It’s one thing to counterfeit a twenty or hundred dollar bill. The amount of financial damage is usually limited to a specific region and only affects dozens of people and thousands of dollars. Secret Service agents quickly notify the banks on how to recognize these phony bills and retail outlets usually have procedures in place (such as special pens to test the paper) to stop their proliferation.

But what about gold? This is the most sacred of all commodities because it is thought to be the most trusted, reliable and valuable means of saving wealth.

A recent discovery — in October of 2009 — has been suppressed by the main stream media but has been circulating among the “big money” brokers and financial kingpins and is just now being revealed to the public. It involves the gold in Fort Knox — the US Treasury gold — that is the equity of our national wealth. In short, millions (with an “m”) of gold bars are fake!

Who did this? Apparently our own government.

Background

In October of 2009 the Chinese received a shipment of gold bars. Gold is regularly exchanges between countries to pay debts and to settle the so-called balance of trade. Most gold is exchanged and stored in vaults under the supervision of a special organization based in London, the London Bullion Market Association (or LBMA). When the shipment was received, the Chinese government asked that special tests be performed to guarantee the purity and weight of the gold bars. In this test, four small holed are drilled into the gold bars and the metal is then analyzed.

Officials were shocked to learn that the bars were fake. They contained cores of tungsten with only a outer coating of real gold. What’s more, these gold bars, containing serial numbers for tracking, originated in the US and had been stored in Fort Knox for years. There were reportedly between 5,600 to 5,700 bars, weighing 400 oz. each, in the shipment!

At first many gold experts assumed the fake gold originated in China, the world’s best knock-off producers. The Chinese were quick to investigate and issued a statement that implicated the US in the scheme.

What the Chinese uncovered:
Roughly 15 years ago — during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] — between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day.

According to the Chinese investigation, the balance of this 1.3 million to 1.5 million 400 oz tungsten cache was also gold plated and then allegedly “sold” into the international market. Apparently, the global market is literally “stuffed full of 400 oz salted bars”. Perhaps as much as 600-billion dollars worth.

An obscure news item originally published in the N.Y. Post [written by Jennifer Anderson] in late Jan. 04 perhaps makes sense now.

DA investigating NYMEX executive ,Manhattan, New York, –Feb. 2, 2004.
A top executive at the New York Mercantile Exchange is being investigated by the Manhattan district attorney. Sources close to the exchange said that Stuart Smith, senior vice president of operations at the exchange, was served with a search warrant by the district attorney’s office last week. Details of the investigation have not been disclosed, but a NYMEX spokeswoman said it was unrelated to any of the exchange’s markets. She declined to comment further other than to say that charges had not been brought. A spokeswoman for the Manhattan district attorney’s office also declined comment.”

The offices of the Senior Vice President of Operations — NYMEX — is exactly where you would go to find the records [serial number and smelter of origin] for EVERY GOLD BAR ever PHYSICALLY settled on the exchange. They are required to keep these records. These precise records would show the lineage of all the physical gold settled on the exchange and hence “prove” that the amount of gold in question could not have possibly come from the U.S. mining operations — because the amounts in question coming from U.S. smelters would undoubtedly be vastly bigger than domestic mine production.

No one knows whatever happened to Stuart Smith. After his offices were raided he took “administrative leave” from the NYMEX and he has never been heard from since. Amazingly, there never was any follow up on in the media on the original story as well as ZERO developments ever stemming from D.A. Morgenthau’s office who executed the search warrant.

Are we to believe that NYMEX offices were raided, the Sr. V.P. of operations then takes leave — all for nothing?

The revelations of fake gold bars also explains another highly unusual story that also happened in 2004:
LONDON, April 14, 2004 (Reuters) — NM Rothschild & Sons Ltd., the London-based unit of investment bank Rothschild [ROT.UL], will withdraw from trading commodities, including gold, in London as it reviews its operations, it said on Wednesday.

Interestingly, GATA’s Bill Murphy speculated about this back in 2004;
“Why is Rothschild leaving the gold business at this time my colleagues and I conjectured today? Just a guess on my part, but [I] suspect something is amiss. They know a big scandal is coming and they don’t want to be a part of it… [The] Rothschild wants out before the proverbial “S” hits the fan.” — BILL MURPHY, LEMETROPOLE, 4-18-2004

What is the GATA?
The Gold Antitrust Action Committee (GATA) is an organisation which has been nipping at the heels of the US Treasury Federal Reserve for several years now. The basis of GATA’s accusations is that these institutions, in coordination with other complicit central banks and the large gold-trading investment banks in the US, have been manipulating the price of gold for decades.

