The question is: How close is America to fiscal crisis?

Economics by invitation

The question is:

How close is America to fiscal crisis?

Feb 11th 2011 by R.A. | The Economist

The Congressional Budget Office projects that America's 2011 deficit will be $1.5 trillion, or 9.8% of GDP, and debt held by the public in the 2011 fiscal year will approach 70% of GDP. How close is America to facing a bond market crisis? Should drastic cuts to the budget be made now? Over what horizon should they extend? And what balance between tax increases and spending cuts should be struck?

Or is the entire underlying premise of the question mistaken? Can America count on a return to growth to solve most of its near-term budget problems? And how should other economies approach America's fiscal morass?

America is bankrupt

Laurence Kotlikoff our guest wrote on Feb 11th 2011, 14:20 GMT

THE US has a fiscal gap—the present value of all its future spending (including servicing its official debt) less all its future taxes of $202 trillion—almost 14 times GDP. Greece, by comparison, has a fiscal gap of about 11 times GDP. To close the US fiscal gap would require raising all federal taxes, immediately and permanently by almost two thirds!

The Economist as well as all other financial media as well as virtually all economists (academic and business) and policymakers are focusing on the official debt. For the US, the official debt is $9 trillion. This is minor compared to the fiscal gap, which includes all liabilities, official and unofficial. The fiscal gap is huge compare to the official debt because Uncle Sam has spent six decades accumulating massive obligations to make social insurance payments, which it carefully kept off the books.

My paper with Jerry Green makes clear that, from the perspective of economic theory, the deficit is a number in search of a concept—that what we report as official versus unofficial debt is purely a matter of the words we choose; i.e., the debt measures/reflects our fiscal language, not our fiscal policy.

This labeling problem—that current taxes can just as well be labeled "current government borrowing coupled with future taxes" and current transfer payments can just as well be labeled "current government lending coupled with future transfer payments", means that "the" deficit is up for grabs. Each of the billions of people on this planet is free to use different words to differently, but consistently, re-characterise past US government receipts and payments and arrive at whatever size current US debt he or she wishes to report.

As a simple example, if we classify this year's FICA contributions as "government borrowing" rather than "taxes" and call the future promised benefits "repayment of the borrowing less a future tax", the same amount of money will move from the public to the government this year and the same amount of money will move from the government to the public in the future, but we'll increase this year's reported official deficit from 9% to 15% of GDP.

Time is not well defined in physics. The debt is not well defined in economics. Both are functions of frames of reference, i.e., language. Neither tells us about reality.

Focusing on the debt, as virtually everyone is doing, is straight out of "The Emperor's New Clothes". If everyone continues to do so, there will be no crisis, at least not for a while. But if enough people start looking at the only measure of fiscal solvency that is label-invariant, namely the infinite horizon fiscal gap (finite horizon fiscal gaps suffer fully from the labeling problem), they will realise that the US is bankrupt—not in 30 years, not in 10 years, not in 5 years, but today. When that happens, the crisis will follow immediately.

As for how to fix the fiscal mess, we need immediate and radical reform. On this score, please read " Jimmy Stewart Is Dead", particularly the Afterword, which lays out in a few pages how to fix the healthcare system, the Social Security system, and the tax system. Alternatively, read my op eds on these topics posted at www.kotlikoff.net.

Gradual steps should be taken to avert an abrupt crisis

Viral Acharya our guest wrote on Feb 11th 2011, 15:35 GMT

IT IS clear that America cannot just "count on" growth going forward. While growth-enhancing strategies may work, and corporations may invest more as jobs and demand pick up, creating a virtual cycle, the scale of efforts and mixed results over the past two years suggest that any counting on growth must also prudentially count on associated risks. The risk of a fiscal stimulus that does not deliver on growth is an added government debt burden. While there is perhaps no immediate fiscal crisis and the woes of European countries only strengthen the role of the dollar as international reserve currency, there are three issue to worry about:

1. An American debt crisis is unlikely to be a smooth outcome; it will more likely be a trigger strategy at which its risks start looking worse than another group of countries and investors switch to a more diversified base of international currencies for their reserve holdings. This will likely erode the liquidity premiums built into different ends of the Treasury curve and raise the borrowing costs steeply and abruptly.

2. When an American debt crisis looms large, any current government would hate to be the one that takes tough measures to rein them in as the end game approaches. They would all want to borrow, even at exorbitant costs, to roll on the debt and pass on the cost to the next cycle of politicians. This political economy consideration implies that there is a prudential need to manage fiscal issues ahead of time, rather than by reacting at the end. It is quite possible that some of what we are seeing now is in fact an outcome of such political economy considerations—borrow now to "count on" growth and pass on risks to the future.

3. Spending cuts, tax increases and lengthening of debt maturity in spite of greater borrowing costs may all be needed to achieve lower liabilities, a better asset base and reduced rollover risk. These policies, if implemented abruptly, would also be dangerous, both from a triggering-a-debt-crisis standpoint as well as from the political instability or stalemate they may bring about. Again, a prudential strategy would be to work on these gradually. Of course, tax increases may be needed to affect the transfers essential for better provision of safety net employment insurance and health care.

Given these risks but also the emerging signs of a fledgling recovery, a slow but definitive fiscal policy commitment would be the best road forward. Policy uncertainty could exacerbate any risks the American economy faces in case growth does not pick up.

No crisis is imminent, but fiscal reform is necessary

Scott Sumner our guest wrote on Feb 14th 2011, 15:28 GMT

THE US does not face an imminent fiscal crisis. The US government will not default on its debts, and it’s even unlikely that the Fed will be forced to monetise federal debts. However our fiscal regime is becoming increasingly dysfunctional, thus radical reform would be quite helpful. I’ll sketch out what I view as ideal, with the understanding that political constraints will make actual reforms much more modest.

Despite 9% unemployment, a rapid move toward fiscal austerity in the US would be highly desirable. Before doing so, however, Congress and the Fed need to get on the same page regarding stabilisation policy. The government should give the Fed a desired trajectory for nominal GDP growth over the next 10 years, and instruct them to engage in level targeting, which involves making up for any near-term overshoots or shortfalls. This would anchor NGDP growth expectations, allowing Congress to sharply reduce the deficit without endangering the recovery.

The next step is to reduce expenditures. Obviously this is a political decision, but I’d favor much lower spending on the military, homeland defense, and agriculture. Programmes such as highways and K-12 education should be shifted back to the states. In the medium term we should gradually shift from an insurance-based system of medical expenditure (public and private) to a system where most medical expenditures are made out of health saving accounts, with catastrophic insurance plans covering the most expensive procedures. This could help restrain the growth of Medicare. Over the very long term we need to shift to a system of fully-funded private retirement accounts, on top of a basic annuity provided by the government. All fiscal reforms should be aimed at moving the US toward the low-tax, high-saving Singapore model.

Our tax system also requires radical restructuring. We need new consumption and environmental taxes, but adding them to our current tax regime would invite even greater distortions and inefficiencies. Instead I’d eliminate both the personal and corporate income taxes and replace them with a progressive consumption tax regime, comprised of three parts:

1. A progressive payroll tax, with an earned-income tax credit for low income workers.
2. A progressive value-added tax, with much higher rates on luxury goods.
3. A relatively steep carbon tax.

Obviously this sort of radical restructuring is not politically feasible, but some reform is likely over the next decade, due to the increasing inefficiencies of our current tax system. For instance, the US corporate income tax is now the highest among developed countries, but is also riddled with loopholes.

The tax plan I outlined has features that are attractive to both the left and the right, and thus provides a road map for future compromises. Republicans should insist that no new broad-based tax is added without first eliminating at least one of the existing (income) tax systems.

Democrats should insist that any new consumption taxes be progressive. Because reducing complexity and eliminating taxes on capital are both huge net gains for the economy, there are win-win compromises available if both sides are willing to deal.

A "stealthy default" may punish foreign creditors

Stephen King our guest wrote on Feb 15th 2011, 14:00 GMT

IT'S abundantly clear that America's fiscal arithmetic simply does not add up. The implication is a continued increase in its government debt-to-GDP ratio over the medium term. But will this lead to crisis? And, if so, what kind of crisis?

One option is to "do a Japan" which, despite all its difficulties, has almost miraculously managed to live with persistent increases in government debt while enjoying an extraordinarily low cost of borrowing. Japan, however, is special. Its creditors are almost entirely Japanese, suggesting that both creditors and debtors have a strong "national interest" in resolving any fiscal difficulties. And Japan's stagnation—associated with persistent corporate sector de-leveraging—has released savings which the government has been able to tap into very cheaply.

The US is hardly in the same position. Its creditors are increasingly foreign, not domestic, and it has a paucity of savings. Politically, it would surely struggle to cope with ongoing Japan-style stagnation associated with continued de-leveraging. Under these circumstances, the escape route will be a "stealthy default".

