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  One hallmark of a failed state is that the crooks are inside the government, using government to protect and to advance their private interests. Another hallmark is rising income inequality as the insiders manipulate economic policy for their enrichment at the expense of everyone else.

  As noted above, income inequality in the US is now extreme. The 2008 Organization for Economic Co-operation and Development (OECD) report, “Income Distribution and Poverty in OECD Countries,” concludes that the US is the country with the highest inequality and poverty rate across the OECD and that since 2000 nowhere has there been such a stark rise in income inequality as in the US. The OECD finds that in the US the distribution of wealth is even more unequal than the distribution of income.

  On October 21, 2009, Business Week highlighted a new report from the United Nations Development Program that concluded that the US ranked third among states with the worst income inequality. As number one and number two, Hong Kong and Singapore, are both essentially city states, not countries, the US actually has the shame of being the country with the most inequality in the distribution of income.

  The stark increase in US income inequality in the 21st century coincides with the offshoring of US jobs, which enriched executives with “performance bonuses” while impoverishing the middle class, and with the rapid rise of unregulated over-the-counter (OTC) derivatives and extraordinary debt leverage, which enriched Wall Street and the financial sector at the expense of everyone else.

  Many critics of the worsening income and wealth distribution place the blame on President George W. Bush’s tax cuts, which were extended by Congress and President Obama. As the richest 1% receive much of their income in the form of capital gains, the reduction in the capital gains tax rate to 15% helped to worsen the inequality. However, the emphasis on taxation ignores the impact that two decades of jobs offshoring has had on the distribution of income and wealth. Taxing the rich cannot redress the loss of income for most Americans caused by moving US jobs offshore and by the conversion of that income into executive pay and shareholder’s capital gains.

  The OECD report shows that the rate of increase in US income inequality declined during the Reagan years despite the tax rate reductions. During the mid-1990s the Gini coefficient (the measure of income inequality) actually fell. Beginning in 2000 with the New Economy (essentially financial fraud and offshoring of US jobs), the Gini coefficient shot up sharply.

  While income and wealth accumulates at the top, millions of Americans have lost their homes and half of their retirement savings, while being loaded up with government debt to bail out the banksters who created the crisis.

  Frontline’s TV broadcast, “The Warning,” documents how Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, Deputy Treasury Secretary Larry Summers, and Securities and Exchange Commission Chairman Arthur Levitt blocked Brooksley Born, head of the Commodity Futures Trading Commission (CFTC), from performing her statutory duties and regulating over-the-counter (OTC) derivatives. http://www.pbs.org/wgbh/pages/frontline/warning/view/

  After the worst crisis in US financial history struck, just as Brooksley Born predicted, a disgraced Federal Reserve Chairman, Alan Greenspan, was summoned out of retirement to explain to Congress his unequivocal assurances that no regulation of derivatives was necessary. Greenspan had even told Congress that regulation of derivatives would be harmful. A pathetic Greenspan had to admit that the free market ideology on which he had relied turned out to have a flaw.

  Greenspan may have bet America’s economy on his free market ideology, but does anyone believe that Rubin and Summers were doing anything other than protecting the enormous fraud-based profits that derivatives were bringing Wall Street? As Brooksley Born stressed, OTC derivatives are a “dark market.” There is no transparency. Regulators have no information on them and neither do purchasers.

  Even after Long Term Capital Management failed in 1998 and had to be bailed out, Greenspan, Rubin, and Summers stuck to their guns. Greenspan, Rubin and Summers, and a gullible Securities and Exchange Commission Chairman, Arthur Levitt, who now regrets that he was the banksters’ dupe, succeeded in manipulating Congress into blocking the CFTC from doing its mandated job. Brooksley Born, prevented by the public’s elected representatives from protecting the public, resigned. Wall Street money simply shoved facts and honest regulators aside, resulting in the financial crisis that hit in 2008 and continues to plague the economy today.

  The financial insiders running the Treasury, White House, and Federal Reserve shifted to taxpayers the cost of the catastrophe that they had created. When the crisis hit, Henry Paulson, appointed by President George W. Bush to be Rubin’s replacement as the Goldman Sachs representative running the US Treasury, hyped fear to obtain from “the people’s representatives” in Congress with no questions asked hundreds of billions of taxpayers’ dollars (TARP money) to bail out Goldman Sachs and the other malefactors of unregulated derivatives.

  When Goldman Sachs announced that it was paying massive six and seven figure bonuses to every employee, public outrage erupted. In defense of banksters, saved with the public’s money, paying themselves bonuses in excess of most people’s life-time earnings, Lord Griffiths, the British Vice Chairman of Goldman Sachs International, said that the public must learn to “tolerate the inequality as a way to achieve greater prosperity for all.”

  In other words, “Let them eat cake.”

  According to the UN report cited above, Great Britain has the 7th most unequal income distribution in the world. After the Goldman Sachs bonuses, the British will move up in distinction, perhaps rivaling Israel for the fourth spot in the hierarchy.