What is the GLD?GLD is a short form for Good London Delivery. The London Bullion Market Association (LBMA) has defined “good delivery” as a delivery from an entity which is listed on their delivery list or meets the standards for said list and whose bars have passed testing requirements established by the associatin and updated from time to time. The bars have to be pure for AU in an area of 995.0 to 999.9 per 1000. Weight, Shape, Appearance, Marks and Weight Stamps are regulated as follows:

Weight: minimum 350 fine ounces AU; maximum 430 fine ounces AU, gross weight of a bar is expressed in troy ounces, in multiples of 0.025, rounded down to the nearest 0.025 of an troy ounce.

Dimensions: the recommended dimensions for a Good Delivery gold bar are: Top Surface: 255 x 81 mm; Bottom Surface: 236 x 57 mm; Thickness: 37 mm.

Fineness: the minimum 995.0 parts per thousand fine gold. Marks: Serial number; Assay stamp of refiner; Fineness (to four significant figures); Year of manufacture (expressed in four digits).

After reviewing their prospectus yet again, it becomes pretty clear that GLD was established to purposefully deflect investment dollars away from legitimate gold pursuits and to create a stealth, cesspool / catch-all, slush-fund and a likely destination for many of these fake tungsten bars where they would never see the light of day — hidden behind the following legalese “shield” from the law:

[Excerpt from the GLD prospectus on page 11]
“Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss.”

The Federal Reserve knows but is apparently part of the scheme. Earlier this year GATA filed a second Freedom of Information Act (FOIA) request with the Federal Reserve System for documents from 1990 to date having to do with gold swaps, gold swapped, or proposed gold swaps.

On Aug. 5, The Federal Reserve responded to this FOIA request by adding two more documents to those disclosed to GATA in April 2008 from the earlier FOIA request. These documents totaled 173 pages, many parts of which were redacted (blacked out). The Fed’s response also noted that there were 137 pages of documents not disclosed that were alleged to be exempt from disclosure.

GATA appealed this determination on Aug. 20. The appeal asked for more information to substantiate the legitimacy of the claimed exemptions from disclosure and an explanation on why some documents, such as one posted on the Federal Reserve Web site that discusses gold swaps, were not included in the Aug. 5 document release.

In a Sept. 17, 2009, letter on Federal Reserve System letterhead, Federal Reserve governor Kevin M. Warsh completely denied GATA’s appeal. The entire text of this letter can be examined at http://www.gata. org/

The first paragraph on the third page is the most revealing.”In connection with your appeal, I have confirmed that the information withheld under exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”

above statement is an admission that the Federal Reserve has been involved with the fake gold bar swaps and that it refuses to disclose any information about its activities!

The above statement is an admission that the Federal Reserve has been involved with the fake gold bar swaps and that it refuses to disclose any information about its activities!

Why use tungsten?
If you are going to print fake money you need to have the special paper, otherwise the bills don’t feel right and can be easily detected by special pens that most merchants and banks use. Likewise, if you are going to fake gold bars you had better be sure they have the same weight and properties of real gold.

In early 2008 millions of dollars in gold at the central bank of Ethiopia turned out to be fake. What were supposed to be bars of solid gold turned out to be nothing more than gold-plated steel. They tried to sell the stuff to South Africa and it was sent back when the South Africans noticed this little problem. The problem with making good-quality fake gold is that gold is remarkably dense. It’s almost twice the density of lead, and two-and-a-half times more dense than steel. You don’t usually notice this because small gold rings and the like don’t weigh enough to make it obvious, but if you’ve ever held a larger bar of gold, it’s absolutely unmistakable: The stuff is very, very heavy.

The standard gold bar for bank-to-bank trade, known as a “London good delivery bar” weighs 400 troy ounces (over thirty-three pounds), yet is no bigger than a paperback novel. A bar of steel the same size would weigh only thirteen and a half pounds.

According to gold expert, Theo Gray, the problem is that there are very few metals that are as dense as gold, and with only two exceptions they all cost as much or more than gold.

The first exception is depleted uranium, which is cheap if you’re a government, but hard for individuals to get. It’s also radioactive, which could be a bit of an issue.

