The world economy

Weaker than it looks

Growth is healthy in America and Britain. But most of the world economy is in trouble

Oct 11th 2014
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FOR the American and British economies it has been a long road out of the woods, but the journey is nearing its end. America’s unemployment rate fell below 6% in September. Britain’s economy, where output was up 3.2% in the year to June, is growing faster than any other big rich country’s. Central bankers are counting the days until they can raise interest rates.

Virtually everywhere else, however, the news is grim and getting grimmer. The euro zone, the world’s second-biggest economic area, seems to be falling from a feeble recovery back into outright recession as Germany hits the skids. Shockingly weak industrial production and export figures mean Germany’s GDP is likely to shrink for the second consecutive quarter—a popular definition of recession. Japan, the world’s third-biggest economy, may also be on the edge of a downturn, because April’s rise in the consumption tax is hurting spending more than expected. Russia’s and Brazil’s economies are stagnant, at best. Even in China, still growing at a suspiciously smooth 7.5% a year, there are worries about a property bust, a credit bubble and a fall in productivity.

Such a lopsided world economy is unlikely to be stable. Either the weakness outside the Anglo-Saxon world proves temporary, or it will spook financial markets and darken the outlook everywhere. The conventional view is that global growth will strengthen in 2015 as America’s surge buoys other places, and as the recent weakness elsewhere proves temporary. The IMF reckons global growth will rise to 3.8% next year. This newspaper, however, is more worried on two counts. First, today’s weakness, especially in the euro area, could last longer than investors expect; and second, the lopsided growth could itself fuel destabilising shifts, particularly in the dollar.

Fearing the wurst
 
The euro area is in a far bigger mess than the headline figures suggest because its growth has long been flattered by Germany. Italy has been in recession for two years; France’s economy has been stagnant for months. Now that Germany is in trouble, the chances of a Japan-style deflationary spiral have risen sharply. German policymakers remain pigheadedly opposed to the stimulus the euro area needs. Even as their own economy has stalled, they are determined to balance the budget in 2015.

They want to force France to cut its deficit, they show little interest in a euro-wide investment scheme, and their opposition explains why the ECB is going so slowly with a bond-buying scheme to address deflation. The quantitative easing that markets expect is months off, if it happens at all.

The euro zone’s prospects are grimmest, but other weaklings are also a long way off recovery. In Japan, for instance, the economy is due to get clobbered by another rise in the consumption tax in October 2015. And with commodity prices falling and China slowing, it is hard to see how other emerging economies will accelerate, even if America is growing.

Optimists see the stronger dollar as a simple means to export America’s recovery elsewhere; but that too is more complicated than it first looks. The greenback is certainly on the rise, fuelled by faster growth and the prospects of tighter monetary policy from the Fed. On a trade-weighted basis, it is up 6.3% since July, and is at a six-year high against the yen and two-year high against the euro (see article). It looks likely to go higher: dollar surges tend to stretch over several years.

This should be good news for the weaklings: their exporters will get more competitive, while pricier imports will ward off deflation. But it could also bring risks. Currencies have a tendency to overshoot. Firms and governments that have borrowed in dollars in recent years will have to pay more. Dollar borrowing by emerging-market firms has risen dramatically since 2008, to an estimated 70% of total bond issuance. And the temporary boost from a cheaper currency could provide the likes of France, Italy and Brazil (and increasingly Germany) yet another excuse to put off structural reform.

The prescription for the weaklings is simple: heal thyself. Rather than waiting for America to solve their problems, the laggards should treat the recent spate of bad news as a wake-up call. The ECB should start bond-buying forthwith. The Japanese government should delay the rise in the consumption tax until the economy recovers. Countries that can afford it, notably Germany, should invest in infrastructure. And even America and Britain should be wary, especially over tightening monetary policy too quickly. There is a lot that can go wrong—and they don’t want to be dragged back into those woods again.


Dam breaks in Europe as deflation fears wash over ECB rhetoric

'We are reaching the end game in Europe. If they don’t launch real QE soon, the consequences are too awful to contemplate,' warns RBS

By Ambrose Evans-Pritchard, International Business Editor

4:55PM BST 10 Oct 2014

The ECB's chosen gauge of inflation expectations has fallen to a dangerous new low
The ECB's chosen gauge of inflation expectations has fallen to a dangerous new low Photo: EPA


A key gauge of deflation risk in Europe is flashing red, dropping to record lows on fears of fresh recession and lack of decisive action by the European Central Bank.
 

The sudden lurch downwards came as Bank of America warned that France’s debt ratio could rocket to 120pc of GDP within five years, unless the EU authorities take radical steps to reflate the region’s economy. Italy’s debt could threaten 150pc even earlier.
 
The 5-year/5-year forward swap rate monitored closely by traders plummeted beneath 1.77pc on Friday morning as a global growth scare drove European stock markets to a 12-month low.

“This rate is the most important market signal on the planet right now. Everybody is watching the chart, and it has just gone off a cliff,” said Andrew Roberts, credit chief at RBS.
 



Bond markets echoed the refrain, with yields on 10-year German Bunds falling to an all-time low of 0.88pc on flight to safety, though the bond rally can also be seen as a bet by traders that the ECB will soon be forced to launch full-blown quantitative easing.
 
Mario Draghi, the ECB’s president, has adopted the 5Y/5Y rate as the bank’s policy lodestar, used to distill expectations of future inflation. Any fall below 2pc is deemed a risk that expectations are becoming “unhinged” and could lead to a Japanese-style deflation trap.
 
Mr Roberts said the ECB’s plan for asset purchases - or “QE-lite” - does not yet add up to a coherent strategy. “We don’t think they can boost their balance sheet by more than €165bn over the next two years by buying asset-backed securities (ABS) and covered bonds together, given the haircut effects. The sums are trivial,” he said.
 
RBS estimates that the inflation rate has already dropped to below 0.1pc in the eurozone if one-off tax rises and fees are stripped out, and this measure may turn negative in October. “Deflation is already knocking on the door. We think it could happen as soon as next month given the latest fall in food prices,” said Mr Roberts.
 
“We are reaching the end game in Europe. If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate,” he said.
 
Ruben Segura-Cayuela, from Bank of America, said low inflation has become “the biggest threat to the dynamics of public debt” in the eurozone, warning that debt ratios risk “spiraling up” even at levels of around 0.5pc.
 
France’s debt will keep rising from 93pc to 102pc of GDP by 2016, even in the best of circumstances. It will reach 117pc under a “lowflation scenario”, and 120pc if there is no further fiscal tightening. Spain’s debt will hit 113pc under similar circumstances. “What worries us is that we are not even stress testing for deflation,” he said.





Bank of America said the ECB may have to take far more radical steps, pledging to violate its own 2pc inflation limit deliberately in order to break out of the vicious circle. “A commitment to keep nominal rates low for a long period does not necessarily work, and alone does not guarantee a recovery. The situation in the euro area might require more forceful action, a nominal anchor that implies the central bank committing to overshoot its inflation target,” it said.
 
This is almost impossible to imagine, given the political character of the eurozone. Any such move would breach EU treaty law.
 
It remains far from clear what the ECB intends to do. On Thursday, Mr Draghi vowed “new measures” to head off deflation if necessary, but traders are looking past the rhetoric for hard facts. The ECB’s balance sheet contracted by €10bn last week, falling back to levels of early July. Mr Draghi has yet to flesh out his vague plan to boost it by €1 trillion.
 
The US Federal Reserve, the Bank of Japan and the Bank of England all set clear timetables, spelling out exactly how many bonds they would buy, and the scale has been much larger in proportion to GDP. The ECB has merely given pledges, and these have since been qualified by the Bank of France, and have been openly attacked by the Bundesbank.
 
