The Dark Side of the Economic Crises

The following is a translation from the Russian of an interview with Andrei Fursov, the leader of the Center for the Russian Studies of the Moscow Humanitarian University, taken by Mikhail Delyagin, Director of the Institute of the Problems of Globalization. The video of the interview (in Russian) can be found on YouTube. I've taken liberty to skip certain parts of the interview, such as a discussion of a Nassim Taleb's book (new in Russia but old news for the English reader) and certain cultural references which are not likely to be understood and fully appreciated by the English reader.


MD: Our guest is Adrei Ilyich Fursov, the leader of the Center for the Russian Studies of the Moscow Humanitarian University and in my opinion (I can be mistaken) one of the best contemporary Russian historians, if not the best one. Andrei, I've got a very interesting subject to discuss with you. When I was a kid, my grandma used to say this trademark phrase of her when she had to put all the dots over the "i"s in an argument with any person of little understanding: "That's what's printed in the newspaper!" And indeed, this is an approach that's very typical of the contemporary analysts. And intelligent stock market analysts have discovered a shocking thing: a forecast, a serious one, the one that's based on the official statistical data, on good, working models, and on the official messages about how this world is set up, is going to almost always turn out to be wrong. So by trial and error, at the expense of those who trust them, they have established that official information is incomplete, insufficient, and describes the reality in such a way that one can not trust this information only. One has to take into account something else in order to have a professional, complex forecast. So what is that "something else" that's missing in the official macroeconomic models, in what's "printed in the newspapers"?

AF: Well, a lot is missing, willingness to tell the truth for one thing. <...> Seriously speaking, one of the tasks of the official media, of the official scientists, is precisely to mislead people, to form a certain opinion, a certain picture. Recall that with naive simplicity, the US analysts and some Nobel Prize winners admitted after the crisis had began: "Yes, we lied, because on the eve of the presidential elections in the US we could not tell the truth in order to not let down the President. Yes, we lied." -- just like Gollum in the Lord of the Rings -- he also said "Yes, I lied!" So in this sense, the official information does perform its main function: to disorient 90% of the populace.

DM: And therefore this is not so much information and analytics, but, using our old language, propaganda, isn't it?

AF: And disinformation. In other words, informational sabotage.

DM: I see. And what is it that this informational sabotage is hiding and what are the key powers at the world's financial markets, in the global economy, besides the official ones? And what is their role in the crisis that is now unfolding?

AF: Well, in addition to the official powers, there are other powers. But the thing is, these powers act as official ones, too. For example, the Rothschilds, the Rockefellers, the Warburgs, the Morgans -- they keep acting in both the official and the unofficial capacity. It's another matter that the structures they created were indeed semi-official. But looking from a different perspective, there is the Trilateral Commission, quite officially, but most of this structure's activities are unofficial. In general I must say that after 1945, activities of most official structures, including the government and the special services, had been gradually drifting into the shadow, and eventually, at the end of the '60s -- beginning of the '70s, the shadow and its owner swapped places. By the way, Samuel Huntington wrote quite well about it in one of his analytical works. He noted, perhaps in 1982, that in the '50s,'60s and '70s, a re-orientation of the western special services from the service of the State to the service of the transnational corporations took place. So, all the institutions are kind of official, but the main focus of their activities is behind the scenes. And what is in the limelight, turns out to be, just how Galich sung, "All that, my dear redhead, is just for the public".

<...>

DM: So you mean, the official institutions which have preserved their appearances, have also changed their contents.

AF: Not even that, they are just functionally subordinate to the unofficial institutions and to their own unofficial activity.

DM: But subordinate to what, what kind of unofficial activity is that?

AF: Well, the thing is that unfortunately, the contemporary social sciences and history are written, using not quite polite an expression, for the sucker. They hide 6/7 of the iceberg and show us only its tip. In reality, one of the main subjects of our world, since the XIX century, remains something which can be called hidden structure of supranational control. I dislike Ivan Ilyin's term "the global behind-the-scenes" -- it's too dramatic, romantic and full of pathos. In reality, there is very little pathos in the activity of these structures. The essence is very simple. The thing is, the capitalist system is unified economically, it's the single global market. But in the political aspect, it's a system of states. It's a sum, not a whole. But all constituents of the global capitalist class, including the burgeoisie as one of the constituents of this class, have interests which are global in nature. And institutions are required to resolve these contradictions. And those institutions did not originally exist in a ready state, they had to be created. Another thing: the more public and democratic was the system of government becoming, the more access was the civil society getting to the process of decision-making (take universal suffrage), the more transparent was politics becoming, the larger was the degree to which the real power was hidden behind the scenes. And already Disraeli in his novel Coningsbi said that the world is ruled quite differently from the way majority thinks it is, and is ruled by very different people. And primarily it is ruled by the financial capital. If we look at the history of the past 200 years, one of the red threads so to speak which becomes more and more red and scarlet, A Study in Scarlet, in the development of the modern world, is the struggle of the financial capital for the political, economical and informational control. And the tipping point was between 1870 and 1950. Starting in the 1870, with the last colonial re-partition of the world, money became necessary and the money could only be provided by the financial capital. And here the financial capital got its hands dirty very actively on the global level. On the level of individual countries, the financial capital of Britain put the country under control in 1846. As soon as the bread laws [Assize of Bread and Ale? CF] were abolished in 1846 [1836? CF], industrial investments became less profitable and by the time of World Exposition of 1867 England was losing the role of the global economy leader, and in the last third of that century the country lost it completely. The financial capital of England, the Rothschilds, sacrificed the industry and agriculture in favor of the financial capital. Same thing happened in the US after Kennedy's death, and to be more precise, after the creeping coup whose first manifestation was Kennedy's death and the last one -- Nixon's impeachment. So here the Americans did a fast-forward of the British scenario. So, starting with 1870, the financial capital begins its struggle for, among other sorts of world power, the political one. And a milestone here is 1913, creation of the Federal Reserve System. To prevent the social resistance, at first a crisis was organized in 1907. To make the society shake they first "induced a spasm", to use Dostoevsky's expression, "to induce a spasm in the masses". And the society was ready to accept the Federal Reserve System, a dozen private banks which began, with the government's agreement, to perform one of the functions of the State.

