From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — and they’re about to do it again

By MATT TAIBBI

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.

Invasion of the Home Snatchers

By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman — not to mention …

This article appeared in the July 9, 2009 issue of Rolling Stone. The issue is available in the online archive.

But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.

The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.

The Feds vs. Goldman

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.

If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year’s strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn’t one of them.

BUBBLE #1 The Great Depression

Goldman wasn’t always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids —just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to smalltime vendors in downtown Manhattan.

You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.

Wall Street’s Big Win

This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an “investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.

Beginning a pattern that would repeat itself over and over again, Goldman got into the investmenttrust game late, then jumped in with both feet and went hogwild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was in large part owned by Goldman Trading.

Taibblog: Commentary on politics and the economy by Matt Taibbi

The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line. The basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.

In a chapter from The Great Crash, 1929 titled “In Goldman Sachs We Trust,” the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leveragebased investment. The trusts, he wrote, were a major cause of the market’s historic crash; in today’s dollars, the losses the bank suffered totaled $475 billion. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity,” Galbraith observed, sounding like Keith Olbermann in an ascot. “If there must be madness, something may be said for having it on a heroic scale.”

BUBBLE #2 Tech Stocks

Fast-forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor’s assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.

It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “long-term greedy.” One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grownup’ corporate clients who had made bad deals with us,” he says. “Everything we did was legal and fair — but ‘long-term greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.”

But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s cochairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.

Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national clichè that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline The Committee To Save The World. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin’s complete and total failure to regulate his
old firm during its first mad dash for obscene short-term profits.

The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via IPOs, hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.

“Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public,” says one prominent hedge-fund manager. “The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash.” Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there saying Bullshit.com is worth $100 a share.”

The problem was, nobody told investors that the rules had changed. “Everyone on the inside knew,” the manager says. “Bob Rubin sure as hell knew what the underwriting standards were. They’d been intact since the 1930s.”

Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. “In the early Eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future.”

Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.

How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,” which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show” to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price — let’s say Bullshit.com’s starting share price is $15 — in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit — a six percent fee of a $500 million IPO is serious money.

Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nicholas Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television asshole Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman.

“Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “They totally fueled the bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation — manipulated up — and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed to pay $40 million for its laddering violations — a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)

Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price — ensuring that those “hot” opening-price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business — effectively robbing all of Bullshit’s new shareholders by diverting cash that should have gone to the company’s bottom line into the private bank account of the company’s CEO.

In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman’s board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, Goldman gave special stock offerings to executives in 21 companies that it took public, including Yahoo! cofounder Jerry Yang and two of the great slithering villains of the financial-scandal age — Tyco’s Dennis Kozlowski and Enron’s Ken Lay. Goldman angrily denounced the report as “an egregious distortion of the facts” — shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. “The spinning of hot IPO shares was not a harmless corporate perk,” then-attorney general Eliot Spitzer said at the time. “Instead, it was an integral part of a fraudulent scheme to win new investment-banking business.”

Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.

Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits — an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman’s mantra of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement.

The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else’s Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that “I’ve never even heard the term ‘laddering’ before.”)

For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent —they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.

BUBBLE #3 The Housing Craze

Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.

None of that would have been possible without investment bankers like Goldman, who created vehicles to package those shitty mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con’s mortgage on its books, knowing how likely it was to fail. You can’t write these mortgages, in other words, unless you can sell them to someone who doesn’t know what they are.

Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance — known as credit default swaps — on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won’t.

There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated — and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.

More regulation wasn’t exactly what Goldman had in mind. “The banks go crazy — they want it stopped,” says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. “Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped.”

Clinton’s reigning economic foursome — “especially Rubin,” according to Greenberger — called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.

But the story didn’t end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities — a third of which were sub-prime — much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.

Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was0.71 percent. Moreover, 58 percent of the loans included little or no documentation — no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.

Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners — old people, for God’s sake — pretending the whole time that it wasn’t grade D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions … However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

“That’s how audacious these assholes are,” says one hedge fund manager. “At least with other banks, you could say that they were just dumb — they believed what they were selling, and it blew them up. Goldman knew what it was doing.”

I ask the manager how it could be that selling something to customers that you’re actually betting against — particularly when you know more about the weaknesses of those products than the customer — doesn’t amount to securities fraud.

“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”

Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. New York state regulators are suing Goldman and 25 other underwriters for selling bundles of crappy Countrywide mortgages to city and state pension funds, which lost as much as $100 million in the investments. Massachusetts also investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders who got stuck holding predatory loans. But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million — about what the bank’s CDO division made in a day and a half during the real estate boom.

The effects of the housing bubble are well known — it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.

And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm’s payroll jumped to $16.5 billion — an average of $622,000 per employee. As a Goldman spokesman explained, “We work very hard here.”

But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down — and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.

BUBBLE #4 $4 a Gallon

By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn’t leave much to sell that wasn’t tainted. The terms junk bond, IPO, sub-prime mortgage and other once-hot financial fare were now firmly associated in the public’s mind with scams; the termscredit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years — the notion that housing prices never go down — was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.

Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.

That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be “very helpful in the short term,” while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.

But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling — which, in classic economic terms, should have brought prices at the pump down.

So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. The commodities market was designed in large part to help farmers: A grower concerned about future price drops could enter into a contract to sell his corn at a certain price for delivery later on, which made him worry less about building up stores of his crop. When no one was buying corn, the farmer could sell to a middleman known as a “traditional speculator,” who would store the grain and sell it later, when demand returned. That way, someone was always there to buy from the farmer, even when the market temporarily had no need for his crops.

In 1936, however, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission — the very same body that would later try and fail to regulate credit swaps — to place limits on speculative trades in commodities. As a result of the CFTC’s oversight, peace and harmony reigned in the commodities markets for more than 50 years.

All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren’t the only ones who needed to hedge their risk against future price drops — Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.

This was complete and utter crap — the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman’s argument. It issued the bank a free pass, called the “Bona Fide Hedging” exemption, allowing Goldman’s subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.

Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market — driven there by fear of the falling dollar and the housing crash — finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers — and that’s likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.

What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. “I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC,” says Greenberger, “and neither of us knew this letter was out there.” In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.

“I had been invited to a briefing the commission was holding on energy,” the staffer recounts. “And suddenly in the middle of it, they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Duh, duh.’ So we went back and forth, and finally they said, ‘We have to clear it with Goldman Sachs.’ I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?'”

