Locust blog

January 29, 2009

Unprecedented Crisis In US, UK, Australia, Europe

Filed under: Economic Collapse-Depression, Economy, Globalism — whitelocust @ 7:48 pm

Unprecedented Crisis In US, UK, Australia, Europe

Today was like most any day in recent memory: Another day, Another day of grim news.

In the US, President Obama is struggling to cope with an “unprecedented crisis”, regulators closed Centennial Bank in California, Freddie Mac is asking for more cash, and 30 year bonds are getting shellacked.

Overseas, French and Flemish governments are intervening in the markets, the UK is shrinking at the fastest pace since 1980, and Australia needs action to save jobs. Rounding up the grim news, 1.2 million corporate networks have become infected with worms that attack Microsoft Corp.’s Windows operating system.

Here are the grim details.

Obama Seeks $825 Billion For “Unprecedented Crisis”

Citing an unprecedented crisis Obama Presses Congress on Stimulus.

President Barack Obama said his administration and Congress will reach agreement within weeks on an $825 billion stimulus plan to cope with what may be an “unprecedented” economic crisis.

“We are experiencing an unprecedented, perhaps, economic crisis that has to be dealt with,” Obama said today as he began a meeting with nine Democratic and Republican leaders at the White House, his first such session with lawmakers since taking office on Jan. 20. He also called for greater oversight of spending by financial institutions that get bailout money.

Obama is confronting a weakening economy and eroding investment values. Average home prices in November dropped 8.7 percent from a year earlier, the most in at least 18 years, the government said yesterday. Housing starts fell 16 percent last month, the number of Americans filing first-time claims for jobless benefits climbed to a 26-year high, and the Standard & Poor’s 500 Index has lost 7.9 percent since the start of the year.

Undeniably Grim News In The UK

There is “undeniably grim news” in the UK, as the Economy Shrinks Most Since 1980, in Recession.

The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession.

Gross domestic product fell 1.5 percent from the previous quarter, the Office for National Statistics said in London today. Economists had predicted a 1.2 percent drop, according to a Bloomberg News survey. The economy has now shrunk in two quarters, the conventional definition of a recession.

The pound dropped against the dollar and U.K. stocks fell after the report. Prime Minister Gordon Brown said that the government is using “every weapon at our disposal” to fight the crisis. Bank of England Governor Mervyn King says officials may start buying up securities soon as interest rates lose their potency to aid the economy.

“This is undeniably grim,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “Two or three quarters more like this and you’re talking about depression, not recession. This should hasten activity to address the credit and money market issues.”

Service industries shrank by 1 percent on the quarter, manufacturing dropped 4.6 percent and construction fell 1.1 percent, the statistics office said. Business services and finance, accounting for 30 percent of the economy, contracted 0.5 percent and also slipped into a recession.

Regulators Close 1st Centennial Bank

A quick check of my calender shows this is Friday. And as often happens on Fridays, Regulators close 1st Centennial Bank in California

Regulators have shut down 1st Centennial Bank in California, the third U.S. bank to fail this year. California regulators closed the Redlands-based bank on Friday and appointed the Federal Deposit Insurance Corp. as receiver. 1st Centennial had assets of $803.3 million and deposits of $676.9 million as of Jan. 9.

The FDIC says 1st Centennial’s insured deposits will be assumed by First California Bank, based in Westlake Village, Calif. Its six branches will reopen Monday as offices of First California.

Major Financial Institutions Collapse

Australia’s treasurer Wayne Swan says Australia Won’t ‘Hesitate’ to Boost Economy.

Australia’s government won’t hesitate to stimulate the economy further should the need arise amid the global recession, Treasurer Wayne Swan said. Swan, speaking to the New York investment community, said the government could add to some A$45 billion ($29 billion) in stimulus already announced should economic conditions worsen.

“We will not hesitate to take whatever further action is necessary to support growth and jobs,” Swan, 54, said in speech notes received via e-mail. “Major financial institutions, some of which have withstood world wars and the Great Depression, have either collapsed or been bailed out.”

Freddie Mac Asks For $35 Billion More Taxpayer Funds

The GSEs are running out of cash as expected (at least as readers of this blog expected), so it id no surprise that Freddie Mac asks the government for more help

Freddie Mac plans to ask the government for up to $35 billion in extra support as the housing slump continues to hammer the mortgage giant.

The Federal Housing Finance Agency, Freddie Mac’s conservator, will ask the Treasury Department for additional funds of between $30 billion and $35 billion, the mortgage giant said in a regulatory filing Friday.

Based on a preliminary evaluation of its fourth-quarter operations, Freddie Mac’s management believes that it will need the extra support to offset the impact of operating losses as well as other items that could affect the company’s net worth.

Freddie Mac (FRE) has already drawn $13.8 billion under the $100 billion agreement. That happened in November, after Freddie reported very weak third-quarter results.

Let’s do the math: $35 billion + $13.8 billion = $48.8 billion. Freddie Mac is nearly halfway towards burning up $100 billion in taxpayer money. I predict Freddie will be out of money by the end of the year.

Tough Year Ahead For Credit Card Industry

Capital One massive $1.4 billion writeoff yesterday suggests the Credit card industry faces tough 2009

Capital One (COF) , one of the largest card issuers, reported a $1.4 billion fourth-quarter net loss late Thursday as it set aside another $1 billion to cover higher charge-offs this year.

The fourth-quarter charge-off rate in the U.S. card business was 7.08%, up from 6.13% during the third quarter. That’s expected to jump to roughly 8.1% in the first quarter of 2009, up from the mid-7% range Capital One previously forecast.
Credit-card companies are being hit as falling house prices, the financial crisis and surging unemployment limit the ability of some customers to pay back debt racked up on their cards.

Capital One said it expects the U.S. unemployment rate to reach 8.7% by the end of 2009 from 7.2% currently and that, on average, home prices will fall another 10% this year.

“From a credit perspective, 2009 is literally and figuratively a write-off,” Richard Shane, an analyst at Jefferies & Co., wrote in a note to investors on Friday. “We view the entire industry embarking on a path of permanently lower equity returns.

Richard Shane is thinking clearly, a rare happenstance these days.

Citigroup Raises $12 Billion

Struggling to save the bank, Citigroup Raises $12 Billion in FDIC-Backed Bond Sale

Citigroup Inc. sold $12 billion of notes guaranteed by the Federal Deposit Insurance Corp. as Chief Executive Officer Vikram Pandit tries to bolster capital and save the bank from insolvency.

The sale is the biggest offering of debt backed by the FDIC since banks began using the government’s Temporary Liquidity Guarantee Program on Nov. 25, according to data compiled by Bloomberg. The offering by Citigroup and its Citigroup Funding unit surpasses GE Capital Corp.’s $10 billion sale on Jan. 5.

Dwindling capital and a sinking stock price have already forced Pandit to take $45 billion in cash from the U.S. government and abandon the bank’s decade-old strategy of selling multiple financial services under one roof.

Citigroup cannot be saved from insolvency, Citigroup was insolvent a year or more ago. The effort now is to save Citibank, as every other part of the “group” is for sale. Of course Citibank itself is insolvent, but no one wants to come out and say it.

Manhattan’s Largest Apartment Complex Facing Eventual Default

The party is nearly over for the owners of Manhattan’s largest apartment complex. Tishman’s Stuyvesant Town Fund May Run Dry This Year

Tishman Speyer Properties LP and BlackRock Realty, owner of Manhattan’s largest apartment complex, are relying on a reserve fund to pay debt on the property and have only six months of money left before it runs out, Fitch Ratings said in a report.

The fund for the Stuyvesant Town and Peter Cooper Village apartments has declined to $127.7 million as of Jan. 15, from $400 million when it was established. Property cash flow is not expected to improve from 2008 based on the borrower’s restated budget for 2009, the ratings company said.

‘Although the property’s performance remains consistent, the cash flow generated from the property continues to require significant reserves to cover debt service obligations,” Fitch analysts Sue Ann Butera and Adam Fox in New York said.

Tishman Speyer and BlackRock paid $5.4 billion for the properties in 2006 with plans to convert rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds.

A general reserve fund for the property has also been “completely depleted,” the Fitch analysts said today.

Kiss this baby goodbye. There is no hope of survival. Some bank is going to become the proud owner of Stuyvesant Town and Peter Cooper Village.

Treasury Bonds Routed

On fears of massive supply, U.S. Treasury 30-Year Bonds Post Biggest Weekly Loss Since 1987

Treasuries fell, with 30-year bonds posting the biggest weekly loss in almost 22 years, on concern that debt sales will increase as the government boosts spending to ease the deepening economic slump.

Ten-year yields touched a six-week high amid speculation President Barack Obama’s administration will join governments around the world in selling record amounts of bonds to rescue banking systems and battle a global recession. Goldman Sachs Group Inc. yesterday raised its 2009 Treasury borrowing estimate to $2.5 trillion.

“Supply is a concern for this year,” said Michael Pond, interest-rate strategist in New York at Barclays Capital Inc., one of 17 primary dealers required to bid at U.S. debt auctions. “We are approaching the refunding period where we will get long-dated issuance, so it’s not surprising that it is weighing on investors’ minds.”

Thirty-year yields increased six basis points, or 0.06 percentage point, to 3.32 percent at 4:04 p.m. in New York, according to BGCantor Market Data. For the week, the bond’s yields were up 43 basis points, the most since the five days ended April 24, 1987.

It is possible bond bears are finally right and the low in yields is in. But even if it is, a retest is likely.

French And Flemish Government Aid Banks

In Europe, French and Flemish government capital infusions failed to stop the markets from falling. European stocks fall to near six-year low

European shares hit their lowest level for almost six years on Friday after a dismal week that saw heavy selling of bank and insurance shares. Any hopes that bank stocks might rally during the week, after a rout the previous Friday, were swiftly crushed on Monday when sentiment was soured by a record loss from Royal Bank of Scotland.

The FTSE Eurofirst 300 index of blue-chip shares Friday fell 0.3 per cent to 760.54, its lowest level since April 2003, after touching a low of 741.37. The pan-European index has fallen in 12 of the past 13 sessions. Over the week it fell 5.4 per cent and it is down 43 per cent over the past year.

Intervention from the French and Flemish governments provided some relief. France’s three largest banks, BNP Paribas, Société Générale and Credit Agricole, all gained after the government said it would provide a further €10.5bn to its banks in return for their executives’ forgoing bonuses. SocGen added cheer by announcing that it expected to break even for the fourth quarter of 2008 and earn a net profit of €2bn for the year.

The bounce, however, was brief. BNP Paribas ended the week 26 per cent lower at €21.38 and SocGen fell 14 per cent to €27.25. Credit Agricole was a relative success, posting a weekly fall of just 8.5 per cent to close Friday at €7.58.

Shares in Belgium’s KBC were crushed in the first three days of trading. They lost losing 55 per cent as investors panicked over the banking and insurance group’s exposure to toxic structured credit products.

By Thursday the savageness of the sell-off forced the Flemish government to act. It injected €2bn of extra capital into KBC as the bank seized the opportunity to announce a provisional 2008 loss of €2.5bn. Its shares rallied 50 per cent, as traders who had sold the shares short were forced to buy them back to limit their losses. KBC closed 40 per cent lower for the week at €12.24.

Astonishing Incongruities- Is It Time to Bail Out of the US?

Astonishing Incongruities

Is It Time to Bail Out of the US?

By Paul Craig Roberts

California State Controller John Chiang announced on January 26 that California’s bills exceed its tax revenues and credit line and that the state is going to print its own money known as IOUs. The template is already designed.

Instead of receiving their state tax refunds in dollars, California residents will receive IOUs. Student aid and payments to disabled and needy will also come in the form of IOUs. California is negotiating with banks to get them to accept the IOUs as deposits.

California is often identified as the world’s eighth largest economy, and it is broke.

A person might think that California’s plight would introduce some realism into Washington, DC, but it has not. President Obama is taking steps to intensify the war in Afghanistan and, perhaps, to expand it to Pakistan.

Obama has retained the Republican warmongers in the Pentagon, and the US continues to illegally bomb Pakistan and to murder its civilians. At the World Economic Forum at Davos this week, Pakistan’s prime minister, Y. R. Gilani, said that the American attacks on Pakistan are counterproductive and done without Pakistan’s permission. In an interview with CNN, Gilani said: “I want to put on record that we do not have any agreement between the government of the United States and the government of Pakistan.”

How long before Washington will be printing money?

On January 28 Obama announced his $825 billion bailout plan. This comes on top of President Bush’s $700 billion bailout of just a few months ago.

Obama says his plan will be more transparent than Bush’s and will do more good for the economy.

As large as the bailouts are–a total of $1.5 trillion in four months–the amount is small in relation to the reported size of troubled assets that are in the tens of trillions of dollars. How do we know that by June there won’t be another bailout, say $950 billion?

Where will the money come from?

Obama’s bailout plan, added to the FY 2009 budget deficit he has inherited from Bush, opens a gaping expenditure hole of about $3 trillion.

Who is going to purchase $3 trillion of US Treasury bonds?

Not the US consumer. The consumer is out of work and out of money. Private sector credit market debt is 174% of GDP. The personal savings rate is 2 percent. Ten percent of households are in foreclosure or arrears. Household debt-service ratio is at an all-time high. Household net worth has declined at a record rate. Housing inventories are at record highs.

Not America’s foreign creditors. At best, the Chinese, Japanese, and Saudis can recycle their trade surpluses with the US into Treasury bonds, but the combined surplus does not approach the size of the US budget deficit.

Perhaps another drop in the stock market will drive Americans’ remaining wealth into “safe” US Treasury bonds.

If not, there’s only the printing press.

The printing press would turn a deflationary depression into an inflationary depression.

Unemployment combined with rising prices would be a killer.

