The World Is a Battlefield: Jeremy Scahill on "Dirty Wars" and Obama"s Expanding Drone Attacks

JEREMY SCAHILL: I called it Dirty Wars because, you know, particularly in this administration, in the Obama administration, I think a lot of people are being led to believe that there’s—there is a such thing as a clean war and that the drone and what’s called targeted killing—I mean, I use that term myself, but it’s actually not—if you think about it, it’s actually not a very appropriate term for what’s going on, because it’s—as we know, these strikes are anything but targeted, in many cases, and we don’t know the—we don’t even know the identities of many of the people that we’re killing in intentional strikes. So, I called it Dirty Wars because there is no such thing as a clean war, and drone warfare is not clean, but also as a sort of allusion to how we’ve returned to the kind of 1980s way of waging war, where the U.S. was involved in all these dirty wars in Central and Latin America, in Guatemala, Nicaragua, Honduras, and beyond. And we’re using—you know, we’re in a world right now where the U.S. is using proxies, that effectively are death squads, in Somalia to hunt down people that the U.S. has determined are enemies. We’re using mercenaries. President Obama continues to use mercenary forces in various wars, declared and undeclared, around the world. You also have the aiding of dictatorships and other, you know, right-wing governments around the world and propping them up. It’s very similar to what Reagan and company were doing in Central America.

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The World Is a Battlefield: Jeremy Scahill on "Dirty Wars" and Obama"s Expanding Drone Attacks

Noam Chomsky: How Close the World Is to Nuclear War

A powerful excerpt from the new book, "Nuclear War and Environmental Catastrophe."

The following is an excerpt from the new book Nuclear War and Environmental Catastrophe, by Noam Chomsky and Laray Polk, which takes the form of a series of interviews with MIT Professor Noam Chomsky (Seven Stories, 2013).

Laray Polk:What immediate tensions do you perceive that could lead to nuclear war? How close are we?

Noam Chomsky:Actually, nuclear war has come unpleasantly close many times since 1945. There are literally dozens of occasions in which there was a significant threat of nuclear war. There was one time in 1962 when it was very close, and furthermore, it’s not just the United States. India and Pakistan have come close to nuclear war several times, and the issues remain. Both India and Pakistan are expanding their nuclear arsenals with US support. There are serious possibilities involved with Iran—not Iranian nuclear weapons, but just attacking Iran—and other things can just go wrong. It’s a very tense system, always has been. There are plenty of times when automated systems in the United States— and in Russia,it’s probably worse—have warned of a nuclear attack which would set off an automatic response except that human intervention happened to take place in time, and sometimes in a matter of minutes. That’s playing with fire. That’s a low-probability event, but with low-probability events over a long period, the probability is not low.

There is another possibility that, I think, is not to be dismissed: nuclear terror. Like a dirty bomb in New York City, let’s say. It wouldn’t take tremendous facility to do that. I know US intelligence or people like Graham Allison at Harvard who works on this, they regard it as very likely in the coming years—and who knows what kind of reaction there would be to that. So, I think there are plenty of possibilities. I think it is getting worse. Just like the proliferation problem is getting worse. Take a couple of cases: In September 2009, the Security Council did pass a resolution, S/RES/1887, which was interpreted here as a resolution against Iran. In part it was, but it also called on all states to join the Non-Proliferation Treaty. That’s three states: India, Pakistan, and Israel. The Obama administration immediately informed India that this didn’t apply to them; it informed Israel that it doesn’t apply to them.

If India expands its nuclear capacity, Pakistan almost has to; it can’t compete with India with conventional forces. Not surprisingly, Pakistan developed its nuclear weapons with indirect US support. The Reagan administration pretended they didn’t know anything about it, which of course they did. India reacted to resolution 1887 by announcing that they could now produce nuclear weapons with the same yield as the superpowers. A year before, the United States had signed a deal with India, which broke the pre-existing regime and enabled the US to provide them with nuclear technology—though they hadn’t signed the Non-Proliferation Treaty. That’s in violation of congressional legislation going back to India’s first bomb, I suppose around 1974 or so. The United States kind of rammed it through the Nuclear Suppliers Group, and that opens a lot of doors. China reacted by sending nuclear technology to Pakistan. And though the claim is that the technology for India is for civilian use, that doesn’t mean much even if India doesn’t transfer that to nuclear weapons. It means they’re free to transfer what they would have spent on civilian use to nuclear weapons.

And then comes this announcement in 2009 that the International Atomic Energy Agency has been repeatedly trying to get Israel to open its facilities to inspection. The US along with Europe usually has been able to block it. And more significant is the effort in the international agencies to try to move toward a nuclear-weapon-free zone in the Middle East, which would be quite significant.6 It wouldn’t solve all the problems, but whatever threat Iran may be assumed to pose—and that’s a very interesting question in itself, but let’s suppose for the moment that there is a threat—it would certainly be mitigated and might be ended by a nuclear-weapon-free zone, but the US is blocking it every step of the way.

Laray Polk: Now that Iran’s reactor at Bushehr is running, the current fear is that they’re going to use the plutonium produced from the fuel cycle to make weapons. The questions raised about Iran’s possible nuclear weapons program are similar to those asked of Israel–

Noam Chomsky:Since the 1960s. And in fact, the Nixon administration made an unwritten agreement with Israel that it wouldn’t do anything to compel Israel, or even induce them, to drop what they call their ambiguity policy—not saying whether or not they have them. That’s now very alive because there’s this regular five-year Non-Proliferation Review Conference.In 1995, under strong pressure from the Arab states, Egypt primarily, there was an agreement that they would move toward a nuclear-weapon-free zone and the Clinton administration signed on. It was reiterated in 2000. In 2005 the Bush administration just essentially undermined the whole meeting. They basically said, “Why do anything?”

It came up again in May 2010. Egypt is now speaking for the Non-Aligned Movement, 118 countries, they’re this year’s representative, and they pressed pretty hard for a move in that direction. The pressure was so strong that the United States accepted it in principle and claims to be committed to it, but Hillary Clinton said the time’s “not ripe for establishing the zone.” And the administration just endorsed Israel’s position, essentially saying, “Yes, but only after a comprehensive peace agreement in the region,” which the US and Israel can delay indefinitely. So, that’s basically saying, “it’s fine, but it’s never going to happen.” And this is barely ever reported, so nobody knowsabout it. Just as almost nobody knows about Obama informing India and Israel that the resolutions don’t apply to them. All of this just increases the risk of nuclear war.

It’s more than that actually. You know, the threats against Iran are nontrivial and that, of course, induce them to move toward nuclear weapons as a deterrent. Obama in particular has strongly increased the offensive capacity that the US has on the island of Diego Garcia, which is a major military base they use for bombing the Middle East and Central Asia. In December 2009, the navy dispatched a submarine tender for nuclear submarines in Diego Garcia. Presumably they were already there, but this is going to expand their capacity, and they certainly have the capacity to attack Iran with nuclear weapons. And he also sharply increased the development of deep-penetration bombs, a program that mostly languished under the Bush administration. As soon as Obama came in, he accelerated it, and it was quietly announced—but I think not reported here—that they put a couple of hundred of them in Diego Garcia. That’s all aimed at Iran. Those are all pretty serious threats.

