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Monthly Archives: November 2011

I am scheduled to talk with K.T. MacFarland of Fox News on her Defcon III show, today at 2:15. The subject is Pakistan, per my essay this week, “Blazing Saddles in Pakistan.

 

What Do We Do about Pakistan’s Nukes?

November 28th, 2011 - 5:01 am

If Pakistani border posts fired on NATO troops before they called in last week’s air strike, the simplest inference is that Pakistan provoked the whole incident in order to wrong-foot the United States. This seems to be Pakistan’s answer to American charges that its intelligence services helped set up the Sept. 13 attack on our Kabul embassy by the al-Haqqani network, as outgoing JCS Chief Michael Mullen charged on Sept. 22.

How does Pakistan get away with it?

In this morning’s “Spengler” column at Asia TImes Online, I observe that Pakistan has successfully deployed the “Blazing Saddles” defense against the United States: take yourself hostage and point a gun at your own head. “One step closer and the [N-word] gets it!,” the black sheriff tells a prospective lynch mob in Mel Brooks’ 1974 classic. Much as I admire Rick Santorum, his notion that we must be Pakistan’s friend because Pakistan has nuclear weapons is the wrong way to look at it. On the contrary, the U.S. should call the bluff, and threaten Pakistan with dismemberment and state failure in the event that it fails to control the terrorists who infest its military and intelligence services. It is a win-win proposition.

As I wrote:

If America puts a figurative gun to the head of the Pakistani government and orders it to extirpate the radical Islamists in the military, two outcomes are possible. One is that Islamabad will succeed. The second is that it will fail, and the country will degenerate into chaos. That is the scenario the American policy is supposed to avoid at all costs, but it is hard to see why America would be worse off. If the elements of Pakistani intelligence that foster terrorism cannot be suppressed, it is clear that they are using resources of the central government to support terrorism. In the worst case, they will continue to foster terrorism, but without the resources of the central government. From America’s vantage point, a disorderly collapse of Pakistan into a failed state is a better outcome than a strong central government that sponsors terrorism. At worst, a prolonged civil conflict between American-backed elements of the Pakistani military and Islamist radicals would leave the radicals weaker than they are now.

Pakistan’s congenital incapacity to be a “friend” of the United States stems from the fact that it is an artificial state in constant danger of fragmenting into ethnic components, and America’s objectives in Afghanistan exacerbate its problems. We have painted ourselves into a corner:

America’s misguided attempt to stabilize Afghanistan allows Islamabad to blackmail the United States by threatening to promote instability. If the United States accepts Afghan instability as a permanent condition and uses its in-country capability to wear down its enemies in a standing civil war, it can turn the tables by threatening to export the instability to Pakistan. Pakistan has been truncated before, when it lost Bangladesh. It could happen again. The object is not to dismember Pakistan, but rather to persuade Islamabad to behave. If this seems harsh, it is worth recalling that Washington has done this sort of thing before. The Reagan administration did its best to prolong the Iran-Iraq war.

As for the nukes: in the worst case, send in U.S. forces and take them away. That’s not as far-fetched as it might sound, as Jeffrey Goldberg and Marc Ambinder report in the December issue of The Atlantic. China’s presence in Pakistan complicates matters, but the Chinese have more to lose from Pakistani terrorism than we do (Pakistan’s intelligence services are training Muslim Uyghur separatists for infiltration into China’s Xinjiang province next door).

The ugly denouement of the so-called Egyptian Spring is visible in the collapse of Egypt’s stock exchange (down 11% in the first three days of this week) and the impending collapse of the Egyptian pound, as residents and foreigners flee to hard currency. A unique sort of brutality characterizes Egypt’s currency crisis: banks cannot meet the demand for currency because it is impossible transport bank notes. Mobs hijack the armored cars, as Al Ahram reported today:

 ”Demand on the dollar increased by 100 per cent since Saturday,” said Bilal Khalil, deputy head of the exchange division of the Federation of Egyptian Chambers of Commerce (FCC).