Inflation would kill the dollar as well, leaving the US unable to pay for its imports.

All the Obama regime sees is a “credit problem.” But the crisis goes far beyond banks’ bad investments. The United States is busted. Many of the state governments are busted. Homeowners are busted. Consumers are busted. Jobs are busted. Companies are busted.

And Obama thinks he has the money to fight wars in Afghanistan and Pakistan.

Except for the superrich and those banksters and CEOs who stole wealth from investors and shareholders, Americans have suffered enormous losses in wealth and income.

The stock market decline has destroyed about 45% of their IRAs, 401Ks, and other equity investments. On top of this comes the decline in home prices, lost jobs and health care, lost customers. The realized gains in mutual funds and investment partnerships, on which Americans paid taxes, have been wiped out.

The government should give those taxes back.

Americans who have seen their retirement savings devastated by complicity of government regulators and lawmakers with financial gangsters should not have to pay any income tax when they draw on their pensions.

The financial damage inflicted on Americans by their own government is as great as would be expected from foreign conquest. While Washington “protected” us from terrorists by fighting pointless wars abroad, the US economy collapsed.

How can President Obama even think about fighting wars half way around the world while California cannot pay its bills, while Americans are being turned out of their homes, while, as Business Week reports, retirees will work throughout their retirement (which assumes that there will be jobs), while careers are being destroyed and stores and factories shuttered.

Americans are facing tremendous unemployment and hardship. Obama doesn’t have another dollar to spend on Bush’s wars.

Taxpayers are busted. They cannot stand another day of being milked by the military-security complex. The US government is paying private mercenaries more by the day than the monthly checks it is providing to Social Security retirees.

This is insanity.

The banksters robbed us twice. First it was our home and stock values. Then the government rewarded the banksters for their misdeeds by bailing out the banksters, not their victims, and putting the cost on the taxpayers’ books.

The government has also robbed the taxpayers of $3 trillion dollars to fight its wars. About $600 billion are out of pocket costs, and the rest is on the taxpayers’ books.

When foreign creditors look at the debt piled on the taxpayers’ books, they don’t see a good credit risk.

Washington is so accustomed to ripping off the taxpayers for the benefit of special interests that the practice is now in the DNA. While bailouts are being piled upon bailouts, wars are being piled upon wars.

Before Obama gets in any deeper, he must ask his economic team where the money is coming from. When he finds out, he needs to tell the rest of us.

Slim Times For American Newspapers. Good!

Filed under: Death of the Nation, Economic Collapse-Depression, Economy — whitelocust @ 7:44 pm

Slim Times For American Newspapers. Good!

By Peter Gadiel

American newspapers are dying. Let us celebrate, since in their extinction lies the only hope for journalism—and (as I will illustrate via my recent experience with the Gannett-owned Asbury [NJ] Park Press) for the patriotic immigration reform so desperately needed by the American nation.

In former Times (that’s Times with a capital “T”) it would have been unthinkable to say such a thing. Newspapers were journalism and journalism was newspapers. But those days are long gone, and it’s not just because of talk radio and the internet.

What we have in these Times are newspapers engaging in the fraud of providing propaganda in the guise of journalism. Until these publications disappear, journalism as we once knew it can’t make a comeback.

Of course, reporters, and even editors, have always been human. But when even a small city would have several competing papers, it was unlikely that one paper could for long get away with fooling the public.

Additionally, newspapers were largely owned, edited and to a considerable degree staffed by people who actually were from the town about which they wrote. Thus, when you got the Sheboygan (Wis.) Press, The Indianapolis Star or the Florence(Ala.) Times-Daily it was a pretty sure thing that when you read an editorial, the news pages, the women’s page—whatever—you were reading something written or at least edited by someone who had roots in that city.

Not so today. The people writing the editorial in the Hendersonville (N.C.) Times News or “reporting” about events in the Asbury Park Press are corporate gypsies who come from someplace else via some school of journalism located somewhere else. They are all waiting to move to a bigger paper in a bigger city on the way up to starting the trip all over again back down in the small towns as assistant editor.

What’s worse, the gypsies who staff those papers are hired by people who are answerable to the likes of “Pinch” Sulzberger of the NY Times or whoever it is in McLean, Va. that’s running Gannett these days. This guarantees that the Hendersonville (N.C.) Times (owned by the NY Times) no more reflects the people of Hendersonville, N.C. than does the New York Times itself.

But those Times are ending. Just as Enron collapsed due to fraud committed by the crooks who ran it, the newspaper industry is dying because of the dishonesty of its management in peddling propaganda.

Annual double digit declines in circulation. Editorships an ever-shrinking game of musical chairs. Gannett has just announced another layoff in the hundreds, is about to close the Tucson Citizen and perhaps the Detroit Free Press, and is requiring its remaining employees to take a week off without pay. Stock prices are doing dives worthy of Enron, although over a longer term: NY Times is down 66% since Jan. ’08; 88% since the beginning of ’04. Gannett is down over 80% since January ’08; 92.5% since January ‘04.

I grew up in a family where no day was ever complete without the New York Times. But after its betrayal of the readers’ trust in the last thirty years, the decline of that empire is a pleasure to observe. The company has to sell most of its headquarters building to raise operating funds; the purchase of the Boston Globe has exposed publisher Pinch Sulzberger as a fool; the Jayson Blair fiasco and the recent publication of a fake letter to the editor from the “Mayor of Paris” reveal that the people that Sulzberger has installed should be demoted back to reporting for their high school papers.

And now has come the utter humiliation of having to beg for a quarter billion in life-support dollars from that corrupt oppressor of the Mexican worker, Carlos Slim.

Considering how skimpy the paper has become in the desperate effort to save money, it’s now appropriate in more ways than one to call it the Slim Times.

I’ve been a volunteer in the cause of secure borders and immigration reform for seven years. So I have been both witness to and victim of the appalling lies the newspaper moguls have routinely inflicted on the public.

Case in point: a “news” article from the May 24, 2008 edition of the Asbury Park Press of a rally in Lakewood, NJ by citizens supporting local enforcement of immigration law (commonly known as 287g authority“).

The rally was organized by local resident Diane Reaves. Among the speakers were two Hispanics including well-known activist Carmen Morales; Ed Kowalski, whose 17 year old niece was stalked, raped and murdered by an illegal alien; and myself, father of a young man killed on 9/11 by aliens admitted through the criminal negligence of State Department officials.

All of the speakers were either immigrants themselves, or were the children or grandchildren of legal immigrants to the US. We all emphasized that in our statements. Nevertheless, the Asbury Park Press headlined its coverage: “Anti-immigrant rally in Lakewood.” [Anti-immigrant rally in Lakewood draws about 70, by Zach Patberg]

As anyone with experience in this area knows, “anti-immigrant” is the standard claim made by open border and illegal alien supporters against anyone who even suggests that immigration law be enforced. Do you dare mention violent gangs prevalent among illegals? You are “anti-immigrant.” Want to make sure that people coming to the USA are not a threat to our security? You are anti-immigrant.” Want to require foreign visitors to have a visa to enter the USA? You are anti-immigrant.” Lost your job to an illegal, been the victim of a crime by an alien and you dare to complain? You are anti-immigrant.

The title of the article was the least of the Asbury P-P’s distortions. Disrupting the rally was one Jared Schultz, from Trenton, NJ and his gang. Mr. Schultz does not believe in allowing people to speak if they disagree with him. His method of suppressing our speech was to utilize electronic amplification turned up to very high volume, scream “fascist,” “racist,” and create electronic screeches so rally attendees could not hear us.(Jared Schultz is a member of Anti-racist Action of Trenton. [Send them mail] He and three others are in legal trouble over an incident in which it is alleged that they thought they were attacking neo-Nazis, but were actually attacking undercover police officers. )

We could not utter a single word without their electronic interference. One of their oft-repeated chants addressed to Mrs. Reaves ended with the threat: “we know where you sleep at night”. The force of this threat was made more real by the fact most Mr. Schultz’s gang was wearing masks.

But the article in the Asbury Park Press described that mob as a group of “hecklers”. It did not mention the word “mask,” did not mention the threat to Mrs. Reaves, did not even mention the successful electronically-amplified interference other than to mention that Schultz had a “bullhorn.”

In response to the charges of “fascism” by Shultz, I made sure in my statement as to note that my own family had been refugees from the Nazis. My father was Jewish and that my Protestant mother had defied the Nazis, leaving Germany literally 24 hours before the Gestapo came to arrest her. I made a point of speaking to the Park-Press’s reporter to emphasize those facts—as did Mrs. Morales and Mr. Kowalski about their own reasons for favoring enforcement of the law.

None of this was deemed worthy of being mentioned by Zach Patberg, [Email him] the reporter for the Gannett Corporation’s Asbury Park Press. What was included was a claim by Schultz that “he was approached by at least one member of a neo-Nazi group.”

After the event I tried to reach the editor of the paper, Hollis Towns, [Send him mail] but as newspapers so often say: “He did not return repeated phone calls.”

This then, is what Gannett and its corporate colleagues have tried to sell as “journalism.” No less than Enron, the management at the NY Times Co., Hearst, Gannett, et al. have engaged in fraud. It took a while, but the American public caught on. As a result, these companies are, it is to be hoped, headed for the same fate as Enron.

I rejoice in the industry’s fate.

Postscript: In the Gannett Blog, run by a laid off Gannett employee, an anonymous source, speaking of the December round of Gannett layoffs, reported that the art department at the Asbury Park-Press had been “decimated” and eleven people had been laid off from the news room. [Tally hits 863 as Gannett's mass layoff spreads]

Certainly, the quality of journalism in the U.S. will be noticeably improved if among those laid off are the reporter and editor referred to here.

And imagine the improvement after publications like this entirely disappear.

Hyperinflation Will begin In China And It Will Destroy The Dollar

Hyperinflation Will begin In China And It Will Destroy The Dollar
Eric deCarbonnel
January 20, 2009

The conventional wisdom on China is dead wrong. Specifically, there is a widespread belief, as expressed by Goldman Sachs, that “China will keep the yuan trading within a narrow range in 2009 due concerns about exporters.” Worse still, others are even predicting that China will devalue its currency! The sheer wishful thinking is astounding! The idea that “China will keep the dollar peg to help its exporters” ranks all the way up there with “Housing prices always go up” and “You can spend your way to prosperity”.

THERE ARE NO FREE LUNCHES

If you have learned nothing else in the last year and a half, you should have learned that if something sounds too good to be true, that is because it IS too good to be true. The media overwhelmingly presents China’s dollar peg as a win-win situation: Americans get cheap imports and low interest rates while China gets a strong manufacturing sector. While commentators do sometimes debates whether China will keep lending us money forever, they never talk about the REAL problem with the dollar peg.

Below is a chart which shows how China’s dollar peg works. See if you can spot the downside that the media never seems to mention.

The US’s trade deficit requires China to print money!

The little discussed downside of the dollar peg is all the money China has to print to maintain it. China’s Central Bank puts the extra dollars it receives from its trade surplus into its growing foreign reserves and then prints yuan to pay Chinese exporters. This results in an increase in China’s base money supply by an amount equal to the increase in its foreign exchange reserves. While China’s ability to keep accumulating US reserves is endless, its ability to keep its money supply under control is not.

The true threat to the dollar peg

If there is one development which could force China to drop its dollar peg, it is out of control inflation. Rampant inflation would result in millions of citizens starving and would create widespread social unrest. Keeping food prices low is a matter of political survival for Chinese authorities. So, facing the choice between losing their grip on power and losing the dollar peg, they will not hesitate for a second to sacrifice the dollar to save their own skin.

So far China been able to contain inflation, but…

In recent years, China has been able to contain the inflationary effects of its trade surplus by soaking up or “sterilizing” all the extra liquidity (printed yuan). These sterilization efforts mostly involved:

A) Raising the reserve requirements of commercial banks. In essence, the PBOC (People’s Bank of China) prints money to fund its trade surplus and then increases the amount of yuan banks have to keep as reserves at the Central bank, preventing the printed cash from reaching the economy. As of May of last year, commercial banks’ reserve requirements were at 16.5 percent

B) Selling RMB-denominated sterilization bills. The state owned and controlled banking system has been forced to absorb the majority of these bills. As of May of last year, the value of sterilization bills reached 10 percent of bank deposits.

Taken together, these two steps have immobilized roughly 26.5 percent of Chinese commercial banks’ deposits. This shows the magnitude China has had to intervene so far, as the value of sterilization instruments outstanding has been increasing at roughly the same rate as its foreign reserves.

PBC Foreign Reserves and Sterilization Instruments (US$ Billions)

While China has been able to contain inflation to single digits for the last decade, that is about to change. All economic forces are aligning in China for a surge in inflation.

1) China has abandoned its sterilization operations

Currently, the PBOC has abandoned its sterilization efforts all together:

A) The PBOC has lowered reserve requirements by 2 percentage point for China’s big banks and by 4 percentage point for all other banks.

B) The PBOC has scaled back sterilization efforts by reducing liquidity-draining three-month and 52-week bill sales from once a week to once every two weeks. As a result of these decreasing sales, the clearing house for China’s interbank bond market expects PBOC’s 2009 bill issues to be down over 70%, which will increase the Chinese base money supply by 2 trillion yuan.

These actions signify that the PBOC has ceased sterilizing its currency interventions and is focusing on (imaginary) deflation risks. A flood of cash has been unleashed, and a tsunami of pent-up inflation will soon hit China.

2) China is running record trade surpluses

China’s imports are crashing much faster than its exports. In December, Chinese imports fell 21.3% while exports fell only 2.8%. As a result, China has been running record trade surpluses these last three months: $35 billion, $40 billion, and 39 billion.

The reason for China’s surplus is obvious when you think about it. Consider the following list of goods a country can exports and ask yourself what would hold up best during a severe global economic downturn.

