President Barack Obama

The speculation after the November presidential election was that Barack Obama originally wanted  Bill Clinton’s former Treasury Secretary, Larry Summers, to serve in the same capacity in his administration. When criticism arose within his own party due to Summers’ strong ties to Wall Street, Obama selected  Timothy Geithner as Treasury Secretary and appointed  Larry Summers to serve as Director of the National Economic Council. In essence, Summers is serving as the principal economic advisor to President Barack Obama. In that role, Summers was undoubtedly one of the principal architects of the Obama administration’s so-called Economic Recovery Act, the $787 billion deficit-driven stimulus package that was supposed to put the brakes on the free fall in employment numbers in the United States.

Increasingly, many critics, not all of them Republican, have raised serious doubts as to the efficacy of the Obama stimulus plan. However, the Obama team is not about  passivity and turning the other cheek in the  face of public doubts. They are pushing back, and taking the lead in connection with the stimulus plan has been Larry Summers.

Appearing before the Peterson Institute for International Economics, Larry Summers wanted to make the case that the Recovery Act was, in fact, working. One would expect a man with as brilliant an intellect as Mr. Summers is alleged to possess to offer convincing analysis based on solid macroeconomic data. However, if that was your expectation, you are out of luck. This is what President Obama’s lead economic advisor had to offer as irrefutable “proof” that the administration’s Recovery Act was functioning according to plan: the number of people conducting Google searches for the term “economic depression,” which had increased last fall in the wake of the demise of Lehman Brothers, was now “back to normal.”

Is Larry Summers serious? This is the strategic data point that the key actor within Obama’s team of economic advisors is fixated on? Google searches are now the leading indicator and most persuasive metric of what’s happening to the real economy? Well, Mr. Summers, last fall, when you noticed  a spike in Google searches related to an economic depression, I established a new website on the crisis, GlobalEconomicCrisis. Com, http://www.globaleconomiccrisis.com. During the first few weeks that the website existed, there was hardly any traffic. Now, months afterwards, the site receives hundreds of thousands of hits per month.  Is that indicative of economic trends? Of course not. But neither is Larry Summers’ “observation.”

A far more relevant indicator of what is occurring with the real economy is the unemployment rate. Contrary to the declarations of the Obama administration that passage of the Recovery Act would stem the tide of job layoffs and stabilize the official unemployment rate at 8%, this sobering statistic has now increased to 9.5%, excluding the long-term unemployed and underemployed unable to find full-time jobs. All indications are that this number will exceed double-digits by the end of the year.

The attempt by Larry Summers to utilize nonsensical data in defence of the core economic policy of the Obama administration in addressing the most severe economic contraction in American history since the Great Depression not only fails to reassure an increasingly uncertain public; it increases scepticism regarding the suitability of Larry Summers to serve as the White House point-person on the economy. Those who had pre-existing doubts regarding Summers due to his role in dismantling the  Glass- Steagall Act ( which eliminated the  longstanding separation between investment and retail banks, leading to the subprime implosion that sparked the current economic crisis) will see them reinforced by the bizarre rationalizations he is now  increasingly resorting to in defence of the Obama administration’s economic policies.

Perhaps we should not be surprised by the convoluted logic Summers invokes in support of  his view of reality. After all, a major factor in his fall from the presidency of Harvard University was his “explanation” for why females were grossly under-represented in tenured academic positions in the sciences and engineering: “the different availability of aptitude at the high end,” according to Summers.

Starting with Alan Greenspan as long-serving Fed chairman, and continuing with the likes of Rubin, Paulson, Bernanke, Geithner and now Summers, the public has been subjected to propaganda from the political establishment that presents those who have been selected to design our economic architecture as being brilliant beyond all measure. If we have learned anything over the past year, it is that these supposed geniuses of macroeconomic policy are in fact highly fallible. If nothing else, Larry Summers’ perplexing descent into meaningless trivialities suggests that this key economic policymaker is as detached from reality as most of his recent predecessors. Rather than being reassured by his reference to Google searches that bright rays of sunshine are about to dissipate the dark economic clouds hovering over the nation, I see Larry Summers’ ascendancy  in the economic policymaking hierarchy of the Obama administration as the harbinger of a long recessionary winter which still lies ahead.

“Commercial real estate is the next shoe to drop.”