Even though it may be written "US dollars" on the American money, these are not the dollars of the US Government. The dollars of the US Government had been issued for a very brief time after June 4th, 1963, when Kennedy signed Executive Order allowing the banks to issue money backed by silver. That was a horrible blow to the Federal Reserve System, and I think that was one of the reasons Kennedy lost his life. Nobody abolished this order, but nobody follows it. That was when real American money was issued.

A curious thing: we see American banknotes of various denominations, most frequently $100, but there are American banknotes of $1000, and $5000 and $100,000! And it's very telling whose portrait is shown on the $100,000 banknote: Woodrow Wilson, the man who permitted the Federal Reserve System! He permitted it, and must have gotten a basket of cookies and a barrel of jam [this is an allusion to a certain bad guy from a Soviet children's story The Military Secret by A. Gaidar -- CF], and it is his portrait on the $100,000 banknote.



MD: You put your hand in a pocket, I thought you were about to pull out and show us that banknote.

AF (laughing): Yes, 1913. And note: the Federal Reserve System was created to provide very large loans. And what kind of spending would one need those loans for? War, for one thing. Which is something that happened in 1914.

MD: And nearly happened in 1912.

AF: Nearly indeed.

MD: When Jaurès, French socialist, stopped it.

AF: And by the way note what happened to Jaurès.

MD: Two days before the war broke out, he was shot in a cafe.

AF: One June 30th. And on June 28th, Franz Ferdinand was killed.

MD: Ah-ha...

AF: And on the 28th, there was an assassination attempt on Rasputin and he had to be taken out of the game, he had been absent for a month. And he himself said that had he been in the capital, Dad, Nicolas II, [Rasputin used to call Nicolas II "Dad" -- CF] would have never gotten into this war. Thus during these few days a few individuals who could stop the war, were neutralized. Here is what's interesting: the war broke out, but six months before that, Pilsudski, not an unknown man, speaking at the French Geographical Society, in February of 1914, dropped these words in a very casual manner: "Soon there will be a big was in Europe... Austro-Hungary and Germany will be defeated first, and then it will be Russia's turn." So all this was in the air.

MD: I see. And is there something of that kind in the air now, also based on the interests of large financial capital which has already created this world?

AF: There is, but it wouldn't be right to skip the very important period of the '20s and the crisis of 1929-1933 which people compare with the present crisis. In 1913 the financiers strengthened their economic position, but their next step was a political one. And their plan concerning Europe was very interesting. Why did they support Hitler? In their opinion, Hitler had to create European Union. They called it European Venice, Venice on the scale of Europe. In 1932, when Hitler lost the elections and was going down, Hjalmar Schacht said: "Never mind, in six months Hitler will become the Reichschancelor and he will unify Europe for us". A few months ahead of Germany's defeat, Hitler said: "I was Europe's last hope". So, that particular attempt to unify Europe had failed, but another one was successful, the one directed from overseas. And a very interesting change took place in the global capitalist class which our Soviet analysts overlooked, which cost them dearly, because it was this young predator faction of the capitalist class who broke the spine of the Soviet Union. People have various names for this faction, I prefer to call them Coprporatocracy. This is a layer of bureaucrats, secret service people, representatives of transnational corporations who interlocked and left the state offside.

MD: The new nomads, as Comrade Attali said.

AF: Attali, exactly. It's another thing that in the first thirty years after the war they could not get much room for operations for a very simple reason: they had to pay off the upper part of their national worker class and the middle class. That's because the Soviet Union still existed and they had to buy popular loyalty, and there was welfare state. But by the mid-'70s the welfare state became overly bureaucratic and began demanding more and more funds. And by mid-'70s, the Western elite confronted this problem: a little bit more industrial development and the welfare state becomes completely socialistic and they would lose their privileges and positions. And then the elite confronted two problems: an economic one and a political one. The economic one was to define the vector of the future economic development. Further development of industries would increase the working class and strengthen its positions -- that would not do. Another option was to get into computer technologies. That would lead to science-intensive production and one could kick the workers' asses and transfer the industry into the Third World, organize the South Korean Wonder and pump profits out of there. And most importantly, computing technologies promised, in addition to all that, a way of controlling reality. It's not a coincidence that the term "globalization" as a scientific term and the term "virtual reality" both emerged in 1983. The second problem the elite was solving was the following: further democratic development spelt a danger to the positions of the elite, and not accidentally, in the report "The Crisis of Democracy", created for the Trilateral Commission by three Western sages, Crozier, Watanuki and Huntington, it was written frankly that further development of democracy in the West would weaken the positions of the establishment. It was openly written there that the task of the establishment was to induce apathy in the masses and to un-democratize the society, explaining to the people that democracy is not a value, but an instrument. And if we recall that... it was not a dogma, but an operating manual. Then market fundamentalists came to power...

MD: When was that report released?

AF: In 1975. In 1979, Thatcher came to power, followed by Reagan, and they started demolishing their middle classes and the working people, but again, as long as the Soviet Union exists, they couldn't go into full swing. They could only pound the Latin American middle class in full swing. As a result of the IMF's structural reforms in the '80s, the Latin American middle class collapsed. 92% went into poverty, 8% became, so to speak, the new middle class. And then it was the turn of Eastern Europe. One can come up with different interpretations of the actions of Gorbachev and Yeltsin, but one interpretation which does not contradict the rest of them is to say that this was a pogrom of the communist "middle class". In 1989, 14 million people lived below the poverty line in Eastern Europe, including former Soviet Union. That isn't a lot.
In 1996, the number became 168 million people. In UNESCO poverty report from 2002 this was called the largest destruction of the middle class in history. The wealth of course moved to the West.

MD: And here is a question... If these are new nomads, what is Genghis Khan's family name?

