U.S. $60 billion dollar arms deal with Saudi Arabia Single Q&A with Noam Chomsky

a U.S. $60 billion dollar arms deal with Saudi Arabia has been in the news lately, and given the dominance of the U.S. over most nations in the middle east, it appeared at first, to be a significant shift away from the U.S. imperial framework that we use to maintain control over the energy resources in the gulf. The core roles of the U.S. energy system is that Israel is our #1 client--they police the region, and the Saudis were given the role established by British planners prior to the 2nd world war. With other state power systems coming in and out of fashion but managed by the U.S. at various points in time. Given the established role of the Saudis to maintain a weak central government which could be protected by "gendarmes" in the case of attack or an internal revolt, I wondered if this 60 billion dollar arms deal would be a major shift away from the dominant order

I asked Noam Chomsky on this topic, and here was the response:

ER: It's my understanding that the weapons are not as advanced as what we send to Israel, but does this undermine the imperial framework established by the Franco-British empires and... inherited and expanded by the U.S? Is the tension between Israel and Saudi Arabia significant given their respective roles in the system? Is it a major policy shift to allow the Saudis greater internal military control?

NC: You’re right that the arms are not as advanced as what is sent to Israel, which doesn’t object to them. And it’s doubtful that they have any purpose beyond internal repression and tying Saudi Arabia more closely to the US, with more control by the US (training, logistic support, repair, etc.). It strengthens the imperial framework, in this sense. Israel and Saudi Arabia have been tacit allies since 1967, with rare shifts.

A simplified political spectrum.

There has always been some confusion and arbitrary discussion about what the American political spectrum is. What defines the left and what defines the right. In many cases, there is an overlapping spectrum for libertarianism, socialism, liberal on social issues type stuff, but I don't use that stuff. It doesn't work for me from a framework standpoint. Anyone can arbitrarily define what they want "right" or "left" or "liberal" or "conservative" to mean. They are just labels. But if there is a continuum, I prefer the one I laid out below. But I do understand the concepts of the libertarian socialists and that the historical difference between was the difference in tactics between the anti-statist wing of the left (called libertarian) and the statist wing--which went in the socialist direction. But I do not find this to be relevant today.

In essence, the further left you go, the less power you have in few hands and the more power you have as broadly distributed as possible. The further right you go, the more it is concentrated in fewer and fewer hands. That's my metric.

Using the left as democratic, right as authoritarian and hierarchical is simply easier and clears up the muddy confusion over libertarians and socialism, liberals and the older political language. The language and discourse of modern politics is important because we power levelers are at a disadvantage for getting our message out, and the right wing has all of the advantage. We need to be quick with our message so it can be passed along quickly, without always needing such an extensive explanation.

Then there is the matter of labeling the opposition. I am growing fond of the term "right wing socialists" For starters, there is just a tiny splash of "national socialists" in the word, but most importantly, they have spent so much time and effort defining socialism as what they want it to mean through decades upon decades of business financed corporate propaganda--that the base of the right already has such an imprint of it to make it an extremely uphill, costly, and unnecessary battle to attempt to reclaim the word. The same applies to the word "Liberal".

The reason the term applies and fits so well is the bottom line economic reality that the right wing socialists very willingly, especially since Ronald Reagan's election in 1980, have taken the public money, and pooled it collectively and redistribute the wealth upwards. This has always been done, but it has been done at a more accelerated rate since Reagan's presidency. From a historical standpoint, it is the exception, not the rule to have power distributed towards the majority and away from the top. This a predictable consequence of living in a society that is dominated by privately financed corporate propaganda relaying precisely the opposite message: That the broader population is somehow in control and has somehow restricted the super special people who are not powerful because of their positions and experience in those positions but because of their inherent specialness.

