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Sunday, January 30, 2005

Adnan Khashoggi Linked to 911 Terrorists
Part I

By Alex Constantine

Decades before burning skyscrapers, codified torture, secret trials and mass detentions, there was Barrick Gold, a mining concern in Canada with roots in the American intelligence establishment. It is fitting that gold, the seductive but dead heart of world capitalism, should christen a story about the most unconscionable event in Wall Street history: 911.

Barrick's incorporation is obscure. Most accounts claim that the firm was founded by Peter Munk, a former radio manufacturer who made a splash in the Canadian press when he disposed of his shares in the company shortly before it was declared insolvent, a golden parachute paid for by investors and the Canadian taxpayer. His name was instantly mud in the investment community, but fortunately for Munk, no indictment was ever brought against him.

Today, his overall worth is estimated at $350 million.1 Munk's redemption was the work of Adnan Khashoggi, who would go on to notoriety as an Ollie North intermediary in the Iran-Contra affair. Khashoggi and Munk kicked off their partnership with a series of hotel investments. In 1983, the raided his fat cash reserves to purchase Barrick. Munk was installed as chairman.

Khashoggi distanced himself from Barrick shortly after the Iran-Contra scandal broke (but held onto his stock, tied up as collateral for North's arms transfers to Iran in 1985), notes Observer reporter Gregg Palast in a book on the 2000 presidential election, before Bush was invited in. That was in 1995: "Munk's reputation was restored, at least in his own mind, in part by massive donations to the University of Toronto. Following this act of philanthropy, the university awarded Munk­adviser Bush an honorary degree. Several students were arrested protesting what appeared to them as a cash-for-honors deal."2

The bonds were positively Sicilian. in 1986, Khashoggi was was arrested for fraud and held in a New York prison. Munk paid his $4 million bail.3

Financial researcher Lois Battuello was Palast's key source of information concerning Barrick. It was Battuello who gave Palast a file on Barrick Resources International (BRI), the nascent firm founded two years before Barrick Gold, a spin-off, by the Central Intelligence Agency's Kermit Roosevelt to serve as a dummy business front.

This was roughly the same time that Roosevelt cemented relations with Khashoggi, who brought Munk along, on behalf of the CIA. In 1983, Battuello says, the disgraced entrepeneur "picked up the mantle of this clandestine front (read looted taxpayer dollars) in Toronto as though it was his operation. It was simply put together with evil money,' and it gave Adnan Khashoggi an excuse to be visible in Toronto, where he established yet more businesses and outposts."4 The offshore division of Khashoggi's Barrick Resources, for instance, controlled Jetborne, Inc., a company in Toronto used by Khashoggi to ship arms to Iran under the direction of Reagan's NSC.5

Khashoggi's empire, raised on a bed of gold, metastisized rapidly. In 1973, he dropped in his burgeoning portfolio a company in possession of nearly two million acres of prime real estate, the Arizona-Colorado Land & Cattle Company -- not far from the 100,000 acre Paloma Ranch near Gila Bend, deeded to the CIA's Kermit Roosevelt and John B. Anderson.6

Two years later, in cahoots with Sheik Kamal Adham -- then director of Saudi intelligence (1963-79), brother-in-law of King Faisal and the CIA's key liaison to the Arab world -- Khashoggi founded Oryx.

But the Saudi Sheik's thieving bonds with Khashoggi and the CIA were forged decades earlier, with the incorporation of Barrick. The company's seed investors were Saudis with Agency ties, including Shiek Kamal Adham, Adnan Khashoggi, and Prince Nawaf bin Abdul Aziz (a major investor in Barrick, code-named "Tumbleweed" by his CIA contacts).7 By 1978, Adham was worth roughly $134 million.

It was but two years earlier that the son of Prescott Bush, a well-heeled CIA director, struck up an alliance with Saudi Arabia and Iran under the Shah. George H.W. Bush's left-hand man at Langley was Kamal Adham. After leaving the CIA in January, 1977, Bush was appointed to the executive committee chair of First International Bancshares (FIB), the largest bank in the District of Columbia. (In the 1980s, the Shiek and Abdul Khalil ((Adham's successor as Saudi intelligence director)), then officers of BCCI, were implicated in a hostile bid for FIB, by this time transmorgrified into a dummy front for its scandal-infested parent, BCCI.)

Raymond Close, another revolving-door, covert dervish, CIA station chief in Saudi Arabia, took arms from the Saudis and gave them to Pakistan, and in 70s left the Agency and went to work for BCCI director Kamal Adham.

Majority shares in Capcom, a BCCI susidiary, were held by Saudi spooks Adham and Khalil. Capcom sidelines included money laundering and drug trafficking.8 Adham was eventually prosecuted for fraud in the BCCI case and paid a $100 million fine.

Oryx, the demonic corporate brat of Khashoggi and Adham, has recently been linked by investigative reporter Daniel Hopsicker (Welcome to Terrorland) to Wallace Hilliard, proprietor of Huffman Aviation in Florida, where Mohammed Atta's suicide cult trained in aero-terrorism.

Of the 220 flight schools in Florida, Atta had to pick Huffman.

Wallace Hilliard, Khashoggi's lackey, bought Huffman Aviation in 1999, and hired Rudi Dekkers, a Dutchman, to run it. The following year, Hilliard's LearJet was stopped on the runway at Orlando Executive Airport by armed DEA agents.

At Huffman, too, the CIA was a silent partner. Sander Hickes, a reporter for the Long Island Press, found that Hilliard "did business with Myron Du Bain, who worked alongside late ex-CIA director John McCone on the boards of several banks. Du Bain was chairman of the Fireman's Fund Insurance Company in 1981 when the company announced plans to acquire Employers Health, an insurance company cofounded by Hilliard."9

In July, Daniel Hopsicker, after a two-year investigation into Huffman Aviation, offered from his MadCowMorningNews web soapbox the suggestion that Mohammed Atta had been engaged "in a lucrative drug trafficking operation which linked Osama bin Laden's thugs and drug lieutenants to their equally-thuggish American counterparts. This places the two terrorists at the same airport where DEA agents brandishing submachine guns seized a Lear jet belonging to the owner of the flight school [Hilliard] where Atta and Al-shehhi were taking lessons ... at that very moment."

DEA agents, Hopsicker wrote, "discovered 43 pounds of heroin aboard Hilliard's Lear. The Orlando Sentinel hailed the bust as the largest seizure in Central Florida's history.' After we'd learned the whole story, we discovered the bust had been an accident, carried out by low-level DEA operatives not clued-in to the protected nature of the trade. Nor was this the only time Hilliard's name came up in connection with narcotics trafficking."10

Likewise, Hilliard's Saudi boss would soon be immersed in criminal activity of his own -- with direct ties to terrorism -- in Armenia. Banking fraud was rampant there, Global News Wire reported in August, 2004, "thanks to the Arab millionaire Adnan Khashoggi -- an active partner of Armenian businessmen in the illicit drug and arms trades." Khashoggi's first bucket-shop banking operation was a branch of the Caucasus Investment Bank in Susa. In quick succession, with the assistance of Abu Muslum, an Arab businessman, he opened the Hamaz and Beit ul-Muqaddas banks.

Rovsan Novruzoglu, a political scientist and director of the International Strategic Research Center in Azerbaijan, observes that Adnan Khashoggi's banks "played a big part in the formation of terrorist camps and in the opening of laboratories for developing chemical and bacteriological weapons in Nagornyy Karabakh."11

Back home, Hilliard's flight school, as Hopsicker reported, "was training dozens of terrorists to fly -- including both pilots crashing into the World Trade Center.”

NOTES

1) Greg Palast, "Poppy Strikes Gold," excerpt from "The Best Democracy Money Can Buy," http://www.democraticunderground.com/articles/03/07/09_gold.html

2) Ibid.

3) Greg Palast, "Best democracy money can buy: Gregory Palast examines the sources of the $500m that boosted Bush's bid for the White House," Observer, November 26, 2000.

4) Lois Ann Battuello, e-mail exchange with author, October 1, 2004.

5) Ibid. Today, Khashoggi has interests in some 1500 companies, and indirect involvement in others. The second largest shareholder in Ruppert Murdoch's News Corp., for instance, is Prince Walid bin Talal bin Abdulaziz as Saud (Prince Alwaleed), a Khashoggi colleague.

6) Ibid.

7) Jay Taylor, "Jay Taylor: J. Taylor's Gold and Technology Stocks" (Volume 22 No. 15), January 3 2004.

8) Martin J. Rivers, "A Wolf in Sheikhs Clothing: Bush Business Deals with 9 Partners of bin Laden's Banker," Geocities, March 15, 2004.

9) Sander Hicks, "No Easy Answer - Heroin, Al Qaeda And The Florida Flight School," Long Island Press, February 19, 2004.

10) Daniel Hopsicker, "9/11's Big Dirty Secret," MadCowMorningNews, July 192004, http://www.madcowprod.com

11) M. Macidli, "Azerbaijani Daily Outlines Activities of International Armenian Haybun Organization," Global News Wire, August 27, 2003

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Sunday, January 23, 2005

Depleted Uranium


Coming to a Doorstep Near You

The horror of Depleted Uranium is not limited to Iraq - it may well be at our doorsteps. The information which some governments are concealing is presented here.

By James Denver
Caduceus - Democracy Betrayed

'I'm horrified. The people out there - the Iraqis, the media and the troops - risk the most appalling ill health. And the radiation from depleted uranium can travel literally anywhere. It's going to destroy the lives of thousands of children, all over the world. We all know how far radiation can travel. Radiation from Chernobyl reached Wales and in Britain you sometimes get red dust from the Sahara on your car.

'The speaker is not some alarmist doom-sayer. He is Dr Chris Busby, the British radiation expert, Fellow of the University of Liverpool in the Faculty of Medicine and UK representative on the European Committee on Radiation Risk, talking about the best kept secret of this war: the fact that, by illegally using hundreds of tons of depleted uranium (DU) against Iraq, Britain and America have gravely endangered not only the Iraqis but the whole world.