AF (smiling): Temüjin.

MD: No, the name of the present one?

AF: The present one? He's got a collective name. Collective leadership. This leadership is far from being unified. The Rothschilds are ready to sacrifice the US dollar, but the Rockefellers are not. And Obama, who is about to receive a Nobel Prize, will fight tooth and nail to defend the dollar.

MD: He hasn't got many teeth and nails.

AF: He hasn't and the discontent regarding Obama is growing. Our press and TV simply hide a number of facts. For example, on September 12, this year, there was a demonstration in Washington DC which gathered 1,700,000 people. To put this in perspective, in 1990 we had 240,000-280,000 people marching here under the slogan "Let the Communist Party live on the Chernobyl Nuclear Power Plant" -- and that was impressive. They were shouting "Obama, get out of the White House". Obama boarded a helicopter and flew to a meeting of 15,000 supporters. There is information on the net and in press that people in America buy up ammo, because they believe America is moving towards a most serious crisis, a most serious shake-over, and the demand for ammo went through the roof. When Obama became president, there were 11 or 12 states which did not need subsidies, now there is only one, Texas.

MD: It's worse than we have.

AF: It's worse.

MD: We have more than ten. Even if we forget the crisis, we still have 8 non-subsidized regions.

AF: That's again answering the question of what picture the official media paint. They say "there are problems in the West, but in general it's all fine out there". In reality it's not all fine, they face massive problems... <...>

MD: The global crisis is continuing and roughly speaking, there are two rival groups, which form a coherent whole and within that whole there are two rivals, the Rothschilds and the Rockefellers, right? They disagree, among other things, on the US dollar. Which other groups exist there? Equally significant, equally autonomous? Or just these two?

AF: You know, in general we know very little about the structure of the global capitalist class. In the Soviet Union, all serious studies of the capitalist system were discontinued in the mid-'50s. Both academia and the special services. Stalin's personal intelligence service worked quite seriously on the issue of the ruling families of the West. So did Hitler's team by the way. That Hitler's team had 1,936,000 index cards if I am correct and 678,000 dossiers. On the Freemasons, among others. By the way, Freemasonry archives and the Rothschilds' archives ended up in the Soviet Union after WWII.

MD: We must have given them back by now?

AF: Yes, Boris Nikolaevich Yeltsin gave Freemasonry archives back to the Freemasons and the Rothschilds' archives back to the Rothschilds. That was a very elegant story. The Rothschilds bought for $300,000 a thing of tremendous importance for us: correspondence of Alexander II with his morganatic spouse Princess Yurievskaya, 4,500 letters. They presented this as a gift to Russia, and we reciprocated by giving our gold away in exchange for this necklace of glass beads.

MD: Farm land -- to peasants, plants -- to workers, sea water -- to sailors!

AF: Yes, and dossiers -- to the Rothschilds! As one Western analyst noted, the Rothschilds got for money something that no amount of money could have ever bought. The only archive which remains in Russia and which awaits its researchers, unless someone sells it, is the archive of a German institute with no parallel in history -- the Ahnenerbe. [AF is talking here specifically about the so called trophy archives obtained by the USSR in the course of WWII -- CF].

MD: It's still in our hands, isnt' it?

AF: It is.

MD: And of course with seals never touched.

AF: As one person told me, in order to work with that archive, one needs a top security clearance. But people who have that clearance have never heard of Ahnenerbe.

MD: And usually they don't know the language.

AF: They don't know the language. But the problem is, they have never heard of Ahnenerbe. And those who did hear about it, lack the security clearance.

MD: I see. But still, going back to the two powers: all right, but what about the Chinese clans that are rapidly rising on the basis of the Chinese state -- isn't that a global power?

AF: I believe the situation here is not that simple. Of course, China is fighting for a place in the sun. But take one thing into account. Because the Chinese consider themselves the middle of the Earth and the center of the Universe, for them, as one leading China expert noted, to offer a global project to the world is beneath their dignity. They are not a global civilization so to speak. And in reality, they are interested in one important thing. When we talk about China, we have to be mindful of the fact that 1/3 of Chinese history is disintegration, revolts, crashes. And the Chinese leadership knows that only too well. They know very well how to feed somebody a line. When the Chinese leaders tell us that by 2040 or 2050 the country will reach a very good level economically, they know only too well what will come next. Because revolts and disintegration in China always follow good economic times. Especially since that good economic level is only going to be achieved in the coastal provinces and everyone else is going to suck on their own paw. What are the Chinese doing now? All their policy is directed... And they are accurate people, I believe they forecast and understand very well that after 2050 and maybe earlier, China can disintegrate and the disintegrated phase may last 50 to 70 years. So their goal is to weaken their rivals along the perimeter so that for 50 or 70 years those rivals will not be able to take advantage of the situation. The Chinese are acting in a very professional way.

MD: Along the perimeter, in the globalized world, means the entire world.

AF: Along the perimeter means the US, Russia...

MD: Europe and everybody else?

AF: Europe is pretty far from China, and besides, Chinese have always considered Europe as a counterweight to the US.

MD: Yes.

AF: But the task... I do not think that the Chinese clans can seriously play in the global arena on their own. The situation is, in my opinion, very simple. No matter how strong China is economically, it's got a very fragile social structure and a fragile ecology system. These talks of China's brilliant future in the XXIst century resemble to me very much some talks of the early XXth century, both in Russia and in the West, that Russia was about to dominate the world by 1930. But they did not take into account the fragile social structure and that's what broke down. In that respect, one ought not to believe the economists with their forecasts. And great many of our China experts are in fact sponsored by China and work in a certain direction.

MF: And even if they are not sponsored by the Chinese, it's human nature to fall in love with the subject of one's studies.

AF: Yes, quite right. When we had a discord in our relations with Mao Tse Tung, our China experts were saying that it's all very bad out there and they overlooked the economic boom. Now they are saying it's all great out there, they want us to be friends with China in every possible way and they are overlooking the negative stuff.

