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Strategic and Economic Analysis
Afghanistan and Global Economic Forecast
By Craig B Hulet
Copyright © 2001KC & Associates
KC& Associates
P.O. Box 710, Amanda Park, WA 98526 (360) 288-2652
www.kcandassociates.org
KC & Associates Investigations Research Associates
STRATEGIC ANALYSIS
Afghanistan: Extremist Diaspora Will Fuel Expanded Conflict -- Long term Effects
on Global Operations -- Economic/Political:
By Craig B Hulet, et al (Sources: strategic and counter-terrorist specialist groups
and individuals have contributed to this analysis; some wish to remain undisclosed)
Date November 20, 2001
Globalization has diffused economic and technological power
around the world....And globalization also has
the potential of giving rise to a gnawing sense of
impotence as decisions affecting the lives of millions slip
out of local political control.
America at the Apex: Empire or Leader
Dr. Henry Kissinger
The Taliban’s withdrawal into the mountains is making Afghanistan an ineffective base
for militant Muslims. Many foreign-born members of al Qaeda and the Taliban, cut off
from their infrastructure and under attack from Northern Alliance Afghans and U.S.
forces, will (and are) trying to leave the country. A number of these operatives will
attempt to return to their home countries - or go to others not under U.S. bombardment -and resume militant activities. (Source, StratFor) Additionally, it is now known that all of
the hijackers allegedly having purportedly been of the nineteen identified by the FBI
were all in the United States legally with only a few having overstayed their visas
(Associated Press and INS reported). That all of these now, understood as, terrorists,
(today called terrorists, but prior to that none were on any State Department watch list as
having committed any crimes) is a significant development where any thorough analysis
is concerned. This office argued from the beginning (when briefing Federal Law
Enforcement intelligence personnel on September 11, 2001 @ 9am West Coast Time)
and during numerous media interviews, that we are not dealing with terrorism in any
classical sense, but a new level of “international urban guerrilla warfare.” (See my first
briefing paper On War: September 11, 2001, September, 2001) It was then stated, “look
at the nationalities of the suspects and their supporting network.” That these skilled
operatives of the 9-11 incidents came from over sixty different nation-states is
significant. That many, if not most, are “clean” and without any previous known illegal
activity, passports were valid, will make the apprehension of others that much more
difficult.
Analysis:
The process which has brought the war in Afghanistan to its current point
(Nov.20th-30th, 2001) has not been fully disclosed to the public. Pieces of evidence
slowly coming to fruition will give analysts fits for years to come. One thing of recent
significance is that the Bush Administration, beginning in February 2001, had intensely
engaged the ruling Taliban in negotiations regarding their future in the region right up
until five weeks before the September 11, air attacks. Administration officials stated until
that time that the Taliban were seen as a “stabilizing force in the region” by Washington
and offered them recognition and financial aid packages based on the specific offers from
Washington. This period of recognition has not been admitted to publicly but has been
widely reported in the foreign press, primarily the French and British. (see Oil &
Sovereignty, Nov. 2001) This will undoubtedly be seen as a betrayal by the regime and
Ussamah bin Laden’s forces.
It is these kinds of effects, consequences that is, of the bombing that shall create a
long-term problematic for doing business globally and American tourism worldwide. We
shall be well-remembered by Muslims everywhere. A map below demonstrates how far
and wide the refugee Afghan Arabs, as they are called, will be disbursed. When the world
believes it has returned to normal, these dispersed guerrillas will strike again, both at the
United States and the symbols of global hegemony like the World Trade Center (WTC)
and the World Trade Organization (WTO). (See Foreign Affairs, William Perry, The Next
Attack: Nov./Dec. 2001)
Some 50 Filipinos suspected of training with al Qaeda in Afghanistan have started
slipping back into the Philippines through mostly Muslim-dominated islands in the south,
according to immigration authorities cited by the Philippine Daily Inquirer. A Philippine
government source told the paper the suspected terrorists began arriving soon after the
Northern Alliance started overrunning Taliban strongholds in Afghanistan.
The Taliban’s retreat over the past two weeks has made Afghanistan a much less
effective base for militant Muslims. Many foreign-born members of al Qaeda and the
Taliban will try to leave (and are) the country, although many won’t get past Pakistan or
even the Afghan border. Still others will be apprehended when they arrive in their home
countries, but some will slip through the cracks and resume operations. The CIS countries
have jointly announced their co-operation with the West. (Source: Caspian News Agency
11/30/01) The Taliban’s position in Afghanistan has been upended, with the group losing
control of about 70 percent of the country. Taliban loyalists who are not surrounded in
Kunduz or Kandahar have predictably taken to the hills to begin a more guerrilla-style
war. Other members of the country’s majority Pushtun population, of which many were
only marginal Taliban sympathizers to begin with, have simply switched loyalties to the
Northern Alliance. But many of the Taliban’s foreign fighters are not surrendering. These
fighters, known as “Afghan Arabs,” include not just Arab nationals but also Filipinos,
Chinese Uighers, Indonesians, Malaysians, Bosnians and Chechens. Some have lived in
Afghanistan since the 1980s while others moved in once the Taliban took control.
Estimates of their number range from 10,000 to 25,000. The map below shows the
numerous routes these former fighters will traverse the globe. (Strategic Forecasting)
Many will remain in the region to fight on against the newest ruling puppet regime the
United Nations, but in all seriousness, the United States will try to place in power. The
Taliban have vowed to fight this new regime with the same tenacity as they fought the
Soviets. They must be taken seriously. Russia will not stand by and watch the United
States decide which parties rule in this region as will be shown further below.
The region which borders on the larger Caspian Sea region will for years to come be a
source of destabilization and terrorist activity and guerrilla warfare. But increasingly the
area will be more isolated as well. While the Russian media has been consistently
reporting the potential long-term destabilization effects it has been largely ignored by a
seemingly obedient American press. This will change over time as further issues below
become common knowledge. The most significant issue which shall come to light soon
enough will the U.S. politico-commercial objectives in the region. The Silk Road
Strategy as it is called.
The Afghan Arab Diaspora will be modeled on the above map, showing the various
nations these members had originally held residence. (Source Map, Strategic Forecast)
The Northern Alliance, it is now well known, which Mr. Bush has chosen to align
itself with has a far worse human rights record than the Taliban. The Northern Alliance
has also asked the British and Americans to leave Afghanistan causing a split in its own
force network. These various warlords will war with each other and with the now
splitting-up forces of the Taliban: a war of all against all. The members of Ussamah bin
Laden’s forces, on the other hand, will be enlivened and more dedicated than ever. Proof
of everything they have been told about America by bin Laden and others, will be seen as
verified if not prophesized.
Part of their devotion may be attributed to religious fervor, but some of it is likely due
to fear of reprisal from vengeful Afghans. Hundreds of foreign fighters have reportedly
been executed by Northern Alliance troops since their advance. (StratFor) This has been
denounced by the Bush Administration but is pointless and was fully expected by all
serious analysts.
It is also apparent that Afghanistan is no longer the ideal base for extremist groups that
it once was. Training camps, munitions depots and communications equipment have all
been destroyed, along with the government that sheltered extremist fighters. These
factors will likely force many Afghan Arabs to leave the country. A similar situation
existed in the early 1990s, after the Soviets left Afghanistan and Kabul’s communist
regime crumbled. Large numbers of well-trained Afghan Arabs discovered they weren’t
especially welcome in the country, and many returned to their home states.
These returnees formed the core of extremist groups such as the Egyptian Islamic
Jihad, the Abu Sayyaf in the Philippines and Algeria’s Islamic Salvation Front. Some of
these extremists returned to Afghanistan once the Taliban took power while others joined
Ussamah bin Laden’s alleged al Qaeda group. It should be pointed out that the al Qaeda
group has been almost mythically enlarged in the eyes of the world the way the mafia has
been by Hollywood to a generation of movie goers. But the disparate groups which do
work together and have been since about 1982 (See Hulet per contra Bush Oct. 2001)
exist and reprisals against Americans must be predictably assumed.