Actually, the question of the Iranian threat is quite interesting. It’s discussed as if that’s the major issue of the current era. And not just in the United States, Britain too. This is “the year of Iran,” Iran is the major threat, the major policy issue. It does raise the question: What’s the Iranian threat? That’s never seriously discussed, but there is an authoritative answer, which isn’t reported. The authoritative answer was given by the Pentagon and intelligence in April 2010; they have an annual submission to Congress on the global security system, and of course discussed Iran. They made it very clear that the threat is not military. They said Iran has very low military spending even by the standards of the region; their strategic doctrine is completely defensive, it’s designed to deter an invasion long enough to allow diplomacy to begin to operate; they have very little capacity to deploy force abroad. They say if Iran were developing nuclear capability, which is not the same as weapons, it would be part of the deterrent strategy,which is what most strategic analysts take for granted, so there’s no military threat. Nevertheless, they say it’s the most significant threat in the world. What is it? Well, that’s interesting. They’re trying to extend their influence in neighboring countries; that’s what’s called destabilizing. So if we invade their neighbors and occupy them, that’s stabilizing. Which is a standard assumption. It basically says, “Look, we own the world.” And if anybody doesn’t follow orders, they’re aggressive.

In fact, that’s going on with China right now. It’s been a kind of a hassle, also hasn’t been discussed much in the United States—but is discussed quite a lot in China, about control of the seas in China’s vicinity. Their navy is expanding, and that’s discussed here and described as a major threat. What they’re trying to do is to be able to control the waters nearby China—the South China Sea,Yellow Sea, and so on—and that’s described here as aggressive intent. The Pentagon just released a report on the dangers of China. Their military budget is increasing; it’s now one-fifth what the US spends in Iraq and Afghanistan, which is of course a fraction of the military budget. Not long ago, the US was conducting naval exercises in the waters off China. China was protesting particularly over the plans to send an advanced nuclear- powered aircraft carrier, the USS George Washington, into those waters,which, according to China, has the capacity to hit Beijing with nuclear weapons—and they didn’t like it. And the US formally responded by saying that China is being aggressive because they’re interfering with freedom of the seas. Then, if you look at the strategic analysis literature, they describe it as a classic security dilemma where two sides are in a confrontation. Each regards what it’s doing as essential to its security and regards the other side as threatening its security, and we’re supposed to take the threat seriously. So if China is trying to control waters off its coast, that’s aggression and it’s harming our security. That’s a classic security dilemma. You could just imagine if China were carrying out naval exercises in the Caribbean—in fact, in the mid-Pacific—it would be considered intolerable. That’s very much like Iran. The basic assumption is “We own the world,” and any exercise of sovereignty within our domains, which is most of the world, is aggression.

Laray Polk: Is there any type of nuclear racism involved in these issues?

Noam Chomsky: I think it would be the same if there were no nuclear weapons. I mean, it goes back to long-term planning assumptions, and I don’t really think it’s racism. Let’s take a concrete case. We have a lot of internal documents now, some interesting ones from the Nixon years. Nixon and Kissinger, when they were planning to overthrow the government of Chile in 1973, their position was that this government’s intolerable, it’s exercising its sovereignty, it’s a threat to us, so it has to go.14 It’s what Kissinger called a virus that might spread contagion elsewhere, maybe into southern Europe—not that Chile would attack southern Europe—but that a successful, social democratic parliamentary system would send the wrong message to Spain and Italy. They might be inclined to try the same, it would mean its contagion would spread and the system falls apart. And they understood that, in fact stated that, if we can’t control Latin America, how are we going to control the rest of the world? We at least have to control Latin America. There was some concern—which was mostly meaningless, but it was there—about a Soviet penetration into Latin America, and they recognized that if Europe gets more involved in Latin America, that would tend to deter any Soviet penetration, but they concluded the US couldn’t allow that because it would interfere with US dominance of the region. So, it’s not racist. It’s a matter of dominance.

In fact, the same is happening with NATO. Why didn’t NATO disappear after the Soviet Union collapsed? If anybody read the propaganda, they’d say, “Well, it should have disappeared, it was supposed to protect Europe from the Russian hordes.” Okay, no more Russian hordes, so it should disappear. It expanded in violation of verbal promises to Gorbachev. And it expanded, I think, largely in order to keep Europe under control. One of the purposes of NATO all along was to prevent Europe from moving in an independent path, maybe a kind of Gaullist path, and they had to expand NATO to make sure that Europe stays a vassal. If you look back to the planning record during the Second World War, it’s very instructive. It’s almost never discussed, but there were high-level meetings from 1939 to 1945 under the Roosevelt administration, which sort of planned for the postwar years. They knew the United States would emerge from the war at least very well off and maybe completely triumphant. They didn’t know how much at first. The principles that were established were very interesting and explicit, and later implemented. They devised the concept of what they called the Grand Area, which the US must dominate. And within the Grand Area, there can be no exercise of sovereignty that interferes with US plans—explicit, almost those words. What’s the Grand Area? Well, at a minimum, it was to include the entire Western Hemisphere, the entire Far East, and the whole British Empire—former British Empire—which, of course, includes the Middle East energy resources. As one high-level advisor later put it: “If we can control Middle East energy, we can control the world.” Well, that’s the Grand Area.

As the Russians began to grind down the German armies after Stalingrad, they recognized that Germany was weakened—at first, they thought that Germany would emerge from the war as a major power. So the Grand Area planning was extended to as much of Eurasia as possible, including at least Western Europe, which is the industrial-commercial center of the region. That’s the Grand Area, and within that area, there can be no exercise of sovereignty. Of course, they can’t carry it off.

For example, China is too big to push around and they’re exercising their sovereignty. Iran is trying, it’s small enough so you can push them around—they think so. Even Latin America is getting out of control. Brazil was not following orders. And, in fact, a lot of South America isn’t, and the whole thing is causing a lot of desperation in Washington. You can see it if you look at the official pronouncements. China is not paying attention to US sanctions on Iran. US sanctions on Iran have absolutely no legitimacy. It’s just that people are afraid of the United States. And Europe more or less goes along with them, but China doesn’t. They disregard them. They observe the UN sanctions, which have formal legitimacy but are toothless, so they’re happy to observe them. The major effect of the UN sanctions is to keep Western competitors out of Iran, so they can move in and do what they feel like. The US is pretty upset about it. In fact, the State Department issued some very interesting statements, interesting because of their desperate tone. They warned China that, this is almost a quote, “if you want to be accepted into the international community, you have to meet your international responsibilities, and the international responsibilities are to follow our orders.” You can see both the desperation in US planning circles and you can kind of imagine the reaction of the Chinese foreign office, they’re probably laughing, you know, why should they follow US orders? They’ll do what they like.

They’re trying to recover their position as a major world power. For a long time they were the major world power before what they call the “century of humiliation.” They are now coming back to a three-thousand-year tradition of being the center of the world and dismissing the barbarians. So, okay, “we’ll just go back to that and the US can’t do anything about it,” which is causing enormous frustration. That’s why they get terribly upset when China doesn’t observe US sanctions on Iran. By now it’s not China and Iran that are isolated on Iran sanctions; it’s the United States that’s isolated. The nonaligned countries—118 countries, most of the world—have always supported Iran’s right to enrich uranium, still do. Turkey recently constructed a pipeline to Iran, so has Pakistan. Turkey’s trade with Iran has been going way up, they’re planning to triple it the next few years. In the Arab world, public opinion is so outraged at the United States that a real majority now favors Iran developing nuclear weapons, not just nuclear energy. The US doesn’t take that too seriously, they figure that dictatorships can control the populations. But when Turkey’s involved or, certainly, when China’s involved, it becomes a threat. That’s why you get these desperate tones. Apart from Europe, almost nobody’s accepting US orders on this. Brazil’s probably the most important country in the South. Not long ago, Brazil and Turkey made a deal with Iran for enriching a large part of the uranium; the US quickly shot that down. They don’t want it, but the world is just hard to control. The Grand Area planning was okay at the end of the Second World War when the US was overwhelmingly dominant, but it has been kind of fractured ever since—and during the last few years, considerably. And I think this is related to the proliferation issues. The US is strongly supporting India and Israel, and the reason is they’ve now turned India into a close strategic ally—Israel always was. India, on the other hand, is playing it pretty cool. They’re also improving their relations with China.

