The Death of Money

April 1, 2014

by James Rickards

James Rickards is the author of the national bestseller Currency Wars. He is a portfolio manager at West Shore Group and an adviser on international economics and financial threats to the Department of Defense and the U.S. intelligence community.

The prospect of the dollar failing, and the international monetary system with it, looks increasingly inevitable. The dollar nearly ceased to function as the world’s reserve currency in 1978, and similar symptoms can be seen today.

DEATH OF MONEY

Few Americans in our time recall that the dollar nearly ceased to function as the world’s reserve currency in 1978. That year the Federal Reserve dollar index declined to a distressingly low level, and the U.S. Treasury was forced to issue government bonds denominated in Swiss francs. Foreign creditors no longer trusted the U.S. dollar as a store of value. The dollar was losing purchasing power, dropping by half from 1977 to 1981; U.S. inflation was over 50 percent during those five years. Starting in 1979, the International Monetary Fund (IMF) had little choice but to mobilize its resources to issue world money (special drawing rights, or SDRs). It flooded the market with 12.1 billion SDRs to provide liquidity as global confidence in the dollar declined.

We would do well to recall those dark days. The price of gold rose 500 percent from 1977 to 1980. What began as a managed dollar devaluation in 1971, with President Richard Nixon’s abandonment of gold convertibility, became a full-scale rout by the decade’s end.

The efforts of Federal Reserve Chairman Paul Volcker and the newly elected Ronald Reagan would save the dollar. The dollar did not disappear as the world’s reserve currency after 1978, but it was a near run thing.

Now the world is back to the future.

A similar constellation of symptoms to those of 1978 can be seen in the world economy today. In July 2011 the Federal Reserve dollar index hit an all-time low, over 4 percent below the October 1978 panic level. In August 2009 the IMF once again acted as a monetary first responder and rode to the rescue with a new issuance of SDRs, equivalent to $310 billion, increasing the SDRs in circulation by 850 percent. In early September gold prices reached an all-time high, near $1,900 per ounce, up more than 200 percent from the average price in 2006, just before the new depression began.

The parallels between 1978 and recent events are eerie but imperfect. There was an element ravaging the world then that is not apparent today. It is the dog that didn’t bark: inflation. But the fact that we aren’t hearing the dog doesn’t mean it poses no danger. And from the Federal Reserve’s perspective, inflation is not a threat; indeed, higher inflation is both the Fed’s answer to the debt crisis and a policy objective.

This pro-inflation policy is an invitation to disaster, even as baffled Fed critics scratch their heads at the apparent absence of inflation in the face of unprecedented money printing by the Federal Reserve and other major central banks. Many ponder how it is that the Fed has increased the base money supply 400 percent since 2008 with practically no inflation. But two explanations are very much at hand — and they foretell the potential for collapse. The first is that the U.S. economy is structurally damaged, so the easy money cannot be put to good use. The second is that the inflation is coming. Both explanations are true — the economy is broken, and inflation is on its way.

The world economy is not yet in the “new normal.” Instead, the world is on a journey from old to new with no compass or chart. Turbulence is now the norm.

Danger comes from within and without. We have a misplaced confidence that central banks can save the day; in fact, they are ruining our markets. The value-at-risk models used by Wall Street and regulators to measure the dangers that derivatives pose are risible; they mask overleveraging, which is shamelessly transformed into grotesque compensation that is throwing our society out of balance. When the hidden costs come home to roost and taxpayers are once again stuck with the bill, the bankers will be comfortably ensconced inside their mansions and aboard their yachts. The titans will explain to credulous reporters and bought-off politicians that the new collapse was nothing they could have foreseen.

While we refuse to face truths about debts and deficits, dozens of countries all over the globe are putting pressure on the dollar. We think the gold standard is a historical relic, but there’s a contemporary scramble for gold around the world, and it may signify a move to return to the gold standard. We greatly underestimate the dangers from a cyberfinancial attack and the risks of a financial world war.

Regression analysis and correlations, so beloved by finance quants and economists, are ineffective for navigating the risks ahead. These analyses assume that the future resembles the past to an extent. History is a great teacher, but the quants’ suppositions contain fatal flaws. The first is that in looking back, they do not look far enough. The second flaw involves the quants’ failures to understand scaling dynamics that place certain risk measurements outside history. Since potential risk is an exponential function of system scale, and since the scale of financial systems measured by derivatives is unprecedented, it follows that the risk too is unprecedented.

While the word collapse as applied to the dollar sounds apocalyptic, it has an entirely pragmatic meaning. Collapse is simply the loss of confidence by citizens and central banks in the future purchasing power of the dollar. The result is that holders dump dollars, either through faster spending or through the purchase of hard assets. This rapid behavioral shift leads initially to higher interest rates, higher inflation, and the destruction of capital formation. The end result can be deflation (reminiscent of the 1930s) or inflation (reminiscent of the 1970s), or both.

The coming collapse of the dollar and the international monetary system is entirely foreseeable. This is not a provocative conclusion. The international monetary system has collapsed three times in the past century — in 1914, 1939, and 1971. Each collapse was followed by a tumultuous period. The coming collapse, like those before, may involve war, gold, or chaos, or it could involve all three. The most imminent threats to the dollar, likely to play out in the next few years, are financial warfare, deflation, hyperinflation, and market collapse. Only nations and individuals who make provision today will survive the maelstrom to come.

In place of fallacious, if popular, methods, complexity theory is the best lens for viewing present risks and likely outcomes. Capital markets are complex systems nonpareil. Complexity theory is relatively new in the history of science, but in its 60 years it has been extensively applied to weather, earthquakes, social networks, and other densely connected systems. The application of complexity theory to capital markets is still in its infancy, but it has already yielded insights into risk metrics and price dynamics that possess greater predictive power than conventional methods.

The next financial collapse will resemble nothing in history. But a more cleared-eyed view of opaque financial happenings in our world can help investors think through the best strategies.

This article is adapted from “The Death of Money: The Coming Collapse of the International Monetary System” by James Rickards, in agreement with Portfolio, an imprint of Penguin Random House. Copyright James Rickards, 2014.


China loses its allure

January 27, 2014

This week’s print edition of The Economist brings a worth reading story on China: life is getting harder for foreign companies there.

“According to the late Roberto Goizueta, a former boss of The Coca-Cola Company, April 15th 1981 was “one of the most important days…in the history of the world.” That date marked the opening of the first Coke bottling plant to be built in China since the Communist revolution.

The claim was over the top, but not absurd. Mao Zedong’s disastrous policies had left the economy in tatters. The height of popular aspiration was the “four things that go round”: bicycles, sewing machines, fans and watches. The welcome that Deng Xiaoping, China’s then leader, gave to foreign firms was part of a series of changes that turned China into one of the biggest and fastest-growing markets in the world.

For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over.”

Read full story.


Trade Deals Take Global Commerce Back to the Future

January 17, 2014

Edward Alden argues in an article for World Politics Review that the United States and European Union are reasserting their control over global trade rules after two decades of stalemate with developing countries.

After the negotiations that led to the creation of the WTO in 1995, developing country officials were determined to never again allow the U.S. and EU dictate the final terms of a global trade agreement. For the past two decades, until this month’s modest agreement in Bali, they have made good on that threat. But through ambitious regional deals, the U.S. and EU are reasserting control over global trade rules.

“Never again. That was the sentiment I remember hearing over and over from developing country officials following the tumultuous completion of the Uruguay Round negotiations in 1993 that led to the creation of the World Trade Organization (WTO) two years later. Once again, most of them believed, the United States and the European Union had dictated the final terms of a global trade agreement and forced it down the throats of the rest of the world. These countries were determined to have far more say in the shape of any future deals.

For the past two decades, until this month’s modest agreement in Bali to adopt new “trade facilitation” measures, the developing countries have made good on that threat. They have insisted that any new global trade agreement, such as that pursued unsuccessfully over the past decade through the Doha Round, pay special attention to their needs and priorities in areas like agriculture, manufacturing and intellectual property rules. Their united opposition has made it impossible to conclude another big global trade round on terms acceptable to the U.S. and EU.”

Read full story.


Stanley Fischer To Become Next Federal Reserve Vice Chairman

December 12, 2013

Stanley Fischer, the former Bank of Israel governor and International Monetary Fund (IMF) official, is alleged to be the successor of Janet Yellen as vice chairman of the U.S. Federal Reserve.

STANLEY FISCHER

As a professor of economics at Massachusetts Institute of Technology (MIT), he taught Fed Chairman Ben S. Bernanke, whose term ends in January 2014, and European Central Bank chief Mario Draghi.

Washington Post columnist Neil Irwin, and author of The Alchemists: Three Central Bankers and a World on Fire, explains why Stanley Fischer is the most qualified candidate for the job.

“A crisis-management veteran. Fischer has faced trial by fire, most dramatically as the deputy managing director at the IMF from 1994 to 2001. He was on the front lines dealing with of a series of emerging market crises, including in Mexico, East Asia and Russia.

In other words, if there were to be a crisis in one or more of the emerging powers like China, India or Brazil, it would be the sort of thing that Fischer has spent his career preparing for. That is doubly important right now, as money has been gushing out of emerging economies in the past few months, driving their currencies down and their borrowing costs up.”

Read full story.


Guest Editorial: The Currency War

February 21, 2011

What’s Behind the Currency War?

By Professor Dr. Antony P. Mueller

In September 2010, a short time before the international financial summit of the Group of Twenty (G20) took place in South Korea, Brazilian finance minister Guido Mantega declared that the world is experiencing a “currency war” where “devaluing currencies artificially is a global strategy.”

Dr. Antony P. Mueller is a professor of economics at the graduate business school of the University of Caxias-do-Sul (UCS) in Brazil. He is an adjunct scholar of the Ludwig von Mises Institute and president and founder of The Continental Economics Institute.

Dr. Antony P. Mueller is a professor of economics at the graduate business school of the University of Caxias-do-Sul (UCS) in Brazil. He is an adjunct scholar of the Ludwig von Mises Institute and president and founder of The Continental Economics Institute.

By announcing the outbreak of a “currency war,” Mantega wanted to draw attention to the problems caused by the ongoing exchange-rate manipulations that governments put in place in order to gain economic advantages. In this sense, “currency war” denotes the conflict among nations that arises from the deliberate manipulation of the exchange rate in order to gain international competitiveness by way of currency devaluation.

Competitive Devaluation

Calling competitive devaluation a “war” may seem like a gross exaggeration. Yet in terms of its potential of destruction, the current global financial conflict may well rank at a level similar to that of a real war.

In a wider historical perspective, the current currency war is the latest conflict in a series of acute crises of the modern international monetary system. In a world of national monetary regimes based on fiat money without physical anchors, domestic monetary instability automatically transforms into exchange-rate instability. As before, the current crisis of the international economic order is mainly the result of monetary fragilities coming from the unsound national monetary systems and reckless domestic monetary and fiscal policies.

The immediate cause of the currency war entering an acute stage is the policy of massive quantitative easing practiced by the US central bank. Whatever the original intention of this policy may have been, the consequences of the Fed’s measures include monetary expansion, low interest rates, and a weaker US dollar. With dollar interest rates approaching the “zero bound,” the United States is joining Japan in the effort to stimulate a sluggish economy with massive monetary impulses.

Until recently, the currency war was contained as a kind of financial cold war. The conflict entered its hot phase as a result of the expansive monetary policies that were put in place in the wake of the financial-market crisis that began in 2007. In defiance of the fact that the financial crisis itself was the result of the extremely expansive monetary policies in the years before, many central banks have now accelerated monetary expansion in the vain attempt to cure the disease with the same measures that had caused it in the first place.

Easy Money and International Financial Flows

What has emerged in the global financial arena over the past couple of years is the interplay among easy money, low interest rates, international trade imbalances, financial flows, and exchange-rate manipulations. The failure of attempts to cure overindebtedness with more debt, and to stimulate weak economies by giving them interest rates as low as possible, provokes a repetitive pattern of bubble and crash where each phase ends in a higher level of government debt.

A global search for higher yields has been going on not unlike what happened in the late 1960s and 1970s, when the United States inflated and the countries that had linked their exchange rates to the US dollar suffered from imported inflation. Nowadays, the formal dollar-based fixed-exchange-rate system no longer exists. It has been replaced by a system that sometimes is called “Bretton Woods II”: a series of countries, particularly in Asia this time, have pegged their exchange rates (albeit without a formal agreement) to the US dollar.

If a country wants to slow down the appreciation of its exchange rate that comes as a consequence of the financial inflows from abroad, it must intervene in the foreign-exchange markets and monetize at least a part of the foreign exchange. This way, the monetary authorities will automatically increase the domestic money stock. Additionally, under this system relatively poor countries feel forced not only to buy the debt issued by the relatively wealthy countries like the United States but also to buy these bonds at their current extremely low yields.

Under current conditions, the monetary expansion gets globalized and invades even those countries that wish to practice restrictive monetary policy. Relatively high levels of the interest rate improve the restrictive currency’s attractiveness. Thus, more and more monetary expansion happens on a global scale, which in turn provides the fuel for the next great wave of international financial flows.

The weaker countries, which compete with each other on the basis of low prices, are getting pushed to the side; it was just a matter of time until more and more governments would begin to intervene in the foreign-exchange markets by buying up foreign currencies in order to try to prevent their exchange rates from appreciating too much, too fast.

Yet using the exchange rate as a tool in order to gain economic advantage or avert damage for the domestic economy is inherently at variance with a sound global monetary order, because one country’s devaluation automatically implies the revaluation of another country’s currency and thus the advantage that one tries to obtain will be achieved by putting a burden on other countries.

Escalation

By recycling the monetary equivalent of the trade surplus into the financial markets around the globe, monetary authorities in surplus countries form a symbiosis with trade-deficit countries in fabricating a worldwide monetary expansion of extreme proportions.