Although a similar exodus may be attempted now, it has been argued by some analysts
that “getting out of Pakistan isn’t easy. Northern Alliance loyalists and Pushtun turncoats
are combing the hills while U.S. and British special forces are manning roadblocks
throughout the south. Escaping north means braving the desert in southern Turkmenistan,
army troops in Uzbekistan,... (and Russian border frontier guards from Tajikistan to
Armenia)... Human smugglers can breach the Iranian border, but the Tehran government
is decidedly anti-Taliban.” (StratFor). We do not agree with the depth of this argument
although certainly it will be true in many cases. The network of Afghanistan’s canals
underground which have been used for centuries to bring water to this arid land are now
used as an underground virtual highway (footpath and crawlspace in other cases) that
only the experienced trained guerrillas know well; the very experienced know every route
which can be traveled.
In any case, the best option may be eastward through Afghanistan’s 1,500-mile border
with Pakistan. But despite a multitude of routes, this option is no longer as simple as it
was three months ago. Pakistan has reinforced its border with 20,000 soldiers and is
likely using the recent $80 million in U.S. aid for equipment such as sensors and
night-vision gear. (This has not been verified)
But things get marginally easier for militants upon their arrival in Pakistan, as the
Taliban have a significant support network in the country. But sea routes out of Pakistan
-- the most common and anonymous method of transportation -- are now being patrolled
by the U.S. Navy, with warships searching merchant vessels leaving the country.
(Evening Standard, a British daily).
Given enough time and money, and with the general chaos in Afghanistan and
Pakistan, it can be assumed that perhaps no more than 2000 to 5,000 Afghan Arabs will
escape to their home countries. These fighters may likely find shelter in numerous areas:
Morocco, Algeria, Egypt, Jordan, Saudi Arabia and the other Persian Gulf states,
Lebanon, Syria, Turkey, Russia (Chechnya), Yemen, Pakistan, Uzbekistan, Tajikistan,
western China, Malaysia, Philippines, Indonesia, Bosnia, Sudan and Somalia. President
Bush has revealed the week of November 20th, that Somalia, Yemen and Sudan are
targeted next after Afghanistan falls; hints at a late January date are profoundly
optimistic, but Mr. Bush has the habit now of going his own way regardless of what
world opinion says.
It has been argued that “most of the Middle Eastern states have extensive internal
security apparatuses, capable of monitoring and intercepting returning extremists. A
handful of fighters may be able to slip into each nation, but large-scale returns are
unlikely.” (Strategic Forecast) We think this may be too pessimistic an appraisal if Mr.
Bush does continue to bomb other states as he now claims is his intent. This will further
reduce the support from these countries and many may even have to begin turning a
blind-eye where specific returning guerrillas are concerned.
In Asia, both Malaysia and China have strict internal security. Conversely the
Philippines and Indonesia are relatively easy to penetrate; Indonesia has lax border
security and the southern Philippines is the site of a large-scale Muslim insurgency. But
relatively few Afghan Arabs are Asian, and non-Asians would be highly conspicuous.
Somalia, Sudan and Chechnya are realistically the two areas where significant
numbers of Afghan Arabs could set up camp. Their relatively close location to
Afghanistan and already unstable situations would make it easier for large numbers of
fighters to remain undetected. All three should expect to see significant inflows. This will
make the Mediterranean region less hospitable to American business ventures.
In any event, an extremist rise in most of the various host countries should be expected
as the evacuation from Afghanistan continues. The fighters will return with experience,
training and a renewed network of contacts in other countries. The returnees will likely
not take direct orders from bin Laden, al Qaeda or the Taliban. Communications will be
monitored, and the al Qaeda network appears to be in some disarray. But wherever they
end up, the fighters will adapt their skills and ideology to the local context and exploit
existing political or military rifts. In most cases these actions will be consistent with al
Qaeda’s interests, and violence against host governments, foreign, and especially
American businesses or U.S. military personnel should be expected.
One side effect of this dispersal may be the foundation of a second network of Islamic
extremists. Just as the Soviet war against Afghanistan -- and the subsequent scattering of
fighters -- produced a worldwide network of extremists, the American war in Afghanistan
will produce a secondary network, one that might not be centered around Osama bin
Laden, but centered around an anti-American focus like never before.
Taliban Withdrawal Was Strategy, Not Rout:
November 15, 2001 (Sources: Strategic Forecast, The Guardian and The U.K.
Independent)
In less than a week, Taliban fighters have been swept from most of northern Afghanistan,
including the key cities of Mazar-e-Sharif, Herat, Kunduz, Taloqan, Bamiyan, Jalalabad
and the capital Kabul. How did a force that only two months ago controlled most of
Afghanistan get swept from the battlefield so quickly, and is the battle over? Evidence
suggests it has only just begun.
Analysis:
Northern Alliance troops moved into Kabul on Nov. 13, less than a week after launching
an offensive that has swept the Taliban from most of northern Afghanistan. The Northern
Alliance now controls the key cities of Mazar-e-Sharif, Herat, Kunduz and Taloqan, all
located astride vital supply routes into neighboring countries. Popular uprisings have
reportedly ousted the Taliban from Bamiyan and Jalalabad, and there are even reports of
anti-Taliban Pushtun forces marching on Kandahar. On the surface it appears a lightning
offensive by the Northern Alliance -- supported by U.S. aerial bombardment -- has
shattered the Taliban army in a matter of days. But have the Taliban been defeated? An
examination of the Taliban withdrawal suggests the group has intentionally surrendered
territory in the interest of adopting tactics more amenable to its strengths. The United
States now must face what every guerrilla warrior wants, a ground war on their territory;
a protracted war is the only war a guerrilla army can ever hope to win. This office only
hopes that Mr. Bush and Mr. Blair have not been led into a Custer-like war; have not
taken the bait to fight a guerrilla war where nobody is likely to be the winner. A guerrilla
war is not fought with victory foremost in mind. The guerrilla fights with but one primary
objective: To survive.
The towns abandoned have no strategic importance to the Taliban, nor anybody else;
they cannot even be called pre-industrial towns. To abandon these primitive bombed-out
facilities has only propaganda value to the Western forces; and virtually only Americans
in the world will believe this matters one whit. The war was always destined to be fought
as a guerrilla war within the territories and mountains, arid wastelands and urban centers
of far more developed nations as the war’s zones of attack. The targets will be western
international and global and this war will last for well over a decade
If the United States and its allies misread the Taliban withdrawal as a rout, they could
quickly find themselves locked in a nasty guerrilla war in Afghanistan. Worse, that war is
likely to spread well beyond Afghanistan’s borders, as the core of Taliban and al Qaeda
forces in that country seek to secure their supply lines and capitalize on their strengths
and their opponents’ weaknesses. America proper will be hit again. Christmas week must
be considered an important symbolic point to attack.
Western Political/Commercial Objectives:
Reasons for long-term terrorism are many but one significant area overlooked is the
recent standing recognition of the Taliban regime as the Afghanistan sovereigns by the
Bush Administration until five weeks before the September 11, 2001 air attacks. This will
always be seen as a betrayal by the Taliban refugees and guerrillas as well as all members
of Usammah bin Laden’s groups.
When Pakistan ditched its ally, the Taliban, in September, and sided with the
U.S., Islamabad and Washington fully expected to implant a pro-American
regime in Kabul and open the way for the Pak-American pipeline. But this was
not to be.
In a dazzling coup, Russian President Vladimir Putin stole a march on the Bush
administration, which was so busy trying to tear apart Afghanistan to find bin
Laden it failed to notice the Russians were taking over half the country...The wily
Russians achieved this victory through their proxy Afghan force, the Northern
Alliance. Moscow, which has sustained the Alliance since 1990, re-armed it after
Sept. 11 with new tanks, armoured vehicles, artillery, helicopters and trucks. The
Alliance’s two military leaders, Gen. Rashid Dostam and Gen. Muhammed
Fahim, were stalwarts of the old Communist regime with close links to the KGB.
Putin put the chief of the Russian general staff, Viktor Kvashnin, and the deputy
director of the KGB, in charge of the Alliance. During the Balkan fighting in
1999, the hard-charging Kvashnin outfoxed the U.S. by seizing Pristina’s airfield,
thus assuring a permanent Russian role in Kosovo. (Source: By Eric Margolis,
Nov. 25th, 2001 The Toronto Sun)
Now, Kvashnin, has done it again. To the outrage of Washington and Islamabad,
Kvashnin rushed the Northern Alliance into Kabul, in direct contravention of Bush’s
dictates. The Alliance is now Afghanistan’s dominant force and, in the face of Bush-led
multi-party political talks in Germany the weekend of November 24th, the Northern
Alliance now styles itself the new sovereign government, a claim fully backed by
Moscow. The conference was moved to Bonn from Berlin for security reasons.