The CFTC cited a rule that prohibited it from releasing any information about a company’s current position in the market. But the staffer’s request was about a letter that had been issued 17 years earlier. It no longer had anything to do with Goldman’s current position. What’s more, Section 7 of the 1936 commodities law gives Congress the right to any information it wants from the commission. Still, in a classic example of how complete Goldman’s capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.

Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index — which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil — became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly “long only” bettors, who seldom if ever take short positions — meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it’s terrible for commodities, because it continually forces prices upward. “If index speculators took short positions as well as long ones, you’d see them pushing prices both up and down,” says Michael Masters, a hedge fund manager who has helped expose the role of investment banks in the manipulation of oil prices. “But they only push prices in one direction: up.”

Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an “oracle of oil” by The New York Times, predicted a “super spike” in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives.”

But it wasn’t the consumption of real oil that was driving up prices — it was the trade in paper oil. By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.

In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees’ Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn’t just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World.

Now oil prices are rising again: They shot up 20 percent in the month of May and have nearly doubled so far this year. Once again, the problem is not supply or demand. “The highest supply of oil in the last 20 years is now,” says Rep. Bart Stupak, a Democrat from Michigan who serves on the House energy committee. “Demand is at a 10-year low. And yet prices are up.”

Asked why politicians continue to harp on things like drilling or hybrid cars, when supply and demand have nothing to do with the high prices, Stupak shakes his head. “I think they just don’t understand the problem very well,” he says. “You can’t explain it in 30 seconds, so politicians ignore it.”

BUBBLE #5 Rigging the Bailout

After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.

It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman’s last real competitors — collapse without intervention. (“Goldman’s superhero status was left intact,” says market analyst Eric Salzman, “and an investment banking competitor, Lehman, goes away.”) The very next day, Paulson green-lighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.

Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.

Converting to a bank-holding company has other benefits as well: Goldman’s primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict of interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.

The collective message of all this — the AIG bailout, the swift approval for its bank holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn’t a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. “In the past it was an implicit advantage,” says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. “Now it’s more of an explicit advantage.”

Once the bailouts were in place, Goldman went right back to business as usual, dreaming up impossibly convoluted schemes to pick the American carcass clean of its loose capital. One of its first moves in the post-bailout era was to quietly push forward the calendar it uses to report its earnings, essentially wiping December 2008 — with its $1.3 billion in pretax losses — off the books. At the same time, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009 — which apparently included a large chunk of money funneled to it by taxpayers via the AIG bailout. “They cooked those first quarter results six ways from Sunday,” says one hedge fund manager. “They hid the losses in the orphan month and called the bailout money profit.”

Two more numbers stand out from that stunning first-quarter turnaround. The bank paid out an astonishing $4.7 billion in bonuses and compensation in the first three months of this year, an 18 percent increase over the first quarter of 2008. It also raised $5 billion by issuing new shares almost immediately after releasing its first quarter results. Taken together, the numbers show that Goldman essentially borrowed a $5 billion salary payout for its executives in the middle of the global economic crisis it helped cause, using half-baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout.

Even more amazing, Goldman did it all right before the government announced the results of its new “stress test” for banks seeking to repay TARP money — suggesting that Goldman knew exactly what was coming. The government was trying to carefully orchestrate the repayments in an effort to prevent further trouble at banks that couldn’t pay back the money right away. But Goldman blew off those concerns, brazenly flaunting its insider status. “They seemed to know everything that they needed to do before the stress test came out, unlike everyone else, who had to wait until after,” says Michael Hecht, a managing director of JMP Securities. “The government came out and said, ‘To pay back TARP, you have to issue debt of at least five years that is not insured by FDIC — which Goldman Sachs had already done, a week or two before.”

And here’s the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?

Fourteen million dollars.

That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion — yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.

How is this possible? According to Goldman’s annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.

This should be a pitchfork-level outrage — but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. “With the right hand out begging for bailout money,” he said, “the left is hiding it offshore.”

BUBBLE #6 Global Warming

Fast-forward to today. It’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.

Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.

The new carbon credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.

Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.

The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.

Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climate change problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that cap-and-trade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.”

The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy futures market?

“Oh, it’ll dwarf it,” says a former staffer on the House energy committee.

Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe — but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected.

“If it’s going to be a tax, I would prefer that Washington set the tax and collect it,” says Michael Masters, the hedge fund director who spoke out against oil futures speculation. “But we’re saying that Wall Street can set the tax, and Wall Street can collect the tax. That’s the last thing in the world I want. It’s just asinine.”

Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees — while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.

It’s not always easy to accept the reality of what we now routinely allow these people to get away with; there’s a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can’t really register the fact that you’re no longer a citizen of a thriving first-world democracy, that you’re no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.

But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going.

This article originally appeared in RS 1082-1083 from July 9-23, 2009. This issue and the rest of the Rolling Stone archives are available via All Access, Rolling Stone’s premium subscription plan. If you are already a subscriber, you can click here to see the full story. Not a member? Click here to learn more about All Access.