*** Commodities (Oil, gas, steel, etc)
*** Capital goods (Airplanes, Caterpillars, Machinery for new factories, Machinery for new mining/oil exploration projects, etc)
*** Durable goods (SUVs, CARs, appliances, business equipment, electronic equipment, home furnishings, etc)
*** Luxury goods (brand name products, designer clothing, artwork, etc…)
*** Cheap consumer goods (everything you buy at Wal-Mart)

The answer is that the demand for cheap consumer goods will hold up better than anything else. This can easily be seen in the retail sales this holiday shopping season. Wal-Mart, which imports 70% of its products from China, was the only retail to post a year-on-year increase in sales. So while the world economy might be imploding spectacularly, demand for Wal-Mart’s cheap Chinese goods is holding up quite well. The implications of this is that while China’s exports will fall, they will fall less than those of any other country.

The current trade surplus is still completely unsustainable. If China’s continues running a 40 billion dollar trade surplus all year, its base money supply will double by the end of 2009. Also, since China has halted the appreciation of the yuan, its trade surplus is unlikely to shrink as demand for cheap consumer goods is set to remain strong.

3) The Chinese economy will shrink in 2009

Consistently amazing economic growth is the biggest factor which has helped China contain inflation. Inflation happens when the money supply is growing faster than the economy, and china’s economy has been growing fast. This economic growth has helped absorb the enormous quantities of yuan that have been printed to support the dollar. However, this will change in 2009. Due to falling global demand, China’s economy is set for zero, if not negative, growth which will remove a significant mitigating force against inflation and amplify the inflationary impact of China’s printing press.

Side note: China’s economic strength is underestimated

It is important to note that, while economic growth will go probably go negative, China’s economy will not crash. The strength of the Chinese economy is widely underestimate in the media today. In addition to the resilient worldwide demand for its cheap consumer goods, China is also benefiting for import substitution at home. This is why imports to China are falling so fast: Chinese are switching to cheap domestic product instead of expensive foreign imports. So while there has been a sharp drop in Chinese demand for big-ticket brands (Dior, Chanel, Hermes, etc…) and others luxury items, knock-offs and other cheap goods are still flying off the shelves. Chinese consumers are downshifting, but they are still spending strong, as reflected by the 21% year-over-year growth in 2008.

However, despite China’s strong fundamentals, the current worldwide downturn is too strong for it to escape. The worldwide financial carnage is so severe that even the demand for cheap consumer goods will decrease. As a result, while China may outperform every country on Earth, its economy will still suffer in 2009.

4) Deflation in China would be too good to be true

China has been in a constant war with the inflation caused by the dollar peg. Economic growth and sterilization operations alone have not been enough to absorb the growing liquidity, and China has been forced to turn to ever more drastic steps in its efforts to contain inflation. These stifling policy measures together with its sterilization efforts have enormously suppressed domestic demand and have distracting the government from developing key services enjoyed by other developed nations. This suppressed domestic demand has also distorted China’s economy, as reflected by the undersized service sector, and has lowered the quality of life for Chinese citizens.

Chinese financial repression and market socialism

In its losing battle with inflation, China has adopted stifling policy measures to suppress domestic demand and keep prices down:

(these are only a few of the anti-inflation measures China has adopted)

A) Strict price controls. (ie: Large wholesalers must seek central government approval if they want to raise prices by 6 percent within the space of 10 days or by 10 percent within a month.)
B) Credit ceilings. (limits on how much commercial banks can lend)
C) Floors on lending rates and ceilings on deposit rates
D) Strict rules governing lending decisions
E) Tight land purchase and lending requirements
F) Direct government intervention to limited expansion in certain industries (ie: aluminum, steel, autos and textiles sectors in 2004)
G) Penalty taxes on anyone buying and selling real estate in a short period of time.
H) Forcing local government to cut back spending by delaying approval of their investment projects
I) High sales taxes.
J) Etc…

Suppressed domestic demand has distorted China’s economy

The distortions caused by sterilization operations and stifling policy measures are best seen when comparing China’s and the US’s economy:

A) US home buyers get tax incentives VS Chinese home buyers get tax penalties
B) US gets artificially low interest rates VS China’s artificially high interest rates
C) US’s “service economy” VS China’s “service-less economy”
D) Etc…

In the US, the overvalued dollar and easy credit environment have caused the service sector to become oversized, artificially raising America’s standard of living. In contrast, China’s suppressed domestic demand has led its service sector to become undersized, artificially decreasing its standard of living.

Focus on inflation has lead to a lack of key government services

With Chinese authorities sidetracked by their export oriented focus and battle with overheating, the development of key government services enjoyed by other developed nations has been neglected. As a result, Chinese citizens’ lack of social security, free education, and available consumer credit, which has forced them to save far more than their Western counterparts, leaving them with less disposable income.

Deflation would be a godsend to China

Chinese authorities must be thrilled about the prospect of fighting deflation instead of inflation. Fighting deflation would allow China to:

A) Scale back its increasingly costly sterilization efforts.
B) Lower interest rates.
C) Get rid of all the controls which are distorting domestic property markets.
D) Promote consumer spending without worrying about the inflationary impact.
E) Develop a comprehensive social security net.
F) Increase funding of public education.
E) Accelerate the development of a system to rate people’s credit.
F) Encourage growth in underdeveloped domestic sectors (housing, health care, education, entertainment, etc)
G) Etc…

Most of the steps above are already being taken by Chinese authorities. Unfortunately, there are no free lunches. The possibility that China can maintain a highly inflationary currency peg, reverse years of anti-inflation policies, release a flood of sterilized yuan back into circulation, and go on a Western-style stimulus/bailout binge without experiencing double digit inflation is zero.

5) No deleveraging

There is no chance of real deflation happening in China. None. The Strength of China’s Banking System makes it impossible.

A) Apart from Bank of China, Chinese banks have little exposure to overseas debt. So, although toxic US securities were sold to banks around the world, China’s capital controls protected its banking system from America’s bad debt

B) As a side effect of the country’s sterilization operations, 26.5 percent of Chinese commercial banks’ deposits were placed with the central bank last year (reserve requirements and forced underwriting of PBOC bills).

C) Unlike Western banks, who have been enjoying a credit bonanza for decades, Chinese banks have only recently gotten into the credit game, after years of being ridiculed for being overly cash-centric. Because of this late entry, Chinese banks completely missed the subprime party.

D) China is also in the enviable position of being one of the few countries which doesn’t need to deleverage. While Western banks were going insane with high leverage and off-balance sheet financial vehicles, Chinese banks were doing the opposite, as can be seen on the chart below (from Tao Wang of UBS).

E) China has been waging a war against NPLs (non-performing loans) in the last few years. For example, with heavy penalties having been imposed on bank managers responsible for new NPLs, Chinese banks have become much more concerned about the loan safety than profitability. This battle again NPLs has paid off. As of September 30, 2008, nonperforming loans totaled only 2 percent for Chinese banks, compared to the 2.3 percent for FDIC-insured banks in the US. Loan loss provisions have also improved substantially, with provisions of Chinese banks amounting to an impressive 123 percent of their NPLs.

F) Finally, China’s money supply itself is underleveraged when compared to the rest of the world. For example, the US’s M2 to M1 ratio is 65% higher than China’s. The Chinese M2 to GDP ratio is also more 160 percent, perhaps, the highest in the world.

When considering the strength of Chinese Banks and underlying strength of China’s economy, no debt deflation is possible.

If there is no chance of deflation, then why is China’s cpi slowing down?

There are three main reasons for the slowdown in China’s cpi:

A) The bursting of the commodity bubble. Because of speculator dominated futures markets in the US, commodity prices were boosted to artificial level going into the summer of 2008. As these inflated commodity prices fell back down to Earth, they caused a temporary worldwide slowdown in inflation.

B) In the second half of the year, deleveraging and hedge fund redemption caused the outflow of a large amount of hot money from China. This outflow temporary depressed asset prices.

C) The unwinding of the commodity bubble spread deflation fears worldwide and caused the velocity of money to drop.

6) Deflation fears are paralyzing China’s money supply

“deflation fears” have slowed the Chinese money supply to a crawl. While they are still spending, Chinese consumers are delaying big purchases and downshifting to discount stores. Businesses are strapped for cash, and scared Chinese banks are dumping riskier borrowers, like credit-card holders. China is experiencing one of the brief deflationary periods which typically precede hyperinflation.

Deflation fears in China also provide the perfect example of how a slowdown in the “velocity of money” and makes prices fall. Right now, Chinese banks are hoarding cash and delaying payments on personal credit cards. Only a year ago, most banks paid credit-card transactions in 14 days, but now merchants are having to have to wait 20, 40 or even 90 days to get paid. With lenders making credit-card transactions as unattractive as possible, many merchants are refusing to take credit cards from Chinese consumers. Think about that for a second, all that purchasing power from Chinese credit cards wiped out due to nothing but fear itself.

The important point to note about the price deflation caused by the deflation fears is that it will reverse sharply once inflation picks up. Banks will begin paying credit cards normally, and merchants will start accepting them again. The enormous amount of purchasing power which disappeared will reappear just as suddenly, causing a wild jump in inflation.

7) Sterilization operations have become a loss generating ventures

Until last year, China’s sterilization operations had been profitable, since the rate of interest that Beijing earned on foreign exchange reserves (mainly US Treasuries) had been higher than the rates it was paying on its yuan-denominated sterilization bills at home. However, now that the fed has lowered US interest rates to zero for the foreseeable future, China’s dollar peg has become a loss-making policy. When inflation hits china and interest rates rise again, China’s losses from its currency sterilization will become staggering.

8) China likely to attract a flood of hot money in 2009

China has had a problem with hot money inflows in the past, and those problems are likely to get worse this year. Hot money refers to the money that flows regularly between financial markets in search for the highest short term interest rates possible. This hot money has found ways around China’s capital controls and flows freely in and out of China to the authorities great frustration.

When hot money flows into china, it forces the PBOC to print money the same way as the trade surplus does. At the beginning of last year, these hot money inflows were one of China’s biggest problems, bringing inflation up to 8.6 despite the authorities best efforts. The country’s hot money problem ended temporarily with the bursting of the commodity bubble.

In the second half of last year, deflation fears and hedge fund deleveraging cause much of this hot money to leave China and seek the “safety” of US treasuries. This small exodus is what is responsible for the brief fall in China’s foreign reserves. However, the outflow of hot money from China has ended, and it now looks set to reverse.

In the next month or so, rising inflation will start pushing up Chinese interest rates at a time when central banks around the world have set their rates at or near zero. Since the entire world knows that the yuan is undervalued, these higher rates will make China the most attractive destination on Earth for those seeking safe high yielding interest rates, and the hot money problem will return with a vengeance.

9) Chinese authorities are pulling out all the stops

Chinese authorities are pulling out all the stops to get the country back on track. In order to prop up economic growth, Chinese authorities have:

A) Raised tax rebates for exporters of everything from high-tech and electronic products (motorcycles, sewing machines and robots, etc) to some rubber and wood products.
B) scraped export taxes for some steel products, aluminum, rice, wheat, flour and fertilizers
C) Cut the lock-up period beyond which people can resell their property without paying a business tax from five years to two years.
D) scraped the urban property tax for foreign firms and individuals
E) Allowed people to buy second homes on the same preferential terms normally reserved for first time buyers.
F) Announced plan to spend 900 billion yuan over three years to build affordable housing
G) Cut the deed tax payable by first-time buyers of homes smaller than 90 sq m is to 1 percent.
H) Announced measures such as cash subsidies and tax cuts to encourage home purchases
I) Announced plans for a 4 trillion yuan (586 billion) stimulus package to boost domestic demand through 2010.
J) Announced plans to invest 5 trillion yuan roads, waterways and ports in the next three to five years (over 2 trillion yuan more than originally planned).
K) Approved 2 trillion yuan for railway investment
M) Announced a tax break for public infrastructure projects.
N) Abolished the 5 percent withholding tax on interest income.
O) Scraped the 0.1 percent tax on purchases of equities.
P) Instructed Central Huijin (a government investment arm) to buy shares of listed Chinese firms.
Q) Encouraged state-owned firms to buy back shares.
R) Raised minimum grain purchase prices by 15 percent
S) Approved landmark reforms that give peasants the right to lease or transfer their land-use rights
T) Issued a stimulus package for its auto sector, including a tax cut
U) Set a price floor for air tickets
V) Handed out cash gifts to brighten their mood before the Chinese New Year
W) Etc…

10) Banks are flooding the economy with new loans

Chinese authorities are pushing banks to extend credit and help fight “deflation”. To encourage this money supply growth and new lending, the PBOC (the People’s Bank Of China) has halted sterilization operations and has cut the benchmark one-year lending rate by 2.16 percent and the deposit rate by 1.89 percent. Also, as part of these efforts, Chinese officials are reversing decades of financial repression and freeing up their banking system.

As China lifts restrictions on lending, banks are flooding the economy with new loans. Credit ceilings under which commercial banks have been operating have now been removed, and credit controls have been relaxed to give banks more leeway in making lending decisions. Chinese lenders will now be able to restructure loans and adjust the types and maturities of debt. Banks are being pressured to use this new financial freedom to “promote and consolidate the expansion of consumer credit”.

In addition to stimulating consumption, credit constraints are being relaxed to give loan access to small and medium privately owned businesses, which have until now been mostly shut out of credit by the state-owned financial system. As part of this effort and in order to help banks overcome their deflation fears, China has said it will tolerate more bad debt. This step is particularly significant, as the heavy penalties imposed for the creation of new non-performing loans has been a big restraint on credit expansion.

Finally, the commitment of Chinese authorities to fight deflation is so great that regulators have stated they will support the sale and securitization of loans. I repeat, China is moving towards securitization of loans! The adoption of securitization holds the potential to enormously accelerate money supply growth.