The Treasury Department isn't in the business of delivering an outright default, but monetary trickery can nevertheless shift the burden from US debtors to foreign creditors. The best way to do this is to print money, not so much to raise domestic inflation (that would hit domestic creditors, including many in the baby boomer generation who vote in elections) but, instead, to devalue the dollar. Because foreign creditors have mostly lent to the US in dollars, the renminbi or rouble value of their US investments would then be worth a lot less.

Admittedly, faced with this risk, bond yields might still rise. Much then depends on whether the Federal Reserve would then extend its unconventional stimulus programmes in a bid to keep yields at low levels. If it does so, the risk of a major dollar collapse will surely increase.

The Chinese, Russians and other don't vote in US elections. When political expediency dominates economic reality, foreign creditors become an easy target: because they are, the risks of a financial crisis will escalate, ultimately undermining the dollar's reserve currency status.

America has time, but isn't using it wisely

Tom Gallagher our guest wrote on Feb 15th 2011, 19:49 GMT

I THINK the US will face a financial market backlash against its fiscal outlook when most but not necessarily all of these conditions are present. First, there has to be more progress on deleveraging. Until private sector borrowing returns to more normal levels, there won't be anything for federal deficits to crowd out. Second, foreign central banks would have to materially reduce their purchases of US Treasuries. Third, other developed countries need to make progress in addressing their fiscal challenges. Think of Mohamed El-Erian's line about Treasuries being the least dirty shirt in the laundry. Finally, Washington has to demonstrate it isn't going to make the necessary changes to bring deficits down to sustainable levels. The most likely inference from the behaviour of forward rates (I'm thinking of the 10-year Treasury yield 5 or 10 years forward, going back several years) is that markets at least implicitly assume US policymakers will deal with the deficit when they have to (as they have in the past).

Anyone following the US budget debate over the last several weeks will tell you that you can put a check next to the last factor. The chances that Washington would act on longer-term deficits in advance of a financial market crisis were always low, but they went lower in the last month or so. Republicans made aggressive proposals to cut non-security domestic discretionary spending programmes, a budget category that does not contribute at all to the longer-run deficit problem. Rather than try to broaden the debate to include medium-term entitlement and tax changes, President Obama decided to confine the battle to these same programme areas.

In short, what the economy could use is a debate over medium-term entitlement and tax changes. Instead what it's getting is a debate over near-term non-security discretionary spending. There's a risk the economy gets too little deficit reduction in the longer run and too much in the near term.

My own guess is that the deleveraging of the US economy will not proceed so fast as to produce a budget crisis in financial markets any time soon, possibly until after the 2012 election. But I wouldn't bet a lot on that, and prudent policymaking would try to head off a financial market crisis by putting in place policy changes to take effect a few years from now. And incredible as it may seem, markets are giving US policymakers an enormous benefit of the doubt, such that it shouldn't take much in the way of medium-term policy changes to validate this market assumption, but Washington looks set to fall short of even that.

America is missing its 2011 window of opportunity

John Makin our guest wrote on Feb 16th 2011, 14:33 GMT

AMERICA is missing the chance in 2011—with firmer growth and no election pending—to move proactively toward a credible, multi-year plan for deficit reduction along the lines suggested by the President’s Fiscal Commission report last December. The President’s own 2012 budget abuses baseline methodology to create illusory cuts. Unfortunately, a fiscal crisis—signalled by sharply higher borrowing costs for the United States government—probably won’t emerge during this year's discussion of 2012 and future budgets.

Deficit reduction should include tax reform

Michael Heise our guest wrote on Feb 16th 2011, 16:00 GMT

THE US fiscal position has deteriorated significantly over the past few years. Fiscal policymakers have so far opted to postpone fiscal consolidation with a view to getting the economy back on a firmer footing.

But the US is walking a fine line. The costs of delaying consolidation in terms of risks to credibility, long-term interest rates and economic growth in the medium and long run must also be considered. Waiting to put fiscal policy on a sustainable course pumps government debt up further. Without doubt, rapid debt accumulation increases the likelihood of a fiscal crisis, with investor confidence in the government’s ability to handle its budget undermined and borrowing rates pushed up to unaffordable levels.

Pinpointing a debt-to-GDP ratio which indicates that a crisis is likely or imminent is difficult. Many factors appear to be important in triggering a crisis, including the long-term budget outlook and whether the economy is growing or appears to be in weak state. Presently, economic indicators suggest that the US economy gathered pace over the second half of 2010 and into this year and will be strong enough to produce visible positive effects on employment. Solid growth should alleviate investors’ concerns.

Nevertheless, the US fiscal problems are not just cyclical but also structural, rendering sweeping fiscal consolidation inevitable. Republican members of Congress are already demanding fiscal reforms in the current fiscal year. The desired measures appear to include a whopping $100 billion cut in discretionary spending levels as a first step to return budget appropriations to FY 2008 levels.

Given the current political situation the Obama administration will likely pick up on some proposals although such a compromise would undermine the aim of the Tax Relief, Unemployment Insurance Reauthorisation, and Job Creation Act of 2010.

Meaningful fiscal reform requires long-term measures to rein in the deficit. Regaining fiscal flexibility and preparing for the long-run budgetary challenges associated with the ageing of the population requires a downward path of the debt-to-GDP ratio in the second half of this decade. To achieve this, spending cuts are unlikely to suffice, so higher tax revenues by way of a better-designed tax system must be part of the solution.

Indeed, the latitude available for increasing tax revenues would seem to be greater in the US than elsewhere, as the tax-to-GDP ratio is among the lowest in the OECD area. In order to limit the negative impact on economic incentives, broadening the tax base should clearly be considered. Tax exemptions are more generous than in many other countries. And another feature of the US system is the small share of consumption taxes—compared with other OECD countries there is plenty of scope to raise indirect taxes. Environmental taxes are also a potentially important revenue source. According to some estimates, raising current fuel taxes to the OECD average could generate additional revenues of close to 1% of GDP in the US.

The US corporate tax system is also excessively complex. While there is a high marginal tax rate on corporate profits, the overall revenue from the tax is quite low. This clearly points to the need for an overhaul. It should be possible to lower the corporate tax rate and thereby reinforce the effects of a competitive exchange rate without sacrificing revenue (broadening the tax base).

There is no fundamental deficit crisis

Brad DeLong our guest wrote on Feb 16th 2011, 17:51 GMT

HOW close is America to fiscal crisis, The London Economist asks: "The Congressional Budget Office projects that America's 2011 deficit will be $15 trillion, or 9.8% of GDP, and debt held by the public in the 2011 fiscal year will approach 70% of GDP...".

John Makin laments that "a a fiscal crisis—signalled by sharply higher borrowing costs for the United States government—probably won’t emerge" soon. Stephen King laments that "America's fiscal arithmetic simply does not add up". Scott Sumner laments that "our fiscal regime is becoming increasingly dysfunctional...radical reform would be quite helpful". "The ingredients are in place for a crisis," claims Peter Boone. "America is bankrupt," claims Larry Kotlikoff.

Tom Gallagher, by contrast seems to have it much closer to right: "[W]hat the economy could use is a debate over medium-term entitlement and tax changes. Instead what it's getting is a debate over near-term non-security discretionary spending."

What is going on? Start with Figure A-1 from the CBO's 2010 Long-Term Budget Outlook:

This tells us that America has a large short-term deficit now: we are still in a deep downturn, and as a result revenues are temporarily below trend and spending is temporarily above trend. But, the CBO projects in its current-law extended baseline, as the economy recovers revenues will rise and spending will decline, and from 2015 on the dotted revenue line matches the top of the primary spending line.

Our current deficit is not a problem: running a deficit during an economic downturn is healthy and appropriate. Our short-term deficit problem is that our deficit is not large enough given that if Congress simply goes on autopilot the revenue and primary spending lines are likely to cross by themselves in four years.

And our long term projected spending and revenue balance is not a problem *if*. If the economy and if programmes perform as expected, if the US government continues to be able to finance its debt at a real interest rate less than the growth of labour productivity plus the labour force, and if Congress and the president do not do anything further to raise spending above or decrease taxes below current law, the United States simply does not have a fundamental fiscal crisis.

The problems are all in the *ifs*. If people fear that there will be a fiscal crisis they could demand an interest rate premium for rolling over US government debt, and then we would we have a non-fundamental fiscal crisis. Could we have one? Yes: the East Asian economies had one in 1997-1998. Had foreign investors not panicked and fled, there would have been no problem. Those foreign investors who did not panic did well. Those who bailed themselves in at the bottom of the crisis did extremely well. But that was no consolation to the East Asian governments that faced the crisis, or to the East Asian workers rendered unemployed by the consequences of the crisis.