The paradoxical, or rather perverse, features of the current state of affairs were highlighted a short time ago when in January 2011 the monetary authorities of Turkey decided to lower the policy interest rates so as to make the inflow of foreign funds less attractive, despite a booming Turkish economy that shows plenty characteristics of a bubble.

Exchange-rate policies produce the usual spiral of interventionism: the de facto consequences tend to diverge from the original intentions, prompting further rounds of doomed interventions. This interventionist escalation is not only limited to an incessant repetition of the same failed policies, but the errors committed in one policy area also affect other parts of the economy. Thus, it is only a matter of time until errors of monetary policy lead to fiscal fiascos, and exchange-rate interventions lead to trade conflicts.

At first sight, exchange-rate intervention may appear tolerable as the legitimate pursuit of national self-interest. But exchange-rate policies are intrinsically matters that tend to stir transnational controversies. When a country’s exchange rate policy collides with the interests of the trading partners, the tit-for-tat of mutual retaliation automatically tends to lead to an escalation of the conflict. Once the process of competitive devaluation has started, a devaluation by one country invites other countries to devaluate their exchange rates as well. As a consequence, the international monetary order will eventually disintegrate, and sooner or later the conflict will go beyond currency issues and affect a wide spectrum of economic and political relations.

Therefore, because of the unsound monetary system, a peaceful international political system also is constantly at risk. Monetary conflicts provoke political confrontations. Besides the immediate costs of exchange-rate conflicts that come from the damage to international trade and investment, and thereby to the international division of labor, harm will also be done to confidence and trust in the international political arena.

The dispute about exchange rates is the consequence of contradictory tensions that are innate to the modern monetary system. In this respect the currency war is an expression of the defects that characterize an unsound and destructive financial system. The outbreak of the currency war is a symptom of a deeply flawed international monetary order.

Brazil

When Brazil’s finance minister repeated his warnings in January 2011 and said that “the currency war is turning into a trade war,” Mantega sent a signal to the world that the escalation of the trade war had started. Because of the massive inflow of money from abroad, the Brazilian currency had sharply appreciated and the Brazilian economy was losing competitiveness.

In order to reduce the impact on is domestic economy, Brazil had been intervening in the foreign-exchange markets, diminishing the degree of currency appreciation. In doing so, the monetary authorities had to buy foreign currencies, mainly US dollars, in exchange for its domestic money.

By pursuing such a policy over the past couple of years, Brazil has increased its foreign-exchange reserves from around 50 billion to 300 billion US dollars. Yet even despite these foreign-exchange interventions, the Brazilian currency appreciated drastically against the US dollar and other currencies.

By various estimates, Brazilian foreign trade suffers from an exchange-rate overvaluation of around 40 percent. As a consequence, Brazil’s current account balance, which was still at surplus in 2007, has plunged into a deficit of 47.5 billion US dollars in 2010. At the same time when an artificial boom is taking place as the result of massive monetary expansion, the Brazilian economy suffers from creeping deindustrialization.

Part of the explosion of Brazil’s current-account deficit can be explained by weak demand from its trading partners, which have plunged into a prolonged recession. Yet beyond this circumstance, there has been another causal chain at work: the inflow of funds from abroad that boosts the exchange rate provides the grounds for an exorbitant increase of the country’s monetary base.

The combination of ample liquidity at home, weak demand from some trading partners abroad, and a strong exchange-rate appreciation provides the basis for an extreme import expansion that vastly exceeds exports. Unlike a country such as Germany, for example, whose industry is pretty resilient against currency appreciation, Brazil resembles in this respect the countries of the Southern periphery of the eurozone in its incapacity to cope effectively with an overvalued currency.

When, in January 2011, a new government took power in Brazil, the newly-elected president, Dilma Rousseff, declared in her inauguration speech that she will protect Brazil “from unfair competition and from the indiscriminate flow of speculative capital.” Guido Mantega, the former and new Brazilian finance minister, did not hesitate to join in when he asserted that the government has an “infinite” number of interventionist tools at its disposal with which to protect national interests. Mantega said that the government is ready to use taxation and trade measures in order to stop the deterioration of Brazil’s trade balance.

China

The countries that form the favored group that gets targeted by international financial flows in search of higher yields compete among themselves in order to prevent their currencies from appreciating too much, and as a group these countries compete against China in their efforts to maintain a competitive exchange rate.

China’s position forms part of a long causal chain, which includes low interest rates and monetary expansion in the United States, that fuels higher import demand. Given that China drastically devalued its exchange rate as early as in the 1980s, this country was at the forefront of gaining advantage of America’s import surge; China grabbed the golden opportunity to turn itself into the major exporter to the United States.

In order to maintain its currency at its undervalued level, the Chinese monetary authorities must buy up the excess of foreign exchange that accumulates from its trade surplus, preferably by buying US treasury notes and bonds. In this way, China became America’s main creditor. Over the past decade, China increased its foreign exchange position from a meager $165 billion in 2000 to an amount that was approaching $3 trillion at the end of 2010.

From the 1980s up to the early 1990s, China devalued its currency from less than 2 Yuan to the US dollar to an exchange rate of 9 Yuan against the US dollar. And despite its huge trade surpluses, China has only slightly revalued the Yuan ever since, establishing the current exchange rate at 6.56 Yuan per US dollar.

Over the past decade, China has become the major financier of the US budget deficit. Together with other monies flowing in from abroad, the US government was relieved from the need to cut spending. The inflow of foreign capital also allowed the US government to pay lower interest rates for its debt than it would have if only domestic supply of savings were available. Foreign imports put pressure on the price level, and the US central bank could continue monetary expansion without an immediate effect on the price-inflation rate.

If China wants to hold its competitive position through an undervalued currency, the Chinese monetary authorities must continue their policy of intervention in the foreign-exchange markets. As a consequence of buying dollars from its exporters, the domestic money supply in China continues to rise, throwing additional fuel on a domestic boom that is already in full swing.

Even more so than their Brazilian counterparts, China’s political-decision makers have failed to exert moderation or restraint when it comes to interventionist measures. As long as China’s leadership presumes that it gains from exchange-rate manipulation, its currency interventions will go on.

Global Financial Fragilities

Since the abandonment of the gold standard, the global financial system has been in disarray. All the international monetary arrangements that have been established since then have ended in crisis and finally collapsed. For almost a hundred years now, one interventionist scheme has been established and then soon fallen to pieces.

When the monetary and fiscal decision makers in the United States and Europe discarded all restraints against intervention in the wake of the financial market crisis, socialist and interventionist governments around the globe felt vindicated. They had long been convinced that only through state control could financial stability be obtained. Due to the policies adopted by Western countries in their futile attempt to overcome the financial-market crisis, the leaders of the so-called emerging economies have become even more unscrupulous interventionists.

Political leaders around the globe have shed the little that was left of support for free markets and set the controls for a way back on the road to serfdom. It is mainly due to ignorance that the modern monetary system gets labelled as a laissez-faire or free market system. In fact not only the basic “commodity” of this scheme, i.e., fiat money, but also its price and quantity are largely determined by political institutions such as central banks.

It is more than absurd when, in the face of crises and conflicts, more government intervention gets called upon: it was state intervention in the first place that laid the groundwork for the trouble to appear.

So-called “speculative” international capital flows already happened decades ago. What has changed since then is the amount of hot money and the speed with which it floats around the world. It would be wrong to describe these financial movements as an expression of free markets. The fact, for instance, that in 2010 daily transactions on the international currency market have reached a volume of four trillion US dollars is the result of unhampered fiat-money expansion and massive state intervention in the foreign-exchange markets.

The increase in the global money supply that has been going on for many years finds its complement in a global asset boom. The inflation of money drives up the price of precious metals, natural resources, and food. Once more, the world experiences a period of fake prosperity not much different from the real-estate bubble, and many other episodes, that led to previous financial crises.

Conclusion

The political endeavours to gain competitive advantages through exchange-rate devaluation sows mistrust among nations; and the ensuing regime uncertainties frustrate the business community. Over time the conflict over exchange rates tends to destroy the global division of labor.

Once again, the international monetary system is on the brink of a breakdown. As in the past, the main reason behind the current conflict is extreme monetary expansion. Unsound monetary systems produce turmoil not just at home but also in the international arena. Excessive monetary expansion, which is the cause of domestic malinvestment, is also the root of economic distortions at a global level.

Without a fundamental change of the monetary system itself, without a return to sound money, the international monetary system will remain in a state of permanent fragility — ever oscillating between the abyss of deflationary depression and the fake escape of hyperinflation. This is the fate of the world when nations implement fiat monetary systems and put them under political authority.

© 2011, Dr. Antony P. Mueller.


Barack Obama’s State of the Union Address 2011

January 26, 2011

In his State of the Union address on January 25, 2011, U.S. President Barack Obama mentioned a plan for investment in crucial areas like education, high-speed rail, and green technology, as well as reforming the tax code to help the United States meet the challenge of globalization amid relentless competition from rising economies such as China and India.

A Member of Congress reads along as President Barack Obama delivers the State of the Union address in the House Chamber at the U.S. Capitol in Washington, D.C., Jan. 25, 2011. (Photo by Pete Souza)
A Member of Congress reads along as President Barack Obama delivers the State of the Union address in the House Chamber, January 25, 2011. (Photo by Pete Souza)

“We need to out-innovate, out-educate, and out-build the rest of the world,” he said in his speech (see full transcript below). At the same time, Obama, who is facing massive deficits, did not call for new programs. Instead, he promised a five-year budget freeze on non-defense discretionary spending, which he said had the prospective to reduce the deficit by $400 billion over ten years.

When Obama did address U.S. foreign policy, he mainly focused on his latest successes – such as ratifying the new START arms control treaty with Russia and the trade agreement with South Korea, and concealed critical issues like drug violence in Mexico, instability in Pakistan, and climate change.

In an op-ed in The New York Times Chief Washington Correspondent David E. Sanger argues that one of President Barack Obama’s “subtexts on Tuesday night was that doing big things these days may require a bit more humility, a lot more work, and some international partners that Americans rarely thought about twenty years ago but whose competition they have now grown to fear.”

Read full story.

Nota bene: for full coverage of the Union Address 2011 and more insight, check out also The Wall Street Journal.

***

Remarks by the President in State of Union Address
United States Capitol, Washington, D.C.

January 25, 2011 – 9:12 P.M. EST

THE PRESIDENT: Mr. Speaker, Mr. Vice President, members of Congress, distinguished guests, and fellow Americans:

Tonight I want to begin by congratulating the men and women of the 112th Congress, as well as your new Speaker, John Boehner. (Applause.) And as we mark this occasion, we’re also mindful of the empty chair in this chamber, and we pray for the health of our colleague — and our friend -– Gabby Giffords. (Applause.)

It’s no secret that those of us here tonight have had our differences over the last two years. The debates have been contentious; we have fought fiercely for our beliefs.  And that’s a good thing. That’s what a robust democracy demands. That’s what helps set us apart as a nation.

But there’s a reason the tragedy in Tucson gave us pause. Amid all the noise and passion and rancor of our public debate, Tucson reminded us that no matter who we are or where we come from, each of us is a part of something greater -– something more consequential than party or political preference.

We are part of the American family.  We believe that in a country where every race and faith and point of view can be found, we are still bound together as one people; that we share common hopes and a common creed; that the dreams of a little girl in Tucson are not so different than those of our own children, and that they all deserve the chance to be fulfilled.

That, too, is what sets us apart as a nation.  (Applause.)

Now, by itself, this simple recognition won’t usher in a new era of cooperation.  What comes of this moment is up to us.  What comes of this moment will be determined not by whether we can sit together tonight, but whether we can work together tomorrow.  (Applause.)

I believe we can.  And I believe we must.  That’s what the people who sent us here expect of us. With their votes, they’ve determined that governing will now be a shared responsibility between parties.  New laws will only pass with support from Democrats and Republicans.  We will move forward together, or not at all -– for the challenges we face are bigger than party, and bigger than politics.

At stake right now is not who wins the next election -– after all, we just had an election. At stake is whether new jobs and industries take root in this country, or somewhere else.  It’s whether the hard work and industry of our people is rewarded.  It’s whether we sustain the leadership that has made America not just a place on a map, but the light to the world.

We are poised for progress.  Two years after the worst recession most of us have ever known, the stock market has come roaring back.  Corporate profits are up.  The economy is growing again.

But we have never measured progress by these yardsticks alone.  We measure progress by the success of our people.  By the jobs they can find and the quality of life those jobs offer.  By the prospects of a small business owner who dreams of turning a good idea into a thriving enterprise. By the opportunities for a better life that we pass on to our children.

That’s the project the American people want us to work on.Together. (Applause.)

We did that in December. Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today.  Every business can write off the full cost of new investments that they make this year. And these steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.

But we have to do more. These steps we’ve taken over the last two years may have broken the back of this recession, but to win the future, we’ll need to take on challenges that have been decades in the making.

 Many people watching tonight can probably remember a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbors.  If you worked hard, chances are you’d have a job for life, with a decent paycheck and good benefits and the occasional promotion. Maybe you’d even have the pride of seeing your kids work at the same company.

That world has changed. And for many, the change has been painful. I’ve seen it in the shuttered windows of once booming factories, and the vacant storefronts on once busy Main Streets. I’ve heard it in the frustrations of Americans who’ve seen their paychecks dwindle or their jobs disappear -– proud men and women who feel like the rules have been changed in the middle of the game.

They’re right. The rules have changed.  In a single generation, revolutions in technology have transformed the way we live, work and do business. Steel mills that once needed 1,000 workers can now do the same work with 100. Today, just about any company can set up shop, hire workers, and sell their products wherever there’s an Internet connection.

Meanwhile, nations like China and India realized that with some changes of their own, they could compete in this new world. And so they started educating their children earlier and longer, with greater emphasis on math and science. They’re investing in research and new technologies. Just recently, China became the home to the world’s largest private solar research facility, and the world’s fastest computer.