April 8 |  by Mario Cavolo

Five years from now, the year 2016 will mark the beginning of America’s recovery. That is very good news. All countries go through long-term economic cycles that must be respected. Make no mistake, America, with all of her problems, with all of her incompetent, greedy, irresponsible, elite leaders, with all of her deeply flawed banking and trading practices, is still a powerhouse — is still by far the world’s largest economy, a resilient and dynamic force in the world politically, economically and militarily. Add it up. Rome will not burn while Nero fiddles. Rome will transform, Rome will reshape, Rome will respond. Rome will never stop being Rome. Rome will always be a powerhouse on the global economic and political stage. That is America now and in five years. Maybe not for reasons you think, nor like, nor appreciate, nor agree with. Too bad. Indeed, they didn’t ask you, and less and less is your power to get involved in any of it in a meaningful way.
If this is my vision and position, that five years hence marks the beginning of recovery in America, I must offer core reasons supporting the argument. What will be the catalysts to change? Indeed, as a falling euro would make me want to take my true love to Europe for the month, a falling dollar makes me want to choose America instead. In five years the USD index will be sitting in a new-low range of 60-70. The argument that a further falling dollar will cause inflation doesn’t matter because on the Asia Pacific side, there is inflation too. Inflation is inflation for everyone and it is nothing new. There will be wild asset-swings along the way but as the dollar falls, foreign interest and money will roll in on a broad scale. The trend is already in place and now I move the romantic argument of where I can have my cheapest holiday to the business front, sharing the story of the “Invest America” event which recently took place here in Shanghai at the Grand Hyatt in Pudong.  In this world, the world most Americans don’t spend time thinking about, is the world of “invest in America.”  Amen to that. Amen to the Chinese who are so filthy rich with cash that a tour group of 50 needs four hours to make it through customs because every one of them is carrying a bag of cash they need to declare — cash which, by the way, is mostly likely uncounted in China’s GDP figures. For the rich Chinese who can easily invest USD $500,000- $1,000,000 in the EB-5 investment visa residence program. Do you think they are investing in Malaysia, where they can get a green card by investing only $35,000? Of course not. They want America. They love and want many of the great things about America.
One Rises, Other Declines
It is not farfetched to recognize the rise of one region of the world balancing the decline of another. This is expected in the course of longer term economic and societal cycles. Let me tell you bluntly: Even as America has her problems, to any Chinese, an American passport or green card is the holy grail of freedom. The word for America in Chinese is “Mei Guo,” which means beautiful country, and the newly rich Chinese want America. They see it and they will buy America piece by piece, ranging from macro banks to local houses and stores. They will own more and more of it. As Europeans came in the early 1900’s, the Chinese will come in our age. They don’t need to cross the border illegally without money as many from Mexico because they have plenty of money. They, the Chinese, the Asians, will diversify American society with a rising percentage of Chinese and Asia population because in the future America will be the place to be once again. But in fact, even now America is already the place to be for the “new” crop of immigrating Americans from rising Asia led by China. They are thrilled to be capitalizing on America’s problems, to be buying up America’s assets on the cheap. They would expect American government to start offering more and more legal incentives and breaks to attract more investment; and indeed, that trend is already in place.
If you think Donald Trump getting his breaks to invest in a declining New York City was a big deal, imagine 100,000 Chinese Donald Trumps doing the same thing. Let’s note that, according to Forbes magazine’s 2011 list of billionaires, the U.S. leads the world with 413, up from 403 last year. China now has 115, but that’s up almost 50% from 64. At the USD millionaire level, the number of Chinese millionaire households is reported to be 670,000.  But Rupert Hoogewerf, founder of the Hurun report, and I agree that those numbers are still off by half, mostly due to the enormous amount of hidden wealth in greater China. The other significance of the point is that the vast majority are newly wealthy and have the “conquer the world” attitude that goes with new wealth. So then, some have asked, why would they invest in America? For two reasons, both strong and intertwined; because they are pragmatic opportunists who love a bargain, and because they still see all the advantages and great things about America through a romantic eye, even with the current issues upon us. They keenly have their eye on America — trust me, believe me, they do. They see China’s problems, all the rottenness of China as clearly as most readers at Rick’s site see the rottenness of America. And so they have a very high level of interest to diversity, to protect themselves via such diversification as establish life and business and investment across the Pacific in America. Be thankful for the economic power that the rise of Asia led by China will bring to America’s shores in the coming years, in her time of need, in her need to recover from an unprecedented — and yes, shameful — debt hangover. The next five years will be rough but will gradually also build the foundational trends over the next five years leading to rebuilding, restructuring and new opportunities that will emerge. This incoming wave to America also applies at the academic level. Who are the high scoring students in college? The Chinese, the Asians. Where do they want to study more than anywhere else? America.
Verdict: bye-bye world?  No.  It’ll be Asia Saves The Day As The Dollar Falls to Attractive Levels. Five years from now, today’s declining America is well on the road to recovery due to the continuing trend of a falling dollar with rising inflow of interest and investment, much of it from economically rising Asia led by China. Doomsday for the USD? Nonsense. Never. Ridiculous. All assets, economies and systems are far too intertwined. By the way, much the same for the state of affairs in Europe; declining situation for so many, but the euro isn’t going to dissolve.

The Very Bad News
The very bad news is that before America’s meaningful recovery begins in five years, encouraged by a falling dollar with rising incoming foreign interest and investment, the jig is already up, the decline is already in place and it is falling squarely on the middle class of America right now. It is infuriating, it is shameful. Over the next five years, the decline will continue. Products and services around them will become more expensive, while opportunities to improve life and career will continue to decline. The jump across the canyon to the more secure side of the society will grow wider and wider.  This subject can be expanded upon from endless points of view.
The solution for those in the wrong place at the wrong time — for anyone who does not have money but has a sufficiently entrepreneurial spirit combined with desperate need, is to focus on how to sell anything to the people who do have the money, including the incoming Chinese. This is why all of us remind Washington to beef up the National Exports Initiative program, purposely focusing on exports to greater China, build exports, build up new manufacturing sector, creating jobs. That’s a genuine by-the-book solution. (Note to readers: greater China includes mainland, Hong Kong, Macau and Taiwan.)  The trick will be to identify the more secure upper-middle and upper-income people who are buying; to find out what they need and want; and to do your darndest to position yourself to sell it to them. Since your job prospects are miserable, you may as well give it a go, including partnering up in small groups to form small companies, opening stores on Amazon, Alibaba, Taobao, etc. Identify what the incoming Asian money is investing in, and figure out a business plan — a project to offer them to do business with you. This does not help the many middle-class folks who are not inclined toward or capable of moving forward. For the group of 50-100 million lower- and middle class Americans who are truly stuck, the budget retail industry will flourish, supported by government programs, continuously expanding food stamps and other social support programs, so that they can at least get by. Walgreen’s 2-for-1s and Filiberto’s fresh-but-really-cheap burritos mark the budget lifestyle. This aspect marks the rise of the lower-income Asian lifestyle in America by necessity: families sharing residences, renting out rooms, eating  basic low-cost meals consisting of noodles, rice, meat, beans, veggies. Second cars will continue to decrease in numbers while bicycle and scooter counts will rise. Merchant thinking will rise and small, cheap-to-open local stores and flea markets will pop up, like the shop-houses of Latin America and Asia. As covered here earlier, more will go to gardens, fresher and cheaper, for food. Meanwhile, taxes for the rich must and will rise.
Verdict:  America becomes a completely different place than it was, marked by the decline of the middle class, making the next five years amongst the worst in American economic history for that strata of the country. Yet, the rest of the population and society, as if one could easily imagine that vivid separation and marginalization, continues to thrive, with plenty of wealth and job security to weather the economic storms.
Food, Oil Can’t Go Much Higher
Meanwhile, more on the equity and economic side of the picture in five years. The S&P will roller-coaster but end up close to where it is now, if not 20% higher. Same for the Hong Kong/China indexes. Interest rates will rise, but not by much – and so will oil, because the world economy cannot withstand oil at too high a price. The agriculture commodities have peaked now and won’t be higher five years hence. These items won’t be higher because they can’t be higher.  The gold/silver complex will continue to rise toward those $2000/$100 targets or more. The Chinese RMB will still not be a free-floating trading currency. The rich elite are greedy but not so stupid as to ruin it for themselves.  And so, returning to a statement I made in Rick’s forum many months earlier: In the face of potentially higher USD, Treasury and other bond yields worldwide, pieces of the sovereign debts, pensions, Social Security, etc. will be somehow set aside, forgiven, defaulted, dissolved off the books, renamed, re-categorized, hidden, re-classified, adjusted with more mark-to-market type shenanigans – whatever.  They’ll make new choices, new policy announcements as needed, to keep the global economic system going. They’ll make those choices as needed at the time to avert “disaster”.