For these weapons have released deadly, carcinogenic and mutagenic, radioactive particles in such abundance that - whipped up by sandstorms and carried on trade winds - there is no corner of the globe they cannot penetrate - including Britain.

For the wind has no boundaries and time is on their side: the radioactivity persists for over 4,500,000,000 years and can cause cancer, leukaemia, brain damage, kidney failure, and extreme birth defects - killing millions of every age for centuries to come. A crime against humanity which may, in the eyes of historians, rank with the worst atrocities of all time.

Yet, officially, no crime has been committed. For this story is a dirty story in which the facts have been concealed from those who needed them most. It is also a story we need to know if the people of Iraq are to get the medical care they desperately need, and if our troops, returning from Iraq, are not to suffer as terribly as the veterans of other conflicts in which depleted uranium was used.

'Depleted' uranium is in many ways a misnomer.

For 'depleted' sounds weak. The only weak thing about depleted uranium is its price. It is dirt cheap, toxic, waste from nuclear power plants and bomb production. However, uranium is one of earth's heaviest elements and DU packs a Tyson's punch, smashing through tanks, buildings and bunkers with equal ease, spontaneously catching fire as it does so, and burning people alive. 'Crispy critters' is what US servicemen call those unfortunate enough to be close. And, when John Pilger encountered children killed at a greater distance he wrote: 'The children's skin had folded back, like parchment, revealing veins and burnt flesh that seeped blood, while the eyes, intact, stared straight ahead. I vomited.' (Daily Mirror)

The millions of radioactive uranium oxide particles released when it burns can kill just as surely, but far more terribly. They can even be so tiny they pass through a gas mask, making protection against them impossible. Yet, small is not beautiful. For these invisible killers indiscriminately attack men, women, children and even babies in the womb - and do the gravest harm of all to children and unborn babies.

Doctors in Iraq have estimated that birth defects have increased by 2-6 times, and 3-12 times as many children have developed cancer and leukaemia since 1991. Moreover, a report published in The Lancet in 1998 said that as many as 500 children a day are dying from these sequels to war and sanctions and that the death rate for Iraqi children under 5 years of age increased from 23 per 1000 in 1989 to 166 per thousand in 1993. Overall, cases of lymphoblastic leukemia more than quadrupled with other cancers also increasing 'at an alarming rate'. In men, lung, bladder, bronchus, skin, and stomach cancers showed the highest increase. In women, the highest increases were in breast and bladder cancer, and non-Hodgkin lymphoma.1

On hearing that DU had been used in the Gulf in 1991, the UK Atomic Energy Authority sent the Ministry of Defence a special report on the potential damage to health and the environment. It said that it could cause half a million additional cancer deaths in Iraq over 10 years. In that war the authorities only admitted to using 320 tons of DU - although the Dutch charity LAKA estimates the true figure is closer to 800 tons. Many times that may have been spread across Iraq by this year's war. The devastating damage all this DU will do to the health and fertility of the people of Iraq now, and for generations to come, is beyond imagining.

We must also count the numberless thousands of miscarried babies. Nobody knows how many Iraqis have died in the womb since DU contaminated their world. But it is suggested that troops who were only exposed to DU for the brief period of the war were still excreting uranium in their semen 8 years later and some had 100 times the so called 'safe limit' of uranium in their urine. The lack of government interest in the plight of veterans of the 1991 war is reflected in a lack of academic research on the impact of DU but informal research has found a high incidence of birth defects in their children and that the wives of men who served in Iraq have three times more miscarriages than the wives of servicemen who did not go there.

Since DU darkened the land Iraq has seen birth defects which would break a heart of stone: babies with terribly foreshortened limbs, with their intestines outside their bodies, with huge bulging tumours where their eyes should be, or with a single eye - like Cyclops, or without eyes, or without limbs, and even without heads. Significantly, some of the defects are almost unknown outside textbooks showing the babies born near A-bomb test sites in the Pacific. Doctors report that many women no longer say 'Is it a girl or a boy?' but simply, 'Is it normal, doctor?' Moreover this terrible legacy will not end. The genes of their parents may have been damaged for ever, and the damaging DU dust is ever-present.

Blue on Blue

What the governments of America and Britain have done to the people of Iraq they have also done to their own soldiers, in both wars. And they have done it knowingly. For the battlefields have been thick with DU and soldiers have had to enter areas heavily contaminated by bombing. Moreover, their bodies have not only been assaulted by DU but also by a vaccination regime which violated normal protocols, experimental vaccines, nerve agent pills, and organophosphate pesticides in their tents. Yet, though the hazards of DU were known, British and American troops were not warned of its dangers. Nor were they given thorough medical checks on their return - even though identifying it quickly might have made it possible to remove some of it from their body. Then, when a growing number became seriously ill, and should have been sent to top experts in radiation damage and neurotoxins, many were sent to a psychiatrist.

Over 200,000 US troops who returned from the 1991 war are now invalided out with ailments officially attributed to service in Iraq - that's 1 in 3. In contrast, the British government's failure to fully assess the health of returning troops, or to monitor their health, means no one even knows how many have died or become gravely ill since their return. However, Gulf veterans' associations say that, of 40,000 or so fighting fit men and women who saw active service, at least 572 have died prematurely since coming home and 5000 may be ill. An alarming number are thought to have taken their own lives, unable to bear the torment of the innumerable ailments which have combined to take away their career, their sexuality, their ability to have normal children, and even their ability to breathe or walk normally. As one veteran puts it, they are 'on DU death row, waiting to die'.

Whatever other factors there may be, some of their illnesses are strikingly similar to those of Iraqis exposed to DU dust. For example, soldiers have also fathered children without eyes. And, in a group of eight servicemen whose babies lack eyes seven are known to have been directly exposed to DU dust. They too have fathered children with stunted arms, and rare abnormalities classically associated with radiation damage. They too seem prone to cancer and leukaemia. Tellingly, so are EU soldiers who served as peacekeepers in the Balkans, where DU was also used. Indeed their leukaemia rate has been so high that several EU governments have protested at the use of DU.

The vital evidence

Despite all that evidence of the harm done by DU, governments on both sides of the Atlantic have repeatedly claimed that as it emits only 'low level' radiation DU is harmless. Award winning scientist, Dr Rosalie Bertell who has led UN medical commissions, has studied 'low level' radiation for 30 years.2 She has found that uranium oxide particles have more than enough power to harm cells, and describes their pulses of radiation as hitting surrounding cells 'like flashes of lightning' again and again in a single second.2 Like many scientists worldwide who have studied this type of radiation, she has found that such 'lightning strikes' can damage DNA and cause cell mutations which lead to cancer.

Moreover, these particles can be taken up by body fluids and travel through the body, damaging more than one organ. To compound all that Dr Bertell has found that this particular type of radiation can cause the body's communication systems to break down, leading to malfunctions in many vital organs of the body and to many medical problems. A striking fact, since many veterans of the first Gulf war suffer from innumerable, seemingly unrelated, ailments.

In addition, recent research by Eric Wright, Professor of Experimental Haematology at Dundee University, and others, have shown two ways in which such radiation can do far more damage than has been thought. The first is that a cell which seems unharmed by radiation can produce cells with diverse mutations several cell generations later. (And mutations are at the root of cancer and birth defects.) This 'radiation induced genomic instability' is compounded by 'the bystander effect' by which cells mutate in unison with others which have been damaged by radiation - rather as birds swoop and turn in unison. Put together, these two mechanisms can greatly increase the damage done by a single source of radiation, such as a DU particle.Moreover, it is now clear that there are marked genetic differences in the way individuals respond to radiation - with some being far more likely to develop cancer than others. So the fact that some veterans of the first Gulf war seem relatively unharmed by their exposure to DU in no way proves that DU did not damage others.

The price of truth

That the evidence from Iraq and from our troops, and the research findings of such experts, have been ignored may be no accident. A US report, leaked in late 1995, allegedly says, 'The potential for health effects from DU exposure is real; however it must be viewed in perspective... the financial implications of long-term disability payments and healthcare costs would be excessive.'3

Clearly, with hundreds of thousands gravely ill in Iraq and at least a quarter of a million UK and US troops seriously ill, huge disability claims might be made not only against the governments of Britain and America if the harm done by DU were acknowledged. There might also be huge claims against companies making DU weapons and some of their directors are said to be extremely close to the White House. How close they are to Downing Street is a matter for speculation, but arms sales makes a considerable contribution to British trade. So the massive whitewashing of DU over the past 12 years, and the way that governments have failed to test returning troops, seemed to disbelieve them, and washed their hands of them, may be purely to save money.

The possibility that financial considerations have led the governments of Britain and America to cynically avoid taking responsibility for the harm they have done not only to the people of Iraq but to their own troops may seem outlandish. Yet DU weapons weren't used by the other side and no other explanation fits the evidence. For, in the days before Britain and America first used DU in war its hazards were no secret.4 One American study in 1990 said DU was 'linked to cancer when exposures are internal, [and to] chemical toxicity - causing kidney damage'. While another openly warned that exposure to these particles under battlefield conditions could lead to cancers of the lung and bone, kidney damage, non-malignant lung disease, neuro-cognitive disorders, chromosomal damage and birth defects.5

A culture of denial

In 1996 and 1997 UN Human Rights Tribunals condemned DU weapons for illegally breaking the Geneva Convention and classed them as 'weapons of mass destruction' 'incompatible with international humanitarian and human rights law'. Since then, following leukaemia in European peacekeeping troops in the Balkans and Afghanistan (where DU was also used), the EU has twice called for DU weapons to be banned. Yet, far from banning DU, America and Britain stepped up their denials of the harm from this radioactive dust as more and more troops from the first Gulf war and from action and peacekeeping in the Balkan and Afghanistan have become seriously ill.

This is no coincidence. In 1997, while citing experiments, by others, in which 84 percent of dogs exposed to inhaled uranium died of cancer of the lungs, Dr Asaf Durakovic, then Professor of Radiology and Nuclear Medicine at Georgetown University in Washington was quoted as saying, 'The [US government's] Veteran Administration asked me to lie about the risks of incorporating depleted uranium in the human body.' He concluded, 'uranium. does cause cancer, uranium does cause mutation, and uranium does kill. If we continue with the irresponsible contamination of the biosphere, and denial of the fact that human life is endangered by the deadly isotope uranium, then we are doing disservice to ourselves, disservice to the truth, disservice to God and to all generations who follow.' Not what the authorities wanted to hear and his research was suddenly blocked.