Germany’s five economic institutes - or Wise Men - said the ECB’s asset purchases will add “hardly any” extra stimulus to the real economy and may be unworkable in any case. They said there are not enough private securities that can plausibly be bought, and noted that a previous scheme to buy €40bn of covered bonds had run into the ground.
 
Analysts are watching German politics just as closely as ECB language. The rise of Germany’s AfD anti-euro party raises the political bar even further for full-fledged QE, and eurosceptics have announced their intention to file cases at the German constitutional court to block asset purchases once they begin.
 
The court has already ruled that the ECB’s backstop measures for Italian and Spanish debt (OMT) “manifestly violate” the EU Treaties and are probably “Ultra Vires”, which prohibits the Bundesbank from taking part. Pending cases on QE would raise questions over whether the Bundesbank might have to step aside on asset purchases.
 
The current circumstances are very different from July 2012, when Mr Draghi had the full political backing of the German finance ministry for his OMT rescue plans. This time he must battle critics across the whole political spectrum in Germany.
 
Giulio Mazzolini and Ashoka Mody, from the Bruegel think tank in Brussels, said the eurozone seems to be tipping into a “debt-deflation cycle” as rising debt and deflation feed off each other, yet the authorities remain paralyzed and still refuse to face up the gravity of the threat. “Even now, ECB officials regard deflation to be unlikely,” they said.


Op-Ed Contributor

Mexico’s Deadly Narco-Politics

By  IOAN GRILLO

OCT. 9, 2014       
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Credit Philipp Dornbierer      
 
 
IGUALA, Mexico — STUDENT protesters in rural Mexico have long dealt with heavy-handed police officers. But on the black night of Sept. 26, students who attended a rural teachers’ college realized they were facing a far worse menace in this southern city. Not only were police officers shooting haphazardly at them, killing three students and several passers-by; shady gunmen were also firing from the sidelines.
 
The next morning, the corpse of a student was dumped on a major street. He’d had his skin peeled off and his eyes gouged out. It was the mark of drug cartel assassins.
 
Soldiers and federal detectives detained two alleged cartel hit men, who confessed they had conspired with the police to murder students. They led troops to pits on the outskirts of Iguala containing 28 charred corpses. Forensic teams are working to identify the bodies. A total of 43 students went missing that night, many last seen being bundled into police cars.

When I went to the grave site on an eerie hill, it still stank of decaying human flesh. I had just been interviewing some of the students’ classmates at their university, mostly teenage sons of poor farmers, who are idealistic, committed and frightened. I have covered cartel violence in Mexico for over a decade. But as I inhaled the stench of death on that hill, and saw photos of the mutilated student on the road, I felt as never before that I was covering an act of pure unadulterated evil.
 
Why drug cartels want to slaughter students may at first seem inexplicable. But it is a symptom of a systematic process that has been taking place in Mexico for years. Drug cartels are taking over chunks of government apparatus, from local police forces to city and state governments.

Sometimes, they control the officials; other times, cartel members themselves are the officials. I call it state capture. A student I talked to had a more visceral term for it: narco-politica, or narco-politics.
 
It’s a terrifying concept. Being ruled by corrupt and self-interested politicians can be bad. But imagine being ruled by sociopathic gangsters. They respond to rowdy students in the only way they understand: with extreme violence designed to cause terror. They stick the mutilated body of a student on public display in the same way they do rival traffickers.
 
The market city lies amid hills of marijuana and opium fields and is the fief of a brutal cell of traffickers who call themselves Guerreros Unidos, or Warriors United. After the discovery of the massacre of the students, federal soldiers took control of the city. Twenty-two police officers were detained for working with the cartel. In a brazen move, the Warriors put up banners calling for the release of the officers.
 
The Iguala police chief is now on the run with an arrest warrant behind him. The Iguala mayor has also fled town as the state moves to impeach him. An intelligence agency report linked him to the Warriors, the Mexican media revealed. His wife has also come into the spotlight. One of her brothers served prison time for trafficking and two others were killed in a gangland shooting, according to the intelligence report. Who knows how high this trail of corruption may lead?
 
The Iguala mayor was a member of the opposition Democratic Revolution Party. But the international attention to this atrocity is also an embarrassment for President Enrique Peña Nieto. Since taking power in 2012, he has been laboring to change Mexico’s violent image, focusing on reforms such as opening up the nation’s energy sector to foreign companies. He has also taken down major drug traffickers, such as Joaquín Guzmán Loera, known as El Chapo, and Nazario Moreno González, also known as El Más Loco. Some observers say Mr. Peña Nieto’s reforms have made this “Mexico’s moment.” But can it really be Mexico’s moment with such barbaric crimes against young people taking place? The president may be reforming Mexico’s laws, but this case highlights the deep problems in the institutions needed to uphold those laws.
 
The students in Iguala had themselves protested against Mr. Peña Nieto’s reforms, as they are opposed to an education law that will evaluate teachers. Most come from poor indigenous communities where many don’t even speak Spanish, and they object to being tested, and someday possibly being fired, for not knowing enough English.
 
The rural teachers’ university the students attend is a longtime center of radicalism, covered in pictures of Che Guevara and Lenin. Their protests can be noisy and anger residents as they blockade roads, holding up traffic, and vandalize buildings. To travel to their marches, they often commandeer commercial buses. They normally return them and the practice is largely tolerated, but the bus companies complain about the disruption of their operations.

About 120 of these students had come to Iguala from their nearby university on Sept. 26 and took three buses from the city station. They were driving the buses out of town when the police officers and cartel gunmen opened fire on them. Some students say they threw stones back, but none of them were armed when the killing spree began.
 
The events that led to such a violent response are still blurry. There are reports that city officials were particularly angry about students disturbing a public event. The large group of boisterous students could be seen by cartel operatives as invading their turf. But whatever the exact mechanics, the frightening specter is of a city controlled by gangsters responding to public disorder with mass murder.
 
The students wanted the buses to travel to an annual demonstration on Oct. 2 in Mexico City. That day commemorates the massacre by soldiers of dozens — or possibly hundreds — of students in the capital’s square of Tlatelolco in the lead-up to the 1968 Olympics. The students in Iguala never made it to mourn the dead of half a century ago. Now Sept. 26 marks a new date of atrocities on Mexico’s calendar. 

 


Currencies

Buck to the future

Is the dollar starting another long-term rally?

Oct 11th 2014
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SUDDENLY the dollar is the currency of the moment. The greenback has risen 6.3% on a trade-weighted basis over the past three months. It recently hit a six-year high against the yen and a two-year high against the euro.

The trend reflects confidence in the prospects for the American economy, combined with worries about the health of the rest of the world. On October 7th the IMF lowered its forecast for global growth in 2014 to 3.3% from the 3.7% it foresaw in April. Some of the biggest reductions were in Europe: it now expects France to grow just 0.4% this year, half a percentage point less than in July.

To confirm the fund’s pessimism, German industrial production fell 4% in August while factory orders dropped by almost 6%; both were the biggest declines in more than five years. In contrast, the latest American data showed a 248,000 jump in jobs in September and a fall in the unemployment rate to 5.9%.

This relatively strong economic performance has reinforced expectations that the Federal Reserve will start to push up interest rates next year while the European Central Bank and the Bank of Japan will keep them low. Higher rates will attract investors to the dollar, particularly those who follow a strategy dubbed the “carry trade”, in which they borrow money in a country with low rates and invest it in a country with higher ones.

