Chinese Quake Shows Change in Winds Across Asia: William Pesek

Commentary by William Pesek

May 16 (Bloomberg) -- The focus in Asia is now on the 7.9- magnitude earthquake that killed untold thousands in China this week. It's worth pausing for a moment to consider how the country's biggest quake in 58 years offers a reason for optimism.

The contrast between China's impressive relief efforts and Myanmar's shameful failure to allow the rapid delivery of international aid after this month's cyclone is as huge as it is telling. China's response differs markedly from how the country dealt with a 1976 earthquake that killed 250,000 people in the northeastern city of Tangshan.

Back then, the government downplayed the severity of the disaster and declined offers for international help. That left poorly equipped soldiers to aid the city's devastated population. The episode led to the downfall of China's leaders, and memories of it are probably on the minds of President Hu Jintao and Premier Wen Jiabao.

The openness with which the government has addressed this week's quake is extraordinary. It has allowed reasonably free reporting and fewer-than-usual efforts to conceal the severity of the crisis. It shows how China has learned from the past.

China yesterday gave emergency rescue teams from Japan the go-ahead to aid earthquake-relief efforts, the first country from which it accepted such help. Say what you want about Japan-China relations -- this is big stuff.

Communist Party leaders used the old playbook in recent years when rural Chinese were killed by flooding on the Yangtze River and during the SARS epidemic in 2003. News reporting also was limited earlier in the year when freak snowstorms stranded thousands. The candor about the latest disaster contrasts with the media lockdown during Tibetan riots before the Beijing Olympics.

Signs of Thawing

The quake occurred at a time when Asian nations are redefining their relationships with one another. There are now signs of thawing among East Asia's three big economies -- China, Japan and South Korea -- as they attempt to join hands.

Such efforts start small -- like with a Japanese leader, Yasuo Fukuda, who is more interested in working with China than scoring points with Japanese nationalists. They begin with a Chinese president willing to visit Japan without lecturing officials in Tokyo, as Hu did this month. They begin with a new Korean leader willing to mend fences with vital neighbors.

Korean President Lee Myung Bak last month visited Tokyo, where he and Prime Minister Fukuda called for a ``new era of bilateral relations.'' In late May, Lee is expected to fly to Beijing for a summit with Chinese leaders. Fukuda, meanwhile, hasn't visited Tokyo's Yasukuni Shrine, which includes memorials to convicted war criminals and irks Asian neighbors who say it celebrates Japan's wartime aggression.

Lee's Visit

Of course, Lee shouldn't be offended if China postpones his visit to Beijing. Hu and Wen are understandably busy grappling with the aftermath of China's earthquake.

While the steps to reconciliation are modest and may prove fleeting, they are good signs for a region with much to discuss.

Pressing issues go beyond record oil and food prices, rising interest rates, earthquake relief in China, a calamitous cyclone in Myanmar, terrorism and pandemics.

Asia needs to boost efforts to reduce poverty, create free- trade zones, build regional bond markets, link stock trading, adopt standardized accounting, streamline immigration policies, tackle climate change and ease tensions with North Korea.

The region's leaders also should be thinking about how to bring home the trillions of dollars of savings parked in low- yielding U.S. Treasuries. Those funds could be used more productively in Asia supporting local entrepreneurs and improving roads, bridges, power systems, schools and hospitals.

The Big Three

It's almost impossible to do that when three of the region's biggest economies are barely speaking, as has been the case in recent years. If ever there was a time for Asia's powers to get together and keep history or disputes over tiny islands from scuttling the future, it's now.

China, Japan and Korea have never been closer economically. The same goes for East Asian trade with India, too. Without these large and influential economies working together, the odds of today's growth continuing get worse. And so, the signs of thawing in recent weeks are heartening.

Investors are now focused on the short-term implications of the earthquake. The affected region, Sichuan, plays a small role in China's overall economy. Still, economists such as Ting Lu of Merrill Lynch & Co. in Hong Kong expect China to put off interest-rate increases aimed at taming inflation, which surged to 8.5 percent last month.

The tragedy may make the government ``even more cautious in pursuing further macro tightening measures,'' says Denise Yam, an economist at Morgan Stanley in Hong Kong. ``Controls over bank lending could be eased earlier than expected.''

Yet over time, the events unfolding in China may usher in a sea change in China's willingness to open up to a curious world. As that phenomenon dovetails with efforts in Asia to reduce tensions, the region's economic and political prospects will become all the brighter.

Asia's status quo is poised for an overhaul.

We've Seen This Movie Before

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Inflation is a destructive distorter. it fuels speculation and hoarding, as well as misdirects investment into normally uneconomic activities or stops the flow of productive investment altogether as people and businesses clutch their cash. The political mood sours as prices go up and particular industries are harshly hit.

We now see all of this unfolding. The dollar debasement that the Federal Reserve began in 2004 and exacerbated in the aftermath of last summer's credit crisis is wreaking the havoc history told us it would. The world, as the media constantly report, is experiencing a shortage of food, and even when food is available, the rising prices are rendering it unaffordable to the poor. President Bush has announced an emergency food-aid package for hard-hit parts of the world.

Rants against speculators are growing louder and shriller. Oil's current crazy prices are not because of supply and demand; with the slowdown in global economic growth, oil inventories are doing quite nicely. So suspicion of market manipulation grows.