James Helsel, Treasurer of the U.S. National Association of Realtors

 
Pennsylvania realtor and U.S. National Association of Realtors official James Helsel joined with other concerned parties in meeting with a congressional committee last week, conveying a collective message that was saturated with gloom and doom. A commercial real estate implosion has been predicted for months by many observers, including this writer. There is now mounting evidence that this sector of the economy is indeed in the grips of a severe contraction, with all indicators pointing to an accelerating price deflation spiral over a period that may extend to several years.

It has all happened before. In the early 1990s speculators drove the valuations on commercial space far beyond the bounds of prudence. When reality caught up, the worst crash in real estate prices ensued. It now seems increasingly clear that this early 90`s disaster is about to be eclipsed by the commercial real estate crash of the current Global Economic Crisis. In fact, commercial real estate prices have already fallen from their 2007 peak valuation by a greater figure than that which has crippled the U.S. residential housing market. As with the housing market, the commercial real estate contraction will adversely affect the balance sheets of the nation’s banks. However, the dynamics of that impact will be qualitatively different.

The subprime debacle in the housing market overwhelmingly impacted the largest U.S. banks and financial institutions. With commercial real estate, however, the pyramid becomes inverted. The bulk of the exposure to commercial real estate mortgages is held by financial institutions of small to medium size. Deutsche Bank real estate analyst Richard Parkus told the same congressional committee addressed by James Helsel that the four largest American banks have an average exposure of 2 percent to commercial real estate on their balance sheets. In contrast, the banking institutions that ranked between 30 to 100 in order of size had on average a 12 percent exposure to commercial real estate mortgages. What these figures suggest is that a massive collapse in the U.S. commercial real estate market will cripple a large number of regional and community banks, in comparison to a few “too large to fail“  institutions stricken by the subprime housing disaster.

Though publicly quiet on this gathering storm, behind the scenes the economic policymakers in the Obama administration are deeply worried by this growing danger of a wider banking crisis brought on by a massive collapse in commercial real estate. The Federal Reserve is also in a state of high anxiety, for the same reasons. By June of this year, there were already 5,315 commercial properties in default, a figure that is more than double the number of commercial real estate defaults in all of 2008.

Many loans initiated when the prices of commercial properties were at their peak will be coming due over the next 3 years, including $400 billion by the end of 2009, and nearly $2 trillion by 2012. With unemployment skyrocketing, real disposable income shrinking and nearly 7% of income now being saved by the chastened American consumer, it is a foregone conclusion that a greater proportion of these loans will become non-performing. In the current economic climate, there are simply no options available in terms of refinancing and securitization. As with housing, a glut of foreclosed commercial properties will further depress prices, creating a vicious concentric circle of financial doom.

Ultimately, the coming collapse in the U.S. commercial real estate market is not only inevitable; it is round two of the banking crisis. Having barely escaped alive from the consequences of the subprime housing collapse due to trillions of dollars in taxpayer aid and quantitative easing from the Federal Reserve, combined with Timothy Geithner’s stage-managed “Stress Test,“ it is difficult to see an escape route for the American banking sector once the ravages of the commercial real estate storm have hit with gale force. That must be what the Obama administration and the Fed are frantically consulting on behind the scenes, hoping against hope that they have a TARP 2 ready in time. In the final analysis, a very large number of small to medium sized banks in trouble can pose just as great a systemic risk to the global financial system as was the case with a small number of banking giants. What happens to the concept of “too big to fail“  in that scenario?

Larry Summers, Timothy Geithner and Ben Bernanke may be fated to go down in history as the three horsemen of the global financial and economic apocalypse. Though Fed Chairman Bernanke was inherited by the Obama administration, Geithner, Summers et al were the chosen economic team of the Obama administration. In effect, their selection was the single most important decision made by President Barack Obama  in response to the Global Economic Crisis. Regrettably, thus far their performance has been found wanting. Most disconcertingly, many of their public statements are Bush 43 redux, a smorgasbord of overly-optimistic platitudes utterly dichotomized from economic realities. Perhaps the one phrase that is most likely to haunt the Obama administration is one uttered originally by Ben Bernanke in the spring; those perennial “green shoots” that the Fed Chairman could see sprouting amid the recessionary quicksand engulfing the global economy.

Like a barbershop quartet, other senior Obama economic policymakers and advisors sang the happy melodies of these enigmatic green shoots. This happy talk was not without its effect; in large measure the bear market rally on Wall Street, what others have referred to as a “dead cat bounce,” was a by-product of investor optimism fuelled by the green shoots serenade flowing from the banks of the Potomac.