Burhanuddin Rabbani, the leader of the Northern Alliance, has rightly called the
conference a “symbolic” effort to establish a broad-based government as past
attempts over many decades to impose peace on Afghanistan have proved
fruitless. Undoubtedly, too, it will turn into a media circus....Iran, Afghanistan
(Northern Alliance), Russia and to some extent India have formed their own
agenda, and everything is likely to follow their program, while the interests of the
main investors in the drama - the US, Britain and Pakistan - have been reduced to
virtual observers. (Source; November 23rd, Asia Times, Talks promise only hot
air: By Syed Saleem Shahzad)
The pipelines Mr. Bush and western oil consortiums want must run South through
Afghanistan. With the Russians (and Chinese?), the pipelines shall run North and East,
which is of course the real “silk road” route. Has Mr. Bush seriously blundered, as Mr.
Margolis suggests? This we shall have to wait and see. The question remains who will
control the vast oil and gas reserves in the region? The Russians and Chinese or the
American-led western Empire? Does this put us in the grip of a new Cold War? And
should the outcome turn to confrontation with the Russians and possibly the Chinese,
what effect will this have on the global economy, not to mention the American economy,
staggering under what is beginning to look more and more like a coming deflationary
cycle of recessionary proportions...if not worse? That the Russians are on the move
along with the Chinese in the region is not under dispute; a quick search of the sources
available such as the Caspian News Agency (CNA) and Azerbaijan’s News Service
Azerinews.com one finds activity ongoing such as the press briefing below:
LUKOIL will take part in Baku-Ceyhan project in case of receiving approval
of Russian government
Caspian News Agency, Thu 22 Nov 2001
Moscow, November 22, 2001. (CNA). LUKOIL Russian Oil Company will take
part in the construction of Baku-Ceyhan oil-pipeline in case if it is made certain of
profitability of this project and receives government’s approval, Vagit Alekperov,
the president of LUKOIL, stated at the press conference organized within the
frames of Oil of Russia – Present and Future International forum, started today in
Moscow. According to Alekperov, on November 23 the representatives of
LUKOIL and TransOil will get acquainted with new surveys of the experts of
Azerbaijani International Operation Company (AIOC) on Baku-Ceyhan project.
Thus, LUKOIL can soon make clear for itself the issue about its participation in
the project, however, the final decision by the heads of the company will be
coordinated with the Russian government.
CASPIAN NEWS AGENCY
/20:25 28.11.2001/ Russia/Oil/PSA/Summit
Kalujny will take part in Russian energy summit PSA 2001: investments to XXI
century Moscow, November 28, 2001. (CNA). The Russian energy summit On
Production Sharing Agreement (PSA) 2001: investments in XXI century will take
place December 10-11 of 2001, in Moscow. Special Envoy of the Russian
president Victor Kalujny will take part in the summit. Initiators of the conference
informed CNA that intermediate results of the work on formation of efficient
managing and legal infrastructure of PSA will be concluded. The sides will also
create preconditions for dynamic growth of investment activity in oil and gas
sphere in various regions of Russia, on the Caspian Sea in particular.
The heads of the Russian and foreign oil and gas companies, banks, largest
industrial enterprises, heads of federal bodies of local self government, Russian
lawmakers etc. will take part in the conference. Moscow’s international
oil club and Oil and Gas Vertical organized the summit with assistance of CWC
Associates company and Ministry for Economic Development and Trade of the
Russian Federation. It is the second such Forum, the first one - PSA 2000 - was
held last fall in Southern Sakhalin
/15:58 10.12.2001/ Kazakhstan/President/oil/transportation
Foreign investors prefer oil transportation from Kazakhstan via Iran to Persian
Gulf, Kazakh President considers
Astana, December 10, 2001. (CNA). The Foreign investors working in
Kazakhstan consider most profitable to transport oil via Iran to the Persian Gulf,
the Kazakh President Nursultan Nazarbayev said a briefing in Astana. "This is not
only my opinion, but of companies working in Kazakhstan including the US
ones," the head of the state stressed.
The President reminded that the maximum capacity of the CPC oil pipeline
recently put into operation amounts at 48 million tons per year and this route
would be loaded by the raw materials from the Tengiz field. At the same time the
exploitation of the world largest Kashagan field will start at the end of 2005. "In
2015 the export possibilities of Kazakhstan are forecasted at the level of 150
million tons of oil, and up to 80 billion cubic meters of natural gas will be
extracted in passing," Nazarbayev said. The President noted that various vectors
of oil pipelines are important for the state, that’s why Astana "supported
the Baku-Ceyhan oil pipeline."
The Kazakh leader also mentioned the possibility "of handing up to 20 million
tons of oil from Kazakhstan to Baku via the Caspian Sea without oil pipeline
construction" exists. Besides, Nazarbayev mentioned "we have a contract on oil
pipeline to the West China." On the whole, the President concluded, "we are
interested in many opportunities." -OK/16:11 05.12.2001/ Russia/oil/conference
Perspectives of Russian Oil Industry Development international conference
opened in Moscow
Moscow, December 5, 2001. (CNA). Perspectives of Russian Oil Industry
Development international conference opened today, December 5, in Moscow. At
the forum’s opening ceremony the first deputy of Russian Energy
Minister Ivan Matlashov said the main aim of the conference is preparation for
the 17th World Oil Congress. CNA reports that representatives of Russian
Energy, Foreign, Economic Development and Trade Ministries, heads of leading
oil companies, including LUKOIL, Rosneft, Zarubezhneft and others, take part in
the forum. -OK/17:49 05.12.2001/ Russia/oil/strategy/Caspian Sea
Russian energy strategy foresees implementation of large projects in Caspian
region
Moscow, December 5, 2001. (CNA). According to the Russian Energy strategy,
series of large projects will be implemented in the Caspian region till 2022, senior
councilor of Russian Foreign Ministry Stanislav Jhiznin said at the conference
called as Perspectives of Russian Oil Industry Development.
He mentioned one of such projects would be the oil main construction. The
diplomat said despite Europe is the central market for Russia, "later on our state
intends expanding its market infrastructure." According to the Russian Energy
strategy, the market developing will go in the eastern and southern directions. So,
Jhiznin stressed the Central Asian and Caspian regions are "the most prior and
attractive ones for investors." -OK12:25 03.12.2001/ Azerbaijan/oil/exporters/CIS/Alliance
Azerbaijan supports Kazakh initiative on establishing Alliance of CIS states - oil
and gas exporters
Baku, December 3, 2001. (CNA). Azerbaijan supports the Kazakh initiative on
establishing Alliance of CIS states - oil and gas exporters in contrast to the OPEC,
president of the Azeri State Oil Company (SOCAR) Natig Aliyev informed CNA.
He added the CIS state-members, extracting and exporting hydrocarbons, should
carry out the coordinated policy. The Kazakh President Nursultan Nazarbayev
declared the same idea. He suggested establishing the Alliance of oil and gas
state-exporters with participation of Kazakhstan, Russia, Azerbaijan,
Turkmenistan and Uzbekistan. Nazarbayev said the new Alliance would serve in
contrast of the OPEC in oil and gas spheres, and the principal role in it should be
played by Russia. -OK______
/12:09 03.12.2001/ Azerbaijan/AIOC/contracts
AIOC signed contracts on constructive works within Stage-1 of three Caspian
oilfields exploitation
Baku, December 3, 2001. (CNA). The Azerbaijani International Operating
Company (AIOC) signed recently six main contracts for USD 750 million on
Stage-1 construction works concerning Azeri Caspian oilfield exploitation.
The consortium press release reads that the Stage-1, approved in August 2001 by
the AIOC shareholders, is estimated at USD 3.4 billion: USD 1.1 billion will go
for construction works, USD 1 billion - for Azeri field drilling. The rest funds
should be spent on purchasing equipment and establishing reserves, insurance and
project managing. AIOC signed contacts with several companies: with the
McDermott company - on construction of upper units of the drilling platform on
the Azeri contract area and laying down the underwater gas pipeline from the
field to shore terminal, with the Bouygues Offshore company - on construction of
the foot block, piles and bedplate for drilling, with the Emtunga International
company - on construction of accommodation hulks on the drilling platform, the
Saipem company - on transportation and installation work, and the Eiffel
company - on delivering the drilling module of the platform.