China’s efforts to boost lending are working. In December, China’s M2 money and loan growth soared. Just look at the graph of Chinese money supply growth below.

Does it look like China is headed towards deflation to you? (this chart will become much scarier once January’s numbers are added in)

Conclusion

I view hyperinflation in China as absolutely guaranteed. Zero doubt. China is dismantling all the measures it has put in place over the years to fight inflation. It is dropping restrictions on purchasing property, eliminating price controls, getting rid of loan quotas, lowering interest rates, ceasing its sterilization efforts, etc… It is also pulling out all the stops to boost government spending and new loan creation.

Meanwhile, China’s 40 billion dollar trade surplus means that its base money supply looks set to double in 2009. There is also the fact that China’s money supply is frozen due to cash hoarding and will cause inflation to increase when it accelerates. Finally, the commodity bubble has finished bursting, and China’s economy looks set to shrink.

Every economic factor in China suggests an enormous wave of hyperinflation will begin early this year. While I have written about the threats facing the dollar, this will be the event that finally ends the US’s borrowing binge and destroys our currency.

Hyperinflation in China will be a monumental event

Because China makes most of the world cheap consumer goods, it will export its hyperinflation around the world. This means that no fiat/paper currencies will survive this with its purchasing power intact. Some will lose all value (dollar) while others will survive while experiencing a loss of purchasing power (yuan, euro, yen, etc…). The only money that will retain its full value in the face of Chinese hyperinflation is gold.

China will sink the dollar to save the yuan

Once hyperinflation kicks into gear, Chinese authorities will find it impossible to bring it under control without sacrificing the dollar. Since hyperinflation would hurt Chinese exporters as much as losing their US exports, China will face a clear cut decision. By dumping the dollar peg and selling its USD holdings, China will help contain domestic inflation in many ways:

1) China will no longer be printing massive quantities of yuan to support the dollar.
2) By selling dollars in exchange for yuan, China will be able to take those yuan out of circulation, shrinking its monetary base.
3) Since the yuan will strengthen enormously again foreign currencies, Chinese exports will fall and that means there will be a lot more goods available for domestic consumption.
4) Since the yuan will be stronger against foreign currencies like the dollar, Chinese imports will rise. That means cheaper commodity prices across the board.
5) Dropping the dollar peg will make the yuan a major reserve currency. That means lower interests rates in China as foreign central banks build up yuan reserves.

Those expecting deflation are in for a surprise

Western nations who are lowering interest rate very sharply, without fearing inflation, are mainly concentrating on the domestic dynamics of their economies and the value of their currency. My bet is that no one is even considering the possibility that inflation could be imported from China, and, when cheap Chinese imports stop being cheap anymore, it will catch everybody completely by surprise.

Job-killing recession racks up more layoffs, with no end in sight.

Filed under: Death of the Nation, Economic Collapse-Depression, Economy, Globalism — whitelocust @ 1:17 am

Job-killing recession racks up more layoffs

WASHINGTON — The recession is killing jobs at an alarming pace, with tens of thousands of new layoffs announced Monday by some of the biggest names in American business — Pfizer, Caterpillar and Home Depot.

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More pink slips, pay freezes and other hits are expected to slam workers in the months ahead as companies desperately look for ways to survive.

“We’re just seeing the tip of the iceberg — the big firms,” said Rebecca Braeu, economist at John Hancock Financial Services. “There’s certainly other firms beneath them that will lay off workers as quickly or even quicker.”

Looking ahead, economists predicted a net loss of at least 2 million jobs — possibly more — this year even if President Barack Obama’s $825-billion package of increased government spending and tax cuts is enacted. Last year, the economy lost a net 2.6 million jobs, the most since 1945, though the labor force has grown significantly since then.

The unemployment rate, now at a 16-year high of 7.2 percent, could hit 10 percent or higher later this year or early next year, under some analysts’ projections.

Obama called on Congress Monday to speedily enact his recovery plan, warning that the nation can’t afford “distractions” or “delays.”

With the recession expected to drag on through much of this year, more damage will be inflicted on both companies and workers.

The mounting toll was visible Monday as roughly 40,000 more U.S. workers got the grim news.

Pharmaceutical giant Pfizer Inc., which is buying rival drugmaker Wyeth in a $68 billion deal, and Sprint Nextel Corp., the country’s third-largest wireless provider, said they each will slash 8,000 jobs.

Home Depot Inc., the biggest home improvement retailer in the U.S., will get rid of 7,000 jobs, and General Motors Corp. said it will cut 2,000 jobs at plants in Michigan and Ohio because of slow sales.

“We are seeing no improvement in labor market conditions,” said Sal Guatieri, senior economist at BMO Capital Markets Economics. “This year could be as bad as last year in terms of layoffs.”

In response to deteriorating business conditions, Caterpillar Inc., the world’s largest maker of mining and construction equipment, disclosed nearly 20,000 job cuts, most of which already have been made. They include 5,000 new layoffs of white collar workers, which will occur globally by the end of March.

Earlier actions included the elimination of 2,500 Caterpillar workers through a buyout offer announced in December, the termination of about 8,000 contract and temp agency workers, and the reduction of 4,000 full-time factory workers through firings and buyouts.

Texas Instruments Inc., which makes chips for cell phones and other gadgets, will cut 3,400 jobs due to slumping demand. The Dallas-based company said Monday it will slash 12 percent of its work force — 1,800 jobs through layoffs and another 1,600 through voluntary retirements and departures. And Brooks Automation Inc. said it plans to get rid of 350 jobs, or 20 percent of its work force. It will be the second round of cuts for Brooks, which makes software and equipment for chip manufacturers.

Oilfield services provider Halliburton Co. said it will eliminate jobs in markets particularly hard hit by the recession, though it didn’t provide details. Its larger rival Schlumberger Ltd. said last week it will cut up to 5,000 jobs worldwide in the first half of 2009 and consider further reductions this spring.

The flurry of layoffs comes on the heels of similar action by big-name companies just last week.

Microsoft Corp. said it will slash up to 5,000 jobs over the next 18 months. Intel Corp. said it will cut up to 6,000 manufacturing jobs. And United Airlines parent UAL Corp. said it would get rid of 1,000 jobs, on top of 1,500 axed late last year.

And there’s no end in sight. In a survey by the National Association for Business Economics, 39 percent of forecasters predicted job reductions through attrition or “significant” layoffs over the next six months, up from 32 percent in the previous survey in October. Around 45 percent in the current survey anticipated no change in hiring plans. About 17 percent thought hiring would increase.

A new report by the placement firm Challenger, Gray & Christmas found that companies are often turning to a creative combination of measures to cut costs — beyond layoffs. Those measures include pay freezes or reductions, forced vacations, travel cutbacks and the elimination of year-end bonuses.

“Many companies cannot cut their payrolls as deeply as they have in previous downturns, simply because they did not do as much hiring during the most recent expansion,” said John Challenger, president of the firm. “As a result, they are forced to find alternative ways to keep costs down.”

Not all the economic news was as grim Monday. Sales of previously owned homes and a separate barometer of economic activity each logged unexpected gains in December. But economists didn’t view them as signs of improvement.

“Keep the party hats in boxes and the Champagne in the cellar,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “It’s one month’s set of data and they tell us little about the future.”

Economists said the uptick in home sales was due to sinking prices spurring buyers. In the other report, a government-influenced balloon in the nation’s money supply largely affected the outcome.

Wall Street closed moderately higher. The Dow Jones industrials rose 38.47, or 0.48 percent, to 8,116.03, after briefly moving into negative territory.

The National Association of Realtors said sales of existing homes rose 6.5 percent to an annual rate of 4.74 million last month. Buyers took advantage of dramatically lower prices, especially in distressed states like California, Florida and Nevada, where foreclosures are soaring.

The nationwide median sales price sank to $175,400, down 15.3 percent from a year ago. That marked the biggest annual drop on records going back to 1968. The median is the middle point, where half the homes sell for more and half for less.

For all of last year, existing-home sales totaled 4.9 million, down more than 13 percent from the previous year, and the lowest since 1997.

Meanwhile, the Conference Board’s monthly forecast of economic activity rose 0.3 percent in December. But that pickup was influenced mainly by federal efforts to ease the credit crisis, which caused the supply of money to expand. If the jump in the money supply were excluded, the board’s index would have dropped sharply, economists said.

The national economy, meanwhile, is continuing to backslide.

Many analysts predict the economy will have contracted at a pace of 5.4 percent in the fourth quarter when the government releases that report Friday. If they are correct, that would mark the worst performance since a 6.4 percent drop in the first quarter of 1982. The economy is still contracting now — at a pace of around 4 percent, according to some projections.

AP writers Ellen Simon and Alan Zibel contributed to this report.

Warning: Megabanks Could Fail Despite Federal Aid

Warning: Megabanks Could Fail Despite Federal Aid

Martin D. Weiss, Ph. D.

The time has come to issue one of my sternest warnings to date: Bank of America and Citigroup could fail despite the most radical government rescues of all time.

Right now, after recent close calls with instant death, these two megabanks are on life support, receiving massive transfusions of government capital. But they’re still hemorrhaging, and no one in Washington has found a cure.

Already, they have received capital injections of $90 billion ($45 billion each).

Already, this bailout is larger than the total combined capital of PNC Bank, Suntrust Bank and State Street Bank — all among America’s ten largest.

Yet, ironically, that $90 billion is still a drop in the ocean compared to their massive exposure to risky assets.

The shocking facts revealed in the banks’ own balance sheets and in the OCC’s Quarterly Report demonstrate the enormity of problem:

Massive Risks at America’s Megabanks
(bill. of dollars)
B of A
Citi
B of A + Citi
JPM
9/30/2008
Total assets
1,831
2,050
3,881
2,251
All derivatives
38,186
39,979
78,165
91,339
Credit default swaps
3,291
2,467
5,758
9,250
Exposure to defaults by trading partners
177.6%
259.5%
400.2%

Fact #1. Too big to save. Bank of America Corp. and Citigroup, Inc. have combined assets of $3.9 trillion, or 43 times the size of the Treasury bailout funds they’ve received to date.

Fact #2. Bigger losses ahead. Even before any further declines in the economy, an unusually large portion of their assets are already in grave jeopardy — commercial real estate loans going sour, credit cards loans tanking, auto loans sinking, and residential mortgages turning to dust. Now, as the economy continues to tumble, avoiding much larger losses will be almost impossible.

Fact #3. Big derivatives players. Bank of America and Citigroup are the nation’s second and third largest high-rollers in the derivatives market, with a combined total of $78 trillion in these bets outstanding. That’s over ten times the derivatives that Lehman Brothers had on its books when it failed last year.

Fact #4. They’ve bet far too much on each other’s failure. Bank of America and Citigroup are also the second and third largest participants in the most dangerous derivatives of all — credit default swaps. These are the big bets that financial institutions make on the failure of other major companies.

But participants in this market are like shipwrecked sailors in a sinking lifeboat betting fortunes on who will live and who will survive: If a company bets too heavily on failures and too many companies actually fail, who’s going to make good on those bets?

And unfortunately, betting on each other’s demise in huge amounts is exactly what the nation’s megabanks have done. At their latest reckoning, Bank of America and Citigroup held credit default swaps with notional values of $2.5 trillion and $3.3 trillion, respectively. (See OCC report, pdf page 23.)

Total between the two: An astounding $5.8 trillion!

This number is not directly comparable to capital. But just to give you a sense of the magnitude of the problem, Bank of America and Citigroup’s combined credit default swaps are more than sixty times larger than the $90 billion they’ve received so far in capital infusions from the Treasury Department.

Fact #5. JPMorgan Chase is not far behind. Right now, Washington and Wall Street are still counting on at least JPMorgan Chase to pick up the pieces after major failures and shotgun mergers.

But according to the OCC, among the three megabanks, JPMorgan Chase is actually the most heavily leveraged, with over 400% of its capital already exposed to the risk of default by trading partners. Bank of America’s and Citigroup’s exposure (177.6% and 259.5%, respectively) is also wild, but JPMorgan Chase’s exposure is obviously far greater.

Fact #6. JPMorgan Chase’s derivatives could double the size of the banking crisis overnight. On the day that JPMorgan Chase needs to join the ailing Bank of America and Citigroup in Uncle Sam’s intensive care unit, the derivatives mess doubles immediately.

Bank of America Shares Plunging Toward Zero

Reason: The bank has $9.2 trillion in credit default swaps, almost twice as much as Bank of America and Citigroup combined.

Fact #7. Stocks crashing. Shares in failed banks are worth zero, and that’s where Bank of America’s are headed. Citigroup’s are already close, making it almost impossible for the company to raise capital from investors.

In light of these facts, how can the government save America’s megabanks?

Wall Street is hoping that the Obama administration will create a separate, government-run “bad bank” to take bad assets off their hands. And some pundits are even proposing that the U.S. government nationalize the big banks in trouble. But …

  • Neither approach addresses the obvious reason our nation’s banks are in the ICU to begin with: Excess debts and risk-taking. In fact, these “solutions” would merely pile on more of the same. Meanwhile …
  • Both approaches spread and transform the contagion from a Wall Street debt crisis into a Washington debt crisis, as the federal deficit explodes to as much as $2 trillion in fiscal 2009.

My Forecast: Washington Will
Ultimately Lose This Epic Battle!

No matter what the government does, it cannot patch back together the busted market for mortgages, derivatives and especially credit default swaps.

It cannot stop a pandemic of loan losses among large AND small banks as the economy sinks and traditional bank lending goes bad.

It cannot stop the contagion of falling confidence, fear and panic. It cannot outlaw gravity or stop investors from selling. Nor can it turn back the clock and reverse years of financial sins.

So don’t count on Uncle Sam to save your bank, your business, or the economy.