During 12 years of ever-growing British whitewash the authorities have abolished military hospitals, where there could have been specialized research on the effects of DU and where expertise in treating DU victims could have built up. And, not content with the insult of suggesting the gravely disabling symptoms of Gulf veterans are imaginary they have refused full pensions to many. For, despite all the evidence to the contrary, the current House of Commons briefing paper on DU hazards says 'it is judged that any radiation effects from.possible exposures are extremely unlikely to be a contributory factor to the illnesses currently being experienced by some Gulf war veterans.'

Note how over a quarter of a million sick and dying US and UK vets are called 'some'.The way aheadBritain and America not only used DU in this year's Iraq war, they dramatically increased its use - from a minimum of 320 tons in the previous war to at minimum of 1500 tons in this one.

And this time the use of DU wasn't limited to anti-tank weapons - as it had largely been in the previous Gulf war - but was extended to the guided missiles, large bunker busters and big 2000 pound bombs used in Iraq's cities. This means that Iraq's cities have been blanketed in lethal particles - any one of which can cause cancer or deform a child.

In addition, the use of DU in huge bombs which throw the deadly particles higher and wider in huge plumes of smoke means that billions of deadly particles have been carried high into the air - again and again and again as the bombs rained down - ready to be swept worldwide by the winds.

The Royal Society has suggested the solution is massive decontamination in Iraq. That could only scratch the surface. For decontamination is hugely expensive and, though it may reduce the risks in some of the worst areas, it cannot fully remove them. For DU is too widespread on land and water.

How do you clean up every nook and cranny of a city the size of Baghdad? How can they decontaminate a whole country in which microscopic particles, which cannot be detected with a normal geiger counter, are spread from border to border? And how can they clean up all the countries downwind of Iraq - and, indeed, the world?So there are only two things we can do to mitigate this crime against humanity.

The first is to provide the best possible medical care for the people of Iraq, for our returning troops and for those who served in the last Gulf war and, through that, minimize their suffering. The second is to relegate war, and the production and sale of weapons, to the scrap heap of history - along with slavery and genocide.

Then, and only then, will this crime against humanity be expunged, and the tragic deaths from this war truly bring freedom to the people of Iraq, and of the world.

Read the full article in issue 60 of Caduceus...

References
1. The Lancet volume 351, issue 9103, 28 February 1998.
2. Rosalie Bertell's book Planet Earth the Latest Weapon of War was reviewed in Caduceus issue 51, page 28.
3. http://www.gulflink.osd.mil/du_ii/du_ii_tabl1.htm TAB L_Research Report Summaries
4. http://www.wagingpeace.org/articles/02.01/020117moret.htm

The secret official memorandum to Brigadier General L.R.Groves from Drs Conant, Compton and Urey of War Department Manhattan district dated October 1943 is available at the website http://www.mindfully.org/Nucs/2003/Leuren-Moret-Gen-Groves21feb03.htm

5. http://www.gulflink.osd.mil/du_iitab11.htm TAB L_Research Report Summaries

Further informationThe Low Level Radiation Campaign hopes to be able to arrange a limited number of private urine tests for those returning from the latest Gulf war.

It can be contacted at: The Knoll, Montpelier Park, Llandrindod Wells, LD1 5LW. 01597 824771. Web: http://www.llrc.orgJames Denver writes and broadcasts internationally on science and technology.

Source:
http://www.caduceus.info/articles/denver.htm
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Wednesday, January 19, 2005

The Coming Wars:


What the Pentagon Can Now Do in Secret


By Seymour M. Hersh
The New Yorker

24-31 January 2005 Issue

George W. Bush's re-election was not his only victory last fall. The President and his national-security advisers have consolidated control over the military and intelligence communities' strategic analyses and covert operations to a degree unmatched since the rise of the post-Second World War national-security state. Bush has an aggressive and ambitious agenda for using that control-against the mullahs in Iran and against targets in the ongoing war on terrorism-during his second term. The C.I.A. will continue to be downgraded, and the agency will increasingly serve, as one government consultant with close ties to the Pentagon put it, as "facilitators" of policy emanating from President Bush and Vice-President Dick Cheney. This process is well under way.

Despite the deteriorating security situation in Iraq, the Bush Administration has not reconsidered its basic long-range policy goal in the Middle East: the establishment of democracy throughout the region. Bush's re-election is regarded within the Administration as evidence of America's support for his decision to go to war. It has reaffirmed the position of the neoconservatives in the Pentagon's civilian leadership who advocated the invasion, including Paul Wolfowitz, the Deputy Secretary of Defense, and Douglas Feith, the Under-secretary for Policy. According to a former high-level intelligence official, Secretary of Defense Donald Rumsfeld met with the Joint Chiefs of Staff shortly after the election and told them, in essence, that the naysayers had been heard and the American people did not accept their message. Rumsfeld added that America was committed to staying in Iraq and that there would be no second-guessing.

"This is a war against terrorism, and Iraq is just one campaign. The Bush Administration is looking at this as a huge war zone," the former high-level intelligence official told me. "Next, we're going to have the Iranian campaign. We've declared war and the bad guys, wherever they are, are the enemy. This is the last hurrah-we've got four years, and want to come out of this saying we won the war on terrorism."

Bush and Cheney may have set the policy, but it is Rumsfeld who has directed its implementation and has absorbed much of the public criticism when things went wrong-whether it was prisoner abuse in Abu Ghraib or lack of sufficient armor plating for G.I.s' vehicles in Iraq. Both Democratic and Republican lawmakers have called for Rumsfeld's dismissal, and he is not widely admired inside the military. Nonetheless, his reappointment as Defense Secretary was never in doubt.

Rumsfeld will become even more important during the second term. In interviews with past and present intelligence and military officials, I was told that the agenda had been determined before the Presidential election, and much of it would be Rumsfeld's responsibility. The war on terrorism would be expanded, and effectively placed under the Pentagon's control. The President has signed a series of findings and executive orders authorizing secret commando groups and other Special Forces units to conduct covert operations against suspected terrorist targets in as many as ten nations in the Middle East and South Asia.

The President's decision enables Rumsfeld to run the operations off the books-free from legal restrictions imposed on the C.I.A. Under current law, all C.I.A. covert activities overseas must be authorized by a Presidential finding and reported to the Senate and House intelligence committees. (The laws were enacted after a series of scandals in the nineteen-seventies involving C.I.A. domestic spying and attempted assassinations of foreign leaders.) "The Pentagon doesn't feel obligated to report any of this to Congress," the former high-level intelligence official said. "They don't even call it 'covert ops'-it's too close to the C.I.A. phrase. In their view, it's 'black reconnaissance.' They're not even going to tell the cincs"-the regional American military commanders-in-chief. (The Defense Department and the White House did not respond to requests for comment on this story.)

In my interviews, I was repeatedly told that the next strategic target was Iran. "Everyone is saying, 'You can't be serious about targeting Iran. Look at Iraq,'" the former intelligence official told me. "But they say, 'We've got some lessons learned-not militarily, but how we did it politically. We're not going to rely on agency pissants.' No loose ends, and that's why the C.I.A. is out of there."


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For more than a year, France, Germany, Britain, and other countries in the European Union have seen preventing Iran from getting a nuclear weapon as a race against time-and against the Bush Administration. They have been negotiating with the Iranian leadership to give up its nuclear-weapons ambitions in exchange for economic aid and trade benefits. Iran has agreed to temporarily halt its enrichment programs, which generate fuel for nuclear power plants but also could produce weapons-grade fissile material. (Iran claims that such facilities are legal under the Nuclear Non-Proliferation Treaty, or N.P.T., to which it is a signator, and that it has no intention of building a bomb.) But the goal of the current round of talks, which began in December in Brussels, is to persuade Tehran to go further, and dismantle its machinery. Iran insists, in return, that it needs to see some concrete benefits from the Europeans-oil-production technology, heavy-industrial equipment, and perhaps even permission to purchase a fleet of Airbuses. (Iran has been denied access to technology and many goods owing to sanctions.)

The Europeans have been urging the Bush Administration to join in these negotiations. The Administration has refused to do so. The civilian leadership in the Pentagon has argued that no diplomatic progress on the Iranian nuclear threat will take place unless there is a credible threat of military action. "The neocons say negotiations are a bad deal," a senior official of the International Atomic Energy Agency (I.A.E.A.) told me. "And the only thing the Iranians understand is pressure. And that they also need to be whacked."

The core problem is that Iran has successfully hidden the extent of its nuclear program, and its progress. Many Western intelligence agencies, including those of the United States, believe that Iran is at least three to five years away from a capability to independently produce nuclear warheads-although its work on a missile-delivery system is far more advanced. Iran is also widely believed by Western intelligence agencies and the I.A.E.A. to have serious technical problems with its weapons system, most notably in the production of the hexafluoride gas needed to fabricate nuclear warheads.

A retired senior C.I.A. official, one of many who left the agency recently, told me that he was familiar with the assessments, and confirmed that Iran is known to be having major difficulties in its weapons work. He also acknowledged that the agency's timetable for a nuclear Iran matches the European estimates-assuming that Iran gets no outside help. "The big wild card for us is that you don't know who is capable of filling in the missing parts for them," the recently retired official said. "North Korea? Pakistan? We don't know what parts are missing."

One Western diplomat told me that the Europeans believed they were in what he called a "lose-lose position" as long as the United States refuses to get involved. "France, Germany, and the U.K. cannot succeed alone, and everybody knows it," the diplomat said. "If the U.S. stays outside, we don't have enough leverage, and our effort will collapse." The alternative would be to go to the Security Council, but any resolution imposing sanctions would likely be vetoed by China or Russia, and then "the United Nations will be blamed and the Americans will say, 'The only solution is to bomb.'"