The AIOC president David Woodword informed CN about USD 75 million
would be invested in modernization of Azeri constructive and sea units within
Stage-1. Extraction of the first portion of oil from Stage-1 is scheduled for first
quarter of 2005, and by this time Baku-Tbilisi-Ceyhan oil pipeline will have been
put into operation. -OK/16:04 04.12.2001/ Azerbaijan/oil/BP/prospecting
BP company intends resuming oil prospecting on Inam offshore structure
Baku, December 4, 2001. (CNA). The BP company intends resuming prospecting
drilling on the Inam offshore perspective structure in the first half of 2002. BP
representatives informed CNA the drilling work held up due to high pressure in
the bed in August 2001 would resume after coordination the Istiglal drilling unit
operating schedule. Till March 2002 this floating semisubmersible drilling unit
will be used by the Exxon Mobil company on the Nakhchyvan perspective
structure on the Caspian Sea. -OK-
/12:15 05.12.2001/ Armenia/Ukraine/cooperation
Ukrainian company to take part in Iran-Armenia gas pipeline construction
Yerevan, December 5, 2001. (CNA). Administration of the Intercontact Ukrainian
company received reliable guarantees of investments' protection "at the highest
level," the honorary president of Intercontact, people's deputy of Ukrainian
parliament Aleksander Edin said after negotiations with Armenian authorities for
purchasing the controlling interest of the Nairit-1 close jsc.
Recently Aleksander Edin and the deputy of Ukrainian Minister of Industrial
Policy Aleksey Golubev met with the Armenian Prime Minister and
parliamentary Speaker. They were also received by the Armenian President
Robert Kocharian. Armenian presidential press service informed CNA the
Ukrainian guests emphasized Armenian attraction for business, while stressing the
internal political stability in the state and prudential approaches of the Armenian
government to industrial development. The Armenian President mentioned the
economic policy of Armenian government is aimed at creation of new
workplaces.
During the meeting with Armenian President the arrangement on Intercontact's
participation in Iran-Armenia gas pipeline construction, particularly a 40-km part
of the main on the Armenian territory, is reached, Edin informed journalists. -OKAccording to CSA’s regular daily briefings, which this office subscribes to, there are
ongoing CIS (Commonwealth of Independent States) meetings at every level of each
government. These meetings include discussions regarding the re-establishment of some
governmental body in Afghanistan. The ten year anniversary of the CIS was held in
Moscow, as are all the other ongoing meetings every year. Russia is increasingly the
largest single trading partner with every country, including now Azerbaijan (as of the
period September through January 2000-2001), according to CNA. It is becoming clear
that not only has Mr. Bush not solved the problems in the region, the problems are
increasingly being brokered by Moscow. In a recent (2am) CNN interview former
Hoover Institution fellow and former editor of the Washington Times, now editor at
United Press International (UPI), Mr. Arnaud deBorchgrave, argued that Mr. Bush may
have brought on a new Cold War over the energy issues surrounding not only the critical
Caspian region, but the entire outstretched areas including Russia and China and Georgia.
Additionally the Chinese have had a decade’s lead in doing for the region what the
western powers completely neglected to do at all. The Chinese have been financing and
helping to build the infrastructure of these neighboring states; agribusiness, hydroelectric,
textile mills and mining ventures of every stripe. (CNA reports Nov.2001) The United
States and its western partners have only and exclusively been trying to control the
regions oil and gas; typical of Empire, its interests rest with control and power and of less
interest, what happens to the region’s peoples and governments thus exploited. This is no
post-Marxist analysis, this is simply the history of the region to date and makes perfect
sense. The Russians and Chinese have to live with these bordering states and every
conflict in their region stands to spill over into their own territories’ (especially their
Muslim populations) people. What happens in these regions regarding oil and gas
exploration and the much needed transport system of pipelines has been the “only”
serious concern of the West and the United States in particular which this writer has
addressed extensively in my latest working paper. (Oil & Sovereignty, In Whose
Interests?, November 20, 2001) This neglect and effort to isolate Iran and Russia out of
the oil markets will prove to be a dismal failure. A new Cold War may indeed be in the
offing.
The map below shows the various routes proposed over the last several years since 1993.
The map above was prepared for hearings into the Caspian oil region and Initiative of
February 18th, 1997. (See the Hydra of Carnage: the bellum justum Between Empire and
Revolt, October, 2001, working paper by Craig B Hulet and the hearings on H.R. 2867)
Global Economic Effects:
What Mr. Bush has [inadvertently?] accomplished is to create a world-wide hatred of
Americans and American-led industries as well as Americans traveling anywhere in the
world on the part of much of the Muslim world. How will this affect the global economy
and the U.S. economy is difficult in the extreme to assess. With interest rates hovering
around zero, there would seem to be little Greenspan’s Fed can do. Can they increase the
money supply as they had in the past by other means, (repurchase agreements and such)
and stimulate another speculative bubble in the laggardly stock market? Not likely given
the lack of serious assurances by the Administration that all this war-making is really
almost over.
The U.S. economy is officially in recession and could be in the grip of a downturn
even longer than that seen in the early 1990s, according to an independent panel seen as
the authority on American business cycles. The National Bureau of Economic Research
(NBER), the official arbiter of turning points in the US economy, November 26th,
declared that the country’s first downturn of the century began on March of this year
2001 and that America may not recover until next summer mid-2002. This may be overly
optimistic as much of the government’s statistical methods, the math that is, is considered
highly questionable by most analysts in the private sector. Privately analysts and their
investor clients whether individuals or corporations, are fretting that we are in even worse
shape as investment dollars are drying-up and banks are extremely reluctant to loan.
Interest rates are so low that the middle class which depends on its meager investment to
show a livable return are going to have to begin to dip into their capital to make their
current expenditures as the returns have been halved.
The recession brings to an end ten years of uninterrupted economic expansion in
America, the NBER panel said, the longest on record. The recession is America’s first for
a decade and the country’s tenth since the Second World War. NBER research suggested
that the US economy may not recover until the summer of next year, meaning that the
current downturn would easily outlast that in the early 1990s, which was just eight
months long. Depending what happens over Christmas week, this could turn out to be
terribly optimistic. President Bush said the panel’s pronouncement emphasized the need
for Congress to pass an emergency stimulus package as soon as possible. “I knew the
economy was not in good shape right after I took office,” he said.
The NBER said that the US expansion came to an end long before September 11,
although the attacks had made the downturn deeper and longer. “Before the attacks, it is
possible that the decline would have been too mild to qualify as a recession. The attacks
may have been an important factor in turning the episode into a recession.” The panel
does not use the conventional measure of recession — two consecutive quarters of falling
national income — but uses a much wider definition. In the U.S.’s case, falls in
manufacturing production, employment and sales all pointed to a broad-based
contraction, according to the NBER report.
Christmas week in America, pointed out above, will be seen as an important critical
point to attack by the international guerrilla movement which has come to light after
September 11, 2001. This could have a devastating impact on the economy as a whole
and significantly push the nation into a worse deflationary spiral if not a full blown
depression. Should America not get hit in any important way that week it will be because
our nation’s counter terrorist forces will have intervened and shut down the attempt. But
the attempts will certainly be made.
The Future in the Offing?
After one of the best ten-year runs in economic history, the torrent of bad news flooding
Alan Greenspan’s office this January had to be jarring. The country had just seen its
worst quarter of economic growth since 1995, and manufacturing activity had fallen to its
lowest level since 1991. Spending by businesses on new plants and equipment had
dropped for the first time in a decade. And the stock markets’ decline, already nine
months old, showed no signs of abating. So Greenspan lowered interest rates, over and
over again. By mid-August, the venerable Fed chairman had cut the target federal funds
rate, the key short-term interest rate, by an astonishing three points--the fastest rate
reduction in almost 20 years.
Greenspan’s actions weren’t controversial. Cutting interest rates--that is, using
“monetary policy”--is the anti-recession weapon of choice across the economics
profession. Lower interest rates make it cheaper to borrow money, which encourages
consumers to buy big-ticket items--like appliances, cars, and homes--and companies to
invest more heavily in new equipment. Since recessions usually occur because consumers
have stopped spending, leaving businesses with excess inventory and forcing them to
scale back production, cutting interest rates is often the perfect antidote.