So, yes, the world has changed. The competition for jobs is real.  But this shouldn’t discourage us.  It should challenge us. Remember -– for all the hits we’ve taken these last few years, for all the naysayers predicting our decline, America still has the largest, most prosperous economy in the world.  (Applause.) No workers — no workers are more productive than ours. No country has more successful companies, or grants more patents to inventors and entrepreneurs. We’re the home to the world’s best colleges and universities, where more students come to study than any place on Earth.

What’s more, we are the first nation to be founded for the sake of an idea -– the idea that each of us deserves the chance to shape our own destiny. That’s why centuries of pioneers and immigrants have risked everything to come here. It’s why our students don’t just memorize equations, but answer questions like “What do you think of that idea?  What would you change about the world? What do you want to be when you grow up?”

The future is ours to win. But to get there, we can’t just stand still.  As Robert Kennedy told us, “The future is not a gift. It is an achievement.”  Sustaining the American Dream has never been about standing pat. It has required each generation to sacrifice, and struggle, and meet the demands of a new age.

And now it’s our turn.  We know what it takes to compete for the jobs and industries of our time.  We need to out-innovate, out-educate, and out-build the rest of the world.  (Applause.)  We have to make America the best place on Earth to do business.  We need to take responsibility for our deficit and reform our government.  That’s how our people will prosper.  That’s how we’ll win the future.  (Applause.)  And tonight, I’d like to talk about how we get there.

The first step in winning the future is encouraging American innovation.  None of us can predict with certainty what the next big industry will be or where the new jobs will come from.  Thirty years ago, we couldn’t know that something called the Internet would lead to an economic revolution.  What we can do — what America does better than anyone else — is spark the creativity and imagination of our people.  We’re the nation that put cars in driveways and computers in offices; the nation of Edison and the Wright brothers; of Google and Facebook.  In America, innovation doesn’t just change our lives.  It is how we make our living.  (Applause.)

Our free enterprise system is what drives innovation.  But because it’s not always profitable for companies to invest in basic research, throughout our history, our government has provided cutting-edge scientists and inventors with the support that they need.  That’s what planted the seeds for the Internet.  That’s what helped make possible things like computer chips and GPS.  Just think of all the good jobs — from manufacturing to retail — that have come from these breakthroughs.

Half a century ago, when the Soviets beat us into space with the launch of a satellite called Sputnik, we had no idea how we would beat them to the moon.  The science wasn’t even there yet.  NASA didn’t exist.  But after investing in better research and education, we didn’t just surpass the Soviets; we unleashed a wave of innovation that created new industries and millions of new jobs.

This is our generation’s Sputnik moment.  Two years ago, I said that we needed to reach a level of research and development we haven’t seen since the height of the Space Race.  And in a few weeks, I will be sending a budget to Congress that helps us meet that goal.  We’ll invest in biomedical research, information technology, and especially clean energy technology -– (applause) — an investment that will strengthen our security, protect our planet, and create countless new jobs for our people.

Already, we’re seeing the promise of renewable energy.  Robert and Gary Allen are brothers who run a small Michigan roofing company.  After September 11th, they volunteered their best roofers to help repair the Pentagon.  But half of their factory went unused, and the recession hit them hard.  Today, with the help of a government loan, that empty space is being used to manufacture solar shingles that are being sold all across the country.  In Robert’s words, “We reinvented ourselves.”

That’s what Americans have done for over 200 years: reinvented ourselves.  And to spur on more success stories like the Allen Brothers, we’ve begun to reinvent our energy policy. We’re not just handing out money.  We’re issuing a challenge.  We’re telling America’s scientists and engineers that if they assemble teams of the best minds in their fields, and focus on the hardest problems in clean energy, we’ll fund the Apollo projects of our time.

At the California Institute of Technology, they’re developing a way to turn sunlight and water into fuel for our cars.  At Oak Ridge National Laboratory, they’re using supercomputers to get a lot more power out of our nuclear facilities.  With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have a million electric vehicles on the road by 2015.  (Applause.)

We need to get behind this innovation.  And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies.  (Applause.)  I don’t know if — I don’t know if you’ve noticed, but they’re doing just fine on their own.  (Laughter.)  So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.

Now, clean energy breakthroughs will only translate into clean energy jobs if businesses know there will be a market for what they’re selling.  So tonight, I challenge you to join me in setting a new goal:  By 2035, 80 percent of America’s electricity will come from clean energy sources.  (Applause.)

Some folks want wind and solar.  Others want nuclear, clean coal and natural gas.  To meet this goal, we will need them all — and I urge Democrats and Republicans to work together to make it happen.  (Applause.)

 Maintaining our leadership in research and technology is crucial to America’s success.  But if we want to win the future -– if we want innovation to produce jobs in America and not overseas -– then we also have to win the race to educate our kids.

Think about it.  Over the next 10 years, nearly half of all new jobs will require education that goes beyond a high school education.  And yet, as many as a quarter of our students aren’t even finishing high school.  The quality of our math and science education lags behind many other nations.  America has fallen to ninth in the proportion of young people with a college degree.  And so the question is whether all of us –- as citizens, and as parents –- are willing to do what’s necessary to give every child a chance to succeed.

That responsibility begins not in our classrooms, but in our homes and communities.  It’s family that first instills the love of learning in a child.  Only parents can make sure the TV is turned off and homework gets done.  We need to teach our kids that it’s not just the winner of the Super Bowl who deserves to be celebrated, but the winner of the science fair.  (Applause.)  We need to teach them that success is not a function of fame or PR, but of hard work and discipline.

Our schools share this responsibility.  When a child walks into a classroom, it should be a place of high expectations and high performance.  But too many schools don’t meet this test. That’s why instead of just pouring money into a system that’s not working, we launched a competition called Race to the Top.  To all 50 states, we said, “If you show us the most innovative plans to improve teacher quality and student achievement, we’ll show you the money.”

Race to the Top is the most meaningful reform of our public schools in a generation.  For less than 1 percent of what we spend on education each year, it has led over 40 states to raise their standards for teaching and learning.  And these standards were developed, by the way, not by Washington, but by Republican and Democratic governors throughout the country.  And Race to the Top should be the approach we follow this year as we replace No Child Left Behind with a law that’s more flexible and focused on what’s best for our kids.  (Applause.)

You see, we know what’s possible from our children when reform isn’t just a top-down mandate, but the work of local teachers and principals, school boards and communities.  Take a school like Bruce Randolph in Denver.  Three years ago, it was rated one of the worst schools in Colorado — located on turf between two rival gangs.  But last May, 97 percent of the seniors received their diploma.  Most will be the first in their families to go to college.  And after the first year of the school’s transformation, the principal who made it possible wiped away tears when a student said, “Thank you, Ms. Waters, for showing that we are smart and we can make it.”  (Applause.)  That’s what good schools can do, and we want good schools all across the country.

Let’s also remember that after parents, the biggest impact on a child’s success comes from the man or woman at the front of the classroom.  In South Korea, teachers are known as “nation builders.”  Here in America, it’s time we treated the people who educate our children with the same level of respect.  (Applause.)  We want to reward good teachers and stop making excuses for bad ones.  (Applause.)  And over the next 10 years, with so many baby boomers retiring from our classrooms, we want to prepare 100,000 new teachers in the fields of science and technology and engineering and math.  (Applause.)

In fact, to every young person listening tonight who’s contemplating their career choice:  If you want to make a difference in the life of our nation; if you want to make a difference in the life of a child — become a teacher.  Your country needs you.  (Applause.)

Of course, the education race doesn’t end with a high school diploma.  To compete, higher education must be within the reach of every American.  (Applause.)  That’s why we’ve ended the unwarranted taxpayer subsidies that went to banks, and used the savings to make college affordable for millions of students.  (Applause.)  And this year, I ask Congress to go further, and make permanent our tuition tax credit –- worth $10,000 for four years of college.  It’s the right thing to do.  (Applause.)

Because people need to be able to train for new jobs and careers in today’s fast-changing economy, we’re also revitalizing America’s community colleges.  Last month, I saw the promise of these schools at Forsyth Tech in North Carolina.  Many of the students there used to work in the surrounding factories that have since left town.  One mother of two, a woman named Kathy Proctor, had worked in the furniture industry since she was 18 years old.  And she told me she’s earning her degree in biotechnology now, at 55 years old, not just because the furniture jobs are gone, but because she wants to inspire her children to pursue their dreams, too.  As Kathy said, “I hope it tells them to never give up.”

If we take these steps -– if we raise expectations for every child, and give them the best possible chance at an education, from the day they are born until the last job they take –- we will reach the goal that I set two years ago:  By the end of the decade, America will once again have the highest proportion of college graduates in the world.  (Applause.)

One last point about education.  Today, there are hundreds of thousands of students excelling in our schools who are not American citizens.  Some are the children of undocumented workers, who had nothing to do with the actions of their parents. They grew up as Americans and pledge allegiance to our flag, and yet they live every day with the threat of deportation.  Others come here from abroad to study in our colleges and universities.  But as soon as they obtain advanced degrees, we send them back home to compete against us.  It makes no sense.

Now, I strongly believe that we should take on, once and for all, the issue of illegal immigration.  And I am prepared to work with Republicans and Democrats to protect our borders, enforce our laws and address the millions of undocumented workers who are now living in the shadows.  (Applause.)  I know that debate will be difficult.  I know it will take time.  But tonight, let’s agree to make that effort.  And let’s stop expelling talented, responsible young people who could be staffing our research labs or starting a new business, who could be further enriching this nation.  (Applause.)

The third step in winning the future is rebuilding America.  To attract new businesses to our shores, we need the fastest, most reliable ways to move people, goods, and information — from high-speed rail to high-speed Internet.  (Applause.)

Our infrastructure used to be the best, but our lead has slipped.  South Korean homes now have greater Internet access than we do.  Countries in Europe and Russia invest more in their roads and railways than we do.  China is building faster trains and newer airports.  Meanwhile, when our own engineers graded our nation’s infrastructure, they gave us a “D.”

We have to do better.  America is the nation that built the transcontinental railroad, brought electricity to rural communities, constructed the Interstate Highway System.  The jobs created by these projects didn’t just come from laying down track or pavement.  They came from businesses that opened near a town’s new train station or the new off-ramp.

So over the last two years, we’ve begun rebuilding for the 21st century, a project that has meant thousands of good jobs for the hard-hit construction industry.  And tonight, I’m proposing that we redouble those efforts.  (Applause.)

We’ll put more Americans to work repairing crumbling roads and bridges.  We’ll make sure this is fully paid for, attract private investment, and pick projects based [on] what’s best for the economy, not politicians.

Within 25 years, our goal is to give 80 percent of Americans access to high-speed rail.  (Applause.)  This could allow you to go places in half the time it takes to travel by car.  For some trips, it will be faster than flying –- without the pat-down.  (Laughter and applause.)  As we speak, routes in California and the Midwest are already underway.

Within the next five years, we’ll make it possible for businesses to deploy the next generation of high-speed wireless coverage to 98 percent of all Americans.  This isn’t just about — (applause) — this isn’t about faster Internet or fewer dropped calls.  It’s about connecting every part of America to the digital age.  It’s about a rural community in Iowa or Alabama where farmers and small business owners will be able to sell their products all over the world.  It’s about a firefighter who can download the design of a burning building onto a handheld device; a student who can take classes with a digital textbook; or a patient who can have face-to-face video chats with her doctor.

All these investments -– in innovation, education, and infrastructure –- will make America a better place to do business and create jobs.  But to help our companies compete, we also have to knock down barriers that stand in the way of their success.

For example, over the years, a parade of lobbyists has rigged the tax code to benefit particular companies and industries.  Those with accountants or lawyers to work the system can end up paying no taxes at all.  But all the rest are hit with one of the highest corporate tax rates in the world.  It makes no sense, and it has to change.  (Applause.)

So tonight, I’m asking Democrats and Republicans to simplify the system.  Get rid of the loopholes.  Level the playing field.  And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit.  It can be done.  (Applause.)

To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 -– because the more we export, the more jobs we create here at home.  Already, our exports are up.  Recently, we signed agreements with India and China that will support more than 250,000 jobs here in the United States.  And last month, we finalized a trade agreement with South Korea that will support at least 70,000 American jobs.  This agreement has unprecedented support from business and labor, Democrats and Republicans — and I ask this Congress to pass it as soon as possible.  (Applause.)

Now, before I took office, I made it clear that we would enforce our trade agreements, and that I would only sign deals that keep faith with American workers and promote American jobs.  That’s what we did with Korea, and that’s what I intend to do as we pursue agreements with Panama and Colombia and continue our Asia Pacific and global trade talks.  (Applause.)

To reduce barriers to growth and investment, I’ve ordered a review of government regulations.  When we find rules that put an unnecessary burden on businesses, we will fix them.  (Applause.)  But I will not hesitate to create or enforce common-sense safeguards to protect the American people.  (Applause.)  That’s what we’ve done in this country for more than a century.  It’s why our food is safe to eat, our water is safe to drink, and our air is safe to breathe.  It’s why we have speed limits and child labor laws.  It’s why last year, we put in place consumer protections against hidden fees and penalties by credit card companies and new rules to prevent another financial crisis.  (Applause.)  And it’s why we passed reform that finally prevents the health insurance industry from exploiting patients.  (Applause.)

Now, I have heard rumors that a few of you still have concerns about our new health care law.  (Laughter.)  So let me be the first to say that anything can be improved.  If you have ideas about how to improve this law by making care better or more affordable, I am eager to work with you.  We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.  (Applause.)

What I’m not willing to do — what I’m not willing to do is go back to the days when insurance companies could deny someone coverage because of a preexisting condition.  (Applause.)

I’m not willing to tell James Howard, a brain cancer patient from Texas, that his treatment might not be covered.  I’m not willing to tell Jim Houser, a small business man from Oregon, that he has to go back to paying $5,000 more to cover his employees.  As we speak, this law is making prescription drugs cheaper for seniors and giving uninsured students a chance to stay on their patients’ — parents’ coverage.  (Applause.)