As Yogi Berra would say, “it’s déjà vu all over again.” George W. Bush’s economic team was also full of joyful verbiage, until the floor literally collapsed from under them with the disintegration of Lehman Brothers. In the case of the Obama economic crisis management team, however, this theory of hope triumphing over reality has been executed with even more creative dexterity. With all credible mathematical indicators revealing that most of the largest U.S. banks are functionally insolvent, the Treasury Department concocted a totally cosmetic set of so-called “stress tests” to “prove” that these insolvent banks were, actually, “solvent.” In addition, by forcing changes in the FASB rules through political intervention, some of these banks were even able to show a profit in their Q1 results.

The June unemployment numbers, however, are throwing a cold dose of reality in the direction of the pontificators of ephemeral green shoots. With the publicly released U3 Labor Department jobless report showing the level of U.S. unemployment having risen to 9.5%, and the less publicized but far more accurate U6 report showing actual unemployment and underemployment now at a staggering 16.5%, it is quite clear that the American economy, along with most of the planet, is still undergoing a painful contraction. The fact that one in six Americans is either unemployed or trapped in low-paying part-time employment due to the lack of full-time positions, is a far more significant economic indicator than short-term gyrations on Wall Street or periodic upward anomalies confronting an otherwise downward economic trend.

Amid all the green shoots fantasizing, it must be recalled that the United States economy depends on the spending of the U.S. consumer for more than 70% of its aggregate demand. The real significance of rising unemployment, exchanging full-time jobs for part-time employment and the fear factor inhibiting spending by those who think they may lose their jobs, is a radical contraction in consumer spending. It is this reality more than any other that is weighing heavily on the nation’s economic superstructure. Not only is joblessness rising. After years of American consumers spending more than they earned, they have now shifted radically towards a high level of savings. Transitioning from a negative savings rate, the U.S. wage earner now banks nearly 7% of his/her declining take- home pay, despite virtually zero interest being offered to savers due to the Federal Reserve’s zero interest monetary policy.

The American consumer is scared, and is not being seduced by talk of green shoots emanating from Washington. With consumer spending undergoing significant contraction not only in the United States but in virtually all major economies throughout the globe, increasing pressure will bear on securitized investments based on loan portfolios directly or indirectly linked to consumer spending. Retail and shopping mall mortgages will witness higher levels of defaults, in conjunction with the already virulent afflictions  hammering sub prime and prime residential mortgages, commercial office space mortgages, consumer loans and credit card debt.

The Obama administration apparently believed that the original $700 billion TARP Wall Street bailout passed by Congress in the last weeks of the Bush administration, and President Obama’s $800 billion stimulus spending bill, would suffice to stabilize the economy and put the brakes on the free fall in employment numbers. However, jobs are still being shredded each month by the hundreds of thousands, while banks still suffer from balance sheets saturated with toxic assets. The FDIC has already closed more U.S. banks this year than in all of 2008.

As I indicated in a recent piece, there is already serious discussion occurring in the corridors of power in Washington on the necessity of a second stimulus spending package. This is an acknowledgement that the Obama economic crisis team, thus far, has been an abject failure. However, with so much money already having been borrowed by the U.S. government on a variety of schemes supposedly aimed at saving the economy, further large doses of public debt bring along very dangerous negative implications of their own.

In a recent column in the Financial Times of London, Mohamed A. El-Erian, chief executive and co-chief investment officer of PIMCO, the world largest bond trading firm, offered the following observation:
“The bottom line is a simple yet powerful one. The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance and the consumer, it is now threatening the potency and credibility of the economic policy making apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year’s financial crisis and the unintended consequences of the experimental policy responses. Given the inevitable socio-political dimensions, this story will play out well beyond the realm of the economy, policymaking and markets.”

Mohamed El-Erian is not offering green shoots, but he does speak the truth. Unfortunately, the truth is so bitter, it is unlikely that President Obama’s principal economic advisors will face up to the harsh and even brutal realities of the Global Economic Crisis until it is far too late for any policy response to be effective.

President Barack Obama, 44th President of the United States of America, sent out the following Independence Day message via the Internet. The Obama letter was sent by e-mail in advance of President Obama’s first official visit to Russia. The Obama July 4th message follows:

This weekend, our family will join millions of others in celebrating America. We will enjoy the glow of fireworks, the taste of barbeque, and the company of good friends. As we all celebrate this weekend, let’s also remember the remarkable story that led to this day.

Two hundred and thirty-three years ago, our nation was born when a courageous group of patriots pledged their lives, fortunes, and sacred honor to the proposition that all of us were created equal.

Our country began as a unique experiment in liberty — a bold, evolving quest to achieve a more perfect union. And in every generation, another courageous group of patriots has taken us one step closer to fully realizing the dream our founders enshrined on that great day.