A European Ambassador noted that President Bush is scheduled to visit Europe in February, and that there has been public talk from the White House about improving the President's relationship with America's E.U. allies. In that context, the Ambassador told me, "I'm puzzled by the fact that the United States is not helping us in our program. How can Washington maintain its stance without seriously taking into account the weapons issue?"

The Israeli government is, not surprisingly, skeptical of the European approach. Silvan Shalom, the Foreign Minister, said in an interview last week in Jerusalem, with another New Yorker journalist, "I don't like what's happening. We were encouraged at first when the Europeans got involved. For a long time, they thought it was just Israel's problem. But then they saw that the [Iranian] missiles themselves were longer range and could reach all of Europe, and they became very concerned. Their attitude has been to use the carrot and the stick-but all we see so far is the carrot." He added, "If they can't comply, Israel cannot live with Iran having a nuclear bomb."

In a recent essay, Patrick Clawson, an Iran expert who is the deputy director of the Washington Institute for Near East Policy (and a supporter of the Administration), articulated the view that force, or the threat of it, was a vital bargaining tool with Iran. Clawson wrote that if Europe wanted cooperation with the Bush Administration it "would do well to remind Iran that the military option remains on the table." He added that the argument that the European negotiations hinged on Washington looked like "a pre-emptive excuse for the likely breakdown of the E.U.-Iranian talks." In a subsequent conversation with me, Clawson suggested that, if some kind of military action was inevitable, "it would be much more in Israel's interest-and Washington's-to take covert action. The style of this Administration is to use overwhelming force-'shock and awe.' But we get only one bite of the apple."

There are many military and diplomatic experts who dispute the notion that military action, on whatever scale, is the right approach. Shahram Chubin, an Iranian scholar who is the director of research at the Geneva Centre for Security Policy, told me, "It's a fantasy to think that there's a good American or Israeli military option in Iran." He went on, "The Israeli view is that this is an international problem. 'You do it,' they say to the West. 'Otherwise, our Air Force will take care of it.'" In 1981, the Israeli Air Force destroyed Iraq's Osirak reactor, setting its nuclear program back several years. But the situation now is both more complex and more dangerous, Chubin said. The Osirak bombing "drove the Iranian nuclear-weapons program underground, to hardened, dispersed sites," he said. "You can't be sure after an attack that you'll get away with it. The U.S. and Israel would not be certain whether all the sites had been hit, or how quickly they'd be rebuilt. Meanwhile, they'd be waiting for an Iranian counter-attack that could be military or terrorist or diplomatic. Iran has long-range missiles and ties to Hezbollah, which has drones-you can't begin to think of what they'd do in response."

Chubin added that Iran could also renounce the Nuclear Non-Proliferation Treaty. "It's better to have them cheating within the system," he said. "Otherwise, as victims, Iran will walk away from the treaty and inspections while the rest of the world watches the N.P.T. unravel before their eyes."


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The Administration has been conducting secret reconnaissance missions inside Iran at least since last summer. Much of the focus is on the accumulation of intelligence and targeting information on Iranian nuclear, chemical, and missile sites, both declared and suspected. The goal is to identify and isolate three dozen, and perhaps more, such targets that could be destroyed by precision strikes and short-term commando raids. "The civilians in the Pentagon want to go into Iran and destroy as much of the military infrastructure as possible," the government consultant with close ties to the Pentagon told me.

Some of the missions involve extraordinary cooperation. For example, the former high-level intelligence official told me that an American commando task force has been set up in South Asia and is now working closely with a group of Pakistani scientists and technicians who had dealt with Iranian counterparts. (In 2003, the I.A.E.A. disclosed that Iran had been secretly receiving nuclear technology from Pakistan for more than a decade, and had withheld that information from inspectors.) The American task force, aided by the information from Pakistan, has been penetrating eastern Iran from Afghanistan in a hunt for underground installations. The task-force members, or their locally recruited agents, secreted remote detection devices-known as sniffers-capable of sampling the atmosphere for radioactive emissions and other evidence of nuclear-enrichment programs.

Getting such evidence is a pressing concern for the Bush Administration. The former high-level intelligence official told me, "They don't want to make any W.M.D. intelligence mistakes, as in Iraq. The Republicans can't have two of those. There's no education in the second kick of a mule." The official added that the government of Pervez Musharraf, the Pakistani President, has won a high price for its cooperation-American assurance that Pakistan will not have to hand over A. Q. Khan, known as the father of Pakistan's nuclear bomb, to the I.A.E.A. or to any other international authorities for questioning. For two decades, Khan has been linked to a vast consortium of nuclear-black-market activities. Last year, Musharraf professed to be shocked when Khan, in the face of overwhelming evidence, "confessed" to his activities. A few days later, Musharraf pardoned him, and so far he has refused to allow the I.A.E.A. or American intelligence to interview him. Khan is now said to be living under house arrest in a villa in Islamabad. "It's a deal-a trade-off," the former high-level intelligence official explained. "'Tell us what you know about Iran and we will let your A. Q. Khan guys go.' It's the neoconservatives' version of short-term gain at long-term cost. They want to prove that Bush is the anti-terrorism guy who can handle Iran and the nuclear threat, against the long-term goal of eliminating the black market for nuclear proliferation."

The agreement comes at a time when Musharraf, according to a former high-level Pakistani diplomat, has authorized the expansion of Pakistan's nuclear-weapons arsenal. "Pakistan still needs parts and supplies, and needs to buy them in the clandestine market," the former diplomat said. "The U.S. has done nothing to stop it."

There has also been close, and largely unacknowledged, cooperation with Israel. The government consultant with ties to the Pentagon said that the Defense Department civilians, under the leadership of Douglas Feith, have been working with Israeli planners and consultants to develop and refine potential nuclear, chemical-weapons, and missile targets inside Iran. (After Osirak, Iran situated many of its nuclear sites in remote areas of the east, in an attempt to keep them out of striking range of other countries, especially Israel. Distance no longer lends such protection, however: Israel has acquired three submarines capable of launching cruise missiles and has equipped some of its aircraft with additional fuel tanks, putting Israeli F-16I fighters within the range of most Iranian targets.)

"They believe that about three-quarters of the potential targets can be destroyed from the air, and a quarter are too close to population centers, or buried too deep, to be targeted," the consultant said. Inevitably, he added, some suspicious sites need to be checked out by American or Israeli commando teams-in on-the-ground surveillance-before being targeted.

The Pentagon's contingency plans for a broader invasion of Iran are also being updated. Strategists at the headquarters of the U.S. Central Command, in Tampa, Florida, have been asked to revise the military's war plan, providing for a maximum ground and air invasion of Iran. Updating the plan makes sense, whether or not the Administration intends to act, because the geopolitics of the region have changed dramatically in the last three years. Previously, an American invasion force would have had to enter Iran by sea, by way of the Persian Gulf or the Gulf of Oman; now troops could move in on the ground, from Afghanistan or Iraq. Commando units and other assets could be introduced through new bases in the Central Asian republics.

It is possible that some of the American officials who talk about the need to eliminate Iran's nuclear infrastructure are doing so as part of a propaganda campaign aimed at pressuring Iran to give up its weapons planning. If so, the signals are not always clear. President Bush, who after 9/11 famously depicted Iran as a member of the "axis of evil," is now publicly emphasizing the need for diplomacy to run its course. "We don't have much leverage with the Iranians right now," the President said at a news conference late last year. "Diplomacy must be the first choice, and always the first choice of an administration trying to solve an issue of ... nuclear armament. And we'll continue to press on diplomacy."

In my interviews over the past two months, I was given a much harsher view. The hawks in the Administration believe that it will soon become clear that the Europeans' negotiated approach cannot succeed, and that at that time the Administration will act. "We're not dealing with a set of National Security Council option papers here," the former high-level intelligence official told me. "They've already passed that wicket. It's not if we're going to do anything against Iran. They're doing it."

The immediate goals of the attacks would be to destroy, or at least temporarily derail, Iran's ability to go nuclear. But there are other, equally purposeful, motives at work. The government consultant told me that the hawks in the Pentagon, in private discussions, have been urging a limited attack on Iran because they believe it could lead to a toppling of the religious leadership. "Within the soul of Iran there is a struggle between secular nationalists and reformers, on the one hand, and, on the other hand, the fundamentalist Islamic movement," the consultant told me. "The minute the aura of invincibility which the mullahs enjoy is shattered, and with it the ability to hoodwink the West, the Iranian regime will collapse"-like the former Communist regimes in Romania, East Germany, and the Soviet Union. Rumsfeld and Wolfowitz share that belief, he said.

"The idea that an American attack on Iran's nuclear facilities would produce a popular uprising is extremely ill informed," said Flynt Leverett, a Middle East scholar who worked on the National Security Council in the Bush Administration. "You have to understand that the nuclear ambition in Iran is supported across the political spectrum, and Iranians will perceive attacks on these sites as attacks on their ambitions to be a major regional player and a modern nation that's technologically sophisticated." Leverett, who is now a senior fellow at the Saban Center for Middle East Policy, at the Brookings Institution, warned that an American attack, if it takes place, "will produce an Iranian backlash against the United States and a rallying around the regime."


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Rumsfeld planned and lobbied for more than two years before getting Presidential authority, in a series of findings and executive orders, to use military commandos for covert operations. One of his first steps was bureaucratic: to shift control of an undercover unit, known then as the Gray Fox (it has recently been given a new code name), from the Army to the Special Operations Command (socom), in Tampa. Gray Fox was formally assigned to socom in July, 2002, at the instigation of Rumsfeld's office, which meant that the undercover unit would have a single commander for administration and operational deployment. Then, last fall, Rumsfeld's ability to deploy the commandos expanded. According to a Pentagon consultant, an Execute Order on the Global War on Terrorism (referred to throughout the government as gwot) was issued at Rumsfeld's direction. The order specifically authorized the military "to find and finish" terrorist targets, the consultant said. It included a target list that cited Al Qaeda network members, Al Qaeda senior leadership, and other high-value targets. The consultant said that the order had been cleared throughout the national-security bureaucracy in Washington.