So I say to this chamber tonight, instead of re-fighting the battles of the last two years, let’s fix what needs fixing and let’s move forward.  (Applause.)

Now, the final critical step in winning the future is to make sure we aren’t buried under a mountain of debt.

We are living with a legacy of deficit spending that began almost a decade ago.  And in the wake of the financial crisis, some of that was necessary to keep credit flowing, save jobs, and put money in people’s pockets.

But now that the worst of the recession is over, we have to confront the fact that our government spends more than it takes in.  That is not sustainable.  Every day, families sacrifice to live within their means.  They deserve a government that does the same.

So tonight, I am proposing that starting this year, we freeze annual domestic spending for the next five years.  (Applause.)  Now, this would reduce the deficit by more than $400 billion over the next decade, and will bring discretionary spending to the lowest share of our economy since Dwight Eisenhower was President.

This freeze will require painful cuts.  Already, we’ve frozen the salaries of hardworking federal employees for the next two years.  I’ve proposed cuts to things I care deeply about, like community action programs.  The Secretary of Defense has also agreed to cut tens of billions of dollars in spending that he and his generals believe our military can do without.  (Applause.)

I recognize that some in this chamber have already proposed deeper cuts, and I’m willing to eliminate whatever we can honestly afford to do without.  But let’s make sure that we’re not doing it on the backs of our most vulnerable citizens.  (Applause.)  And let’s make sure that what we’re cutting is really excess weight.  Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine.  It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact.  (Laughter.)

Now, most of the cuts and savings I’ve proposed only address annual domestic spending, which represents a little more than 12 percent of our budget.  To make further progress, we have to stop pretending that cutting this kind of spending alone will be enough.  It won’t.  (Applause.)

The bipartisan fiscal commission I created last year made this crystal clear.  I don’t agree with all their proposals, but they made important progress.  And their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it –- in domestic spending, defense spending, health care spending, and spending through tax breaks and loopholes.  (Applause.)

This means further reducing health care costs, including programs like Medicare and Medicaid, which are the single biggest contributor to our long-term deficit.  The health insurance law we passed last year will slow these rising costs, which is part of the reason that nonpartisan economists have said that repealing the health care law would add a quarter of a trillion dollars to our deficit.  Still, I’m willing to look at other ideas to bring down costs, including one that Republicans suggested last year — medical malpractice reform to rein in frivolous lawsuits.  (Applause.)

To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations.  (Applause.)  We must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.  (Applause.)

And if we truly care about our deficit, we simply can’t afford a permanent extension of the tax cuts for the wealthiest 2 percent of Americans.  (Applause.)  Before we take money away from our schools or scholarships away from our students, we should ask millionaires to give up their tax break.  It’s not a matter of punishing their success.  It’s about promoting America’s success.  (Applause.)

In fact, the best thing we could do on taxes for all Americans is to simplify the individual tax code.  (Applause.)  This will be a tough job, but members of both parties have expressed an interest in doing this, and I am prepared to join them.  (Applause.)

So now is the time to act.  Now is the time for both sides and both houses of Congress –- Democrats and Republicans -– to forge a principled compromise that gets the job done.  If we make the hard choices now to rein in our deficits, we can make the investments we need to win the future.

Let me take this one step further.  We shouldn’t just give our people a government that’s more affordable.  We should give them a government that’s more competent and more efficient.  We can’t win the future with a government of the past.  (Applause.)

We live and do business in the Information Age, but the last major reorganization of the government happened in the age of black-and-white TV.  There are 12 different agencies that deal with exports.  There are at least five different agencies that deal with housing policy.  Then there’s my favorite example:  The Interior Department is in charge of salmon while they’re in fresh water, but the Commerce Department handles them when they’re in saltwater.  (Laughter.)  I hear it gets even more complicated once they’re smoked.  (Laughter and applause.)

Now, we’ve made great strides over the last two years in using technology and getting rid of waste.  Veterans can now download their electronic medical records with a click of the mouse.  We’re selling acres of federal office space that hasn’t been used in years, and we’ll cut through red tape to get rid of more.  But we need to think bigger.  In the coming months, my administration will develop a proposal to merge, consolidate, and reorganize the federal government in a way that best serves the goal of a more competitive America.  I will submit that proposal to Congress for a vote –- and we will push to get it passed.  (Applause.)

In the coming year, we’ll also work to rebuild people’s faith in the institution of government.  Because you deserve to know exactly how and where your tax dollars are being spent, you’ll be able to go to a website and get that information for the very first time in history.  Because you deserve to know when your elected officials are meeting with lobbyists, I ask Congress to do what the White House has already done — put that information online.  And because the American people deserve to know that special interests aren’t larding up legislation with pet projects, both parties in Congress should know this:  If a bill comes to my desk with earmarks inside, I will veto it.  I will veto it.  (Applause.)

The 21st century government that’s open and competent.  A government that lives within its means.  An economy that’s driven by new skills and new ideas.  Our success in this new and changing world will require reform, responsibility, and innovation.  It will also require us to approach that world with a new level of engagement in our foreign affairs.

Just as jobs and businesses can now race across borders, so can new threats and new challenges.  No single wall separates East and West.  No one rival superpower is aligned against us.

And so we must defeat determined enemies, wherever they are, and build coalitions that cut across lines of region and race and religion.  And America’s moral example must always shine for all who yearn for freedom and justice and dignity.  And because we’ve begun this work, tonight we can say that American leadership has been renewed and America’s standing has been restored.

Look to Iraq, where nearly 100,000 of our brave men and women have left with their heads held high.  (Applause.)  American combat patrols have ended, violence is down, and a new government has been formed.  This year, our civilians will forge a lasting partnership with the Iraqi people, while we finish the job of bringing our troops out of Iraq.  America’s commitment has been kept.  The Iraq war is coming to an end.  (Applause.)

Of course, as we speak, al Qaeda and their affiliates continue to plan attacks against us.  Thanks to our intelligence and law enforcement professionals, we’re disrupting plots and securing our cities and skies.  And as extremists try to inspire acts of violence within our borders, we are responding with the strength of our communities, with respect for the rule of law, and with the conviction that American Muslims are a part of our American family.  (Applause.) 

We’ve also taken the fight to al Qaeda and their allies abroad.  In Afghanistan, our troops have taken Taliban strongholds and trained Afghan security forces.  Our purpose is clear:  By preventing the Taliban from reestablishing a stranglehold over the Afghan people, we will deny al Qaeda the safe haven that served as a launching pad for 9/11.

Thanks to our heroic troops and civilians, fewer Afghans are under the control of the insurgency.  There will be tough fighting ahead, and the Afghan government will need to deliver better governance.  But we are strengthening the capacity of the Afghan people and building an enduring partnership with them.  This year, we will work with nearly 50 countries to begin a transition to an Afghan lead.  And this July, we will begin to bring our troops home.  (Applause.)

In Pakistan, al Qaeda’s leadership is under more pressure than at any point since 2001.  Their leaders and operatives are being removed from the battlefield.  Their safe havens are shrinking.  And we’ve sent a message from the Afghan border to the Arabian Peninsula to all parts of the globe:  We will not relent, we will not waver, and we will defeat you.  (Applause.)

American leadership can also be seen in the effort to secure the worst weapons of war.  Because Republicans and Democrats approved the New START treaty, far fewer nuclear weapons and launchers will be deployed.  Because we rallied the world, nuclear materials are being locked down on every continent so they never fall into the hands of terrorists.  (Applause.)

Because of a diplomatic effort to insist that Iran meet its obligations, the Iranian government now faces tougher sanctions, tighter sanctions than ever before.  And on the Korean Peninsula, we stand with our ally South Korea, and insist that North Korea keeps its commitment to abandon nuclear weapons.  (Applause.)

This is just a part of how we’re shaping a world that favors peace and prosperity.  With our European allies, we revitalized NATO and increased our cooperation on everything from counterterrorism to missile defense.  We’ve reset our relationship with Russia, strengthened Asian alliances, built new partnerships with nations like India.

This March, I will travel to Brazil, Chile, and El Salvador to forge new alliances across the Americas.  Around the globe, we’re standing with those who take responsibility -– helping farmers grow more food, supporting doctors who care for the sick, and combating the corruption that can rot a society and rob people of opportunity.

Recent events have shown us that what sets us apart must not just be our power -– it must also be the purpose behind it.  In south Sudan -– with our assistance -– the people were finally able to vote for independence after years of war.  (Applause.)  Thousands lined up before dawn.  People danced in the streets.  One man who lost four of his brothers at war summed up the scene around him:  “This was a battlefield for most of my life,” he said.  “Now we want to be free.”  (Applause.)

And we saw that same desire to be free in Tunisia, where the will of the people proved more powerful than the writ of a dictator.  And tonight, let us be clear:  The United States of America stands with the people of Tunisia, and supports the democratic aspirations of all people.  (Applause.)

We must never forget that the things we’ve struggled for, and fought for, live in the hearts of people everywhere.  And we must always remember that the Americans who have borne the greatest burden in this struggle are the men and women who serve our country.  (Applause.)

Tonight, let us speak with one voice in reaffirming that our nation is united in support of our troops and their families.  Let us serve them as well as they’ve served us — by giving them the equipment they need, by providing them with the care and benefits that they have earned, and by enlisting our veterans in the great task of building our own nation.

Our troops come from every corner of this country -– they’re black, white, Latino, Asian, Native American.  They are Christian and Hindu, Jewish and Muslim.  And, yes, we know that some of them are gay.  Starting this year, no American will be forbidden from serving the country they love because of who they love.  (Applause.)  And with that change, I call on all our college campuses to open their doors to our military recruiters and ROTC.  It is time to leave behind the divisive battles of the past.  It is time to move forward as one nation.  (Applause.)

We should have no illusions about the work ahead of us. Reforming our schools, changing the way we use energy, reducing our deficit –- none of this will be easy.  All of it will take time.  And it will be harder because we will argue about everything.  The costs.  The details.  The letter of every law.

Of course, some countries don’t have this problem.  If the central government wants a railroad, they build a railroad, no matter how many homes get bulldozed.  If they don’t want a bad story in the newspaper, it doesn’t get written.

And yet, as contentious and frustrating and messy as our democracy can sometimes be, I know there isn’t a person here who would trade places with any other nation on Earth.  (Applause.)

We may have differences in policy, but we all believe in the rights enshrined in our Constitution.  We may have different opinions, but we believe in the same promise that says this is a place where you can make it if you try.  We may have different backgrounds, but we believe in the same dream that says this is a country where anything is possible.  No matter who you are.  No matter where you come from.

That dream is why I can stand here before you tonight.  That dream is why a working-class kid from Scranton can sit behind me.  (Laughter and applause.)  That dream is why someone who began by sweeping the floors of his father’s Cincinnati bar can preside as Speaker of the House in the greatest nation on Earth.  (Applause.)

That dream -– that American Dream -– is what drove the Allen Brothers to reinvent their roofing company for a new era.  It’s what drove those students at Forsyth Tech to learn a new skill and work towards the future.  And that dream is the story of a small business owner named Brandon Fisher.

Brandon started a company in Berlin, Pennsylvania, that specializes in a new kind of drilling technology.  And one day last summer, he saw the news that halfway across the world, 33 men were trapped in a Chilean mine, and no one knew how to save them.

But Brandon thought his company could help.  And so he designed a rescue that would come to be known as Plan B.  His employees worked around the clock to manufacture the necessary drilling equipment.  And Brandon left for Chile.

Along with others, he began drilling a 2,000-foot hole into the ground, working three- or four-hour — three or four days at a time without any sleep.  Thirty-seven days later, Plan B succeeded, and the miners were rescued.  (Applause.)  But because he didn’t want all of the attention, Brandon wasn’t there when the miners emerged.  He’d already gone back home, back to work on his next project.

And later, one of his employees said of the rescue, “We proved that Center Rock is a little company, but we do big things.”  (Applause.)

We do big things.

From the earliest days of our founding, America has been the story of ordinary people who dare to dream.  That’s how we win the future.

We’re a nation that says, “I might not have a lot of money, but I have this great idea for a new company.”  “I might not come from a family of college graduates, but I will be the first to get my degree.”  “I might not know those people in trouble, but I think I can help them, and I need to try.”  “I’m not sure how we’ll reach that better place beyond the horizon, but I know we’ll get there.  I know we will.”

We do big things.  (Applause.)

The idea of America endures.  Our destiny remains our choice.  And tonight, more than two centuries later, it’s because of our people that our future is hopeful, our journey goes forward, and the state of our union is strong.

Thank you.  God bless you, and may God bless the United States of America.  (Applause.)

END           10:13 P.M. EST


China-Bashing contaminates 2010 United States midterm elections

October 8, 2010

China is emerging as a common adversary in midterm U.S. election campaigns, as candidates from both parties seize on anxieties about China’s growing economic power to attack each other on trade policies, outsourcing, and the deficit.

 

French political cartoon from the late 1890s. A pie represents "Chine" (French for China) and is being divided between caricatures of Queen Victoria of the United Kingdom, William II of Germany (who is squabbling with Queen Victoria over a borderland piece, whilst thrusting a knife into the pie to signify aggressive German intentions), Nicholas II of Russia, who is eyeing a particular piece, the French Marianne (who is diplomatically shown as not participating in the carving, and is depicted as close to Nicholas II, as a reminder of the Franco-Russian Alliance), and the Meiji Emperor of Japan, carefully contemplating which pieces to take. A stereotypical Qing official throws up his hands to try and stop them, but is powerless. It is meant to be a figurative representation of the Imperialist tendencies of these nations towards China during the decade.

French political cartoon from the late 1890s. A pie represents "Chine" (French for China) and is being divided between caricatures of Queen Victoria of the United Kingdom, William II of Germany (who is squabbling with Queen Victoria over a borderland piece, whilst thrusting a knife into the pie to signify aggressive German intentions), Nicholas II of Russia, who is eyeing a particular piece, the French Marianne (who is diplomatically shown as not participating in the carving, and is depicted as close to Nicholas II, as a reminder of the Franco-Russian Alliance), and the Meiji Emperor of Japan, carefully contemplating which pieces to take. A stereotypical Qing official throws up his hands to try and stop them, but is powerless. It is meant to be a figurative representation of the Imperialist tendencies of these nations towards China during the decade.