Today, all Americans have a hard-fought birthright to a freedom which enables each of us, no matter our views or background, to help set our nation’s course. America’s greatness has always depended on her citizens embracing that freedom — and fulfilling the duty that comes with it.

As free people, we must each take the challenges and opportunities that face this nation as our own. As long as some Americans still must struggle, none of us can be fully content. And as America comes ever closer to achieving the perfect Union our founders dreamed, that triumph — that pride — belongs to all of us.

So today is a day to reflect on our independence, and the sacrifice of our troops standing in harm’s way to preserve and protect it. It is a day to celebrate all that America is. And today is a time to aspire toward all we can still become.

With very best wishes,

President Barack Obama

July 4th, 2009

Only a few weeks ago, the cheerleaders from the financial community and Obama administration were preaching the gospel of “green shoots,” those supposedly subtle indicators that the U.S. recession was bottoming out , and a recovery was just around the corner. However, amid a flood of dire economic and financial news, not the least being the bad unemployment numbers for June, there is increasing talk in Washington that a second dose of deficit-driven stimulus spending  will be required from Washington if the nation’s severe economic contraction is to be reversed.

Not surprisingly, the Republicans are already labelling President Obama’s economic recovery spending package a failure. They point out that Barack Obama’s economic team had envisioned the unemployment rate stabilizing at 8% during 2009, as the impact of nearly $800 billion in borrowed money being unleashed by the Federal government would arrest the free fall in employment numbers. The June statistics released by the Labor department reveal that nearly half a million Americans lost their jobs in June, a significantly higher number than was posted in the previous month, taking the official U3 unemployment rate to 9.5%. However, the disastrous economic performance of the George W. Bush administration, aided and abetted by a  Congress under Republican domination for most of the previous president’s term of office, undercuts the credibility of the GOP’s criticism of the Obama administration on economic policy. Of far greater significance is that much of the criticism is now coming from the left-of-center of the Democratic Party.

Many neo-Keynesian economists  were critical of the original Obama stimulus package for allegedly being too small. Their position was that the  contraction brought on by the Global Economic Crisis required governments across the world, but especially in the United States, to borrow massively in order to compensate for the diminution in private sector economic activity. In a recent op-ed piece in The New York Time, economist Paul Krugman represented this point of view forcefully in labelling the current stimulus package as being  totally inadequate, and emphasizing that a second stimulus spending bill of sizeable dimensions was essential if the U.S. was to avoid slipping into an even worse economic crisis. He drew parallels with the economic downturn that occurred in 1937, when the Roosevelt administration pulled back from New Deal pump-priming in order to bring the Federal budget back under control.

While the Obama administration has been hesitant thus far in committing to a second stimulus spending bill, the combination of growing calls for more deficit spending combined with political realities, namely the 2010 mid-term elections, will likely create accelerating momentum towards another so-called “economic recovery act.” No Democrat wants to run in 2010 with unemployment continuing to rise.

Putting aside political factors, is a second stimulus spending bill a wise course to follow? In my view the answer is no. Just as I disagreed with the wisdom of both the original $800 billion spending bill and the $700 TARP Wall Street bailout package of last fall, I fail to see how the at best short-term enhancement of certain economic indicators outweighs the massive liability of further damaging the already frail fiscal health of the country. The neo-Keynesian economists fail to understand that the United States no longer has the luxury of engaging in counter-cyclical economic policy when its bank balance is mired in red ink. The global bond market is already providing early warning signs that  profligate borrowing needs on the part of the U.S. government are simply unsustainable in the long-run. Not only would another stimulus spending orgy  probably not improve the nation’s long-term economic health; the further deterioration in the fiscal viability of the U.S. government will inevitably create its own negative feedback loop, further exacerbating the underlying weaknesses in the American economy.

The fiscal catastrophe  underway in America’s largest state, California, should serve as a brightly-lit red warning lamp for the entire nation. Endless debt by the sovereign does not guarantee long-term economic equilibrium. It is a roadmap to financial and economic Armageddon.

Barack Obama will soon be embarking on his first official visit to Russia. As Russia still retains a vast nuclear weapons arsenal, it is a priority for the Obama administration to improve relations with the Russian Federation.

During the Bush administration, U.S.-Russia relations were allowed to deteriorate. Barack Obama hopes to reverse direction on Russia, and enhance ties with the Russian Federation. A new agreement on limiting nuclear arms will be sought. Obama will also seek the cooperation of the Russian government on matters involving Iran and North Korea.