The airline industry, despite usually loaded planes, is drowning in red ink because of rising fuel costs. To break even, major carriers will have to cut their capacity by 20%. The auto industry is reeling. Buyers are suffering from gas-price sticker shock and are sitting on liquid assets until they get a better fix on where the economy is actually going.

Congress is full of proposals to tax windfall profits. On Apr. 30 the Wall Street Journal ran a front-page headline about how "big agriculture" is making money hand over fist while the specter of hunger and malnutrition stalks the globe. Food shortages are being blamed on our binging on corn-based ethanol. But almost every other food commodity price is far, far above what it was last summer.

The political mood will get uglier when higher energy costs are passed on to consumers in higher electricity bills this summer.

Amazingly the roles of the Fed and other global central banks in all this are almost entirely ignored. John Maynard Keynes' 1919 observation still holds true: When inflationary forces are unleashed and the destruction is felt, not one person in a million will understand the inflationary process in play.

Inflation accounts for at least half of the price of oil today. We are not running out of the stuff. Recently an oilfield was discovered off the coast of Brazil that could hold as much as 33 billion barrels of oil. There are tens of billions of barrels of oil--not to mention gobs of natural gas--off our own coasts, yet Congress has declared 85% of the U.S. Outer Continental Shelf off-limits to exploration and drilling.

The dollar is the global currency (at least for now). When it falls in value the nominal price of commodities zooms up, with the poor being hurt disproportionately. When prices go up, people figure they better start storing foods and precious metals. Such hoarding worsens the situation.

The inflation-racked 1970s saw one commodity shortage after another. Johnny Carson, then king of late-night TV, jocularly warned of an impending shortage in toilet paper. The next morning millions of people cleared store and supermarket shelves of the stuff all around the country. We did indeed end up having a toilet paper shortage.

Given the baleful political and economic consequences of this inflation, aren't you astonished that the Administration and the Fed haven't taken an active role in shoring up our enfeebled greenback?

Burmese Barbarism

The horrors unfolding in Burma should once and for all drive a stake through the hearts of those diehards in the West, particularly in universities, who romanticize leftist dictatorships--but probably won't. As long as an oppressive government proclaims its affinity for Marx and "the people," it is given an amazing benefit of the doubt. It's not only intellectuals and academics who defend such regimes--attributing every atrocity to various U.S. policies--but also journalists and pundits who go out of their way to understand the regime's "point of view."

Cuba is a prime example of this weird love/fascination. People rationalize this murderous dictatorship with such phrases as: "They provide health care for everyone, unlike the U.S." An Academy Award-nominated documentary filmmaker produced a work with just such a theme. These distortions are not corrected by facts.

Burma's military clique took over the government in 1962. The strongman at the time proclaimed to be ushering in a new kind of socialism. All he and his successors have done is impoverish a country that should have experienced India/China-like growth rates. Burma's former capital, Rangoon, is run-down. One can see that this was once a vibrant city with an active commercial class. Those living in the countryside are achingly poor; housing structures are crude. It doesn't take much imagination from even a brief visit--which I made a month before the cyclone struck--to see how devastating such a storm would be.

As in Cuba, North Korea and pre-Deng Xiaoping China, Burma's rulers are interested only in perpetuating their power, clichés about "helping the people" notwithstanding. They would rather see their citizens die or suffer than let in outsiders who might expose those with whom they come in contact to new ideas and things that could somehow undermine the reigning dictatorship.

Burma's current gang of thugs didn't adequately warn the citizens of the impending catastrophe and have hobbled international relief efforts in the cyclone's aftermath. No wonder the death toll will exceed 100,000. Unfortunately such reprehensible behavior has plenty of precedent. North Korea didn't hesitate to let more than 2 million of its people starve to death in the 1990s and early years of this decade, when its already grossly inefficient communist/collectivist agricultural system was hit by drought. (Of course, Pyongyang's "Beloved Leader" didn't cut back on his imported brandy.) Cambodia's Communist rulers in the mid-1970s didn't rely on nature to decimate the population: The government murdered one-third of its own people. Joseph Stalin manufactured a famine in Ukraine in the early 1930s that killed 10 million people. And Mao Zedong's schemes, such as the Great Leap Forward, killed at least 60 million people.

China's authoritarian government initially played down or suppressed the SARS outbreak in 2002, but word of it leaked out. The government, knowing China must become part of the global economy, then responded positively and openly.

Burma's rulers think with the same kind of mind-set that prevailed in China before Deng's 1978 modernizing program. They haven't even taken any cues from Vietnam, a communist country that began a China-like opening of its economy in the 1990s.

The only good that will come of this devastation is that any legitimacy the Burmese government may have had has been destroyed. Once the shock and numbness from the cyclone recedes, agitation for regime change will intensify enormously. As one resident of Rangoon put it, "If you engage in a protest, police quickly appear to stop it. But when there is a natural disaster, they are nowhere to be found."

Piggy Pols

Desperate to find money to fund its ever more bloated budgets, the Massachusetts legislature is considering levying a 2.5% annual tax on the portion of college and university endowment funds exceeding $1 billion. The lion's share of the money from such a tax would come from Harvard University's endowment, which currently stands at around $35 billion, although eight other institutions would be hit as well. Legislators are salivating over the prospect of an easy extra $1.4 billion a year with which to fund pet projects.