To really change minds, you cannot operate on the terms of your opponents. They are setting the framework, and to play in to their frame and defend is not a winning strategy. They have already defined socialism and liberals. By using the updated, realistic term "right wing socialists" we mitigate their positioning by muddying the water--while building up the movement that defines the left: economic democracy and a broader distribution of power and decision making to the majority.

Attack and build, attack and build.

Expand the house of represenatives.

One huge problem with the house is that you really are just about as removed from your house rep as you are the executive branch (and certainly the aristocratic Senate, with its archaic 6 year terms). The country has expanded a great deal, and yet the house is capped at 435 (an arbitrarily established number I should add).

An excellent solution to me is to acknowledge the telecommunications revolution, and allow remote voting on national legislation, this will also allow the expansion of the house to a much larger number.

The clear and obvious advantages to a house of 4350 rather than 435 is that gerrymandering would be greatly reduced (though not impossible over time, I will concede) and local control over reps would be increased because there would be much smaller district sizes (right now the average district is well over 600k per rep. The second advantage here is that the problem of the 20th century was that political candidates were privately financed by the interests that privately control the country. So to pay off 435 is manageable, to a pay off 4350 is much costlier, and to pay off 43,500 even more so. Voting today is done on financial and party line basis...there is not enough of an advantage to be found in the networking and compromise side to outweigh the expansion of the house of representatives into something that can actually represent the varied people's interests in the country.

A Honduras Solution.

There are 2 standoffs in Honduras. The first standoff is between one section of Honduran elites and their now deposed elected president Manuel Zelaya. The second is the political line being walked between the rest of Latin American leaders and the United States. The U.S. is heavily tied down in the middle east and central Asia, after a massive bet was placed by the neoconservative faction of the American political right on using military control to lock down the energy reserves in the Persian Gulf as one of the last great sources of American power (that is to say, control of energy for the rest of the world). As of now, the U.S is suffering from what used to be called imperial overstretch. From a historical standpoint, our power over others is in a state of decline as other powers rise (by definition, "super-power" or power is a relationship between peoples, and by extension, any region that extricates itself in varying degrees from U.S. control is reducing our overall power over them).



The Persian Gulf: Unstable as the region is, the U.S. heavily protects "our resources" under various middle eastern desert states through a proxy system. Clients manage our resources for us, leaders, kings, 99% of the vote dictators, have come and gone while serving U.S. national and corporate power. Oil is the prime resource, which the U.S. uses as leverage against its strategic competitors by using force in "deterring potential competitors from even aspiring to a larger regional or global role." Part of this past weeks news that world powers seek to unpeg oil from the U.S. dollar is sign of the trajectory of our declining ability to control the energy supplies needed for other nations. While I don't see the peg shifting in the short term, the writing is on the wall.



Central Asia: Part of the Condoleezzaliza rice containment strategy to curb Chinese inroads into energy producing regions in Central Asia is to finance clients in places like Uzbekistan...as the 2 links here describe from an east Asian perspective, the moves taking place in this region.



Japan and South Korea: Outside of the North Korean diplomacy game, Japan and SK have remained loyal clients, staking their economic fate on exporting to the United States. Clearly though, they took a much more independent path of development, maintaining much more state control over their economies, developing much more quickly than their disorganized counterparts in the global south.



European Union: Preventing a rival superpower has been an objective of U.S. power since the early 1990s. As the cold war deterance faded, the U.S. accelerated violent attacks on defenseless targets, as the Soviets could be ignored, and the U.S. could flex its muscles. (Grenada, Panama, Iraq, Kosovo, etc..), the central lesson was that attacks can occur on targets that were unable to adequately defend themselves. The EU quickly accelerated internal integration with the creation of the common currency. This trajectory of EU integration remains firmly in place in my view, though clearly, there will be ups and downs in the future.