The carry trade has been difficult in recent years because nearly all countries in the rich world have held rates close to zero. But there is now a significant carry in the bond markets, where ten-year Treasury bonds yield one-and-a-half percentage points more than German bonds of the same maturity—a very wide gap by historical standards.
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A stronger economy also makes American companies more appealing to international investors. America’s stockmarkets have outperformed their rivals in Europe and Japan this year, even before the strength of the dollar is taken into account. Foreign firms have bid a combined $325 billion for American firms this year. That increases the demand for dollars.

The big question, however, is how long this trend will last. As the chart shows, the latest rebound is small by the standards of the huge rallies in the early 1980s and the late 1990s. A strengthening dollar has its advantages for Americans. Foreign investors will be keener to hold Treasury bonds, making it easier for the government to fund its deficit. American tourists will find their money goes further on foreign trips. Imports will fall in price, keeping inflation down despite the healthy economy.

But there are downsides too. American companies will find that their overseas profits are worth less in dollar terms; around a third of the revenues of S&P 500 companies come from abroad, according to Factset, a data firm. America’s exports will be less competitive, at a time when the country still has a current-account deficit of 2.3% of GDP, despite the boom in shale oil. As a result, a big appreciation of the dollar cuts GDP growth by around half a point over the following year, according to the Fed’s models. (This may mean the Fed is slower to tighten policy than the markets expect, a factor that may eventually limit the dollar’s rise.)

A stronger dollar will have the opposite effect on the European and Japanese economies, making their exports cheaper and pushing up import prices. Policymakers in both areas may welcome that, since they are struggling to generate growth and avoid deflation. As David Bloom, head of foreign-exchange strategy at HSBC, a bank, says, “The dollar on its own may not be able to save the world but it will certainly buy these economies time.”

For emerging markets, the effect is probably less positive. Back in 2010 Guido Mantega, Brazil’s finance minister, warned that loose monetary policy in America and elsewhere was leading to “currency wars” in which rich countries were trying to improve the competitiveness of their exports by devaluing their currencies. Investors were also pouring money into emerging markets, enticed by their better growth prospects, leading some countries (including Brazil) to impose capital controls. A stronger dollar may now prompt capital to flow out of such countries just as fast. That will be a particular problem in places where governments or firms have borrowed significantly in dollars, since their revenues are denominated in local currency but their liabilities in dollars.

A prolonged dollar rally may also have political ramifications. A paper by Douglas Campbell of the University of California, Davis, found that the previous two big dollar surges led to a decline in manufacturing jobs. That provoked complaints from American politicians that first Japan and then China were unfairly suppressing their currencies to take American jobs. It is easy to imagine the same arguments resurfacing this time, with the obvious target being Germany. It already has a current-account surplus of 7.2% of GDP; the euro’s recent weakness is likely to boost it further.

Governments resisted calls for protectionism in the past, but their economies were stronger then. It may be harder to ward off in future, given that voters have already been angered by years of austerity and declines in inflation-adjusted wages.


10/08/2014 05:34 PM

Freedom vs. Stability

Are Dictators Worse than Anarchy?

A Commentary By Christiane Hoffmann
 
A sign with the face of Syrian President Bashar al-Assad at a protest in Geneva.
A sign with the face of Syrian President Bashar al-Assad at a protest in Geneva.

Although there is always reason to celebrate the toppling of an autocrat, the outcome of the Iraq war and the rise of Islamic State have demonstrated in horrific terms that the alternative can be even worse.

In mid-April 2003, German author Hans Magnus Enzensberger published a piece in the daily Frankfurter Allgemeine Zeitung in which he celebrated the fall of Saddam Hussein. He wrote of his "deep," even "triumphant" joy upon learning of the end of Iraq's brutal dictatorship. The article was also full of derision and mockery for the skeptics who warned against the wisdom of US President George W. Bush's invasión.

At the time, I was thrilled about Enzensberger's contribution. His was one of very few voices that dared counter the almost unanimous public opposition to the American offensive in Iraq. Just before the outbreak of the war, I visited northern Iraq, including the town of Halabja, where Saddam murdered thousands of Iraqi Kurds with poison gas in 1988. The gas killed children playing in the streets and women on their way to the market. I met with survivors whose lungs were almost destroyed: people who had been dying a painful death for the 15 years since the attack. More than any other city, Halabja is symbolic of the crimes Saddam perpetrated against his own people. Although I was not in favor of the Iraq war, my visit made it clear to me that the overthrow of a dictator is cause for joy.

But in the end, the skeptics were proven right. In 2003, Enzensberger believed forecasts that up to 200,000 people would die in Iraq as a result of the invasion were absurdly high. But serious studies have suggested that that number has been significantly exceeded in the 11 years since Saddam's fall. Iraq and the entire region have descended into chaos and anarchy, clearing the way for the radicalization fostered by Islamic State.

There are many reasons to be gratified by the end of a dictatorship. For one, it means that a criminal is no longer in a position of power. And there's the prospect that democracy could take root in its stead. Some people also believe that anything is better than despotism.

But that last belief is incorrect.

What Is the Role of the State?

The last decade has shown that there is something worse than dictatorship, worse than the absence of freedom, worse than oppression: civil war and chaos. The "failing states" that currently stretch from Pakistan to Mali show that the alternative to dictatorship isn't necessarily democracy -- all too often, it is anarchy. In the coming years, global politics will not be defined by the polarity between democratic and autocratic states as much as it will by the contrast between functioning and non-functioning ones.

Rule is order. For Thomas Hobbes, the father of modern political science, the intrinsic function of the state was to impose legal order in order to subdue the "state of nature." In "Leviathan," which he wrote in the 17th century under the shadow of the English Civil War, he argued that the state's monopoly on violence was legitimate when used to protect the lives and possessions of the state's citizens. When the state was no longer able to guarantee order, the threat of "war of every man against every man" loomed. The latter was the state of nature that the state, symbolized by the Leviathan, was tasked with taming.

In his 1525 article "Against the Murderous, Thieving Hordes of Peasants," Martin Luther also argued in favor of a severe sovereign putting a stop to the German Peasants' War. Luther was largely sympathetic to the complaints of the peasants, but he was turned off by the rampant violence and anarchy of their rebellion. The rebels, Luther wrote, should be dealt with "just as one must kill a mad dog."

Germany last experienced an extended period of anarchy almost 400 years ago during the Thirty Years' War. In the long period of peace and stability that has followed World War II, we in the West have come to view political continuity as the norm. During the decades of the Cold War, the threat to Western Europe did not come from weak states, warlords and terrorist organizations but from Communism. The era was marked by the confrontation between Western democracy and socialist dictatorship: The opposite of dictatorship was democracy.

The peaceful revolutions in Eastern Europe in the 1990s confirmed this view. In those countries, the collapse of the socialist dictatorships led not to anarchy but to the installation of a new, democratic order. This created the illusion that one merely had to remove obstacles for democracy to appear, almost automatically.

The Russian Example

But in Russia the transition from the Soviet system to democracy failed. After the end of socialism, Russians were able to vote in more-or-less democratic elections and the economy was privatized. But the rule of law did not take hold. Instead, capriciousness and corruption gained the upper hand; power was monopolized by the strong. Chechnya began fighting for independence and the state started to disintegrate.

Such was the situation when Boris Yeltsin named Vladimir Putin prime minister in 1999. To Yeltsin, Putin, the head of domestic intelligence, seemed to be the only person capable of keeping the country together. Putin's task when he took over the Russian presidency a short time later was to return a crumbling state to functionality.