However, today there are no signs of any possibility of a collapse of foreign investor confidence in their US Treasury holdings. A non-fundamental crisis is not even a cloud on the horizon.

But there are the other *ifs*.

The big *if* is, to put it simply, this: Congress will pass something stupid and the president will sign. Congress might never come up with pay-fors for its recurrent AMT patches. Congress might remove the revenue raising parts of the Affordable Care Act. Congress might remove the cost saving parts of the Affordable Care Act. The Supreme Court might decide, just for the hell of it, to rule that the cost saving parts of the Affordable Care Act are unconstitutional. Congress might pass a big unfunded tax cut just for the hell of it. Congress might pass a big unfunded spending increase just for the hell of it.

All of these *ifs* are very real worries.

But none of them can be fixed by legislative action now.

No Congress now can cement up the exits to keep some future Congress from doing something really stupid.

And dinking around with cuts to non-security discretionary spending right now doesn't do anything to help.

What is the solution to our long-run deficit problem? It is simply this: elect honourable and intelligent women and men to Congress. Elect representatives who will not pass unfunded tax cuts—as the Republicans did in 2001. Elect representatives who will not pass unfunded spending increases—as the Republicans did in 2003. Elect presidents who will promise at the start of their turns to veto legislative acts that do not meet long run paygo requirements. Choose Supreme Court justices who will not prostitute their high office for the short term political benefit of the party they happen to belong to—as the Republican justices did after the 2000 election.

Gee. I guess our long run fiscal problem is really dire and insoluble.

A Massive Wealth Transfer

The Fed's Policy of Creating Inflation

by Rodrigue Tremblay / February 15th, 2011

If once [the people] become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.
– Thomas Jefferson (1743-1826), 3rd US President

If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.
– Thomas Jefferson

[Corruption in high places would follow as] all wealth is aggregated in a few hands and the Republic is destroyed.
– Abraham Lincoln (1809-1865), American 16th US President (1861-65)

When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.
Frederic Bastiat (1801-1850), French economist

Inflation made here in the United States is very, very low.
– Ben Bernanke, Fed Chairman, Thursday, February 10, 2011

Let us begin with some macroeconomic indicators of reference.

In October 2010, the world value of total production (all Gross Domestic Products or GDPs) was estimated to be $61.96 trillion U.S. dollars at current nominal prices. The U.S.GDP was estimated at $16.11 trillion or 26 % of world GDP.

The two largest financial markets in terms of trading values are the global foreign exchange market (all currency markets) that has an average daily turnover in global foreign exchange transactions of about $4 trillion per day, and the privately-traded and mostly unregulated world derivatives market (all the derivatives markets) whose total world outstanding contracts has been estimated by the Bank for International Settlements in Switzerland to have a notional or face value of about $791 trillion in 2010.

In terms of real wealth, however, the two most important financial markets are the world bond market and the world stock market. In 2009, for example, the global bond market had an outstanding value of $US 91 trillion, with the U.S. bond market, at a value of $US 35.5 trillion, being the largest domestic bond market. In mid-2010, the global equity market capitalization on regulated exchanges was estimated at $US 54.9 trillion, with the U.S. stock market having a value of some $US 19.8 trillion.

With such a large amount of financial assets, it is understandable that shifts in prices and interest rates have important effects on each market. If long-term interest rates go up, the nominal value of bonds goes down, and conversely, when interest rates decline, bond prices go up. As for stocks, many factors, such as company earnings, future profit prospects and inflation expectations, as well as political and taxation considerations, can influence their value. However, in general, they tend to fare better when short-term interest rates are low rather than high.

Sometimes, these two important financial markets move up together, especially in an environment of general disinflation, when interest rates tend to decline. They also tend to decline in tandem when real interest rates are on the rise, both bond prices and stock prices are then falling.

Sometimes, however, they can move in different directions, especially in the early phase of an inflationary period, such unexpected inflation being good for the stock market but bad for the bond market. Since last fall, this has been case, with the bond market falling and the stock market rising. The question is how long this decoupling can last.

And how does the Fed’s monetary policy fit into such an environment of oncoming inflation, and what should the Fed do?

Last November 3rd, the day after the 2010 mid-term elections, the Bernanke Fed announced that it will be embarking on a second round of quantitative easing (QE2), a fancy word for printing new money in exchange for government bonds—in other words, monetizing the public debt. It seems that Chairman Bernanke and the Fed board felt that months of lending to the large American banks trillions of dollars at close to zero interest rate, while paying them 0.25 percent to keep their excess reserves on its books, was not enough. They announced that the Fed would buy $600 billion-worth of additional Treasury bonds until June 2011, while reinvesting some $300 billion of principal payments from its portfolio holdings of mortgage-backed securities.

In doing so, the Fed professed to follow two somewhat interrelated objectives: 1) to lower long-term real interest rates in order to stimulate economic activity and create employment; and 2) to simultaneously raise inflation expectations in order to avoid the effect of deflation on the U.S. debt-leveraged economy. It should be remembered that from 1913 to 1977, the Fed had only one objective to pursue, i.e. price stability. Currently, however, the Fed has officially a double mandate. As a matter of fact, since 1977, the amended Federal Reserve Act of 1913 stipulates that the U.S. central bank should set its monetary policy in order to promote employment while maintaining price stability. It says that the Fed should promote “maximum employment, stable prices, and moderate long-term interest rates.”

Of course, a central bank in a fiat currency system can always create inflation through monetary policy and its printing press, but, in a market economy, it has little direct influence on job creation and on long-term interest rates. Employment depends on investments, innovation and market opportunities at home and abroad, while long-term interest rates depend on the amount of savings available, on investment demand and on long-term inflation expectations, all factors that are more or less out of the reach of a central bank. It is easy to delude oneself into thinking otherwise, but that’s the reality.

What the Fed can do with certainty, however, is to create inflation by expanding the monetary base and the money supply; it can also reign in inflation by draining liquidity from the system. If it goes overboard one way or the other, it can also create asset price bubbles by maintaining its managed short-run interest rates too low for too long, or it can create a credit crunch by putting the brakes too hard on credit creation, usually in a haste to correct its previous mistake.

These short-term gyrations in monetary policy are very destabilizing to the real economy, sometimes creating a temporary boom; sometimes precipitating an economic downturn. They are also accompanied by massive shifts of wealth between creditors and debtors.

In the first instance, when the Fed (or any central bank for that matter) creates too much money by buying financial assets and writing checks on itself, inflation and inflation expectations ensue. This pushes short-term interest rates down and long-term interest rates up (a steepening of the yield curve) and the price of long bonds goes down, with the effect of imposing an inflation tax on all the holders of fiat dollars. This inflation tax results in a transfer of wealth between unsuspecting dollar holders and bond holders who see the real value of their holdings go down, while net debtors and stock owners see their real debt load being reduced by inflation and the value of most shares in the stock market going up.

In the second instance, the reverse can happen if the economy is starved of liquidity: the yield curve inverts with short-run interest rates moving way up as compared to long-term interest rates. A stock market crash and an economic recession generally follow.

That’s pretty much what the Fed has been doing over its nearly 100 years of existence, keeping short-run interest rates too low for too long, creating unsustainable asset bubbles, and then applying the monetary brakes to kill inflation expectations that it has created on its own. Sometimes, the Fed has maintained price stability and the value of the U.S. dollar; but at other times, it has willingly acted to destroy the purchasing power of the dollar by printing too much of it.

As a general principle, if inflation expectations increase faster than nominal long-term interest rates, real interest rates, i.e. the real cost of capital for investors and home buyers, would decline and this would, hopefully, stimulate economic activity and employment.

Unfortunately for the Fed, its Nov. 3rd announcement translated into an important loss of confidence in its ability to design and pursue an appropriate monetary policy and was immediately decried by other central banks and by America’s biggest creditor, China, as a blatant attempt to generate and export inflation. Bond prices began immediately to fall and bond yields to rise. It seems that bondholders began selling longer-term Treasuries at a faster rate than the Fed could buy them.

Chairman Ben Bernanke and his board seem to have forgotten that the United States is now a debtor nation, not a creditor nation. A creditor nation could get away with an outspoken policy of creating inflation—but not a debtor nation. In 2010 alone, the U.S. registered another half a trillion-dollar trade deficit with the rest of the world. This has to be financed, and it is done with foreign borrowings. To a large extent, foreign creditors now decide the final outcome of American monetary policy.

The 10-year Treasury yield, which hit a low at 2.40 percent in October 2010, was at 2.63 percent the day before the Fed’s announcement on November 2, 2010. As it turned out, it closed at 3.64 on Friday February 11, after hitting a high of 3.75 percent on February 8. The same is true of the 30-year Treasury yield that hit a high of 4.76 percent on February 8, thus approaching the dangerous threshold of 4.90 percent. The latter stood at 3.93 percent on Nov. 2, 2010.