The second exception is a real winner:
tungsten. Tungsten is vastly cheaper than gold (maybe $30 dollars a pound compared to $12,000 a pound for gold right now). And remarkably, it has exactly the same density as gold, to three decimal places. The main differences are that it’s the wrong color, and that it’s much, much harder than gold. (Very pure gold is quite soft, you can dent it with a fingernail.)

A top-of-the-line fake gold bar should match the color, surface hardness, density, chemical, and nuclear properties of gold perfectly. To do this, you could could start with a tungsten slug about 1/8-inch smaller in each dimension than the gold bar you want, then cast a 1/16-inch layer of real pure gold all around it. This bar would feel right in the hand, it would have a dead ring when knocked as gold should, it would test right chemically, it would weigh *exactly* the right amount, and though I don’t know this for sure, I think it would also pass an x-ray fluorescence scan, the 1/16″ layer of pure gold being enough to stop the x-rays from reaching any tungsten. You’d pretty much have to drill it to find out it’s fake.

Such a top-quality fake London good delivery bar would cost about $50,000 to produce because it’s got a lot of real gold in it, but you’d still make a nice profit considering that a real one is worth closer to $400,000.

What’s going to happen now?

Politicians like Ron Paul have been demanding that the Federal Reserve be more transparent and open up their records for public scrutiny. But the Fed has consistently refused, stating that these disclosures would undermine its operation. Yes, it certainly would!

Ron Paul
Forbes
October 31, 2009

The large-scale government intervention in the economy is going to end badly.

Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

I am  reminded of the outlook in 1930, when the experts were  certain that the worst of the Depression was over and that recovery was just around the corner.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.

Anytime the central bank intervenes to pump trillions of dollars into the financial system, a    bubble is created that must eventually deflate. We have seen the results of Alan Greenspan’s excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.

This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble’s collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve’s balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.

Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury’s program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person’s pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.

The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar’s purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.

Ron Paul is a Republican congressman from Texas.

Roubini: Global Markets Could Soon Crash

Dan Weil
Newsmax
October 31, 2009

The global markets are at risk of crashing when the dollar rebounds, says economist Nouriel Roubini.

Roubini, a professor at NYU, is credited with long predicting the financial collapse of 2007 and 2008.

“In the short run what’s happening is there’s a wall of liquidity, not just in the U.S., but around the world, that is chasing assets,” he told CNBC.

“It’s equities, it’s commodities, it’s credit, it’s gold, it’s emerging market asset classes.”

And what does that amount to? “Now we are in the mother of all carry trades,” Roubini says.

Read entire article

By Paul Craig Roberts
 

America is not the internationally competitive land of small businesses that politicians love to tout

By Mark Weisbrot

August 14, 2009 “The Guardian” — The Great Recession is allowing some widely held beliefs about the US economy – which were the source of much evangelism over the last few decades – to run up against a reality check. This is to be expected, since the United States has been the epicentre of the storm of policy blunders that caused the world recession.

This month my CEPR colleagues John Schmitt and Nathan Lane showed that the United States is not the nation of small businesses that it is regularly dressed up to be for electoral campaign speeches and editorials. If we look at what percentage of our overall labour force is self-employed, or what percentage of manufacturing workers or high-tech workers are employed in small businesses – well, the US ranks at or near the bottom among high-income countries.

As economist Paul Krugman noted after reading the study: “One more American myth bites the dust.” Indeed it has. And as both the authors of the paper and Krugman note, there is a plausible explanation for the US’s low score in the small business contest: our lack of national health insurance. There are enough risks associated with choosing to start a business over being an employee, but the Europeans don’t have to worry that they will go bankrupt for lack of health insurance.

A number of other alleged advantages of America’s “economic dynamism” are also mythical. Most people think that there is more economic mobility in America than in Europe. Guess again. We’re also near the bottom of rich countries in this category, for example as measured by the percentage of low-income households that escape from this status each year.

The idea that the US is more “internationally competitive” has been without economic foundation for decades, as measured by the most obvious indicator: our trade deficit, which peaked at 6% of GDP in 2006. (It has fallen sharply from its peak during this recession but will rebound strongly when the economy recovers).

And of course the idea that our less regulated, more “market-friendly” financial system was more innovative and efficient – widely held by our leading experts and policy-makers such as Alan Greenspan, until recently – collapsed along with our $8tn housing bubble.