He was also being asked to lead a vast, sparsely populated country where state control had always been fragile: "Russia is large and the czar is far away," holds one Russian proverb. The specter of the "Smuta" -- a period of chaos and anarchy in the early 17th century -- continues to hang over Russian history. The iron-fisted Brezhnev era, by contrast, is considered by many in the country to be among the happiest periods in recent times.

In Yugoslavia, it also later became apparent that it is much easier to topple dictators than to establish democracies. Although a few weeks of bombing is generally sufficient to mortally wound autocratic regimes -- such as those run by Milosevic, Saddam, Gadhafi or Mullah Omar -- even in Europe, in relatively small territories such as Bosnia-Herzegovina and Kosovo, it took years to establish halfway stable countries with reasonably democratic governments.

The effort -- both in terms of money and labor -- was enormous. For years, control in Bosnia was largely in the hands of the High Representative in Bosnia and Herzegovina -- an office created by the Dayton Peace Agreement -- while in Kosovo, the United Nations ran the country.

The Importance of Stability

All of which raises the question: Is stability a value in and of itself? Those who answer in the affirmative are often seen as cynics who place little importance in freedom and human rights.

But the uncomfortable truth is that dictatorship is often preferable to anarchy. Were people given a choice between a functioning dictatorship and a failing or failed state, the dictatorship would often be seen as the lesser evil. And most people believe that a more-or-less secure livelihood and a modicum of justice are more important than individual freedoms and unimpeachable democracy.

It is easy to label these kinds of attitudes as backwards from the comfort of a Western democracy. When I ask my Iranian friends why they don't rebel against the Islamic system they hate, they say they don't want a revolution because it might worsen the situation. And they know what they are talking about -- the last revolution in Iran was just 35 years ago.

Political instability triggers the yearning for order, sometimes at any price -- and thus often paves the way for extremists. That was true in Germany at the end of the Weimar Republic; in Russia, Stalinism followed the revolution and civil war; in Afghanistan, the period of unrest following the Soviet withdrawal spurred the rise of the Taliban. And now Islamic State has appeared in Iraq and Syria,.

That is why the swath of political instability stretching from Pakistan to Mali is so disconcerting. In Iraq, Syria, Yemen and Libya, central governments have lost control over vast portions of their territory and entire countries are becoming ungovernable. Tribes and clans are fighting with each other while warlords are exerting regional control -- at least, until they lose it again.

The failed democratization of Iraq and the unsuccessful "Arab Spring" in Syria have fed the rise of Islamic State. In neither of these countries does democracy currently have realistic prospects for success. The best solution for Syria -- and this is not cynicism speaking -- would perhaps be a military putsch against Assad. It would rid the country of its dictator while leaving the country's last center of power, the Syrian army, intact and able to resist Islamic State.

Unappealing but Right

This kind of argument isn't particularly attractive -- smelling, as it does, of cool realpolitik. It is an admission of the West's impotence -- of its limited ability to export its values and lifestyle. It feels like a selling out of ideals. The argument is also often used to justify doing business with dictators and, even worse, provides dictators with justification for their own policies of oppression.

But that doesn't make it wrong. There are an increasing number of failed states in the world.
According to the Fragile State Index assembled by the Fund for Peace, the number of states receiving a rating of "very high alert" or "high alert" has increased from nine to 16 since 2006.

The spread of democracy and freedom, by contrast, has hardly made any progress. According to Freedom House, following a significant increase in the number of free countries at the beginning of the 1990s, there has been little change since 1998.

Democracy can only function in an environment where there is at least a minimum of stability. And it cannot necessarily establish this stability itself. In Iraq and Egypt, that process has failed, at least for the time being. In Afghanistan, the power of President Hamid Karzai, who made way for his successor at the end of September, never extended much beyond the city limits of the capital, Kabul, despite massive Western support. It is debatable whether the rudimentary rule of law established there after 13 years of Western involvement can survive ISAF's departure at the end of this year.

Free countries, as constitutional law expert Ernst-Wolfgang Böckenförde once wrote, flourish in conditions that they themselves are unable to guarantee. Without a cultural learning process -- like the one undergone by Europe over the centuries -- the toppling of a dictator and the holding of elections are not sufficient to establish democracy. As such, the West should value functioning states to a greater degree in the future.

Even as it longs to see the departure of autocrats in Russia, China, Central Asia and elsewhere, the alternatives must be seriously examined. And the next time an intervention is considered -- whether this means military force, sanctions, or the support of opposition powers -- the West must consider what will follow the toppling of the dictator. Indeed, that is exactly the argument US President Barack Obama used recently to justify his reticence to use force: "That's a lesson that I now apply every time I ask the question, 'Should we intervene militarily? Do we have an answer (for) the day after?'"

Hans Magnus Enzensberger now sees the toppling of Saddam and the Iraq War as an illustration for the fact that it is necessary every now and again to change one's opinion. At an August literature festival in Potsdam, he said that, with the opinion piece he wrote, he "fell heavily on my face."


Derivatives

Armageddon delayed

Throwing sand into the gears of the financial doomsday machine

Oct 8th 2014           

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“WE WILL not kick you when you are down, at least not for a couple of days”: that is the gist of a putative deal struck by 18 global banks this week, which agreed not to pull abruptly out of contracts with each other if one of them hits the buffers. As modest as that may sound, regulators see it as the foundation of a firewall to halt the spread of future financial crises.

The agreement concerns derivatives, contracts whose value “derives” from the performance of an underlying asset such as a share, currency or bond. Banks use them to hedge themselves or speculate, to the chagrin of regulators who dislike how hard they are to value and how easily they can entangle financial institutions in a web of interdependency.

If a bank will benefit from invoking its right to demand early settlement of such contracts when a counterparty runs into trouble, it tends to do so, naturally enough. Lehman Brothers discovered this in 2008; bankruptcy lawyers are still untangling the mess. If everyone cuts and runs at once, however, the stricken party has to hand over cash when it can least afford it, deepening the crisis.

By contrast, a brief stay might give regulators time to right a listing bank, by forcing it to sell off still-healthy units, say. America and Europe have instituted such moratoriums since the crisis, but these do not apply to cross-border deals. Global rules which extend the principle to asset managers and others are in the pipeline.

Banks hope their voluntary fix will assuage regulators’ concerns that many of them are still “too big to fail”. Officials are increasingly anxious to find a way to close ailing financial firms without sparking a global panic. American regulators recently sent back for revision all 11 “living wills” they have received from banks, detailing how they might be wound down in a crisis. But at least one element of such a resolution is now clearer.

Transcript of the IMF Managing Director Press Conference

Washington, D.C.

Thursday, October 09, 2014


SPEAKERS: 

CHRISTINE LAGARDE

Managing Director, IMF

DAVID LIPTON

First Deputy Managing Director, IMF

GERRY RICE

Director, Communications Department, IMF

 
Mr. Rice: Good morning everyone and thank you for coming today, and welcome to our 2014 Annual Meetings. We look forward to the questions this morning and ask you to be brief and then we can do as many as posible.

Let me introduce to you this morning our Managing Director, Christine Lagarde. We also have with us just to her right our First Deputy Managing Director, David Lipton.

Without further ado, let me turn to the Managing Director for some opening remarks, and then we will come to your questions in the room. Please identify yourself before asking the question.

The Managing Director: Good morning to all of you. I hope you are well and I would like to not only welcome you, but include you in wishing this institution a happy birthday. It is 70 years old and a brand new, energized, relevant machine, I can assure you.

I will say a few words about the current economic outlook as we see it, for those of you who have not followed previous press conferences by our terrific team, and I would like to say a few words about the institution first.

As I said, it is 70 years old, founded in 1944, and I believe that it is not only relevant but in a position to respond to the challenges that the world is facing. As a sign of that, I would just like to mention a couple of examples.