Africa-now

Japan-now

East Asia Rising

China, Japan, South Korea, and Taiwan are drawing together and gaining ground fast, but at what cost to the rest of the world?
By JEAN KUMAGAI, WILLIAM SWEET  /  OCTOBER 2004

If the 19th century belonged to Britain and the 20th century to the United States, the 21st century will surely be East Asia’s. Already, South Korea, Taiwan, the eastern industrial areas of China, and Japan form an increasingly integrated economic bloc that rivals both Western Europe and the United States. Within decades, the region will become the world’s dominant economic force.
The effects of East Asia’s growing weight in world affairs are felt everywhere, whether by the DaimlerChrysler assembly line worker in Germany who’s asked to give up his cherished hourly break or the Wal-Mart shopper in Texas who can now buy a Chinese-made DVD player for US $30 [see photos, ” “Made in Asia””].
Adjusting to East Asia’s ascendancy is another matter entirely. The situation is reminiscent of that of a century ago, when the Europeans and the Japanese failed to acknowledge the rise of the United States, resulting in miscalculations that contributed mightily to the outbreak of two world wars. In Europe today, a sense of deep unease is pervasive. While the war against Iraq and strained relations with the United States would seem the cause for such anxiety, in fact, incumbent governments are in trouble throughout Europe, whether they supported the war or not. The pattern suggests that other forces are at work, and the smart political money says that the most important force is East Asia.
What’s at issue is whether the European nations can still afford their generous welfare systems and labor benefits when Chinese factory workers earn on average a tenth of what their German counterparts make. And it’s not just the production workers. Earlier this year, the chief executive officer of Munich-based Siemens AG, Germany’s foremost engineering company, announced plans to hire 1000 Chinese engineers and invest about $1.25 billion in the People’s Republic.
In the United States, although political debate this year has been dominated by Iraq and terrorism, the profound issues raised by Asia’s economic rise are starting to get some attention. On 8 July, when U.S. trade representative Robert B. Zoellick announced he had persuaded China to phase out a tax advantage for its semiconductor manufacturers, he did so under a big banner emblazoned with the words “Real Results”–a George W. Bush re-election slogan.
The Democratic Party’s presidential candidate, Senator John F. Kerry, has meanwhile taken the Bush administration to task for tolerating China’s “predatory currency manipulation,” for allowing the U.S. trade deficit with China to balloon to roughly $125 billion in 2003, and for being “asleep at the wheel” while China pirates U.S. software, optical discs, and other technologies and deprives its workers of rudimentary rights.
To assess what’s at stake in East Asia, especially in terms of the technology development that has been the driving engine of the region’s ascendancy, IEEE Spectrum convened a panel of policy experts and engineers in Washington, D.C., in June [see sidebar, “Panelists and Their Affiliations”]. Five panelists were IEEE members, three of them IEEE fellows. The panelists were selected partly to exploit regional and technical expertise but also to reflect the diversity of opinion found among those concerned about the implications of East Asia’s rise. As a result, there were few, if any, points on which all parties agreed; even the definition of the word export was debated. What follows is a condensed rendering of the panelists’ perceptions, thoughts, and expectations for East Asia.
Given Taiwan’S Tiny Size , lack of natural resources, and often precarious political position, its phenomenal expansion in the high-tech arena is the most striking among Northeast Asia’s tech titans. In a period of just 40 years, the country has moved from a sleepy, agricultural economy to the builder of some of the world’s leading tech industries. It has accomplished that feat despite deep divisions between the native Taiwanese and the Chinese nationalists who came to the island with Chiang Kai-shek in 1949 and despite the diplomatic isolation imposed by mainland China.
Most notable among Taiwan’s technology success stories are its chip foundries, Taiwan Semiconductor Manufacturing Co. (TSMC), in Hsinchu, and United Microelectronics Corp. (UMC), in Taipei. Between them, they now control three-quarters of the $20 billion global market for chips made under contract. Taiwan also boasts the world’s largest notebook-computer manufacturer, and the nation’s thin-film-transistor liquid-crystal display makers are now second in sales only to South Korea’s. Drawn by Taiwanese expertise as well as government incentives, a number of multinational tech firms, including Microsoft, Intel, and IBM, have established R and D centers in Taiwan’s renowned science parks.
What has spurred this stellar growth? For one, the strongest culture of entrepreneurship in Northeast Asia, if not the world. “In Taiwan, everyone wants to be their own boss, everyone wants to be a CEO,” noted Robert Y. Lai, a former TRW Inc. executive and now a consultant on Taiwan-related security and industry issues. “There’s a joke that if you throw a stone on a busy street in Taipei, the chance of hitting a CEO is very good.” As a result, he said, small and medium-size businesses thrive there in a way that they don’t in South Korea or Japan.
Another difference that sets Taiwan apart is that it doesn’t have the high level of government-funded R and D seen in Japan and South Korea, noted Michael G. Pecht, a professor at the University of Maryland who has written extensively about the Asian electronics industries. “In Taiwan, it’s survival of the fittest,” he says.
Taiwan’s adversarial relationship with mainland China, ironically, has tended to work to Taiwan’s advantage. “Thanks to political pressure from the People’s Republic of China, Taiwan cannot get international loans,” said Lai. “The result is that the Taiwan government has no foreign debt, period. And it has huge foreign deposits.” Those assets helped Taiwan weather the financial crisis that whipsawed through the rest of Asia in 1997-1998, Lai noted.
But how long can Taiwan remain a high-tech leader? Even more so than South Korea and Japan, it now leans heavily on China as both a market and a manufacturing base. Tens of thousands of Taiwanese-owned businesses have gravitated toward China’s eastern industrial regions [see photo, ” “Boomtown””], and an estimated 300 000 Taiwanese now work there, with another 15 000 to 20 000 joining them each year. Many of these migrants–so numerous they now merit their own name, taishang –are either professionals or skilled workers.
Their strained relations notwithstanding, China and Taiwan increasingly depend on each other economically, and that fact greatly complicates cross-strait politics. China continues to maintain a policy aimed at “reuniting” Taiwan with the mainland by 2020. The Taiwanese, meanwhile, are divided over the question of independence; the former ruling party, the Kuomintang, generally supports reunification, whereas the new regime, led by President Chen Shui-bian, leans toward the two countries’ going their separate ways.
Fearing erosion of its industrial base, the Taiwanese government has tried to limit investment in China–by restricting its chip makers from moving their most advanced technologies to the mainland, for example. But there is little the government can do to staunch the brain drain to China. “There are Taiwanese who worked for Motorola or Intel for 10 years or so and gained experience in the U.S. semiconductor industry, then spent 3 to 5 years at TSMC and UMC, and now they’re in China,” Pecht says.
Taiwan’s TSMC last spring sued its main Chinese competitor, Semiconductor Manufacturing International Corp., in Shanghai, claiming that the company hired away key employees who disclosed proprietary information about TSMC’s chip-making technology. The legal spat has not deterred TSMC from seeking, and winning, approval from the Taiwanese government to start producing less-advanced 8-inch wafers at its first mainland fab, in Shanghai. The plant is scheduled to begin full-scale production by the end of this year.
Chicago Architect Daniel Burnham’S famous motto, “Make no small plans,” could just as well be applied to South Korea. In utter ruin 50 years ago and barely rising to the level of a subsistence farm economy, it has achieved the same standard of living in a half century that countries such as Spain took two centuries to reach. No other nation has grown so fast and accomplished so much starting with so little.
South Korea today makes half the world’s computer memories, and its top companies–notably Samsung Group and LG Group, both in Seoul–have emerged as the global leaders in business-critical fields like cell telephony and flat-panel displays. Hyundai Motor Co., also in Seoul, which built its first clunky automobile just 30 years ago, incredibly ranked No. 1 in a recent U.S. survey of car reliability. “The country was virtually bankrupt [after the Asian financial crisis of 1997], but now its top technology companies are dominant or at least very strong in the world,” observed panelist Paul F. Liao, chief technology officer for the U.S. arm of the Japanese electronics giant Panasonic/Matsushita Electric Corp.