On the other hand, most Americans pay a high price for the institutional arrangements that bring us these mythical successes. We have the dubious honour of being the only “no-vacation nation“, ie no legally required paid time off and of course some weeks fewer actual days off per year than our European counterparts enjoy. We have a broken healthcare system that costs about twice as much per capita as that of our peer nations and delivers worse outcomes, as measured by life expectancy and infant mortality. We are near the top in terms of inequality among high-income countries and at the bottom for parental leavepolicies and paid sick days. The list is a long one.

Yet it was just two years ago that Nicholas Sarkozy successfully won the presidency of France by arguing that the French could not afford their welfare state and had to adopt a series of reforms that would make the French economy more “dynamic” like that of the US. These included tax cuts for the rich and labour law changes that would make it easier for employers to fire people.

Many French are now sorry they voted for this guy and very glad that they have more protection than most Americans have from the ravages of the recession. Of course they could also use a larger economic stimulus, but the fact that they don’t have one is due to the neoliberal policies of their own government and those of the European Union, especially the European Central Bank.

There is another area where the comparison between the American and European model has serious implications for the future of the planet: climate change. “Old Europe” uses about half as much energy per capita as the US does. A big part of this difference is because Europeans, in recent decades, have taken much more of their productivity gains in the form of increased leisure time, rather than working the same (or longer) hours in order to consume more.

We estimated that the US would consume about 20% less energy if it had the work hours of the EU-15. This would have a significant impact on world carbon emissions. Furthermore, when the world economy recovers, there are a number of middle-income countries that will approach high-income status in the not-too-distant future (South Korea and Taiwan are already there). Whether they choose the American or the European model will have an even bigger impact on global climate change.

The major media in both Europe and the United States have played an important role, for decades, in helping politicians capitalise on economic mythology to push policy in economic and socially destructive directions on both sides of the Atlantic. It remains to be seen how much the Great Recession will influence the thinking and reporting of these influential institutions.

© Guardian News and Media Limited 2009

A desperate attempt at reassurance

By Nick Beams, WSWS

4 July 2009

Fareed Zakaria, editor of Newsweek International, has written an essay entitled “The Capitalist Manifesto: Greed is Good (To a point)”, which is intended to express relief that the panic engendered by the global financial crisis is easing, and to offer reassurances that, for all its faults, capitalism is still “the most productive economic engine we have yet invented.”

The problem with this claim that all is, again, for the best in the best of all possible worlds, is that far from the crisis having ended, it is only just beginning to unfold.

Zakaria begins by drawing comfort from the fact that the financial crises of the past 20 years were all overcome, leading to further economic growth. The stock market crash of 1987 defied predictions of a return to the Great Depression and “turned out to be a blip on the way to an even bigger, longer boom.” The 1997 Asian financial crisis did not lead to a global slump. Instead, the Asian economies “rebounded within two years”. The collapse of Long Term Capital Management in 1998, described by then US Treasury secretary Robert Rubin as “the worst financial crisis in 50 years”, did not result in the end of hedge funds. Rather they have “massively expanded” since then.

How were these earlier crises overcome? As Zakaria notes, US Federal Reserve chairman Alan Greenspan always advanced the same solution: cut interest rates and provide easy money, creating a series of asset bubbles.

When the subprime crisis developed in 2007, Fed chairman Ben Bernanke followed the same procedure. However, on this occasion, interest rate cuts failed to alleviate the crisis. The Fed initiated its injections of liquidity in August 2007, but the situation only worsened. The investment bank Bear Stearns went under in March 2008, followed by the collapse of Lehman Brothers in September and, by the end of 2008, notwithstanding massive injections of liquidity, all five Wall Street investment banks had either collapsed or been forced to restructure. The global financial system was on the brink of a meltdown.

This alone demonstrates that, far from the happy scenario painted by Zakaria—this crisis is just like the others since 1987—the collapse that began in 2007 marked a qualitative turn in an ongoing process.

Zakaria is forced to acknowledge that the global financial system has been “crashing more frequently over the past 30 years than in any comparable period in history”. But he insists that the problem is not with the profit system itself. “What we are experiencing is not a crisis of capitalism. It is a crisis of finance, of democracy, of globalization and ultimately of ethics.”

In the first place, the separation of capitalism from each of these phenomena is absurd—as if the capitalist mode of production could somehow be lifted out of the historical situation in which it is situated; as if it does not shape the socio-political environment in which it operates, including the prevailing ethics.