 

With U.S. economic revival still slow, trade policy looms as a an issue in midterm races, The Wall Street Journal reports.

***

China-Bashing Gains Bipartisan Support

By Naftali Bendavid, The Wall Street Journal, October 8, 2010

China is emerging as a bogeyman this campaign season, with candidates across the American political spectrum seizing on anxieties about the country’s growing economic might to pummel each other on trade, outsourcing and the deficit.

In television ads, China is framed as an ominous foreign influence in a time of economic anxiety, often accompanied by red flags and communist-style stars and sometimes by Asian-sounding music. Democrats say Republicans support tax breaks that reward companies for moving jobs to China; Republicans blame Democrats for a federal budget deficit they say forces the U.S. to borrow money from China.

“Candidates are looking to speak in a visceral way to the fears and concerns of voters about jobs,” said Lawrence Jacobs, a political scientist at the University of Minnesota. “Bashing China is safe.”

The heated rhetoric puts the White House in a bind. Administration officials often don’t mind Congress putting pressure on China, and Treasury Secretary Timothy Geithner himself in a speech Wednesday offered a blunt critique of Beijing’s currency policy. But officials also worry that a confrontational approach could backfire.

Both nations may feel compelled by public opinion to engage in “an escalation of rhetoric that is going to be difficult to manage” after the election, said Charles Freeman, chairman of China studies at the Center for Strategic and International Studies in Washington.

Wang Baodong, a spokesman for Beijing’s embassy in Washington, criticized candidates’ use of his country in campaign messages. “China is committed to promoting strong bilateral trade and economic cooperation, which brings about enormous benefit to the welfare of our two peoples,” Mr. Wang said. “So making China an issue in the elections or in any other forms is irrelevant and wrong-targeted.”

Mark Schauer, a Michigan Democrat facing a tough re-election fight, has aired an ad against his Republican rival saying, “Tim Walberg made it way too easy for companies to outsource our jobs to China.” Mr. Walberg said the ad was misleading and that he considered American products superior to Chinese ones.

In Ohio, Democratic Senate candidate Lee Fisher has focused on GOP opponent Rob Portman’s stint as a House member and as U.S. trade representative under President George W. Bush. “Congressman Rob Portman knows how to grow the economy—in China,” said a recent Fisher ad.

The Portman campaign rejected these assertions, saying Mr. Portman fought to increase exports and was the first U.S. trade representative to take China to court and win.

Republicans, for their part, cited China in their recently released “Pledge to America.” “We now borrow 41 cents of every dollar we spend, much of it from foreign countries, including China, and leave the bill to our kids and grandkids,” it said, as it attacked Democrats for “unparalleled recklessness with taxpayer dollars.”

Warnings of foreign influence have often been a feature of U.S. elections, especially in times of economic insecurity. And there is little reason to believe the latest ads will have a long-term effect on U.S.-China relations. or on the fate of anti-China legislation, which has struggled in Congress.But with China on the rise, warnings about it seem to have a special resonance this campaign season. The House, with GOP support, passed a bill in September to penalize Beijing’s foreign-exchange practices. A few days earlier, Democrats unsuccessfully pushed a measure to end corporate tax deductions for expenses related to shifting jobs overseas.

Meanwhile, in West Virginia, an ad by Republican Spike Maynard against Rep. Nick Rahall featured Asian music and Chinese flags. It cited a Texas wind farm that reportedly planned to apply for federal stimulus funds while obtaining its windmills from China. “It’s on our jeans, even our children’s toys: ‘Made in China,’ ” the narrator said.

Democrats said the windmill project would have materials manufactured in the U.S. and that the operator hadn’t applied for stimulus funds.

A similar back-and-forth is unfolding in Virginia, where an ad by Republican State Sen. Robert Hurt accuses Rep. Tom Perriello (D., Va.) of voting to give tax breaks to foreign companies “creating jobs in China.”

That’s a reference to a portion of the stimulus package that gives tax breaks for green jobs. The Perriello campaign said Mr. Hurt’s pledge not to raise taxes means he’d oppose closing tax loopholes for companies that move jobs overseas.

About the author: Naftali Bendavid covers Congress and politics for The Wall Street Journal. Before coming to the Journal, he covered the White House and the Justice Department for the Chicago Tribune. Bendavid also spent five years as deputy Washington bureau chief for the Tribune, overseeing its coverage of government and politics. Bendavid has covered such stories as the impeachment of Bill Clinton, the Al Gore presidential campaign, the September 11, 2001 terrorist attacks and the Supreme Court confirmation of Sonia Sotomayor.

Reprinted with kindly permission of The Wall Street Journal.


Four European Oil Firms Stop Investing in Iran

October 1, 2010

The United States announced that four of Europe’s five biggest oil companies (Total, Shell, Statoil and Eni) would end their energy investments in Iran, an attempt to bolster the Obama administration’s efforts to pressure Iran into entering negotiations over its nuclear program.

Lloyd’s of London also announced it would not insure petroleum shipments going into Iran.

A chart of the major "big oil" companies (Author: Boereck, Hamburg)

A chart of the major "big oil" companies (Author: Boereck, Hamburg)

“The goal here is not to impose sanctions for sanctions’ sake but to end companies from doing business with Iran,” Deputy Secretary of State James B. Steinberg said.

Read full story.


Principles for Economic Revival

September 22, 2010

Top White House economic adviser Lawrence Summers announced he will leave, allowing President Barack Obama to reshape his economic staff after midterm elections.

President Barack Obama makes his point to Lawrence Summers, left, head of the National Economic Council, and Office of Management and Budget Director Peter Orszag, seated next to Summers, during a budget meeting in the White House Roosevelt Room in the President's first week in office. Rahm Emanuel, White House Chief of Staff, is seated to the President's left (January 24, 2009)

President Barack Obama makes his point to Lawrence Summers, left, head of the National Economic Council, and Office of Management and Budget Director Peter Orszag, seated next to Summers, during a budget meeting in the White House Roosevelt Room in the President's first week in office. Rahm Emanuel, White House Chief of Staff, is seated to the President's left (Photo: Peter Souza; January 24, 2009).

The Federal Reserve said yesterday it was prepared to do more to help the U.S. economy but stopped short of announcing specific measures.

In the Wall Street Journal, George P. Shultz, Michael J. Boskin, John F. Cogan, Allan Meltzer, and John B. Taylor outline a set of policies to guide economic policymakers back to rapid growth, including lowering taxes, balancing the budget, modifying Social Security and healthcare entitlements, and a stronger monetary policy.

Read full story.


U.S. Recession Longest Since World War II

September 21, 2010

The U.S. recession lasted eighteen months and was the longest since World War II, according to the National Bureau of Economic Research, which announced yesterday that the recession ended in June 2009.

Read full story.


Global Economic Prospects for 2010 and 2011

April 13, 2010

In a new Peter G. Peterson Institute for International Economics paper, Michael Mussa boosts his forecast of global real GDP growth in 2010 to 4.5 percent and projects roughly the same for 2011, indicating a V-shaped recovery is underway.

“Looking ahead, if the recovery proceeds at even a moderately vigorous pace, it will be necessary to reemploy many of those who lost their jobs during the recession. As this happens, the average level of productive efficiency of the workforce is likely to decline somewhat; relatively less productive workers will predominate among those who are reemployed. Accordingly, the outsized gains in labor productivity that we have seen in recent quarters are unlikely to persist, and unit labor costs are likely to rise.”

 

Read full story.


U.S. Federal Reserve Fights to Maintain Powers

March 8, 2010

The U.S. Federal Reserve is fighting Congress to maintain its role in regulating U.S. banks amid rising internal tensions over the central bank’s reorganizing, The Wall Street Journal reports.

“The worst of the banking crisis may be long over, but the political contest over the Federal Reserve is entering a crucial phase in which its personality and role will almost certainly be redefined.

The Fed has tried to fend off very public efforts in Congress to strip it of responsibility for regulating America’s banks, but a less-visible battle has been playing out inside the central bank. The Fed has undertaken a wrenching reorganization of its army of 3,000 bank supervisors, which has centralized more power in Washington and sometimes pitted officials at the 12 regional Fed banks against those in the capital.”

Read full story.


Robert E. Rubin and Sebastian Mallaby on the Global Economy

February 26, 2010

Former U.S. secretary of the treasury Robert E. Rubin and director of  the Center for Geoeconomic Studies at the Council on Foreign Relations Sebastian Mallaby will discuss the global economy at 92nd Street Y in New York City on March 2, 2010 at 8:00 p.m.

To purchase tickets at a discounted rate of 20% off, click here, and use code RR20.


Capitalism Still the Only Game in Town

January 13, 2010

Alex J. Pollock says volatility is key to capitalism’s success as an economic system.

“A Business Week article in 1979 proclaimed ‘The Death of Equities.’  A few years later, a vast, long-running bull market in stocks began. In 1997, the Financial Times similarly announced ‘The Death of Gold.’

Our current decade, needless to say, has brought a giant bull market in the shining metal, ‘barbarous relic’ though it was claimed to be.

With the financial crisis of 2007-09, we were treated to announcements of ‘The Death of Capitalism.’ This is just as hopeless a prediction as the other two were. The bull market in capitalism also will return, because it will continue to be unmatched at creating economic well-being for ordinary people on the trend–but it will not do so without its inevitable cycles of booms and busts.

The future of capitalism, which is better thought of as economies based on enterprise, market competition and uncertainty, is robust on the trend line, but volatile, as always. People who think capitalism is about equilibrium, who value above all stability and theorise that markets will create it, are shocked by this volatility. This is to miss the essence of the matter.”

Read full story.


How Offshore Oil and Gas Production Benefits the Economy and the Environment

December 2, 2009

In a new Heritage Foundation paper, co-founder of environmental non-profit SOS California Bruce Allen argues that offshore oil and gas production can benefit, rather than damage, the economy and the environment.

Conventional wisdom holds that offshore oil and gas production harms the surrounding environment. This blanket ‘wisdom’ ignores the fact that the largest source of marine hydrocarbon pollution is offshore natural oil seepage. It also ignores the fact that offshore oil production has lowered the amount of oil released into the ocean by reducing natural oil seepage, especially in areas with active offshore oil seeps, such as California’s Santa Barbara coast. This Heritage Foundation analysis cites studies, developments, and biological facts that demonstrate often-overlooked benefits of offshore oil and gas production.”

Read full story.


Start-Up Nation: The Story of Israel’s Economic Miracle

October 24, 2009

The Story of Israel's Economic Miracle

“The West needs innovation; Israel’s got it,” write Dan Senor and Saul Singer, authors of Start-Up Nation: The Story of Israel’s Economic Miracle. They argue that the Israeli economic model, based on innovation, can help the West, in particular, “get out of its economic hole.”

Start-Up Nation addresses the trillion-dollar question: How is it that Israel – a country of 7.1 million people, only sixty years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources – produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada, and the United Kingdom?

Drawing on examples from the country’s foremost inventors and investors, geopolitical experts Dan Senor and Saul Singer describe how Israel’s adversity-driven culture fosters a unique combination of innovative and entrepreneurial intensity.

As the authors argue, Israel is not just a country but a comprehensive state of mind. Whereas Americans emphasize decorum and exhaustive preparation, Israelis put chutzpah first. “When an Israeli entrepreneur has a business idea, he will start it that week,” one analyst put it. At the geopolitical level, Senor and Singer dig in deeper to show why Israel’s policies on immigration, R&D, and military service have been key factors in the country’s rise – providing insight into why Israel has more companies on the NASDAQ than those from all of Europe, Korea, Japan, Singapore, China, and India combined.

So much has been written about the Middle East, but surprisingly little is understood about the story and strategy behind Israel’s economic growth. As Start-Up Nation shows, there are lessons in Israel’s example that apply not only to other nations, but also to individuals seeking to build a thriving organization. As the U.S. economy seeks to reboot its can-do spirit, there’s never been a better time to look at this remarkable and resilient nation for some impressive, surprising clues.

Reviews & Endorsements

“An eye-opening look at a side of Israel that most people never think about.” (The Week)

“There is a great deal for America to learn from the very impressive Israeli entrepreneurial model—beginning with a culture of leadership and risk management. Start-Up Nation is a playbook for every CEO who wants to develop the next generation of corporate leaders.” Tom Brokaw, special correspondent for NBC News, author of The Greatest Generation

“Senor and Singer’s experience in government, in business, and in journalism—and especially on the ground in the Middle East—come to life in their illuminating, timely, and often surprising analysis.” George Stephanopoulos, host of This Week, ABC News

“In the midst of the chaos of the Middle East, there’s a remarkable story of innovation. Start-Up Nation is filled with inspiring insights into what’s behind Israel’s dynamic economy. It is a timely book and a much-needed celebration of the entrepreneurial spirit.” Meg Whitman, former president and CEO of eBay

“Senor and Singer highlight some important lessons and sound instruction for countries struggling to enter the 21st century. An edifying, cogent report, as apolitical as reasonably possible, about homemade nation building.” Kirkus Reviews

“The authors ground their analysis in case studies and interviews with some of Israel’s most brilliant innovators to make this a rich and insightful read not just for business leaders and policymakers but for anyone curious about contemporary Israeli culture.” Publishers Weekly

To order the book, click here.


Alan Poseners Kolumne: Dienstwagen und Diners

August 28, 2009

Der britisch-deutsche Journalist Alan Posener startet heute eine neue Kolumne. Er wird  wöchentlich das Zeitgeschehen in Politik, Gesellschaft, Wirtschaft und Kultur für HIRAM7 REVIEW unter die Lupe nehmen.