Indeed, with a little help from fiscal policy--that is, using tax cuts or government
spending to put extra money in the hands of consumers and businesses--the Federal
Reserve has gotten pretty good at managing recessions this way, in some folk’s opinion.
As Northwestern University economist Robert Gordon has pointed out, recessions
between 1846 and 1945 were two-thirds as long as their corresponding expansions.
Between 1945 and 1982, recessions were only one-fourth as long. (America’s most recent
recession, in 1991, fits this pattern as well.) So despite the stream of bad economic news,
economists were confident that Greenspan’s rate cuts would work their magic soon
enough. “We’re in that awkward period where ... people are losing faith,” Mickey Levy,
the chief economist at Bank of America told the Los Angeles Times in August. “They say,
‘Monetary policy doesn’t work.’ But guess what? It always does.”
Even the near economic shutdown that followed September 11 hasn’t shaken this
conviction. After two additional half-point rate cuts, Glenn Hubbard, chairman of the
White House Council of Economic Advisers, insisted that “[t]he dynamics of the
recovery are likely to be fairly similar to what we’ve seen before. I have no reason to
believe [monetary] policy won't be very effective.” According to a recent survey by Blue
Chip Economic Indicators, most economists agree. The majority of those surveyed
predicted a recovery sometime early next year, with GDP growing at a 1.4 percent annual
rate in the first quarter and a 2.9 percent rate in the second. By mid-summer the economy
should be back in overdrive.
If this recession is like every other American recession since World War II, that
optimism is fully merited. The problem is that there’s mounting evidence it’s not. This
time around, it wasn’t a change in consumer spending that brought the economy to a
standstill; it was largely a change in business spending. As anyone who has picked up a
financial page in the last year knows, the story of the 1990s is that company after
company bet heavily that consumers would purchase huge amounts of goods and services
in the future, particularly in areas related to information technology (IT). Businesses
raised vast amounts of capital, bought and sold equipment at a frenzied pace, and
dramatically increased their productive capacity--only to discover that every other
business was doing the same, thus increasing the nation’s overall productive capacity far
beyond what consumers could realistically support. When that became apparent,
businesses literally stopped investing in new equipment, and the economy--whose growth
in the late ‘90s had been driven in part by a surge in investment--suddenly and
dramatically faltered.
Cutting interest rates in the middle of this type of economic slowdown, as Greenspan
did this year, won’t help much. As long as companies feel they already have too much
equipment, no amount of interest rate cutting will induce them to buy more. And cutting
rates before such a slowdown begins in hopes of staving it off--as Greenspan did in
1998--may even be counterproductive. Low interest rates at the tail end of a long boom
can encourage businesses to binge on new equipment when they already have too much.
Then, when the optimism finally fades, companies must shed even more productive
capacity. Some companies retire equipment; others merge or go out of business. Either
way, the adjustment is more painful than it would otherwise have been.
In other words, economists’ current faith in monetary policy has a lot to do with the
kinds of recessions we’ve seen in the past, and little to do with the recession we’re in
now. By ignoring the difference, they’re not only failing to solve the problem, they may
actually have made it worse. As economists describe it, the standard, postwar business
cycle begins with an expansion, when demand picks up after the previous recession.
Before long, this modest growth evolves into an outright boom, in which the economy
begins expanding faster than its long-term growth rate and very near its overall capacity
to produce goods and services. Next is what economists refer to as the “crunch” period,
during which time the onset of inflation--as consumers demand more goods and services
than can be produced--provokes the Fed to raise interest rates. These higher interest rates
cause consumers to scale back big-ticket purchases and, usually not long after, businesses
cut back production to compensate. This stamps out inflation, but triggers a recession, as
layoffs and bankruptcies ensue. The final phase, sometimes called “reliquefication,”
describes the financial restructuring that occurs when businesses and consumers pay off
the debts they accumulated during the boom period, and businesses liquidate the
inventories that had piled up along the way. Some time after that happens, the assumption
goes, consumers (and then businesses) start spending, and the cycle begins all over again.
Given that framework, it’s easy to see how public policy can speed the recovery along:
When demand slows down, you simply cut interest rates to get consumers spending
again.
A Different Sort of Problem:
But suppose you faced a different sort of recession. Suppose that, instead of a credit
crunch, in which rising interest rates caused consumers to cut back, businesses were the
ones that stopped spending first, because they realized all the demand they had been
anticipating wasn’t going to materialize for years (if ever), even though they already had
the capacity in place--both in terms of equipment and employees--to accommodate it
today. At that point, no amount of interest rate reductions would prompt more spending.
You’d just have to ride out the storm.
Unfortunately, that’s the situation we seem to be in. Between October 2000 and March
2001, corporate profits shrunk at an annual rate of 20 percent, as the demand for goods
and services fell vastly short of expectations. Facing declining profits, businesses simply
stopped spending: Investment in capital equipment froze in the first quarter of 2001,
having increased by over 21 percent in the same quarter the year before. Much of the
drop-off was driven by an astounding 12.8 percent decline in spending on information
technology, which at the time accounted for about half of all capital investment. The
impact on an economy propelled by investment in information technology was not hard
to discern. From July 1999 to June 2000, IT spending had increased 16.6 percent, and the
economy as a whole had grown at a rate of 5.1 percent. Over the following year, IT
spending fell by 6.5 percent and GDP growth weighed in at a mere 1.3 percent.
And capital spending still hasn’t hit bottom. Until now, software had been the lone
safe haven amid the information technology collapse. While spending on hardware
dropped at an annual rate of 31 percent in the first half of this year, software fell just 5
percent. Indeed, software remains one of the few sectors that venture capitalists are still
funding. But there is a trend in this area to diversify away from technology whose effects
will not be apparent for years. And there’s reason to suspect we’re on the verge of a
software collapse as well. As Stephen Roach, chief economist for Morgan Stanley Dean
Witter, points out, companies spent $1.40 on software for every dollar they spent on
hardware between 1990 and 1997. That figure rose to $1.70 between 1998 and 2000,
largely due to the rise of Internet-related business. But because hardware spending has
been falling at a much faster rate than software spending, the ratio had risen to $2.09 by
the middle of this year. There’s no way that kind of ratio can be sustained: Businesses
only need so much software to run a fixed amount of hardware.
It gets worse. At its peak in 2000, capital spending accounted for only 14 percent of
corporate costs, meaning there was only so much cost-saving that restraining investment
could yield. Much more daunting was the 70 percent of corporate costs accounted for by
labor. In fact, as Roach has noted, the glut of capital equipment that firms accumulated in
the late ‘90s was surpassed only by the glut of personnel they hired, again in anticipation
of demand that was still years away. Much of that personnel glut came in the form of
managers. By 2000 the size of the nation’s managerial class had risen to nearly 20
million, up more than 20 percent since 1994. Which meant that, to really cut costs,
companies would have to cut high-paying jobs. And, over the last few months, they’ve
done exactly that. From October 2000 to February 2001, managers accounted for less
than 2 percent of the 400,000 Americans who lost their jobs. Between March and June,
they accounted for a whopping 64 percent of 486,000. And though the subsequent spike
in layoffs is typically blamed on the terrorist attacks, its impetus clearly predates
September 11th. In fact, according to The New York Times, many firms actually delayed
and even moderated their layoffs in the weeks following the attacks for fear of appearing
callous.
But just because this recession is different from the ones we’ve seen in the recent past
doesn’t mean it’s unprecedented. There is a model to explain it, and it comes from the
early-twentieth-century economist, Joseph Schumpeter. In his 1939 classic, Business
Cycles, Schumpeter argued that economic cycles are essentially driven by the economy’s
response to innovation. His idea goes something like this: When some lucky entrepreneur
invents a new technology, he borrows money, starts a firm, and begins to rack up huge
profits. Soon, other entrepreneurs adopt more or less the same technology and begin
making huge profits of their own.
The problem is that great innovations tend to create a surge of optimism, causing what
Schumpeter referred to as a “secondary wave.” That is, not only do firms in the
innovating industry invest great sums, but other firms begin to speculate, figuring they,
too, can cash in on the new technology. To borrow Schumpeter’s example, a new factory
means more business for the local grocer, which means more business for the wholesaler,
which means more business for the manufacturer, who, in turn, ramps up production.