Revenue-hungry pols are leaving no pocket unpicked. Cut or rein in spending? Heaven forbid. They figure they'll tap into what they perceive as a growing resentment against top-notch universities whose endowments have expanded enormously in recent years while tuitions have simultaneously skyrocketed.

That resentment has led Senator Chuck Grassley (R--Iowa), the ranking Republican on the Senate Finance Committee, to propose that large college endowments be forced to make the same 5% minimum annual payouts that foundations must.

One Massachusetts legislator cited the big endowments as "exorbitant." Who ever thought the day would come when elite universities would be put in the same boat as "greedy" oil companies?

While the odds of a Massachusetts tax actually being enacted may seem remote at the moment, universities had better brace themselves for a Grassley-like broadside. Parents and students are questioning why education costs always rise faster than the rate of inflation. Expect congressional hearings into why university costs rise so rapidly, with a lot of emphasis on the fact that tenured professors spend far less time teaching than they did 20 years ago. For starters, well-endowed universities and colleges will have to follow the lead of Princeton, Harvard, Yale and others in making outright grants to students in place of traditional student loans.

What Is Your Kid Up To?

Hold Tight--by Harlan Coben (Dutton, $26.95). An aptly chosen title for Coben's newest novel. As in his previous mesmerizing masterpieces, this one grips you from beginning to end with its sizzling plots, subplots and all-too-human (and sometimes inhuman) characters. It also touches on an increasingly sensitive subject for today's parents--what their kids are doing on the Internet.

In this Coben tale a physician and his lawyer wife, after much agonizing, decide to install spy software in their teenage son Adam's computer. Since the suicide of a friend of Adam's, their son has become remote, withdrawn. But Adam's mother senses something else is at work, and her fears are further aroused when she and her husband come across a cryptic instant-message exchange. Then Adam disappears.

Before the book closes, we come across cyber-bullies, serial killings, a shady teenage hangout club in the Bronx and another explosive topic in these days of DNA testing: Is a kid's father his biological father?

Bernanke's Bubble Laboratory

Princeton Protégés of Fed Chief
Study the Economics of Manias

By JUSTIN LAHART

PRINCETON, N.J. -- First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities.

But how and why do bubbles form? Economists traditionally haven't offered much insight. From World War II till the mid-1990s, there weren't many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like.

The dot-com boom began to change that. "You were seeing live, in action, the unfolding of lots of examples of valuations disconnecting from fundamentals," says Princeton economist Harrison Hong. Now, the study of financial bubbles is hot.

Its hub is Princeton, 40 miles south of Wall Street, home to a band of young scholars hired by former professor Ben Bernanke, now the nation's chief bubble watcher as Federal Reserve chairman. The group includes Mr. Hong, a Vietnam native raised in Silicon Valley; a Chinese wunderkind who started as a physicist; and a German who'd been groomed to take over the family carpentry business. Among their conclusions:

Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going down than up, the bullish investors dominate.

Once they get going, financial bubbles are marked by huge increases in trading, making them easier to identify.

Manias can persist even though many smart people suspect a bubble, because no one of them has the firepower to successfully attack it. Only when skeptical investors act simultaneously -- a moment impossible to predict -- does the bubble pop.

BUBBLEOLOGY

• Lots to Study: Research on financial bubbles is hot in academia these days.

• Jersey Boys: The hub is Princeton, where three young economists use mathematical methods to study them.

• One Finding: Investment manias can persist even though many investors see that a bubble is forming.

As a result of all that and more, the Princeton squad argues that the Fed can and should try to restrain bubbles, rather than following former Chairman Alan Greenspan's approach: watchful waiting while prices rise and then cleaning up the mess after a bubble bursts.

If the tech-stock collapse didn't make that clear, the damage done by the housing and credit bubbles should, argues José Scheinkman, 60 years old, a theorist Mr. Bernanke recruited in 1999 from the University of Chicago. "Advanced economies are very dependent on the health of the financial system. What this bubble did was destroy the capacity of the financial system to finance the U.S. economy," Mr. Scheinkman says.

The Fed is giving the activist approach some thought. In a speech scheduled for delivery Thursday night, Fed Governor Frederic Mishkin suggested that while it was inappropriate to use the blunt instrument of interest-rate increases to prick bubbles, if too-easy credit appeared to be fueling a mania, policy makers might craft a regulatory response that could "help reduce the magnitude of the bubble."

Yet the very concept of bubbles is at odds with the view of some that market prices reflect the collective knowledge of multitudes. There are economists who dispute the existence of bubbles -- arguing, for instance, that what happened to prices in the dot-com boom was a rational response to the possibility that nascent Internet firms might turn into Microsofts. But these economists' numbers are thinning.

When Mr. Bernanke became head of Princeton's economics department in 1996, he saw finance as a fertile field for economic research. Princeton was weak in it. Mr. Bernanke raised $10 million from the Leon Lowenstein Foundation to create the Bendheim Center for Finance, named for the foundation's president, Robert Bendheim, an alumnus.

Mr. Bernanke hired finance experts who had broad interests and were eager to work with the university's deepening bench of theorists. He lured Dilip Abreu, known for work in game theory, back from Yale, to which he had earlier defected. Making a virtue of an institutional weakness, the absence of a business school, Princeton assimilated the finance scholars into the economics department and freed them to pursue research.