Von Alan Posener
Die Welt / Welt am Sonntag  / HIRAM7 REVIEW

Es ist schon komisch: Milliarden und Abermilliarden gibt die Regierung aus, um Banken zu retten, Firmen vor den Folgen unternehmerischer Fehlentscheidungen zu schützen oder dem Volk vor der Wahl zu neuen Autos zu verhelfen. Und worüber regt sich der Wähler auf?

Über die paar tausend Euro Steuergelder, die Ulla Schmidt verpulvert hat, um ihr Dienstauto und ihren Chauffeur in den Urlaub zu nehmen. Oder über Angela Merkels Geburtstagsessen für Josef Ackermann.

Eine solche Personalisierung der Politik ist Ausdruck einer Infantilisierung. Einer Kapitulation vor der Komplexität. Wer kann aus dem Kopf sagen, worin die Gesundheitsreform eigentlich besteht? Aber es sagt einem doch der gesunde Menschenverstand – also der Neid, dieser verlässlichste aller Sozialinstinkte, dass die Ministerin in Spanien keinen gepanzerten Dienstwagen mitsamt Chauffeur braucht. Unsereiner fährt doch auch Fiat Panda.

Und wer vermag schon zu beurteilen, ob die Banken, die ihrerseits gnadenlos jeden vor die Hunde gehen lassen, der seine Raten nicht zahlen kann, wirklich so systemisch relevant sind, dass sie ihrerseits nicht pleite gehen dürfen?

Aber es sagt einem doch der gesunde Bürgerneid, dass die Kanzlerin unsere Steuergelder nicht verpulvern darf, um  Herrn Ackermann ein Geburtstagsessen auszurichten. Vielleicht schweigt aber auch der Neid. Denn wir mögen die Kanzlerin.

Die Gesundheitsministerin hingegen können wir nicht leiden. Neulich mussten wir für die Zahnfüllung zuzahlen, und der Zahnarzt sagte, das sei wegen der Gesundheitsreform. Und dann fährt sie auch noch mit dem Dienstauto in den Urlaub!

Zwei Drittel aller neu zugelassenen Autos in Deutschland sind Dienstwagen. Man darf annehmen, dass damit auch privat gefahren wird, und dass nicht jede private Fahrt abgerechnet wird. Und wer private Essen als Geschäftsessen abrechnen kann, tut es. Wir haben die Politiker, die wir verdienen. Und gerade das nervt uns.

Natürlich nervt auch die Patzigkeit, mit der die ehemalige Genossin des Kommunistischen Bundes Westdeutschland und heutige Sozialdemokratin Ulla Schmidt ihr Recht auf einen Dienstwagen verteidigt. Ein bisschen Zerknirschtheit wäre angebracht. Deutsche Politiker sollten wenigstens so tun, als gehörten sie zu uns.

Was man Ulla Schmidt vorwerfen kann, ja muss, ist dies: sie hat dieses Grundgesetz der deutschen Politik vergessen. Das ist eher ein intellektuelles als ein moralisches Versagen. Umso schlimmer übrigens. Wie konnte sie glauben, das käme nicht raus? Oder dass sie damit durchkäme? Es kommt immer raus.

Und man kommt damit nicht durch. Es sei denn, man ist französischer Präsident. Aber das ist eine andere Geschichte. 

Die in HIRAM7 REVIEW veröffentlichten Essays und Kommentare geben nicht grundsätzlich den Standpunkt der Redaktion wieder.


Why Capitalism Works: An Address by Former New York City Mayor Rudolph Giuliani

July 24, 2009

Drawing on his experiences as mayor of New York City, Rudolph Giuliani gave a wide-ranging speech at the American Enterprise Institute (AEI) on July 22, 2009. He praised the American capitalist system, calling it the best system in the world.

“There is nobody else’s economy that’s better than ours. We are exceptional. No one is allowed to say that anymore, but it’s true,” Rudolph Giuliani said. He argued for a belief in individual freedom, saying that “people make better choices than government.”

Click here to download or listen to audio of the lecture at The American Enterprise Institute (AEI).

Special thanks to Veronique Rodman, AEI’s Director of Communications, for recording and streaming the event.


New York financier Bernard Madoff Gets 150-Year Prison Term

June 30, 2009

Bernard Madoff - U.S. Department of Justice

The disgraced New York financier Bernard Lawrence “Bernie” Madoff has been sentenced to 150 years in prison by a court after pleading guilty to a massive Ponzi scheme, which severely impacted, among others, many philanthropies and individuals.

The sentence means that the 71-year-old, once a highly-respected Wall Street figure, will spend the rest of his life in jail.

He took billions of dollars from investors who trusted his reputation for providing spectacular returns and most of it has not been traced. The money was never invested but was put in banks and used to shore up the illusion that his business was trading successfully, as well as financing his luxury lifestyle.

Applause erupted in the courtroom when the sentence was announced, and despite a pubic apology by Madoff, Judge Denny Chin showed no leniency. “I don’t get a sense that Mr. Madoff has done all he could, or told all that he knows,” the judge said.

Read full story.


OECD revises World Economic Outlook forecast upward

June 24, 2009

The Organization for Economic Cooperation and Development (OECD) today revised its World Economic Outlook forecast upward for the first time since 2007, indicating that the global economic slide may be approaching a bottom.

The group revised its estimates for 2009 upward, projecting a contraction of 4.1 percent rather than the 4.3 percent it projected before, and also projected slight growth in 2010, whereas before it had projected none.

Here is the text of the OECD report.

The new OECD report coincides with meetings of the U.S. Federal Reserve’s Open Market Committee today in Washington.

A blog entry in the Wall Street Journal says the focus of the Fed’s meetings will be interest rates, how to word its statement on the economy, and the Fed’s asset purchase plan.

Read full story.


U.S. Federal Reserve makes stiff warning on deficit

June 4, 2009

Speaking before the Committee on the Budget of the U.S. House of Representatives in Washington, yesterday, U.S. Federal Reserve Chairman Ben Shalom Bernanke said Washington will need to bring down long term budget deficits and said a failure to do so could lead to future debt problems.

Bernanke highlighted rising pressure on long-term interest rates as a problem.

***

Chairman Ben S. Bernanke
Chairman of the Board of Governors of the United States Federal Reserve
Current economic and financial conditions and the federal budget
Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C.
June 3, 2009

Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.

Economic Developments and Outlook

The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May – suggests that sizable job losses and further increases in unemployment are likely over the next few months.

However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households’ spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline – a precondition for any recovery in homebuilding.

Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall’s sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production.

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.

Conditions in Financial Markets

Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs. It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions. The issuance of asset-backed securities (ABS) backed by credit card, auto, and student loans has also picked up this spring, and ABS funding rates have declined, developments supported by the availability of the Federal Reserve’s Term Asset-Backed Securities Loan Facility as a market backstop.

In markets for longer-term credit, bond issuance by nonfinancial firms has been relatively strong recently, and spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide. Mortgage rates and spreads have also been reduced by the Federal Reserve’s program of purchasing agency debt and agency mortgage-backed securities. However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.

As you know, last month, the federal bank regulatory agencies released the results of the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine, for each of the 19 U.S.-owned bank holding companies with assets exceeding $100 billion, a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions over the next two years turn out to be worse than we currently expect. According to the findings of the SCAP exercise, under the more adverse economic outlook, losses at the 19 bank holding companies would total an estimated $600 billion during 2009 and 2010. After taking account of potential resources to absorb those losses, including expected revenues, reserves, and existing capital cushions, we determined that 10 of the 19 institutions should raise, collectively, additional common equity of $75 billion.

Each of the 10 bank holding companies requiring an additional buffer has committed to raise this capital by November 9. We are in discussions with these firms on their capital plans, which are due by June 8. Even in advance of those plans being approved, the 10 firms have among them already raised more than $36 billion of new common equity, with a number of their offerings of common shares being over-subscribed. In addition, these firms have announced actions that would generate up to an additional $12 billon of common equity. We expect further announcements shortly as their capital plans are finalized and submitted to supervisors. The substantial progress these firms have made in meeting their required capital buffers, and their success in raising private capital, suggests that investors are gaining greater confidence in the banking system.

Fiscal Policy in the Current Economic and Financial Environment

Let me now turn to fiscal matters. As you are well aware, in February of this year, the Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity. The package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases, and federal grants for state and local governments.

Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts; then again, heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households’ propensity to spend. Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be. The Congressional Budget Office (CBO) has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO’s estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs.

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth – requires that spending and budget deficits be well controlled.

Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Federal Reserve Transparency

Let me close today with an update on the Federal Reserve’s initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the Joint Economic Committee, I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public. That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed’s balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged. In addition, the reports will provide quarterly updates of key elements of the Federal Reserve’s annual financial statements, including information regarding the System Open Market Account portfolio, our loan programs, and the special purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve’s actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public.


U.S. treasury secretary Geithner urges combined U.S.-China efforts to boost global economy

June 1, 2009
 

United States Secretary of the Treasury Timothy Geithner

United States Secretary of the Treasury Timothy Geithner

Timothy Geithner, in his first visit to China as U.S. Treasury Secretary, presented a plan for the United States and China to work together to rebuild the global economy and restore growth.

In a speech today at Peking University, Geithner stressed that there is much that both the United States and China need to do to rebalance the world economy. He called for China to make its currency more flexible in exchange for fiscal reforms in the United States. He also said China would need to diversify its economy beyond relying so heavily on exports for growth, and that the United States, in return, would focus on mitigating its ballooning deficit to protect massive Chinese investments in U.S. government debt.

Chinese media focused on Geithner’s implication that China should play a more significant role in global economic policymaking. China Daily says the primary goal of Geithner’s trip, which has included meetings with several leading Chinese economic policymakers, has been to reaffirm China’s faith in U.S. dollar-backed assets and still fears that U.S. budget deficit and loose monetary policy will prompt inflation, undermining Chinese holdings of both the U.S. dollar and U.S. Treasury bonds.

Below is the text of Timothy Geithner’s speech.

***

The United States and China, Cooperating for Recovery and Growth

 Treasury Secretary Timothy F. Geithner

Speech at Peking University – Beijing, China
June 1st, 2009

 It is a pleasure to be back in China and to join you here today at this great university. 

I first came to China, and to Peking University, in the summer of 1981 as a college student studying Mandarin. I was here with a small group of graduate and undergraduate students from across the United States. I returned the next summer to Beijing Normal University. 

We studied reasonably hard, and had the privilege of working with many talented professors, some of whom are here today. As we explored this city and traveled through Eastern China, we had the chance not just to understand more about your history and your aspirations, but also to begin to see the United States through your eyes. 

Over the decades since, we have seen the beginnings of one of the most extraordinary economic transformations in history. China is thriving.  Economic reform has brought exceptionally rapid and sustained growth in incomes. China’s emergence as a major economic force more fully integrated into the world economy has brought substantial benefits to the United States and to economies around the world.  

In recognition of our mutual interest in a positive, cooperative, and comprehensive relationship, President Hu Jintao and President Obama agreed in April to establish the Strategic and Economic Dialogue. Secretary Clinton and I will host Vice Premier Wang and State Councilor Dai in Washington this summer for our first meeting.  I have the privilege of beginning the economic discussions with a series of meetings in Beijing today and tomorrow. 

These meetings will give us a chance to discuss the risks and challenges on the economic front, to examine some of the longer term challenges we both face in laying the foundation for a more balanced and sustainable recovery, and to explore our common interest in international financial reform.

Current Challenges and Risks

 The world economy is going through the most challenging economic and financial stress in generations. 

 The International Monetary Fund predicts that the world economy will shrink this year for the first time in more than six decades. The collapse of world trade is likely to be the worst since the end of World War II. The lost output, compared to the world economy’s potential growth in a normal year, could be between three and four trillion dollars.

In the face of this challenge, China and the United States are working together to help shape a strong global strategy to contain the crisis and to lay the foundation for recovery. And these efforts, the combined effect of forceful policy actions here in China, in the United States, and in other major economies, have helped slow the pace of deterioration in growth, repair the financial system, and improve confidence. 

In fact, what distinguishes the current crisis is not just its global scale and its acute severity, but the size and speed of the global response.

At the G-20 Leaders meeting in London in April, we agreed on an unprecedented program of coordinated policy actions to support growth, to stabilize and repair the financial system, to restore the flow of credit essential for trade and investment, to mobilize financial resources for emerging market economies through the international financial institutions, and to keep markets open for trade and investment. 

That historic accord on a strategy for recovery was made possible in part by the policy actions already begun in China and the United States. 

China moved quickly as the crisis intensified with a very forceful program of investments and financial measures to strengthen domestic demand.

In the United States, in the first weeks of the new Administration, we put in place a comprehensive program of tax incentives and investments ¨C the largest peace time recovery effort since World War II – to help arrest the sharp fall in private demand. Alongside these fiscal measures, we acted to ease the housing crisis. And we have put in place a series of initiatives to bring more capital into the banking system and to restart the credit markets.  

These actions have been reinforced by similar actions in countries around the world. 

In contrast to the global crisis of the 1930s and to the major economic crises of the postwar period, the leaders of the world acted together. They acted quickly. They  took steps to provide assistance to the most vulnerable economies, even as they faced exceptional financial needs at home. They worked to keep their markets open, rather than retreating into self-defeating measures of discrimination and protection. 

And they have committed to make sure this program of initiatives is sustained until the foundation for recovery is firmly established, a commitment the IMF will monitor closely, and that we will be able to evaluate together when the G-20 Leaders meet again in the United States this fall. 

We are starting to see some initial signs of improvement. The global recession seems to be losing force. In the United States, the pace of decline in economic activity has slowed. Households are saving more, but consumer confidence has improved, and spending is starting to recover. House prices are falling at a slower pace and the inventory of unsold homes has come down significantly. Orders for goods and services are somewhat stronger. The pace of deterioration in the labor market has slowed, and new claims for unemployment insurance have started to come down a bit. 