I said this morning in the presence of a lot of the members of the community looking after and trying to help the three West African countries that are hit by Ebola, I said for once, just for once, it is absolutely fine if those countries increase their fiscal deficit. This is not like the IMF.

David [Lipton] was a bit concerned, actually. I'm sure that we have some colleagues who would be a bit concerned. But, it is just an indication that we are capable of mobilizing resources. They're not grants, unfortunately, and others are going to have to put grants on the table in significant numbers, but there are circumstances where we are capable of revisiting traditional standards.

We have done the same this year concerning sovereign debt restructuring. As you know this is a matter that we have studied, where we have come up with proposals, revisions of certain clauses of sovereign bond issuance terms. And we will continue to work on those issues. In the same vein, we are also helping the Financial Stability Board (FSB), following up, working, monitoring, and helping with profound changes and modified regulations applicable to the financial sector.

There are areas where we were not expected, and at the age of 70 it is not bad to actually look at the fiscal side of climate change, and what can be done about it. And we have made proposals concerning removing subsidies in a socially responsible way. We have made proposals concerning price setting and including externalities in the price of fossil energies.

It is also responsible in my view to assess the sustainability of growth in the light of strongly increasing inequalities, becoming excessive. And therefore likely to hamper growth. It is not irrelevant, either, for the IMF to look into growth and jobs and the inclusion of women in the job market. Those are areas that some might argue are not absolutely core business, and yet we contend that it is part and parcel of the mission of the IMF to look at issues that are macro critical, but touch on topics that we are facing and that in many ways can be new, or more acute.

In addition to that, we do all the normal things that we have to do. So, surveillance, bilateral, multilateral, the intersection of the two, of course. Lending, of course. And we have done more lending than maybe might have been considered. We extended a significant facility to Ukraine earlier this year. We are negotiating with a couple of African countries that are looking at support. The Arab countries in transition are also major clients of the Fund.

And the third areas where business is expanding, if I may say, is technical assistance, capacity building and training. We have opened our fifth training center this year, and technical assistance is an area where there is massive, massive demand from all corners of the membership. So, it is with that background that I wanted to wish us a happy 70th anniversary.

Moving to the more traditional comments that you might have expected from me.

For those of you who have seen the World Economic Outlook or watched the press conference of Olivier Blanchard, as you well know we have trimmed our forecast for 2014 and 2015, 3.3 percent in 2014, 3.8 percent in 2015. And what we have noted, clearly, is more and more country specificity in the analysis that we work. It is not as if a group of countries, the advanced economies or the emerging market economies, were recovering while others would be lagging behind. Within each group some countries are ahead, and others are lagging behind. In the advanced economies clearly the recovery is driven by the United States and the United Kingdom, while the euro area and Japan are lagging behind. In the emerging market economies, you have reasonably strong, although slower growth, out of China, better than what we had thought out of India, and clearly a major slowdown in countries like Brazil and Russia.

So, very country specific, and by the same token the low income and developing countries are thriving. From a much smaller base, granted, but their growth rates are very impressive, which is why it makes the current epidemic, Ebola, even more threatening, because it might certainly jeopardize economic recovery that was underway and entail a decline of those economies that would be wasting the gains that they have earned as a result of their efforts.

So in the face of what we have called the risk of a new mediocre, where growth is low, and uneven, we certainly believe that there has to be a new momentum and that is what we will be discussing with the membership in the coming days.

I believe that you have received the Global Policy Agenda, a copy of which I have somewhere here. This is the document that encapsulates for the membership the strategic direction of the work we will be discharging over the next 12 months, and this is the document on which we seek their approval and their support.

Now, this new momentum with hopefully more growth, more jobs, better growth, better jobs, is what we would certainly call upon the membership to produce. What does it mean in practice?

And I will very quickly touch on the three key topics.

The first one is monetary policy, where we would be seeing asynchronous movements probably but particularly in the eurozone and Japan, more of that accommodative monetary policy is needed going forward in order to support the economy.

While at the same time the Fed is probably going to normalize its monetary policy and where we're going to continue to caution a lot of the emerging market economies and low income countries and developing countries to just prepare themselves for a bit more volatility than we have observed over the last few months.

On the fiscal front we believe that more growth friendly fiscal policies can be put in place, and those of you who have followed the press conference of Vitor Gaspar, the new head of the Fiscal Affairs Department, will understand what I mean by pointing to the potential labor reforms and fiscal policies adjusted to support job market reforms, which we believe could make a lot of sense.

We also think that the financial policies must continue to aim at reducing excesses, make the financial system sounder, and strengthen its ability to help the recovery.

Now, there is a third package we have been referring to regularly, which is the structural reforms. We don't believe that the structural reform is the sort of third chapter, by the way.

We believe that it is very important, and it has to be country specific. At the juncture of demand and supply driven measures, we have strongly held the views that infrastructure and investment in infrastructure can be a good way to support growth in the short term, by putting people to work, by launching major construction efforts or maintenance jobs, but can also impact on the supply side in the medium term by facilitating and accelerating the creation of value down the road.

So this is in a nutshell what we are forecasting, what we hope to discuss in the next few days, and I will be very happy to take questions together with David on any topic that you care to ask questions about.

Mr. Rice: Thank you, Madame Lagarde. We begin here on the right.

QUESTION: I was wondering in your global policy agenda you said your analysis of the world looks uneasily familiar, and a lot of your advice has been -- you've been saying it for the past three years or more since the crisis countries need to do these structural reforms and it looks like fiscal and monetary policy have reached some of their limits and is why we're turning to infrastructure spending. Would you agree with that analysis and do you think countries need to step up their game?

The Managing Director: We strongly agree and we hope to convince those countries that satisfy the various conditions, it is not investment in infrastructure at any rate, under any circumstances. It is clearly beneficial and we believe that it can be not only growth friendly but even debt friendly if done under the right conditions, with enough slack in the economy so that it picks up from there, with a financing situation that continues to be very accommodative and at very low cost, and with clearly a need for infrastructure. So, on that basis, we believe that it is helpful and as I said, it addresses both the demand short term and the supply side of the economy.

Structural reforms, yes, we have said that, and in a way it is the common factor to many of the countries in the various regions, but what we are seeing is that they have to be country specific. They have to be well adjusted to the political acceptability, the multiplying effect it can produce on those economies. But, it is a question of doing it, not just talking about it. We can talk, we can publish reports, we can do that, and we will continue to do so and will be as granular as we can be, although it is not necessarily our domain of competence by excellence. Other institutions can do that better. But we can certainly, No. 1, cooperate with them, and No. 2 reinforce the message, but it is a question of getting on with the job and doing it.

QUESTION: Madame Lagarde, according to data released this week by the IMF China will overtake the U.S. as the world's largest economic borrower, at least in terms of PPP. How challenging is it for the IMF since China holds less than 4 percent of voting rights at the Board? Do you think that the legitimacy of the institution is at risk and do you think the IMF will have to go beyond 2010 quota reform that is currently stuck.

The Managing Director: The 2010 quota and governance reform is an absolute must, it has to be implemented, and everybody knows that it is currently stuck before the U.S. Congress. We very much hope that the different branches of the U.S. authorities, executive and legislative, and members of the legislative amongst themselves, will understand the relevance of having an IMF that is representative of the global economy and includes the people that should sit at the table.

Now, this has not happened. It was due in 2012. It is overdue in 2014. And I strongly hope that under President Obama's leadership and with the right understanding of the parties, the role of the IMF warrants that ratification.

Who was first on the job concerning Ukraine?

The IMF.