The forthcoming trip by Barack Obama to Russia will be historic. President Obama may in fact help thaw the cold state of relations with Moscow.

President Barack Obama has expressed his oppositon to the coup d’etat by the Honduras army that deposed that contry’s elected President. Obama made the comment to journalists while meeting with the President of Columbia at the White House.

Central America has a history of the military overthrowing civillian governments. The coup in Honduras is a test for the Obama administration. One issue is the stong affinity between the deposed head of state of Honduras and the controversial President of Venuzuela, Hugo Chavez. While supporting the restoration of the deposed President of Honduras, Barack Obama may be hesitant at being seen on the same political side as Chavez. The Obama administration will need to handle this issue carefully.

Ironically, even after 9/11, the Bush administration still considered Afghanistan somewhat of a backwater theatre of operations, choosing to mount its major military effort in Iraq, a country that did not attack America. For most of the last 8 years, the battle against a resurgent Taliban has been fought by a small contingent of U.S. troops, reinforced by a dozen or more NATO allies involving a multitude of microscopic deployments, each with its own unique rules of engagement. The opposition to the Islamist forces in Afghanistan can best be described as a multi-headed hydra mounted on a small body. Military specialists, especially those with expertise on counterinsurgency and partisan warfare, would not be surprised at the current negative character of the war in Afghanistan, which has spilled over into Pakistan, in the process destabilizing that nuclear-armed state.

President Barack Obama has long been opposed to the military adventure in Iraq, on the grounds that it had dangerously distracted the United States from focusing on crushing Al-Qaeda and its allies in Afghanistan. History has already validated Obama’s assessment on what the correct priority should have been for the U.S. armed forces. The question now facing Obama and his administration is what strategy to pursue in Afghanistan. The fragments that have emerged so far seem to indicate two trends; modestly reinforce the U.S. troop presence in Afghanistan, while linking the Taliban and Al-Qaeda presence in neighboring Pakistan to the overall theater of operations.

Will President Obama’s approach on Afghanistan prove more efficacious than that of George W. Bush? The lessons of history raise doubts that deserve serious reflection. The United States has not had a stellar record in winning wars against determined insurgents fighting a fierce guerrilla war. Vietnam is a conspicuous reminder that even hundreds of thousands of American troops, backed by massive technical means and a powerful airforce, cannot guarantee victory.

There is a voice from the distant past who has something to say that is highly relevant to the military challenges facing the U.S. military in Afghanistan. The Swiss military theoretician, Antoine Henri Jomini, served as a senior staff officer in Napoleon’s army during the Peninsular War. This brutal, conflict, fought on the Iberian Peninsula, began with the occupation of Spain by the French army. The population revolted, leading to a savage conflict that gave rise to the term “guerrilla war.” The British sent a small but well disciplined professional army to aid the Spanish insurgents, under the command of the Duke of Wellington. In five years the combined army of Spanish guerrillas and British regular troops utterly defeated the French. Napoleon’s defeat in the Peninsular War, combined with his forced retreat from Russia, brought about his ultimate downfall.

When writing his seminal work, “Art of War,” Jomini applied the lessons he had learned during the Peninsular War to form general principals and doctrine on guerrilla and insurgent conflicts. The principals he laid down align with the American experience in Afghanistan with chilling relevance.

“When the people are supported by a considerable nucleus of disciplined troops, the difficulties are particularly great,” wrote Jomini. “The invader has only an army, whereas his adversaries have both an army and a people in arms, making means of resistance out of everything and with each individual conspiring against the common enemy.”

With centuries of virtually uninterrupted warfare, including a brutal Soviet occupation that the Afghans successfully resisted, a large component of the country’s male population is well trained in small arms tactics, making expert use of their land’s barren and mountainous terrain. Just as Wellington’s troops added stiffening to the ranks of the Spanish guerrilla fighters, there exists a large corps of veteran fighters, including commanders, that multiplies the effectiveness of the younger insurgents joining the ranks of the Taliban in sufficient numbers to extend the conflict indefinitely.