Khalil went on to say that many people prefer to convert pounds to dollars in times of crisis. “The exceptionally high demand on the American dollar resulted in a shortage of supply and a higher cost,” he said.

However, Khalil pointed out, the pound until Monday was still sold officially at LE5.98 in banks, but exceeded LE6 in exchange companies because they did not have enough cash to meet the soaring demand.

“Armoured money transfer vehicles were not safe anymore because law breakers take advantage and target the vehicles for a hijack,” Khalil said. “Transferring dollars between banks and exchange companies has become worrying more than ever.”

Now, that’s something new and nasty under the sun. I’ve observed first-hand the collapse of national currencies in Peru, Nicaragua, Russia and other blighted countries, but a breakdown of the rule of law to the point that banks cannot transport currency is something new.

The Chamber of Commerce’s Mr. Khalil also reports a black market erupting in the failing Egyptian currency:

Khalil believes that banks have the needed supply to stabilise the market but are afraid to transfer money to their branches and exchange companies at this time.

As is the case during all crises, Khalil added, the black market has flourished, where the dollar is sold at an even higher price. This leads to a further weakening of the local currency. “People just look to invest in the safe haven of the dollar without thinking of the repercussions on the pound,” he said.

It is entirely understandable that the Egyptian mob wants to help itself to the contents of armored cars, considering that the Egyptian press and blogs have reported for months that the country’s leaders are stealing rice, diesel oil, propane, and other commodities whose distribution is controlled by state companies. If everyone is stealing, why shouldn’t the man in the street get his share, too? Massive theft from state warehouses has been reported widely in Egyptian print and Internet media, but under the mainstream media’s affirmative action policy for failed states, not a word about this has made it into the conventional press.

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Egypt and Turkey: Middle East Basket Cases

November 22nd, 2011 - 6:03 am

The mainstream media has finally picked up the story I’ve been telling since February about Egypt’s impending economic collapse. The country is nearly out of money. Under the headline, “The Egyptian pound has a distressed future,” the Financial Times reported Nov. 16, just before the last days’ slaughter on Tahrir Square, “Investors are betting against the Egyptian pound, expressing their belief that it is soon to take a dive through the futures market while the spot market is held up by Egyptian government support. The pound’s twelve-month non-deliverable forwards (NDFs) weakened 2.8 per cent on Wednesday on fears that Egypt’s reserves, which are being used to support the currency, might be reaching critical levels. The spot market, in contrast, held steady – but for how long?”

Reuters reports:

CAIRO Nov 22 (Reuters) – Egypt’s pound fell to its weakest against the dollar since January 2005 on Tuesday as mass protests against army rule prompted the cabinet to tender its resignation and threw polls into doubt, giving a fresh jolt to a shaky business climate.

The Central Bank of Egypt (CBE) has sought to defend the currency during the nine turbulent months since the overthrow of President Hosni Mubarak, but now traders said the pound could soon break through 6 to the dollar as investors run for cover.

They said demand for dollars among local companies and individuals had grown with the street clashes that have left 36 people dead since Saturday. Voting in the three-phase poll for the lower house of parliament is due to start on Nov. 28.

Egypt’s stock market is in free-fall, down 50% since the overthrow of Hosni Mubarak. What’s interesting is that Turkey’s stock market isn’t far behind.

The economic crisis overwhelming the Middle East stretches from Libya all the way through to Turkey. The problems are of a different order, to be sure. As I reported earlier, Egypt’s spendable foreign exchange reserves are down to just $13 billion and falling daily as the central bank buys its own unwanted currency from the market in order to postpone the inevitable collapse in the change rate. Why not just devalue? The probable answer is that the generals and their civilian front men are moving as much money as they can out of the country before Egypt goes bankrupt. Last month the generals fired all the private-sector board members of the central bank, as I reported at Asia Times Online. Everything that can be sold abroad for cash is being sold. Al-Ahram reported Nov. 19 that there is no enforcement of the ban on rice exports, because controls have simply broken down. Egypt subsidizes rice at a fraction of the world market price, so traders have an incentive to sell it overseas. Not only the country’s capacity to buy food in the future, but its existing stocks of food are disappearing. And Egypt imports half its caloric consumption.

