Israel, the Ponzi state

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A Ponzi scheme consists in the perpetrator offering unrealistic returns on the capital invested and then using the assets of the later investors to pay high profits to the earlier ones. It's success depends on the new investors bringing more and more even newer ones into the game. It all falls apart when people start asking awkward questions and demanding their money back. This causes a panic and the entire pyramid collapses.

Bernard L. Madoff has become a household word with his Ponzi-Pyramid scheme that has bilked billions of dollars from the world's wealthy. Many if not most of Madoff's victims are Jewish. They trusted him and he betrayed them.

My thesis is that the state of Israel is a huge Ponzi scheme: a geo-strategic Ponzi, a military-Ponzi and finally, or perhaps first of all, a moral-Ponzi.

How is Israel a "Ponzi scheme"?

Israel's first "selling point", the much quoted and much disputed old saw, "a land without a people for a people without a land", which, whoever actually said it first, has led to much ethnic cleansing, is the nucleus of the entire "scam". Although in the light of the "New Historians" the phrase is not being used so much anymore, when I lived in Israel in the 1970s, soon after the Six Day War, this phrase was repeated to me endlessly.

Zionism's second and most powerful selling point and the final, by default, defense of everything that Israel does, is that the pain that Europeans inflicted on the Jewish people entitles the Jewish people to inflict pain on a third party, the Palestinians, who played no part whatsoever in the Shoa. This has to be the most curious reading of the law of Talion in all its endless history.

"A land without a people for a people without a land" presupposes that some people are entitled to be more visible than others, have more rights than others, are more "equal" than others. No democracy can be built on sands like these. Take the finest people in the world, and Israel has taken some of the finest, and then flatter, force, entice, fool or trick them into playing out that phrase and despite the quality of the players, nothing but evil can result.

What is happening today in Gaza flows naturally from that phrase.

Why is all this a fraud?

The victims of the Israeli Ponzi are many...

In physical pain, and humiliation, the Palestinians are the greatest victims of course, but immense will be the pain of the Jewish people all over the world as they awake to find that what was sold to them as a safe refuge, a place of regeneration and a "light unto the gentiles", has in fact, become a death trap and a moral sewer of corrupt politicians committing sordid common crimes of every sort while simultaneously bombing entrapped civilians.

When they find that their refuge and light has become a place where the Jewish people's name is being dirtied for the ages, then that awakening will finally have a much more lasting effect on our western world then rivers of innocent blood. In many ways the Jewish people have always been and continue to be the "mirror soul" of western culture, and the tarnishing of that mirror deforms us all.

I also said that Israel is a geo-political and military Ponzi too.

After the Six Day War and especially after the Yom Kippur war Israel and its military have been sold in the USA as an essential American strategic asset in the Middle East, when in fact America's support of Israel's military machine is probably the greatest, perhaps the only obstacle that America faces in having normal relations with the Muslim world.

The Gaza operation is so sordid and criminal and the images of civilian suffering so horrifying, that to be associated with them drains any life out of the soft power that America may still possess.

Gaza has been a wake up call for even the most sober of strategists.

One of America's most highly respected strategic thinkers, Anthony H. Cordesman, writing for the Center for Strategic and International Studies:

Has Israel somehow blundered into a steadily escalating war without a clear strategic goal or at least one it can credibly achieve? Will Israel end in empowering an enemy in political terms that it defeated in tactical terms? Will Israel’s actions seriously damage the US position in the region, any hope of peace, as well as moderate Arab regimes and voices in the process?

To be blunt, the answer so far seems to be yes. (...) As we have seen all too clearly from US mistakes, any leader can take a tough stand and claim that tactical gains are a meaningful victory. If this is all that Olmert, Livni, and Barak have for an answer, then they have disgraced themselves and damaged their country and their friends. If there is more, it is time to make such goals public and demonstrate how they can be achieved. The question is not whether the IDF learned the tactical lessons of the fighting in 2006. It is whether Israel’s top political leadership has even minimal competence to lead them

In short Israel is in the process of destroying any future the United States might still have of influencing events in its favor in the Middle East.

Perhaps there is a window opening briefly where Barack Obama may have the opportunity, by simply washing his hands, to rid the USA of this horrible problem... perhaps by just giving the Israelis enough rope, they may end up hanging themselves.