In late November, 2004, the Times reported that Bush had set up an interagency group to study whether it "would best serve the nation" to give the Pentagon complete control over the C.I.A.'s own elite paramilitary unit, which has operated covertly in trouble spots around the world for decades. The panel's conclusions, due in February, are foregone, in the view of many former C.I.A. officers. "It seems like it's going to happen," Howard Hart, who was chief of the C.I.A.'s Paramilitary Operations Division before retiring in 1991, told me.

There was other evidence of Pentagon encroachment. Two former C.I.A. clandestine officers, Vince Cannistraro and Philip Giraldi, who publish Intelligence Brief, a newsletter for their business clients, reported last month on the existence of a broad counter-terrorism Presidential finding that permitted the Pentagon "to operate unilaterally in a number of countries where there is a perception of a clear and evident terrorist threat. ... A number of the countries are friendly to the U.S. and are major trading partners. Most have been cooperating in the war on terrorism." The two former officers listed some of the countries-Algeria, Sudan, Yemen, Syria, and Malaysia. (I was subsequently told by the former high-level intelligence official that Tunisia is also on the list.)

Giraldi, who served three years in military intelligence before joining the C.I.A., said that he was troubled by the military's expanded covert assignment. "I don't think they can handle the cover," he told me. "They've got to have a different mind-set. They've got to handle new roles and get into foreign cultures and learn how other people think. If you're going into a village and shooting people, it doesn't matter," Giraldi added. "But if you're running operations that involve finesse and sensitivity, the military can't do it. Which is why these kind of operations were always run out of the agency." I was told that many Special Operations officers also have serious misgivings.

Rumsfeld and two of his key deputies, Stephen Cambone, the Under-secretary of Defense for Intelligence, and Army Lieutenant General William G. (Jerry) Boykin, will be part of the chain of command for the new commando operations. Relevant members of the House and Senate intelligence committees have been briefed on the Defense Department's expanded role in covert affairs, a Pentagon adviser assured me, but he did not know how extensive the briefings had been.

"I'm conflicted about the idea of operating without congressional oversight," the Pentagon adviser said. "But I've been told that there will be oversight down to the specific operation." A second Pentagon adviser agreed, with a significant caveat. "There are reporting requirements," he said. "But to execute the finding we don't have to go back and say, 'We're going here and there.' No nitty-gritty detail and no micromanagement."

The legal questions about the Pentagon's right to conduct covert operations without informing Congress have not been resolved. "It's a very, very gray area," said Jeffrey H. Smith, a West Point graduate who served as the C.I.A.'s general counsel in the mid-nineteen-nineties. "Congress believes it voted to include all such covert activities carried out by the armed forces. The military says, 'No, the things we're doing are not intelligence actions under the statute but necessary military steps authorized by the President, as Commander-in-Chief, to "prepare the battlefield."'" Referring to his days at the C.I.A., Smith added, "We were always careful not to use the armed forces in a covert action without a Presidential finding. The Bush Administration has taken a much more aggressive stance."

In his conversation with me, Smith emphasized that he was unaware of the military's current plans for expanding covert action. But he said, "Congress has always worried that the Pentagon is going to get us involved in some military misadventure that nobody knows about."

Under Rumsfeld's new approach, I was told, U.S. military operatives would be permitted to pose abroad as corrupt foreign businessmen seeking to buy contraband items that could be used in nuclear-weapons systems. In some cases, according to the Pentagon advisers, local citizens could be recruited and asked to join up with guerrillas or terrorists. This could potentially involve organizing and carrying out combat operations, or even terrorist activities. Some operations will likely take place in nations in which there is an American diplomatic mission, with an Ambassador and a C.I.A. station chief, the Pentagon consultant said. The Ambassador and the station chief would not necessarily have a need to know, under the Pentagon's current interpretation of its reporting requirement.

The new rules will enable the Special Forces community to set up what it calls "action teams" in the target countries overseas which can be used to find and eliminate terrorist organizations. "Do you remember the right-wing execution squads in El Salvador?" the former high-level intelligence official asked me, referring to the military-led gangs that committed atrocities in the early nineteen-eighties. "We founded them and we financed them," he said. "The objective now is to recruit locals in any area we want. And we aren't going to tell Congress about it." A former military officer, who has knowledge of the Pentagon's commando capabilities, said, "We're going to be riding with the bad boys."

One of the rationales for such tactics was spelled out in a series of articles by John Arquilla, a professor of defense analysis at the Naval Postgraduate School, in Monterey, California, and a consultant on terrorism for the Rand Corporation. "It takes a network to fight a network," Arquilla wrote in a recent article in the San Francisco Chronicle:

When conventional military operations and bombing failed to defeat the Mau Mau insurgency in Kenya in the 1950s, the British formed teams of friendly Kikuyu tribesmen who went about pretending to be terrorists. These "pseudo gangs," as they were called, swiftly threw the Mau Mau on the defensive, either by befriending and then ambushing bands of fighters or by guiding bombers to the terrorists' camps. What worked in Kenya a half-century ago has a wonderful chance of undermining trust and recruitment among today's terror networks. Forming new pseudo gangs should not be difficult.

"If a confused young man from Marin County can join up with Al Qaeda," Arquilla wrote, referring to John Walker Lindh, the twenty-year-old Californian who was seized in Afghanistan, "think what professional operatives might do."

A few pilot covert operations were conducted last year, one Pentagon adviser told me, and a terrorist cell in Algeria was "rolled up" with American help. The adviser was referring, apparently, to the capture of Ammari Saifi, known as Abderrezak le Para, the head of a North African terrorist network affiliated with Al Qaeda. But at the end of the year there was no agreement within the Defense Department about the rules of engagement. "The issue is approval for the final authority," the former high-level intelligence official said. "Who gets to say 'Get this' or 'Do this'?"

A retired four-star general said, "The basic concept has always been solid, but how do you insure that the people doing it operate within the concept of the law? This is pushing the edge of the envelope." The general added, "It's the oversight. And you're not going to get Warner"-John Warner, of Virginia, the chairman of the Senate Armed Services Committee-"and those guys to exercise oversight. This whole thing goes to the Fourth Deck." He was referring to the floor in the Pentagon where Rumsfeld and Cambone have their offices.

"It's a finesse to give power to Rumsfeld-giving him the right to act swiftly, decisively, and lethally," the first Pentagon adviser told me. "It's a global free-fire zone."

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The Pentagon has tried to work around the limits on covert activities before. In the early nineteen-eighties, a covert Army unit was set up and authorized to operate overseas with minimal oversight. The results were disastrous. The Special Operations program was initially known as Intelligence Support Activity, or I.S.A., and was administered from a base near Washington (as was, later, Gray Fox). It was established soon after the failed rescue, in April, 1980, of the American hostages in Iran, who were being held by revolutionary students after the Islamic overthrow of the Shah's regime. At first, the unit was kept secret from many of the senior generals and civilian leaders in the Pentagon, as well as from many members of Congress. It was eventually deployed in the Reagan Administration's war against the Sandinista government, in Nicaragua. It was heavily committed to supporting the Contras. By the mid-eighties, however, the I.S.A.'s operations had been curtailed, and several of its senior officers were court-martialed following a series of financial scandals, some involving arms deals. The affair was known as "the Yellow Fruit scandal," after the code name given to one of the I.S.A.'s cover organizations-and in many ways the group's procedures laid the groundwork for the Iran-Contra scandal.

Despite the controversy surrounding Yellow Fruit, the I.S.A. was kept intact as an undercover unit by the Army. "But we put so many restrictions on it," the second Pentagon adviser said. "In I.S.A., if you wanted to travel fifty miles you had to get a special order. And there were certain areas, such as Lebanon, where they could not go." The adviser acknowledged that the current operations are similar to those two decades earlier, with similar risks-and, as he saw it, similar reasons for taking the risks. "What drove them then, in terms of Yellow Fruit, was that they had no intelligence on Iran," the adviser told me. "They had no knowledge of Tehran and no people on the ground who could prepare the battle space."

Rumsfeld's decision to revive this approach stemmed, once again, from a failure of intelligence in the Middle East, the adviser said. The Administration believed that the C.I.A. was unable, or unwilling, to provide the military with the information it needed to effectively challenge stateless terrorism. "One of the big challenges was that we didn't have Humint"-human intelligence-"collection capabilities in areas where terrorists existed," the adviser told me. "Because the C.I.A. claimed to have such a hold on Humint, the way to get around them, rather than take them on, was to claim that the agency didn't do Humint to support Special Forces operations overseas. The C.I.A. fought it." Referring to Rumsfeld's new authority for covert operations, the first Pentagon adviser told me, "It's not empowering military intelligence. It's emasculating the C.I.A."

A former senior C.I.A. officer depicted the agency's eclipse as predictable. "For years, the agency bent over backward to integrate and coordinate with the Pentagon," the former officer said. "We just caved and caved and got what we deserved. It is a fact of life today that the Pentagon is a five-hundred-pound gorilla and the C.I.A. director is a chimpanzee."

There was pressure from the White House, too. A former C.I.A. clandestine-services officer told me that, in the months after the resignation of the agency's director George Tenet, in June, 2004, the White House began "coming down critically" on analysts in the C.I.A.'s Directorate of Intelligence (D.I.) and demanded "to see more support for the Administration's political position." Porter Goss, Tenet's successor, engaged in what the recently retired C.I.A. official described as a "political purge" in the D.I. Among the targets were a few senior analysts who were known to write dissenting papers that had been forwarded to the White House. The recently retired C.I.A. official said, "The White House carefully reviewed the political analyses of the D.I. so they could sort out the apostates from the true believers." Some senior analysts in the D.I. have turned in their resignations-quietly, and without revealing the extent of the disarray.