Jomini provides a description of what he learned about insurgencies in the Peninsular War, lessons that are applicable two centuries later in the mountains of Afghanistan:

“These obstacles become almost insurmountable when the country is difficult. Each armed inhabitant knows the smallest paths and their connections; he finds everywhere a relative or friend who aids him. The commanders also know the country and, learning immediately the slightest movement on the part of the invader, can adopt the best measures to defeat his projects. The enemy, without information of their movements and not in a condition to reconnoiter, having no resource but in his bayonets and certain of safety only in the concentration of his columns, is like a blind man. His combinations are failures. When, after the most carefully concerted movements and the most rapid and fatiguing marches he thinks he is about to accomplish his aim and deal a terrible blow, he finds no signs of the enemy but his campfires. So while, like Don Quixote, he is attacking windmills, his adversary is on his line of communications, destroys the detachments left to guard it, surprises his convoys and his depots, and carries on a war so disastrous for the invader that he must inevitably yield after a time.”

Unless President Barack Obama restores the military draft, raises an army of several hundred thousand soldiers to occupy and guard every vital installation in Afghanistan, and convinces the American people that they must sustain such a massive occupation for possibly decades, and accept substantial casualties and massively increased military expenditures, he will lack the means to challenge the insurgency in a decisive manner. As commander in chief, therefore, Obama is faced with two choices. He either maintains the status quo with slightly more troops, which will mean only prolonged stalemate. Or he can refocus U.S. objectives on the limited goal of ensuring Afghanistan never again allows its territory to be used as a base to attack the United States.

The first choice only promises a higher list of dead and maimed Americans, and frightful expenditures at a time of profound economic and financial crisis. The latter choice opens up the possibility of a negotiated resolution of the conflict, leading to the attainment of U.S. national security objectives without the permanent occupation of a land historically hostile to all foreign armies.

The latest nuclear escapade by North Korea is being interpreted as continuity with its longstanding policy of using its possession of weapons of mass destruction as a means to creatively employ economic blackmail. However, the North Korean political economy is so dysfunctional, I think there may be a much more radical calculation emanating from Pyongyang.

There are few countries on the planet that have economies as shattered as North Korea’s. Officially a Marxist-Communist state, its reality is in fact much different. Peculiar for a nation supposedly based on Marxism, North Korea is ruled by a family dynasty. The founder of North Korea, Kim Il-Sung, is worshipped as a God, and his lifeless corpse is constitutionally still the president-for-life of the DPRK. The son of Kim Il-Sung, Kim Jong-il, is the current ruler of North Korea and it is rumored that one of his sons is also being groomed for political succession. Like his father, Kim Jong-il is also deified, and referred to in every proclamation as “the Great Leader.” However, despite his exalted status, his people have endured repeated famines that have snuffed out the lives of millions, according to international relief organizations. Furthermore, with the demise of the Soviet Union and the termination of its subsidies to North Korea, the nation’s industrial infrastructure has essentially collapsed. Men still show up for work in the factories, but nothing is produced, for the most part, and the pay is a pittance. It is the women who actually run the economy of North Korea, largely through the black market. Though theoretically illegal, this otherwise draconian police state largely tolerates the female-dominated black market, estimated by some observers to represent 80% of the DPRK’s meager economic output. The women of North Korea are the breadwinners in that society, having rediscovered entrepreneurial skills and are engaged in craft production and trading goods smuggled into the DPRK from China.

Having a national economy largely based on the black market is actually in conformity with other aspects of North Korea’s unique political culture. Another example is how its communist-indoctrinated diplomats are expected to engage in profitable capitalism while posted abroad, so as not to bother Pyongyang with inconsequential and mundane matters, such as paying the rent on their embassies. For that reason, numerous North Korean diplomats have been expelled by their foreign hosts for engaging in activity “incompatible with their status.” That term usually means espionage; in the case of the DPRK, the diplomats were expelled for engaging in narcotics trafficking.

In this basket-case of an economy, North Korea has had only one export commodity that has consistently been a strong earner of foreign exchange; armaments. In the past, ballistic missiles have been a hot export commodity for the rulers in Pyongyang. However, many of North Korea’s traditional missile buyers, including Iran, now manufacture their own rockets. With demand for its medium range missiles potentially drying up, North Korea must look at new products that will stimulate demand. Long range ballistic missiles that can strike targets in the United States are one example of product diversification that may explain the DPRK’s recent test of a supposed satellite launch. However, the crown jewel in North Korea’s product portfolio is its nuclear weapons capability.

Though most analysts believe that the recent detonation of a nuclear device by North Korea was just its traditional blackmail-driven saber rattling, I think there may be a far more dangerous motive behind the atomic weapons test. North Korea’s first nuclear test in 2006 is widely viewed as being a dude. While the basic concept of creating a nuclear blast is relatively simple-bringing together a critical mass of fissile materials-the means of achieving full yield requires sophisticated physics and engineering. The small yield of the blast in 2006 revealed that the DPRK had not yet mastered the technique of “extending the generation,” meaning prolonging the natural onset of a nuclear explosion by a ten millionth of a second. What seems like an insignificant time factor makes all the difference between an explosion that is in the same category as a large conventional bomb, and a blast on par with the bomb that destroyed Hiroshima in 1945. Until the DPRK had demonstrated its ability to “extend the generation,” potential foreign buyers of nuclear weapons would have little faith in North Korean nuclear weapons technology.