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Jon Corzine’s MF Global is missing $600 million of customer money, and the bankruptcy trustee has no idea when it might be found or when investors might be paid back, if ever. The New York Times today says that the investigation points to the conclusion that the firm simply misappropriated (that is, stole) customer money to back up failing bets on the distressed bonds of failing European governments.

The former head of Goldman Sachs and Democratic governor of New Jersey presided over a firm that may turn out to have been a criminal enterprise.  Maybe the Occupy Wall Street movement should shift venue to the headquarters of the Democratic Party, which has a long pattern of involvement in outright corruption.

If this is the case — and I will patiently await the results of investigation by the proper authorities before coming to any conclusion — the only proper thing to do would be to throw the book at Corzine and his colleagues and put some people in jail for a very, very long time. In response to corporate malfeasance and Wall Street’s misbehavior in the advent of the 2008 crisis, we have had a raft of new legislation and regulation — Sarbanes-Oxley, Dodd-Frank, the Volcker rules, and more minutiae than the battery of corporate lawyers hired by the banks can follow. My few friends still employed in the investment banking industry are making a fraction of what they once did, but their lawyers are getting fat. The last hiring bubble in Wall Street, I’m told, is in risk management and legal services. Remember what Mother used to say: “You can’t have any new laws until you use the old ones!”

There is overwhelming documentation that key Democratic Party figures used government sponsored enterprises — the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — to corrupt Congress on a grand scale in order to pay themselves spectacular sums. Last year Gretchen Morgenson and Josh Rosner told the sordid story in their book Reckless Endangerment:

The authors, Gretchen Morgenson, a Pulitzer Prize-winning business reporter and columnist at The New York Times, and Joshua Rosner, an expert on housing finance, deftly trace the beginnings of the collapse to the mid-1990s, when the Clinton administration called for a partnership between the private sector and Fannie and Freddie to encourage home buying. The mortgage agencies’ government backing was, in effect, a valuable subsidy, which was used by Fannie’s C.E.O., James A. Johnson, to increase home ownership while enriching himself and other executives. A 1996 study by the Congressional Budget Office found that Fannie pocketed about a third of the subsidy rather than passing it on to homeowners. Over his nine years heading Fannie, Johnson personally took home roughly $100 million. His successor, Franklin D. Raines, was treated no less lavishly.

To entrench Fannie’s privileged position, Morgenson and Rosner write, Johnson and Raines channeled some of the profits to members of Congress — contributing to campaigns and handing out patronage positions to relatives and former staff members. Fannie paid academics to do research showing the benefits of its activities and playing down the risks, and shrewdly organized bankers, real estate brokers and housing advocacy groups to lobby on its behalf. Essentially, taxpayers were unknowingly handing Fannie billions of dollars a year to finance a campaign of self-promotion and self-­protection. Morgenson and Rosner offer telling details, as when they describe how Lawrence Summers, then a deputy Treasury secretary, buried a department report recommending that Fannie and Freddie be privatized. A few years later, according to Morgenson and Rosner, Fannie hired Kenneth Starr, the former solicitor general and Whitewater investigator, who intimidated a member of Congress who had the temerity to ask how much the company was paying its top executives.

The quotes above are from a New York Times book review by the Clinton administration’s most left-wing cabinet member, Robert Reich. Congress subsidized Fannie Mae and Freddie Mac, the two agencies skimmed a third of the subsidy, and used it to pay their executives and lobby Congress. The master manipulator in the Morgenson-Rosner story is James A. Johnson, Mondale’s 1984 campaign manager and a top Democratic Party player for decades, who became FNMA chairman in 1990 and created the lobbying behemoth.