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The White House solidified its control over intelligence last month, when it forced last-minute changes in the intelligence-reform bill. The legislation, based substantially on recommendations of the 9/11 Commission, originally gave broad powers, including authority over intelligence spending, to a new national-intelligence director. (The Pentagon controls roughly eighty per cent of the intelligence budget.) A reform bill passed in the Senate by a vote of 96-2. Before the House voted, however, Bush, Cheney, and Rumsfeld balked. The White House publicly supported the legislation, but House Speaker Dennis Hastert refused to bring a House version of the bill to the floor for a vote-ostensibly in defiance of the President, though it was widely understood in Congress that Hastert had been delegated to stall the bill. After intense White House and Pentagon lobbying, the legislation was rewritten. The bill that Congress approved sharply reduced the new director's power, in the name of permitting the Secretary of Defense to maintain his "statutory responsibilities." Fred Kaplan, in the online magazine Slate, described the real issues behind Hastert's action, quoting a congressional aide who expressed amazement as White House lobbyists bashed the Senate bill and came up "with all sorts of ludicrous reasons why it was unacceptable."

"Rummy's plan was to get a compromise in the bill in which the Pentagon keeps its marbles and the C.I.A. loses theirs," the former high-level intelligence official told me. "Then all the pieces of the puzzle fall in place. He gets authority for covert action that is not attributable, the ability to directly task national-intelligence assets"-including the many intelligence satellites that constantly orbit the world.

"Rumsfeld will no longer have to refer anything through the government's intelligence wringer," the former official went on. "The intelligence system was designed to put competing agencies in competition. What's missing will be the dynamic tension that insures everyone's priorities-in the C.I.A., the D.O.D., the F.B.I., and even the Department of Homeland Security-are discussed. The most insidious implication of the new system is that Rumsfeld no longer has to tell people what he's doing so they can ask, 'Why are you doing this?' or 'What are your priorities?' Now he can keep all of the mattress mice out of it."

Source:
http://www.newyorker.com/fact/content/?050124fa_fact


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Sunday, January 16, 2005

The Big Picture Re: Dollar's Value and China

Part 1
The world's biggest-ever Ponzi-scheme Confidence racket re:

Value of US Dollar
By Andre Gunder Frank

"Uncle Sam's power rests on two pillars only, the paper dollar and the Pentagon. Each supports the other, but the vulnerability of each is also an Achilles' heel that threatens the viability of the other." .....to compensate for less bread and civil rights at home, an even more patriotic, nay chauvinist, circus at the cost of others abroad is the real danger of the current policies to "defend freedom and civilization".

Part 2
This is the Chinese Century

by William Rees-Mogg

"If one measures world trade, the United States and China together account for half of the growth. That certainly makes the United States and China the engines of growth for the whole world economy." "Yet China's economy is growing at twice the rate of America's."

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Part I - Global Ponzi Scheme depends on confidence in US dollar monetary value


Why the emperor has no clothes
By Andre Gunder Frank

Uncle Sam has reneged and defaulted on up to 40% of its trillion-dollar foreign debt, and nobody has said a word except for a line in The Economist. In plain English that means Uncle Sam runs a worldwide confidence racket with his self-made dollar based on the confidence that he has elicited and received from others around the world, and he is a also a deadbeat in that he does not honor and return the money he has received.

How much of our dollar stake we have lost depends on how much we originally paid for it. Uncle Sam let his dollar fall, or rather through his deliberate political economic policies drove it down, by 40%, from 80 cents to the euro to 133 cents. The dollar is down by a similar factor against the yen, yuan and other currencies. And it is still declining, indeed is apt to plummet altogether.

There was also a spate of competitive devaluations in the 1930s, called the "beggar thy neighbor policy" of shifting the costs for the neighbors to bear. True, as the dollar has declined, so has the real value that foreigners pay to service their debt to Uncle Sam. But that works only if they can themselves earn in currencies that have increased in value against the dollar. Otherwise, foreigners earn and pay in the same devalued dollars, and even then with some loss from devaluation between the time they got their dollars and the time they repay them to Uncle Sam. China and other East Asian nations do earn in dollars, to which they have pegged their currencies, so they have already lost a substantial portion of their dollar stake, by far the world's largest.

And they, like all others, will also lose the rest. For Uncle Sam's debt to the rest of the world already amounts to more than a third of his annual domestic production and is still growing. That alone already makes his debt economically and politically never repayable, even if he wanted to, which he does not. Uncle Sam's domestic, eg credit-card, debt is almost 100% of gross domestic product (GDP) and consumption, including that from China. Uncle Sam's federal debt is now US$7.5 trillion, of which all but $1 trillion was built up in the past three decades, the last $2 trillion in the past eight years, and the last $1 trillion in the past two years. Alas, that costs more than $300 billion a year in interest, compared with, for example, the $15 billion spent annually on the National Aeronautics and Space Administration (NASA). But no worries: Congress just raised the debt ceiling to $8.2 trillion. To help us visualize, $1 trillion tightly packed up in $1,000 bills would match! a building 40 stories high.

But nearly half is owed to foreigners. All Uncle Sam's debt, including private household consumer credit-card, mortgage etc debt of about $10 trillion, plus corporate and financial, with options, derivatives and the like, and state and local government debt comes to an unvisualizable, indeed unimaginable, $37 trillion, which is nearly four times Uncle Sam's GDP. Only some of that can be managed domestically, but with dangerous limitations for Uncle Sam noted below. That is only one reason I want you to meet Uncle Sam, the deadbeat confidence man, who may remind you of the film Meet Joe Black; for as we get to know him better below, we will find that he is also a Shylock, and a corrupt one at that.

The United States is the world's most privileged nation for having the monopoly privilege of printing the world's reserve currency at will and at a cost of nothing but the paper and ink it is printed on. Moreover, by doing so, Uncle Sam can export abroad the inflation he generates by the extra dollars he prints, of which there are already at least three times as many floating around the world as at Uncle Sam's home.

Additionally, his is also the only country whose "foreign" debt is mostly denominated in his own world-currency dollars that he can print at will; while most foreigners' debt is also denominated in the same dollar, but they have to buy it from Uncle Sam with their own currency and real goods. So he simply pays the Chinese and others in essence with these dollars that already to begin with have no real worth beyond their paper and ink. So especially poor China gives away for nothing at all to rich Uncle Sam hundreds of billions of dollars' worth of real goods produced at home and consumed by Uncle Sam. Then China turns around and trades these same paper dollar bills in for more of Uncle Sam's paper called Treasury Certificate bonds, which are even more worthless, except that they pay a percent of interest. For as we already noted, they will never be able to be cashed in and redeemed in full or even in part, and anyway have lost much of their value to Uncle Sam already.

In an earlier essay, I argued that Uncle Sam's power rests on two pillars only, the paper dollar and the Pentagon.

Each supports the other, but the vulnerability of each is also an Achilles' heel that threatens the viability of the other. Since then, Iraq, not to mention Afghanistan, has shown confidence in the Pentagon not to be what it was cracked up to be; and with the in-part-consequent decline in the dollar, so has confidence in it and Uncle Sam's ability to use it to finance his Pentagon's foreign adventures (See Coup d'Etat and Paper Tiger in Washington, Fiery Dragon in the Pacific, which also conjures up the productive growth of China). Additionally we must realize that Uncle Sam's numbers above and below are also all literally relative. So far relations with other countries, in particular with China, still favor Uncle Sam, but they also help maintain an image that is deceptive.

Consider the following: A $2 toy leaving a US-owned factory in China is a $3 shipment arriving at San Diego. By the time a US consumer buys it for $10 at Wal-Mart, the US economy registers $10 in final sales, less $3 import cost, for a $7 addition to the US GDP. (Blaming 'undervalued' yuan wins votes , Asia Times Online, February 26, 2004)

Moreover, ever-clever Uncle Sam has arranged matters so as to earn 9% from his economic and financial holdings abroad, while foreigners earn only 3% on theirs, and among them on their Treasury Certificates only 1% real return. Note that this difference of 6 percentage points is already double what Uncle Sam pays out, and his total 9% take is triple the 3% he gives back. Therefore, although foreign holdings and Uncle Sam's are now about equal, Uncle Sam is still the big net interested winner, just like any Shylock, but no other ever did so grand a business.

But Uncle Sam also earns quite well, thank you, from other holdings abroad, eg from service payments by mostly poor foreign debtors. The sums involved are not peanuts or even small potatoes. For from his direct investments in foreign property alone, Uncle Sam's profits now equal 50%, and including his receipts from other holdings abroad now are a full 100% of profits derived from all of his own domestic activities combined. These foreign receipts add more than 4% to Uncle Sam's national domestic product. That helps nicely to compensate for the failure of domestic profits as yet to recover even their 1972 level, because Uncle Sam has failed to boost productivity sufficiently at home.

The productivity hype of president Bill Clinton's "new economy" in the 1990s was limited to computers and information technology (IT), and even that proved to be a sham when the dot-com bubble burst. Also, not only the apparent increase in "profits" but also that of "productivity" were, at the bottom, on the backs of shop-floor, office and sales-floor workers working harder and longer hours and, at the top, the result of innovative accounting shams by Enron and the like. Such factors still compensate for and permit much of Uncle Sam's $600-billion-and-still-rising trade deficit from excess home consumption over what he himself produces. That is what has resulted in the multi trillion-dollar debt. Exactly how large that debt is Uncle Sam is reluctant to reveal, but what is sure is that it is by far the world's largest, even as net debt to foreigners, after their debt to him is deducted.

How has all this come about? The simple answer is that Uncle Sam, who is increasingly hooked on consumption, not to mention harder drugs, saves no more than 0.2% of his own income. The Federal Reserve's guru and now you see it, now you don't doctor of magic, Alan Greenspan, recently observed that this is so because the richest 20% of Americans, who are the only ones who do save, have reduced their savings to 2%. Yet even these measly savings (other, poorer countries save and even invest 20%, 30%, even 40% of their income) are more than counterbalanced by the 6% deficit spending of the government. That is what brings the average saving rate to 0.2%.

To maintain that $400-plus-billion budget deficit (more than 3% of national domestic product), which is really more the $600 billion if we count, as we should, the more than $200 billion Uncle Sam "borrows" from the temporary surplus in his own Federal Social Security fund, which he is also bankrupting. (But never mind, President George W Bush just promised to privatize much of that and let people buy their own old-age "security" in the ever-insecure market).So with this $600-billion-plus budget deficit and the above-mentioned related $600-billion-plus deficit, rich Uncle Sam, and primarily his highest earners and biggest consumers, as well as of course the Big Uncle himself, live off the fat of the rest of the world's land.