MF: But regardless of how local their goals are...

AF: Objectively speaking, China is a global player.

MF: Objectively, a global player and the local goals are not that important, in any case they act on the global scale.

AF: The thing is, in the globalized world, the contradiction between the local and the global levels is lifted, and Robertson, who coined the term "globalization" in 1983, said in a couple of years: "You know, this term should be changed, this term is not precise, it should be glocalization". But by that time the term has gained momentum and it could not be stopped.

MF: Will this Chinese group be able to counter the Rockefellers and the Rothschilds in their attempts to mop up all of the middle classes and cut their costs?

AF: The thing is, if that happens to be in the interests of that group, I think... not sure about "counter", but it will be able to help.

MF: It will be able to help, but the Chinese middle class will be unavoidably mopped up too in that case, will it not?

AF: Yes of course, and that's a very big contradiction China is facing. In reality, China has a very limited room to maneuver. I am selling you this story for what I've bought it for, as they say, but the late Alexander Alexandrovich Zinoviev told me that when he lived in the US and worked in a certain closed-doors American institute in the early '80s, he saw all the materials regarding our future Perestroika, how the events would unfold, how the Soviet Union would be destroyed, and saw the materials on how they were going to strike China. And while Perestroika was conceived mainly as an attack in the informational sphere, the plan regarding China involved a sharp increase in the difference of the living standards between the coastal provinces and the heartland. In other words, they were planning to provoke a social conflict.

MF: Well, the general plot is more or less clear...

AF: Clear, yes.

MF: Let's take another look some time down the road, time will show, how we, how the Chinese, the Americans and other nationally divided, nationally oriented people, are going to counter that, whether they we be able to do that at all, and what will come out of that. Good luck.

AF: Time will show, good luck to all of us.

"The decline rates of the main macroeconomic indicators in the US are not expected to change..." -- Mikhail Khazin's 2010 economic forecast

This cheerful forecast appeared on WorldCrisis.ru -- as public domain materials of such quality are hard to find, I've taken time to translate it.

The economic forecast for 2010

As we usually do on this site (WorldCrisis.ru -- CF), we begin by analyzing the previous forecast, the one for the year 2009. It began by stating that 2009 would be the year of write-downs of the losses, incurred, first of all, by the financial institutions and other companies. In particular it was noted that the scale of securitization chains, that is of credits issued by, first of all, financial companies, having derivatives as a collateral, would be reduced considerably.

This forecast came true almost completely. First of all, it was publicly admitted that the financial standing of a major fraction of companies and their securities is at odds with reality. The distortions were so significant that investors and even US functionaries began suing the rating agencies, who kept inflating the credit ratings in the interests of the financial elite.

Second, it has become clear that the system of derivatives in general does not suit the conditions of the financial crisis, those of the dropping GDP, asset depreciation and of the financial risk insurance system falling apart. As a result, to avoid liquidity crisis, the monetary authorities of the US had to replace mutual credits of banks, secured by derivative paper, by direct credits from the FRS. The volume of such programs reached, only officially, a couple trillion dollars, and various rumors raise the estimate to 9 trillions.



Third, the degree of mutual mistrust became so high that the credit portfolio of the US banks began to shrink rapidly, having reached the levels not seen in decades. Shrinking of such a scale had not taken place for at least 40 years -- the volume of credits kept growing all the time. The unique and scary tempo of the decrease in the credit portfolio volume is the main proof that the crisis is continuing.

A special mention was made of the continuing "parade of devaluations", the aim of which, according to the forecast, was to save those enterprises that were about to collapse under the weight of the credit burden, being no longer able to refinance their debts. This phenomenon manifested itself, first of all, in the support of the national banking systems, on which the UK spent over 50% of its GDP, Netherlands -- over 40%, USA -- over 30% (taking the off-the-balance-sheet FRS funds), Germany -- over 20%. A significant fraction of these funds is emissionary in origin (exceptions are Russia and China who used moneys accumulated in the reserves), while the currency devaluation, barely seen in their relative movements, is seen clearly in the growth of gold price. Meanwhile the US authorities are actively pressuring the banking system to increase crediting of the real sector.

For the above-mentioned reason no large bankruptcies took place (even though the destiny of GM is, most likely, still awaiting many American enterprises) but in the US for example, the bankruptcy rate of small enterprises grew up sharply. As it usually happens during the acute phase of the crises, numerous cases of financial fraud were revealed, of which the Madoff case was the most conspicuous. As in other similar cases, it soon became clear that the regulating bodies had all the possibilities and all the information needed to nip this fraud in the bud. The fact that this had not been done undermined faith in the entire system of financial regulation, which, under conditions of the crisis, clearly won't increase stability of the global financial system.

In the forecast, the sovereign defaults were assumed to begin in 2009. The large amount of cash emission prevented these events, even though the problems of Ukraine, Spain, Greece, Dubai were heard about.

In the forecast, a lot of space was dedicated to the choices of government policies, American above all, pursuing economic recovery. In particular, it was stated that since the American economists are not inclined to study interactions between the sectors of the economy, they would not be able to understand exactly how the declining demand and changes in its structure would influence revenues in various sectors, and consequently, they would not be able to formulate a well articulated and adequate recovery policy for the real sector.

That's exactly what has happened -- the US authorities, having no adequate information, limit themselves with supporting the credit system at large (which in fact amounts to the efforts, and not the most successful ones, to prolong the credits) and with targeted support of the largest businesses. In this respect, the forecast came true with such an accuracy that I am going to quote it here: "If Obama indeed wanted a change, under the slogan of which he was elected, then yes. But the entire composition of his administration, which consists almost exclusively of Clinton's era corrupt officials, indicates that they will prolong the current situation to the end. Prolong, extending the pleasure of distributing budget funds and keeping the global financial system in check. Besides that, such a scenario allows them to maintain the living standards in the US and prevent social protests (even though according to some data, the nation's authorities are getting ready for them). Naturally, all this is possible only up to a certain moment, but let me assume that this moment will come after 2009, although some experts expect sharp events to begin this Fall".