Obviously, the Fed’s ultra loose monetary policy has backfired. Its intended policy of printing money in excess of what the economy demands has resulted in raising real long-term interest rates, not lowering them. Indeed, with long-term nominal rates on the rise while inflation will take many months to surface, the immediate effect of the Fed’s November announcement was to raise real long-term Treasury rates, not to lower them. Mortgage rates are also on the rise, threatening to postpone the long anticipated recovery in the housing market.

It is certainly possible that we are entering a period when the already observed rise in real interest rates can derail the stock market rally that has been in force since early March 2009. Later on, however, a slowdown in the economy coupled with fiscal compressions can be expected to push long-term rates down again. Such a roller-coaster path for interest rates is not very helpful.

The current Fed board seems to believe that the Fed is more than a central bank, that it is a sort of a government unto itself that can both control monetary conditions and solve the structural problems in the real economy at the same time, irrespective of what the rest of the world thinks. This would seem to be most unrealistic. Perhaps a dose of humility would be salutary at this time, before irreparable damage is done.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and author of the books The Code for Global Ethics and The Code for Global Ethics, Ten Humanist Principles (prefaced by Dr. Paul Kurtz). He can be reached at: rodrigue.tremblay@yahoo.com. Read other articles by Rodrigue, or visit Rodrigue's website.

This article was posted on Tuesday, February 15th, 2011 at 8:00am and is filed under Banks/Banking, Economy/Economics, Finance.

A Massive Wealth Transfer

The Fed's Policy of Creating Inflation

by Rodrigue Tremblay / February 15th, 2011

If once [the people] become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.
– Thomas Jefferson (1743-1826), 3rd US President

If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.
– Thomas Jefferson

[Corruption in high places would follow as] all wealth is aggregated in a few hands and the Republic is destroyed.
– Abraham Lincoln (1809-1865), American 16th US President (1861-65)

When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it.
Frederic Bastiat (1801-1850), French economist

Inflation made here in the United States is very, very low.
– Ben Bernanke, Fed Chairman, Thursday, February 10, 2011

Let us begin with some macroeconomic indicators of reference.

In October 2010, the world value of total production (all Gross Domestic Products or GDPs) was estimated to be $61.96 trillion U.S. dollars at current nominal prices. The U.S.GDP was estimated at $16.11 trillion or 26 % of world GDP.

The two largest financial markets in terms of trading values are the global foreign exchange market (all currency markets) that has an average daily turnover in global foreign exchange transactions of about $4 trillion per day, and the privately-traded and mostly unregulated world derivatives market (all the derivatives markets) whose total world outstanding contracts has been estimated by the Bank for International Settlements in Switzerland to have a notional or face value of about $791 trillion in 2010.

In terms of real wealth, however, the two most important financial markets are the world bond market and the world stock market. In 2009, for example, the global bond market had an outstanding value of $US 91 trillion, with the U.S. bond market, at a value of $US 35.5 trillion, being the largest domestic bond market. In mid-2010, the global equity market capitalization on regulated exchanges was estimated at $US 54.9 trillion, with the U.S. stock market having a value of some $US 19.8 trillion.

With such a large amount of financial assets, it is understandable that shifts in prices and interest rates have important effects on each market. If long-term interest rates go up, the nominal value of bonds goes down, and conversely, when interest rates decline, bond prices go up. As for stocks, many factors, such as company earnings, future profit prospects and inflation expectations, as well as political and taxation considerations, can influence their value. However, in general, they tend to fare better when short-term interest rates are low rather than high.

Sometimes, these two important financial markets move up together, especially in an environment of general disinflation, when interest rates tend to decline. They also tend to decline in tandem when real interest rates are on the rise, both bond prices and stock prices are then falling.

Sometimes, however, they can move in different directions, especially in the early phase of an inflationary period, such unexpected inflation being good for the stock market but bad for the bond market. Since last fall, this has been case, with the bond market falling and the stock market rising. The question is how long this decoupling can last.

And how does the Fed’s monetary policy fit into such an environment of oncoming inflation, and what should the Fed do?

Last November 3rd, the day after the 2010 mid-term elections, the Bernanke Fed announced that it will be embarking on a second round of quantitative easing (QE2), a fancy word for printing new money in exchange for government bonds—in other words, monetizing the public debt. It seems that Chairman Bernanke and the Fed board felt that months of lending to the large American banks trillions of dollars at close to zero interest rate, while paying them 0.25 percent to keep their excess reserves on its books, was not enough. They announced that the Fed would buy $600 billion-worth of additional Treasury bonds until June 2011, while reinvesting some $300 billion of principal payments from its portfolio holdings of mortgage-backed securities.

In doing so, the Fed professed to follow two somewhat interrelated objectives: 1) to lower long-term real interest rates in order to stimulate economic activity and create employment; and 2) to simultaneously raise inflation expectations in order to avoid the effect of deflation on the U.S. debt-leveraged economy. It should be remembered that from 1913 to 1977, the Fed had only one objective to pursue, i.e. price stability. Currently, however, the Fed has officially a double mandate. As a matter of fact, since 1977, the amended Federal Reserve Act of 1913 stipulates that the U.S. central bank should set its monetary policy in order to promote employment while maintaining price stability. It says that the Fed should promote “maximum employment, stable prices, and moderate long-term interest rates.”

Of course, a central bank in a fiat currency system can always create inflation through monetary policy and its printing press, but, in a market economy, it has little direct influence on job creation and on long-term interest rates. Employment depends on investments, innovation and market opportunities at home and abroad, while long-term interest rates depend on the amount of savings available, on investment demand and on long-term inflation expectations, all factors that are more or less out of the reach of a central bank. It is easy to delude oneself into thinking otherwise, but that’s the reality.

What the Fed can do with certainty, however, is to create inflation by expanding the monetary base and the money supply; it can also reign in inflation by draining liquidity from the system. If it goes overboard one way or the other, it can also create asset price bubbles by maintaining its managed short-run interest rates too low for too long, or it can create a credit crunch by putting the brakes too hard on credit creation, usually in a haste to correct its previous mistake.

These short-term gyrations in monetary policy are very destabilizing to the real economy, sometimes creating a temporary boom; sometimes precipitating an economic downturn. They are also accompanied by massive shifts of wealth between creditors and debtors.

In the first instance, when the Fed (or any central bank for that matter) creates too much money by buying financial assets and writing checks on itself, inflation and inflation expectations ensue. This pushes short-term interest rates down and long-term interest rates up (a steepening of the yield curve) and the price of long bonds goes down, with the effect of imposing an inflation tax on all the holders of fiat dollars. This inflation tax results in a transfer of wealth between unsuspecting dollar holders and bond holders who see the real value of their holdings go down, while net debtors and stock owners see their real debt load being reduced by inflation and the value of most shares in the stock market going up.

In the second instance, the reverse can happen if the economy is starved of liquidity: the yield curve inverts with short-run interest rates moving way up as compared to long-term interest rates. A stock market crash and an economic recession generally follow.

That’s pretty much what the Fed has been doing over its nearly 100 years of existence, keeping short-run interest rates too low for too long, creating unsustainable asset bubbles, and then applying the monetary brakes to kill inflation expectations that it has created on its own. Sometimes, the Fed has maintained price stability and the value of the U.S. dollar; but at other times, it has willingly acted to destroy the purchasing power of the dollar by printing too much of it.

As a general principle, if inflation expectations increase faster than nominal long-term interest rates, real interest rates, i.e. the real cost of capital for investors and home buyers, would decline and this would, hopefully, stimulate economic activity and employment.

Unfortunately for the Fed, its Nov. 3rd announcement translated into an important loss of confidence in its ability to design and pursue an appropriate monetary policy and was immediately decried by other central banks and by America’s biggest creditor, China, as a blatant attempt to generate and export inflation. Bond prices began immediately to fall and bond yields to rise. It seems that bondholders began selling longer-term Treasuries at a faster rate than the Fed could buy them.

Chairman Ben Bernanke and his board seem to have forgotten that the United States is now a debtor nation, not a creditor nation. A creditor nation could get away with an outspoken policy of creating inflation—but not a debtor nation. In 2010 alone, the U.S. registered another half a trillion-dollar trade deficit with the rest of the world. This has to be financed, and it is done with foreign borrowings. To a large extent, foreign creditors now decide the final outcome of American monetary policy.

The 10-year Treasury yield, which hit a low at 2.40 percent in October 2010, was at 2.63 percent the day before the Fed’s announcement on November 2, 2010. As it turned out, it closed at 3.64 on Friday February 11, after hitting a high of 3.75 percent on February 8. The same is true of the 30-year Treasury yield that hit a high of 4.76 percent on February 8, thus approaching the dangerous threshold of 4.90 percent. The latter stood at 3.93 percent on Nov. 2, 2010.