Latin America: The U.S. regards Latin America as our backyard. In NSC-68, George Kennan, in a highly influential policy document notes that the U.S. would use "harsh measures of repression" to maintain control of those resources. The cold war pretexts would be used to justify the countless dictators which kept each country from voting in ANY popular government (no matter what ideology) which won on a platform of diverting resources away from the U.S. for the benefit of the domestic population. The 20th century in Latin America was a sad one filled with torture, and mass murder traced to Washington's doorstep, and rationalized away with fear mongering corporate propaganda used to justify our anti-democratic interventions such as this:



By the turn of the 21st century, A series of elected governments has been swept into power in Latin America encouraging integration within the region on a scale never before seen. With integration occurring, the old guard of Latin American elites in Honduras (this applies to Latin American elites in general) wants to ensure its own power with the backing of the United States. But the U.S. is tied down elsewhere, and cannot afford a concerted protest of this type of behavior by the rest of the governments Latin America (especially Brazil and Argentina). To resolve the Honduran Crisis, Brazil should attempt to threaten to put a coalition together for a "humanitarian intervention" in Honduras. Picking up an alliance of Brazil, Argentina, Nicaragua, Bolivia, and at the last minute Venezuela would be the wisest course of action. By threatening multi-lateral invasion, the U.S. hand will be forced by virtue of the fact that if it wishes to slow the decline of its influence, it will have to force the Honduran elite's hand. Otherwise, the situation will at best become like Haiti following the 91 coup--when Clinton condemned the coup, but walked the line long enough to allow the back channel support of the right wing to arm the Haitian thugs and allow them to massacre, rape, and torture the Lavalas supporters for years. By the time Aristide was returned to power, the base of his support was destroyed. In Honduras, the base for Zelaya is not even close to the base of support Aristide had from Lavalas (the popular coalition/party that backed the early aristide period) in the early 90s. However the play, if Brazil and Argentina choose to act on it, will certainly have the intended effect. The U.S. will either act to maintain its status as the alpha dog, or it will allow a broad Latin American coalition to invade and place peacekeepers on the ground. It is likely that tepid EU support may be offered if Bolivia and Venezuela are not on board at least at first.

Ultimately, a considered goal should be to get on the road to an EU Style of integration which will once again, force the U.S. to take a much more responsible lead or else be left in the unilateral cold.

The Commodities Bubble, Stocks, Gold, and Money.

The debate now is when to raise rates to prevent inflation. The debate later will be why monetary policy is failing society.

To support this blog, click all the random ads that pop up on this page. They don't know who I am, and I don't know who they are, but I get like 80 cents (until the bottom falls out of that market too.. hah) * update: adsense took their ads away. So much for my little plan.

In my view at this time, gold is a bubble financed by low interest rates. The narrative in the financial press is that gold is a hedge against future inflation. But I am pretty sure that gold is being pumped up by the same forces pumping up equity markets. Super high leverage from low rates has pumped more money into the system--but it does not "print money" as the common metaphor (again, see the Schiff/Ron Paul post) has said. The Federal Reserve and all other monetary incentive to invest policies only create the option to create money out of thin air. It is NOT a guaranteed event. Let's run through a scenario.

Let's just say we have 1 billion dollars in a a hedge fund. The hedge fund borrows 9 billion more at a 1% rate. It now takes 10 billion and attempts to invest its money at a profit. To clear things up, why does it want to borrow money if it has 1 billion already? The short answer is so that it can magnify profits. A 1 billion dollar investment with an 8% annual return nets 80 million, a 10 billion investment at the same rate of return is 800 million. The gains are magnified--but so too are potential losses. But the interest rate in question plays a huge role in monetary policy, because if the initial borrowing rate is 7% then the return on our hedge fund investment is the difference between 8% and 7%. A 1% rate of return.