As was forecast, the US was busy with propaganda of optimistic expectations, demonstrated the "recovery" (up to and including statistical re-calculations aimed at transferring the growth rates from the past years to the two past quarters of the year 2009), and obstructed public discussion of the real causes of the crisis internationally. Besides, the US manipulated oil prices actively to maintain the optimal shape of its balance sheet.

For Europe, as it was assumed in the forecast, the debates went along the lines of divisions between the individual states and EU at large as well as along the internal division lines within the Euro zone. As we assumed, the North-European countries (Germany and France) who play the main role in determining the ECB policies, are quite happy with the "strong" Euro, while the southern countries, Spain and Greece in particular, suffered great deal from that policy. This is related to the details of the economic model of these countries, under which the main incomes for significant parts of population come from tourism. Under conditions of crises when tourism shrinks, these countries used to increase their social programs, which allowed them to support the population and to devalue their currencies, thus stimulating tourism. The latter became impossible when Euro was introduced, while the former caused the budgets to go out of limits set by the Stability Pact, which by the way everybody just stopped paying attention to. But in any case, the elites of the southern European countries began considering leaving the Euro zone quite seriously.


A weakness of the 2009 forecast was its lack of discussion of China and South-Eastern Asia in general, of the Latin America, and of the selected large markets, such as the oil market. The forecast concluded with macro-economic indicators. The US GDP was forecast to drop 8-12%. Official data do not support such a drop, but there is no particular reason to trust them. The statistical authorities in the US (as elsewhere) are famous for the games they play with numbers, while the very notion of GDP appears to be fairly controversial. But specific numbers which are a lot harder to tamper with, show that the drop of the mentioned scale indeed took place. This is seen from the chart of the bank credits above and from the yearly data on retail sales and aggregate demand, not to mention the real estate market.

For these reasons it's impossible to tell for sure whether the forecast materialized in this part, or not. As for the statement that the dollar had to fall a bit with respect to other currencies in the middle of the year, it turned out to be quite true, but the expected coming of a new wave of crisis by the end of the year did not happen, while the US dollar did begin its rise with respect to the Euro. A few words about that will be said below, and now let me start with the 2010 forecast proper.

The key to describing the economic evolution of the world in the coming year is to make a choice between the deflationary and (hyper)inflationary scenarios. The choice will depend on the interaction of two major parameters of the US economy: the monetary emission and the decline in the aggregate demand. The latter should be of the order of 8-12% a year, unless a way of increasing the consumer crediting is found. This is analogous to the events of 1930-32 in the US. Emission can, if only in part, compensate for this decline, but it causes inflation, which also reduces the demand expressed in real prices. For this reason, the emission rate has to grow continuously in order to compensate for the falling demand. Let's note that pure scenarios materialize rarely (a refusal of a government to support the economy the way it happened in the '30s was unique, and most likely a repetition of such a scenario is impossible -- except for perhaps in Russia), and that means that the scenarios will alternate. But right now we are interested in the events of 2010 and not in the general scenario of the crisis.

If one fails to compensate for the decline in demand, then all companies, producers and middle-men alike, including banks and other financial institutions, get in trouble. Sooner or later they lower the price of their services, cut expenses... And then a chain of bankruptcies begins, in which the very first bankruptcy triggers a chain of other ones, because the reserves are already exhausted, and under the conditions of falling demand, attracting credits is tough. A new deflationary wave begins, the way it happened in Fall 2008, in the beginning of the '30s in the US, or to some extent, in Japan of '90s (but only to some extent because in Japan, the picture is washed out due the monstrous volume of export).

A major difference between these scenarios is that the deflationary one increases the cost of money while the inflationary one, on the contrary, lowers it. Accordingly, those institutions who have priority access to funds (such as the founding banks of the FRS which, at least for now, carries out the dollar emission) are interested in the deflationary scenario, and those who need money (budgets of various levels) -- in the inflationary one. Those with positive balance sheets (banks) need the cost of money to go up, although there are details. The thing is, the fractional reserve banking system, practiced nearly everywhere in the world, leaves the banks unprotected against the runs on the bank (which busted many of them in the '30s in the US), therefore those who can not obtain refinancing in a higher level bank can be afraid of deflation. But in any event, those are not the ones that determine the stance of the financial elite on the issue. And those with negative balance sheets (households, state budgets, corporations) are more interested in an inflationary scenario, which allows their debts to depreciate. And their nominal incomes grow in that case, which makes them feel better.

There is one more circumstance. For the last 30 years, any growth in any sector was linked, one way or another, to inflating financial bubbles. And the US authorities, for whom it is a matter of life or death to crank up the economic engine again, will try (and indeed are trying!) to inflate these bubbles here and there, expecting to create "secondary" demand and restart the entire economic mechanism.

Thus we can note that the balance of interests in the American society (which, up to minor details, is understood to determine the situation in the entire world, since the US is the world's largest consumer) is more or less clear, but the timing of making the decision will be determined by the politics and is therefore outside the scope of purely economic analysis.

Indeed, to carry out the emission, one needs a conscientious decision of the FRS. But within the FRS itself, except for its leader Bernanke, who is not only appointed by the US president but is more of a scientist than a banker, practically nobody supports the inflationary scenario. The banking elite remember their golden 1930s, when the printing press access allowed them to easily buy on the cheap practically all valuable assets in the US and almost everywhere else in the world. The '30s were the time of the most significant redistribution of property in the favor of the financiers, the period which they don't mind repeating. Besides, the entire system of the economic mainstream, that is not only the theory, but its supporting institutions, including the IMF and the World Bank, created in the last 30 years, the period of financial dominance in the economy, is built upon the thesis that high inflation is unacceptable in any event.