They are building on work done by the late Hyman Minsky, whose once-ignored ideas about investing manias are now in vogue, and the late economic historian Charles Kindleberger, whose 1978 "Manias, Panics and Crashes" is a classic. But compared with Mr. Minsky or another student of bubbles, Yale's Robert Shiller, the Princeton trio focuses less on mass psychology than on mathematical models. These they use to show how bubbles can be created even in markets that include rational, calculating investors.

Hard to Short

Bubbles don't spring from nowhere. They're usually tied to a development with far-reaching effects: electricity and autos in the 1920s, the Internet in the 1990s, the growth of China and India. At the outset, a surge in the values of related businesses and goods is often justified. But then it detaches from reality.

Mr. Hong, growing up in Sunnyvale, Calif., and teaching at Stanford, had a front-row seat to the technology boom. Recognizing a mania, he resisted investing in tech stocks himself -- until they were about to crest.

He recalls his thought process: "My sister's getting rich. My friends are getting rich....I think this is all crazy, but I feel so horrible about missing out, about being left out of the party." In 2000, "I finally caved in," he says. "I put in some money just as a hedge against other people getting richer than me and feeling better than me." But 2000, of course, was the year the bubble burst.

Mr. Hong, who came to Princeton two years later, and now is 37, argues that big innovations lead to big differences of opinion between bullish and bearish investors. But the deck is stacked in favor of the optimists.

One who believes a stock is too high can short it, borrowing shares and selling them in hopes of replacing them when they're cheaper. But this can be costly, both in the fees and in the risk of huge losses if the stock keeps rising. Many big investors rarely short stocks. When differences between bullish investors and bearish ones are extreme, many of the bears simply move to the sidelines. Then, with only optimists playing, prices go higher and higher.

In housing and the credit markets, the innovation was slicing and dicing loans in novel ways. As investors bought the resulting mortgage securities, they provided abundant capital for home buyers; buoyed by this and falling interest rates, house prices surged.

Betting against house prices is hard; only a few sophisticated investors found roundabout ways to do it, in derivatives markets. Most skeptics about the housing boom just sat it out; the optimists were unchecked.

At some point in a bubble, optimists' enthusiasm runs its course. Prices turn down. There's an expectation that at this point, investors who were skeptical may see prices as more reasonable and start buying. If they don't, that's a signal that prices had gotten way too high -- and then they tumble.

The insights of bearish investors "are more likely to be flushed out through the trading process when the market is falling, as opposed to when it's rising," Mr. Hong and Harvard's Jeremy Stein write. They say this explains why prices fall more rapidly than they go up. Over 60 years, nine of the 10 biggest one-day percentage moves in the S&P 500 were down.

When a lot of borrowed money is involved -- as it often is in a bubble -- once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt. That pattern offers a strong argument, in Mr. Hong's view, for government to restrain bubbles and the borrowing that fuels them.

The Trading Signal

At the height of the tech bubble, Internet stocks changed hands three times as frequently as other shares. "The two most important characteristics of a bubble," says Wei Xiong, are: "People pay a crazy price and people trade like crazy."

After finishing undergraduate studies in China at age 18, Mr. Xiong came to the U.S. intent on becoming a particle physicist. He earned a master's from Columbia but decided physics was too mature for him to make a mark. He switched to economics and earned a Ph.D. from Duke University. He was just 24 when Mr. Bernanke hired him in 2000.

According to a model he developed with Mr. Scheinkman, investors dogmatically believe they are right and those who differ are wrong. And as one set of investors becomes less optimistic, another takes its place. Investors figure they can always sell at a higher price. That view leads to even more trading, and, at the extreme, stock prices can go beyond any individual investor's fundamental valuation.

China's stock market gave Mr. Xiong, Mr. Scheinkman and New York University's Jianping Mei a laboratorylike setting to study. Chinese companies issued two classes of shares, representing identical stakes. Only Chinese could buy Class A shares, and, until 2001, only foreign investors could buy Class B shares.

When other countries have used such setups, the foreign-owned shares have traded at higher prices. But in China between 1993 to 2000, the economists found, Class A shares averaged more than five times the price of Class B shares and were traded five times as frequently -- a hint they were infected with bubble virus.

Companies with fewer A shares outstanding tended to see both higher trading volume and higher prices. That was consistent with a theory Mr. Xiong developed with Messrs. Scheinkman and Hong: In markets with lots of disagreement about values, the optimists are better able to dominate when there are fewer shares available.

Today, there's disagreement over commodity prices: to what extent do they reflect fundamentals like Chinese demand, and to what extent investment mania? Trading points toward a bubble: Daily volume on crude-oil contracts is running 50% above last year. Yet the initial findings of work Mr. Hong has done with Motohiro Yogo of the Wharton School -- comparing cash prices and futures prices -- suggest that "prices for commodities are expensive," but not a bubble, Mr. Hong says.

Mr. Xiong's father-in-law and brother trade stocks in China. At the start of 2007, he cautioned his brother to get out, to no avail. But Chinese stocks are higher today, despite falling since November. "If he actually followed my advice I'm not sure what he would think of me," Mr. Xiong says.

Why Bubbles Persist

Bubbles often keep inflating despite cautions such as Mr. Greenspan's famous warning of "irrational exuberance." Tech stocks rose for more than three years after he said that, in late 1996. Markus Brunnermeier, 39, thinks he understands why this happens.

Growing up near Munich, Germany, he expected to become a carpenter like his father. A building slump dissuaded him, and after stints in a tax office and the army he enrolled at the University of Regensburg.