  Despite the absurdity of unregulated derivatives, the high level of public anger, and Greenspan’s confession to Congress that his theory has a flaw, still nothing has been done to regulate derivatives. One of Rubin’s Assistant Treasury Secretaries, Gary Gensler, replaced Brooksley Born as head of the CFTC. Larry Summers was appointed head of President Obama’s National Economic Council. Former Federal Reserve official Timothy Geithner, a Paulson protege, was appointed Treasury Secretary. A Goldman Sachs vice president, Adam Storch, was appointed the chief operating officer of the Securities and Exchange Commission. The Banksters remain in charge.

  Is there another country in which in full public view a handful of insiders so blatantly use government for the enrichment of private interests, with a coterie of “free market” economists available to justify plunder on the grounds that “the market knows best”? A narco-state is bad enough. The US surpasses this horror with its financo-state.

  As Brooksley Born says, if nothing is done “it’ll happen again.”

  But nothing can be done. The crooks have the government.

  Death By Globalism

  Economists have made themselves irrelevant. If you have any doubts, have a look at the 2010 summer issue of the magazine, International Economy, a publication endorsed by former Federal Reserve chairmen Paul Volcker and Alan Greenspan, by Jean-Claude Trichet, former president of the European Central Bank, by former Secretary of State George Shultz, and by the New York Times and Washington Post.

  The main feature is “The Great Stimulus Debate,” which addresses the question: Is the Obama fiscal stimulus helping the economy or hindering it? Princeton economics professor and New York Times columnist Paul Krugman and Moody’s Analytics chief economist Mark Zandi represent the Keynesian view that government deficit spending is needed to lift the economy out of recession. Zandi declares that thanks to the fiscal stimulus, “The economy has made enormous progress since early 2009,” a mistaken opinion shared by the President Obama’s Council of Economic Advisors and the Congressional Budget Office.

  The opposite view, associated with Harvard economics professor Robert Barro and with European economists, such as Francesco Giavazzi and Marco Pagano and the European Central Bank, is that government budget surpluses achieved by cutting government spending spur the economy by reducing the ratio
of debt to Gross Domestic Product. This is the “let them eat cake school of economics.”

  Barro says that fiscal stimulus has no effect, because people anticipate the future tax increases implied by government deficits and increase their personal savings to offset the added government debt. Giavazzi and Pagano reason that since fiscal stimulus does not expand the economy, fiscal austerity consisting of higher taxes and reduced government spending could be the cure for unemployment.

  If one overlooks the real world and the need of life for sustenance, one can become engrossed in this debate. However, the minute one looks out the window upon the world, one realizes that cutting Social Security, Medicare, Medicaid, food stamps, and housing subsidies is a certain path to death by starvation, curable diseases, and exposure when 15 million or more Americans have lost jobs, medical coverage, and homes. Although some proponents of this anti-Keynesian policy deny that it results in social upheaval, Gerald Celente’s observation is closer to the mark: “When people have nothing left to lose, they lose it.”

  The Krugman Keynesian school is just as deluded. Neither side in “The Great Stimulus Debate” has a clue that the problem for the U.S. is that a large chunk of U.S. GDP and the jobs, incomes, and careers associated with it, have been moved offshore and given to Chinese, Indians, and others with low wage rates. Corporate profits have soared, while job prospects for the middle class have been eliminated.

  The offshoring of American jobs resulted from (1) Wall Street pressures on corporations for “higher shareholder earnings,” that is, for more profits, and from (2) no-think economists, such as the ones engaged in the debate over fiscal stimulus, who mistakenly associate globalism with free trade instead of with its antithesis--the pursuit of lowest factor cost abroad or absolute advantage.

  As economists assume, incorrectly, that free trade is always mutually beneficial, economists have failed to examine the devastatingly harmful effects of offshoring. The more intelligent among them who point it out are dismissed as “protectionists.”

  The reason fiscal stimulus cannot rescue the U.S. economy has nothing to do with the difference between Barro and Krugman. It has to do with the fact that a large percentage of high-productivity, high-value-added jobs and the middle class incomes and careers associated with them have been given to foreigners. What used to be U.S. GDP is now Chinese, Indian, and other country GDP. When the jobs have been shipped overseas, fiscal stimulus cannot put unemployed workers back to work.

  The “let them eat cake school” is equally off the mark. As jobs, investment, research and development have been moved offshore, cutting the social safety net simply drives the domestic population deeper in the ground. Americans cannot pay their mortgages, car payments, tuition, utility bills, or for that matter, any bill, based on Chinese and Indian pay scales. Therefore, Americans are priced out of the labor market and become dependencies of the federal budget. “Fiscal consolidation” means writing off large numbers of humans.

  During the Great Depression, many wage and salary earners were new members of the labor force arriving from family farms, where many parents and grandparents still supported themselves. When their city jobs disappeared, many could return to the farm.