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With the financial news focused on the unraveling of Europe’s state finances, the mounting economic catastrophe in the Muslim world has barely merited a mention. Egypt and Syria are about to go over a cliff, while Turkey, supposedly the poster boy for Islamic success, faces a nasty economic reversal — not a catastrophe of Egyptian proportions, but sufficient to destroy Tayyip Erdogan’s reputation as an economic wizard and make his fractious country hard to govern. The so-called Arab Spring will end with no winners, only losers.

Egypt: Two Months Import Coverage, and Falling

Egypt’s foreign exchange reserves stood at $36 billion before the February uprising. The central bank claims that it still has $22 billion on hand, but an analysis by the Royal Bank of Scotland reported by the Financial Times puts the true number at just $13 billion, or two months’ import coverage for a country that imports half its caloric consumption. The central bank has lost $23 billion of the $36 billion in the past ten months, the RBS analysis concludes. Adds the FT:

Even that’s not the end of the story. First half 2011 balance of payments figures showed a deficit of $10.3bn in a period when the central bank actually lost $17.6 bn in liquid and other foreign currency assets, says Agha.

So hard currency is going into capital flight and into the proverbial mattress. Egyptians are even hoarding Egyptian currency, with the level of currency in circulation growing dramatically this year at an annual rate of 25 per cent, compared with 13 per cent previously.

By early 2012, expect to find the members of the Supreme Command of the Armed Forces moving into just-purchased mansions in South Kensington or Cannes, and bare cupboards in state warehouses. The military’s only response to the crisis was to fire all the independent directors of Egypt’s central bank, as I reported last month. That implies that they want a free hand to embezzle. By the end of next year, I predict, Egypt will become Somalia-on-the-Nile.

Assad Goes for Broke, Literally

Syria, meanwhile, plans to raise government spending by 60 percent, mainly in the form of salary hikes for state workers, while tax revenues plunged by 40 percent, Bloomberg News reported today. By my back-of-the-envelope calculation, that would put Syria’s government deficit about a third of GDP. Syrians were hungry before the uprising against Assad, which began with a protest over food prices. The Assad regime is betting the Syrian treasury on its survival, and the likeliest outcome is a collapse of the currency and chaos. It is hard to measure the economic misery of a country in civil war, particularly since the government has restricted food, energy and water provisions to areas of opposition strength. If the civil war continues, of course, the body count will take everyone’s mind off the economy.

Erdogan to Turks: “Let Them Eat Baklava”

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Herbert E. Meyer, the Vice Chairman of the CIA’s National Intelligence Council under Reagan’s DCI Bill Casey, was one of a handful of Reagan Revolutionaries who believed that the days of the Evil Empire were numbered. In the 1980s, the overwhelming academic consensus held that the Soviet economy was doing well and that Communism was a permanent part of the world landscape. Meyer and his team at CIA argued that Russia was heading towards economic collapse. That was the kind of bold thinking that won the Cold War. I was a young fellow carrying a spear in those days (for Norman A. Bailey, the head of plans at NSC), able to catch an occasional glimpse of the great project that people like Herb Meyer had set in motion. It was an enormous honor to find Herb Meyer’s review of my two just-published books today in The American Thinker. The Reaganauts were my teachers, and a passing grade from an authority like Herb Meyer is a great encouragement.