Unfortunately, people get carried away when making these adjustments, as do the
interests that finance them. As Schumpeter put it, “many people will act on the
assumption that the rates of change they observe will continue indefinitely, and enter into
transactions which will result in losses as soon as facts fail to verify that assumption.”
Because Schumpeter understood growth as a function of innovation, he understood
recessions as inevitable periods of adaptation: An economy assimilating a new innovation
accumulates deadweight that must be purged--firms made obsolete, firms that adapt
slowly or poorly, and firms dependent on firms in either of these categories. The
speculative phase Schumpeter identified exacerbates the problem by creating more
deadweight. As a result, more people have to bear more pain--in the form of bankruptcy
and job losses--for a longer period of time. Schumpeter made technological innovation
the central feature of his model because, at the time he was writing, it was the most
important force propelling the economy. Beginning in the mid-nineteenth century, the
growth of railroads drove the nation’s westward expansion. Around the turn of the
century, electricity and automobiles were revolutionizing the industrial world.
Moreover, each boom period seemed to be followed by an equally violent bust. Take the
post-Civil War railroad boom. As optimism surrounding the railroad expansion grew,
banks lent to companies against bonds that were later sold to the public, and speculation
in railroad stocks increased dramatically. That optimism reached a fever pitch in 1869,
with the completion of a transcontinental route at Promontory Point, Utah. As one
contemporary observer put it, “They built [rail]roads everywhere, apparently in perfect
confidence that the country would so develop as to support all the [rail]roads that could
be built.”
And then, in Schumpeter’s words, “railroad construction had temporarily exhausted
possibilities.” The more than 50,000 miles of track laid in the United States roughly
equaled the amount that existed in all of Western Europe, whose population was more
than three times the size. Which makes it hardly surprising that the failure of the once
powerful Northern Pacific Railroad could trigger a market crash in 1873. Stock prices
and land values imploded (the latter having risen wildly in areas opened up by rail
expansion), and 40 percent of railway bonds became worthless over the next few years.
Annual construction of track slowed from 7,500 miles just before the crash to 2,500 miles
afterward. And the ripple effects produced a depression whose magnitude would not be
replicated until the 1930s. The reason? As Schumpeter put it, “...railroad construction ...
had so revolutionized the economic system that liquidation, absorption, adaptation ... was
an unusually long and painful affair.”
Fast-forward 125 years and the story is eerily similar. In the late 1990s fiber optic
cable seemed to hold the same limitless possibilities that rails had in the 1860s. Amid a
dramatic increase in Internet use, demand for “bandwidth” (i.e., capacity for handling
communications traffic) literally skyrocketed. The main reason was that the vast majority
of existing infrastructure had been made from copper wire, meaning that signals had to be
transmitted electronically--not the most efficient process, as anyone who has ever tried to
connect to the Internet using a regular phone line can tell you. The beauty of fiber optics,
on the other hand, was that they transmitted signals as light. That meant each signal
encountered less resistance en route to its destination and arrived much more quickly.
Meanwhile, because photons are much lighter than electrons, each optic cable could haul
millions of times more traffic than its copper counterpart. In light of that advance, one
widely reported estimate predicted that telecommunications companies would spend
more than $1 trillion upgrading their networks over the next 20 years.
Needless to say, the possibilities weren’t lost on American businessmen. In June 1998
a fledgling company named Global Crossing had laid a single, 5,000-mile fiber optic
cable. Two years later it had literally crossed the globe, the size of its network soaring to
over 100,000 miles. During the same period, an army of “new economy” entrepreneurs
were doing the same. At last count, a rival company called PSINet had assembled a
million-mile network. Another rival, Qwest, had laid more than 190,000 miles of fiber. In
all, more than 40 million miles of optical fiber were laid--enough to send an e-mail to
Mars and still have cable left over. And, ironically, much of it was laid along existing rail
lines.
Unfortunately, as with railroads in the 1860s, no one has figured out what to do with all
that cable just yet. Even under the wildly optimistic, if popular, assumption that Internet
traffic was doubling every few months, it would have taken years for demand to warrant
the amount of cable actually installed. A report by Merrill Lynch this summer revealed
that just 2.6 percent of all the fiber in the ground was being used. The vast majority of it
isn’t even operational (or “lit,” as they say in the industry). As a result, wholesale
bandwidth prices (i.e., the fees phone companies and Internet service providers pay to
send information across optical networks) plummeted by around 60 percent last year.
And with it, the price of fiber optic companies’ stocks. Today a share of Global Crossing,
once valued at over $73, fetches a meager $1.58.
Given the parallels between today and the booms of the nineteenth century, why are
economists so confident this recession will turn out like the relatively painless downturns
of recent decades--recessions amenable to swift interest rate cuts by the Fed? The answer
has a lot to do with the evolution of the discipline over the last half-century. For all
practical purposes, macroeconomics didn’t exist as a distinct field prior to the Great
Depression. The economy was seen as the sum of its individual markets, which meant no
special tool was needed for analyzing it as a whole. Just as individual markets were
self-correcting, the thinking went, so was the entire economy.
The Depression, of course, changed that view. A collapse in the nation’s money
supply triggered a severe deflation, meaning that each dollar was worth progressively
more as time went by. (There is some debate as to what caused this collapse, with some
economists citing a string of bank failures and others pointing to mistakes by the Fed.)
With dollars worth more the longer people held them, there was no incentive to spend
them sooner rather than later. Demand for goods and services plummeted, destroying
millions of jobs in the process. Meanwhile, with the value of each dollar rising, it became
progressively more expensive for employers to pay their employees the same number of
dollars. Before long, the economy fell into a vicious cycle, as rising unemployment
squeezed demand, and lower demand increased unemployment.
It soon became apparent that the problem wasn’t going to fix itself. Hence the need for
a radical rethinking of the way we managed the economy. The Keynesian revolution, and
the subsequent monetarist counterrevolution, accomplished just that--with Keynesians
(notably Keynes himself) arguing that government must spend money to prop up demand
in a recession, and a few decades later, monetarists arguing that the government must
ensure a stable money supply. As a practical matter, there is an obvious complementarity
between the two positions: Government spending can help stimulate demand, while
stabilizing the money supply arrests deflation. And today macroeconomics is
characterized by a synthesis of those two components.
But something interesting happened as modern macroeconomics was being born. First,
as Northwestern’s Gordon has noted, in the transition to the postwar era, economists
switched their focus from explaining business cycles as self-contained phenomena (as
Schumpeter had) to simply explaining how various “shocks” to the economy--a rise in
interest rates, a rise in oil prices--were propagated. Second, in the transition from
Keynesianism to monetarism, the focus shifted again. The new goal was to define the
relationship between the money supply and economic growth, and calibrate the economy
accordingly. With that growing preoccupation, it’s no surprise that, by the late 1960s,
professional economists had reached a consensus about the power of monetary
policy--that it could, for example, cure a recession regardless of its cause. By the late
1970s that confidence had pervaded Washington as well.
As we’re now learning, that confidence wasn’t entirely justified. But it’s not just that
monetary policy may prove ineffectual for the kind of recession we face today. After all,
with the sort of capacity glut we’re now facing, just about every policy response--tax
cuts, spending increases, you name it--would prove ineffectual. The real trouble is that
our faith in monetary policy may have actually made this recession worse. To see why,
you have to return again to the Great Depression, whose lasting contribution to
contemporary macroeconomics was the idea that severe recessions and depressions are
almost always the result of policy mistakes.
According to the current consensus, the glaring policy mistake of the 1930s was a
failure to stabilize the money supply to offset deflation. As a result, economists grew
convinced that the money supply must be increased any time there’s a serious negative
shock to the economy. (The process is known as “increasing liquidity” and can be
accomplished by buying up Treasury bonds, which the Fed does when it lowers interest
rates.) For the most part, that has been seen by many as a pretty successful approach. In
the wake of the stock market crash of October 1987, for example, the country very likely
avoided a financial crisis because Alan Greenspan had learned exactly that lesson.