  Today farming is in the hands of agri-business corporations. There are no farms to which the unemployed can return.

  The “let them eat cake school” never mentions the one point in its favor. The US, with all its huffed up power and importance, depends on the US dollar as reserve currency. It is this role of the dollar that allows America to pay for its imports in its own currency. For a country whose trade is as unbalanced as America’s, the reserve currency privilege keeps the country afloat.

  The threats to the dollar’s role are the budget and trade deficits. Both are so large and have accumulated for so long that the ability to make good on them is in doubt. As I have written for a number of years, the US is so heavily dependent on the dollar as reserve currency that the US must have as its main policy goal to preserve the dollar in that role. Otherwise, the US, an import-dependent country, will be unable to pay for its excess of imports over its exports.

  “Fiscal consolidation,” the new term for austerity, could save the dollar. However, unless starvation, homelessness and social upheaval are acceptable consequences, the austerity must fall on the military budget. America cannot afford its multi-trillion dollar wars that serve only to enrich those invested in the armaments industries. The U.S. cannot afford the neoconservative dream of world hegemony and a conquered Middle East open to Israeli colonization.

  Is anyone surprised that not a single proponent of the “let them eat cake school” mentions cutting military spending? Entitlements (Social Security and Medicare), despite the fact that they are paid for by earmarked payroll taxes and have been in surplus since the Reagan administration, are always what economists put on the chopping bloc.

  Where do the two schools stand on inflation vs. deflation? We don’t have to worry. Martin Feldstein, one of America’s pre-eminent economist says: “The good news is that investors should worry about neither.” His explanation epitomizes the insouciance of American economists.

  Feldstein says that there cannot be inflation because of the high rate of unemployment and the low rate of capacity utilization. Thus, “there is little upward pressure on wages and prices in the United States.”

  As for deflation, no risk there either. The huge deficits prevent deflation, “so the good news is that the possibility of significant inflation or deflation during the next few years is low on the list of economic risks faced by the U.S. economy and by financial investors.”

  What we have in front of us is an unaware economics profession. There might be some initial period of deflation as a result of weak consumer demand. The deflation would be short lived, because the prospect of financing a $1.5 trillion annual deficit evaporates once individual investors complete their flight from the stock market into “safe” government bonds, once the hyped Greek, Spanish, and Italian sovereign debt crises have driven investors out of euros into dollars, and once the banks’ excess reserves created by the bailout have been used up in the purchase of Treasuries.

  Then what finances the deficit? Who purchases the next $1.5 trillion tranche of US Treasuries in order to cover the budgetary red ink? Don’t look for an answer from either side of The Great Stimulus Debate. Economists haven’t a clue despite the fact that the answer is obvious.

  The Federal Reserve will monetize the federal government deficit. The result of printing money in the absence of employment opportunities will be to combine high inflation with high unemployment. This would be economic armageddon. The no-think economics establishment has no policy response for such an event.

  Economists who have spent their professional lives rationalizing “globalism” as good for America have no idea of the disaster that they have wrought.

  PART THREE

  The End Of Sovereignty

  The European sovereign debt crisis is being used to achieve three goals: to protect bankers from their mistakes by passing the cost to the European peoples; to change the rules under which the European Central Bank operates; and to terminate the economic and political sovereignty of the European Union member countries.

  The European financial crisis originated with Wall Street’s marketing of junk financial instruments with fraudulent investment grade ratings. Goldman Sachs used Enron-style accounting to hide the extent of Greece’s public debt so that the Greek government could continue to borrow within the EU rules. When it was discovered that German, French, and Dutch banks held not only Wall Street’s junk “securities,” but also Greek, Spanish, Italian, Irish, and Portuguese (PIIGS) sovereign debt in excess of what the countries could service, the second stage of the debt crisis hit.

  The US and the UK are countries with their own currencies, and their central banks can create money in order to extend credit to the governments. In contrast, members of the European Union share a common currency. The central bank
s of the member countries cannot create euros in order to serve as creditors to the governments. European Union member governments are dependent on private banks to finance their deficits.

  The EU has rules governing the permissible size of member countries’ budget deficits. However, a number of member countries have succeeded in evading the limits. The European Central Bank (ECB) is prohibited by its charter from financing the deficits of member countries. Regardless of the rules, the sovereign debt crisis has caused the ECB to assent to bailout schemes that violate its charter by requiring the ECB to lend in support of Greek sovereign debt.

  The initial response to the Greek sovereign debt crisis was to prevent the private German, French, and Dutch banks from losing any money. Instead of restructuring and writing down part of Greece’s public debt, the decision was made to impose severe austerity on the Greek population. Wages, pensions, and employment were reduced, and Greece was told to sell its state lottery, municipal water companies, and the country’s ports. Islands that are part of the national heritage would be sold to real estate developers. The funds expected from the austerity and privatization package would be used to repay the ECB and IMF for loans that enable the Greek government to repay the private banks.