Keep up to 90% of your money in cash.

Avoid bank deposits as much as possible, using mostly short-term Treasury bills or equivalent.

Above all, focus on building up your own resources and finding alternative sources of income or profits. For specific instructions on precisely how, click here for our free one-hour video, “7 Startling Forecasts for 2009.” But you don’t have much time; it goes offline tomorrow.

Good luck and God bless!

The economic crisis should be treated as “the difficult birth-pangs of a new global order”, with new rules introduced on trade, Gordon Brown says.

Brown warns against ‘pessimism’

Gordon Brown has given a wide-ranging speech on the economy

The economic crisis should be treated as “the difficult birth-pangs of a new global order”, with new rules introduced on trade, Gordon Brown says.

The prime minister set out a series of actions designed to “replace fear with confidence” and warned against just “muddling through as pessimists”.

During a speech defending his handling of the crisis he also warned against the “deglobalisation threat”.

His speech came as a poll suggested the Tory lead had grown to 15% over Labour.

The UK is now officially in recession for the first time since 1991, with many businesses blaming difficulties in obtaining loans for the crisis.

‘Fill the gap’

Last week the government announced a scheme to offer banks insurance against losing more money from the bad debts which started the credit crunch.

The Bank of England will also be able to buy up to £50bn worth of assets in companies in all sectors of the economy.

Addressing the Foreign Press Association in London, Mr Brown said such measures were intended to “fill the gap” in lending.

He added: “We face a choice. We could allow this crisis to start a retreat from globalisation.

It will be like turning around a supertanker
George Osborne, Conservatives

“As some want, we could close our markets – for capital, financial services, trade and for labour – and therefore reduce the risks of globalisation.

“But that would reduce global growth, deny us the benefits of global trade and confine millions to global poverty.

“Or we could view the threats and challenges we face today as the difficult birth-pangs of a new global order – and our task now as nothing less than making the transition through a new internationalism to the benefits of an expanding global society – not muddling through as pessimists but making the necessary adjustment to a better future and setting the new rules for this new global order.”

‘Gloomsters’

He said: “As the downturn spreads across the world, we are, for the first time, seeing cross border flows growing more slowly than domestic flows. And we are seeing banks favouring domestic lending over foreign lending.

“This is a trend which must be halted if we are to avoid the risk of a damaging worldwide spiral of deleveraging and deglobalisation – with adverse consequences for all economies.”

Mr Brown received some support for his attempts to brighten the gloom as Barclays Bank shares soared 60% after its chairman and chief executive wrote an open letter to investors saying its profits would be above £5.3bn.

HAVE YOUR SAY

The effects of the recession are now really starting to bite

Chris Beaven, Stevenage

And the director general of the Confederation of British Industry, Richard Lambert, wrote in the Daily Telegraph that “the UK is not about to go bust” and that recent government measures “will be enough to prevent something much worse (than the current recession) – provided we don’t allow ourselves to get swept away by the gloomsters”.

But SNP spokesman Stewart Hosie described Mr Brown’s comments as “meaningless rubbish” designed to deflect criticism from the prime minister.

“Gordon Brown might be better answering why he allowed a credit bubble during his tenure as chancellor or why debt levels were so high that the recession can now only be fought by doubling the national debt to over £1 trillion,” he said.

Meanwhile, shadow chancellor George Osborne told the Institute of Chartered Accountants that a Conservative government would make Whitehall more accountable.

‘Incentives’

He promised to include a clause on the responsibility to taxpayers in the employment agreements of senior civil servants, with the Civil Service Code being rewritten to incorporate “responsible financial management”.

Public sector employees should also be rewarded for suggesting waste-cutting ideas, Mr Osborne added.

He said: “We need a new culture of financial discipline across Whitehall. That means new incentives, new information and new powers of investigation.”

Mr Osborne added: “Creating a new culture of financial discipline in Whitehall is not going to be easy. It will be like turning around a supertanker.

“But with a determined political will and the right plans, we can do it. We can turn the Whitehall supertanker and put Britain on the right course.”

A ComRes opinion poll for the Independent suggests the Conservatives have increased their lead over Labour to 15 points – from five points last month.

It puts the party on 43%, with Labour on 28% and the Liberal Democrats on 16%. ComRes telephoned 1,012 adults from 21 to 22 January.

The Ugly Truth: America’s Economy is Not Coming Back

Filed under: Death of the Nation, Economic Collapse-Depression, Economy, Globalism — whitelocust @ 1:11 am

The Ugly Truth: America’s Economy is Not Coming Back

President Barack Obama and his economic team are being careful to couch all their talk about economic stimulus programs and bank bailout programs in warnings that the economic downturn is serious and that it will take considerable time to bounce back.

I’m reminded of an experience I had with Chinese medicine when I was living in Shanghai back in 1992. I had come down with a nasty case of the flu while teaching journalism at Fudan University on a Fulbright Scholar program. A Chinese colleague suggested I go to the university clinic. When I told him there wasn’t much point since doctors couldn’t do much for the flu besides recommend fluids and bed rest, he said, “That’s Western doctors. You could go to the Chinese medicine doctors at the clinic. They can help you.” I figured, what the hell, and we went. The doctor inquired into the lurid details of my illness—how my bowel movements looked, the color of the mucus in my nose, etc. He didn’t really examine me physically. Then he prescribed an incredible number of pills and teas and sent me home with a huge bag of stuff, and instructions on the regimen for taking them through the course of each day. I followed the directions dutifully, and my colleague came by each day to check on my progress. By the fifth day, when I was still running a fever and feeling terrible, I told him I didn’t think the Chinese medicine was working. He replied confidently, “Chinese medicine takes a long time to work.”

I laughed at this. “Sure,” I said. “But the flu only lasts a week or so, and now, when I get better, you’ll say it was the Chinese medicine, right?”

He smiled and agreed. “Yes. You are right.”

Obviously the Obama administration recognizes that it needs to keep the finger of blame for the current economic collapse squarely pointed at the Bush administration, which is certainly fair in large part (though the Clinton deregulation of the banking industry played a major part in the financial crisis and its enthusiastic promotion of globalization began the massive shift of jobs overseas that has left the nation’s productive capacity hollowed out). But it also seems to recognize that it cannot tell the bitter truth, which is that our national economy will never “bounce back” to where it was in 2007.

America, and individual Americans, have been living profligately for years in an unreal economy, propped up by easy credit which inflated the value of real estate to incredible levels, and which led people to spend way beyond their means. Ordinary middle-class working people have been encouraged to buy obscenely oversized homes at 5% down, or even no down payment. They have been lured into buying cars the size of trucks, one for each driving-aged member of the family (in our town, so many high school kids drive to school that the school ran out of parking spaces and the yellow school buses, largely empty on their runs, are referred to by the students as the “shame train,” an embarrassment to be seen riding). They’ve installed individual back-yard swimming pools, unwilling to share the water with their neighbors in community pools. Boring faux ethnic restaurant franchises of all kinds have befouled the landscape, filling up with families too stressed out to cook, and willing to endure over-salted, over-priced and tasteless cuisine and tacky plastic décor night after night.

Now this is all crashing down. Property values are in free-fall. Car sales have fallen off a cliff. Joblessness is soaring (At present, it’s approaching an official rate of 8%, but if the methodology used in 1980, before the Reagan administration changed it to hide the depth of that era’s deep recession, were applied, it would be 17% today, or one in seven workers).

Eventually, the economic slide will hit bottom and begin its slow climb back, as all recessions do, but there will be no return to the days of $500,000 McMansion developments, three-car garages and a new car every two or three years for both parents plus a car for each highschooler. Not only will banks no longer be able to offer such credit to clients. People, having been burned, will not be willing to borrow so much. Company health care benefits, pension programs or 401(k) matching programs that were slashed during this downturn will not be restored when the economy picks up again.

Over the last 20 years, America has degenerated into a nation of consumers, with 72 percent of Gross Domestic Product (sic) now being accounted for by consumer spending—most of it going for things that are produced overseas and shipped here.

That is not an economic model that is sustainable, and it is a model that has just suffered what is certainly a mortal blow.

What we are now seeing is the beginning of an inevitable downward adjustment in American living standards to conform with our actual place in the world. As a nation of consumers, and not producers, with little to offer to the rest of the world except raw materials, food crops, military hardware and bad films (none of which industries employ many people), we are headed to a recovery that will not feel like a recovery at all. Eventually, productive capacity will be restored, as lowered US wages make it again profitable for some things to be made here at home again, but like people in the 1930s looking back at the Roaring 20s of yore, we are going to look back at the last two decades as some kind of dream.

It would be better if the new administration would be honest about this, because with honesty, we could have a recovery program that would actually address the real critical issues facing the country—the decline of our educational system, the irrationality of official promotion of home ownership that has led to the proliferation not just of suburbs but of exurbs, the over-reliance on the automobile for transportation, the unprecedented waste of resources, the pillaging of the environment, not to mention the decimation of the retirement system and the creation of a vast medical-industrial complex that is sucking the life-blood out of families and businesses alike.

With honesty, we could also confront the other big obstacle to national recovery—the nation’s obsession with militarism and foreign wars. The honest truth is that the US is technically bankrupt and in a state of chronic decline, and yet the nation persists in spending a trillion dollars a year on war and preparations for war, as though America were in mortal danger from foreign enemies.

The truth is that we are not threatened by Communism, by drug lords, or by Muslim Jihadists in any serious way. Rather, we have become our own worst enemy.

The administration could start by telling us all this straight up, but the problem is, most of us probably don’t want to hear it, which explains why we’re not hearing it. It also explains why we’re about to blow another trillion or so dollars on propping up failing banks, funding pointless highway and bridge construction, and blowing up illiterate peasants in remote places like Afghanistan and Pakistan.

Worship of the beast, by the stupid dark masses.

Blast from the past, 1996- How do you tell when a great civilization is in decline? When a great nation is on the rocks spiritually, morally, racially, and economically?

The Coming Race War in America
A Wake-up Call
By Carl T. RowanChapter One: America’s Violent Decline

How do you tell when a great civilization is in decline? When a great nation is on the rocks spiritually, morally, racially, and economically?

I look closely at my country, and everywhere I see signs of decadence, decay, and self-destruction.

Respect for law and order has declined drastically, except in the phony speeches of politicians.

The nation’s capital is awash with special counsel and special prosecutors, taking testimony from the President, the First Lady, key members of the cabinet and the Congress–all accused or suspected of criminal wrongdoing. The FBI is far short of being trustworthy, its agents and former agents deep in partisan politics. Local police departments reek with corruption, including condoned lawlessness by some policemen. Our prisons bulge with record numbers of young Americans, mostly the fruit flies of the drug trade, while the big bumblebees of the crime and drug syndicates peddle their wares with impunity.

Every day our newscasts begin with stories of grisly murders, sexual assaults, grotesque abuses of children, mass killings on job sites, and worse.

America is sinking in greed. Our workers fear tomorrow and their bosses grab what they can today. A corporate fatcat can get a $10 million reward for “downsizing” his firm–that is, putting thousands of employees out of work.

Public morality has probably never been lower. Lawmakers writhe and wrangle over how to deal with television programming that spews out sexual rot and gratuitous violence morning, afternoon, and night–prime time sewers. Congress makes believe that a meaningless “rating system” and a V-chip will solve the problem.

Racism has not been as virulent throughout America since the Civil War, with short fuses burning on a thousand powder kegs. We have seen our greatest law enforcement agency, the FBI, sit for weeks in a stalemate with a small Montana cult, the Freemen, whose leaders preach that the descendants of northern Europeans are “God’s chosen people,” that Jews are “the children of Satan,” and that African Americans and other people of color are by nature dumb and immoral.

We see the Freemen and other hate groups like the Aryan Nation, the skinheads, the Ku Klux Klan, and assorted militias piling up arms for what they say is a coming race war in America that will precede the return of Christ.

These are the adherents of a “Christian Identity” movement whose, followers refuse to pay governmental levies, but collect taxes themselves. They rake in millions through extortion, the widespread use of bogus checks and phony credit cards, and simple extortion.

But local law enforcers and even the FBI are afraid to tangle with them, wary since their disastrous confrontations with the David Koresh cult in Waco, Texas, and the Randy Weaver group at Ruby Ridge in Idaho.

Official, open coddling of these groups pretty much ensures that the race war these white supremacists predict will really come.

I know that these harsh judgments about America as it nears the turn of the century are not what most Americans want to hear. In the wake of the fall of the “Evil Empire” that was the old Soviet Union, with the still-limited development of China and the Third World, and the starkly limited hegemony of European and other “first world” nations, Americans prefer to boast that the United States is the last of the great powers. As proof we cite our nuclear arsenals and the fact that we have the only quick-strike forces capable of moving into Bosnia, Africa, and the Middle East, to wage war or peace, within hours of a White House go-ahead to strike. We like to boast of our economic might, even though we’ve seen a frightful decline in good, high-paying jobs. We like to think that we are the world’s cultural giant because our movies and music, our top television shows, are coveted the world over, this much to the dismay of foreign leaders who think the cultural fare that we export carries the seeds of national destruction.

So much of what Americans boast about nowadays is superficial, even delusionary. Look below the surface. I have done so and concluded that this country, for which I have fought in war and peace, is in precipitous decline. The leaders of Rome, Greece, the Third Reich, the British Empire, never saw the onset of decadence and internal rot in time; we can, and we must, if the United States is not to succumb to its internal hatreds and moral excesses, to be consumed by its own self-destruction.

Who can overlook the decline of marriage as an American institution, with Hollywood and television stars, and so many social and political leaders, abusing drugs and having sex and babies out of wedlock? Our teenagers see no stigma in this lifestyle. Licentiousness and depravity have made the United States a hollow remake of Sodom and Gomorrah, with even preachers and priests, nuns and schoolteachers, unveiled as the practitioners of child abuse, as marriage killers, and as outright murderers.