Read this by Gideon Levy in today's Haaretz:

This past weekend, the UN and the Human Rights Commission in Geneva have demanded an investigation into war crimes allegedly perpetrated by Israel. In a world in which Bosnian leaders and their counterparts from Rwanda have already been put on trial, a similar demand is likely to arise for the fomenters of this war. Israeli basketball players will not be the only ones who have to shamefully take cover in sports arenas, and senior officers who conducted this war will not be the only ones forced to hide in El Al planes lest they be arrested. This time, our most senior statesmen, the members of the war kitchen cabinet, are liable to pay a personal and national price.

I don't write these words with joy, but with sorrow and deep shame. Despite all the slack the world has cut us since as long as we can remember, despite the leniency shown toward Israel, the world might say otherwise this time. If we continue like this, maybe one day a new, special court will be established in The Hague.

A very slender hope, indeed.

I think Barack Obama or any other president of the USA that I can think of, or even imagine, would do anything in their power, up to and including invading Holland in order to prevent Levy's scenario from ever taking place.

However, if Obama does allow a Hague trial of the Israeli "kitchen cabinet" to occur (and why not include Bush, Cheney and Rumsfeld while they are at it?) I will be forced to conclude that Obama's admirers are not blowing smoke out of their hinder parts, but that he is, in fact, the great man they insist he is. DS

We all live in Ponzi land

David Seaton's News Links

I was talking to a very shrewd and well informed friend of mine, a now sedate notary who was once a sort of Spanish Gordon Gekko in the 1980s. He gave me a very intelligent analysis of the crisis.

At the bottom of it, he said, was the enormous increase in productivity brought on by information technologies. We simply produce much more than we can possibly consume: we need lots of consumers and much fewer workers.

How are underemployed people supposed to buy anything? On credit. Something has to give, has given. I think he's right.

A very good example might be how much supermarkets have changed in the last 20 years. Remember (if you can) the days before bar code cash registers existed. Totaling up the merchandise, taking payment and making change was much slower work than today. Check-out girls needed a much bigger skill set in that environment: to add and subtract accurately in their heads to begin with.

Now, passing the product over the laser reader, passing the banker or credit card through the card reader and getting the customer's signature is only the work of seconds and if the customer pays in cash, the cash register tells the check-out girl the exact change to give. A person of average or better than average intelligence, who has successfully completed high school is wasted in such a job.

At the same time that the products are being checked out, the system is seamlessly keeping track of the inventory and calculating the buying needed to keep the shelves full and may even send the orders directly to the head office, several states away, where the orders are also processed electronically and trucks are filled and dispatched with a fraction of the human input needed only a few years ago. Now, project this technological productivity explosion onto almost any human activity. More work done with a shrinking work force.

It is easy to see that with this system it is possible to have much bigger stores with a much wider variety of products, employing many fewer and much less skilled, therefore lower paid, workers than ever before.

With lower costs and more technology, profits rise and much of this gain is reinvested in more productivity-raising technology, which makes more skills and the people who have them redundant. This means, perversely, that more profits usually lead to less jobs or much poorer jobs. This paradigm, which until recently only held true for the poorly educated, is now reaching the ranks of university graduates. Now, with digital technology, even high intellectual output tasks can be outsourced to where people with postgraduate degrees can be hired for the same cost per hour as high school graduates in a developed country.

Result: As more money is invested in raising productivity, fewer and fewer people can produce more and more for a market glutted with products that fewer and fewer people can afford to buy without going into debt.

Salaries don't rise because most workers are not really needed that badly and are easy to replace if they go on strike, complain or even report in sick.. and thus they have no bargaining power. Any shortages such as one resulting from low birthrate in developed countries can be solved by outsourcing the jobs to poorer countries with high birthrates.

All people are really required to do is to buy many things that they don't really need, which they can do, even with a McJob, by using a credit card... hereby kicking the can into the future: a future with poorer paying jobs, less horizon, more need of credit to participate, with less chance of ever paying back the debts incurred.