Uncle Sam absorbs the savings of others who themselves are often much poorer, particularly when their central banks put many of their reserves in world-currency dollars and hence into the hands of Uncle Sam in Washington, and some also in dollars at home. Their private investors send dollars to or buy dollar assets on Wall Street, all with the confidence that they are putting their wherewithal in the world's safest haven (and that, of course, is part of the above-mentioned confidence racket).

From the central banks alone, we are looking at yearly sums of more than $100 billion from Europe, more than $100 billion from poor China, $140 billion from super-saver Japan, and many 10s of billions from many others a! round the globe, including the Third World. But in addition, Uncle Sam obliges them, through the good offices of their own states, to send their thus literally forced savings to Uncle Sam as well in the form of their "service" of their predominantly dollar debt to him.

His treasury secretary and his International Monetary Fund (IMF) handmaiden blithely continue to strut around the world insisting that the Third - and ex-Second, now also Third - World of course continue to service their foreign debts, especially to him. No matter that with interest rates multiplied several times over by Uncle Sam himself after the Fed's Paul Volcker's coup in October 1979, most have already paid off their original borrowings three to five times over. For to pay at all at interest rates that Volcker boosted to 20%, they had to borrow still more at still higher rates until thereby their outstanding foreign debt doubled and tripled, not to mention their domestic debt from which part of the foreign payments were raised, particularly in Brazil. Privatization is the name of the game there and elsewhere, except for the debt. The debt was socialized after it had been incurred mostly by private business, but only the state had enough power to squeeze the greatest bulk of back payments out of the hides of its poor and middle-class people and transfer them as "invisible service payments" to Uncle Sam.

When Mexicans were told to tighten their belts still further, they answered that they couldn't because they had already had to eat their belts. Only Argentina and for a while Russia declared an effective moratorium on debt "service", and that only after political economic policies had destroyed their societies, thanks to Uncle Sam's advisers and his IMF strong arm. Since then, Uncle Sam himself has been blithely defaulting on his own foreign debt, as he already had several times before in the 19th century.

Speaking of that, it may be well to recall at least two pieces of advice from that time: Lord Cromer, who administered Egypt for then-dominant British imperial interests, said his most important instrument for doing so was Egypt's debts to Britain. These had just multiplied when Egypt was obliged to sell its Suez Canal shares to Britain in order to pay off earlier debts and British prime minister Benjamin Disraeli explained and justified his purchase of the same on the grounds that it would strengthen British imperial interests.

Today, that is called "debt-for-equity swaps", which is one of Uncle Sam's latter-day favorite policies to use the debt to acquire profitable and/or strategically important real resources, as of course also was the canal as the way to the jewel of the British Empire, India.

Another piece of practical advice came from the premier military strategist Carl von Clausewitz: make the lands you conquer pay for their own conquest and administration. That is of course exactly what Britain did in and with India through the infamous "Home Charges" remitted to London in payment for Britain administering India, which even the British themselves recognized as "tribute" and responsible for much of "The Drain" from India to Britain. How much more efficient yet to let foreign countries' own states administer themselves but by rules set and imposed by Uncle Sam's IMF and then effect a drain of debt service anyway.

Actually, the British therein also set the 19th-century precedent of relying on the "imperialism of free trade" with "independent" states as far and as long as possible, using gunboat diplomacy to make it work (which Uncle Sam had already learned to copy by early in the 20th century); and if that was not enough, simply to invade, and if necessary to occupy - and then rely on the Clausewitz rule. We shall note several recent instances thereof, and especially the Iraqi one, in the second article in this series.

Last but not least, oil producers also put their savings in Uncle Sam. With the "shock" of oil that restored its real price after the dollar valuation had fallen in 1973, ever-cleverer-by-half Henry Kissinger made a deal with the world's largest oil exporter, Saudi Arabia, that it would continue to price oil in dollars, and these earnings would be deposited with Uncle Sam and partly compensated by military hardware. That deal de facto extended to all of the Organization of Petroleum Exporting Countries (OPEC) and still stands, except that before the war against Iraq that country suddenly opted out by switching to pricing its oil in euros, and Iran threatened do the same.

North Korea, the third member of the "axis of evil", has no oil but trades entirely in euros. (Venezuela is a major oil supplier to Uncle Sam and also supplies some at preferential rates as non-dollar trade swaps to poor countries such as Cuba. So Uncle Sam sponsored and financed military commandos from its Plan Colombia next door, promoted an illegal coup and, when that failed, pushed a referendum in his attempt at yet another "regime change"; and now along with Brazil all three are being baptized as yet another "axis of evil").

To return to the main issue and call a spade a huge spade, all of the above is part and parcel of the world's biggest-ever Ponzi-scheme confidence racket. Like all others, its most essential characteristic is that it can only continue to pay off dollars and be maintained at the top as long as it continues to receive new dollars at the bottom, voluntarily through confidence if possible and by force if not. (Of course, the Clausewitz and Cromer formulas result in the poorest paying the most, since they are also the most defenseless: so that the ones sitting on/above them pass much of the cost and pain down to them.)What if confidence in the dollar runs out? Things are already getting shakier in the House of Uncle Sam.

The declining dollar reduces the necessary dollar inflows, so Greenspan needs to raise interest rates to maintain some attraction for the foreign dollars he needs to fill the trade gap. As a quid pro quo for being reappointed by President George W Bush, he promised to do that only after the election. That time has now arrived, but doing so threatens to collapse the housing bubble that was built on low interest and mortgage - and remortgage - rates.

But it is in their house values that most Americans have their savings, if they have any at all. They and this imaginary wealth effect supported over-consumption and the nearly as-high-as-GDP household debt, and a collapse of the housing price bubble with increased interest and mortgage rates would not only drastically undercut house prices, it would thereby have a domino effect on their owners' enormous second and third remortgages and credit-card and other debt, their consumption, corporate debt and profit, and investment. In fact, these factors would be enough to plummet Uncle Sam into a deep recession, if not depression, and another Big Bear deflation on stock and de facto on other prices, rendering debt service even more onerous. (If the dollar declines, even domestic price inflation is de facto deflationary against other currencies, which Russians and Latin Americans discovered to their peril, and which we observe below.)

Still lower real US investment would reduce its industrial productivity and competitiveness even more - probably to a degree lower than can compensated for by further devaluing the dollar and making US exports cheaper, as is the confident hope of many, probably including the good Doctor. Until now, the apparent inflation of prices abroad in rubles and pesos and their consequent devaluations have been a de facto deflation in terms of the dollar world currency. Uncle Sam then printed dollars to buy up at bargain-basement fire-sale prices natural resources in Russia (whose economy was then run on $100 bills), and companies and even banks, as in South Korea. True, now Greenspan and Uncle Sam are trying again to get other central banks to raise their own interest rates and otherwise plunge their own people into even deeper depression.

But even if he can, thereby also canceling out the relative attractiveness of his own interest-rate hike, how could that save Uncle Sam? What remains the great unknown and perhaps still unknowable is how a more wounded, Ponzi-less Uncle Sam would react with more "Patriotic" acts at home and abroad with the weapons - including the now almost ready "small" nukes - he would still have, even if his foreign victims no longer paid for new ones. So, to compensate for less bread and civil rights at home, an even more patriotic, nay chauvinist, circus at the cost of others abroad is the real danger of the current policies to "defend freedom and civilization".

So, far beyond Osama bin Laden, al-Qaeda and all the terrorists put together, the greatest real-world threat to Uncle Sam is that the inflow of dollars dries up. For instance, foreign central banks and private investors (it is said that "overseas Chinese" have a tidy trillion dollars) could any day decide to place more of their money elsewhere than in the declining dollar and abandon poor ol' Uncle Sam to his destiny. China could double its per capita income very quickly if it made real investments at home instead of financial ones with Uncle Sam. Central banks, European and others, can now put their reserves in (rising!) euros or even soon-to-be-revalued Chinese yuan.

Not so far down the road, there may be an East Asian currency, eg a basket first of ASEAN + 3 (China, Japan, South Korea) - and then + 4 (India). While India's total exports in the past five years rose by 73%, those to the Association of Southeast Asian Nations (ASEAN) rose at double that rate and sixfold to China. India has become an ASEAN summit partner, and its ambitions stretch still further to an economic zone stretching from India to Japan.

Not for nothing, in the 1997 East Asian currency and then full economic crisis, Uncle Sam strong-armed Japan not to start a proposed East Asian currency fund that would have prevented at least the worst of the crisis. Uncle Sam then benefited from it by buying devalued East Asian currencies and using them to buy up East Asian real resources, and in South Korea also banks, at bargain-basement reduced-price fire sales. But now, China is already taking steps toward such an arrangement, only on a much grander financial and now also economic scale.

A day after writing the above, I read in The Economist (December 11-17, 2004) a report on the previous week's summit meeting of ASEAN + 3 in Malaysia. That country's prime minister announced that this summit should lay the groundwork for an East Asian Community (EAC) that "should build a free-trade area, cooperate on finance, and sign a security pact ... that would transform East Asia into a cohesive economic block ... In fact, some of these schemes are already in motion ... China, as the region's pre-eminent economic and military power, will doubtless dominate ... and host the second East Asia Summit." The report went on to recall that in 1990, Uncle Sam shot down a similar initiative for fear of losing influence in the region.

Now it is a case of "Yankee Stay Home".

Or what if, long before that comes to pass, exporters of oil simply cease to price it in ever-devaluing dollars, and instead make a mint by switching to the rising euro and/or a basket of East Asian currencies?

That would at one stroke vastly diminish the world demand for and price of dollars by obliging anyone who wants to buy oil to purchase and increase the demand price of the euro or yen/yuan instead of the dollar.

That would crash the dollar and tumble Uncle Sam in one fell swoop, as foreign - and even domestic - owners of dollars would sell off as many of them as fast as they could, and other countries' central banks would switch their reserves out of dollars and away from Uncle Sam's no-longer-safe haven.