Obviously, the Fed’s ultra loose monetary policy has backfired. Its intended policy of printing money in excess of what the economy demands has resulted in raising real long-term interest rates, not lowering them. Indeed, with long-term nominal rates on the rise while inflation will take many months to surface, the immediate effect of the Fed’s November announcement was to raise real long-term Treasury rates, not to lower them. Mortgage rates are also on the rise, threatening to postpone the long anticipated recovery in the housing market.

It is certainly possible that we are entering a period when the already observed rise in real interest rates can derail the stock market rally that has been in force since early March 2009. Later on, however, a slowdown in the economy coupled with fiscal compressions can be expected to push long-term rates down again. Such a roller-coaster path for interest rates is not very helpful.

The current Fed board seems to believe that the Fed is more than a central bank, that it is a sort of a government unto itself that can both control monetary conditions and solve the structural problems in the real economy at the same time, irrespective of what the rest of the world thinks. This would seem to be most unrealistic. Perhaps a dose of humility would be salutary at this time, before irreparable damage is done.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and author of the books The Code for Global Ethics and The Code for Global Ethics, Ten Humanist Principles (prefaced by Dr. Paul Kurtz). He can be reached at: rodrigue.tremblay@yahoo.com. Read other articles by Rodrigue, or visit Rodrigue's website.

This article was posted on Tuesday, February 15th, 2011 at 8:00am and is filed under Banks/Banking, Economy/Economics, Finance.

Bill Moyers: "Facts Still Matter ..."

Bill Moyers: "Facts Still Matter ..."

Monday 14 February 2011

by: Bill Moyers, t r u t h o u t | Speech

Bill Moyers. (Photo: Grahamtastic; Edited: Jared Rodriguez / t r u t h o u t)

History Makers is an organization of broadcasters and producers from around the world concerned with the challenges and opportunities faced by factual broadcasting. Bill Moyers was the keynote speaker at the 2011 convention on January 27, 2011, in New York City.

Thanks to all of you for your welcome - and for the chance to be here among so many kindred spirits. Your dedication to factual broadcasting, to our craft and calling; your passion for telling stories that matter; for connecting the present to the past, has created a community whose work is essential in this disquieting time when "what is happening today, this hour, this very minute, seems to be our sole criterion for judgment and action." It is a sad world that exists only in the present, unaware of the long procession that brought us here. As Milan Kundera’s insight reminds us, the struggle against power "is the struggle of memory against forgetting."

I talked about this gathering when I was in California this past weekend and spent time with a good friend and supporter of my own work on television, Paul Orfalea. He's the maverick entrepreneur who founded Kinko's in a former hamburger stand with one small rented Xerox copier and turned it into a business service empire with more than two billion dollars a year in revenue. After selling Kinko's, Paul became one of the most popular, if unorthodox, teachers of undergraduates at the University of California/ Santa Barbara. When I told him what I would be doing today he applauded and understood immediately the importance of what you do. He described to me how he teaches history "backwards" to college students who have learned little about the past in high school, don't know that the past is even alive, much less that it lives in them and question its value today. He hands his students a contemporary story from some daily news source, tells them to begin with the "now" of it and to then walk the trail back down the chronology to trace the personalities, circumstances and choices that made it today's news. Their assignment, in effect, is to begin at the entrance to the cave and rewind Ariadne's thread in the opposite direction, back to the deep origins of the story. In an era marked by the lack of continuity and community between the generations, this strikes me as an inspired way to stretch young imaginations across the time zones of human experience.

And it's, of course, what you do so often in your work. No one I know does it more effectively than "Frontline." and I was pleased to learn that you are honoring its executive director, David Fanning, who is a genius, in my book, at story telling grounded in fact and presented with perspective. Over the past quarter century, I have been privileged to collaborate occasionally with David. But beyond my own personal and professional gratitude to him, all of us who produce current affairs and history programming know that he has kept the bar high while producing a body of work unequaled since Fred Friendly. Most of you are too young to have seen the whole arc of David's extraordinary career or to have known Fred Friendly's work. But some of us can never forget we're standing on the shoulder of those two giants.

I also had the privilege of witnessing Fred in action. When he was president of "CBS News" and I was the White House press secretary, he would come down from New York on the shuttle and slip in the back door of the White House and along the hall past the Cabinet Room to the private entrance to my office for an hour-or-so chat. I had done some preliminary work at the Office of Education on the future of public television in 1964, and we were soon talking about the medium's future; he was a true believer in television "that dignifies instead of debases" and of the importance "of at least one channel free of commercials and commercial values." Little did we know at the time that he would soon quit the job he relished as president of the news division that he and Edward R. Murrow had built. The two of them created "See It Now" and "CBS Reports," which set the standard for investigative reporting and documentaries of unprecedented power and impact. One of their collaborations was the famous documentary on the demagogic and dangerous Senator Joseph McCarthy. They made the brilliant decision to let McCarthy speak for himself, an entire broadcast's worth of his bullying words and techniques. McCarthy obligingly hanged himself on national television, far more effectively and fatally than anyone else's words could. His own words had turned Americans against his demagoguery - something for which the right to this day has never forgiven what they denounced as the "Communist Broadcasting System." Watching that documentary over and again, I realized that it is through such unhurried honoring of reality that we can approach the myriad and messy truths of human experience. For lasting effect, those truths cannot be forced into the mind of the public; they must be nurtured.

Fred never wanted to leave CBS, but in 1966, when the network refused to carry Senate hearings on the Vietnam War, choosing instead to run a repeat of "I Love Lucy," he resigned, became the media adviser to the Ford Foundation and was the prime mover in the creation of the Corporation for Public Broadcasting. He became our Johnny Appleseed, persuading the foundation to put its money - millions of dollars - where his mind was.

I had left the White House by then to be publisher of Newsday and would soon join public television as anchor of a weekly broadcast. Fred's first teaching assistant, Martin Clancy, was my star producer. It was usually one of Fred's people who taught me the most about our craft - how it was possible through the coupling of word and image to come close to the verifiable truth and an honest accounting of reality. Fred played a critical role in my life when, after stints at both CBS and PBS, I had to choose between the two. I had found it increasingly difficult at the network to do the work I most wanted to do, but was reluctant to take off the golden handcuffs and leap into the world of independent production. I went over to see Fred at the foundation and there was nothing subtle in his advice. He said, "You're never going to do the work you most want to do until you do it for yourself." So, I followed him overboard.

Fred was right, as he so often was: independence meant the best hope for me to pursue journalism as a mission. Perhaps, we were naïve, but in those days many of us still assumed that an informed public is preferable to an uninformed one. Hadn't Thomas Jefferson proclaimed that, "Whenever the people are well-informed, they can be trusted with their own government"? And wasn't a free press essential to that end?

Maybe not. As Joe Keohane reported last year in The Boston Globe, political scientists have begun to discover a human tendency "deeply discouraging to anyone with faith in the power of information." He was reporting on research at the University of Michigan, which found that when misinformed people, particularly political partisans, were exposed to corrected facts in new stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts were not curing misinformation. "Like an underpowered antibiotic, facts could actually make misinformation even stronger." You can read the entire article online.

I won't spoil it for you by a lengthy summary here. Suffice it to say that, while "most of us like to believe that our opinions have been formed over time by careful, rational consideration of facts and ideas and that the decisions based on those opinions, therefore, have the ring of soundness and intelligence," the research found that actually "we often base our opinions on our beliefs ... and rather than facts driving beliefs, our beliefs can dictate the facts we chose to accept. They can cause us to twist facts so they fit better with our preconceived notions."

These studies help to explain why America seems more and more unable to deal with reality. So many people inhabit a closed belief system on whose door they have hung the "Do Not Disturb" sign, that they pick and choose only those facts that will serve as building blocks for walling them off from uncomfortable truths. Any journalist whose reporting threatens that belief system gets sliced and diced by its apologists and polemicists (say, the fabulists at Fox News, Rush Limbaugh and the yahoos of talk radio.) Remember when Limbaugh, for one, took journalists on for their reporting about torture at Abu Ghraib? He attempted to dismiss the cruelty inflicted on their captives by American soldiers as a little necessary "sport" for soldiers under stress, saying on air: "This is no different than what happens at the Skull and Bones initiation ... you [ever] heard of need to blow some steam off?" As so often happens, the Limbaugh line became a drumbeat in the nether reaches of the right-wing echo chamber. So, it was not surprising that in a nationwide survey conducted by The Chicago Tribune on First Amendment issues, half of the respondents said there should be some kind of press restraint on reporting about the prison abuse. According to Charles Madigan, the editor of the Tribune's Perspective section, 50 or 60 percent of the respondents said they "would embrace government controls of some kind on free speech, particularly when it has sexual content or is heard as unpatriotic."