Laray Polk:President Obama recently secured military basing rights in Australia and formed a new free-trade pact, the Trans-Pacific Partnership, which excludes China. Is this move related to the South China Sea?

Noam Chomsky:Yes, in particular that, but it’s more general. It has to do with the “classic security dilemma” that I mentioned before, referring to the strategic analysis literature. China’s efforts to gain some measure of control over nearby seas and its major trade routes are inconsistent with what the US calls “freedom of the seas”—a term that doesn’t extend to Chinese military maneuvers in the Caribbean or even most of the world’s oceans, but does include the US right to carry out military maneuvers and establish naval bases everywhere.For different reasons, China’s neighbors are none too happy about its actions, particularly Vietnam and the Philippines, which have competing claims to these waters, but others as well. The focus of US policy is slowly shifting from the Middle East—though that remains—to the Pacific, as openly announced. That includes new bases from Australia to South Korea (and a continuing and very significant conflict over Okinawa), and also economic agreements, called “free-trade agreements,” though the phrase is more propaganda than reality, as in other such cases. Much of it is a system to “contain China.”

Laray Polk:To what degree are current maritime sovereignty disputes related to oil and gas reserves?

In part. There are underseas fossil-fuel resources, and a good deal of contention among regional states about rights to them. But it"s more than that. The new US base on Jeju Island in South Korea, bitterly protested by islanders, is not primarily concerned with energy sources. Other issues have to do with Malacca Straits, China"s main trade route, which does involve oil and gas but also much else.

In the background is the more general concern over parts of the world escaping from US control and influence, the contemporary variant of Grand Area policies. Much of this extends the practice of earlier hegemonic powers, though the scale of US post-World War II planning and implementation has been in a class by itself because of its unique wealth and power.

Reprinted with permission from Seven Stories Press. Copyright 2013 — All Rights Reserved

 

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Noam Chomsky: How Close the World Is to Nuclear War

Guest Post: Unintended Consequences Are Increasing World Demand For Gold

Submitted by Chris Martenson of Peak Prosperity,

With the financial experts claiming, some gleefully, that gold has “lost its safe haven status” in the aftermath of its biggest tumble in 30 years, many commentators thought (hoped?) that the dramatic price drop would steer people away from gold ownership. To my eyes, the past week has all the earmarks of a high-gloss propaganda campaign complete with well-placed anti-gold stories in the media and the careful use of language aimed at sowing doubt about gold’s ability to be a store of wealth.

But for those who consider gold a store of value, the recent gold slam is a gift: an invitation to purchase more sound money with fewer units of paper currency. In other words, a sweet deal.  Gold and silver on sale and the world is taking advantage.

As predicted last Friday, I wrote, “[k]nowing the lower prices will only exacerbate this West-to-East flow [of gold], I therefore thought that the bullion banks and central banks would not have dared push that dynamic any further.”

Well, by all accounts, the flow of gold from West to East is now accelerating.

Gold Rout Heralds ‘Hot’ Indian Wedding Jewelry Season

Apr 16, 2013

 

Bullion tumbled 9.1 percent yesterday, the biggest loss since 1983, and that may make the precious metal more affordable to Indians, said Mehul Choksi, chief executive officer of Gitanjali, the nation’s biggest retailer of jewelry and diamonds by sales. The plunge has already revived interest among retail buyers, said Rajesh Mehta, chairman of Rajesh Exports Ltd.

 

“The season is very hot for buying” with weddings and other auspicious dates coming up, Choksi said. “The decline will be positive for jewelry as there will be a pick-up in demand because affordability will increase. Volumes will increase.”

 

“We rushed to buy as soon as we saw prices fall so much and decided to buy jewelry early for our daughter’s wedding in January,” said Blossom D’souza, while browsing through a selection of bangles in a jewelry store in Mumbai’s Chira Bazaar area. “Now we can buy more gold within our budget.”

Doh! Unintended consequences are piling up already, as people in India gleefully accumulate more gold at lower prices. 

And this, regarding Australia:

The Perth Mint reports that retail customers are increasing purchases at a record rate even as gold slumps to a 21 month low.  As the experts were proclaiming the “Death of Gold”, the Perth Mint website recorded the highest activity of the year and one of the best days of the past year.

 

Bargain prices on gold and silver have greatly increased the demand for physical gold and silver by the public.  Demand for gold coins have [sic] skyrocketed with sales of Australian gold bullion coins increasing by 48% in the first quarter over the comparable prior year period.

(Source)

A couple of mainstream media reports linked the gold slam to increased selling by Japanese investors, those ideas turned out to be either speculative, premature, or both:

As global price slumps, “Abenomics” risks drive Japan gold bugs

Apr 16, 2013

 

(Reuters) – When he woke up to news of a collapse in gold prices, Yujiro Yamashita, 63, made his way to Tokyo’s posh Ginza district to buy the precious metal for the first time in 20 years.

 

Yamashita and other contrarian, individual Japanese investors understand that gold is a volatile investment, but say that buying the precious metal is better than the alternatives.

 

A week ago, as the yen-denominated price neared a new peak, jewelry stores and gold merchants across Japan saw long lines of mostly older Japanese looking to cash in on unwanted jewelry and other items that they had held for years.

 

But on Tuesday, buyers outnumbered sellers by a wide margin. At Ginza Tanaka, the headquarters shop of Tanaka Holdings, gold buyers waited for as long as three hours for a chance to complete a transaction.

 

Nearby at Ginza SGC, a gold merchant, buyers had taken about 6 kg (13 lbs) of gold home by early afternoon on Tuesday. In one case, a 60-year-old man, who asked not to be identified, walked out of the store with 500 grams of gold for about 2.2 million yen ($ 22,500).

Meanwhile, the Chinese and Thai, too, are rushing to buy gold as a consequence of the new, lower gold prices, with high sales volumes and shortages being widely reported.

So this is a fairly large story that can be summarized in basic Econ 101 terms: Supply, demand, and prices are all interrelated.  Drop prices and demand increases, which then lowers supply.

In the U.S., all of the dealers I talk to are reporting huge demand and brisk buying. Silver in any form is quite hard to come by unless you want to pay premiums of 20%+ per ounce above spot price. Delivery times are 5 to 6 weeks out now – that’s an unusual situation.  If this recent slam was designed to scare people away from gold, it did not have that desired outcome; in fact, just the opposite.

To Make Matters Worse

There were numerous oddities in the timing of the gold and silver slam of the past week, and among them were two notable developments in the supply chain. Recall that the gold and silver carnage began on a Friday morning (4/12/13).