Take a look at this society’s decline in terms of organized religion. Preachers preach and rabbis teach, but fewer and fewer people listen, and those who visit churches and synagogues rarely heed what they hear. Look at what the Greeks and Romans have written that they saw too late–and what we see now, everywhere in this nation: racial and religious bigotries, blind nationalisms, and myriad other injustices tolerated and even glorified by our philosophers, politicians, Presidents, the “wise men” allowing this, the greatest of societies, to be consumed in hatred.

Look at the piling up of economic injustice and ask how long we can live in peace and prosperity.

The January 22, 1996, issue of U.S. News & World Report carried an article about how WORKERS TAKE IT ON THE CHIN which noted:

* that in 1982 dollars, U.S. workers had suffered a decline in earnings, from an average of $298 weekly in 1970 to $256 in 1994* that during the last five years “the upper class” has gained economically by 76 percent, while the middle class has risen by 6 percent, the working class by 2 percent, and the poorest class by 6 percent

* that in 1945 the top 1 percent of U.S. families held 32.4 percent of the nation’s wealth, but in 1992 that top 1 percent held 42 percent of the wealth. Here was indisputable evidence that while the privileged were assailing attempts of the New Deal and the Great Society to redistribute wealth from the rich to the poor, the rich have been getting richer while the poor have lapsed into deeper poverty

A less conservative publication would have been accused of spreading “inflammatory class warfare verbiage” or “an anti-capitalist, pinko diatribe.”

What we have to recognize is that we are a society stumbling into a vast darkness, because we do not really seek answers to the issues that I have raised, issues that are of concern to all of us. Instead we look for scapegoats!

The result: in just the last decade we have seen some gruesome manifestations of racial and ethnic hatred in America–literally, murder in the streets, blood spilling everywhere. We have seen political fights in Congress over who should get the most of America’s goodies–fights that have caused shutdowns of the federal government and mind-boggling gridlock in Washington. One senses that our nation is split irrevocably and that there is no one to bring us together again.

The blame game seems to be played with every American failure.

Some U.S. auto dealers blame Japan’s supremacy in selling certain products on “unfair trading practices.” From time to time the U.S. industrialists who feel cheated, and the politicians who deplore the trade imbalance with Japan, create almost enough hysteria to foment a trade war between Washington and Tokyo.

Some American industrialists find scapegoats in the men and women of organized labor, claiming that the “exorbitant” demands of U.S. workers drive them to move plants to Taiwan, Singapore, and, yes, Mexico, where they can enjoy cheap labor. So these employers have engaged in economy-crippling wars with the organized-labor movement, which itself is struggling to emerge from a long, tragic decline.

Still, it is clear that organized laborers and their pay, health care, and other demands are not the cause of the rot in industrial America. If greedy union leaders are not responsible for the disappearance of “good jobs”–of high-paying posts as computer chip makers and camera makers and even shirtmakers and shoemakers in the United States, then who is?

The political flamethrowers, such as Governor Pete Wilson of California, think they see advantage in blaming our economic decline on the great influx into the United States of “illegal aliens.” They are bent on making immigration the issue on which many politicians in California, Texas, Colorado, Florida, and other states will rise or fall in the 1996 elections and the remaining years of this century.

The one explosive issue that may trigger the actual burning of America, and certainly exacerbates the ever-widening divisions between and among its citizens, is “affirmative action.” Almost every presidential and congressional candidate now strives to convince voters that black, Hispanic, Asian, and female recipients of undeserved economic preferences are really to blame for the economic malaise that has produced so many millions of “angry white men.”

These simplistic blame games have already created a disrespect, even hatred, not only for the poor, but for government officials at all levels. They are seen as the ones who proposed, enacted, and protected the laws that supposedly have lowered the levels of life of white men. Others who think their plight is far worse than that of white men have also made the government their worst villain. The government is seen as the invader, controller, and circumscriber of the lives of everyone–the middle class that has lost ground, the underclass that never had sufficient chance.

So citizen militias, operating publicly and secretly, have sprung up across America–a fact that exploded into our consciousness with the dreadful bombing of the federal Alfred P. Murrah office building in Oklahoma City in 1995.

Some Americans prefer to think that some grotesque mental illness affecting only a handful of individuals would provoke the bombing of a huge building and the murder of 168 people–but only the next bombing will show us the level to which “the government” has become the enemy of “the people.”

Yes, I can virtually guarantee you that there will be other bombings of the magnitude of the one that occurred in Oklahoma City. That is because the forces that prompted the Oklahoma City crime have influenced hundreds of thousands of other Americans who nurse precisely the same hatreds that were unleashed in Oklahoma.

Note, for example, that the crazy defiance and the spirit of violence of the Montana Freemen did not end with their “surrender” to the FBI. They still defied the authority of the federal courts. In late June, in a Billings, Montana, courtroom, one of the Freemen, Steven Charles Hance, said to U.S. magistrate Richard Anderson, “You’re going down, son.” The Freemen had already been charged with threatening the life of another federal judge, and yet they were handled with kid gloves.

We cannot afford to ignore the fact that the Freemen are just a tiny part of a nationwide horror–the sprouting up of highly armed militias and paramilitary groups across America, all of them expressing some degree of racial paranoia and hatred. The most watched of these “patriot” right-wing groups are the Militia of Montana, the Unorganized Militia of the United States, the Michigan Militia, Police Against the New World Order, the Idaho Sovereignty Association, United Sovereigns of America, the North American Freedom Council, and the Texas Constitutional Militia. But those pressing to create a constitutional crisis by promoting a ghastly race war are going underground.

The nation was stunned late in June 1996 when federal officials announced that they had arrested ten men and two women in Phoenix on charges that they had plotted to blow up buildings that housed the Bureau of Alcohol, Tobacco and Firearms, the Internal Revenue Service, the Secret Service, and other federal agencies. These twelve members of a group called the Viper Militia, which almost no one had heard of, had gone so far as to videotape the columns in these buildings where explosives should be put so as to most effectively cause the buildings to collapse. Their plan had been foiled through a marvelous piece of police work. An Arizona law officer infiltrated the group and in meeting after meeting listened to the militiamen boast of how they would quickly kill any infiltrator.

Police learned quickly that these twelve alienated Americans had the explosives and weapons with which to carry out what would have been a devastating act of domestic terrorism. In the home of one Viper alone, that of Gary C. Bauer, the group’s ordnance expert, federal agents found almost one-half ton of ammonium nitrate. This little Viper Militia group had stashed away in one Phoenix house half a ton of ammonium nitrate; fifty-five gallons of nitromethane; a highly toxic yellow powder explosive called picric acid; many blasting caps; and more than seventy automatic rifles. This tiny band of self-styled revolutionaries had, right in residential Phoenix, the ingredients for a bomb at least half as large as the one used to blow up the Alfred P. Murrah federal building in Oklahoma City, killing 168 people.

The evidence mounts that many of the eight hundred or so militia groups that have sprung up in this country are amassing even greater caches of explosives and firearms, and that the serious terrorists are operating in units of fewer than a handful of people, so as to prevent infiltration by lawmen.

Yet, FBI and other officials in Washington tell me that Americans as a whole are not yet sufficiently aware of the gravity of the situation. These “patriot” criminals are now regularly robbing banks with automatic weapons. They are planning assassinations and attacks on police and military units. They are suspected of the sabotage derailment of an Amtrak train outside Phoenix in October 1995.

Incredibly, within weeks, for most Americans it was as though the events in Phoenix never occurred. The Viper Militia had produced no bodies to bury, no loved ones to mourn, so the threat didn’t seem as real as was the Oklahoma City bombing.

It may be years before we learn how many paramilitary groups like the Vipers were driven underground by the arrests and seizures of weapons in Arizona.

But overt or covert, all these groups profess to believe that dangerous conspirators, including Jewish bankers and publishers and animal-like blacks, have usurped the U.S. Constitution, corrupted the courts and the banks, and moved to take arms away from loyal citizens. Their solution is to fight what the fringe leaders call “the System” by setting up common-law courts, robbing banks, and engaging in terrorism.

You cannot dismiss all these whites as mere “angry men” who shout a lot about their grievance but aren’t likely to become violent. They have done violence almost beyond comprehension in Oklahoma City. And “they” were clearly influenced by a weird novel, The Turner Diaries, published in 1978 under the pseudonym of Andrew Macdonald by a former physics professor named William Pierce. This uncompromising racist, Pierce, has become the prophet of a Caucasian war, and his book has become the bible of the “save the White race” movement.

In May 1996, I wrote to the National Alliance in Hillsboro, West Virginia, to purchase a copy of William Pierce’s The Turner Diaries. Along with the book I got a sheet stating:

For far too long, we of European descent have allowed clever aliens to rob us of our identity and our history and to impose on us an alien morality in which the highest virtue is to hate our own race.The time has come for a courageous rethinking of all our values–for a new morality for White people, based firmly on Nature’s laws and on the highest ideals of our Race-soul, a morality in which the first principle is the survival and advancement of our race–a principle to which all other things are subordinate.

Clearly, the lives of all those people who died in Oklahoma City were subordinate to the mad-dog, white-supremacist goals of those who are waging war to gain the power to say who can live in America. I have read the most racist of all the literature of slavery days, and of the bitter conflicts of the 1950s and 1960s, and I recall nothing as bigoted as The Turner Diaries. Almost every page reeks with talk of “depraved blacks raping white women,” “the corruption of our people by the Jewish-liberal-democratic-egalitarian plague,” details of the assassination of white editors who side with blacks; with the conclusion that “it is frighteningly clear now that there is no way to win the struggle in which we [whites] are engaged without shedding torrents–veritable rivers–of blood.”

I am aware that white people who have just begun to read this book are probably fixated on the question of when and why angry blacks will begin the race war. There is no question in my mind that the disciples of William Pierce will start the fires of what some of them refer to as “Armageddon.” Pierce wrote the “fictional” details of how to blow up the FBI headquarters in Washington, D.C. His scheme, right down to the use of ammonium nitrate fertilizer, was copied in the Oklahoma City tragedy. It is known that right-wing militiamen Timothy McVeigh, who was indicted on charges of carrying out that bombing, regarded The Turner Diaries as his gospel.

When Mike Wallace of CBS’s “60 Minutes” confronted Pierce in the mountains of West Virginia, he found a man who would express no sorrow about the Oklahoma City bombing, just regret about the timing of it.

“[The bombing] does not make sense under the present conditions that we have when there’s no group capable of actually taking on the federal government and defeating it,” Pierce said. “I do not believe that we are in a revolutionary phase yet. I believe that the people have a lot of waking up and understanding to do first.”

By way of “educating” the people, Pierce told Wallace that he had sympathy for the Montana Freemen and the Unabomber, favored shipping American blacks to Africa, and admired more than any man Adolf Hitler–an admiration he expressed by keeping two original copies of Mein Kampf right over his shoulder in his office.

Pierce has sold some two hundred thousand copies of The Turner Diaries since 1978. He has made a deal with publisher Lyle Stuart, a Jew, to republish the book and give it wider circulation. Stuart told Mike Wallace that he wants the world to know what Pierce stands for.

The Clinton administration’s timid handling of the Freemen emboldened not just the Freemen, but lawless militiamen everywhere. Some of the most reactionary politicians in America went to that Jordan, Montana, farmhouse to try to negotiate a peaceful end to the standoff, but came away saying that the Freemen did not want a peaceful end to the dispute. That event made it clear that if the FBI and state law enforcement units continue to be intimidated, these groups that declare themselves to be beyond the jurisdictions of the law agencies of “the System” will strike out violently, making a race war inevitable.

Are you worried yet?

Just note that amidst all the concern about The Turner Diaries, the FBI’s National Security Division was issuing a bulletin to police agencies that some militia leaders had issued directives for their “Project Worst Nightmare,” in which militia units were told to prepare to “shut federal operations down” in the event that federal forces were used to assault the Montana Freemen farmhouse. The private militias were given “targets of opportunity,” including communications facilities, senior federal law enforcement officials, and “selected news media.”

In May, the FBI made more headlines by confirming that it had learned of anonymous threats to alcoholic beverage producers and broadcasters who air alcohol commercials, federal government officials, members of the news media, and Jewish executives and physicians.

The threat to kill government officials was based on cries that the Freemen standoff was a plot to attack all militias and seize their weapons. The threat to Jews involved an alleged plan to murder twelve hundred Jewish executives and physicians if Israel did not withdraw its military from Lebanon immediately.

In Georgia, just before the Olympic Games in Atlanta, federal treasury agents arrested two members of the Georgia Republic Militia on charges that they were plotting to make dozens of pipe bombs for use in a “war” against the United Nations and the “new world order.” Fears were expressed that Robert Starr, the militia commander, and William James McCranie, Jr., planned to explode devices during the Olympics. A pipe bomb was exploded, with no evidence of involvement by the Georgia Republic Militia. The FBI poured hundreds of agents into efforts to identify the perpetrator of a crime that killed one woman and injured more than a hundred people.

How far can the madness go? The incidents and developments cited above represent mostly the homegrown threats. Add in the likelihood of foreign terrorists intervening in alliance with whatever groups stand up against Pierce and his Hitlerite punks and you have the makings of a terrible conflagration–one worse than the Civil War. Worse because the 200 million handguns on America’s streets will come into play, along with the automatic guns and other weapons held by militias, weapons stolen from U.S. armories and gun stores, and sophisticated weapons provided by some foreign countries.

In April 1996, the FBI declared that Islamic radicals represent “the greatest threat coming to us domestically in the United States.”