However the FRS does not hang in the air and the Washington's pressure on it gets stronger and stronger, the above mentioned example with financial bubbles is an indicator of that. The House has tried already to carry out an independent audit of this body, and the FRS managed to repel the attack, but how much longer is that going to last? Bernanke is desperately fighting for independence of his structure, in particular, for the bankers' right to independently appoint the directors of the regional reserve banks, but it is clear that if the White House's attacks intensify, the FRS will not be able to hold ground. And the White House needs money badly: to increase the social payouts, to support strategically important sectors, for the military programs, and finally, for the recently adopted health care reform.

By the way, there are many people who don't understand why Obama fights for this program so desperately. The answer is obvious: today, tens of millions people in the US are unable to obtain health insurance in principle, while there is no free medicine in the country. As the living standards of the populace there will deteriorate further, about 100 million people (according to the optimistic estimates and 150 million -- half the nation -- according to the pessimistic ones) will become unable to get medical help. No state leader can afford that, which means the reform must be carried out at any cost, which requires money.

FRS has already committed a severe violation of the IMF Statute, having began a direct buy-out of the US Treasuries on the money created by direct emission. How much was bought out off the balance sheet is a secret so far. But in any event, the emission will have to be increased since the FRS can not afford to leave the White House without funding, that would be a catastrophe for the nation's central bank, and the one that will almost inevitably lead to the nationalization of the emissionary functions of this body.

On the other hand, the FRS has a way of decreasing the amount of money in the economy: by stopping the banking stimulus program. At the recent FOMC meeting a plan to begin collection of the funds previously issued to the banks was announced, which will strengthen the deflationary trend. In my opinion, the financiers will win the first round of the fight. That's because they are clearly quicker to react and because Obama's economic policy is to a large degree controlled by Wall Street whose representatives occupy practically all key economy positions in the White House, and because any major decisions in the US government have to go through long and painful discussion in the House. And because the efficiency of jump-starting the economy by inflating new bubbles turned out to be extremely low.

Here we ought to return to the 2009 forecast, or rather that section of it, which discussed the USD growth at the end of the year. In my opinion, a choice between a (hyper)inflationary scenario and a deflationary one -- in favor of the latter -- had to be made back then, which would create a turning point in the markets: up for the dollar, down for the stock markets and oil. However, a number of events, among which was the process of re-electing Bernanke the FRS chairman for the second term, delayed the process. Nevertheless, the second deflationary wave is likely to strike in the first half of the current year. It will carry the Dow down to the level of 6000-7000, oil -- to the level of $35-40 a barrel, and EUR/USD -- to the 1.35 mark or lower. After which for a number of reasons, including the pressure from the White House, the emission will continue, which will stop the decline at a new, lower level.

Let's note one important thing related to the role of China in the modern global economy. China began experiencing serious economic problems: the engine of its economy is export, which is shrinking. As a consequence, the Chinese authorities are beginning to stimulate internal consumption by non-economic means, which will inflate sizable bubbles in the Chinese economy quite quickly. And what to do? The leaders can not seriously count on the growth of internal demand: if the production is reoriented towards internal consumer, the revenues and wages will begin to drop. Otherwise, colossal multi-year programs are needed, for which there is no time. And to issue bad credits would mean to seriously undermine the financial system of the country.

And nevertheless, there is a solution. Let's imagine that today China enters the global financial markets with securities denominated in renminbi. Then only due to a change in the exchange rate (renminbi revaluation), China acquires a powerful source of income, which can offset the export revenue decline and can speed up the process of re-orienting the economy towards internal consumption dramatically. And the global financial market, suffocating in excess cash with no ability to invest it profitably, will rush into these new securities. Moreover, for China this will become a powerful instrument of influencing the global politics, since it will be quite easy to control to whom and in what volume these new papers will be sold.

In order to implement such a program, China needs at least three things: presence of renminbi outside the country (and the programs to accomplish that are already in place and active); convertibility of renminbi (even limited one), and finally, a living global financial system. If the collapse of the SUD-based contemporary system happens before such a Chinese program is launched, the effectiveness of the latter is likely to be reduced considerably. It can't be ruled out that a realization of this fact is what makes the US demand renminbi revaluation from China (since within the export-import framework, such a revaluation will only redistribute the middle-man income from such operations in favor of China). But in any event, Chinese activity is likely to have a considerable stimulating effect on the US elite, causing them to make at least some decisions.

All this means that in 2010 China, amid deteriorating economic indicators and growing bubbles in the internal economy (in that sense the country will make an accelerated march along the US footsteps of the '00 decade) will begin an accelerating expansion into the global financial system and will speed up the formation of a China-centric regional financial cluster.

Thus in 2010 the global financial system will continue moving along the trajectory on which it took off in Summer 2007, and most likely, in the first half of the year, another deflationary episode will take place, which will give way to a new spiral of monetary emission in the Fall. Whether that will cause hyperinflation is an open question, but the most likely answer is no. In this case, serious problems are ahead for the oil exporting countries, therefore it can't be ruled out that the problems like those of Dubai in late 2009 will become familiar. Big troubles are ahead for Europe: even though Euro will head downward, which will make the exporters' life easier, the US demand will continue to decline, and therefore in general the economic position of the EU will weaken.

"Small" countries of Europe will encounter special problems. They won't be able to count on the US help, while the EU leaders too will be out of money. This will spell a sharp decline in the living standards in these countries, which will cause a significant growth of income difference among the EU countries. Besides, a significant fraction of the population of the poorer EU countries will have to migrate back home, since unemployment will grow everywhere and jobs will be reserved for own citizens. Almost certainly, crime will go up, including ethnic crime, which will require authorities of a number of EU countries to demand stronger regulations of cross-border migration. I am not sure whether the process of European integration will recede in 2010, but I am positive that its rate will go down considerably.

One has to take one more thing into account: the second deflationary wave will annihilate all the efforts of the global leaders to maintain optimism among the consumers and companies, which means a sharp rise in savings and a reduction in portfolio investments. Since under deflation, cost of money will grow, more and more potential investors will go into cash and stay that way. By the end of the year, when another inflationary wave strikes, they will be in a rush to invest.