Liao pointed out that South Korea has succeeded in recent years by targeting the U.S. market–not China’s. For example, it adopted and then adapted one of the U.S. standards for cellphones so that its companies could design and manufacture for both the U.S. and South Korean markets.
South Korea, like Japan, received enormous amounts of U.S. aid for reconstruction, and “that had a tremendous influence on the development of technology,” observed panelist Linda Geppert, IEEE Spectrum’s senior technical editor and a semiconductor specialist. Just as the big industrial conglomerates in Japan–the keiretsu–were able to foster rapid transfer and copying of U.S. technology, the South Korean conglomerates, known as chaebol, drew on Japanese technology.
But in the last several years, South Korea, in contrast to Japan, has been weakening the chaebol’s control over the economy and now is attempting to open its markets. Mainly to reassure investors that money put into the country will not disappear without a trace into some old-boys’ network, South Korea’s reform government has sought to strengthen corporate governance and enforce internationally accepted accounting and risk-management rules, while at the same time smoothing relations with the country’s militant trade unions.
Panelist Tim Shorrock, a journalist specializing in Korean and Japanese politics, emphasized that these corporate reforms would never have happened without the thoroughgoing democratization of South Korean society, including the widespread use of the Internet for grass-roots political organizing. South Korea has probably the world’s highest rate of broadband penetration and a young, educated, and highly motivated population. Shorrock pointed out that although the same conservative regime has been pretty much in charge in Japan since 1955, two past presidents in South Korea have been jailed for human rights abuses, an emphatic repudiation of the thinly veiled dictatorship that governed the country for nearly 50 years.
In national elections earlier this year, the reform Uri party won full control of the South Korean government, and in April, the Uri president was reinstalled following a constitutional challenge from the political forces that for decades had been aligned with the country’s dictatorship. With that, the changing of the guard seemed complete.
Taking advantage of the higher standing it has acquired with political democratization and economic opening, South Korea’s stated aim now is to become a hub for Northeast Asian commerce–the go-between for Japanese, U.S., European, and Middle Eastern companies seeking to do business in China. The hope is that many more multinationals will set up shop in South Korea and partner with local firms, getting various kinds of encouragement and breaks from the government.
Can that strategy succeed? Obviously, South Korea’s assets are prodigious. Besides a spectacular economic track record, South Koreans benefit among their Asian neighbors from not being Japanese (whose past empire-building still rankles some), and they have taken advantage of cultural affinities to establish big bases of operations in China. The country is constructing an impressive platform for foreign multinationals outside its new international airport at Inchon, already one of the world’s busiest, and it is setting up a similar enclave for companies specializing in digital media in Seoul itself. In another large project, Samsung is constructing a “Crystal Valley” in South Chungchong province, to develop semiconductors, flat screens, and the like. And a new high-speed train, inaugurated last April and based on France’s TGV, connects Seoul in the far Northwest to Pusan at the peninsula’s southern tip, 400 kilometers away.
But South Korea is not the only aspiring Asian hub, as panelist Liao noted. Singapore’s ambitions are similar, and companies like Motorola and Liao’s own Panasonic have launched big operations in China directly, without feeling a need to work through third parties.
As for the country’s drive to improve corporate governance, there’s still a long way to go, warned panelist John Rutledge of Rutledge Capital, an investment firm. He advised, “Don’t hold your breath.”
Assemble A Group Of Asia Technology experts, and China inevitably begins to consume almost all the oxygen in the room. The reasons are not hard to fathom.
In the most basic raw materials, like oil, cement, and steel, it’s China’s gargantuan demand that is moving the world’s markets. Ask why U.S. drivers are paying the highest gasoline prices in decades, and an important reason is China, which is about to displace Japan as the world’s second biggest oil importer, behind the United States. Ask why people building homes in south Florida are having to wait months to get their foundations poured, and the answer is that there isn’t enough concrete–it’s being bought up by China. In steel, observed panelist Steven C. Clemons of the New America Foundation, China annually consumes 250 million tons, but produces only 210 million tons, which means that if you, too, are in the market for steel, you’re now paying a higher price for it.
Of course, it’s not just a matter of resources and materials. Increasingly, in the last few years, China has become a favored base for assembly of nearly every kind of export product, from plastic party favors to cellphone chip sets. The countries most affected are its immediate neighbors, Taiwan, South Korea, and, above all, Japan. As panelist Shorrock put it, “China is now to Korea what Korea was to Japan 25 years back. [The Chinese] are buying a lot of Korean technology, and they’re manufacturing it into finished goods and exporting it to places like the United States.” By 2001, China already was South Korea’s largest investment market and by 2002, its biggest export market.
As China has built relations with foreign partners, and as its importance has grown as an export market, it has become increasingly capable of muscling multinational companies into disclosing proprietary information about their advanced technology. What’s not so clear is whether China will soon be challenging the advanced industrial economies in every branch of high technology–and whether anything can or should be done about it. Those questions are wildly controversial: members of the panel disagreed sharply about whether the industrial countries should simply resign themselves to China’s ascendancy or try to resist, contain, and channel it.
The Chinese themselves don’t think they’re getting much of the advanced technology. While Americans have complained in the last year about their jobless economic recovery, Chinese have bemoaned what they call a “headless” or “brainless” boom, said panelist Fei-Yue Wang, a University of Arizona specialist on intelligent transportation, who has been involved in the Chinese government’s long-term technology planning.
Willie W. Lu, a wireless technology specialist with Stanford University, wondered why any company would agree to turn over critical technology to a Chinese partner. Given China’s inadequate legal system, there’s no sure way to protect one’s intellectual property once it’s there, he noted.
China may seem a ferocious, unstoppable tiger, but viewed up close, said Lu, it is in many ways a sickly beast. Many of its problems are well known, at least to China watchers: its troubled monetary system, poor lines of division between state entities and the private sector, pervasive corruption in some provincial and local governments, water and energy scarcity and environmental degradation, creeping unemployment, and the deterioration of its Mao-era health-care system and other social safety
nets.
Of all the serious problems, Lu puts inadequate education in first place. Though Chinese universities graduate about 325 000 engineers every year, 80 percent of the population have little more than a primary education, Lu says. The country as a whole is “like an overnight billionaire” that lacks the sophistication and knowledge to manage its own affairs. “The whole country needs to go back to the academy,” Lu concludes.
Panelist Alan Tonelson , a policy analyst and D.C. lobbyist, who makes it his business to highlight China’s impact on employment and growth in the United States, sees things differently. He emphatically rejects the notion that China is doomed to perpetual backwardness–and he sees the implications as ominous for all advanced industrialized countries. “American technology competitiveness vis-à-vis China has been eroding rather significantly, and the pace of this erosion is going to speed up dramatically because it’s the kind of process that feeds on its own momentum,” he says. “As increasingly sophisticated manufacturing flows into China, the R and D, engineering, and design functions associated with that manufacturing are going to flow to China, too.”