So given the nature of our current monetarist regime, the one that has ruled the economy since the late 1970s, the missing link in the money printing and inflation discussion is that money only gets printed when it gets borrowed and invested. And right now, money is being borrowed and invested. The S&P is up 50% or so since March 2009. However, this money is being made on money in the same way that houses were mysteriously worth twice as much in 3 years during the housing bubble. Given the extra push and incentives on profitability (low rates, combined with the government buying up assets that the private sector couldn't sell except for at a major loss), it's understandable that a herd of investment is being plowed into anything that can be bought and sold for a profit. And that's where you get the money printing business coming into the discussion. The money gets printed when it gets borrowed and magnified into circulation. Monetarists use the following metrics to break down the money supply: M0, M1, M2, and M3. If the hedge fund $1 billion puts that billion into the stock market then the aggregate value will go up by whatever buying impact that $1 billion has on the market. If the fund pumps $10 billion in, then the demand impact goes up by ten times as much, and the value of the market will reflect that as well.

The take home lesson here is that ALL inflationary scenarios are built on the investor class taking the low interest rate bait and plowing it into the markets. They are most likely highly leveraged bets which makes me instinctively feel that once the losses start, it will be a very rapid decline because of the magnification of losses on the way down--and the subsequent lack of incentives and "risk aversion" (fear) will pull private investment out of the market.

For more on this, and some extra history, see my prior post.

Mass Media and the Crisis of Profitability

As I wrote in a prior blog, I believe we are in a major deflationary and de-leveraging spiral stemming from a crisis of profitability (best summarized as a lack of enough total profitability in investment that employs enough people). Since the decision to invest is made collectively (by incorporated institutions) and individually (by wealthy individuals), any given private sector economy starts with the investor and ends with the investor. It is driven from the top down, economic action only takes place on this if those who control enough capital (some industries require more money/capital than others) invest that capital--and they only invest that capital if they are going to profit or perceive they are going to make a profit.



With that in mind, while I think this is an aggregate phenomenon (as in, I think this Deflationary event exists on the whole, when you add up all the parts, but not necessarily in every sector), there are some sectors of the economy, where the fall in profitability has been much more rapid lately, and that's in the for profit media.



For profit media has not always been with us. It is largely a product of the 20th century. 19th newspapers were political partisan newspapers, and "Nearly all weekly and daily papers were party organs until the early 20th century". The 20th century saw the growth in the power in corporations after they were granted the rights of immortal persons in an 1886 judicial decision (corporations are at all times and countries, artificial creations of government). Alongside the growth in political and economic power, came the rise of the corporate press. Journalistic standards would be developed and enhanced, supposedly "unbiased" and "objective" reporters would be trained to cover both sides of the story, and audiences and citizens were transitioned to this new model. Part of the shift came from the ability to finance newspapers from advertising instead of at the point of purchase of a paper. As the model began to shift to an advertisement driven press, it changed the market. The model of the producer selling content to his audience became the producer selling his audience to an advertiser.

Chris Anderson notes in his book Free: The Future of a Radical Price, that the advertiser is subsidizing the content so it appears free to the consumer. TV shows are free if you watch the ads, radio and print were built on the same model. We agree that the model of news is changing. In an interview with Der Spiegel he comments that "now that you don't need this access to a commercial channel to distribute (news), anyone can do it. What we do is still useful but what other people do is equally useful. I don't think our way is the most important and it is certainly not the only way of conveying information. So this is why we're in a funny phase. It's going to take us a decade or two to figure out what it is we're doing."

What I anticipate is a return to the partisan press. To produce propaganda (or Public Relations) is ultimately a cheap endeavor, and will continue to fall in cost. To distribute your message has become easier in the sense that it is possible to connect with many people more easily--but it has become more difficult to cut through the noise of so many options competing for neurological real estate. In 1964, you couldn't miss the Beatles or the basic propaganda line established in the U.S. media. In 2014, art, culture, and politics will relate differently because of a continued fragmentation of common social reference points that were once distributed by the corporate propaganda system in the 20th century.