Like most readers of PJMedia, I’m a steady reader of  Frontpage Magazine. Founder David Horowitz is a former leftist who saw the light, something I can identify with, having wandered in the fever-swamps of fringe politics in my youth. Frontpage editor Jamie Glazov interviewed me this week about How Civilizations Die–a great honor to appear in an online publication of its standing. Here’s the conclusion of the interview:

The United States must act like a superpower, rather than an NGO with a humanitarian agenda. That means standing by friends like Israel, preempting real threats like Iran, and punishing wayward allies like Turkey.  We’ve been talking about a lot of unpleasant things, but it’s important to remember that two-thirds of the world population lives in countries where things are getting better–China, East Asia, India, South America. Tens of millions of people each year move from rural poverty to urban prosperity. In the great scheme of things the Muslim world is of minor importance to America, and its disintegration will make that plain over time. Far more important are our relationships with India and China. And these depend on the perception that America is the undisputed world hyperpower, such that it is pointless to test our patience. That means more military spending, not less, but also less dissipation of our resources on well-meaning but futile exercises in nation-building.  China will be more willing to accommodate American security requirements, for example in Pakistan, if it perceives that American strength is past all possible challenge for the foreseeable future.

Americans have not begun to absorb how much the world has changed. We are likely to have humanitarian disasters on a gigantic scale in Egypt and elsewhere, about which we can do no more than we could in Somalia during the Clinton administration. We like to think of ourselves like the Lone Ranger, fixing everybody’s troubles. There will be occasions when our national security interests require us to stir up troubles rather than mitigate them. I wrote “How Civilizations Die” to harden American hearts, to horrify readers in order to inoculate them against the horrors to come.

 

Who is Mario Monti?

November 14th, 2011 - 12:21 pm

It’s hard imagining Italy going from bad to worse, but Mario Monti might be a worse choice for Italian president than Sylvio Berlusconi, who resigned over the weekend as Italy’s state finances came close to collapse. Berlusconi presided over a corrupt state, and personified its worst excesses in the form of alleged orgies with underaged prostitutes. In general, though the outgoing Italian prime minister was pro-American.

Mario Monti hates America, viscerally. Over dinner with a friend of mine not long ago, Monti weighed in on the Americans: “They’re idiots. They think Venice is in Las Vegas.” He continued in that vein until my friend shut him up.

In a new Macrostrategy report, I review his sorry record of protectionist hostility to American business:

What do we know about Italy’s new president, Mario Monti? An academic economist and former European Commissioner for Competition, his most notable act in office was to block the proposed merger of GE and Honeywell in 2001. As the Economist reported at the time, “President George Bush and several senators have grumbled publicly at what they see as unwarranted interference in an all-American deal, and have hinted that Mr Monti’s true aim was to protect European companies. That has politicized the whole question of antitrust policy and opened a new front for transatlantic tensions.” Monti made his career, that is, by blocking precisely the sort of corporate opening that today might give Italy a chance for recovery. He is a creature of Europe’s self-insulating political elite.

Monti set forth a utopian vision of a united Europe on the eve of the crisis in a May 2010 report to the European Commission entitled, “A New Strategy for the Single Market.”  The report drew on extensive consultations with constituencies, and offers this disturbing comment:

An uncomfortable feature of the single market today emerges prominently from the consultations, although it is seldom brought out explicitly: the single market is less popular than ever, yet it is more needed than ever. Highlighting this contrast will perhaps be considered political incorrect. But only by addressing it openly will it be possible to work for a genuine and sustainable relaunch of the single market.

Prof. Monti, in short, believes in pressing impractical schemes even when no-one wants them. In this, he and Chancellor Merkel are united in a Folie à Deux (mutual delusion, but somehow it seems more appropriate to say it in French). Their chances success range between tiny and nil.

Even on the verge of bankruptcy, the America-haters in Europe can’t control themselves. The only hope for Italy is to shed its kleptocratic model of institutionalized corruption. Nearly 30% of the Italian economy is underground, that is, untaxed — no wonder they have a catastrophic budget problem. The comparable figure for America is 8%. American banks have already offered to take over the viable portions of Italy’s banking system, which is the best thing that could happen to the country — to bring in bankers who run their businesses for profits rather than for political chicanery. And the Chinese have quietly let it be known that they would consider buying Italy’s big state-owned energy companies.

That’s how you solve a liquidity crisis: you give up equity control to outside investors who can run things better. We don’t know what Monti will do, of course, but on the strength of his record, he is likely to continue protecting Europe’s failing elite from global competition. And that will ensure that Italy follows Greece down the road to bankruptcy.