The May 25 nuclear test by the DPRK was, by all accounts, successful. The Russians estimate that the device detonated by the DPRK had a yield of between 10 and 20 kilotons, on par with the bombs dropped on Hiroshima and Nagasaki. Potential customers, including both rogue nations and non-state actors such as Al-Qaeda, have now received a “product demonstration” that is convincing.

While my theory that North Korea’s recent actions are based on a policy decision to begin surreptitiously marketing nuclear weapons technology, and possibly fully assembled nuclear weapons to the highest bidder, may seem far-fetched, there are signs that key decision-makers in the U.S. national security establishment have adopted a similar viewpoint. Recently, the Department of Homeland Security has abandoned plans to place radiation detectors in most ports of entry to the United States. This decision was based on the conclusion that technology does not exists that would reliably detect a well-planned attempt to smuggle a nuclear weapon or its components into the United States. However, there is another area that the Department of Energy, in particular, is aggressively moving forward on. A new field has been invented, called “nuclear forensics.” It is based on the belief that a nuclear detonation is so unique, post-blast analysis can reveal the origin of the fissile materials that were used in the weapon. This seems to be the new deterrent doctrine; if a country such as North Korea sells a nuclear weapon to a terrorist organization that then used it to destroy an American city, the U.S. will be able to scientifically determine the point of origin of the nuclear device, and launch a retaliatory response against the offending nation. The Obama administration considers North Korea a major nuclear proliferation threat

As if the Global Economic Crisis was not enough to worry about, we now may be witnessing the emergence of nuclear proliferation as an export-based strategy for capital formation. It makes one hope that nuclear blackmail is all that North Korea is truly interested in. President Obama will have many sleepless nights worrying about North Korea.

Barack Obama, America’s 44^th President, is one of the most brilliant, hard working and innovative politicians to occupy the White House. If the current economic crisis were a typical post-war cyclical recession, there is no doubt that President Obama would be up to the challenge, and lead the United States to renewed growth and prosperity. Alas, we are in different times, with a uniquely devastating and dangerous economic disaster of worldwide scope. Not even as gifted a leader as Barack Obama, I fear, will prove sufficient in arresting the rampaging Global Economic Crisis.

No one can accuse Obama of not recognizing that the U.S. faces a severe economic recession. Most of his administration’s initial activity has centered around crafting policy responses to the recession, primarily involving the unprecedented expenditure of borrowed money in an attempt to revive growth. However, the very character and essence of his administration’s economic policymaking reveals the lack of comprehension of how dire and unique the Global Economic Crisis is on the part of President Obama. At his core, Obama believes that the American economic system is basically sound, but slid into a severe recession because of irresponsible behavior on the part of some actors within the financial oligarchy. Hence, by restoring growth through deficit spending and enacting a new regulatory regime to restrict the destructive greed of some Wall Street tycoons and bankers, we can return to the happy economic days of yore. In effect, Obama is acting like a nostalgia buff, hoping that the correct policies will recapture the solid economic model of pre-George W. Bush America. Unfortunately, this view of America’s political economy is mythological. The U.S. economy was unhinged under the presidency of Bill Clinton as much as it has been under Bush, yet Obama has chosen Clintonites to serve in the most important economic policymaking positions in his administration. Cheerleaders for a failed model will not lead America to a new economic Jerusalem.

A major part of the problem Obama is facing is philosophical. He is following a conventional view of counter-cyclical economics; when a recession occurs, the sovereign can go into debt and use borrowed money to artificially increase demand and thus arrest the decline in growth. Once the recession is arrested, government fiscal policy can return to a more prudent policy of balanced budgets, as restored economic growth eliminates the need for the government to maintain demand. Sounds simple, as this has been enshrined as the recession-fighting bible created by economist Maynard Keynes. The only difference, the Obama administration would argue, is that this recession is much bigger than previous economic downturns, and therefore requires much more significant deficit spending. Otherwise, the Keynesian model remains unaltered.