The Wednesday prior to that fateful Friday morning, one wall of the Bingham Canyon mine began to shift more rapidly. So they took personnel safety precautions, moved construction equipment out of the way, and prepared for a major ground slide event. At 9:30 PM on Wednesday, that wall gave way, sloughing tens of millions of cubic meters of earth into the operating pit:

Bingham Canyon produces some 400,000 ounces of gold and nearly 3 million ounces of silver on a yearly basis as byproducts of copper mining. It will be several years before the mine is back up to full operating capacity.

Normally, the news of a major mine being taken off line is a bullish sign for the associated commodity, but not in this case. On that same Wednesday gold and silver both went down in price. So the market completely discounted the news.

Coincidentally, also on Wednesday (4/10/13), the Chilean supreme court suspended Barrick Gold’s Pascua Lama mine over a variety of environmental and social concerns, and that project got relegated to years of litigation. This is a huge mine project with probable reserves of over 18 million ounces of gold and 700 million ounces of silver.  It is now completely halted and will remain so as lawyers battle things out in a process that most think will be several years long.

So current and future production of gold and silver took hits last week right before the big price drops. Perhaps this is just a very strange set of related events, but the incongruity and timing cause me to lean towards what Robert Di Niro said in the spy thriller Ronin: There is no such thing as coincidence.

At any rate, whatever the case may be coincidence or not, future supply of gold and silver will be lower than we thought as recently as Tuesday of last week.

Something Is Burning

There has been a lot of speculation about why gold was hit so hard. The theories range from it being “just one of those things” (i.e., normal market behavior) to an orchestrated attack to drive down the price of bullion. I happen to fall into that latter camp and summarized my thinking in why gold is being attacked in yesterday’s report, This Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks.

An important question to ask in the face of such attacks is Qui bono? Who benefits from dropping the price so dramatically and breaking faith in the precious metals as a safe haven?

The Internet is swirling these days with rumors of a near inventory failure at the LBMA (London Bullion Market Association), a ‘too big to fail bank’ of a large sovereign country in Europe that’s teetering, that needed protection against its derivative exposure. One of these could be true – perhaps all of them might be; I honestly don’t know yet. We have imperfect vision into markets these days, and these are each developments that the central powers would be doing their utmost to shield from our view.

But there’s certainly a lot of smoke in the air surrounding the precious metals, and as the adage goes, where there’s smoke, there’s fire.

In Part II: Why There May Be a Lot Less Gold Than We Realize, we explore a particularly interesting possible reason for the suppression of the precious metals. A recent report issued by Sprott Asset Management calculates that the U.S. has silently exported a massive amount of its gold reserves over the past two decades.

If accurate, it puts the long-term manipulation of the gold and silver markets into context. And it gives a reason for why breaking faith in the precious metals at this time would be an important objective. 

Click here to read Part II of this report (free executive summary; enrollment required for full access).

Zero Hedge

Guest Post: Unintended Consequences Are Increasing World Demand For Gold

Guest Post: Unintended Consequences Are Increasing World Demand For Gold

Submitted by Chris Martenson of Peak Prosperity,

With the financial experts claiming, some gleefully, that gold has “lost its safe haven status” in the aftermath of its biggest tumble in 30 years, many commentators thought (hoped?) that the dramatic price drop would steer people away from gold ownership. To my eyes, the past week has all the earmarks of a high-gloss propaganda campaign complete with well-placed anti-gold stories in the media and the careful use of language aimed at sowing doubt about gold’s ability to be a store of wealth.

But for those who consider gold a store of value, the recent gold slam is a gift: an invitation to purchase more sound money with fewer units of paper currency. In other words, a sweet deal.  Gold and silver on sale and the world is taking advantage.

As predicted last Friday, I wrote, “[k]nowing the lower prices will only exacerbate this West-to-East flow [of gold], I therefore thought that the bullion banks and central banks would not have dared push that dynamic any further.”

Well, by all accounts, the flow of gold from West to East is now accelerating.

Gold Rout Heralds ‘Hot’ Indian Wedding Jewelry Season

Apr 16, 2013

 

Bullion tumbled 9.1 percent yesterday, the biggest loss since 1983, and that may make the precious metal more affordable to Indians, said Mehul Choksi, chief executive officer of Gitanjali, the nation’s biggest retailer of jewelry and diamonds by sales. The plunge has already revived interest among retail buyers, said Rajesh Mehta, chairman of Rajesh Exports Ltd.

 

“The season is very hot for buying” with weddings and other auspicious dates coming up, Choksi said. “The decline will be positive for jewelry as there will be a pick-up in demand because affordability will increase. Volumes will increase.”

 

“We rushed to buy as soon as we saw prices fall so much and decided to buy jewelry early for our daughter’s wedding in January,” said Blossom D’souza, while browsing through a selection of bangles in a jewelry store in Mumbai’s Chira Bazaar area. “Now we can buy more gold within our budget.”

Doh! Unintended consequences are piling up already, as people in India gleefully accumulate more gold at lower prices. 

And this, regarding Australia:

The Perth Mint reports that retail customers are increasing purchases at a record rate even as gold slumps to a 21 month low.  As the experts were proclaiming the “Death of Gold”, the Perth Mint website recorded the highest activity of the year and one of the best days of the past year.

 

Bargain prices on gold and silver have greatly increased the demand for physical gold and silver by the public.  Demand for gold coins have [sic] skyrocketed with sales of Australian gold bullion coins increasing by 48% in the first quarter over the comparable prior year period.

(Source)

A couple of mainstream media reports linked the gold slam to increased selling by Japanese investors, those ideas turned out to be either speculative, premature, or both:

As global price slumps, “Abenomics” risks drive Japan gold bugs

Apr 16, 2013

 

(Reuters) – When he woke up to news of a collapse in gold prices, Yujiro Yamashita, 63, made his way to Tokyo’s posh Ginza district to buy the precious metal for the first time in 20 years.

 

Yamashita and other contrarian, individual Japanese investors understand that gold is a volatile investment, but say that buying the precious metal is better than the alternatives.

 

A week ago, as the yen-denominated price neared a new peak, jewelry stores and gold merchants across Japan saw long lines of mostly older Japanese looking to cash in on unwanted jewelry and other items that they had held for years.

 

But on Tuesday, buyers outnumbered sellers by a wide margin. At Ginza Tanaka, the headquarters shop of Tanaka Holdings, gold buyers waited for as long as three hours for a chance to complete a transaction.

 

Nearby at Ginza SGC, a gold merchant, buyers had taken about 6 kg (13 lbs) of gold home by early afternoon on Tuesday. In one case, a 60-year-old man, who asked not to be identified, walked out of the store with 500 grams of gold for about 2.2 million yen ($ 22,500).

Meanwhile, the Chinese and Thai, too, are rushing to buy gold as a consequence of the new, lower gold prices, with high sales volumes and shortages being widely reported.

So this is a fairly large story that can be summarized in basic Econ 101 terms: Supply, demand, and prices are all interrelated.  Drop prices and demand increases, which then lowers supply.

In the U.S., all of the dealers I talk to are reporting huge demand and brisk buying. Silver in any form is quite hard to come by unless you want to pay premiums of 20%+ per ounce above spot price. Delivery times are 5 to 6 weeks out now – that’s an unusual situation.  If this recent slam was designed to scare people away from gold, it did not have that desired outcome; in fact, just the opposite.