But as our faith in monetary policy (and one particular monetary policymaker named
Greenspan) grew, the determination to respond to crises slowly evolved into an attempt to
anticipate, and head off, crises before they ever appeared--what financial observer Jim
Grant derides as “anticipatory monetary policy.” In 1997 concern about financial markets
in Southeast Asia deterred Greenspan from raising interest rates despite evidence of
excess liquidity in the financial system. Then, in late September 1998, Greenspan
dropped the federal funds rate by a quarter-point amid continuing financial woes in
Southeast Asia, a Russian debt default, and the meltdown of the high-powered--and
highly leveraged--Long-Term Capital Management hedge fund. That kind of temporary
move was arguably necessary to prevent a global financial crisis. The problem was that it
turned out not to be temporary at all. Greenspan lowered interest rates by a quarter-point
twice more over the subsequent two months, cuts he didn’t begin to reverse until the
following summer for fear of leaving the economy vulnerable.
The Fed finally raised interest rates back to their September 1998 levels only in
November of 1999, at which point many felt that still further hikes were necessary. But
fear of Y2K-related problems--problems for which he had little concrete evidence and
which subsequently proved nonexistent--caused Greenspan to defer these additional hikes
until February. As with the decision to keep interest rates low earlier in the year, the
move was purely prophylactic. Why was Greenspan so anxious? For one thing, he was
still smarting from what former Fed Vice Chairman Alan Blinder has called the “only
blemish on [his] record”--the failure to head off the 1991 recession that helped usher
President George H.W. Bush from office. As one Wall Street economist put it earlier this
year, “Alan Greenspan was blamed for one Bush recession. He doesn’t want to be blamed
for another.” In addition, Greenspan had become a true believer in the power of
information technology to alter the fundamental laws of economics--in particular the idea
that technology had permanently increased productivity and, therefore, the rate at which
the economy could grow without sparking inflation. In such a context, monetary policy
seemed to hold out the promise of a painless business cycle--one in which no one ever
lost his job. Greenspan practically said as much. At a Senate Budget Committee hearing
in January, he explained that the difference between a mere slowing of growth and an
actual recession (i.e., a period in which the economy contracts) was typically how
consumers responded--the implication being that the Fed could prop up consumer
confidence and thereby keep the economy growing indefinitely.
And yet, as we’re discovering today, the old business cycle still exists: When the
combination of innovation and optimism produces vast excesses, one way or another we
have to sit tight until those excesses are wrung out. Moreover, as a purely logical
proposition, anything we do to add to the excess will make the subsequent wringing-out
more painful. Which, it seems, is precisely what Greenspan did with his preemptive
strikes against recession in the late 1990s. By any objective measure, the excess in the
economy was already great in 1998. Between 1994 and 1998, capacity in three top
technology sectors--computers, communications equipment, and
semiconductors--increased more than 400 percent. Or, to take an old-economy example,
in 1995 the nation had just under 27,000 indoor movie screens. By 1998 that number had
risen to over 33,000, even though admissions hadn’t risen nearly as quickly.
By trying to postpone the inevitable sorting-out period, Greenspan ended up vastly
increasing those excesses: Capacity in the three tech sectors more than doubled between
1998 and 2000; the movie industry added 2,200 more screens even as admissions fell 4
percent. It’s not hard to see why. First, money injected into the financial system
inevitably gets used. When Greenspan’s fear about financial crisis proved overblown,
that use turned out to be investments that “were not justified by fundamentals, and not
socially or privately productive,” according to Ohio State University economist Steve
Cecchetti. But, more generally, when Wall Street concludes that the Fed is committed to
bailing it out, investors and businesses behave more recklessly than they otherwise might.
Now that the recession is underway, cutting interest rates will prevent it from being
worse than necessary. While monetary policy isn’t going get businesses investing in new
equipment any time soon, and it won’t do much to save firms that never should have
existed in the first place, it can prevent sound firms from going under by helping them
pay off debts. Similarly, it can help consumers to refinance mortgages and makers of
big-ticket items like cars to offer cut-rate financing. Government spending might also
help ease the blow--perhaps by extending health insurance to those who lost it with their
jobs. But the hard truth is that we can’t avoid this recession, and there’s not a lot we can
do to make it shorter. The people who make American economic policy may be about to
learn that lesson. It’s just too bad they couldn't have learned it sooner. ( Sources: The
Levy Institute; see also: Tuesday, November 27, 2001 The Times London: Recession in
US could be longer than last time. By Lea Paterson; see also WHY THIS RECESSION
WILL BE WORSE. Wretched Excess, date 12.03.01 by Noam Scheiber; and The Cato
Institute)
Appendix One:
Russia in multi-million arms deal with Northern
Alliance
Moscow gives major backing to opposition forces
Kevin O'Flynn
Tuesday October 23, 2001
"http://www.guardian.co.uk"
Old Soviet tanks, helicopters and kalashnikovs are being supplied in a
multi-million dollar arms deal between Russia and the Northern Alliance.
Russia has long been a secret ally of the Northern Alliance, supplying guns
and supplies to the ousted Afghan government since 1996, but the terror
attacks in the US has pushed Russia's support out into the open.
Russia's defence minister, Sergei Ivanov, has spelled out exactly what the
Northern Alliance wants - familiar, old Soviet hardware that the Northern
Alliance forces have used for years, first in the 1980s against the Soviet
forces they had captured the arms from and then in the 1990s in the series
of civil wars.
The arms deal is estimated to be worth between $40-$70m.
"Russia was supplying all the time," said a defence analyst, Pavel
Felgenhauer. "But this is a major extra investment for the Northern Alliance
to make a major offensive and sweep the Taliban out of northern Afghanistan."
Old Soviet T-55 tanks, military helicopters, kalashnikovs, Igla and Shilka
mobile anti-aircraft missile and armoured fighting missiles are reported to
have been among the first deliveries to Afghanistan.
Forty tanks and twelve military helicopters are still to be delivered,
according to the Associated Press.
"Afghans who have been fighting for the 20 years, including Northern Alliance
fighters, know the old military equipment better than many servicemen in the
Russian armed forces," said Mr Ivanov earlier this month.
"The Northern Alliance needs simple and very reliable, tested equipment: T-55
tanks, ammunition and submachine guns", he added.
"If they get other submachine guns, they [Northern Alliance fighters] throw
them away with indignation and demand only kalashnikovs," the minister said.
The Northern Alliance, Ivanov said, needs "ordinary artillery guns with
shells and ordinary battle infantry vehicles and armoured personnel
carriers".
"These are quite ordinary, simple but reliable weapons, withstanding
fluctuations of temperature and humidity," he added.
As well as military equipment and supplies some Russian defence experts have
claimed that Russia has supplied technical specialists.
Mr Felgenhauer, citing military sources, said that a number of Russian
technical specialists are already in northern Afghanistan helping the
rebels. Other experts, and Mr Ivanov, have said the equipment is simple enough
to be operated without technical assistance.
Russia is not keen on footing the bill for the expensive airlift operation.
Mr Ivanov has asked the US for help and Andrei Belyaninov, the chief of
Russia's chief defence exporter, Rosoboronexport, is said to have discussed
the matter with the British defence minister, Geoff Hoon, when he was in
Moscow earlier this month.
Supplies began to flow into Afghanistan at the end of September.
Ammunition and military hardware is being delivered to the Northern Alliance
via pontoon bridges built by Russia's 201st division over the Pyandj river
that divides Tajikistan and Afghanistan, Nezavismaya Gazeta reported.
Putin meets Afghan alliance leaders
Ian Traynor in Jabal Saraj
Monday October 22, 2001
"http://www.guardian.co.uk"
Vladimir Putin, the Russian president, met the Northern Alliance opposition
leadership of Afghanistan early this morning in the capital of Tajikistan.
Mr Putin's two closest colleagues, Sergei Ivanov, the defence minister, and
Nikolai Patrushev, the security service chief, were already in the Tajik
capital Dushanbe for talks which were to focus on Russian military assistance
to the Northern Alliance and on the shape of a future Afghan government if
the Taliban regime is deposed.
Mr Putin arrived in Tajikistan, which borders Afghanistan, from his Shanghai
summit with President George Bush, a Tajik foreign ministry official said.
He met Burhanuddin Rabbani, the former president and current political leader
of the Northern Alliance, and the Tajik president Imomali Rakhmanov before
flying to Moscow before dawn.