So fasten your seat belts. It’s going to a nasty few months. The point of financial crises is to put assets in the hands of people who deserve to own them, says my friend Neal Soss, the chief economist at Credit Suisse. Ultimately Italy’s productive assets will end up in the hands of people who deserve to own them. The way things are going, not many of them will be Italian.

Please note that RSVP is required.

First Things magazine invites you to attend
an evening with

David Goldman

How Civilizations Die
(And Why Islam Is Dying, Too)

 

Tuesday, December 6, 2011 at 6:00 P.M.

First Things Editorial Offices
35 East 21st Street, Sixth Floor
(between Broadway and Park)
(212) 627-1985

A wine and cheese reception will follow.

 

Please click here to RSVP

 

Space is limited, so be sure to RSVP today to reserve your place.

A prolific writer, David Goldman is a columnist for Asia Times Online, where he writes under the moniker “Spengler.” His primary interests involve issues of religious identity and secularism, the rise and fall of nations and cultures, and trends in demography, as well as classical music. In addition to his “Spengler” column, Goldman has contributed toForbesTablet, and First Things, where he served as Senior Editor.

 

 

What does Sarkozy mean by the term “liar”?

November 8th, 2011 - 11:14 am

One shudders to imagine what noxious vapors swirled through the skull of French President Nicholas Sarkozy as he told Barack Obama that Binyamin Netanyahu was a “liar.” No-one has told the truth more clearly than Netanyahu: as long as the Palestinians cannot bring themselves to pronounce the words “Jewish State,” there won’t be a peace agreement. Where, pray tell, is the lie? Were he less diplomatic, Netanyahu might have added that with Egypt plunging into chaos, and likely to repudiate its peace treaty with Israel, and Syria in civil war, and Iran and Turkey vying to support the overtly (as opposed to de facto) terrorist wing of the Palestinians, the problem of a peace agreement with the beleaguered and unpopular Palestine Authority is moot.

In fairness to Sarkozy, he used the word “liar” advisedly. What does it mean to be a “liar?” Tell the Emperor he has no clothes, and he will scream, “Liar!” Tell the Heaven’s Gate cult that space aliens are not coming to meet them up on the comet, and they will shout, “Liar!” Tell a schizophrenic that the CIA did not implant a radio transmitter in his brain, and he will shout, “Liar!” Tell a trusting wife that her husband is cheating on her, and she will shout, “Liar!” (Tell Hillary Clinton that Bill is not cheating on her, and she also will shout “Liar!”). And tell a European politician that the world has changed such that the European political class no longer has a reason to exist, and he will scream “Liar! Liar!” until his lungs collapse.

Egypt is about to turn into Somalia-on-the-Nile, with unlimited leakage of weapons to Hamas in Gaza. That makes an agreement between Israel and the Palestinians about as probable as the return of the Pharaohs. The simple inattention of the world community to Egypt’s impending catastrophe astonishes. Last week we learned that Egypt’s liquid foreign exchange reserves were down to about $13 billion, about two months’ import coverage in a country that imports half its caloric consumption. A huge current account deficit due to the collapse of the tourist industry and workers’ remittances is partly to blame, but billions are leaving the country each month in capital flight.

On May 27, Sarkozy hosted the leaders of the Group of 8 industrial nations in France. The G8 promised $20 billion in aid to Egypt and Tunisia, and Sarkozy said that the amount might double. Since then, the subject has dropped out the news. If aid to Egypt was on the agenda of the Group of 20 meeting in Cannes Nov. 3, where Sarkozy called Netanyahu a ´ ¨liar,” it went unreported by the whole media. Last May’s emergency package evidently has been forgotten, because the Europeans are too busy figuring out how to bail out Italy and their own banking system, and Obama doesn’t want to defend a massive new foreign aid package in the 2012 elections.

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