Let us examine each of Zakaria’s explanations of the crisis in turn. He insists, along with many others, that the fault lies with the operations of the financial system.

“Finance screwed up, or to be more precise, financiers did. In June 2007, when the financial crisis began, Coca-Cola, PepsiCo, IBM, Nike, Wal-Mart and Microsoft were all running their companies with strong balance sheets and sensible business models. Major American corporations were highly profitable, and they were spending prudently, holding on to cash to build a cushion for a downturn.”

The separation of finance (the bad side) from the rest of the capitalist economy (the good side) has a long history. It was taken up by Marx in his withering critique of the French petty-bourgeois anarchist Proudhon more than 150 years ago. As Marx explained then, the “bad” side cannot be separated from the “good”, especially as it turns out that, more often than not, the “bad” side is the driving force of historical development. And that is the case in the current situation. The development of American capitalism—and the global economy—has been grounded on the vast changes associated with the processes of financialisation that began in the 1980s.

A few figures illustrate what has occurred. In 1980, financial firms accounted for about 5 percent of total corporate profits. By 2006 this had risen to around 40 percent. On a global scale, financial assets in 1980 were roughly equal in value to world gross domestic product. Twenty-five years later they constituted 350 percent of global GDP. At the heart of this transformation has been the accumulation of finance sector debt in the US economy. It rose from 63.8 percent of GDP in 1997 to 113.8 percent in 2007—a result of the banks and financial corporations plunging ever deeper into debt in order to fund their debt-based financial operations.

The rise and rise of financialisation was not simply a policy choice, but a response to a crisis in the capitalist accumulation process that had developed in the late 1960s and 1970s. Faced with a downturn in the rate of profit, American capitalism undertook a major restructuring program from the end of the 1970s onwards. This involved the destruction of large swathes of manufacturing industry, a concerted assault on the social position of the working class, the development of off-shoring and outsourcing to take advantage of cheaper sources of labour, and a turn to financial manipulation, such as hostile takeovers and mergers, as the source of profit.

New mode of accumulation

The transformation of the American economy in the 1980s saw the emergence of a new mode of accumulation, in which profits were made through the appropriation, by financial methods, of already created wealth. Historically, wealth had been accumulated in the US economy through investment, trade and manufacturing. Now the driving force of accumulation became rising asset prices. This has determined the shape of the US economy, and the accumulation of profit by all sections of capital—even for those not immediately connected to finance.

Back in the 1950s and 1960s, manufacturing firms based on assembly-line production were not the largest component of the American economy. But the vast increases in profitability that these methods made possible created the conditions where all sectors of capital could expand. This was a society dominated by what sociologists have called a “Fordist regime” in which, as former GM CEO Charles Wilson famously noted, “what was good for the country was good for General Motors and vice versa.”

In the past 25 years, the fundamental role once played by assembly-line manufacturing in the American economy has been assumed by finance capital.

No matter how sound or well-run an individual capitalist firm may be, the accumulation of profit is a social process. Each firm depends for its expansion on the growth of the economy as a whole. And in the US, finance capital has been the driving force.

Any attempt to separate the “bad” side from the “good” collapses upon even a cursory review. Zakaria points to various corporations as part of the “good” side of American capital. One of them is Microsoft. But one of the chief sources of Microsoft’s profits has been the sales of the computers and software programs that have powered the finance sector. Consider Nike and Wal-Mart. They have profited by exploiting cheap labour in China and other countries, under conditions of globalised production. But these operations, involving complex financial relationships, would have been impossible without the growth of financial derivates. At the same time, Nike and Wal-Mart could not have remained profitable without the rise in US consumer debt—much of it from housing finance—that has sustained American consumption spending in the face of stagnant or declining real incomes over the past quarter century.

The essential significance of the global financial crisis is that it marks the breakdown of the mode of accumulation that has prevailed for the past 25 years.

Financial assets derive their value, in the final analysis, from their claim upon the production of real wealth. Shares are an obvious example. The share is a claim to a portion of a stream of income generated by a particular company. But this share can be bought and sold, and its value may increase in the market in excess of the value of the underlying asset.

The fact that financial assets have expanded almost four-fold in relation to global production over the past two and a half decades means that all their claims to real wealth cannot be met. This disparity is expressed in the emergence of so-called “toxic assets” on the books of the banks and finance houses—claims to income and wealth that are essentially worthless.