To Make Matters Worse

There were numerous oddities in the timing of the gold and silver slam of the past week, and among them were two notable developments in the supply chain. Recall that the gold and silver carnage began on a Friday morning (4/12/13).

The Wednesday prior to that fateful Friday morning, one wall of the Bingham Canyon mine began to shift more rapidly. So they took personnel safety precautions, moved construction equipment out of the way, and prepared for a major ground slide event. At 9:30 PM on Wednesday, that wall gave way, sloughing tens of millions of cubic meters of earth into the operating pit:

Bingham Canyon produces some 400,000 ounces of gold and nearly 3 million ounces of silver on a yearly basis as byproducts of copper mining. It will be several years before the mine is back up to full operating capacity.

Normally, the news of a major mine being taken off line is a bullish sign for the associated commodity, but not in this case. On that same Wednesday gold and silver both went down in price. So the market completely discounted the news.

Coincidentally, also on Wednesday (4/10/13), the Chilean supreme court suspended Barrick Gold’s Pascua Lama mine over a variety of environmental and social concerns, and that project got relegated to years of litigation. This is a huge mine project with probable reserves of over 18 million ounces of gold and 700 million ounces of silver.  It is now completely halted and will remain so as lawyers battle things out in a process that most think will be several years long.

So current and future production of gold and silver took hits last week right before the big price drops. Perhaps this is just a very strange set of related events, but the incongruity and timing cause me to lean towards what Robert Di Niro said in the spy thriller Ronin: There is no such thing as coincidence.

At any rate, whatever the case may be coincidence or not, future supply of gold and silver will be lower than we thought as recently as Tuesday of last week.

Something Is Burning

There has been a lot of speculation about why gold was hit so hard. The theories range from it being “just one of those things” (i.e., normal market behavior) to an orchestrated attack to drive down the price of bullion. I happen to fall into that latter camp and summarized my thinking in why gold is being attacked in yesterday’s report, This Gold Slam is a Massive Wealth Transfer from Our Pockets to the Banks.

An important question to ask in the face of such attacks is Qui bono? Who benefits from dropping the price so dramatically and breaking faith in the precious metals as a safe haven?

The Internet is swirling these days with rumors of a near inventory failure at the LBMA (London Bullion Market Association), a ‘too big to fail bank’ of a large sovereign country in Europe that’s teetering, that needed protection against its derivative exposure. One of these could be true – perhaps all of them might be; I honestly don’t know yet. We have imperfect vision into markets these days, and these are each developments that the central powers would be doing their utmost to shield from our view.

But there’s certainly a lot of smoke in the air surrounding the precious metals, and as the adage goes, where there’s smoke, there’s fire.

In Part II: Why There May Be a Lot Less Gold Than We Realize, we explore a particularly interesting possible reason for the suppression of the precious metals. A recent report issued by Sprott Asset Management calculates that the U.S. has silently exported a massive amount of its gold reserves over the past two decades.

If accurate, it puts the long-term manipulation of the gold and silver markets into context. And it gives a reason for why breaking faith in the precious metals at this time would be an important objective. 

Click here to read Part II of this report (free executive summary; enrollment required for full access).

Zero Hedge

Guest Post: Unintended Consequences Are Increasing World Demand For Gold

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BLACK CONSPIRACY THEORY STREET DOCUMENTARY ( ILLUMINATI,STREET VIOLENCE,NEW WORLD ORDER,ECONOMY)

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BLACK CONSPIRACY THEORY STREET DOCUMENTARY ( ILLUMINATI,STREET VIOLENCE,NEW WORLD ORDER,ECONOMY)

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BLACK CONSPIRACY THEORY STREET DOCUMENTARY ( ILLUMINATI,STREET VIOLENCE,NEW WORLD ORDER,ECONOMY)

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The shifting landscape of the New World Order and the approaching cashless society

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Justin O’Connell writes: As a general rule, if anything is covered en masse by the mainstream media, then I tend to believe that which I am watching is actually one long promotional spot.

The same could potentially be said for Bitcoin as over the past months its popularity has grown so much that “anarcho-capitalist…Libertarian…Freedom Fighter against mankind’s two biggest enemies, the State and Central Banks,” Dollar Vigilante Chief Editor, Jeff Berwick, has been on CNBC, CNN, Fox News, and BBC, and other mainstream outlets.

What brought on this sudden attention? No, not our anarcho-capitalism, but our announcement of the world’s first BitcoinATM.

So, is Jeff just a patsy so that the New World Order can bring in a digital currency? I began wondering this myself, and I came to what I think is a reasonable conclusion.

What many skeptics fail to understand is that the so-called New World Order – with its global governance, fiat currencies and so on – has already, for the most part, been implemented on a global scale. Especially economically. For instance, 95%+ of fiat money today is digital, and it’s all based on the Federal Reserve System, thus creating one worldwide currency with lots of different designs on the actual notes supposedly representing the various cultural backgrounds of nation-states.

Despite nearly everything being digital already, there are mainstream technologies that go above-and-beyond, aiming to rule out the need for cash.

One particular app for this cashless society, above-and-beyond credit and debit, is called Square, and was developed by Jack Dorsey, Twitter’s co-founder. According to CNN, “this is a telltale signs that the mobile-payments revolution has arrived.” CNN writes, as anyone who has studied American consumers know, “changing the way Americans pay for stuff is going to be really hard work.”

But Bitcoin is turning out to be a force to be reckoned with. For instance, in comparison to long-time friends of the liberty movement, gold and silver, Bitcoin seems to have been the play to make over the past six months and beyond. For months, besides today’s drop from $ 150-$ 115, after running to $ 150 from $ 105, our charts over at Gold Silver Bitcoin have shown a bimetallic standard precipitously dropping relative to Bitcoin.

The CNN article surmises that,

“Paying by phone will be as transformative as the advent of the credit card in the 1950s. It will change the way we shop and bank. With powerful smartphones and tablets taking center stage on both sides of the checkout counter, it will reshape the relationship between buyer and seller. Not only will the phone or the tablet become a wallet for consumers, but it will also turn into a credit card reader and a register for merchants. Shoppers will use their mobile device as a coupon book, a comparison-shopping tool, and a repository of those unwieldy loyalty cards they carry from everyone from giant retail chains to the corner bakery. And your smartphones will serve as beacons that will alert a retailer when you walk into its store so that it can recommend products, show you reviews, or direct you to aisle five, where that beanbag chair you didn’t buy last week still beckons — and you can now have it for 10% off. You won’t even need a few singles to tip the valet or pay the dog walker, because they’ll take mobile payments too.”

This basically explains the Bitcoin experience. One big difference? While CNN assumes a central authority, Bitcoin does not. With big players like AT&T, Verizon, Visa, Mastercard, Google, Microsoft, and eBay’s PayPal unit investing in billions in digital payment solutions,  it is no surprise that the mainstream media is serving the idea to the public domain in kind and uncritical ways. One of their assumptions is a monopoly on the technology by some corporation friendly to compromising. While the mainstream press has been unable to ignore Bitcoin, it certainly has been critical of Bitcoin being prone to hackers. Sure, a great many people have lost bitcoins. But, imagine if the general population had to become their own banks. Most of them would get eaten right away by sharks in the economic waters.

The CNN article champions the ease of digital transactions, and the time saved. Bitcoin is surely faster:

“While this revolution will be powered by complex technology, its ultimate effect will be to greatly simplify things for consumers. Think about my experience at Grumpy. While I had to fiddle with my phone ahead of time — to upload my credit card to the Square app and to authorize it to talk to the Grumpy register — once there, the phone never left my pocket. All I had to do was order my cappuccino.”