Pecht, of the University of Maryland, provides evidence to support Tonelson’s claims. Nine years ago, Pecht says, U.S. semiconductor makers could etch chips with features as small as 0.35 micrometers, while their Chinese counterparts could manage only 3 µm. Last year, the United States could inscribe features of 0.10 µm, but China already could do 0.13 µm [see chart, ” China Closes Semiconductor Technology Gap”]. In 10 or 15 years, China’s semiconductor industry has gone from being five generations behind the state of the art to being one generation behind, observes Tonelson.
He lays partial blame for the United States’ eroding lead on multinational companies, which are too eager to exploit China’s low production costs and repressive labor system. The rest of the blame goes to a U.S. administration that he sees as uninformed, uninterested, and inactive. Most of Tonelson’s major points were sharply disputed by fellow panelists, but Clemons, of the New America Foundation, supports him and goes even further, arguing that China’s economy is a bubble–in effect, a disaster waiting to happen to the rest of the world.
Clemons suggests that it is time for the United States to enforce restraint, by, for example, removing tax incentives that encourage U.S. companies to move production offshore. China’s situation is “so potentially disruptive to the global economy that I tend to favor pulling the plug,” he says.
Tell a bunch of electrical engineers to pull a plug, and you can count on a lively response. What plug? Where is it? Do we really control it? And even if we could pull it, wouldn’t the collateral damage resulting from the power loss be unacceptable? The University of Arizona’s Wang hints that attempting to check China’s growth would risk sparking a war.
The predisposition of the engineers on the panel was to agree with Rutledge, the investor, who dismisses any thought of stopping China’s ascendancy, which he sees as a kind of renaissance. For thousands of years, he observes, China was the most advanced and most powerful country in the world, and now it is simply reclaiming what it sees as its rightful place. Rutledge argues that as the cost of moving capital around the world has gone to virtually zero, “Capital will go where capital will go.”
And What Of Japan? Though still by far the region’s most industrially advanced country–with a per capita gross domestic product five and a half times that of China–Japan has watched its East Asian neighbors blossom while its own economy has barely budged for more than a decade. Only this year has Japan finally made some real, if modest, gains; in July the government said it expected the economy to grow by 3.5 percent this fiscal year, the fastest pace since the mid-1990s.
Japan’s predicament has been particularly painful given that, right up until the collapse of its stock market and banking system in 1990, it seemed poised to eclipse the United States as an economic superpower. Japan’s meteoric rise during the 1970s and 1980s, which hinged on the superior quality of its manufacturing and technology, also helped seed the subsequent successes of South Korea, Taiwan, and now China.
Now that Japan appears to be recovering, the obvious question is: how durable will this recovery be? Has the government truly reformed its financial system and rebuilt its industrial structure? Or, as panelist Clemons puts it, “What is Japan getting right, and what is it still getting wrong?”
In broad strokes, the Japanese model has been characterized by government-nurtured and -protected industry, whose most powerful agent was the Ministry of International Trade and Industry (MITI), noted panelist Danielle Kriz, a Japan trade expert in the U.S. Commerce Department’s Office of Technology and Electronic Commerce. As the chief architect of the country’s industrial strategy, MITI fended off international competition, mediated industry disputes, and aided in licensing foreign technology. In the process, it built globally competitive industries in telecom, computers, electronics, automobiles, and many other fields.
But Japan’s bureaucratic decision making eventually backfired in the 1990s, as telecom deregulation in Western Europe and the United States allowed new players to enter those markets and spurred faster consumer adoption of information technology. Meanwhile, the Internet boom and e-commerce took off throughout the Western industrialized world. Neither the Japanese government nor its large industry cartels were nimble enough to recognize the significance of the new technologies.
By 2000, what the government did recognize was Japan’s eroding technology base, which officials viewed with “a sense of crisis,” Kriz said. They responded, in a manner reminiscent of the 1950s-era MITI, by passing a new set of laws and policy, whose aim was to make Japan the most advanced IT country by 2005. The programs combined regulatory reform, increased competition, and projects to build out the Internet; as a result, the 15 million Japanese who now have broadband service enjoy the world’s cheapest rates and among the fastest connection speeds (less than $40 per month for a 45-megabit-per-second line; in the United States, a connection only one-tenth as fast costs more).
But many of the problems that precipitated Japan’s last collapse–the unhealthy level of government-industry collusion, for instance–haven’t been resolved, adds the New America Foundation’s Clemons. “There’s still a kind of village mentality when it comes to promoting Japan’s own, and resisting or excluding others,” he says.
For example, when electronics giant NEC Corp., in Tokyo, began shopping around its plasma display business earlier this year, MITI’s successor, the Ministry of Economy, Trade, and Industry, persuaded the company to sell to a domestic company rather than let it go abroad. “There are a few examples of successful foreign investment in Japan today, but it’s still at the tokenism level,” Clemons concludes.
Like Korea and Taiwan, Japan now views China as a vital trading partner, a base for manufacturing, and a competitive threat. Much of Japan’s recent growth derives from trade with China. From 2001 to 2003, for example, Japan’s technology exports to China more than doubled, while its technology exports to South Korea and Taiwan grew only modestly [see graphs, ” Japan’s Trade With China”]. At the same time, Japanese companies clearly benefit from cheaper labor costs in China.
Kriz believes that, for now at least, the Japanese are doing a good job of keeping their core competencies in Japan. Those competencies include intelligent networks, advanced ceramics and other materials, and some of the sophisticated manufacturing methods for LCDs, she says.
The Japanese still dominate the consumer electronics market, especially at the higher end, Panasonic’s Liao noted. They retain nearly three-quarters of the DVD recorder market and 84 percent of the digital camera market. And the merging of computers, communications, and consumer electronics, resulting in function-laden gadgets like cellphone-cameras and PDA-MP3 players, has been a boon. “Japanese companies need to focus on those things that they do best,” Liao said.
In the long term, though, China will certainly develop the engineering know-how and the marketing savvy to build even the most advanced products, several panelists pointed out. How will Japan, and the rest of the industrialized world, compete then?
As Perhaps The Most Significant Issue in 21st-century geopolitics, East Asia’s economic ascendancy prompts vital questions. Would it be rational policy or imperialist meddling for the United States and Europe to try to contain and control the eastward flow of capital and jobs? For that matter, would an attempt to rein in China’s breakneck growth only precipitate global recession, or even war? Can the East Asian nations take increasing responsibility for working out their own problems, or will political turmoil among them short-circuit their growing cooperation? Is China’s red-hot growth in fact creating another economic bubble that will drag down its trading partners when the bubble inevitably bursts?
On these matters, the panelists disagreed sharply, as indeed all Asia watchers do these days. There are no absolute answers, and the confluence of factors acting within the region and from the outside makes any long-term forecasting impossible.
“There used to be the joke that the United States fought the Cold War and Japan won,” Clemons says. “The new joke is that the United States is fighting the war on terror, but China is winning.” There may be something to that: while the United States and its military allies grapple with difficult situations in Afghanistan and Iraq, China and its East Asian partners are now perceived as an oasis of stability–and they are taking every opportunity to advance their agendas. If the United States continues to be distracted by what it sees as its global responsibilities (and what critics see as global obsessions), it may one day find it has won some battles but lost the struggle that counts most.