In other words, the crisis is not one of liquidity, i.e., lack of sufficient funds to ensure the functioning of an otherwise healthy system, but of insolvency. Its dimensions are indicated by the fact that to restore the parity that existed in 1980 between the value of financial assets and global GDP would mean wiping out financial asset values equivalent to twice global GDP.

These figures make clear the meaning of the bailout and stimulus packages launched by governments around the world. They have nothing to do with maintaining the jobs and living standards of the working class. Rather, they are aimed at transferring as much as possible of the massive debts and “toxic assets” amassed by the financial corporations and banks to the state.

It is precisely this state rescue operation that has boosted stock markets over the past three months and enabled Zakaria to breathe a sigh of relief. As a recent article in the Wall Street Journal noted, one of the main reasons for the more than 30 percent rebound is “disarmingly simple”. Financial markets are “awash in government cash” as a result of the biggest combined financial stimulus the world has seen in modern times.

The US government has already pledged $12.7 trillion in support of the financial system, almost equivalent to America’s gross domestic product. Since the financial crisis intensified in September 2008, governments worldwide have committed $18 trillion in public funds, equivalent to almost 30 percent of world GDP, to recapitalising the banks. This has led to a blowout in their fiscal position.

In Britain, government debt is expected to soon reach 100 percent of GDP while Japan’s government debt is headed for 200 percent by 2011 and government debt in the US is expected to reach 100 percent of GDP by the same time. According to IMF economists, by 2014 public debt to GDP ratios in the G-20 economies, comprising some 85 percent of the global economy, will have increased by 36 percentage points of GDP compared to the levels at the end of 2007.

A new political regime

Government finance, however, cannot go on indefinitely. The debts incurred by the state to finance the banks will be paid through slashing government spending and social services and forcibly impoverishing the working class. The scale of this assault on social conditions and living standards will be directly proportionate to the size of the sums of money involved. According to one estimate in Britain, consumption there will have to be reduced by at least 20 percent from its level in 2006-2007 to make even a start on balancing the government’s books.

Zakaria points to the “terrifying” growth of government debt in America, especially when entitlements and pension commitments are included, and remarks that “no-one has tried seriously to close the gap, which can be done only by (1) raising taxes or (2) cutting expenditures.”

“This is the disease of modern democracy: the system cannot impose any short-term pain for long-term gain.” The political implications are clear: it is impossible to impose the massive spending cuts and rises in revenue needed to wipe off government debt within the present political order. Restructuring the US and other major capitalist economies requires a new, far more repressive regime.

Zakaria goes to extraordinary lengths in his attempt to claim that capitalism is not the cause of the crisis. The real problem, he insists, is not failure, but too much success. The world has been moving to “an extraordinary degree of political stability”; there is no major military competition among the great powers; political violence is on the decline. Given the wars being conducted by the US in Iraq, Pakistan and Afghanistan, such an assertion can only be described as absurd. As for the subsidence of great power rivalry, one need only point to the constant and growing concern in US policy-making circles about the rise of China.

However Zakaria is not going to let facts get in the way of the story he wants to tell. Political stability, he claims, has been accompanied by a reduction in inflation, economic growth and the establishment of a global economic system. It is these “good times” that made people complacent, and, as the cost of capital sank, more foolish. “The world economy had become the equivalent of a race car—faster and more complex than any vehicle anyone had ever seen. But it turned out that no one had driven a car like this before, and no one really knew how. So it crashed.”

What of the future? “The real problem,” he continues, “is that we’re still driving this car. The global economy remains highly complex, interconnected and imbalanced. The Chinese still pile up their surpluses and need to put them somewhere. Washington and Beijing will have to work hard to slowly stabilize their mutual dependence so that the system is not being set up for another crash.”

In other words, while the crisis is over, all the conditions that produced it are still present, and nowhere nearer to being resolved.

Lenin once remarked that the power of Marxism is that it is true. Every so often, even conscious opponents of Marxism are forced, by the very logic of objective facts, to point to processes that form the centre of Marxist analysis. This is the case here.

According to Zakaria: “More broadly, the fundamental crisis we face is of globalization itself. We have globalized the economies of nations. Trade, travel and tourism are bringing people together. Technology has created worldwide supply chains, companies and customers. But our politics remains resolutely national. This tension is at the heart of the many crashes of this era—a mismatch between interconnected economies that are producing global problems but no matching political process that can effect global solutions.”