The article portends that “a cashless future is more real than many suspect.” According to the global head of mobile at Visa, “financial institutions are going to have a big role to play.”

“We are, I think, on a precipice of some fundamental change in the way money is exchanged between consumers and businesses,” Rep. Shelley Moore Capito, R-W.Va., said as she opened the first of a string of hearings one year ago on cashless ways.

The Federal Reserve found that 12 percent of cell phone users had already made a payment through their phones, and almost two-thirds of technology experts surveyed by the Pew Center on Internet and American Life said they expected mobile payments to eclipse cash and credit cards by 2020.

But, Square and similar technologies are different from Bitcoin. Bitcoin has caught on with a younger generation that, as Trace Mayer once put it to me (to paraphrase), “grew up in a digital sea. [The younger generation] are fish in a digital sea, whereas the older generation are snorkeling tourists.” In other words, p2p technology is a concept in-and-of itself for the Internet-literate. That goes a long way to explaining its popularity.

As the late Bob Chapman of the International Forecaster asked about gold and silver relative to fiat, “where else are you going to go” in a time of ubiquitous deceit? Bitcoin offers yet another alternative to what I’ve coined a “rebel’s portfolio” already heavy in silver and gold.

The pseudonymous nature (read: not totally anonymous) of Bitcoin does associate IPs with wallets. But, the paper-trail is a more obtuse alternative to the traditional bank account. The Powers That Be focus intensely on record-keeping, the historical record shows this, and so any added time-cost for their zeroing-in on you acts as the new privacy.

The popular appeal of Bitcoin – its p2p foundation – is as simple as first-language to the younger generation. Trace explains this well. Max Keiser recently said that he called gold in 2008, and people asked “What if the government confiscates my gold?” To which Max Keiser responds, “What you should have been asking yourself is, ‘What if the government confiscates my bank account?’” He then goes on: “Since $ 5 per BTC I’ve been recommending Bitcoin and many of you asked, ‘What if the government shuts off the Internet?’” Max Keiser answers thus: “What you should have been asking yourselves is, ‘What if the government shuts down the banks?”

And so, there are fundamental differences between the digital payment technologies pursued publicly by TPTB, and Bitcoin. This is what caught the eye of so many tech-savvy and Austrian-minded individuals across the world, but largely concentrated in the US and greater North America. Now, with Bitcoin skyrocketing from $ 9.31 last Fall to $ 150 today, the power of the Internet has never been clearer.

Bitcoin is a bet on the Internet. And, if you read our recent TDV Homegrownissue, you might have learned something about the Egyptian experience with a government using the “internet kill switch.” I wrote:

“Over one year ago, the Egyptian government cut off approximately 88% of the country’s internet access. Here is what happened: The government owned the biggest Internet provider in the nation, and only had to contact a few other companies to make this happen. The government ordered the shutdown of nearly all Internet access within Egypt. Ninety-three percent of Egypt’s networks went down. One of the only connections to the Internet that was not blocked belongs to Noor Data Network, the ISP used by the Egyptian (stock) Exchange.”

I then went over some of the ways Egyptians worked around this Internet shutdown, as well as the likelihood of it happening in the US. The conclusion of the article was bullish for the Internet, for the Internet is a vibrant and evolving system. It is crucial to everyone’s way of life, and we see this with centralized and decentralized payment solutions. The Internet will continue to be defended by its users and impinged upon by its self-appointed overseers. It’s a battle in which any Dollar Vigilante would delightfully indulge.

[Editor"s Note: News of Jeff"s latest Bitcoin venture along with a list of Bitcoin-related business opportunities are in the pages of the latest TDV Dispatch, which is available only to subscribers. To learn more about becoming a TDV subscriber, and getting access to more in-depth analysis and actionable ideas, just click here now.]

Anarcho-Capitalist.  Libertarian.  Freedom fighter against mankind’s two biggest enemies, the State and the Central Banks.  Jeff Berwick is the founder of The Dollar Vigilante, CEO of TDV Media & Services and host of the popular video podcast, Anarchast.  Jeff is a prominent speaker at many of the world’s freedom, investment and gold conferences as well as regularly in the media.

 

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Contributed by Jeff Berwick of marketoracle.co.uk.

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The shifting landscape of the New World Order and the approaching cashless society

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There Is a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with Stock Market Super-Star James Chanos

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Editor"s note: This article is the first in a new AlterNet series, “The Age of Fraud.“

Hustlers. Cheaters. Crooks. American business has always had them, and sometimes they’ve been punished. But today, those who cheat and put the rest of us at risk are often getting off scot-free. The recent admission of Attorney General Eric Holder that systemically dangerous megabanks may escape prosecution because of their size has opened a new chapter in fraud history. If you know your company won’t be prosecuted, a perverse logic says that you shouldcheat and make as much money for shareholders as you can.

Jim Chanos is one of America’s best-known short-sellers, famed for his early detection of Enron’s fraudulent accounting practices. In deciding which companies to short (short-sellers make their money when the price of a stock or security goes down), Chanos acts as a kind of financial detective, scrutinizing companies for signs of overvaluation and shady practices that fool outsiders into thinking that they are prospering when they may be on shaky financial footing. Chanos teaches a class at Yale on the history of financial fraud, instructing his students in how to look for signs of cheating and criminal activity. I caught up with Chanos in his New York office to ask about what’s driving the current era of rampant fraud, who is to blame, what can be done, and the ways in which fraud costs us financially and socially.

Lynn Parramore: You’re often characterized as a short-seller. How does fraud become a concern in that context?

Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that — that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.

LP: Researchers have created all kinds of tools, like software to detect speech patterns associated with lying, to try to detect fraud. What are some of the best tools for catching financial fraudsters?

JC: There’s no single tool that works all the time, and some of them are kind of interesting, like the voice detection, or Bedford’s law, which looks at numbers and repetition patterns. But we have seen some models that we work with and I teach in my class– frameworks of fraud and fraud analysis – that have been helpful in looking down through the years where we’ve seen patterns continue. One is a wonderful checklist, the seven signs of ethical collapse in an organization. Some are clearly intuitive, such as a board full of one’s cronies or an obsession with making earnings forecasts. But some are not so obvious, for example, doing good to mask doing bad.

LP: Good deeds can be a sign of fraud?

JC: One of the more interesting observations in the world of fraud is that some of the most egregious frauds were some of the most philanthropic companies in their communities. In some ways, if you look at Bill Black’s theory of the corporation as both a weapon and shield (we teach a lot of Bill Black’s things in my class), you can begin to see that that would be one way in which the bad guys in corporate suites would basically use the corporation as a shield. They’d say, well, look at all the wonderful things we do in the community, how many people we employ. We give to hospitals, we give to the Little League team, and so on. Not all these things would be immediately obvious to the casual observer.

LP: You’re known for your early detection of Enron’s problems. How does a company like Enron stay in business for years? How is the fraud sustained over time?

JC: It’s one of the great questions, Lynn, and I think that in the case of Enron, there were a lot of people getting rich aiding and abetting what turned out to be to be a fraud. They may not have known it was go-to-jail fraud, as it turned out to be (and most fraud certainly does not end up in jail sentences for the perpetrators, as we know).