No wonder many people still believe Obama was born in Kenya, not Hawaii, as his birth certificate shows; or that he is a Muslim, when in fact he is a Christian; or that he is a socialist when day by day he shows an eager solicitude for corporate capitalism. Partisans in particular - and the audiences for Murdoch's Fox News and talk radio - are particularly susceptible to such scurrilous disinformation. In a Harris survey last spring, 67 percent of Republicans said Obama is a socialist; 57 percent believed him to be a Muslim; 45 percent refused to believe he was born in America; and 24 percent said he "may be the antichrist."

The bigger the smear, the more it sticks. And there is no shortage of smear artists. Last year, Forbes Magazine, obviously bent on mischief, allowed the right-wing fantasist Dinesh D'Souza to tar Obama with a toxic brew so odious it triggered memories of racist babble - a perverted combination of half-baked psychology, biology and sociology - that marked the heyday of the Ku Klux Klan. Seizing upon the anti-colonial views of Obama's Kenyan father, who had deserted the family when the boy was two years old and whose absence from his life Obama meditated upon in his best-selling book "Dreams of My Father," D'Souza wrote that, "Incredibly, the US is being ruled according to the dreams of a Luo tribesman of the 1950s. This philandering, inebriated African socialist, who raged against the world for denying him the realization of his anticolonial ambitions, is now setting the nation's agenda through the reincarnation of his dreams in his son."

In a sane political world, you might think at least a few Republican notables would have denounced such hogwash by their own kind for what it was. But no. Newt Gingrich, once their speaker of the House, whose own fantasies include succeeding Obama in the White House, set the tone by praising D'Souza's claptrap as the "most profound insight I have read in the last six years about Barack Obama." D'Souza, said Gingrich, has made a "stunning insight" and had unlocked the mystery of Obama. I could find only one conservative who stood up against this trash. David Frum, the former speechwriter for George W. Bush, wrote on his blog: "The argument that Obama is an infiltrating alien, a deceiving foreigner - and not just any kind of alien, but specifically a Third World alien - has been absorbed to the very core of the Republican platform for November 2010." Once again, the right-wing media machine had popularized a false narrative and made of it a destructive political weapon.

Disinformation is not unique to the right, of course. Like other journalists, I have been the object of malevolent assaults from the "9/11 truthers" for not reporting their airtight case proving that the Bush administration conspired to bring about the attacks on the World Trade Center. How did they discover this conspiracy? As the independent journalist Robert Parry has written, "the truthers" threw out all the evidence of al-Qaeda's involvement, from contemporaneous calls from hijack victims on the planes to confessions from al-Qaeda leaders both in and out of captivity that they had indeed done it. Then, recycling some of the right's sophistry techniques, such as using long lists of supposed evidence to overcome the lack of any real evidence, the "truthers" cherry-picked a few supposed "anomalies" to build an "inside-job" story line. Fortunately, this Big Lie never took hold in the public mind. These truthers on the left, if that is where GPS can find them on the political map, are outgunned, outmatched and outshouted by the media apparatus on the right that pounds the public like drone missiles loaded with conspiracy theories and disinformation and accompanied by armadas of outright lies.

George Orwell had warned six decades ago that the corrosion of language goes hand in hand with the corruption of democracy. If he were around today, he would remind us that "like the rattling of a stick inside a swill bucket," this kind of propaganda engenders a "protective stupidity" almost impossible for facts to penetrate.

But you, my colleagues, can't give up. If you do, there's no chance any public memory of everyday truths - the tangible, touchable, palpable realities so vital to democracy - will survive. We would be left to the mercy of the agitated amnesiacs who "make" their own reality, as one of them boasted at the time America invaded Iraq, in order to maintain their hold on the public mind and the levers of power. You will remember that in Orwell's novel "1984," Big Brother banishes history to the memory hole, where inconvenient facts simply disappear. Control of the present rests on obliteration of the past. The figure of O'Brien, who is the personification of Big Brother, says to the protagonist, Winston Smith: "We shall squeeze you empty and then we shall fill you with ourselves." And they do. The bureaucrats in the Ministry of Truth destroy the records of the past and publish new versions. These in turn are superseded by yet more revisions. Why? Because people without memory are at the mercy of the powers that be; there is nothing against which to measure what they are told today. History is obliterated.

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The late scholar Cleanth Brooks of Yale thought there were three great enemies of democracy. He called them "The Bastard Muses": Propaganda, which pleads sometimes unscrupulously, for a special cause at the expense of the total truth; sentimentality, which works up emotional responses unwarranted by, and in excess of, the occasion; and pornography, which focuses upon one powerful human drive at the expense of the total human personality. The poet Czeslaw Milosz identified another enemy of democracy when, upon accepting the Noble Prize for Literature, he said "Our planet that gets smaller every year, with its fantastic proliferation of mass media, is witnessing a process that escapes definition, characterized by a refusal to remember." Memory is crucial to democracy; historical amnesia, its nemesis.

Against these tendencies it is an uphill fight to stay the course of factual broadcasting. We have to keep reassuring ourselves and one another that it matters and we have to join forces to defend and safeguard our independence. I learned this early on.

When I collaborated with the producer Sherry Jones on the very first documentary ever about the purchase of government favors by political action committees, we unfurled across the Capitol grounds yard after yard of computer printouts listing campaign contributions to every member of Congress. The broadcast infuriated just about everyone, including old friends of mine who a few years earlier had been allies when I worked at the White House. Congressmen friendly to public television were also outraged, but, I am pleased to report, PBS took the heat without melting.

But shining the spotlight on political corruption is nothing compared to what can happen if you raise questions about corporate power in Washington, as my colleague Marty Koughan and I discovered when we produced a program for David Fanning and "Frontline" on pesticides and food. Marty had learned that industry was attempting behind closed doors to dilute the findings of the American Academy of Sciences study on the effects of pesticide residues on children. Before we finished the documentary, the industry somehow purloined a copy of our draft script - we still aren't certain how - and mounted a sophisticated and expensive campaign to discredit our program before it aired. Television reviewers and editorial pages of key newspapers were flooded with propaganda. Some public television managers were so unnerved by the blitz of misleading information about a film they had not yet broadcast that they actually protested to PBS with letters that had been prepared by the industry.

Here's what most perplexed us: the American Cancer Society - an organization that in no way figured in our story - sent to its 3,000 local chapters a "critique" of the unfinished documentary claiming, wrongly, that it exaggerated the dangers of pesticides in food. We were puzzled. Why was the American Cancer Society taking the unusual step of criticizing a documentary that it had not seen, that had not aired and that did not claim what the Society alleged? An enterprising reporter named Sheila Kaplan later looked into those questions for the journal Legal Times. It turns out that the Porter Novelli public relations firm, which had worked for several chemical companies, also did pro bono work for the American Cancer Society. Kaplan found that the firm was able to cash in some of the goodwill from that "charitable" work to persuade the compliant communications staff at the Society to distribute some harsh talking point about the documentary before it aired - talking points that had been supplied by, but not attributed to, Porter Novelli. Legal Times headlined the story "Porter Novelli Plays All Sides." A familiar Washington game.

Others also used the American Cancer Society's good name in efforts to tarnish the journalism before it aired, none more invidiously than the right-wing polemicist Reed Irvine, who pumped his sludge through an organization with the Orwellian name Accuracy in Media. He attacked our work as "junk science on PBS" and demanded Congress pull the plug on public broadcasting. Fortunately, PBS once again stood firm. The documentary aired, the journalism held up and the publicity liberated the National Academy of Sciences to release the study that the industry had tried to cripple.

However, there's always another round; the sharks are always circling. Sherry Jones and I spent more than a year working on another PBS documentary called "Trade Secrets," a two-hour investigative special based on revelations - found in the industry's own archives - that big chemical companies had deliberately withheld from workers and consumers damaging information about toxic chemicals in their products. These internal industry documents are a fact. They exist. They are not a matter of opinion or point of view. They state what the companies knew, when they knew it and what they did with what they knew (namely to deep-six it) at peril to those who worked with and consumed the potentially lethal products.

The revelations portrayed deep and pervasive corruption in a major American industry and raised critical policy implications about the safety of living under a regulatory system manipulated by the industry itself. If the public and government regulators had known what the industry knew about the health risks of its products when the industry knew it, America's laws and regulations governing chemical manufacturing would have been far more protective of human health. But the industry didn't want us to know. That's what the documents revealed and that was the story the industry fought to keep us from telling.