Who managed to disburse very, very quickly and put cash in the banks of Guinea, Sierra Leone, and Liberia?

The IMF.

Not to say others are not doing their job, but we are capable of dealing with crisis situations of that nature like no institution.

Now, I'm not finished. I also want to say that notwithstanding the fact that the reform has not been ratified, we as management include a representative of China, one of the Deputy Managing Directors is Zhu Min and plays a full part of the management and we are delighted that he is sitting at the table with us. Within the teams we have a lot of the underrepresented staff members, and heads of departments. The Secretary's Department head is a Chinese national. You were talking about China in particular, but I would like to enlarge the topic by saying those underrepresented in the quota are not underrepresented necessarily in the management circle or in staff, and at the highest level of the Fund. We certainly pay as much attention as we should to all, and not just to the big players.

QUESTION: We have seen a lot of countries speaking with the IMF, African countries in particular, even working with the IMF with regard to technical assistance, some with the intention to issue a bond, some have already issued bonds and tapping into international bond markets.

To what extent do you think African countries are capable of taking that money and pumping it into the right projects, infrastructure projects, as the IMF has been alluding to, and not making the same mistakes of the past given the debt history of the continent?

The Managing Director: You are right in that quite a few African countries have lately issued sovereign bonds and have been very successful which is a sign there is progress, there is more stability, they are more reliable borrowers, probably, as seen by the financial markets. I think it should be done with measure, like everything. No excess, no abuse. I would like to point out to you that we are currently working within the Fiscal Affairs Department on specific research work to actually focus on how public finance, how civil service in each country, can actually well serve the discharge of major infrastructure projects and we will make that expertise available to the Australian presidency of the G-20 and to all our members, of course, to make sure that they appreciate how good management of public finance, how good governance of public finance, and how focused project management can be in order to serve the efficiency of infrastructure. Because, this is what we have advocated. It will work if it is efficient. It will be efficient if it is well handled by those in charge. And there is a way to do that.

QUESTION: My question is about Greece, of course, Madame Lagarde. The feeling in our country is that after four-and-a-half-years of a program, there is enough austerity and enough pain. The prime minister of Greece said today, and I quote, that he is absolutely convinced that Greece can meet its financing needs in the coming years without needing the money from EU and the IMF. As I understand, he sent a team to Washington to talk with you, and in my opinion the question is simple.

Can Greece make it without the help, without the loans of the IMF and the European Union?

The Managing Director: First of all, it is obviously for each country, and Greece is clearly a point in case, to decide what it wants, and how it wants to handle its financial situation. We are very pleased to see that agrees has significantly improved its position from a fiscal point of view, on the financial markets. There has been significant improvements. But we also believe that going forward and in order to deliver a continuous satisfactory outcome, the country would be in our view in a better position if it had precautionary support. So we're talking about evolution in the relationship, but we believe that the relationship can still be extremely helpful for the country to move on and ultimately on its own. So we are ready to help and we believe that it could be effective.

QUESTION: Good morning. Madame Lagarde, where does the IMF stand on the economies in the Arab world, where some still are coping with the aftermath of the Arab Spring and some are undertaking some really painful reforms? And on geopolitical risks, and falling oil prices, how can the IMF price in those factors and the impact on the oil exporting countries that is considered a main driver and economic power in the region?

The Managing Director: First of all, we are very engaged and involved in the Arab world in general. I'm using the Arab world in general because we used to talk about the Arab countries in transition, the ACT as we had labeled them. I think it goes far beyond the ACT, because there are countries that did not go through the transition or that transition phase, which are struggling at the moment with very complicated issues that have to do with significant military problems, disruption of the entire infrastructure, abundance of migration, people who are being displaced, about 11 million of them in that whole area. So we're trying to help in all these directions, and not only the Arab countries in transition. We go beyond that at the moment.

We have quite a few programs in place. The latest one that was approved was Yemen. A lot of has been achieved. Let's face it. When I look at the program to remove subsidies and to use public finance to better use as safety net for the poor, as support for health and education, a lot has been done. But, there is still a lot more that needs to be done, and we appreciate how difficult it is under the circumstances faced by those countries. And, it is to their credit to have done what they have done, but they have to continue.

I'm particularly pleased to see that there is a good and strong delegation coming from Egypt on the occasion of the Annual Meetings and we will be continuing the discussions with Egypt. I very much hope that we will be able to do an Article IV with our Egyptian friends. Bottom line, we are focused, we are going to continue to be engaged, but this is a part of the world that needs the attention, the support, and the financial support, as well, of the international community.

QUESTION: Thank you, Madame Lagarde, and happy anniversary to the IMF. You normally are asked about risks and problems, and I do want to ask you about the fact that as you mention the euro area is lagging behind, and whether that in your mind is connected to the current sanctions and counter sanctions. But mostly I wanted to ask you, when you look at our part of the world, where do you see grounds for optimism?

The Managing Director: The developments in Ukraine, as a triggering and very unfortunate triggering factor of the sanctions and counter sanctions is one of the geopolitical risks that we identify as a cloud of the horizon of the global economy. So, the very modest growth of the euro area and modest forecast for next year, because we have revised down to .8 [for 2014] and 1.1 [correct: 1.3 for 2015] is partly, but only partly, attributable to the geopolitical risks that we see in that part of the world.

What hope from that area? I would hope if I see a resolve to conduct both reforms on the one hand, and investment on the other hand. I think it goes hand in hand, to give and take, and both surplus and deficit countries have to rally around better growth in that part of the world.

QUESTION: My question is regarding Federal Reserve monetary policy and its effects. As the IMF has indicated that the global recovery is still relying on the advanced economies accommodative monetary policy, will also see the Federal Reserve has a growing concern over the global growth? I wonder, to what extent do you think the Federal Reserve will be able to raise the interest rate later than expected? And also, what is the IMF's latest assessment of its spillover and spill-back effects?

The Managing Director: I do not live in Delphi -- I cannot predict what the Fed will do. I also believe Chairman Yellen has given very clear, very understandable explanation and guidance about the monetary policy of the Fed. We can all read the same thing, we can all understand what is meant by what she says. And, we have also seen delivery of what she has messaged some six months ago, nine months ago.

So that is on the Fed question you had for me.

The other question you had for me dealt with spillovers and spill back. It is an area where we do quite a lot of work, a lot of analysis to actually identify what the outcome of what we call the tapering tantrum. You remember back in May, June, 2013 when there was the perception that there would be a change in the monetary policy of the Fed, there was immediate waves, and outflow of capital, and variations in the currency and exchange rates of quite a few countries, quite a few markets in the emerging world. So we have studied that in detail. We have also studied the response by those countries, to actually draw lessons from that, and are trying to make sure that the countries that will be exposed to yet more volatility when the time countries, have built the defense and have the tools in the toolkit to respond to necessary added volatility.

One more thing. I dealt with your spillover, but spill back is one as well, because when large emerging market economies are in difficulty, or at the risk of instability, it can spill back to the originating country. We are also studying that, and we are very pleased to see that, including in her communication, Chairman Yellen has mentioned the fact that she was paying attention to both.

QUESTION: Looking at the eurozone, it has a very, very slow growth rate, an aging population, doesn't seem to have recovered really from the downturn of 2008/09. We have been here before, haven't we? How close to you think the eurozone is to becoming the new Japan?

The Managing Director: It has been commented upon by Olivier Blanchard. We have alerted about a year ago to the risk of persistent, low inflation, which is one of the attributes of what you have described as the new Japan, or something like that. So low inflation was a risk. We identified that. Measures have been taken by the ECB to try and resist and reverse that risk.