The Marxist movement has long identified as one of the central contradictions of world capitalism that between the global development of the productive forces on the one hand, and the nation state system on which the legal and political superstructure is based, on the other. It is this contradiction that renders socialism, based on the development of an internationally planned economy, an historic necessity. Just as the feudal political order had to be overthrown to make possible the growth of the productive forces under capitalism, so today the globalisation of production has made the capitalist nation-state system as reactionary and backward as the feudal principalities and kingdoms two and three centuries ago.

This contradiction erupted in the first decade of the last century in the form of World War I. It has now emerged once again, at an even higher level. It can only be resolved by the working class taking political power on a global scale; otherwise mankind faces being plunged into wars and economic crises potentially more devastating than those that characterised the first five decades of the twentieth century.

Zakaria calls for better international coordination. But the objective logic of the capitalist system itself drives events in the opposite direction. Capitalist production is carried out on a global scale. Its purpose is not to meet human needs, but to accumulate private profit. When accumulation is expanding, the different sections of capital, as Marx noted, operate as a kind of fraternity, dividing up the spoils among themselves. When the system breaks down and it becomes no longer a question of sharing profits but of trying to avoid losses, a violent struggle breaks out. Such a breakdown no longer simply involves intensified competitive struggles in the market, as it did in the nineteenth century, but, with the vast growth of capitalist industry and finance, economic crises inevitably bring the direct involvement of the capitalist state.

This is what occurred last year. After the collapse of Lehman Brothers in September, with the banking and financial system threatened with meltdown, every government around the world responded, not by working for globally coordinated action, but to protect its “own” banking system, leading to immediate conflicts. In the months since, the differences have only widened. The Germans and French are hostile to the American government’s bailouts because they fear, rightly, that these will enable US banks to retain their dominant global position. The American government, for its part, opposes calls for greater regulation, because they are directed at US finance. The British government, meanwhile, does not want to introduce tougher regulations fearing that they would endanger London’s position, described by Financial Times commentator John Plender as “the adventure playground of the global financial system.” This brings opposition from the German government, which harboured hopes that the crisis would offer more opportunities for Frankfurt. The various industry interventions, likewise, have sharpened national rivalries. The German government’s bailout of Opel, for example, endangers operations in Belgium, even raising questions as to whether rules governing the operation of the single European market might have been breached.

As for co-ordination between the US and China to resolve international monetary imbalances, the Chinese central bank has twice called, within the past three months, for the international financial system to be restructured and the dollar replaced as the world reserve currency. Were that to take place, it would cause a rapid decline in the global position of American capitalism, which has enjoyed enormous advantages from the dollar’s role as world money.

Failing international co-operation, Zakaria warns, there will be “more crashes, and eventually there may be a retreat from globalization toward the safety—and slow growth—of protected national economies.” The development of just such a situation in the 1930s led directly to World War II. It would have even more devastating consequences today.

In the end, Zakaria concludes that a “moral crisis” may “lie at the heart of our problems”. Most of what happened over the past decade was legal but “very few people acted responsibly.” However, he continues, none of this happened because “business people have suddenly become more immoral. It is part of the opening up and growing competitiveness of the business world.”

Zakaria does not choose to develop this point, because to do so would make it all too clear that this “moral crisis” is itself an expression of the crisis of the capitalist economy.

The very processes associated with the rise of finance capital have made the dividing line between legality and illegality, not to speak of morality and immorality, ever-more blurred.

In a world of multi-million and multi-billion dollar financial transactions involving the use of complex derivatives, where the value of a financial asset can be altered by changing the value of one or other of the variables in the mathematical model on which it is based; where the more complex and obscure a financial derivative is, the greater the profit going to the seller; where vast fortunes can be made from financial gambling, and where a firm that does not employ the latest dubious methods to boost the bottom line faces being gobbled up by an asset stripper financed with junk bonds, what price ethics?

Moreover, the growth of a financial oligarchy, which dominates and controls the entire political system, means that any rational reform of the present order is impossible, even if a solution were available.

The productive forces of the global economy—the complex and powerful racing car, to use Zakaria’s analogy—created by the combined intellectual and physical labour of the world’s working class, have developed on an immense scale. But they can no longer be left in the hands of a ruling elite that has lost the historical, political and moral right to remain at the wheel. That is why a socialist revolution, and the transfer of political power to the hands of the working class, has become a historical necessity.