He had struggled to understand why West Germany, where he lived, was so much more prosperous than East Germany. At Regensburg, he came across the work of Friedrich Hayek, the Nobel prize-winning Austrian economist known for a spirited defense of free-market capitalism. Mr. Hayek noted that while East Germany's government set prices, in the west the market set them -- and provided information about supply and demand that helped the economy adjust.

Inspired by Mr. Hayek's work, Mr. Brunnermeier studied economics. But in the 1990s, soaring tech stocks made him skeptical of the quality of information that prices convey. As a graduate student at the London School of Economics, he wrote a survey of research on bubbles and crashes that turned into a book.

Under the Hayek view, bubbles don't make sense. As soon as some group of traders irrationally pushes prices way up, more-rational traders should take advantage of the mispricing by selling -- bringing prices back down. But the tech boom reinforced an oft-quoted warning from John Maynard Keynes: "The market can stay irrational longer than you can stay solvent."

So investors who spot the bubble attack only if each is confident that other skeptics are on board. In work done with Mr. Abreu, Mr. Brunnermeier concluded that if all the rational investors could agree to bet against the bubble, they could make big profits. But if they can't coordinate, it's risky for any one of them to bet against a bubble. So it makes sense to ride it up and then get out quickly as soon as the bubble's existence becomes common knowledge.

That's what Pequot Capital Management did. The hedge-fund company boarded the Internet bandwagon early, investing in America Online in 1994. It was heavily invested in tech stocks through the late 1990s. When they started falling in March 2000, Pequot got hurt. But it was agile enough to take bearish positions on the stocks, and its funds posted strong performances for the year.

Looking through security filings, Mr. Brunnermeier and Stanford's Stefan Nagel found that hedge funds on the whole "skillfully anticipated price peaks" in individual tech stocks, cutting back before prices collapsed and shifting into other tech stocks that were still rising. Hedge funds' overall exposure to tech stocks peaked in September 1999, six months before the stocks peaked. They rode the bubble higher and got out close to the right time.

Mr. Brunnermeier saw the bubble, too. He thought people were crazy for buying tech stocks. But as both the hedge funds' gains and his theoretical work suggest, even if you know there's a bubble, it might be smart to go along.

"I was always convinced that there was an Internet bubble going on and never invested in Internet stocks," he says. "My brother-in-law did. My wife always complained that I studied finance and her brother was making a lot of money on Internet stocks."

Worried About the Price of Gas? End the Wars

Oil Wars

By ISMAEL HOSSEIN-ZADEH

Despite all the recent talk of soaring prices at the pump, political and economic pundits rarely mention the impact of war and political instability in the Middle East on the skyrocketing price of oil. There is strong evidence, however, that the heightened price of energy is a direct consequence of the destabilizing wars and geopolitical insecurity in the region.

These include not only the raging wars in Iraq and Afghanistan, but also the threat of a looming war against Iran. The record of soaring oil prices shows that anytime there is a renewed U.S. military threat against Iran, fuel prices move up several notches.

Not long ago the price of oil was about a quarter of what it is today. But soon after the invasions of Afghanistan and Iraq the price of oil began to escalate in tandem with the escalation of war and political turbulence in the Middle East. The fact that the rise in the price of oil has followed the heightened insecurity in oil markets is neither accidental nor a simple correlation; it represents a causality that runs from the heightened insecurity in oil markets to the inflated price of energy.

The war also contributes to the escalation of fuel cost in indirect ways; for example, by plunging the U.S. ever deeper into debt and depreciating the dollar. As oil is priced largely in U.S. dollars, oil exporting countries ask for more dollars per barrel of oil as the dollar loses value.

Not only are the raging wars in the Middle East responsible for energy price inflation, they are also responsible for price inflation of many other commodities, especially grains and other foodstuff, whose production and transportation depend on fuel. According to the World Bank, food prices have more than doubled over the past three years. The price of rice, the staple for billions of Asians, is up 147% over the past year alone. The mounting food prices have caused hunger and deadly violence in many countries, including Haiti, Egypt, Thailand, Indonesia, Senegal, and Malaysia.

This shows that the disastrous consequences of U.S. wars of choice go beyond Iraq, Afghanistan, and the United States. The skyrocketing costs of fuel and food tend to plunge many of the world economies into a 1970s-style stagflation (a combination of stagnation and inflation) that threatens many lives and/or livelihoods around the globe.

Neoconservative forces in and around the Bush administration and beneficiaries of war dividends—wishing to deflect attention away from war as the main culprit for the skyrocketing energy prices—tend to blame secondary or marginally relevant factors: OPEC, China and India for their increased demand for energy, or supply-demand imbalances in global markets.

Whatever the contributory role of these factors, the fact remains that the current oil price hikes started with the beginning of the Bush administration’s wars against Iraq and Afghanistan. Furthermore, a closer examination of these factors reveals that their roles in the current price inflation of oil have been negligible.

The claim that there is a supply-demand imbalance in global energy markets cannot be backed by facts. The alleged disparity between supply and demand is said to be due to the rapidly growing demand coming from China and India. But that rapid growth in demand is largely offset by a number of counterbalancing factors. These include slower growth in U.S. demand due to its slower economic growth, efficient energy utilization in industrially advanced countries, and increases in oil production by OPEC, Russia, and other oil producing countries.