This perspective by the Obama administration, in my view, is myopic. Like many contemporary politicians and economists, President Obama and his senior economic advisors have misread Maynard Keynes. Contrary to public perception, Keynes was no economic radical, but a centrist in dealing with the challenge of managing economic cycles within a capitalist system. Though Keynes did believe deficit spending was justified as a means to stimulate economies in deep recession, he also advocated budget surpluses during times of relative prosperity. In effect, Keynes believed in “rainy day” economics; in times of plenty you put away a little fiscal cushion that can then be spent during a recessionary period to enable the sovereign to maintain economic demand during a time of private sector contraction and declining tax revenues. This is actually a conservative philosophy that many farmers are familiar with.

In the United States, even during times of sustained economic growth, massive government deficits have been de rigeur during the past nine years, in the process doubling the national debt. There is no rainy day fund to speak of, so the staggering deficits that are now being enacted by the Obama administration are, in my judgement, fiscally unsustainable. Already, the projection for the current fiscal year’s deficit has risen by $200 billion to a stratospheric $1.8 trillion; my own estimate is that it will top $2 trillion. Looking into the future, the current Obama fiscal agenda foresees annual deficits of $1 trillion or more for several years into the future, gambling that the recession will be short-lived, with growth returning as early as the last quarter of 2009, leading to increased tax revenue and declining deficits.

But are we in a recession? The current downturn is already the most protracted and destructive since World War II. However, there is another ingredient that has been added into this toxic economic stew: globalization. We are in a Global Economic Crisis in which synchronized contractions across the world create multiple negative feedback loops that reinforce the underlying negative causation. The subprime collapse in the United States crippled banks in the U.K. and devastated Japan’s export machine; the Eurozone economic contraction is now impacting America’s export driven manufacturers. When China’s exports to America decline, commodity exporters and peripheral economies that supply value-added components to China’s export goods get whipsawed. This phenomenon is occurring at an accelerating pace, despite attempts by the Obama administration to portray minor statistical anomalies to the prevailing trend as “rays of hope” and “green shoots.” Reading tealeaves is no substitute for critical analysis.

The ongoing Global Economic Crisis has proven to be so severe, sustained and virulent that if it is not yet a global depression, it is embarked on that dangerous trajectory. However, another flaw in the Obama administration’s approach is its failure to recognize that a substantial part of the financial system is rotten to the core, and not merely a fundamentally sound system with a few bad applies populating it, who can be restrained by improved regulation. More importantly, the Obama economic team seems to have convinced themselves that “mind over matter” is the best palliative for the nation’s stricken banking system. When a sovereign’s private banks are essentially insolvent and not engaged in normal loan activities, this is another manifestation of an economic depression. Rather than admit the truth, the Obama administration cobbled together a make-believe series of bank stress tests, which supposedly show that America’s banking system, with a few minor problems, is essentially sound and fiscally healthy. This conclusion is an utter fraud, designed to artificially create a climate of economic confidence. It won’t work, and by delaying an honest approach towards the nation’s crippling level of bank insolvency, the policymakers are insuring that the final cost of the inevitable day of reckoning will be far more costly to the taxpayers.

The economist Hernando de Soto has captured the essence of the Global Economic Crisis as few others have. In his view, the Western world, and principally the United States, who have for so long railed against Third World inefficiency and corruption, have created the largest, most toxic shadow economy in the history of human civilization. More than one quadrillion dollars in unregulated financial derivatives paper, according to de Soto, has destroyed inter-bank and financial counterparty trust to such an extent, credit flows have largely frozen despite unprecedented levels of taxpayer-funded borrowing to bailout the global financial system. Nothing short of an honest accounting of the true value of the toxic assets underlying these colossal derivatives products, which equal twenty times the entire world’s GDP, can put the global economy on the road to recovery. Until these unregulated “unknown unknowns” become fully transparent, all other government interventions, including Obama’s massive borrowing binge, are doomed to failure. Sadly, as the bogus bank stress tests reveal, President Barack Obama and his Clinton-era economic advisors have financial transparency as the least important objective on their agenda.

It seems that President Obama, despite his obvious leadership gifts and towering intellect, has chosen to place his faith in a team of advisors who are tied to the Wall Street oligarchy by an umbilical chord than cannot be severed. In a sense, Obama is following the path of the last Soviet leader, Mikhail Gorbachev, who also sincerely wished to resolve his country’s economic problems, but believed that the system was fundamentally sound and only required a modicum of reform to correct its distortions. Only after the collapse of the USSR did Gorbachev conclude that the system itself was unsustainable. Now it appears to this observer that President Obama may be fated to travel the same path as Gorbachev, and like him end up as a valiant failure.