In its place, my guess is that political parties will lock in their own organs of getting out the message. To an extent the GOP has used this strategy already, with considerable success. But this only had the possibility of building a strong base. Completely bypassing the system of corporate media filtering met its match under Clinton and now Obama, both candidates being backed by major corporate money. And while the GOP developed FOX News, and built upon its religious and social conservative base, FOX did and still relies on the advertising for profit model to finance itself. It is an unofficial media organ, tapping into the base created by the conservative movement.

But where advertising was in essence required under the old system, the new system will produce the capacity to distribute information purely for the sake of the message. The option to produce content under the advertising regime will probably remain for some time, but the news outlets, already in a state of decline, will most certainly be replaced by the voices of factions as well as a coalition/party. Whoever wins the game of organizing enough people into a single coalition will be the side that wins the political battles of the future.

The U.S. Dollar, and the Global Political Economy.

Many economic commentators have theorized that the U.S. dollar is set to see a precipitous decline, and quite possibly lose its reserve currency status as other economic rivals such as China and France call for a replacement currency to replace the dollar as the global reserve currency. Gold Bugs have been predicting the dollar's decline for many years, and believe gold is at least one way protect yourself. There is also a view that is more dominant, as expressed in the reporting of the Wall Street Journal, though clearly, the opinion of the economists polled by the business press, is split 50/50 on the inflation debate. As far as commentators go, in my opinion, at least 5% of those who believe in the coming collapse in the dollar were educated on the matter by Ron Paul, and by extension, the Paul campaign's economic advisor Peter Schiff.

2 Dire inflationary warnings relating to Schiff: One, and Two.

I think the view that Inflation is a threat is misguided, and that Deflation is still in the cards in the short term. I will avoid the broad social explanation for what I generally refer to as "the great depression II" or the "great depression 2.0" for another article, and clearly lay out what I think is happening in finance.

For starters, let's look at the type of inflation/dollar issue that the Schiff/Paul campaign brought
to public attention in the 2008 presidential campaign. There clearly was what we can describe as Asset Inflation or, inflation in the price of assets, such as Copper, Gold, Oil, and other commodities. But my question is were these commodity prices driven up by real meaningful demand and consumption, or were they driven up by the perception of demand by players/investors/commentator propagandists on CNBC?

If you use a K-Winter framework, you may find it useful to compare the asset inflation of the late 1920s (against stocks) to the asset inflation of the 2000s.... (houses, equities, and everything else mentioned above).

But outside of the final run up of energy costs in 2007-2008, Inflation has not been a concern at the supermarket..or software, or TVs, computers, etc... This is NOT the 1970s, this isn't prices rising 10% or so in 1979 (even excluding energy at that time--which was a major driver of price rises).

My argument for what is happening in the global economy can be broken down, roughly, into categories.

1. Falling rate of profitability for investors. Investors DRIVE the private economy and control most of the valuable space in global society. As a result, if this group, and it's a small group percentage wise, makes the decision that it is unable to invest its money, then the economy slows down as the rate investment slows down. Think of this as a standoff. Capitalists want to invest, but they can only invest if they perceive possible profitable investment opportunities. Conceptual workers (or as Mike Albert over at Z Magazine, likes to call them), the "coordinator class" want work, and those in the working class want employment. Yet nobody gets what they want because the economy as a game, has rules, and even if all parties COULD agree on a desirable outcome, unless the rules change, outcomes do not change.

Under normal boom/bust conditions. Capital investment into new sectors creates high profits early in the lifespan of the investment--and then falls over time. This creates employment, generally higher wages and higher employment in any given sector early on, and then falls over time as capital re-investment meets competition, and machines replace workers, and productivity rises. In classical economic theory, labor mobility was supposed to keep wages high, as leverage against capital--but in practice, capital is far more mobile than labor. (think of investing in Brazil from your online trading account). And depending on the politics of a country and time, wages can easily be politically slammed to rock bottom, enriching investor and to a lesser extent, coordinator class types in the process.