Nor can OPEC be blamed for the current energy crisis. OPEC’s desire to sometimes limit the supply of oil in order to shore up its price is limited by a number of factors. For one thing, OPEC members are not unmindful of the fact that inordinately high oil prices can hurt their own long-term interests as this is bound to prompt oil importers to economize on fuel consumption and search for alternative sources of energy.

For another, OPEC members also know that inordinately high oil prices could precipitate economic recessions in oil importing countries that would, in turn, lower demand for their oil. In addition, high oil prices tend to raise the cost of oil producers’ imports of manufactured products as high energy costs are bound to be reflected in higher costs of those products.

For these reasons leading OPEC members such as Saudi Arabia and Iran have repeatedly stated that they prefer stable, predictable, and moderate oil prices to short-term oil price hikes that result from war, political turbulence and unstable markets.

The political implications of this discussion are clear: to bring down the prices of fuel and food requires bringing home the troops. By lowering the energy costs of production and transportation this will help save our own and many other economies from the plagues of inflation and stagnation. It will bring relief to hundreds of millions worldwide who are burdened by crippling energy bills and the crushing costs of feeding their families.

Not many people would doubt the devastating socio-economic consequences of the U.S. wars of choice, both at home and abroad. The question is: why can’t they be stopped?

The answer is that while the war has been ruinous to many, it has been a boon for a few, the powerful special interests who not only benefit from war (both economically and geopolitically), but who have also positioned themselves within the U.S. power structure in ways that allows them to constantly invent new enemies and make new wars in order to further their nefarious interests.

Who are these powerful special interests, the highly influential beneficiaries of war dividends who camouflage their evil objectives behind national interests in order to perpetuate war and militarism and fill out their deep pockets, or further their geopolitical interests in the Middle East?

A most widely-cited factor behind the Bush administration’s drive to war and the soaring energy cost is said to be Big Oil. Despite its popularity, however, this claim cannot be supported by facts; it tends to rest more on perception and precedent than reality.

It is true that for a long time, from the beginning of Middle Eastern oil exploration and discovery in the early twentieth century until the mid-1970s, colonial and/or imperial powers controlled oil either directly, or through control of oil producing countries—at times, even by military force. But that pattern of exploitation of global markets and resources has now changed.

It is also true that, once the Bush administration commenced with the invasion of Iraq, American oil companies set up shop in Baghdad in order to partake in the spoils of war. But this was not limited to oil companies; many non-oil transnational corporations likewise rushed to Baghdad to make an economic killing.

The larger part of the perception, however, stems from the fact that oil companies handsomely benefit from oil price hikes that result from war and political turbulence in the Middle East. Such benefits are, however, largely incidental. Surely, American oil companies would welcome the spoils of war. From the largely incidental oil price hikes that follow war and political convulsion, most observers automatically conclude that Big Oil must have been behind the war.

There is no hard evidence, however, that oil companies pushed for or supported the Bush administration’s plans of invading Iraq—just as they are now leery of the administration’s threat of a military strike against Iran. “The big oil companies were not enthusiastic about the Iraqi war,” says Fareed Mohamedi of PFC Energy, an energy consultancy firm based in Washington, D.C. “Corporations like Exxon-Mobil and Chevron-Texaco want stability, and this is not what Bush is providing in Iraq and the Gulf region,” adds Mohamedi [1].

During the past few decades, major oil companies have consistently opposed U.S. policies and military threats against countries like Iran, Iraq, and Libya. They have, indeed, time and again, lobbied U.S. foreign policy makers for the establishment of peaceful relations and diplomatic rapprochement with those countries. The Iran-Libya Sanction Act of 1996 (ILSA) is a strong testament to the fact that oil companies nowadays view wars, economic sanctions, and international political tensions as harmful to their long-term business interests and, accordingly, strive for peace, not war, in international relations.

The 1996 Iran-Libya Sanction Act, which amounted to a total trade and investment embargo against these two countries, penalized not only Iran and Libya, but also major American oil companies, especially the Conoco oil company that had just signed a $1 billion contract to develop fields in Iran.

It is no secret that the major force behind the Iran-Libya Sanction Act was the America Israel Public Affairs Committee (AIPAC). The success of AIPAC in passing ILSA through both the Congress and the White House over the opposition of the major U.S. oil companies is testament to the fact that, in the context of U.S. policy in the Middle East, even the influence of Big Oil pales vis-à-vis the influence of the pro-Israel lobby [2].

So, if Big Oil no longer favors war and political turbulence in oil markets, what, then, are the driving forces behind the Bush administration’s war and military adventures in the Middle East?

Many would immediately point to the power and influence of neoconservative forces in and around the Bush administration. While obviously this would not be false, it would not be the whole truth either; it hides more than it reveals. Specifically, it tends to lose sight of the bigger, but largely submerged, picture: the powerful special interests that lie behind the façade of neoconservative figures.

There is clear evidence that the leading neoconservative figures have been long-time political activists who have worked through think tanks set up to serve either as the armaments lobby, or the pro-Israel lobby, or both—going back to the 1990s, 1980s and, in some cases, 1970s. These corporate-backed militaristic think tanks include the American Enterprise Institute, Project for the New American Century, Center for Security Policy, Middle East Media Research Institute, Washington Institute for Near East Policy, Middle East Forum, National Institute for Public Policy, and Jewish Institute for National Security Affairs.