The industry hired as an ally a public relations firm in Washington noted for using private detectives and former CIA, FBI and drug enforcement officers to conduct investigations for corporations under critical scrutiny. One of the company's founders acknowledged that corporations may need to resort to "deceit" and other unconventional resources to counter public scrutiny. Given the scurrilous campaign that was conducted to smear our journalism, his comments were an understatement. To complicate matters, the Congressman, who for years had been the single biggest recipient of campaign contributions from the chemical industry, was the very member of Congress whose committee had jurisdiction over public broadcasting's appropriations. As an independent production firm, we had not used public funds to produce the documentary. But even our independence didn't stop the corporate mercenaries from bringing relentless pressure on PBS not to air the broadcast. The then president of PBS, Pat Mitchell, stood tall in resisting the pressure and was vindicated: one year later, The National Academy of Television Arts and Sciences awarded "Trade Secrets" an Emmy for outstanding investigative journalism.

Now, you can understand how it is that journalism became for me a continuing course in adult education. It enabled me to produce documentaries like "Trade Secrets" and out-of-the-box series like "Joseph Campbell and the Power of Myth." It enabled me to cover the summits of world leaders and the daily lives of struggling families in Newark. It empowered me to explain how public elections are subverted by private money, and to how to make a poem. Journalism also provided me a passport into the world of ideas, which became my favorite beat, in no small part because I never met anyone - philosopher or physicist, historian, artist, writer, scientist, entrepreneur or social critic - who didn't teach me something I hadn't known, something that enlarged my life.

Here's an example: One of my favorite of all interviews was with my sainted fellow Texan, the writer and broadcaster John Henry Faulk, who had many years earlier, been the target of a right-wing smear campaign that resulted in his firing by CBS from his job as a radio host here in New York, one of the low moments in that network's history. But John Henry fought back in court and won a landmark legal victory against his tormentors. After he returned home to Texas, I did the last interview with him before his death in 1990. He told me the story of how he and his friend Boots Cooper were playing in the chicken coop when they were about 12 years old. They spied a chicken snake in the top tier of nests, so close it looked like a boa constrictor. As John Henry put it, "All our frontier courage drained out our heels - actually it trickled down our overall legs - and Boots and I made a new door through that henhouse wall." Hearing all the commotion Boots' momma came out and said, "Don't you boys know chicken snakes are harmless? They can't harm you." And Boots, rubbing his forehead and behind at the same time, said, "Yes, Mrs. Faulk, I know that, but they can scare you so bad, it'll cause you to hurt yourself." John Henry Faulk told me that's a lesson he never forgot. Over and again I've tried to remember it, too, calling on it to restore my resolve and my soul.

I've had a wonderful life in broadcasting, matriculating as a perpetual student in the school of journalism. Other people have paid the tuition and travel and I've never really had to grow up and get a day job. I think it's because journalism has been so good to me that I am sad when I hear or read that factual broadcasting is passé - that television as a venue for forensic journalism is on its way out and that trying to find out "what really happened" - which is our mandate - is but a quaint relic in an age of post-structuralism and cyberspace. But despite all our personal electronic devices, people are watching more television than ever. Much of this programming is posted online; I believe at least half the audience for my last two weekly series on Friday night came over the weekend via streaming video, iPods and TIVO. I was pleased to discover that the web sites most frequented by educators are those of PBS and that our own sites were among the most popular destinations. That's what keeps us going, isn't it? The knowledge that all the bias and ignorance notwithstanding, facts still matter to critical thinking, that if we respect and honor, even revere them, they just might help us right the ship of state before it rams the iceberg.

That's why, on balance, I count WikiLeaks a plus for democracy. Whatever side you take on the controversy, whether or not you think this information should be disclosed, all parties - those who want it released and those who don't - acknowledge that information matters. Partly because I grew up in the south and partly because of my experience in the Johnson White House, I'm on the side of disclosure, even when it hurts. The truth about slavery had been driven from the pulpits, newsrooms and classrooms during the antebellum days; it took a bloody civil war to drive the truth home. At the Johnson White House, we circled the wagons and grew intolerant of news that didn't conform to our hopes, expectations and strategies for Vietnam, with terrible, tragic results for Americans and Vietnamese, north and south. I say: "Never again!"

Here's a sidebar: I remember vividly the day President Johnson signed the Freedom of Information Act (FOIA): July 4, 1966. He signed it "with a deep sense of pride," declaring in almost lyrical language "that the United States is an open society in which the people's right to know is cherished and guarded." That's what he said. The truth is, the president had to be dragged kicking and screaming to the signing ceremony. He hated the very idea of journalists rummaging in government closets, hated them challenging the authorized view of reality, hated them knowing what he didn't want them to know. He dug in his heels and even threatened to pocket veto the bill after it reached the White House. Only the courage and political skill of a Congressman named John Moss got the bill passed at all and that was after a 12-year battle against his Congressional elders, who blinked every time the sun shined on the dark corners of power. They managed to cripple the bill Moss had drafted and, even then, only some last-minute calls to LBJ from a handful of influential newspaper editors overcame the president's reluctance. He signed "the f------ thing," as he called it and then, lo and behold, went out to claim credit for it.

It's always a fight to find out what the government doesn't want us to know. The official obsession with secrecy is all the more disturbing today because the war on terrorism is a war without limits, without a visible enemy or decisive encounters. We don't know where the clandestine war is going on or how much it's costing and whether it's in the least effective. Even in Afghanistan, most of what we know comes from official, usually military, sources.

Thus, a relative handful of people have enormous power to keep us in the dark. And when those people are in league with their counterparts in powerful corporations, the public is hit with a double whammy. We're usually told the issue is national security, but keeping us from finding out about the danger of accidents at chemical plants is not about national security; it's about covering up an industry's indiscretions and liabilities. Locking up the secrets of meetings with energy executives is not about national security; it's about hiding confidential memos sent to the White House showing the influence of oil companies on policies of global warming We only learned about that memo from the Bush White House, by the way, thanks to the Freedom of Information Act.

Consider WikiLeaks, then, to be one big FOIA dump. Were some people in high places embarrassed? Perhaps. They did squeal, but I don't think they were stuck.

And even so, we learned some important things from WikiLeaks. For example, as Reza Alsan writes in The Atlantic, the president of Iran, Mahmoud Ahmadinejad, may not be as fanatical as we think he is; the diplomatic cables released by WikiLeaks portray him as "a moderate reformer who'd like to cut deals with the West, but can't because hard-liners are calling the shots." One of them even slapped Ahmadinejad across the face when, at a high-level meeting. he proposed that the government allow more personal and press freedom at the height of the 2009 public protests in Iran. Such information can help us evaluate the incessant demands of neoconservative warmongers - the very people who rode the circuit with news of "weapons of mass destruction" in an effort to build support for invading Iraq - that we use military force against Iran to eliminate its nuclear capacity.

There are other uses of the disclosures from WikiLeaks admirably compiled by Greg Mitchell in the current edition of The Nation, where the one-time editor of Editor and Publisher performed an important public service by culling the gold from the dust.

I will close with an urgent appeal to you about one fight we won't win unless all of us join it. I'm sure everyone here agrees that we will eventually be moving to the web, all of us and that "free, instant, worldwide connectivity" is the future. But I'm sure you know that this incredible, free, open Internet highway is at risk, that corporations are on the brink of muscling their way to the front of the line. Media companies want the power to censor Internet content they don't like, to put toll booths on the web so they can charge more for the privilege of driving in the fast lanes, to turn it into a private preserve.

You may have heard that last month the FCC decided to protect free/open Internet access only on landline connections, not wireless - which is to say, there's no net neutrality in most of the online world. As Jenn Ettinger of the nonpartisan, nonprofit Free Press reported in Yes! magazine just two days ago:

The rules that the FCC passed in December are vague and weak. The limited protections that were placed on wired connections, the kind you access through your home computer, leave the door open for the phone and cable companies to develop fast and slow lanes on the Web and to favor their own content or applications.

Worse, the rules also explicitly allow wireless carriers ... to block applications for any reason and to degrade and de-prioritize websites you access using your cell phone or a device like an iPad.

Perhaps the FCC is biding its time, waiting to see how things develop technologically, with the current FCC chair seemingly more open to citizen input than was his predecessor. Or, again, maybe the landline regulation was meant simply to get media reformers off the commission's back. We can't relax our vigilance. In Ettinger's words:

The FCC still has the opportunity to put in place a solid framework that would put the public interest above the profit motive of the phone and cable companies that it is supposed to regulate. And the FCC should take immediate steps to close the loopholes it created, to strengthen its rules and to include wireless protections. The fight is far from over. We can work to change the rules, demand better oversight and consumer protections and make sure that the big companies can't pad their bottom lines on the backs of their customers.

In this effort, we have a strong ally in FCC commissioner Michael Copps, who. on my broadcast last year, spelled out how "our future is going to ride on broadband. How we get a job is going to ride on broadband. How we take care of our health. How we educate ourselves about our responsibilities as citizens ... And it's absolutely imperative that we have a place, that we have a venue to go to, to make sure that that Internet is kept open ... That's our decision to make as a people, as citizens: who's going to control this ultimately?"