The financial system is starting to heal. The clarity and disclosure provided by our capital assessment of major U.S. banks has helped improve market confidence in them, making it possible for banks that needed capital to raise it from private investors and to borrow without guarantees. The securities markets, including the asset backed securities markets that essentially stopped functioning late last year, have started to come back. The cost of credit has fallen substantially for businesses and for families as spreads and risk premia have narrowed.    

These are important signs of stability, and assurance that we will succeed in averting financial collapse and global deflation, but they represent only the first steps in laying the foundation for recovery. The process of repair and adjustment is going to take time. 

China, despite your own manifest challenges as a developing country, you are in an enviably strong position. But in most economies, the recession is still powerful and dangerous. Business and households in the United States, as in many countries, are still experiencing the most challenging economic and financial pressures in decades. 

The plant closures, and company restructurings that the recession is causing are painful, and this process is not yet over. The fallout from these events has been brutally indiscriminant, affecting those with little or no responsibility for the events that now buffet them, as well as on some who played key roles in bringing about our troubles.

The extent of the damage to financial systems entails significant risk that the supply of credit will be constrained for some time. The constraints on banks in many major economies will make it hard for them to compensate fully for the damage done to the basic machinery of the securitization markets, including the loss of confidence in credit ratings. After a long period where financial institutions took on too much risk, we still face the possibility that  banks and investors may take too little risk, even as the underlying economic conditions start to improve. 

And, after a long period of falling saving and substantial growth in household borrowing relative to GDP, consumer spending in the United States will be restrained for some time relative to what is typically the case in recoveries. 

 These are necessary adjustments. They will entail a longer, slower process of recovery, with a very different pattern of future growth across countries than we have seen in the past several recoveries. 

Laying the Foundation for Future Growth

 As we address this immediate financial and economic crisis, it is important that we also lay the foundations for more balanced, sustained growth of the global economy once this recovery is firmly established. 

A successful transition to a more balanced and stable global economy will require very substantial changes to economic policy and financial regulation around the world. But some of the most important of those changes will have to come in the United States and China. How successful we are in Washington and Beijing will be critically important to the economic fortunes of the rest of the world. The effectiveness of U.S. policies will depend in part on China’s, and the effectiveness of yours on ours. 

Although the United States and China start from very different positions, many of our domestic challenges are similar. In the United States, we are working to reform our health care system, to improve the quality of education, to rebuild our infrastructure, and to improve energy efficiency. These reforms are essential to boosting the productive capacity of our economy. These challenges are at the center of your reform priorities, too. 

We are both working to reform our financial systems. In the United States, our challenge is to create a more stable and more resilient financial system, with stronger protections for consumer and investors.  As we work to strengthen and redesign regulation to achieve these objectives, our challenge is to preserve the core strengths of our financial system, which are its exceptional capacity to adapt and innovate and to channel capital for investment in new technologies and innovative companies. You have the benefit of being able to learn from our shortcomings, which have proved so damaging in the present crisis, as well as from our strengths.  

Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies. Because of this, our policies have to be directed at very different outcomes. 

In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past. 

In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China’s ability to weather fluctuations in global supply and demand.

If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down. And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.  

Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer. 

The policy framework for a successful transition to this outcome is starting to take shape.

In the United States, we are putting in place the foundations for restoring fiscal sustainability. 

The President in his initial budget to Congress made it clear that, as soon as recovery is firmly established, we are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term. This will mean bringing the imbalance between our fiscal resources and expenditures down to the point - roughly three percent of GDP – where the overall level of public debt to GDP is definitively on a downward path.  The temporary investments and tax incentives we put in place in the Recovery Act to strengthen private demand will have to expire, discretionary spending will have to fall back to a more modest level relative to GDP, and we will have to be very disciplined in limiting future commitments through the reintroduction of budget disciplines, such as pay-as-you go rules.

The President also looks forward to working with Congress to further reduce our long-run fiscal deficit.

And, critical to our long-term fiscal health, we have to put in place comprehensive health care reform that will bring down the growth in health care costs, costs that are the principal driver of our long run fiscal deficit. 

The President has also proposed steps to encourage private saving, including through automatic enrollment in retirement savings accounts. 

Alongside these fiscal actions, we have designed our policies to address the financial crisis to carefully minimize risk to the taxpayer and to allow for an orderly exit or unwinding as soon as conditions permit. Across the various financial facilities put in place by the Treasury, the Federal Reserve, and the FDIC, we have been careful to set the economic terms at a level so that demand for these facilities will fade as conditions normalize and risk premia recede.  Banks have a strong incentive to replace public capital with private capital as soon as conditions permit. 

Let me be clear - the United States is committed to a strong and stable international financial system. The Obama Administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home. As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary governmental support that we have put in place to overcome the crisis, we will continue to preserve the openness of our economy, and we will resolutely maintain the policy framework necessary for durable and lasting sustained non-inflationary growth.

In China, the challenge is fundamentally different, and at least as complex. 

Critical to the success of your efforts to shift future growth to domestic demand are measures to raise household incomes and to reduce the need that households feel to save large amounts for precautionary reasons or to pay for major expenditures like education.  This involves strengthening the social safety net with health care reform and more complete public retirement systems, enacting financial reforms to help expand access to credit for households, and providing products that allow households to insure against risk.  These efforts can be funded through the increased collection of dividends from state-owned enterprises.

The structure of the Chinese economy will shift as domestic demand grows in importance, with a larger service sector, more emphasis on light industry, and less emphasis on heavy, capital intensive export and import-competing industries.  The resulting growth will generate greater employment, and be less energy-intensive than the current structure of Chinese industry. Allowing the market, interest rates, and other prices to function to encourage the shift in production will be particularly important.

An important part of this strategy is the government’s commitment to continue progress toward a more flexible exchange rate regime.  Greater exchange rate flexibility will help reinforce the shift in the composition of growth, encourage resource shifts to support domestic demand, and provide greater ability for monetary policy to achieve sustained growth with low inflation in the future. 

International Financial Reform

 These are some of the most important domestic economic challenge we face, and these issues will be at the core of our agenda for economic cooperation. 

But I think it is important to underscore that we also have a very strong interest in working together to strengthen the framework for international economic and financial cooperation.  

Let me highlight three important areas.

At the G-20 Leaders meeting, we committed to a series of actions to help reform and strengthen the international financial architecture.

As part of this, we agreed to put in place a stronger framework of standards for supervision and regulation of the financial system.  We expanded and strengthened the Financial Stability Forum, now renamed the Financial Stability Board.  China and other major emerging economies are now full participants, alongside the major financial centers, in this critical institution for cooperation.  We will have the chance together to help redesign global standards for capital requirements, stronger oversight of global markets like derivatives, better tools for resolving future financial crises, and measures to reduce the opportunities for regulatory arbitrage. 

We also committed to an ambitious program of reform of the IMF and other international financial institutions.  Our common objective is to reform the governance of these institutions to make them more representative of the shifting balance of economic and financial activity in the world, to strengthen their capacity to prevent future crisis, with stronger surveillance of macroeconomic, exchange rate, and financial policies, and to equip them with a stronger financial capacity to respond to future crises. We also committed to mobilize $500 billion in additional finance through the enlargement and membership expansion of the IMF’s New Arrangements to Borrow in order to provide an insurance policy for the global financial system.

As part of this process of reform, the United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China’s importance in the global economy.

I believe that a greater role for China is necessary for China, for the effectiveness of the international financial institutions themselves, and for the world economy. 

China is already too important to the global economy not to have a full seat at the international table, helping to define the policies that are critical to the effective functioning of the international financial system.

Second, we must cooperate to assure that the global trade and investment environment remains open, and that opportunities continue to expand.  As economies have become more open and more closely integrated, global economic growth has been stronger and more broad-based, bringing increasing numbers out of poverty, and turning developing nations into major emerging markets.    The global commitment to trade liberalization and increasingly open investment played a critical role in this process ¨C in the industrialized world, in East Asia, and, since 1978, in China.  As we go through the severe stresses of this crisis, we must not turn our backs on open trade and investment - for ourselves and for those who have yet to experience the fruits of growth and development. The United States, China, and the other members of the G20 have committed to not resort to protectionist measures by raising trade and investment barriers and to work toward a successful conclusion to the Doha Development Round. 

And third, one of the most critical long-term challenges that we both face is climate change.  Individually and collectively, there is an urgent need to ensure that each and every country takes meaningful action to deal with this threat.  Reducing land and forest degradation, conserving energy, and using clean technology are important objectives that complement both our efforts to achieve a new, sustainable pattern of growth and our goal of reducing greenhouse gas emissions. China and the United States already are working closely through the Strategic and Economic Dialogue in areas such as clean transportation, clean and efficient production of electricity, and the reduction of air and water pollution.  We must continue these efforts for the sake of our natio ns and the planet.

Conclusion

In the last few years the frequency, intensity, and importance of U.S.-China economic engagements have multiplied.  The U.S.-China Strategic and Economic Dialogue that President Obama and President Hu initiated in April is the next stage in that process.  I look forward to welcoming Vice Premier Wang, State Councilor Dai and their colleagues to Washington to participate in the first meeting of the U.S.-China Strategic and Economic Dialogue.

 Our engagement should be conducted with mutual respect for the traditions, values, and interests of China and the United States. We will make a joint effort in a concerted way “同心协力”.  We should understand that we each have a very strong stake in the health and the success of each other’s economy. 

China and the United States individually, and together, are so important in the global economy and financial system that what we do has a direct impact on the stability and strength of the international economic system.  Other nations have a legitimate interest in our policies and the ways in which we work together, and we each have an obligation to ensure that our policies and actions promote the health and stability of the global economy and financial system.

We come together because we have shared interests and responsibilities.  We also have our own national interests.   I will be a strong advocate for U.S. interests, just as I expect my counterparts to represent China.  China has benefited hugely from open trade and investment, and the ability to greatly increase its exports to the rest of the world.  In turn, we expect increased opportunities to export to and invest in the Chinese economy.   

We want China to succeed and prosper.  Chinese growth and expanding Chinese demand is a tremendous opportunity for U.S. firms and workers, just as it is in China and the rest of the world. 

Global problems will not be solved without U.S.-China cooperation.  That goes for the entire range of issues that face our world from economic recovery and financial repair to climate change and energy policy.

I look forward to working with you cooperatively, and in a spirit of mutual respect.


Germany’s Recession

May 15, 2009

The Financial Times reports Germany’s economy shrank at a record pace during the first three months of 2008, shrinking at a faster rate than analysts had predicted and confirming that Germany is among the European countries hardest hit by the crisis.

The New York Times reports the economy of the eurozone as a whole shrank 2.5 percent during the same period. 


Theory of Integrated Macroeconomics

May 11, 2009

Prof. Solomon Budnik has developed his project of the Internet Stock Exchange for global securities settlements. This project is based on Prof. Budnik’ project and bylaws of the Alternative Int. SE solicited by the Israeli Finance Ministry.

By Professor Solomon Budnik

Professor of Comparative Law, currently chairman of the Aerospace company UTG-PRI LTD. – Tel Aviv, Israel.

Subtitle: Crisis of Unified Economic Systems and Uniform Currency. Macroeconomic Geometry.

ABSTRACT

IN RE: New advances in open economy modeling

With regard to economic modeling, it should be noted that we deal now with the expanding economic universe with ever changing space-time continuum due to ever expanding world population and consumer market. No artificial economic model could adjust to such  circumstances or fit various rigid and incompatible economic systems, particularly not the Nobel Prize in Economics gained behavioral, equilibrium, and game models.

In re:   human behavior and free market  are unpredictable, being unstable, and exercise a cumulative effect upon given economy due to mass public and monetary upheavals. For example, the economy of ill-conceived socio-communist and socialist states was and is based on social rules instead of the rule of capital, and couldn’t therefore be properly planned and predicted, as proven by history.

Astoundingly, the  economic system in USA, etc. is not capitalistic but Capitolistic, judging by politically induced state interference into free market affairs, with catastrophic results remedied by same state with trillions of dollars of misappropriated taxpayers’ money, forcing thereby future generations to slave themselves to repay that national multitrillion dollar debt to totalitarian and human rights violating China and totalitarian, racist and terrorist Arab states controlling the US State Dept. with oil dollars.

The equilibrium model is also wrong, since it contradicts the common sense, physics and geometry, for a physical or economic system doesn’t function or operate in a vacuum of economic space, and  an equilibrium can only be reached  by two corresponding systems positioned in the same economic plane, which is impossible. It means that no monetary system can reach a state of equilibrium in ever changing environment and monetary parameters. In fact, a model or a system in equilibrium is a dead, non-functional body, as is Zimbabwean Central Bank which has abolished its worthless national currency.

The  economic game model is wrong as well, since a game needs at least two players, with the end result of a  winner and a looser, or means a single player that plays with a third-party invented program (Russian and Israeli central banks that used the American FED’s model with devastating results), and usually a game theory is applied post-factum to a past event, as the Israeli economic game theorist applied his game paper to a so-called Oslo Accord and its step-by-step Israeli concessions  never matched by the opposing PA,  the Arab terror outcome of which the Israeli people and economy suffer under since 1993.

In all such circumstances, the society and the free market rebel and correct themselves via revolutions and financial downfalls, with trillions of dollars lost. Accordingly, as the Church had separated itself from the state and became a quasi financial institution above the state, the free market economy should function as a non plus ultra financial institution ruled and protected by integrated macroeconomics with a self-correcting mechanism of a three-tier stock exchange system developed by me.

Accordingly, I suggest that in order to prevent future economic depressions and collapses, the common  macroeconomics should be replaced by integrated macroeconomics (as formulated by me) separated from the monetary and fiscal economics induced and controlled by the state via central bank and the treasury which are self-conflicting bodies without taxpayers’ control.

The reason for such a change is that the capital market should be free from the state control in both

THESIS

Preamble: this paper has been composed due to the fact that all previous economic theories and models have failed in the modern turbulent economic circumstances of the intertwined, dependable and unstable global markets and economic powerhouses, with unpredictable fluctuations of domestic and foreign capital.