There is also evidence that the major components of the Bush administration’s foreign policy, including the war on Iraq, were designed long before George W. Bush arrived in the White House—largely at the drawing boards of these think thanks, often in collaboration directly, or indirectly, with the Pentagon, the arms lobby, and pro-Israel lobby. Even a cursory look at the records of these militaristic think tanks—their membership, their financial sources, their institutional structures, and the like—shows that they are set up to essentially serve as institutional fronts to camouflage the dubious business and political relationship between the Pentagon, its major contractors, and the pro-Israel lobby on the one hand, and militaristic neoconservative politicians, on the other [3].

While the Bush administration’s unilateral wars and military adventures have brought unnecessary death, destruction, and economic hardship to millions, including many in the United States, they have also brought fortunes and prosperity to war profiteers. Pentagon contractors constitute the overwhelming majority of these profiteers. They include not only giant manufacturing contractors such as Lockheed Martin, Northrop Grumman and Boeing, but also a complex maze of over 100,000 service contractors and sub-contractors such as private army or security corporations and “reconstruction” firms.

The rise of the fortunes of the major Pentagon contractors can be measured, in part, by the growth of the Pentagon budget since President George W. Bush arrived in the White House: it has grown by more than 76% percent, from $297 billion in 2001 to almost $520 billion in 2008. These figures do not include the Homeland Security budget, which is close to $40 billion for the 2008 fiscal year alone, and the costs of the wars in Iraq and Afghanistan, which amount to nearly $200 billion per year.

The skyrocketing Pentagon’s share of public money has meant that, for example, in the current (2008) fiscal year military spending represents 58 cents out of every dollar spent by the U.S. government on discretionary programs [4]. (Discretionary programs include everything except Social Security and Medicare, that is, education, health, housing assistance, international affairs, natural resources and environment, justice, veterans’ benefits, science and space, transportation, training/employment and social services, economic development, and several more items.)

The soaring military spending has also meant that beneficiaries of war dividends are essentially looting the national treasury in order to line their pockets. These include not only the Pentagon and its military contractors but also members of the key Congressional committees who have grown increasingly addicted to generous contributions to their reelection that come from the fortunes of the Pentagon and its business clients.

U.S. lawmakers have additional, more direct, financial interests in war and military spending: “Members of Congress have invested nearly 196 million dollars of their own money in companies that receive hundreds of millions of dollars a day from Pentagon contractors to provide goods and services to U.S. armed forces.” This means “lawmakers charged with overseeing Pentagon contractors hold stocks in those very firms” [5].

It also means that our esteemed lawmakers know how or where to invest most profitably: “Shares of U.S. defense companies have nearly trebled since the beginning of the occupation of Iraq. . . . The feeling that makers of ships, planes and weapons are just getting into their stride has driven shares of leading Pentagon contractors Lockheed Martin Corp., Northrop Grumman Corp., and General Dynamics Corp. to all-time highs” [6].

It is not surprising, then, that many elected officials with input or voting power in the process of the appropriation of the Pentagon budget find themselves in the pocket of defense contractors. Neither is it surprising that these dubious relationships should serve as breeding grounds for the near legendary levels of waste, inefficiency, and corruption that surround the military-industrial-congressional complex.

Two major conclusions follow from this discussion. The first is that, as pointed out earlier, war and political instability in the Middle East are the major driving forces behind the soaring price of oil; and that, therefore, to contain or reverse the rising trend of energy prices requires bringing U.S. troops home. The second conclusion is that achievement of this goal, the goal of ending U.S. wars of aggression, is possible only if (a) money or profits are taken out of war, and (b) money is taken out of elections [7].

Bellicosity and Hypocrisy in Tel Aviv

Lies of Aggression

By PAUL CRAIG ROBERTS

On May 15, the White House Moron, in a war-planning visit to Israel, justified the naked aggression he and Olmert are planning against Iran as the only alternative to “the false comfort of appeasement, which has been repeatedly discredited by history.”

But the White House Moron has the roles reversed. It is not Iran that is threatening war. It is Bush. It is not Bush who is appeasing. It is Iran.

Iran has not responded in kind to any of Bush’s warlike moves and provocations. Iran has not sunk a single one of our sitting duck ships and has not given the Iraqi insurgents any weapons that would easily turn the tide of war against the US.

It is Bush, not Iran, who sounds like Adolf Hitler blustering and threatening. It is Bush’s American Brownshirts, the neocons, who express the view: “what’s the good of nuclear weapons if you can’t use them.”

It is the US that is funding assassination teams inside Iran and using taxpayer dollars to fund dissident and violent organizations opposed to the Iranian government. Iran is doing no such thing here.

It is members of the Bush Regime and US generals who continue to lie through their teeth about Iranian support for insurgents, for which they can supply no evidence, and about Iranian nuclear weapons programs, for which the IAEA inspectors can find no sign.

It is the US print and TV media that serves the Bush Regime as propaganda ministry for its lies of aggression.

All the war crimes that are being planned are being planned by Bush and Olmert.

What would George Orwell make of the Bush Regime’s position that anything less than a direct act of naked aggression is appeasement?

The Chicago City Council has passed a resolution “opposing any US attack on Iran and urging the Bush Administration to pursue diplomatic engagement with that nation.” But the White House Moron says diplomacy is appeasement. He learned this false equivalence from the neocon Brownshirts whose control over his administration has made America despised throughout the world, with the exception of Israel.