Roy C Dudgeon

Bio-Accumulation (also referred to as biological amplification and biological magnification) refers to the process by which persistent organic pollutants (POPs) accumulate in higher levels as they are passed from one trophic level to another through food chains.

POPs are a class of artificial chemicals with the following five characteristics. 1. they are persistent (do not break down quickly through natural or biological processes). 2. they are organic compounds (or have a carbon based molecular structure). 3. they are polluting (toxic, or poisonous, many are known carcinogens or mutagens). 4. they are fat-soluble (absorbable by fatty tissues, and therefore subject to accumulation in living tissues). 5. they occur in forms which allow them to travel great distances throughout the biosphere.

Not all pesticides used in the agricultural sector are POPs, and pesticides are not the only chemicals to be concerned about. Some of the most notorious POPs include, but are not limited to, the organochlorine insectides (DDT, aldrine, chlordane), PCBs, and Dioxins. Many such chemicals last for decades or, like DDT can break down into even more toxic compounds.

Understanding how the process works:

An field has been sprayed with DDT, which accumulates on the grain, each contaminated with 1ppm (part per million) of the chemical. An insect eats many plants and the chemical accumulates in their bodily tissues, leading to a concentration of 10 ppm. A frog eats many such insects, leading to a concentration of 100 ppm. A fish eats many such frogs, leading to a concentration of 1000ppm. A human eats many such fish and the concentration increases further.

This implies that species higher up the food chain, such as humans, are at greater risk from the effects of biomagnification of POPs, or food pollution. Carnivores (meat eaters) generally are also at greater risk. This is because, as a general rule, the levels of such toxins are higher in meat than in fruits, grains and vegetables. This provides a good ecological argument for limiting the amount of meat in your diet, and particularly your animal fat intake.

For example, orcas or killer whales are carnivores who eat literally tons of meat on an annual basis and are also quite long lived. A dead orca was found not too many years ago washed up on the California coast. An autopsy revealed that the cause of death was toxic contamination of its bodily tissues with PCBs. Ironically, the rates

were so high that its carcass was classified as toxic waste, which it was illegal to dispose of at sea under American law.