But if you look, for example, at the investment banks that were in on structuring the offshore vehicles that Andy Fastow used to offload bad investments from Enron the parent to these vehicles without telling Enron shareholders that he’d also given them a secret agreement that they would made good any losses by issuing Enron stock (that, by the way, was the crux of the fraud of the firm), when you see just how much in fees a lot of the banks and brokers made in these things, there’s an awfully strong incentive to look the other way and not ask the tough questions. That’s really one of the big flaws, I think, in our current market structure.

LP: What do we know about the timing of frauds? When are they most likely to happen?

JC: One of our models is the Kindleberger-Minsky model, named after Hyman Minsky and Charles Kindleberger. It’s a macro model, and basically it takes a look at various market cycles. What we find is that the greatest clustering of fraud in the financial markets occurs, as you might imagine, during and immediately after the biggest bull markets. As I like to tell my students, it’s basically a period in which people suspend their disbelief. Everybody’s getting rich and it becomes increasingly easy to sell more questionable schemes and investments to investors. Typically the major frauds are uncovered or unmasked after the markets decline, for example, Bernie Madoff or Enron, when investors need money from other losses (and often these things have a Ponzi-like nature and can’t finance themselves from a self-sustaining basis) or people simply begin to build back their sense of disbelief and begin to ask tough questions that they didn’t ask during the bull market. So we do see that the fraud cycle generally does track the broader financial market cycles we see with a little bit of a lag.

LP: One look at your Yale syllabus shows that fraud has been rife through business history. Yet for the last 20 years, many people have insisted with near-religious convictions that markets are efficient and therefore resistant to fraud. Where is this belief coming from, and why is it a problem?

JC: It rests upon an assumption that is deeply flawed, and that is that the people who are stewarding your capital in the marketplace — the boards of directors and the people that the boards hire – management — are acting not only in your best interest, but are playing by the rules all the time, so that, for example, the accounts that the company puts together for the accountants (and keep in mind, management prepares financial statement, not accountants, not the auditors) are accurate. The auditors simply review them, and that’s an important point I always stress to my class. If there are games being played, and if you read the boilerplate of any auditor’s opinion, it says “we rely on the statements of management” – and so if, again, the people in the corporate suite have ethical flaws, we have a system based on truth-telling that may not be exactly always accurate.

I point out to my class that in 1998 there was a survey in Business Week (which is owned by McGraw-Hill) and McGraw-Hill (which also owns Standard and Poor’s) had a conference for the S&P’s 500 chief financial officers. And they asked these chief financial officers if they’ve ever been asked to falsify their financial statements by their superior. Now, the chief financial officer’s superior is the chief executive officer, or the chief operating officer—basically the boss. It was a stunning—of course anonymous – survey. 55 percent of the CFOs indicated they’d been asked, but did not do so. 12 percent admitted that they’d been asked and did so. And then 33 percent said they’d never been pressured to do that. In effect, only one third of the companies in the S&P’s 500 at that time did not have a CEO or COO try to pressure their financial officer to falsify financial results.

So this is agency risk writ large. Investors need to know that. They need to know that an awful lot of games are being played with the numbers and with disclosure and they’ve got to be on their guard. As Tony Soprano once said, as he exhorted his minions to redouble their efforts in the rackets, “We don’t got one of these Enron things going.”

LP: How much of the American economy do you think is built on fraudulent business models? How do we compare with other countries?

JC: Surveys have been very consistent –anonymous surveys of CFOs — and we’ve seen it in some other data we present in our class from various global entities. It appears that incidents of fraud in publicly traded corporations (globally) is somewhere in the order of 10-15 percent of the companies.

Now, that does not mean they’re all Enrons. An awful lot of fraud is, well, I didn’t reserve for bad debts and my earnings were overstated for a few quarters but then we reversed it later, and it’s probably not go-to-jail-type fraud. But it is misrepresenting numbers to the marketplace and to investors. And I think that you can still lose money if it gets revealed when you own the securities. So investors do have to have a healthy skepticism even when it comes to reasonably well-regulated markets like the U.S. and the U.K., because there are incentives, given the stock option-type compensation or the bonuses based on profitability. It gives management an awful lot of latitude to play games with accounting.

LP: Let’s talk about bubbles. Being mistaken or overly excited isn’t fraud. How do you distinguish investor euphoria from fraud? What’s the role of fraud in creating and sustaining bubbles?

JC: If we look at the recent global financial crisis, a lot of people say: why were there no prosecutions? One of the first sort of default defenses you heard over and over again is well, stupidity is not a crime, and making bad decisions is not a crime. It may certainly lead to grievous losses, but that’s the marketplace. And I agree with that 100 percent. The problem is that financial crimes, unlike crimes of passion and crimes of opportunity, come with their alibis already built in.  You build a veneer of legitimacy about what you’re doing. You get accountants to sign off on what you’ve done. You don’t look at any emails or get sent any emails –- at Enron Jeff Skilling never saw any emails, so how do you run a global trading powerhouse and never use email, right?

We teach this legal concept called “willful blindness,” and that is, in some cases senior executives are cut out intentionally from controversial things because they don’t want to be able to say, well, I approved that or I saw that. Someone below them is compensated quite handsomely for taking the fall, if you will.

So we have to understand that the classic definition of fraud is intent to deceive. I am intentionally trying to tell you something that is not true, that I know is not true or I have reason to believe is a reckless disregard of the truth. That is still very difficult to prove legally. But sometimes the market renders its own judgment if the preponderance of evidence in the case of a Lehman Brothers or a Countrywide is such that the executives are not exactly being guardians of the truth.

It is difficult to prosecute these cases. We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission. Most people would agree that that’s not the Justice Department’s role. And I think it’s caused a really reasonable, serious, continued undermining of trust in our markets.

While we may have benefitted from not revealing additional fraud during the dark days of ‘08 and ’09 by indictments and so forth, I still think you have the exogenous cost effect of a lack of trust by our public and by other investors. In effect, it raises the cost of capital. It depresses valuations. If people think that the game is rigged and they’re not in on it, they’re going to put their money somewhere else. And that’s almost impossible to quantify. But you know there’s an effect.

LP: If fraud is widespread, that means the government has failed as a regulator. What are the roots of that failure? Are the tricks too hard to understand? Is it is the prosecutors? Money in politics? What’s going on?

JC: Well, there are some obvious answers to this. Let me say that one of the things I teach in my class, which is technically a history class, is that this goes in waves. As Bill Black points out, the big financial crisis – the banking crisis – prior to the last one, in the early "90s, saw a rash of prosecutions, as did the 1930s after the Pecora Commission, where there was really a public drive to clean up the markets. But if you go back to the 1870s, and the Crédit Mobilier, which was the Enron of its day, scores of lawmakers and the standing vice president were caught with their hand in public till – being paid off by Union Pacific Railroad through their fraudulent Crédit Mobilier construction company. But there were just reprimands. No indictments. The public was outraged; similarly to today, but law enforcement and Congress at the time did not police themselves.

So we do see different public responses and legal responses to different waves of fraud. Having said all that, I think that certainly some observations would be that the concept of regulatory capture and the revolving door is a big one. I mean, how tough are you going to be on industry that you oversee if you’re going to go back into that industry every four or eight years. I think that really muddies the water in terms of getting people who really feel, like, say, a Stanley Sporkin did in the "70s at the SEC, that wrong is wrong and we’re going to go after it.