To make underpaid workers buy things that objectively they don't need, an entire industry (marketing) exists to make them dissatisfied with what they already have. Perversely, unhappiness becomes a social good in such an economic arrangement. A thrifty person, content with his lot, who for thousands of years was seen, in all traditions, as a wise and sensible man; in this contemporary situation is seen as a public enemy to be "stimulated".

In a sense our entire "civilization" is sort of a universal "Ponzi scheme". If the wheel stops even for a moment it all comes tumbling down.

It's amazing that a structure this artificial, that fills so few truly human needs, has taken so long to nearly collapse. DS

Toiling at the Pyramid

I was no more perceptive than anyone else; during the bull market years [of the late 1990s] some people did send me letters claiming that major corporations were cooking their books, but - to my great regret - I ignored them. However, when Enron - the most celebrated company of its time, lauded as the very model of a modern business enterprise - blew up, I immediately saw the implications: if such a famous and celebrated company could have been a Ponzi scheme, it was very unlikely that the rest of U.S. business was squeaky clean. In fact, it quickly became clear, the bubble years were both the cause and effect of an epidemic of corporate malfeasance. Paul Krugman, The Great Unraveling (p. 26) - Quoted in Wikipedia

"That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash." Thomas Friedman - NYT

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The US driven, world economy appears to many to be a pyramid scheme. There is nothing new about financial pyramids, what is new is the sheer size of this one. There are things whose very magnitude make them difficult to process. Things like the size of the bailout, the size of the US current account debt, or the size of Angelina Jolie's lips immediately spring to mind. This universal pyramid, the one that is collapsing around our ears at this moment, is bigger than all of that.

One of the largest pyramids up till this great American cum-universal one was the scam perpetrated on the Albanian people not long after the collapse of Communism. The poor Albanians at least had the excuse of knowing absolutely nothing about money, investment, capitalism or much else besides raising goats and the "thought" of Enver Hoxha. (post-pyramid Albanians have learned a lot about trafficking prostitutes and stolen cars. Will we be so lucky?)

While researching the idea of comparing the Albanian pyramid of 1996-97 and ours of today, I came upon a wonderful old report from the International Monetary Fund. It was written in 1999 by Christopher Jarvis, at that time the Senior Economist in the IMF's Policy Development and Review Department. I recommend reading the whole thing, but there are some parts that I would like to quote extensively because they give a quite succinct and effective description of what a pyramid is, what effects its collapse can produce and some curiously sensible advice on what do about the situation. I say curious, because you will see that the advice given by the IMF to the Albanians is quite different from what advice they give when a pyramid explodes close to home.

First, let's see Jarvis's description what effects the bursting of a nationwide pyramid can have:

The pyramid scheme phenomenon in Albania is important because its scale relative to the size of the economy was unprecedented, and because the political and social consequences of the collapse of the pyramid schemes were profound. At their peak, the nominal value of the pyramid schemes' liabilities amounted to almost half of the country's GDP. Many Albanians—about two-thirds of the population—invested in them. When the schemes collapsed, there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed.

Then he goes on to explain in detail how it all came about... here is a choice and strangely familiar bit which I've taken the liberty of underlining:

The regulatory framework was inadequate, and it was not clear who had responsibility for supervising the informal market. Even after the approval of a banking act in February 1996 that appeared to give the Bank of Albania the power to close illegal deposit-taking institutions, the central bank could not obtain the government's support. Indeed, the government was supportive of the companies: senior government officials frequently appeared at company functions, and, in November 1996, even as the pyramid schemes began to crumble, the prime minister and the speaker of the parliament accepted medals in honor of the anniversary of one of the companies. During the 1996 elections, several of the companies made campaign contributions to the ruling Democratic Party. There were allegations that many government officials benefited personally from the companies.

When it all collapsed the poop really hit the fan:

By March 1997, Albania was in chaos. The government had lost control of the south. Many in the army and police force had deserted, and 1 million weapons had been looted from the armories.(...) The interim government inherited a desperate situation. Some 2,000 people had been killed in the violence that followed the pyramid schemes' collapse. Large parts of the country were no longer within the government's control. Government revenues collapsed as customs posts and tax offices were burned. By the end of June, the lek had depreciated against the dollar by 40 percent; prices increased by 28 percent in the first half of 1997. Many industries temporarily ceased production, and trade was interrupted. Meanwhile, the major pyramid schemes continued to hang on to their assets, proclaim their solvency, and resist closure.