In re: let’s reminiscent briefly on the history of the past empires, state unions and confederations that had led to the rise and fall of the British Empire (despite the gold standard of the Pound Sterling which was the primary reserve currency for much of the world in the 18th and 19th centuries, but perpetual account and fiscal deficits, financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (read current U.S. economic situation), Spanish and Dutch empires, whose economics were based on colonial assets, and the fall of the Austrian-Hungarian entity. The USA had united independent states which then exist on cash injections of the Treasury and the Federal Reserve via dollar printing and the issue of now unsellable state bonds, e.g., the state of California, which has now a budget deficit of $42B, while the overall national debt per American household is now $35.000, to rise to $75.000 due to President Obama’s financial policy. Economic crisis in America happened a number of times, albeit dollar was the world reserve currency guaranteed by gold.

In post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord, the first major economic transformation toward the end of World War II, established the International Monetary Fund (IMF) and a way to value the various currencies of the world relative to each other. All foreign currencies would trade in relationship to the US Dollar and only the US dollar (as the reserve currency) would be tied to a gold standard (meaning the value of dollars circulating must be backed by gold reserves). The Roosevelt dollar was a schizoid, two-tier dollar, whose purchasing power at home did not match its gold parity abroad. At home, it was a fiat monetary unit, not convertible to gold; abroad, it was convertible to gold at $35 per ounce.

Americans of that era learned rather quickly that the maintenance of wealth in tangible form was preferable to paper wealth, so as bank runs became more pronounced, they rushed into and hoarded gold, since a growing distrust of banks meant an equal distrust of paper money.

Executive Order 6102 of April, 1933 and the United States Gold Reserve Act of January, 1934 changed all that. The 1934 Act raised the official price of gold to 35$ per ounce from the 20.67$ paid to Americans who, under the threat of a 10,000$ fine and/or 10 years imprisonment, had been forced to turn in their gold a few months earlier.

The gold standard caused major problems in the 1960′s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that USA were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then).

Ruble of the Imperial Russia had also been guaranteed by gold, but that colonial and agrarian country, notwithstanding its industrial output of the 1913, existed due to wars and foreign loans. The crash of that economically poor, on bayonets unified empire was inevitable, as well as the crash of the following Soviet empire due to its domestic and international aggression and annexation, failed Communist “planed” economy, fifteen fictitious republics on Moscow’s payroll,  one-side introduced fake ruble-dollar parity, purchases of grain abroad for dollars, arms race and non-repaid foreign loans, paid-off by Russia only recently.

And nothing have come up of  the idea of the  Belarus-Russia economic union and  unified currency, and  Belarus now lobbies the EU.

With regard to Euro, it had lost  30% of its value at the issue, and that issue and the annulment of the former European currencies has cost tens billions of dollars. The economy of the leading EU states had thereby been undermined due to the incompatibility of the different economic systems and internal state protectionism of the EU members. The economy of minor states had been damaged due to sharp discrepancies  between the low wages and 2-3 times higher prices due to joining the EU where wages are 10-20 times higher. Example: Bulgaria, Czech Republic, and Baltic States which are virtually bankrupt.

Euro keeps its mark due to free circulation of the paper money in a monetary spread now affecting the UK and Switzerland, but  Euro can fall to a critical point due to reduced  consumption and production,  credit crunch and the strengthening dollar.

EU Central Bank and the Bank of Israel (BOI) had followed suit by emulating FED’s actions applicable in USA only, i.e., by zeroing all interest earning saving deposits and to buying-in own state bonds. In  Israel, the American-led BOI had unreasonably devalued the strong shekel by 30% in favor of  weak dollar and Euro due to threats of total strike and extortion  by the leftist subversive Israeli Labor Union (so-called New Histadrut), albeit the Israeli import is 3-4 times larger then export, and BOI had bought-in the Israeli state bonds, albeit there was no huge foreign debt as in USA, had depleted the Treasury of its large  tax income of 15% on now non-existing shekel saving deposits of the bank customers, had reduced the interest rate to 0.5% thus depriving the bank clients and the banks of their earnings, and made thereby poorer  the consumers. Said erroneous and highly damaging actions had deflated the Israeli economy with no official inflation, caused mass unemployment, closed companies and factories, and caused the 20%-50% rise in travel expenses, food, gas and RE prices due to actual inflation concealed by the BOI, since  its actions are in contradiction to all written and unwritten free market rules, with negative results for Israeli economy, for the reduced money supply wasn’t compensated by a $750B stimulus  package and capital infusion in banks and companies, as in USA.

In Russia, on the contrary, its Central Bank had opted for inflation vs. deflation, and had allowed large interest rates at falling consumer and RE prices, with now value appreciating ruble, thus saving the consumer market, its money circulation and earnings on saving deposits.

Paradox but fact: dollar had appreciated against foreign currencies despite the collapse  of the U.S. economy, since all countries buy up dollars for currency reserves and support of their U.S. market dependent economies.

Hence, it is obvious in my opinion that the U.S. and EU economies and monetary expansions were based quasi on the Einstein’s formula Е = мс2, i.e. energy of the economy is equal to the money mass  multiplied by the speed of its circulation in the quadrature of the given monetary territory. But in case of  the  reduced  circulation of money, as occurs now everywhere, the economy of a state shrinks and is subject to a gravitational collapse due to a  financial black hole.

I would elaborate and picture the economic model in geometric terms of universal macroeconomics, i.e. a circle within a square. Central Bank and the SE of any state are the gravitational monetary bodies in the center of the circle of thereby attracted  economy, and distribute financial energy – the money mass and securitized wealth within the boundaries of given economic universe, whose revolving circle represents the circulation of capital. The “square” of the GDP, cornering the circle of the economy forms four corners – fields of the given financial space, representing respectively the banks, the RE market, consumption and production.

This represents my Unified Field Theory in Economics, as per Einstein’s theory in Physics, applicable to macroeconomics where accordingly monetary forces between the objects of  economy are not transmitted directly between them, but instead go through intermediary financial fields whose  interactions should be unified  (from strongest to weakest) to prevent the crisis of economy.

To substantiate: when too much monies are pumped into that system as in USA prior to the crisis, the ill fetched economy expands and depresses said fields – cornered banks, RE market, consumers and companies,  constituting the depression with corporate bankruptcies where macroeconomics enter into the conflict with the microeconomics (strongest vs. weakest). To rebound, the economy must contract to relieve the tension from said affected segments of the economy and that had happened recently in USA, proving my assumption.

 Here I also introduce the terms of the “spot” money, “intangible” money with delayed transaction and repayment, and “remote” money, the discrepancies in which had led to enormous consumers’ debt and credit crunch in USA. The matter is that the US economy and financial market were erroneously oriented toward assumed  wealth of the consumers, i.e.,  their unsecured credit cards and loans (intangible money with delayed transaction and repayment), but the actual wealth of the consumer is the real money in his pocket (spot money) and remote money in his bank saving account, so if the US credit report companies and lenders would have had checked and calculated the actual cash status of the consumers/debtors using my money terms above prior to issuing  a mortgage or a loan, the monetary and economic crisis in USA could have been avoided.

It means that apart from the usual state and corporate credit rating, the new gross consumer credit rating (GCCR) should be introduced and used to constitute the essential part of the advanced modern macroeconomics, and that is particularly applicable to REITs, Fannie and Freddie in USA. Here, my term of the General Growth Personal Income (GGPI) should be introduced (as previously applied to RE properties), and calculated by the FED or any Central Bank via IRS and Tax Authorities to keep the economy in check and prevent any crisis.

Nota bene: the problem of common macroeconomics is that it is not based on the Rule of Golden Section and the Fibonacci sequence, albeit all universal systems from the human body, plants and up to the universe are based and develop on this very same principle. To elaborate, I would define the monetary correlation between various states and economic systems in the  following approximate ratio, applying Fibonacci figures: USA to the EU as 1:2, USA - UK as 2:3, to China, Japan, India, Mexico respectively as 3:5, 5:8, 8:13, 13: 21, and so on, showing the dilution of capital, having in mind the relevant buying potential of the consumers  which is low in China and India,  in relation to  the billions of people in said states.

The expanding global economy also reflects the geometry of the Fibonacci spiral that approximates the golden spiral of the universal macroeconomics and globalization based on irrational constant of economic dynamics.

This is all because the GDP based common economy is assumed to be closed, no imports or exports occur.

So my opinion  is that any economy should be based  on  the financial pillars consolidated under one roof, i.e., the real estate market, the stock exchange and the gold trade should constitute a uniform, self-containing system, as the project developed by me, namely the Alternative Int. Stock Exchange, to include the Real Estate SE  and the Gold SE, constituting my Integrated Macroeconomic Theory.

I suggest therefore that apart from the GDP, modern economy should be linked to the Gross Foreign Product  (GFP), as termed by me, including foreign revenues of domestic companies and the offshore assets. This implies the repatriation and reinvestment of the foreign gained income and fled capital as the amortization of the domestic corporate and private assets that constitute thereby  the Cumulative Gain Product (СGP), a term  formulated by me. Said new measure  can mitigate the domestic economic crisis and attract foreign capital due to adjusted financial parameters and upgraded credit rating of the given state.

In re: Concerning the collapse of major U.S. and EU investment banks, with heavy losses at the NYSE,  Russian, EU and Asian stock exchanges and monetary systems and to mitigate the economic and financial situation, I have devised the  project  of the innovative Alternative  Int. Stock Exchange  (AISE), to be established in Jerusalem, to include the Real Estate Stock Exchange and the Gold Exchange to secure investors’ assets and gains. Said project is based on my previous project and bylaws of the Tel Aviv Alternative Stock Exchange solicited by the Israeli Finance Ministry.

Said uniquely integrated three-tier financial system would attract large capital due to innovative self-compensating triple index which is not entirely GDP oriented, as the world economies are based  erroneously upon, leading to collapses, so the Israeli economic and financial system would thereby be based on our introduced GFP as well, thus securing the stability of capital and market and bringing the economy out of recession.

Reprinted with kindly permission of Solomon Budnik. (C) 2009 by Solomon Budnik. All Rights Reserved.


World Health Organization increases pandemic threat level for Mexico influenza

April 28, 2009

Fears that the outbreak of Mexico influenza could morph into an international pandemic spread yesterday following the World Health Organization’s (WHO) announcement that it would raise its alert level to Level Four, indicating the disease has already shown sustained human-to-human transmission.

British broadcaster BBC quotes one WHO official who says it is “too late” to contain the spread of the virus from country to country and that officials should instead focus on mitigating its effects.

The Washington Post reports signs have emerged that the outbreak could be beginning to take a toll on the global economy: oil prices, the Mexican peso, and airline stocks all plunged.

Read full story.


Einfallslose mediale Panikmache um die Finanzkrise

April 22, 2009

Nie wird soviel gelogen wie nach der Jagd, im Krieg und vor Wahlen. (Bismarck)

Eine Glosse von Narcisse Caméléon, Ressortleiter Deppologie der HIRAM7 REVIEW und engstirniger Gründer der A(E)del-Partei

Die andauernde Finanzkrise ist gewiss ein ernst zu nehmendes Thema. Panikmache in der Öffentlichkeit und die offensichtlich bewusste Erzeugung eines völlig unzutreffenden Bildes von der Gesamtlage sind aber ganz sicher nicht sehr hilfreich, wenn es darum geht, nachhaltige Konzepte zur Lösung dieser Krise zu erarbeiten und umzusetzen.

Die Presse – selbst von der Krise betroffen – braucht plakative Überschriften, um Leser zu gewinnen; das gilt auch für die Wochenzeitung Der Spiegel, der plötzlich zur Boulevard-Presse mutiert, in dem das Hamburger Blatt so titelt: “Wirtschafts-Absturz macht Merkels Krisenrunde ratlos“.

Die Protagonisten des öffentlichen Schmierentheaters haben einen gefährlichen Brandbeschleuniger für die Finanzkrise unterschätzt: Die Psychologie. Die Angst wird zum Massenphänomen, das uns kollektiv in Atem hält, und dazu beiträgt, dass die spaßlose Lethargie namens Finanzkrise sich verschlimmert, und Bevormunderer und Weltverbesserer uns mit noch mehr Ratschlägen tyrannisierendamit ein paar Milliardäre, auf Kosten der Steuerzahler und mittels einer Umverteilung nach oben, künstlich am Leben erhalten werden, entgegen jegliche marktwirtschaftliche Logik.

Eigentliches Ziel dieser billigen Panikmache ist nichts anderes als uns das nächste “Konjukturprogramm”, sprich Geldsegen für die  Verursacher der Finanzkrise, zu verkaufen.

Wollen die Medien und die Politik die Bürger für dumm verkaufen? Alle Jahre wieder schon, besonders im Superwahljahr 2009 (Europawahl, Bundestagswahl, Bundespräsidentenwahl, Landtagswahlen in Hessen, Sachsen, Thüringen, Brandenburg, Saarland und Kommunalwahlen in acht Bundesländern)…


A Question for the Economists

April 7, 2009

In an op-ed in The Weekly Standard, Harvey C. Mansfield, Professor of political science at Harvard University, wrote on the failure of economists to predict crises.

“One group of those involved in the present financial crisis has so far escaped notice – the economists. They are masters in the science of prediction, but as a group, if not to a man, they failed to predict a crisis that has wiped out nearly half the wealth invested in the stock market and elsewhere (measured of course from the peak). The economists did no better than their unscientific rivals, the stock pickers, who are in the business of prediction.

Perhaps we need a second look not merely at the existing models by which economists predict but at the very idea of prediction as the goal of social science. Economists had been in the habit of asserting that they had come a long way since the Depression, that such an event could not happen again. Yet people are now actually speaking of another Depression as possible. Maybe we know how to avoid the Depression we had, but what about a new one with a new character we do not recognize? Isn’t our present crisis new? Isn’t every crisis new – since surprise is the essence of crisis? If prediction were reliable, we would be prepared for every chance, and our lives would be crisis-free and much duller.”

Read full story.


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