More we hope will be done.

We have also now alerted to the potential risk of recession in the eurozone, and I think that risk has been identified as a probability of about 35-plus percent, anywhere between 35 and 40 percent, which is not insignificant. We're not suggesting that zone is heading toward recession, but we're saying there is a serious risk that happens, if nothing is done. But we are saying also that if the right policies are decided, if both surplus and deficit countries do what they have to do, it is avoidable.

QUESTION: A follow-up question on PPP. Madame Lagarde, how seriously do you think we should look at this data, because if we look at more commonly used data, China's economy is still way behind the United States.

To what extent do you think the purchasing power parity could reflect the real status of economies?

The Managing Director: I will not enter into the debate of what is the best measurement, because there are lots of ideas on the table at the moment, GDP, PPP, the measurements inspired by the Joe Stieglitz commission from four, five years ago, but it is one indicator amongst many others. If you look at GDP per capita, China is way behind, of course, but you have to take all the factors into account to actually assess the stability and the future of an economy. I wouldn't neglect demographics, by the way. So it is a sign that China is growing. It is a fact.

QUESTION: [from translator]: Good morning, Madame Lagarde. I'm representing my Peruvian colleagues, and would like to say we are very pleased that will be hosting the IMF and World Bank meetings in October, 2015.

I want to know what are your expectations for that meeting in Peru, and also I would like to say that the fall in prices of commodities, in particular in metal, has had an impact, negative impact on the economies of a country such Peru. I want to know what other sources of growth the countries could turn to given that the metal prices are falling? So, what other sources of growth could they tap into to offset, that they can move, continue to grow? And, what measures could be taken to address this slowdown in some of our partner countries?

The Managing Director: For those who didn't get the translation, or did you all get it? No. Okay.

It was a very comprehensive question from your Peruvian colleague who, No. 1, was happy to say that Peru will be hosting the next Annual Meetings of the IMF and World Bank next October. So he hopes that you all are coming.

And, then, he asked questions about the current economic situation of Peru, which is an economy clearly marked by extractive industries and the export of commodities, which have suffered from the recent decline in the price of commodities.

First of all, on behalf of our entire institution, I would like to express gratitude to the Peruvian authorities because I know there is work under way, major construction being completed, hopefully by July, 2015, so that we can all be together under one roof on the occasion of the Annual Meetings in Lima.

We are all looking forward to it, I can assure you.

Concerning the Peruvian economy, it is one which has grown very fast, one of the fastest in Latin America over the last decade, and which has taken a hit in the early months of 2014 as a result of a combination of the lower price of commodities, which Peru is a great producer of and great exporter of. And second, as a result also of bottlenecks in the countries given that it has grown so fast and that the infrastructure has not necessarily followed as it should have. For the combination of these two reasons, the growth rate of Peru has gone seriously down in the first few months of 2014, and we're forecasting a significantly slower growth for the country compared with what it has produced in the last decade.

But we believe that the policy measures that have been decided, both from a fiscal standpoint and from a monetary standpoint should be conducive to restoring the situation. We believe that it is not necessarily easy from a political point of view, and we understand that there is a coalition government, but we hope that all members in the coalition will be focused on delivering the right supply and monetary policy mix in order to redress the situation.

Mr. Rice: Thank you all for coming and we'll see you over the coming days.


From Pol Pot to ISIS: “Anything that flies on everything that moves”

October 09, 2014 16:03                                              

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The 2D Squadron, 11th Armored Cavalry, enters Snoul, Cambodia on 4 May 1970 (image from www.history.army.mil)
The 2D Squadron, 11th Armored Cavalry, enters Snoul, Cambodia on 4 May 1970 (image from www.history.army.mil)


In transmitting President Richard Nixon’s orders for a “massive” bombing of Cambodia in 1969, Henry Kissinger said, “Anything that flies on everything that moves”.

As Barack Obama ignites his seventh war against the Muslim world since he was awarded the Nobel Peace Prize, the orchestrated hysteria and lies make one almost nostalgic for Kissinger’s murderous honesty.

As a witness to the human consequences of aerial savagery – including the beheading of victims, their parts festooning trees and fields – I am not surprised by the disregard of memory and history, yet again.A telling example is the rise to power of Pol Pot and his Khmer Rouge, who had much in common with today’s Islamic State in Iraq and Syria (ISIS). They, too, were ruthless medievalists who began as a small sect. They, too, were the product of an American-made apocalypse, this time in Asia.

According to Pol Pot, his movement had consisted of “fewer than 5,000 poorly armed guerrillas uncertain about their strategy, tactics, loyalty and leaders”. Once Nixon’s and Kissinger’s B52 bombers had gone to work as part of “Operation Menu”, the west’s ultimate demon could not believe his luck.

The Americans dropped the equivalent of five Hiroshimas on rural Cambodia during 1969-73. They levelled village after village, returning to bomb the rubble and corpses. The craters left monstrous necklaces of carnage, still visible from the air. The terror was unimaginable. A former Khmer Rouge official described how the survivors “froze up and they would wander around mute for three or four days. Terrified and half-crazy, the people were ready to believe what they were told … That was what made it so easy for the Khmer Rouge to win the people over.”

A Finnish Government Commission of Enquiry estimated that 600,000 Cambodians died in the ensuing civil war and described the bombing as the “first stage in a decade of genocide”. What Nixon and Kissinger began, Pol Pot, their beneficiary, completed.Under their bombs, the Khmer Rouge grew to a formidable army of 200,000.
 
ISIS has a similar past and present. By most scholarly measure, Bush and Blair’s invasion of Iraq in 2003 led to the deaths of some 700,000 people -- in a country that had no history of jihadism. The Kurds had done territorial and political deals; Sunni and Shia had class and sectarian differences, but they were at peace; intermarriage was common. Three years before the invasion, I drove the length of Iraq without fear. On the way I met people proud, above all, to be Iraqis, the heirs of a civilization that seemed, for them, a presence.

Bush and Blair blew all this to bits. Iraq is now a nest of jihadism. Al-Qaeda - like Pol Pot’s “jihadists” - seized the opportunity provided by the onslaught of Shock and Awe and the civil war that followed. “Rebel” Syria offered even greater rewards, with CIA and Gulf state ratlines of weapons, logistics and money running through Turkey. The arrival of foreign recruits was inevitable.

A former British ambassador, Oliver Miles, wrote recently, “The [Cameron] government seems to be following the example of Tony Blair, who ignored consistent advice from the Foreign Office, MI5 and MI6 that our Middle East policy – and in particular our Middle East wars – had been a principal driver in the recruitment of Muslims in Britain for terrorism here.”

ISIS is the progeny of those in Washington and London who, in destroying Iraq as both a state and a society, conspired to commit an epic crime against humanity. Like Pol Pot and the Khmer Rouge, ISIS are the mutations of a western state terror dispensed by a venal imperial elite undeterred by the consequences of actions taken at great remove in distance and culture. Their culpability is unmentionable in “our” societies.
US Marines deploy in Baghdad 09 April 2003 as the regime of Iraqi President Saddam Hussein collapses. (AFP Photo / Karim Sahib)
US Marines deploy in Baghdad 09 April 2003 as the regime of Iraqi President Saddam Hussein collapses. (AFP Photo / Karim Sahib)
 

It is 23 years since this holocaust enveloped Iraq, immediately after the first Gulf War, when the US and Britain hijacked the United Nations Security Council and imposed punitive “sanctions” on the Iraqi population – ironically, reinforcing the domestic authority of Saddam Hussein. It was like a medieval siege. Almost everything that sustained a modern state was, in the jargon, “blocked” -- from chlorine for making the water supply safe to school pencils, parts for X-ray machines, common painkillers and drugs to combat previously unknown cancers carried in the dust from the southern battlefields contaminated with Depleted Uranium.