In the U.S. Wages were politically boosted in value until the politics of the country changed in the late 1970s. Under the rightward shift that occurred during the Carter/Volcker/Reagan period (2 presidents and a fed chair. Incidentally, Paul Volcker has lived long enough to become famous both as the 'Inflation killer' of the 1970s early 80s, AND as an adviser to current president Barack Obama) wages have been steadily lowered, and returns on capital investments shot up...as this steady drop in the value of labor continued for the next 3 decades, it's my assessment that rising credit took the place of income when it came to consumer spending.







In the short run (1980-1992) profits rose, wages fell, government spending that boosted wages fell, and government spending that boosted profits rose. The amount of federal spending was roughly the same in 1988 as it was in 1980, yet wages continued to fall. A corporate and education propaganda shift occurred in the early 90s, which emphasized education as the road out of poverty (the politics of claiming there is light around the corner, at the end of the tunnel seems to be a time honored tradition for keeping the rabble at bay), and future members of the coordinator class were encouraged to develop the skills needed to get better high paying jobs in the future. But most of these jobs have never materialized, at least not to an extent great enough to pull enough people out of unemployment. So at least in the U.S. coordinator class leverage against capital is weak, and weak leverage means low pay and underemployment.

As for the working class, things appear much worse. Wages peaked for ordinary workers in the early 1970s. Factory jobs were sent overseas. They were not sent overseas for any other reason than the fact that the wages paid in manufacturing were higher. Why were wages higher? The collective bargaining regime that lasted roughly from the mid 1930s until the late 70s (Broken by the Carter/Volcker/Reagan crew). The replacement capital has come in the form of service industry work. This work does not pay well. It does not offer benefits, pensions, security, or dignity. Yet the trend will continue to grow. If there is employment to be found, it will be in the service sector--again, low pay, no benefits, no security, etc..

From 1992 until the present, this trend continued. Long term decline in manufacturing, long term increase in the size of the service sector, long term increase in credit, and long term decrease in income for the middle class (i.e. the union class). Starting in the 2000s, the tech bubble came, which brought a flirtation with highly paid tech jobs (only to see the leverage blown out after a couple of years) for coordinator class types. As this bubble burst, the economy nearly imploded, and deflation was regarded as a potential threat by then Fed Chair Alan Greenspan. Rates were lowered, and one final asset bubble push was created. The housing bubble, which I will not delve into here, along with the previously mentioned commodities and oil bubble all share a common theme: wealth is created through the process of a pyramid scheme. the value is driven up the more people play the game. And since it was the only game in town (compared to working the deli counter) and since there was a flood of incentives (easy to get loans, high amounts of credit, etc..) to invest, investors were able to create artificially high price valuations for these things. Of course, the actual income from actual work and wages did not change or went down...and when the end of the mania came, the blame was focused heavily on the details of the housing bubble...talk about missing the forest for the trees.

Reason # 2. The U.S. dollar's role both as the currency of last resort--but also as a carry trade currency: The carry trade is simply the borrowing (selling) out of one currency (in my view, U.S. Dollars) , and then parking it in a higher yielding currency. This can be parked not simply in bonds of a higher yield but in the aforementioned commodities and stocks. This is what I think has occurred to a slow extent from 2000-2008, and to a greater extent from 2008-2009 (after the equity crash of 2008).

3. The collapse in equities and commodities, despite the kitchen sink of Quantitative Easing being thrown at the crisis will lead to a medium term rise in the dollar because I suspect that our major asset classes (commodities and equities) have been financed out of the U.S. dollar, and the Japanese Yen. I cannot predict if the dollar will rise against the Yen if my scenario unfolds, but I think clearly it will gain ground against the Euro, pound, and other majors. If and when there is a 2nd decline in the equity markets, especially the kind that is bought on leveraged loans, the sell off of a stock or commodity will be converted into currency--driving UP the demand for dollars.

--E