After broadcasting false claims for weeks from US generals and Bush Regime spokespersons that the US has “definite proof” in the form of captured Iranian weapons that Iranians were “responsible for killing American troops,” the great free American media went silent when LA Times correspondent Tina Susman reported from Baghdad: “A plan to show some alleged Iranian-supplied explosives to journalists last week in Karbala and then destroy them was cancelled after the United States realized none of them was from Iran.”

A people devoid of a media are sitting ducks for tyrannical government, which is what the US has.

What is the difference between Hitler’s concocted excuses for his acts of naked aggression and the Bush Regime’s plan to use a briefing by General Petraeus, with “captured Iranian weapons” as props, as proof of Iranian complicity in US deaths in Iraq as a means to break down public and congressional resistance to an attack on Iran?

Why has the Bush Regime suffered no consequences for this blatant attempt to orchestrate an excuse for another war?

Why have there been no consequences to the Regime for the blatant lies it told in order to attack Iraq?

Why has the Bush Regime suffered no consequences for its violation of US statutory laws against spying without warrants and against torture?

In the US criminal justice system, three strikes and you are out.

For the Bush Regime is there any limit on its lawless behavior?

How many strikes? A dozen? Thirty? Three hundred?

Is there a limit?

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions.He can be reached at: PaulCraigRoberts@yahoo.com

The State of the Union? Furious.

Fans of HBO's "The Wire" know fictional Baltimore Mayor Tommy Carcetti. The reformer spends his first days in office screeching through every public-works unit, railing about an abandoned car here, a leaking hydrant there.

Shocked city administrators ask their angry new boss: Where is the abandoned car? Which leaking hydrant? The mayor won't specify. In fear, they mobilize their forces to pick up all the abandoned cars, to fix all the hydrants. The beat-down citizens of Baltimore cheer. Mayor Carcetti smiles.

M.E. Cohen

Republicans ought to watch "The Wire."

The state of the union is angry. Citizens are furious about gas prices and health-care costs, broken schools and property taxes. These are the leaky hydrants, the constant reminders that government hasn't done much for them lately. Their fury has bubbled as they've watched Washington obsess over itself – dealing out earmarks, paying off constituencies, launching probes into political enemies. Accomplishing zip.

This anger is the best way to describe today's political landscape. Ever since Republicans were routed in 2006, and more recently with their loss of three special elections, the party has been in a debate about what changed in the country and what to do in response. In the primaries, as Mike Huckabee pitched to evangelicals, Rudy Giuliani pitched to fiscal conservatives, and Mitt Romney pitched to anything that moved, some went so far as to declare the "death" of the Reagan coalition.

Encouraging this panicked discussion has been a new theory that the nation is experiencing a seismic political shift. A few short years ago, we were supposed to be on the verge of a lasting conservative majority. Scrap that. Now we're lurching toward a lasting "middle" majority. Voters are said to have embraced "centrism." (Whatever that is.) All hail "moderates." (Whoever they are.) And don't forget the Moveon.org crowd, who argue we are, in fact, on the verge of a lasting liberal majority.

Maybe voters are just mad as hell. At everyone. George W. Bush's approval ratings have hit an all-time low at 31%, which is not good for Republicans. Then again, the Democratic Congress's approval rating clocked in at 18% – the lowest in Gallup's history.

Consider independents, that key voting group and bellwether of the national mood. Analysts have pointed to the growing number of registered independents as proof the country is moving toward the "middle." But as pollster Whit Ayres notes, what primarily defines independents is that they are all "cynical about politics and politicians." They aren't ideological in any particular way – left, right or center. They are "pragmatists," says Mr. Ayres. "They want solutions to problems."

This is what Republicans haven't yet understood. Their failures in office kicked off this anger, and they remain its target. Yet they've been doing a remarkable impression of 1980s Democrats, who engaged in trivial warfare even as Ronald Reagan laid out his vision for the future.

Today's GOP spends so much time fretting about how to relive the Reagan heyday, it has failed to do him credit by laying out its own plans for today's unique challenges. It remains in hock to interest groups, running ads about sanctuary cities as Americans curse over gas prices. In a repeat of 2006, it spends more time trying to scare voters about Democrats than defining itself. It refuses to give up the earmarks that are a symbol of its worn-out reign.

The presidential candidates tapped into this anger early, no one more so than Mr. Change, Barack Obama. John McCain laid out his first-term vision in a speech this week, but also bashed the Washington "politics of selfishness, stalemate, and delay." This McCain refrain helps explain why he remains competitive with Mr. Obama – in particular among independents.

Mr. McCain's agenda is not "centrist," but conservative. Independents are behind it because the Republican has convinced them he is apart from the status quo, and will get things done.

House Republicans appear to be catching on. This week they rolled out the first part of an election-year agenda that pointedly lists their legislative "solutions" to the problems of today. It is aimed at women, and includes innovative proposals to help families struggling to balance work and home. To follow will be calls for more domestic energy production, a free-market health agenda, national security and entitlement reform.

This redefinition should've come earlier. And it would mean more if House incumbents who swear they've learned a lesson would demonstrate it in office. Say, with an earmark ban.

The real worry for Republicans is that today's anger could fester, and fulfill those prophecies of a long-term shift away from the party. Voters are looking for a feisty Mayor Carcetti.