John P. O’Neill, chief of the FBI’s counterterrorism section, said investigations of international terrorists had increased by 600 percent since the bombing of New York’s World Trade Center in February 1993. “No longer is it just the fear of being attacked by international terrorist organizations–attacks against Americans and American interests overseas,” O’Neill added. “A lot of these groups now have the capability and the support infrastructure in the United States to attack us here if they choose to…. Our largest growth area is in the anti-government movement, particularly in the area of militias…. We are seeing a threat from the international groups and the domestic groups at the same time.”

Although international Islamic terrorists and local militias all profess to hate the U.S. government, they surely will not be on the same side in an American race war. They will be killing each other, turning the United States into a killing field, with blacks, Jews, Hispanics–well, everybody–forced to become combatants or to be slaughtered.

Clearly, no one in America can gain from such a war. But how to stop it? Tragically, the hated “System,” as Pierce has labeled our federal government, must do some of what Pierce and the militiamen say they fear. Federal authorities must rein in to some degree the militia leaders who talk openly about killing federal judges and assassinating other elected officials, and who espouse murdering newspaper editors and destroying banks by writing billions of dollars worth of phony checks.

In April 1996, O’Neill warned against walking into what he called “a crescendo” of anti-government feeling fueled mostly by the Waco siege of the Branch Davidian compound and the shoot-out with the Weavers at Ruby Ridge. He said the image of a U.S. Army tank, with a white star painted on the side, moving against a civilian target, contributed to the anti-government movement “more than anything else.” That thinking virtually paralyzed the FBI, leading to a long standoff during which most of the militia leaders decided they could do almost anything they wanted to do.

The American dilemma now? If we can restrain the crazy, violent, paranoid white men, conceding the existence of millions of white people who secretly sympathize with William Pierce, we will have a chance to pacify the millions of nonwhites who are more than ready to rumble.

We have gone too long without taking “the race problem” seriously enough to put it on a war footing. But we have a little time in which to try to avert the spilling of what Pierce calls “torrents–veritable rivers–of blood.”

Before the big rumble, we are going to have a propaganda war, the guts of which are discernible in this “60 Minutes” exchange between Wallace and Pierce:

WALLACE: (Voiceover) The central message of his novel The Turner Diaries, indeed, his own abiding conviction, is that the United States is being ruined by blacks, Hispanics, Jews–just about everyone but those he calls his people, Aryan whites.The breakdown of our society, you blame, basically, mainly on blacks and Jews.

DR. PIERCE: No, not–not primarily. I–I blame it on the fact that we have …

WALLACE: Dr. Pierce …

DR. PIERCE: … allowed this society to become excessively cosmopolitan; that we have not had real white leadership in this country.

WALLACE: That’s the buzzword; that’s the code word, “cosmopolitan.”

DR. PIERCE: Mm-hmm.

WALLACE: That’s Jews and blacks, and you know it is.

DR. PIERCE: Well, if you want to put it that way, but it involves a lot of other people, too. It involves the mestizos coming across the–our southern border. And …

WALLACE: Race mixing?

DR. PIERCE: Race mixing is–is one of the things which is causing the breakdown of American society, and the alienation of the people generally.

The people who sold me the copy of The Turner Diaries, the price hiked from $5.95 to $12.95, sent me gratis a copy of a National Vanguard Books catalog that listed dozens of racially inflammatory titles, plus many U.S. Army manuals such as Boobytraps, Incendiaries, Explosives and Demolitions, Improved Munitions Handbook, and an assortment of fiction about “Race and Revolution.”

The centerpiece of this catalog is a long article headlined WHO RULES AMERICA?, with a subhead declaring that The Alien Grip on Our News and Entertainment Media Must Be Broken. Who are the “aliens” in this tirade of hatred? Michael Eisner of Walt Disney Company and Capital Cities / ABC; Gerald M. Levin of Time Warner Inc; Sumner Redstone of Viacom; David Geffen, Jeffrey Katzenberg, and Steven Spielberg of Dream Works; the heads of the Newhouse newspapers-books-magazines-and-cable empire, Samuel and Donald Newhouse; the publisher of the New York Times, Arthur Ochs Sulzberger, Jr.; and the publisher of the Washington Post, Donald Graham. You’ve guessed it. All of the people being assailed and threatened in this screed are Jews.

“The Jewish control of the American mass media is the single most important fact of life, not just in America, but in the whole world today,” this article screams. “There is nothing–plague, famine, economic collapse, even nuclear war–more dangerous to the future of our people.”

What are Jews doing to justify such extreme condemnation? The catalog says:

The Jew-controlled entertainment media have taken the lead in persuading a whole generation that homosexuality is a normal and acceptable way of life; that there is nothing at all wrong with White women dating or marrying Black men, or with White men marrying Asiatic women; that all races are inherently equal in ability and character–except that the character of the White race is suspect because of a history of oppressing other races; and that any effort by Whites at racial self-preservation is reprehensible.

I am sure that many Jews hate being tied to African Americans whenever the advocates of a race revolution spread their bigotry. It must be especially irritating when some African Americans like Louis Farrakhan make attacks on Jews a major thrust of their efforts to gain followers and make money. But neither Jews nor blacks can escape the fact that the white-supremacist killers wish both groups a common destiny of either expulsion from these shores or genocide.

I am one black man who wants Pierce and the militiamen to know that there will be no expulsion and no timid voluntary return to Africa.

If decent Americans become afraid to stand up to the threats and violence of the white supremacists, things will become worse very fast. Pierce and his followers will believe that they are in what he calls “a revolutionary phase” in which the federal government “can be defeated.”

The conflict that I foresee will be as crazily complex as it will be violent, cruel, and heinous. We now see the skinheads and Ku Klux Klansmen emboldened in their campaigns against blacks, Jews, Catholics. We see the Muslims at war not only against Jews, but against the Italian mayor of New York, Rudolph Giuliani, and against America as a whole, as reflected in terrorist bombings. We hear black students talk about “the basis of truth” in a speech full of anti-Semitic invective by Nation of Islam minister Khalid Muhammad at Kean College in New Jersey. We see blacks in political struggle with Hispanics. And from Los Angeles to Detroit to New York, we see a growing underclass at war against “the establishment.”

This dreadful upsurge in hurting and hatred in America, the increase in murders that are both random and born of rage, flows in part from the denied but obvious racism and contempt for the poor that were so venomous during the Reagan years, and before that from the spineless neglect and indifference of the Nixon and Ford years. But that is history. A race war of destructive proportions that will shock the world is probable because of these facts:

While President Clinton is no closet bigot, he is not as committed to racial and social equality as were Harry Truman, John F. Kennedy, and Lyndon B. Johnson. Clinton has fed the fever over welfare reform, even after discovering that “the poor must work” rhetoric was hollow, because for millions of impoverished men and women our society has no jobs, offers no training, and will not pay for day care for their children. He has gone along with the pretense that building more and more prisons at obscene costs is a solution to the crime problem. In an effort to prove that he is not “soft on crime” he has not only voiced the “rock ‘em up” mentality, but led the way to designate more federal crimes as reasons to execute offenders.

During the heat of the presidential primaries, Clinton looked like a leader only because the warring Republicans looked so atrociously unpresidential. Pat Buchanan revealed himself to be shamelessly anti-Semitic, anti-black, and anti-Hispanic, thus destroying what little chance he had of winning the GOP nomination. The winner, Bob Dole, began immediately to play the race card, as have all the winning Republican candidates since Eisenhower. They bring the race war closer, but either don’t know it or don’t care.

Sophisticated hatemongers are in their heyday in the American media. The Rush Limbaughs, Howard Sterns, Pat Buchanans, and other socially and morally blind electronic pamphleteers write the nation’s bestselling books because they moderate and dominate the nation’s most-listened-to or most-watched radio and television shows.

Limbaugh and others of his ilk have manipulated public opinion in dangerous ways.

The idea is to make Limbaugh look great while making poor people look like bums, environmentalists appear to be “wackos,” and decent-minded people look like enemies of democracy.

The politicians who love Limbaugh have virtually destroyed the social safety net in America, but they still rant about “reverse discrimination” and the so-called “special privileges” given to minorities. White male paranoia has become epidemic. This despite the fact that the median net worth of black households in this country is $4,604, or just one tenth the median net worth of white families–$44,408. The comparable figure for Hispanics is $5,345.

On talk shows and elsewhere I am frequently asked why “blacks get all the college scholarships.” The General Accounting Office report that 96 percent of all the scholarship money in America goes to whites has done little to wipe out the white cries of persecution, many inspired by the likes of Limbaugh but reverberating in political campaigns across America.

Black judges and generals, cabinet officers and columnists, and talk-show hosts and television anchors are prominent symbols of the racial progress that has taken place in this society over the last two generations. But these symbols create a veneer that hides the truth that for the overwhelming mass of black people, Hispanics, and other nonwhites, precious little has changed during the thirty years that gave us the so-called civil rights revolution.

This harsh truth was never clearer to me than on August 27, 1993, when some seventy-five thousand people marched on Washington, D.C., to commemorate the celebrated March on Washington of 1963 when the Reverend Dr. Martin Luther King, Jr., gave his great “I Have a Dream” speech.

Only the most embittered flamethrowers could argue that no racial progress had been made over those thirty years. Sane people of sufficient age remembered that in 1963 petty apartheid was still a deeply ingrained way of life in the old slave states, and Jim Crow held sway over more of the North than most Yankees would admit. Black children were getting their heads battered and bloodied simply because they tried to buy a hamburger or drink a cola in Jim Crow restaurants, or even fancy department stores. Black travelers were being humiliated on buses and trains, or when they sought shelter in “white” hotels and motels. Jim Crow was king from Indianapolis, Indiana, to Indianola, Mississippi.

That 1963 March on Washington provoked the Congress to pass the Public Accommodations Act of 1964, which erased most of the ugly racism manifested in segregated movie theaters, recreation facilities, and other public places. That law gave a measure of dignity to black people. Few Americans have tried to force blacks into the backs of buses, or deny them the right to sit among whites at theaters, in restaurants, and now even in beauty parlors and dance classes. We have had problems with Denny’s and other fast-food operations, but for the most part a black man’s dollar has come to look as green and good as that of anyone else. Stores that once refused to let black women try on dresses or other garments now spend billions of dollars a year pitching their merchandise to black women.

But those who perceive a dramatic decline in racism in the United States, or who embrace Ronald Reagan’s line that it no longer exists, will point out, accurately, that black political power was relatively inconsequential in 1963.

That 1963 march struck the consciences of millions of white Americans and enabled President Johnson to secure passage of the Voting Rights Act of 1965. As a result, by the time of the 1993 march, blacks from Georgia, North Carolina, Louisiana, Mississippi, had been elected to Congress, and some eight thousand other black elected officials were holding office.

It was notable in 1963 that no black person had ever been a member of a President’s cabinet. In 1963 there were no black syndicated newspaper columnists, no black presidents of major white universities, no black military men who even dreamed of becoming chairman of the Joint Chiefs of Staff. And no one listening to King’s dream would have stretched it to a belief that by 1993 blacks would have served as mayors of Atlanta, Washington, D.C., Baltimore, Philadelphia, New York, Cleveland, Detroit, Los Angeles, New Orleans, and other cities.

But therein lies a damning story of the indelible curse of racism. It was only when the cities were watching their tax bases erode as affluent whites and some privileged blacks fled to suburbs, urban crime rates began to soar, and the public schools were falling into disrepair that the white power structure said: “OK, let’s turn this mess over to a black mayor. And let him have a black police chief and a black superintendent of schools. Let them wrestle with this fucking problem!”

Political leaders moved deliberately to create “black majority” districts–in some cases creating district boundaries that looked absurd. Now politicians who benefited from gerrymandering for decades are screaming that gerrymandering to benefit blacks is unconstitutional. These efforts to rip away the political power blacks have obtained also carry the seeds of violent upheaval.

Then the businessmen who called the shots moved their businesses out of the cities. And Republican Presidents, seeing that our cities were populated more and more by blacks, Hispanics, immigrants legal and mostly illegal, who tended to vote for Democrats, said the big cities could “DROP DEAD!”

The Fair Housing Act of 1968 has never been much more than a joke. Big cities such as Chicago, New York, Detroit, may be more segregated in terms of housing now than was the case twenty-eight years ago.

Jim Crow is maintained as much by bankers and mortgage companies as by hood-wearing white hoodlums. In city after city investigative reporters and others have established the fact that even a black person of exceptional prestige and large financial resources has a more difficult time getting a housing loan than a white applicant with lesser qualifications. The difficulty is magnified if the black applicant is trying to integrate public housing projects in formerly white neighborhoods! In January 1996 we saw the spectacle of FBI agents and U.S. marshals accompanying four black families, including eight children, into the Vidor Village federal housing project in Vidor, Texas, an all-white suburb of Beaumont. The Department of Housing and Urban Development had taken over the project after nine previous black residents were driven out by harassment and threats of violence.

The result is that there is no sense of community that reaches across racial lines. So walls of fear, suspicion, and hatred are maintained. And that makes the unthinkable, a race war in America, possible.

The long-heralded 1954 Supreme Court decision Brown v. Board of Education has failed in many important respects to wipe out Jim Crow in public education and to give blacks the most basic opportunities they were guaranteed forty years ago. The University of Alabama, which once was violently opposed to the admission of any black citizen, can now field a predominantly black football team, or even an all-black basketball team. Cheering fans may think for a moment that racism has vanished. But a visitor to the public schools of Birmingham, Atlanta, Washington, D.C., or Summerton, South Carolina, sees only token integration.

Now, the most pernicious discrimination in public schooling takes place in the North–in the cities such as Boston, Chicago, Detroit. White flight to suburbs, gerrymandering of school district lines, unfair distributions of everything from books, computers, and discretionary funds for teachers have poisoned such relationships as exist between black and white children.