Of course in the United State looting armories wouldn't be necessary as much of the population is already armed to the teeth.

Finally in Albania all was well: the IMF and the World Bank saved the day. Here's how:

(T)he newly elected parliament passed a law, drafted with assistance from the IMF and the World Bank, mandating the appointment of foreign administrators from international accounting firms to liquidate the schemes.

The administrators appointed under the new law were required to report regularly to the government but otherwise had complete independence. They were given broad powers to carry on the companies' businesses, pay their debts, sell their assets, fire staff and managers, seize the assets of individuals connected with the schemes, and hire experts to trace assets abroad. (...) It took several months to dislodge the owners, partly because the administrators needed their cooperation in finding the companies' assets. The administrators did not gain full control of all of the companies until March 1998. Owners who had not fled were jailed, and whatever assets remained were prepared for sale. But much had been lost already.

This next part may sound strangely prescient and familiar to our ears:

Few studies have been done on the macroeconomic effect of pyramid schemes on the scale of those in Albania, which, fortunately, are extremely rare. The closest analogy to such schemes is the asset bubble, whose economic impact is due to changes in perceived wealth. As a bubble expands, people believe themselves to be better off than they actually are, and their demand for goods and money increases, leading to a deterioration in a country's external current account as well as increased output or accelerated inflation or both. If the bubble attracts foreign investors, capital inflows might be sufficient to fund the current account deficit. After the bubble bursts, perceived wealth falls dramatically. Demand for goods and money, as well as output and inflation rates, can be expected to decrease, while the current account balance is likely to improve.

Again, thanks to the Albanians docilely downing the wise medicine the IMF prescribed, everything turned out more or less ok, but check the parts I've underlined:

The long-term effects of the pyramid scheme phenomenon are likely to be limited, reflecting not only the resilience of the Albanian economy but also—and, perhaps, most important—the government's adjustment efforts and its refusal to bail out depositors. Prices and wages are extremely flexible in Albania; as a result, the government was able to cut real public sector wages substantially in 1997 (by leaving nominal wages unchanged), and the economy suffered no loss of competitiveness when the lek appreciated. The new government's willingness to tackle the budget deficit and undertake long-overdue structural reforms was also crucial. However, the social effects were profound.

Next comes a long section detailing the prevention and cure of these situations, which if read in the light of the American government's, recent bi-partisan behavior, is a real gorge raiser (I just can't resist underlining some of it):

Albania's experience contains some important lessons for other countries. There are steps governments can take to make the growth of pyramid schemes less likely. These include establishing a well-functioning formal financial system, setting up a regulatory framework that covers informal as well as formal markets and has clear lines of responsibility for supervision and action, and tackling general governance problems. Although preventing pyramid schemes is not the most important reason for establishing good governance, the Albanian experience is a powerful reminder of the social costs of unchecked criminality. (...) The government should make it clear from the outset that it will not compensate depositors for their losses. If this is not done, the fiscal costs are likely to be ruinous, and the moral hazard considerable.

As Alice in Wonderland said, "I give myself such very good advice".

After the bailout and the huge stimulus in the planning it certainly will never be possible for any US government... or the IMF... or the World Bank, to ever advocate fiscal orthodoxy again with a straight face.

Obviously if the American establishment is not willing to ask of its citizens the austerity it has always demanded of the citizens of other countries, then all its moral authority and prestige has vanished. "Do as I say, not as I do" has never been a formula for successful leadership.

This recession, how it came about and how it is being handled is America's Berlin Wall.

But, be of good cheer!

Nothing goes on forever, no hay mal que cien años dure, ni cuerpo que lo resista, the USA is going to spend quite some time in purgatory to atone for its sins, that is all and that is a lot.

I am not as pessimistic as James Kunstler or even Peter Schiff, but when a Ponzi scheme collapses there is pain and when, (here the USA is Albania on steroids) an entire country is a Ponzi scheme the pain is very great.

When that country prints the world's currency of reference, the quantity and duration of that pain is difficult to calculate, but America has fertile soil, natural resources and a large, young, highly educated, population that is not afraid of hard work, so sooner or later things will work out. DS