With all the media consolidation that's happening today, the web may be the last stand of independent factual broadcasters like you. The stakes are high and we have come to the decisive round. I'll leave you with a story Joseph Campbell told me years ago for my series "The Power of Myth." It seems a fellow rounding the corner saw a fight break out down the block. Running up to one of the bystanders, he shouted: "Is this a private fight or can anyone get in it?"

The Internet fight for democracy is a public fight. Come on in!

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The President as Storyteller in Chief

The President as Storyteller in Chief

Monday 14 February 2011

by: Dean Baker, t r u t h o u t | Op-Ed

President Barack Obama delivers remarks at the US Chamber of Commerce in Washington, on February 7, 2011. (Photo: Drew Angerer / The New York Times)

The celebrations surrounding the 100th anniversary of Ronald Reagan's birth overlooked an important part of Reagan's success: his ability to craft an image to serve as the focus of his political argument. When he was running for president in 1980, Reagan invented two great tales that highlighted the worldview he was selling to his supporters.

One of these tales was the story of the welfare queen. She drove to the welfare office in a Cadillac every month to pick up her welfare check. The other story involved a man who bought an orange with food stamps and then used the change to buy a bottle of vodka. Never mind that these stories were almost certainly not true: they crystallized an image of the world that Reagan campaigned against.

Unfortunately, in this respect, President Obama is no Ronald Reagan. He has persistently refused to give the country a story of the economic downturn. As a result, the center and right have eagerly filled the void.

The center-right story centers on government excess: large budget deficits, overpaid public employees and bloated government social programs. Just as was the case with President Reagan's stories, these stories are not true.

The large budget deficits were an outcome of the crisis: tax collections plummeted and spending on countercyclical programs like unemployment insurance rose. The deficits in the years preceding the crisis were actually relatively small when measured against the size of the economy.

As far as the pay of public employees, there have been a number showing that, after controlling for education and experience, state and local employees are paid slightly less than their private-sector counterparts. It is possible to find examples of public employees who are arguably overpaid, but the data show this is the exception, not the rule.

Finally, we have the story of out-of-control social programs. There are two different stories here. There are a number of programs focused on helping low-income people that even collectively don't amount to a hill of beans in terms of the total budget. We can stop paying for nutrition for poor children or buying heating oil for low-income seniors, but even zeroing out these programs entirely barely makes a dent in the budget.

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Then, we have the universal programs, like Social Security and Medicare. These programs cost a lot of money, but people are willing to pay for them. Furthermore, the story of exploding growth in these "entitlements" stems entirely from our broken health care system.

If per person health care costs in the United States were the same as in any other wealthy country, we would be looking at enormous budget surpluses, not deficits. Everyone in Washington knows this, but they are scared of the drug companies, the insurance companies, the doctors' lobbies, and other powerful interest groups, so instead they push for cutting these essential programs.

In short, the center-right story's can easily be shown to be nonsense. However, President Obama has put up nothing to counter it. He has backed away from telling the public the truth: the country faces an enormous economic hole right now because the financial industry ran wild over the last decade and the Fed and other government regulators let them.

It would not be difficult to come up with salacious images of people like Angelo Mozilo of Countrywide or Robert Rubin of Citigroup living the good life, while tens of millions of people suffer unemployment and/or foreclosures because of the fallout from their greed. President Obama could also highlight the incredible incompetence of top economic officials like Alan Greenspan and Ben Bernanke, who let the $8-trillion housing bubble grow unchecked.

This would provide a compelling and truthful narrative to focus the nation's attention. Polls consistently show that the public has an intense dislike of Wall Street. What better place to direct people's anger than on those who are actually responsible for the economic crisis?

However, President Obama has opted to go in a different direction. He has instead embraced the false narrative pushed by the center-right, actually implying the problem is somehow out-of-control government spending, as though the housing bubble were not the source of the economic crisis. This may endear him to the Wall Street crew, but this narrative is a disaster for those who care about putting people back to work, providing workers with a secure retirement and protecting the gains that unions have helped to secure for workers in both the public and private sector.

At the time of his election, many progressives hoped that President Obama could play the same transformational role in this crisis as President Roosevelt did during the Great Depression. The more limited hope was that he could be an inspirational leader to his base in the same way as Ronald Reagan was for the right. At this point, the best hope is that he doesn't open the door to unwinding 75 years of economic and social progress.

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Capitalism’s Profit System

by Frank Scott / February 14th, 2011

My country is the world.

— Thomas Paine

Workers of the world, unite.

— Karl Marx

Demands for social change are accelerating throughout capital’s global empire. Once limited to armed insurrection, now nations like Bolivia and Venezuela elect governments to replace capitalism with democratically controlled socialism. While their approach is not followed everywhere, more people are demanding democratic power with those demands reaching new peaks in the Middle East.

Recent uprisings in the Arab world may endure short-range attempts at western manipulation, but their long-range outcome is clear to all but the morally disabled. Calls for majority rule are coming from masses of people united in their desire, rather than from elites organizing minority rule and calling it democracy. The USA and Israel will try to control the uncontrollable, but the days of western Zionist rule are numbered. This is not just great news for Arabs or Muslims but for all humanity.

After colonialism officially ended, western domination was maintained over former colonies by governments headed by puppets whose regimes were called democratic as long as they remained under the domain of privately controlled markets and adhered to the dictates of Israel. That minority-dominated system has never been under more pressure as disgusted majorities are crying out “enough is enough”. This global trend may not always be focused on private capital’s anti-democratic control, but that is the core problem which can only be solved by democratic public control of the political economics of all nations. The rise of a previously subjugated population in Egypt heralds a move closer to that solution to humanity’s collective problem.

The commerce of profit and loss has been harshly criticized from as far back as biblical times, when usurious interest and money changers in the temple were subjects of moral outrage. That criticism continued through the ages, often muted because many seemed to prosper under the economics of “buy cheap and sell dear”. Those paying dearly got products they might not otherwise have acquired while achieving material comfort and social status in the process. But the commercial religion of global capitalism has reached a crisis point of physical and moral degradation nearing total breakdown.

Capitalism’s problems are isolated as single issues to obscure the flaws of the entire system, the way people are divided into minorities to keep individuals from acting as an organized majority with common interests. But climate change, imperial war, racial supremacy, corporate greed and countless other problems are the result of private control of markets organized to run on those profit and loss economics of ancient origin.

After ages in which this system enriched some at the expense of most but with support from greater numbers led to believe they would soon be included in the minority feast, we have reached an impasse that threatens to include all in a majority famine. Nature itself is in terminal danger under the abuse of the unnatural rush for private profit. And as the group to whom the profits flow gets smaller, the riches they accumulate grow larger.

The world’s richest minority is wealthier than ever as a result of public debt carried by the global majority in an economic casino of waste and war. Billions live in poverty while the working middle shrinks under an attack on capital’s primitive welfare state which takes their jobs and benefits to create still more wealth for the top. Glaring inequality and declining material standards are being experienced in the once affluent west as well as among the nations formerly providing much of its wealth. All over the world people are expressing contempt for the system reducing them to outrageous poverty, denying them democratic representation and burdening them with unpayable debt.

The Internet age has helped people to better communicate and identify common problems, enabling them to form seemingly leaderless groups that react to conditions with greater speed than authority can respond to and subdue. The result of this consciousness raising experience can be seen in global outbreaks of these fast reacting groups, as in Egypt. The Internet is a form of communication never before available, and breathless supporters can sometimes exaggerate its affect. The overwhelming majority of Egyptians who participated in the demonstrations were not even owners of computers. But the newer communications media of internet, cell phones, and cable news – especially Al Jazeera – is helping create groups that connect in the physical and not just electronic world. The historic rise of the Egyptian people was hardly based on the Internet, but it could not have happened without that tool used by an aroused population. As this electronic global web is better understood as a tool for community organizing and not just market commerce, the universal march to democracy will take on even more speed.

Even when the west tries to manipulate movements with its color-coded and outside financed uprisings to assure private capital’s control, the long-range outcome of more democracy can only mean eventual public control. Whether the new movements call themselves democratic, socialist, Islamist or artistic, most of their national economies will ultimately be placed under the control of the state and the state will at long last – and for the first time in history – be controlled by the people.

Social justice will begin when minority domination of political economics is finally brought to its end. Democracy means majority rule and the social sharing of wealth, not the selfish squandering of humanity’s product on a minority of billionaires, most of whom never worked a day in their lives. We are moving closer to realizing that democratic ideal as a global and not just national reality. The Egyptian people and the Arab world are playing a major role in that realization.

Frank Scott writes political commentary which appears in print in the Coastal Post and The Independent Monitor and online at the blog Legalienate. Read other articles by Frank.

This article was posted on Monday, February 14th, 2011 at 8:00am and is filed under Capitalism, Democracy, Economy/Economics, Egypt, Israel/Palestine.