Blacks gained dignity from the Public Accommodations Act and political power from the Voting Rights Act. But the whole truth is that there can be only limited dignity and self-respect for those who live in poverty, and there is only limited political power for Americans who have no money and can afford no lobbyists or political action committees.

The curse of racism was never more evident than in the fact that while some blacks found dignity and political clout and economic opportunity over the last thirty years, the great mass of black Americans have not. And that fact lies at the heart of the breakdown of so many American families, the rise in rage and violent criminal behavior, and the worries about personal safety that we all feel.

In July 1963 unemployment was 5.1 percent for white Americans and 10.2 percent for nonwhites; in July 1993 joblessness was 6.0 for whites and 12.9 for blacks. In 1963 unemployment for white teenagers was 16.5 percent, but 31.2 percent for nonwhites; in 1993 it was 15.6 for white teenagers, but 32.7 percent for blacks. Over all these years you could bet your life that black unemployment would at any time be at least double that for whites. That is how and why black people have become the heart of America’s permanent underclass.

In 1963, people marched on Washington in part to protest the fact that the median income of black families was only 53 percent of the median income of white families. That march provoked social legislation during LBJ’s presidency that lifted black families to the point where they had $64 for every $100 available to the white family. But then came the racist “white blacklash” that wiped out the heart of Johnson’s bid for a “Great Society.” Black family income fell, so today the normal black family has $57 for every $100 available to the normal white family. That is pitiful, tragic “progress.”

No law has provided for blacks and other minorities what ought to be the most basic of civil rights: the opportunity to work and earn a decent living. I have lived through all the promises of urban renewal, the War on Poverty, Community Action programs, Community Development corporations, Model Cities, Community Development block grants, Urban Development action grants, Enterprise Zones, and now “Empowerment Zones.” But no life-changing money went into urban ghettos or the pockets of rural poverty, because slicksters already eating at the federal gravy train found ways to siphon off, or just plain steal, the monies intended to revitalize the most depressed neighborhoods. Ronald Reagan has been out of office for years now, but prosecutors are still trying to convict and imprison all the HUD officials and their co-conspirators who looted that department of billions of dollars on Reagan’s watch.

You ask why, even with all the new evidence of bigotry, greed, exploitation of the underclass, anyone would be upset enough to start a race-class war. White Americans who have not endured the roller-coaster nightmare of political promises and burgeoning hopes, followed by dashed dreams and more of the traditional neglect, deliberate abuse, and institutionalized racism will never understand why some people stop hoping and start fighting.

From the time I was in elementary school in then Jim Crow Tennessee I have heard optimists, the self-styled keepers of “the American dream,” say: “We can never change this generation of adults, but the kids will solve the problem. They haven’t been fed racism in mother’s milk.”

We are sliding headlong into terrible racial conflict that will dwarf the Los Angeles riots precisely because the baby boomers have not grown up devoted to racial equality the way we thought or hoped they would. In fact, white youngsters–the children of the baby boomers–have swallowed more of the stereotypes that engender fear and hatred in recent years than at any time I have known. Thus, when they see that white girls are fornicating promiscuously, with larger and larger percentages getting pregnant out of wedlock, a “social scientist,” Charles Murray, and his mouthpieces can alarm the nation with warnings that white girls have begun to act like black girls.

In his State of the Union address in January 1994, President Clinton exhorted the nation to “remember that even as we say no to crime, we must give people, especially our young people, something to say yes to.” He said, “We must take the guns out of their hands and give them books.”

But white denial makes good steps difficult to achieve. There are only a few white people–the skinheads, assorted Klansmen–who will openly say they are racists. But corporate boardrooms, local governments, education districts, are full of powerful men and women who are virulent bigots but will be come stridently indignant and threaten to sue if someone calls them a racist. So racism thrives, safe behind a curtain of politically correct language. What constructive things have we actually given to the millions of underclass youth that they can say yes to? Not even books. Most readers of this book will have seen on TV numerous times the wretched public schools for blacks in which there are no encyclopedias, only a few termite-ridden books, not even a magnifying glass, let alone a modern piece of scientific equipment.

For almost seven years I have run a scholarship program for black high school seniors, and I have seen needed and deserved grants go to many hundreds of youngsters who display the learning, achievement, and personal integrity manifested by children who have been given a decent chance. But I see, with growing alarm, that millions of the children who can’t get nominated for a Project Excellence scholarship have never been given a fair shake, never been offered even a tiny stake in this society.

White Americans expect blacks to say yes when they get only the backs of white people’s hands.

Do they expect black youth who are desperate for ways to make an honest dollar to say yes to 40 percent or higher unemployment?

Do they expect proud and angry young black men to say yes to a Congress that allocates billions for new prisons but refuses to fund “dead-end” public service jobs? A “dead-end” job is a blessing for all of us compared with the dead people we keep counting in our pockets of unemployment.

We are at the brink of tragic racial strife because young black men have, in shameful numbers, been given prison cells to bolster the pretense that the bureaucrats are making progress in “the war against drugs.” Bureaucrats fired the first salvos in the race war when they let the white kingpins of the drug trade, corrupt cops and sheriffs, and rich drug-buying actors, publishers, athletes, lawyers, and stockbrokers skate free.

For a generation we have seen a law enforcement version of genocide: our failed drug war has incarcerated, or destroyed the reputations of, a fourth of the young black men in this country.

And now we hear a Democratic President, Bill Clinton, endorse “boot camps” for first-time violators of the law. And Newt Gingrich urging a “wartime” stance in which the federal government builds detention camps.

Welcome to the old South Africa and Nazi Germany!

There is a limit to how much oppression black Americans will take, no matter how much comfortable African Americans such as Carl Rowan tell them that they can never match the firepower of national guardsmen, or the troops that would surely be deployed to put down a black rebellion. Surely the Mayan Indians in Mexico’s southern state of Chiapas knew that their Zapatista National Liberation Army was no match for the military power that Mexico’s corrupt then-president Carlos Salinas de Gortari could throw against them. But rage and desperation provoked the Indians to seize San Cristobal de las Casas and other towns and villages, to take over a radio station, bust open a prison, take many hostages, and make it clear that life in Mexico could never be the same. They wouldn’t take it anymore.

If Gingrich and others think 33 million black people will accept his “stockades” in dumb docility, they had better ponder these facts:

* In every war, in every crisis, no group of Americans has been more loyal than African Americans. But the African American potential for destruction is incalculable should even a thousand desperately angry blacks become allies of the foreign terrorists who wish to do great harm to this country. The gates to the new concentration camps will swing shut much too late to stop those who think it is time for rebellion.* There are now five million or more Muslims living in the United States, a million in deeply troubled California alone, and close to a million in New York. Some 42 percent of the Muslim residents are United States-born African Americans. We would be fools to assume that they will listen only to moderate black pacifists. Louis Farrakhan was surely referring to them when he said in Iran that “God will give the Muslims the honor of destroying America.”

Let me reiterate that black involvement in a race war will largely be reactive–a response to deliberate provocations by the soul brothers of William Pierce and the other white supremacists, but also to those “law and order” Americans whose abuses of the criminal justice system drive blacks to say, “We’ve had enough!” It will be for the most part a black-versus-white war, because the rapidly growing Latin American population has not yet quite learned that the paranoiacs who spew forth rhetoric about killing to save the white race have no more respect for brown people than they do for black people. But Hispanics are sure to learn a lot faster than most Americans think. That is why from the White House to Capitol Hill to the largest and smallest city halls in America, there should be no priority greater than making the moves of justice that will prevent a race war.

You are saying, perhaps, that there can’t possibly be provocations that are serious enough to provoke a race war. Then you have no idea of what goes on in America every day. Consider, for example:

Two Days in December

It was December 6, 1995, a routine night at Fort Bragg, near the Fayetteville, North Carolina, home of the fabled 82nd Airborne Division of the U.S. Army. Many of the fifteen thousand members of this elite unit just sat around drinking beer–not yet sobered by the prospect of having to do duty in Bosnia or any other trouble spot.

One small gathering of drinkers included Private James N. Burmeister II, twenty, of Thompson, Pennsylvania, Private Malcolm Wright, twenty-one, of Lexington, Kentucky, and Specialist Randy Lee Meadows, Jr., twenty-one, of Mulkeytown, Illinois–all Caucasians. With each beer, Burmeister spoke with more agitation about wanting to earn his “spider web tattoo”–a symbol that he had committed a murder “for the cause.” The “cause,” later testimony showed, was white supremacy and the right-wing political agenda.

According to police and court records, Burmeister and Wright set out that December night, with Meadows driving, to find some black people to harass. They came upon a black man, Michael James, thirty-six, and a black woman, Jackie Burden, twenty-seven. After racial insults were hurled, one of the military men shot the two blacks to death.

Police arrested Burmeister and Wright on charges of first degree murder. They charged Meadows with two counts of conspiracy to commit murder.

When police searched Burmeister’s rented room, they realized that these were not random, drunken killings. They found a Nazi flag, white-supremacist literature, pamphlets on Adolf Hitler and Nazi Germany, and a videotape of the movie Natural Born Killers. Among the hate literature was a clandestine newsletter published at Fort Bragg called The Resister. A group called “Special Forces Underground” was publishing this newsletter, which in recent issues had railed against the United Nations, opposed United States policy in Haiti, and declared support for “individual rights, strict constitutionalism, limited government, isolationism, laissez-faire capitalism and republicanism.” Police also found a 9mm Ruger that they said was used to execute Mr. James and Ms. Burden.

When Burmeister, Wright, and Meadows admitted that they were skinheads–a neo-Nazi white-supremacy group that in recent years has become increasingly violent across most of the nation–military authorities at Fort Bragg and in Washington were aghast. Could a brutal, racist, revolutionary group have invaded the army and its celebrated “special forces” in such a frightening way? They must have remembered the two army men who had become buddies at Fort Riley, Kansas, and had been accused of bombing a federal building in Oklahoma City on April 19, 1995. And just two months earlier, at Fort Bragg, a sergeant had been charged with a predawn sniper attack on soldiers who were warming up for a morning run. He had killed one member of the 82nd Airborne and wounded eighteen others.

Here were killings far more disturbing than any number of hate-inspired assaults by whites on blacks, Jews, Asians, and homosexuals. Here was a possible cancer within America’s most vital military forces, an affliction of right-wing hatred that would leave everyone, including the President, vulnerable to wanton murder.

Naturally, neither Pentagon nor White House officials wanted to portray the problem as a national security threat. On December 12, Secretary of the Army Togo D. West, Jr., announced a worldwide investigation of the presence of political extremists in army ranks, and a determination to oust from the military the hate groups that seemed to be gaining influence in American life. But West’s announcement was shrouded in a maze of military mumbo jumbo and political caveats about what the country could do or should do about, or to, haters in military uniforms.

The Pentagon said army regulations prohibit soldiers from active participation in groups that espouse supremacist causes, attempt to create illegal discrimination based on race, creed, religion, or sex, or that advocate the use of violence. The Pentagon said soldiers are discouraged, but not prohibited, from merely being members of hate groups, receiving mail from them, or attending their meetings while off duty.

Lieutenant Colonel Kenneth McGraw, spokesman for the Special Operations Command at Fort Bragg, told the media that the extremists who published The Resister and opposed U.S. policies were not in violation of any regulations.

Was anything being said, or planned, that would deter those ready to kill to earn a tattoo? Or even those military men who printed in The Resister things that went to the heart of the army’s ability to fulfill a mission? Such as:

“The U.S. military has become a slave service for the wealth redistribution schemes of internationalists and gangs of weeping do-gooder mystics. One need simply note the circling of media carrion eaters to predict in which third world toilet these altruists will flush hundreds of millions of U.S. tax dollars and the lives of U.S. servicemen. Peacekeeping is a monumental fraud.”

Secretary West said that he believes the extremists of Christian militia mentality or other haters “are not a sizable proportion of our Army.” But the question arises, “How large, how well-organized, do these groups have to be if they have access to army training, army weapons, army secrets?”

Burmeister was not the only unheeded symptom of racial troubles in the military. Race riots had occurred in Korea years before. The navy had had hate-based eruptions on some ships. White members of hate groups on army bases in Germany wrote racial slurs on the cars of black soldiers. Skinhead groups in Colorado armed themselves with guns stolen by sympathizers on military bases.

Sad to say, the upsurge of violent racism in armed groups in America involves more than the United States Army, Navy, and Marine Corps. It now includes every police force in any city and county in America. the National Guard, federal agencies, and even some private “protective” groups.

On that December day in 1995 when Secretary West declared his intention to ferret out the haters in the army, I reacted with pessimism. I explained why with these words:

Do you remember that half a year ago we were shocked by revelations about an orgy of racism by law enforcement officers at a “Good Ol’ Boys Roundup” in Tennessee? White officials and ordinary agents of the FBI, the Secret Service, the Customs Service, the Drug Enforcement Administration, the U.S. Marshals Service, the Internal Revenue Service, the Immigration and Naturalization Service, the Bureau of Prisons, and even the District of Columbia Metropolitan Police would gather in Ocoee, Tenn., hiding behind a “Nigger Check Point,” to get drunk and vent their racism. Employees of the Bureau of Alcohol, Tobacco and Firearms had begun this event, called “sickening” by President Clinton, in 1985.ATF Director John W. Magaw and the heads of the other law enforcement agencies promised investigations in July. Even though there are videotapes of some of their employees attending those “roundups of hatred,” we haven’t seen a single report of any punishment being meted out to anyone.

It’s time we faced the fact that some people–white, black, brown, or whatever–have violent, authoritarian personalities. The only places where they can legally get a gun, bayonet, or baton and occasionally use them to maim or kill is in a law enforcement agency or the military. We know about the crisis they have brought to the policing of America’s cities. We are learning, much too late, of the frightening problems these authoritarians, especially those driven by hate, are bringing to our legitimate military–and to the “militias” that are springing up.

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