Just before Christmas 1999, the Department of Trade and Industry in London restricted the export of vaccines meant to protect Iraqi children against diphtheria and yellow fever. Kim Howells, a medical doctor and parliamentary Under-Secretary of State in the Blair government, explained why. “The children’s vaccines”, he said, “were capable of being used in weapons of mass destruction”. The British Government could get away with such an outrage because media reporting of Iraq – much of it manipulated by the Foreign Office -- blamed Saddam Hussein for everything.

Under a bogus “humanitarian” Oil for Food Programme, $100 was allotted for each Iraqi to live on for a year. This figure had to pay for the entire society’s infrastructure and essential services, such as power and water. “Imagine,” the UN Assistant Secretary General, Hans Von Sponeck, told me, “setting that pittance against the lack of clean water, and the fact that the majority of sick people cannot afford treatment, and the sheer trauma of getting from day to day, and you have a glimpse of the nightmare. And make no mistake, this is deliberate. I have not in the past wanted to use the word genocide, but now it is unavoidable.”

Disgusted, Von Sponeck resigned as UN Humanitarian Co-ordinator in Iraq. His predecessor, Denis Halliday, an equally distinguished senior UN official, had also resigned. “I was instructed,” Halliday said, “to implement a policy that satisfies the definition of genocide: a deliberate policy that has effectively killed well over a million individuals, children and adults.

A study by the United Nations Children’s Fund, Unicef, found that between 1991 and 1998, the height of the blockade, there were 500,000 “excess” deaths of Iraqi infants under the age of five. An American TV reporter put this to Madeleine Albright, US Ambassador to the United Nations, asking her, “Is the price worth it?” Albright replied, “We think the price is worth it.

In 2007, the senior British official responsible for the sanctions, Carne Ross, known as “Mr. Iraq”, told a parliamentary selection committee, “[The US and UK governments] effectively denied the entire population a means to live.”When I interviewed Carne Ross three years later, he was consumed by regret and contrition. “I feel ashamed,” he said. He is today a rare truth-teller of how governments deceive and how a compliant media plays a critical role in disseminating and maintaining the deception. “We would feed [journalists] factoids of sanitised intelligence,” he said, “or we’d freeze them out.

On 25 September, a headline in the Guardian read: “Faced with the horror of Isis we must act.”The “we must act” is a ghost risen, a warning of the suppression of informed memory, facts, lessons learned and regrets or shame. The author of the article was Peter Hain, the former Foreign Office minister responsible for Iraq under Blair. In 1998, when Denis Halliday revealed the extent of the suffering in Iraq for which the Blair Government shared primary responsibility, Hain abused him on the BBC’s Newsnight as an “apologist for Saddam”. In 2003, Hain backed Blair’s invasion of stricken Iraq on the basis of transparent lies. At a subsequent Labour Party conference, he dismissed the invasion as a “fringe issue”.
US National Security Advisor Henry Kissinger, 13 January 1973 (AFP Photo)
US National Security Advisor Henry Kissinger, 13 January 1973 (AFP Photo)


Now Hain is demanding “air strikes, drones, military equipment and other support” for those “facing genocide” in Iraq and Syria. This will further “the imperative of a political solution”. Obama has the same in mind as he lifts what he calls the “restrictions” on US bombing and drone attacks. This means that missiles and 500-pound bombs can smash the homes of peasant people, as they are doing without restriction in Yemen, Pakistan, Afghanistan and Somalia -- as they did in Cambodia, Vietnam and Laos. On 23 September, a Tomahawk cruise missile hit a village in Idlib Province in Syria, killing as many as a dozen civilians, including women and children. None waved a black flag.

The day Hain’s article appeared, Denis Halliday and Hans Von Sponeck happened to be in London and came to visit me. They were not shocked by the lethal hypocrisy of a politician, but lamented the enduring, almost inexplicable absence of intelligent diplomacy in negotiating a semblance of truce. Across the world, from Northern Ireland to Nepal, those regarding each other as terrorists and heretics have faced each other across a table. Why not now in Iraq and Syria.

Like Ebola from West Africa, a bacteria called “perpetual war” has crossed the Atlantic. Lord Richards, until recently head of the British military, wants “boots on the ground” now. There is a vapid, almost sociopathic verboseness from Cameron, Obama and their “coalition of the willing” – notably Australia’s aggressively weird Tony Abbott -- as they prescribe more violence delivered from 30,000 feet on places where the blood of previous adventures never dried. They have never seen bombing and they apparently love it so much they want it to overthrow their one potentially valuable ally, Syria. This is nothing new, as the following leaked UK-US intelligence file illustrates:

In order to facilitate the action of liberative [sic] forces … a special effort should be made to eliminate certain key individuals [and] to proceed with internal disturbances in Syria. CIA is prepared, and SIS (MI6) will attempt to mount minor sabotage and coup de main [sic] incidents within Syria, working through contacts with individuals... a necessary degree of fear... frontier and [staged] border clashes [will] provide a pretext for intervention... the CIA and SIS should use... capabilities in both psychological and action fields to augment tension."

That was written in 1957, though it could have been written yesterday. In the imperial world, nothing essentially changes. Last year, the former French Foreign Minister Roland Dumas revealed that “two years before the Arab spring”, he was told in London that a war on Syria was planned.“I am going to tell you something,” he said in an interview with the French TV channel LPC, “I was in England two years before the violence in Syria on other business. I met top British officials, who confessed to me that they were preparing something in Syria … Britain was organising an invasion of rebels into Syria. They even asked me, although I was no longer Minister for Foreign Affairs, if I would like to participate … This operation goes way back. It was prepared, preconceived and planned.

The only effective opponents of ISIS are accredited demons of the west – Syria, Iran, Hezbollah.The obstacle is Turkey, an “ally” and a member of Nato, which has conspired with the CIA, MI6 and the Gulf medievalists to channel support to the Syrian “rebels”, including those now calling themselves ISIS. Supporting Turkey in its long-held ambition for regional dominance by overthrowing the Assad government beckons a major conventional war and the horrific dismemberment of the most ethnically diverse state in the Middle East.

A truce – however difficult to achieve – is the only way out of this imperial maze; otherwise, the beheadings will continue. That genuine negotiations with Syria should be seen as “morally questionable” (the Guardian) suggests that the assumptions of moral superiority among those who supported the war criminal Blair remain not only absurd, but dangerous.

Together with a truce, there should be an immediate cessation of all shipments of war materials to Israel and recognition of the State of Palestine. The issue of Palestine is the region’s most festering open wound, and the oft-stated justification for the rise of Islamic extremism. Osama bin Laden made that clear. Palestine also offers hope. Give justice to the Palestinians and you begin to change the world around them.

More than 40 years ago, the Nixon-Kissinger bombing of Cambodia unleashed a torrent of suffering from which that country has never recovered. The same is true of the Blair-Bush crime in Iraq. With impeccable timing, Henry Kissinger’s latest self-serving tome has just been released with its satirical title, “World Order”. In one fawning review, Kissinger is described as a “key shaper of a world order that remained stable for a quarter of a century”. Tell that to the people of Cambodia, Vietnam, Laos, Chile, East Timor and all the other victims of his “statecraft”. Only when “we” recognise the war criminals in our midst will the blood begin to dry.


By John Pilger, London-based journalist, film-maker and author.


A former war correspondent, Pilger has twice won Britain's highest award for journalism; his documentary films have won television Academy Awards in the UK and the US.