That would drive the dollar down even more, and of course halt any more dollar inflow to Uncle Sam from the foreigners who have been financing his consumption spree. Since selling oil for falling dollars instead of rising euros is evidently bad business, the world's largest oil exporters in Russia and OPEC have been considering doing just that.

In the meantime, they have only raised the dollar price of oil, so that in euro terms it has remained approximately stable since 2000. So far, many oil exporters and others still place their increased amount of dollars with Uncle Sam, even though he now offers an ever less attractive and less safe haven, but Russia is now buying more euros with some of its dollars.

So also many countries' central banks have begun to put ever more of their reserves into the euro and currencies other than Uncle Sam's dollar.

Now even the Central Bank of China, the greatest friend of Uncle Sam in need, has begun to buy some euros. China itself has also begun to use some of its dollars - as long as they are still accepted by them - to buy real goods from other Asians and thousands of tons of iron ore and steel from Brazil, etc. (Brazil's president recently took a huge business delegation to China, and a Chinese one just went to Argentina. They are going after South African minerals too.)So what will happen to the rich on top of Uncle Sam's Ponzi scheme when the confidence of poorer central banks and oil exporters in the middle runs out, and the more destitute around the world, confident or not, can no longer make their in-payments at the bottom?

The Uncle Sam Ponzi Scheme Confidence Racket would - or will? - come crashing down, like all other such schemes before, only this time with a worldwide bang. It would cut the present US consumer demand down to realistic size and hurt many exporters and producers elsewhere in the world. In fact, it may involve a wholesale fundamental reorganization of the world political economy now run by Uncle Sam.
(Copyright 2005 Asia Times Online Ltd.)

"An even weaker dollar is a strong possibility"

This Can't Go On Forever - So It Won't

By Joseph Stiglitz
Thu, 6 Jan 2005
The Guardian U.K. S

Joseph Stiglitz is professor of economics at Columbia University and a Nobel prize winner. (He is also a former Finance Director of the World Bank - Editor) Global economic forecasters tend to be upbeat. But not this year.

The beginning of each year is high season for economic forecasters. With few exceptions, Wall Street economists try to give as upbeat an interpretation as the data will allow: gloom-and-doom forecasts do little to sell stocks. But even the salesmen are predicting a weaker American economy in 2005 than in 2004. The biggest global economic uncertainty is the price of oil. Oil producers failed to anticipate the growth of demand in China.

Supply side problems in the Middle East (and Nigeria, Russia, and Venezuela) are also playing a role, while George Bush's misadventure in Iraq has brought further instability. High oil prices are a drain on America, Europe, Japan, and other oil-importing countries. America's oil-import bill over the past year alone is estimated to have risen by around $75bn. If there were any assurance that prices would remain permanently above even $40 a barrel, alternative energy sources would be developed. But we are now in the worst of all worlds - prices so high that they damage the global economy, but uncertainty so severe that the investments needed to bring prices down are not being made.

Meanwhile, the world's central bankers have been trained to focus exclusively on inflation. Many will recall how oil-price increases in the 1970s fueled rapid inflation, and will want to show their resolve not to let it happen again. Interest rates will rise, and one economy after another will slow. The march towards higher interest rates has already begun in the U.S. and elsewhere. For the past three years, falling interest rates have been the engine of growth, as households took on more debt to refinance their mortgages and used some of the savings to consume. Central bankers are hoping that this will not play out in reverse - that higher interest rates will not dampen consumption. Hope may not be enough. House prices could well decline; at the very least, the rate of increase is likely to slow down. This is only one of the uncertainties facing the U.S. economy. Clearly, some of the growth in 2004 was due to provisions that encouraged investment in that year - when it mattered for U.S. electoral politics - at the expense of 2005.

Then there are America's huge fiscal and trade deficits, which jeopardize future American generations' well being, and represent a drag on the current U.S. economy. As one of my predecessors as chair of the Council of Economic Advisers, Herb Stein, famously put it: "If something can't go on forever, it won't." But no one knows how, or when, it will all end. Indeed, President Bush 's election promises include partial privatization of social security and making his earlier tax cuts permanent, which, if adopted, will send the deficits soaring to record levels.

What, exactly, this will do to business confidence and currency markets is anybody's guess, but it won't be pretty. As a result, an even weaker dollar is a strong possibility, which will further undermine the European and Japanese economies. Moreover, America's gains will not balance Europe's losses: the uncertainty is bad for investment on both sides of the Atlantic. Europe, for its part, is finally beginning to recognize the problems with its macro-economic institutions, particularly a stability pact that restricts the use of fiscal policy and a central bank that focuses only on inflation, not on jobs or growth. But there is a good chance that institutional reforms will not come fast enough to lift the economy in 2005. China - and Asia more generally - represents the bright spot on the horizon.

It may be too soon to be sure, but prospects for taming the excessive exuberance of a year ago appear good, bringing economic growth rates to sustainable levels that would be the envy of most other countries. By contrast, the world's other major economies will probably not begin performing up to potential in the next 12 months. They are all caught between the problems of the present and the mistakes of the past: in Europe, between institutions designed to avoid inflation when the problem is growth and employment; in America, between massive household and government debt and the demands of fiscal and monetary policy; and everywhere, between America's failure to use the world's scarce natural resources wisely and its failure to achieve peace and stability in the Middle East.

Joseph Stiglitz is professor of economics at Columbia University, a Nobel prize winner, and a former Finance Director of the World Bank.


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Part 2

This is the Chinese Century
by William Rees-Mogg
6 Jan 2005

America may believe it is still at the heart of events, but the future is being shaped on the margins.

THE 18TH and 19th centuries were the British centuries, in which industrial, political and imperial development in Britain shaped the world. The 20th century was the American century; the United States changed the world, providing a margin of victory in two world wars, and developing all the major new technologies: telephones, automobiles, television, jet aircraft, the internet and so on. We all assume, as Washington undoubtedly assumes, that we are still living in the era of American hegemony, though it is already clear that China may be an emerging superpower.

I think that we may be missing an idea familiar to economists, which was developed in the second half of the 19th century. That idea is "marginalism". It is one of those concepts universally accepted by professionals, but little understood outside. All that the "marginalist revolution" really amounted to was the recognition that economic change is determined by what happens at the margin of transaction. The extra apple sets the price for all apples; if there is one apple short, all apples cost more; one surplus, and they all cost less.

The most popular explanation is Mr Micawber's: "Annual income £20, annual expenditure £19 19s 6d, result happiness. Annual income £20, annual expenditure £20 0s 6d, result misery." Mr Micawber was an economist of the marginalist school. Clearly, the United States is still by far the largest and most powerful economy on earth, with the most powerful defense technology. Yet it is China, not the United States, that is changing the global economy.

As a producer, an exporter and as an importer, the growth of the Chinese economy is changing the marginal levels of global supply and demand. Over the weekend I was reading many forecasts by eminent economists of the world economy in 2005. I was also listening to similar forecasts on television, including CCTV International, the Chinese 24-hour news service. The unanimity was astonishing, as one buzzed from channel to channel, subject to subject, and economist to economist.

What is the prospect for the dollar? That depends on China.
The euro? China.
The oil price? China.
Industrial commodities? China.
Global equity markets? China.
Bond prices? China.
World trade? China.
World growth? China.


In each case, forecast was not based on the absolute size of the Chinese economy, which is still much smaller than that of the United States. The forecasters, looking at their different markets, were all convinced that marginal changes attributable to China would be the decisive factor. That and low Chinese costs.

Some of the figures I found quite unexpected. In the past two years the growth of Japanese exports to China has accounted for 80 per cent of the growth in the Japanese economy. If one measures world trade, the United States and China together account for half of the growth. That certainly makes the United States and China the engines of growth for the whole world economy; by comparison, Europe is a miserable slowcoach. Yet China's economy is growing at twice the rate of America's. In the past 30 years the whole Asian economy has averaged growth which was 3 per cent higher than the rest of the world. China is outperforming the rest of Asia.

On Saturday all the quotas on textile imports were lifted by the World Trade Organisation. This will be an extraordinary opportunity for Chinese textile and clothing manufacturers. Their current share of the US market is about 17 per cent; that is expected to rise to 50 per cent. China's share of the European Union market is expected to rise from 18 to 30 per cent. We already buy Chinese toys; we shall soon all be wearing Chinese clothes. Yet China is not content to remain as a producer of low or middle-technology goods. As the purchase of IBM's personal computer division shows, China is equally a competitor in areas of advanced technology. China has an educational system designed to produce scientists and technologists for the 21st century. Except at the very highest university level, Chinese scientific education has outpaced that of Britain.

China is not only a highly successful exporter, but has also become a very large-scale importer, both of oil and raw materials and of goods from other Asian countries. In Asia, China is a net importer, not only from Japan, but also from other neighboring Asian countries. Japan also has the benefit of being a major investor in the development of Chinese industry.

The big surplus in China's trade is with the United States, and the surplus in trade with Europe is expected to grow. In 2008 the next Olympic Games will be held in Beijing. That will be a celebration of the development of China both as an economic power and as a major power in international affairs. There is, inevitably, a long way to go. Deng Xiao Ping's free-market reforms were initiated only in 1978.No less than 60 per cent of the Chinese population still works on the land, at low wages and usually with peasant levels of productivity. Yet that gives an indication of the reserve of manpower that still remains to be brought into the modern economy.

The Chinese economy probably still has another 25 years of high growth ahead of it. Before it reaches full maturity, the Chinese economy will be a multiple of its present size. My own optimism is not only based on the growth of the economy, though that is the outstanding economic growth record of the past two decades. China has also understood the important of domestic and international freedom of trade and the need for the best possible relations with trading partners. With direct material and financial support, China has been one of the large contributors to the relief of the Indian Ocean countries after the tsunami disaster. The economic maturity of the new China has been accompanied by increasing political maturity. That is the best guarantee for the future of what is beginning to look like the Chinese century.

Copyright 2005 Times Newspapers Ltd.

Source:
http://www.atimes.com/atimes/Global_Economy/GA06Dj01.html

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