In some ways, as much as I consider myself a Democrat, I would say that the most prompt and vigorous response to fraud we’ve seen in the last 20 years has been the Bush administration’s crackdown on Enron, Tyco and Worldcom following the revelations of these massive frauds earlier in the millennium. Despite campaign contributions, John Ashcroft’s Justice Department went after these people and put the resources and set up the task forces and brought them to justice, which is what we’ve not seen in the last five years.

So you never know. A lot depends on the mood, and really, leadership at the top to say, this is wrong and we’re going to bring these people to justice.

LP: Journalists have played a key role in exposing fraud, but they have often been complicit, too. Are the media doing their job covering fraud?

JC: It’s funny because I remember when I spoke to Bethany McClean in early 2001 about Enron, I sort of scoffed at the idea that her magazine – Fortune, at the time – would do anything because Fortune kept putting Enron at the top of its most-admired-companies list. Sometimes it just takes the journalist to actually do the work and get the story and convince a good editor that, well, no matter what we said about it in the past, this is an important story that we need to tell the public. And there are still journalists, like Bethany, out there. Jesse Eisinger is another one who does just amazing work. Jon Weil at Bloomberg –I’m happy to give these people a shout-out because I think they played an important role, and they’re read avidly, so there is a market demand for this kind of journalism—to really call it like they see it.

But journalists are human beings and organizations are filled with human beings and when the bull market gets going, you know, no one wants to be the one who says the emperor has no clothes, unless you can actually point to a smoking gun and say, well, look at this.

LP: Right now, the news is filled of reports of fraud, from companies lying to regulators to money laundering and so on. Yet the GOP is trying to abolish Dodd-Frank, which addresses fraud by providing greater protection for whistleblowers, for example. Why would they be doing this?

JC: Well, I think the best comment was from a senior Democratic senator a number of years ago, who simply and bluntly said, “The banks own this place.” I always tell the story that right after the Bear Stearns collapse in March of ’08, the heads of all the big banks and brokers, they headed down to Washington immediately in April of ’08 to talk to senators and other lawmakers and regulators.

As we now know, what they didn’t ask for was forgiveness for their misdeeds or perhaps forbearance on capital until they could get their house in order or to work with the regulators on what was obviously a massive credit crunch coming. No, what they asked for was two things. They asked for the accounting rules to be liberalized on their hard-to-value assets and for short-sellers to be cracked down on. That was their focus, and, by the way, both happened. There were short-selling bans shortly thereafter and the accounting profession, at the urging of Washington, changed, liberalized, the rules on hard-to-value assets in March of ’09. They got what they wanted, and this tells you something.

It really is amazing to the extent that lawmakers, despite all the evidence that major legislative initiatives that banks have asked for in the last 50 years have generally been harmful to the public purse, they’ve generally gotten what they’ve asked for. You can’t be too cynical.

LP: Will Dodd-Frank really have an impact?

JC: Well, again, banks have gotten into all kinds of trouble throughout their history—with rigorous regulation and not-so-rigorous regulation. It’s the nature of the beast. But things like the Volcker Rule make common sense – that we should not put taxpayers at risk for trading activities, for example. But the banks have made a very strong case that most of what they’re doing can be seen as a hedge in one way or another, and some other part of their business, so therefore it’s not trading. I think all of those activities should be done at the holding company and not at the deposit-taking institutions. That’s a simple way to handle this.

I know banking is complex, but so are $ 700 billion bailouts. And I think there needs to be a sense by depositors and taxpayers who want a safe place to put their money that the deposit-taking institution is regulated tightly and insured properly, and that if banks want to do venture capital lending, private equity investments, hedge fund investments, or derivatives contracts, they can do so in an investment arm that is not as regulated or protected by insurance schemes. It’s seems to me to be common sense, but yet you have armies of lobbyists who will argue vociferously the opposite.

LP: What’s the role of the SEC in preventing and detecting fraud?

JC: The SEC has long held, for example, that short-selling plays an important role because of not only price discovery but also the fraud detection aspect, and they’ve always been pretty vocal about that. But the SEC is outgunned. The markets have grown much, much greater than their budget’s ability to police the markets. They also, you have to remember, have no criminal prosecution powers. That’s the Justice Department, and fraud, by definition is a crime. So you have the 10b-5 rules under the SEC, which are civil, but in fact, in much of this I lay much of the problems about fraud that we have at the feet of the Justice Department, not the SEC, because again, you need to prosecute, and that’s just not happening.

The SEC answers to Congress budget-wise, and this raises certain issues. I think generally when the SEC has gotten involved, they do a good job. But it’s tough, and they’re behind the curve. I think that’s more due to issues of budget and others than to lack of willingness to take on things. I think that they’re doing the best they can but they don’t have the resources.

LP: What are the economic and social impacts of fraud that worry you the most?

JC: The few things that jump out are obviously fraud at institutions that are backed by the taxpayer. Because there you’ve brought someone to the table that doesn’t know they’re at the table – in effect, the public or a small depositor. When the U.S. has to come to the rescue of these big institutions where clearly games were being played, we all lose. If I’m a hedge fund manager or investor, or if I’m a day trader, I understand the risks I’m taking. I’m a big boy, ok? And if I don’t do my work and someone pulls the wool over my eyes, well, shame on me.

But if my aunt in Okauchee Lake ends up having to foot the bill for Countrywide or Lehman Brothers or AIG, that’s not fair. And again, we get to a basic level of fairness. Is that eroded? Is trust in our market eroded because people think the game is rigged? Quite frankly, despite the recovery in the stock market, I think there is still an ongoing perception by the public that the game is rigged, and that my restaurant went out of business, and I didn’t get bailed out, but the guys on Wall Street did and they’re making bigger bonuses than ever. They got to start over with my money, but my restaurant didn’t. And that’s really a sense of fairness, I think, that continues to erode in this country. That’s number one.

Number two, I think that the costs for fraud tend to also disproportionately positively affect the wealthiest people in the country. So it also, in a weird way, increases the income inequality issue, and I think that’s something that’s beyond the purview of me in this interview, but it’s something I think that policy makers should keep in mind, because again, the people taking the biggest risks and taking the biggest paychecks and bonuses — if they had been hedge fund mangers, they would have been wiped out, and that’s that. End of game. But because they were doing it in too-big-to-fail institutions, they got to keep playing. In a weird way it is the antithesis of the free market. The free market would have taken these people out a long time ago. But, in fact, the subsidized market that we have, where the taxpayer stands behind all these bad decisions and the bad accounting, continues to exacerbate the income inequality issues.

LP: How does too-big-to-fail create fraud, and would breaking up the big banks be helpful in addressing it?

JC: Well, as we now know from Lanny Breuer and Eric Holder, too-big-to-fail is also too-big-to-jail. We now have admissions by the federal government that, in fact, this behavior was not extensively examined or investigated because of systemic issues.

It raises an interesting point, doesn’t it? Because if now, as the senior member of a bank, or the board of a bank, I know that there are no criminal penalities for breaking the rules, don’t I have a fiduciary responsibility to my shareholders to actually play fast and loose? Because if I get caught, that’s just the cost of doing business? I know it’s a frightening thought, but if carried to its logical extreme—if truly people believe that because of their size, they can’t be prosecuted, it actually brings forth a new issue of moral hazard extreme: illegal behavior.

That’s why equality under the law is an important concept – one that is being violated now.

Mon, 04/01/2013 – 13:50

 
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There Is a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with Stock Market Super-Star James Chanos