end of the projection period, in 2084, the national debt reaches 947% of GDP, with a budget deficit equal to 61.5% of GDP in that year alone. As the CBO rightly points out, such a budgetary path would be completely untenable.

Now, the minimum growth trajectory that would fit "...decades of double digit growth..." would be 10.0% economic growth for 20 years. If you plug these assumptions into the CBO's AFS case (keeping everything else the same), the faster growth would eliminate the budget deficit by the end of 2014 and pay off the entire national debt by the end of 2020. In fiscal year 2030, the Federal government would run a budget surplus of $16.6 trillion (in 2010 dollars), or 16.9% of that year's GDP. In fact, the interest on the government's accumulated surplus ($69.4 trillion in 2010 dollars, or 475% of 2010 GDP) would pay for more than 60% of government spending that year.

Now, why would a co-chairman of Obama's Debt Commission make such an absurd assertion, and why would no one in the elite media challenge it? I believe that it is because our political and media elites want a bigger, more intrusive, and more expensive government, and they want a Value Added Tax (VAT) to pay for it. Their strategy is to de-legitimize other alternatives-particularly faster economic growth-to the point where they cannot even be discussed.

An example of this "conspiracy against growth" is the CBO's LTBO itself. The CBO assumes that economic growth over the next 74 years will average 2.16%. While the CBO considers the impact of various assumptions on the trajectory of the national debt, it does not consider (or even mention) the possibility of higher growth. This is particularly striking because over the 74-year period from 1935 to 2009, America's real annual economic growth averaged 3.73%.

The difference between 2.16% growth and 3.73% growth is enormous. If you increase the growth rate in the CBO's AFS case to 3.73% (again, holding everything else constant), instead of Federal debt rising steadily from 62% of GDP in 2010 to 87% in 2020, 146% in 2030, and 947% in 2084, the debt would peak at 67% of GDP in 2012 and then begin declining. Without any spending cuts and tax increases, it would fall to 60% in 2020 and 52% in 2030. By 2052, the entire national debt would be paid off.

In addition to the CBO and the mainstream media, the conspiracy against growth includes the Social Security Trustees. In their just-released "2010 Annual Report", the Social Security Trustees assume an economic growth rate of 2.25% over the next 74 years. While they do present a "Low Cost Case" that features (among other things), a real growth rate of 2.93%, they make no mention of this case in their "Conclusions". The solutions discussed are confined to tax increases and benefit cuts. Later in their report, the Trustees present "sensitivity analyses" of their projections (of doom) against eight different variables, but none of these is the one variable that would have the most impact-the rate of economic growth.

The Medicare Trustees' 2010 Annual Report uses the same economic assumptions as the Social Security report. The 38-page "Overview" of the Medicare report makes no mention of the tremendous impact that higher economic growth would have on our nation's ability to afford our Medicare program.

The Republicans running for Congress this year must expose and denounce the conspiracy against economic success. Prosperity is possible, but not if our economy grows at 2.25% per year or less. A "Prosperity Plan" comprising stabilizing the dollar, revoking the Federal Reserve's authority to pay interest on bank reserves, and tax reductions on work, savings, and investment would yield much higher rates of growth than those assumed in the gloomy CBO LTBO.

The Bush tax cuts must be made permanent for everyone. Beyond that, the corporate income tax, the capital gains tax, and the death tax should be repealed. These tax changes would reduce the Federal government's "tax take" from the LTBO AFS case level of 19.3% of GDP to perhaps 17.0% of GDP. The reduction in tax take would be less than predicted by static analysis, because the tax take rises significantly during economic booms. It is reasonable to expect that the Prosperity Plan would yield an economic growth rate averaging at least the 3.73% sustained by the U.S. from 1935 to 2009.

Plugging the revised tax and growth assumptions into the CBO's LTBO model (with no spending cuts), we see that, at first, the tax cuts cause the Federal debt to be higher in the Prosperity Plan (PP) case than in the AFS case. In 2012, the debt is 72% of GDP in the PP case against 69% in the AFS case. However, after that, the much higher rate of PP economic growth asserts itself.

By 2016, the debt levels in the two cases are the same, at 75% of GDP. In 2020, the PP case yields a debt-to-GDP ratio of 81%, vs. the AFS case's 87%. The PP case's debt-to-GDP ratio peaks at 98% in 2034, while the AFS case debt ratio (which is 177% of GDP at that point) just keeps growing. The PP case brings the budget into balance in 2061, at which point the AFS case is running a budget deficit equal to an absurd 35.3% of GDP. The PP case pays off the entire national debt by 2075.

America does not need higher taxes, it needs more economic growth. Prosperity is possible, but the Republicans must make a decisive, public break from the conspiracy against economic growth.

Louis Woodhill (louis@woodhill.com), an engineer and software entrepreneur, is on the Leadership Council of the Club for Growth.