Meanwhile, since falling demand will be the main mechanism for the crisis to continue, and the global demand is expressed mainly in USD, all countries of the world, including China, India and Latin America, will actively support the present model. Meanwhile, as the US share in the global aggregate demand will decline continuously, they will seek alternative sources of demand, and that includes developing national programs of its stimulation. This means that the global financial system, built on the dollar, will remain strong (even though its influence over the regional economic processes will weaken), while the positions of IMF, World Bank and other international financial organizations will weaken. Created within the Bretton-Woods framework and called upon to spread the basic provisions of the "Washington consensus" worldwide, these bodies will lose their positions to other organizations, possibly yet to be created, amid the crisis and incessant economic forecasting errors.

The decline rates of the main macroeconomic indicators in the US are not expected to change and will be around 8-12% a year. This means continuation of serious problems for the South-Eastern Asia and their growing re-alignment towards China and India, as potential sources of demand. China, as has been said, will promote its own currency in the regional markets actively and prepare grounds for their capture through emission of own securities. As far as India is concerned, it will continue its traditional, more conservative policies. Similar processes will unfold in Latin America, except that there, Brazil will be the center, and the formation of a regional currency will accelerate. The competition of the US and Latin America for influence over Mexico will be interesting to watch.

Economic problems and pessimistic sentiment will force the Western governments to search for non-economic factors to blame for the economic difficulties. I mentioned that in the 2009 forecast and the events in Afghanistan, Pakistan, Iran and early in this year even Yemen support such a view point. Most likely, the policy of creating (so far) controlled regional conflicts will continue.

To conclude the forecast, let me note that most likely, no serious collapse of the infrastructure, financial and industrial alike, will take place in 2010, which means that all the trends that began in 2009 will continue their smooth evolution. The key factors for specific businesses will be:

-- difficulties in attracting and deploying investments
-- beginning decay of the middle-class-based social system and respective problems in marketing policies for nearly all producing companies
-- major shifts in management policies
-- growth of bad debts and inaccessibility of credit

Practically any company wishing to continue its business successfully during the crisis, will face these problems, although perhaps the ordering may vary. And only those who solve these problems, will win.

This is the end of the 2010 forecast but I can't rule out having to come back to it later this Summer.

M. Khazin, Moscow, January 1-6, 2010.

Insightful New Year's address on WorldCrisis.ru

This excerpt from Mikhail Khazin's New Year's address to the readers of his WorldCrisis.ru -- a Russian site I check from time to time -- in my opinion helps to put things into perspective. So I've translated from the Russian what I think might be of interest to the English-reading public.

The start of a New Year calls for the summing up of the previous one. A detailed analysis of 2009 as well as a forecast for 2010 are on my to-do list. Now I am about to say just a few words about the main results of the year. From my point of view, the main result is the categoric refusal of the authorities of most large countries to discuss the causes and consequences of the world economic crisis publicly. That the crisis is not over need not be explained to the readers of this site (WorldCrisis.ru -- CF), but the authorities understand this as well. Take discussions in the US leadership about borrowing stimulation as an example... It is clear that one can not credit the real sector of economy under the conditions of falling household demand (who to sell the new products to?), therefore one will have to start with the households. But here a natural question arises: what's the logic behind this Obama's desire? For the households are in debt up to their eyeballs, their incomes do not allow them to even pay back the previous loans without a dramatic lowering of the living standards. So why does Obama want them to borrow more?

The thing is as follows. Because, thanks to the growing household debt, the demand had been growing quite strongly for the past decade, and the economy had been growing with it, today's situation is a dead-end in a sense. If one lowers the demand to bring it in equilibrium with the income, the demand will drop by $3 billion a year, at least. Since such a decline in demand (a reminder: the entire GDP of the USA is, officially, $14 billion a year, and in reality is less) will unavoidably cause an economic downturn, incomes will fall, which in its turn will necessitate a drop in demand and so on. The equilibrium corresponds to a drop in US demand of about $6 billion a year. This adjustment can be made rapidly -- and then the sociopolitical catastrophe in the country will be stronger, but the compensatory growth following it will begin almost instantly. Or it can be made slowly -- then the downturn will be less painful, but it will last longer.

The first of these economic scenarios is a deflationary one. In that case, the credit emission stops (actually, it is stopping already), the prices begin to drop precipitously, companies go bankrupt (like in Fall 2008), but those financial institutions who have access to liquidity, i.e. to the FRS credits, have a strong advantage. They use the credit money to pay their deposit holders (it is the depositors' runs on the banks that were devastating the US banking system in the early '30s, which is why Roosevelt declared a default in 1933, the one modestly called "banking holiday" today), and then buy all the industry and all profitable assets in general. The '30s -- the age of deflation -- became the time of the largest redistribution of property in favor of the financial elite in the Western world. The industrialists' lucky star descended for good, the XIX century, the age of industrialists, came to a final closure; the next century began -- the one which belongs to bankers.

But if the banks continue crediting, the situation is different. In that case all of them will keep accumulating bad debts which will unavoidably lead them to bankruptcy. The only way to survive will be to escalate credit emission in hope for inflation, that is, the depreciation of debts. The abilities of the FRS will be limited, which is something that keeps Obama busy these days. And the main thing: he will have lots of money in the budget, which will allow him to conduct active social policy, to lower the political tension and (it must be owned) to determine, who and how will bankrupt the financial institutions. In that sense the notorious health care reform (which is practically impossible under the deflationary scenario: there will be no money for it in the budget), the reforms to limit the FRS and the borrowing stimulation -- are all parts of the same policy aimed at lowering the role of the financial sector in the ecomony and at strengthening that of the state.

Let's note one important thing. The choice will be made even before Obama's first (and possibly last) presidential term is over, since, once the hyperinflation is started, it will be practically impossible to stop. Which by the way is true for a real deflation too.

Russian sociologist Andrei Fursov on the "tasks" of the financial crisis

I've found this recent (appeared yesterday) and thought provoking piece of analysis by Fursov on russia.ru. Translating from the Russian:

The tasks of the financial crisis

In the recent months people say more and more often that the crisis is abating, that the remission has come, that the crisis was not too dangerous, that now one can take a breather and stop worrying.