The fact that the sale and use of many of the worst POPs (such as the organochlorine insecticides) have been banned by environmental regulations in the industrial countries does not mean the problem has gone away. Many such chemicals, even while being banned domestically, continued to be sold internationally to countries where environmental regulations were more lax. Countries from which we import food.

Conclusion:

The solution to food pollution is simple, and requires the following:

1. enforceable international bans concerning the manufacture and sale of the worst offenders at the global level.

2. required testing of artificial chemicals to determine whether they are POPs prior to their being allowed into the marketplace, also regulated at the global level.

By weeding out POPs from our chemical repertoire we can minimize the risk to both ecosystems and to human health. Because many POPs are incredibly persistent,however, it may be decades before our food supply is safe, even if we eliminate them all immediately.

References, further reading:

Anne Platt McGinn (2000) “POPs Culture,” World Watch March-April.

Anne Platt McGinn (2000) “Oceans Are on the Critical List,” USA Today Magazine.

Ted Williams, (1999) “:Lessons from Lake Apopka,” Audubon, July-August.

by Mike Adams

This is one of the most important issues for the future of human civilization: Who owns your genetic code? Based on existing U.S. law,the corporationsown it. Right now, over20% of your genetic codeis owned by biotech corporations (this is a fact). But the U.S. Justice Department has just issued a “friend of the court” briefing that looks poised to overturn this, driving a stake through the heart of the intellectual property monster known as the biotech industry.

This is a major reversal of decades of U.S. policy. If the U.S. Patent and Trademark Office (USPTO) enforces this new ruling, it would mean an end to all biotech patents on human genes. Effectively, it would set our genetic code free from corporate domination.

Human genes are part of nature, not a human invention

In its brief, the Dept of Justice argued that genes should not be patentable because they are part of nature:

“The chemical structure of native human genes is a product of nature, and it is no less a product of nature when that structure is ‘isolated’ from its natural environment than are cotton fibers that have been separated from cotton seeds or coal that has been extracted from the earth…”(http://graphics8.nytimes.com/packag…)

This makes sense, of course — it’s the same thing I’ve been arguing here on NaturalNews for years. To allow corporations to own even a small part of the human genome is a pathway tohuman slavery. We have been headed down that path for a long time, and now for the first time it appears things may be turning for the better.

The insanity of modern patent law

Few reasonable people would argue that U.S. patent law as it exists today makes any real sense in the first place. Patents are supposed to offer legal protection for “man-made inventions.” The whole idea that you can patent human genes is ridiculous from the outset.

Human genetic code was obviously not invented by humans, and especially not by one person or corporation. To grant a corporation an intellectual property monopoly over even a single human gene is an affront to human heritage and a violation of natural law. That this has already happened is a crime against humanity.

Theoretically, such patents actually give corporations the right tocharge royalties when couples reproducebecause by having a baby, you are “replicating” a patented gene without permission. Thus, you could be guilty of patent violation and be forced to pay a royalty to the patent owner.

Fast forward this a few decades under a country controlled by corporate interests, and you can see where it ends up:Just to have a baby, you might have to pay $100,000 in royalty paymentsto dozens of different corporations who own “your” genetic code. This would all be enforced by local police officers and sheriffs who might arrest you at gunpoint for your acts of “corporate piracy” (getting pregnant).

Don’t think it could happen? Check out the history of the RIAA and its intellectual property war against the people. Look at what Monsanto has done to farmers who accidentally grew GMO crops because the GMO seeds blew into their fields. Look whatMyriad Geneticsis doing right now with its patent on human breast cancer genes BRCA1 and BRCA2 — it’s charging$3,000 a popto run a simple test that determines whether women carry those genes.

Make no mistake: When you hand monopoly control to a corporation, that corporation will exploit it to its fullest extent, even if it means destroying human lives in the process.

Why stop at genes? Seeds should also be set free

If the USPTO disallows all patents on human genes, then by the same logic there should beno patents allowed on seeds or animals, either. The patenting of seeds is yet another method by which powerful corporations like Monsanto and DuPont may effectivelyenslave the human raceby controlling the food supply.

To remove patent protection from seeds is todestroy the seed monopoliesthat these dangerous, destructive corporations depend on to enforce their control over the seed supply. And it is due to patent protection on seeds thatwe have already lost a tremendous amount of seed diversityin the agricultural seed markets.

Patents on genes and seeds are the enemy of freedom. They are the shackles that keep farmers and consumers enslaved by corporate interests. To see that these patents now have the potential to be disallowed entirely gives us a glimmer of hope that corporate domination over the human race may be effectively resisted.

Because, let’s face it: If governments of the world continue to hand over our genes, seeds and medicines to the monopolistic, greed-driven corporations that have already destroyed our farms, contaminated our food supply and poisoned our bodies with synthetic chemicals, then the People of the world will ultimately be driven to the point of armed, violent resistance against their corporate oppressors. There is only so much tyranny the People will take before they rise up against their oppressors and fight back.

Today’s decision by the Dept of Justice may have averted that future bloodshed scenario — at least over the issue of genes and seeds. Long-term peace can only emerge when the People have their freedom and do not feel as if they are living under the threat of constant oppression by governments, corporations or other institutions of power. Every social revolution in the history of human civilization has involved a popular uprising against institutions that violated natural law and human freedom. Andpatents on genes and seeds are a violation of natural law.

Patents on many of Big Pharma’s drugs are also a violation of natural law

For several years now, I have publicly called for all patents on genes, seeds and animals to be declared invalid. I’ve even gone further, calling for all patents onmedicinesto also be declared invalid, although such a move is highly unlikely to take place anytime soon.

Can you imagine what would happen to Big Pharma if all the chemicals they stole from Mother Nature and then patented were suddenly declared “open source?”

Big Pharma would collapse within a year, and the citizens of the USA would be set free to pursuenatural medicine that worksrather than conventional medicine forced upon them under a monopolistic racket protected by the FDA and the USPTO.

Medicine should belong to the People, especially when much of it is sourced from plants in the first place. I believe that the People have a natural right towater,natural medicine,seedsand their own genes, too. To impede the public’s access to such natural, global resources is a violation of natural law and should be resisted by any and all means necessary.

Learn more:http://www.naturalnews.com/030256_genes_patent_protection.html#ixzz1Pz6gROGW