To me, this resembles one familiar story about a boy and the wolves. The boy used to cry "Wolf!", but there were no wolves, people stopped believing him, and when the real wolves showed up, nobody came and the wolves ate the cattle. This resembles today's situation when people are comforting themselves. At first people cried -- "Crisis, crisis!" -- yes, certain phenomena of a crisis took place. Indeed, there were bank mergers, at the same time with other events. For example, there is a lot of talk about swine flu and I believe that's a good distraction -- it draws people's attention away from the crisis, letting other people make some money, but that's a different problem. The main thing is that despite the fact that many new topics appeared recently in the media and along with the talk about the crisis being "not that strong", the topic of the crisis is fading away -- I agree with those economists who believe that the present calm is temporary and the crisis will strike for real in 2014-2015 and that wave will be a lot more serious. Whether this is so we will see, but another question is interesting. This crisis -- to what extent is it "natural" and to what extent is it man-made? Looking at practically all major economic crises of the XXth century, in particular the Great Depression, we see that they are all man-made. And a very simple question can be asked, the way Romans used to do it: "Qui Bono?" For example, what happened after the '29-33 crisis? As a result of that crisis, the financial capital bancrupted small and medium banks, expropriated their assets, and largely put the political life in the US and in the world at large under its own control. That was the main result of the Great Depression and as Carroll Quigley wrote in his remarkable work on the history of the first half of the XXth century, in '29-33, the march of the financial capital to the political power, the march that began in 1870s and had the formation of the FRS as its milestone, has finished with a triumph -- and Carroll Quigley applauded that.

And if we look back at that crisis, it's all quite clear -- those lines, along which people would benefit, obtain privileges, accumulate wealth and so on. If we look at today's crisis, we see the same process, except for it's not the big fish eating the small ones, but super-large fish eating the large ones; large banks go bankrupt, and who is grabbing them? Well, for example, banks that belong to the Morgan family, who did a very good job in these few months during the crisis. Large banks go bust, but the super-large ones acquire their assets. So in reality it's the process of capital concentration that takes place, and that's one of the tasks of this crisis.

In fact, today's capitalist economy is a planned economy, it's not "free". Indeed, in many parts of today's economy there is no "market" at all. What market can you talk about in the natural gas industry? What market is there in the sphere of arms trade? Well of course a few dozen percent in almost every major sphere belong to "market", but in all other respects there are monopolies. It's for a reason that French historian Baudelle used to say: "Capitalism is the enemy of the free market". That's because in the market, capitalists struggle for the monopoly and one should say that the entire history of capitalism is, however paradoxal this might sound, is the struggle of the capitalist class against the market, in the market. The market is preserved as the battle field, but the goal of the battle is to limit the market and thus to finish its existence.

By the way, Attali wrote quite frankly about that in "A Brief History of the Future" where he wrote that the task of the world government which was going to establish its power over the world in the middle of the XXIst century would be to finish up the financial capital, to put it under control and to introduce the global distribution-based economy. And the shortest path towards the world government is the global currency; the shortest path towards the global currency is the global financial and economic crisis.

Thus the present crisis pursues a number of tasks, the tactical and mid-range ones. For example, I am deeply convinced that one of the tasks of the crisis was to slow down China, but this goal was not accomplished, because even though they did slow down China, the rest of national economies began to feel even worse, it's the non-national economies so to speak, who won. Besides, there is a lot of things we don't know, since the financial capital is a non-transparent thing -- it's known that the Morgans did grab some banks but we don't know exactly what the Rothschilds gained as a result of this shake-over, what the Rockefellers gained, we can only guess about some very serious tensions at the world's top, using a number of indirect indicators.

Obama, the Rockefellers' man, is understandably for the US dollar, while the Rothschilds and the Chinese back some other currency. Thus the world crisis, besides its visible aspects, has a very powerful hidden code and that hidden code has to do with the struggles within the world's capitalist class, about which little is known, which are not discussed in the press and on TV. The main fight is under the carpet. And in great many areas we can only form indirect inferences based on some visible movements, although the general direction of the crisis is completely clear -- it's towards concentration of the capital, the maximal concentration of the capital.

Even given that, the most interesting question is the following: suppose those who planned the crisis fully accomplish their goals, and concentrate the huge capitals in the hands of literally a few families. In such a situation, money stops making sense in general, since when money is concentrated in such a compressed form, it becomes power, pure power.

The character of Robert Penn Warren's novel, Willie Stark (his prototype was Huey Long, the Governor of Louisiana and a Roosevelt's rival, killed in '35) used to say: "Money makes sense up to a certain point, beyond which it's only power that makes sense".

I've got no smoking gun, but based on all I know from the history of the capitalist system, I have no doubt that the final result of the accumulation of enormous funds among very few owners will be an abolishment of those same funds and their transformation into sterile pure power, on the basis of which a completely different society will be formed, which is something Attali blabbed about: the financial capital is being put under control, is abolished, and an economy of distribution is established -- and the economy of distribution applies not only to the tangible goods -- it's information and resources, too. That is, an hierarchical structure of global control is established and in that respect this financial crisis of today is, I believe, one of the steps towards this new system.

Whether anything will come out of that is another question. History is ironic at times: for example, certain people in the early XXth century were planning to break Germany, Austro-Hungary, Russia, the Osman Empire apart as something which stood in the way of the financial capital's progress. Well, they did break apart the Osman Empire, they did break apart Austro-Hungary, they even broke apart Russia -- but in Russia's place a creature even more dangerous to the global financial capital emerged, the Soviet Union, the anti-capitalist camp. In other words, there are no linear moves in history, and quite often the people who start such fine multi-move games, these same people lose. We just have to see how the events will unfold in the future, but in order to understand what's going on, one has to, first, watch the events very carefully and second, to avoid getting fooled and to look at the world with one's own eyes and not with somebody else's.