"The internationally recognised government [of Mr Rabbani] long has been
fighting to free its people. Our position [of support] long has been defined,"
Mr Putin said, according to a report from Russia's Itar-Tass news agency.
While the Kremlin stands behind the US air strikes on the Taliban, Russia
is at odds with Washington over a post-Taliban government and is worried about
future US influence in the region.
Although the Americans yesterday bombed the Taliban frontlines north of
Kabul, the kind of action that the Northern Alliance has been requesting,
the Afghan opposition feels angry and sidelined by the US strategy on the
Taliban.
While the US and Pakistan are declaring that "moderate" Taliban figures could
be accommodated in a coalition government, Russia and Iran are opposed to
any Taliban representation. The two countries are the strongest supporters
of the Northern Alliance and Russia is its main military supplier.
The Northern Alliance military leader, General Muhammad Fahim, also in
Dushanbe last night, met the Russian chief of staff, General Anatoly
Kvashnin, earlier this week to discuss the supply of 40 Russian tanks and
70 armoured vehicles.
Both sides were to discuss "Afghanistan's borders to reassure the Russian
government that the capture and the defeat of the Taliban are not dangerous
for them and that America will not control Afghanistan", said General Abdul
Basir, an alliance frontline commander.
_______________________________________________________________________
DRUDGE REPORT SUNDAY DEC 16 2001 9:21:59 ET
MAG: USA DEBATES NEW WAR PLAN FOR IRAQ, TROOPS; POSSIBLE
PARTICIPATION OF IRAN
Here he comes again!
The NEW YORKER is set to unleash a new report by controversial spook J-man
Seymour M. Hersh, publishing sources tell the DRUDGE REPORT.
Headlined "The Iraq Hawks," Hersh drops details of a new war plan for Iraq which is
"now at the center of a furious debate in Washington."
MORE
Iraqi opposition leader Ahmed Chalabi and his Iraqi National Congress have "given the
Bush Administration an updated war plan, which calls not only for bombing but for the
deployment of thousands of American Special Forces troops," Hersh writes.
Hersh's expose is set for December 24 & 31 editions of the magazine.
There is "a second significant addition to the plan: the participation of Iran," which has
agreed to permit opposition forces and their military equipment to cross the Iranian
border into southern Iraq.
The Iraqi National Congress has, with American approval, opened an office in Teheran.
"America's success in routing the Taliban has improved Chalabi's standing with some
elements of Washington's defense community," Hersh writes.
One defense analyst tells Hersh, "They believe they have found the perfect model, and it
works. The model is bombing, a modest insertion of Special Forces, plus an uprising."
The debate within the Bush Administration over what to do about Iraq has been sharp and
personal, Hersh reports.
Pentagon officials "are at odds with the State Department," in particular with Richard Armitage, who signed a 1998 open letter to President Clinton that advocated American
support for Iraqi insurgents but who "has now become, in private, an opponent of the
revised Chalabi plan," Hersh reports.
Stephen Solarz, the former New York congressman who helped draft the 1998 letter,
says, "September 11th changed the whole equation. Before then, an argument could be
made that deterrence worked."
But many within the Administration are skeptical of Chalabi and his supporters. One
senior Administration official tells Hersh that the Administration has no intention of
allowing "a bunch of half-assed people to send foreigners into combat."
Referring to Chalabi and his supporters in and out of government, the official asks, "Who
among them has ever smelled cordite? These are pissants who can't get the President's ear
and have to blame someone else. We're not going to let them lead others down the garden
path."
One former high-level intelligence official explains the pro-Chalabi group this way: "It's
the revenge of the nerds....They won in Afghanistan when everybody said it wouldn't
work, and it's got them in a euphoric mood of cockiness."
The new Hersh streets on Monday.
_____________________________________________________________________
Putin warns US over war on terror
By Andrew Gowers, Robert Cottrell and Andrew Jack in Moscow and Richard McGregor
in Tora Bora
Published: December 16 2001 21:05 | Last Updated: December 17 2001 15:18
Russia expects the US to consult it before taking the "war against terrorism" anywhere
beyond Afghanistan, President Vladimir Putin said in an interview with the Financial
Times.
The US-led war against the Taliban and Osama bin Laden's al-Qaeda network in
Afghanistan appeared to be drawing to a close on Sunday. Some White House officials
are pressing to shift the fight against terrorism to other rogue states.
But the Russian president warned specifically against military action in Iraq. The next
priority for the anti-terrorist coalition should be to "block the financing of terrorist
activities", he said. "And so far I have no confirmation, no evidence that Iraq is financing
the terrorists that we are fighting against."
Mujahideen commanders declared victory in the battle against al-Qaeda forces in
Afghanistan on Sunday, as Donald Rumsfeld, US defence secretary, made a surprise visit
to the US Bagram Airbase in the country.
But after coming down from the Tora Bora mountains at the end of the battle to drive
al-Qaeda from its final stronghold, the Mujahideen said they had not found Mr bin Laden.
"He is not here," said Haji Zaman, one of the commanders of the three Mujahideen forces
fighting with the US. "Osama is not in my pocket. I cannot show him to you."
Mr Zaman said he had seen the cave where Mr bin Laden was thought to be hiding, and
that his body was not among the many left there after Sunday's fighting.
But he and other commanders will continue to search the mountain "metre by metre" on
Monday to hunt for the scores of al-Qaeda members who had fled the battlefield.
Mr Rumsfeld, the first top US official to visit Afghanistan since the war began, met
Hamid Karzai, who will head the interim government that takes power in Kabul on
Saturday. Mr Putin, interviewed at the end of last week, criticised past bombing of Iraq
by US and UK warplanes. The main concern of the international community, he said, was
to prevent Iraq developing weapons of mass destruction. Bombing did not seem to
advance this aim. Russia wanted Iraq to re-admit UN weapons inspectors in exchange for
a full lifting of sanctions, Mr Putin said. But he admitted this idea had "not met with
understanding on the part of Iraq's leadership".
US officials said on Sunday that it may still be difficult to get precise information on Mr
bin Laden's fate.
Tommy Franks, the general in charge of US forces, told ABC News the US had picked
up radio transmissions from Tora Bora last week that appear to be from Mr bin Laden.
But with US air strikes methodically destroying the bunkers and cave complexes that
shelter the remaining al-Qaeda forces, he said it may be impossible to determine who had
been killed. About 200 al-Qaeda members were killed in fighting and 25 taken prisoner
on Sunday. A dozen Mujahideen have also died in the past two days.
US B52 and F18 aircraft conducted another intense round of bombing on Saturday night
and Sunday morning, over a wider area than usual as Al-Qaeda members tried to flee.
_____________________________________________________________________
CASPIAN NEWS AGENCY
CNA all-inclusive newsline
/16:31 06.12.2001/ Kazakhstan/Russia/oil/transit
Kazakh government approved the draft agreement with Russia on oil transit
Astana, December 6, 2001. (CNA). The Kazakh Government approved the draft of
agreement between the Kazakh government and the Russian Federation on oil transit, a
source in the government informed CNA.
Under the draft of agreement, the sides will cooperate with each other in oil transit sphere
on mutually beneficial bases. The agreement specifies the order, terms, total volume of
oil transit via the oil mains. The document also determines transit of oil of one of the
sides from the territory of another side for consumers of third side. A proper agreement
on transit of oil was not signed on November 28, in Moscow. The Russia and Kazakh
Prime Ministers explained to journalists at the briefing about the essence of existing
discords, stressing that the sides continue working on the agreement. The quotas of the
Kazakh side in the Russian pipeline system made 15 million tons of oil for 2001.
Kazakh Prime Minister said that, the state is able to increase twice the volume of oil
extraction. According to the planned figures this year 40-42 million tons of oil must be
extracted in Kazakhstan.
18:15 06.12.2001/ Azerbaijan/oil/extraction
Azerbaijan extracted 13.7 million tons of oil in January-November 2001
Baku, December 6, 2001. (CNA). 13.7 million tons of oil is extracted and over 7.6
million tons exported in Azerbaijan in January-November 2001, SOCAR (Azeri State Oil
Company) representative informed CNA. The official source said from the total volume
of extracted oil about 8.26 tons fell at SOCAR and 5.4 million tons - at the Azeri
International Operating Company (AIOC). SOCAR exported 2.26 million tons of oil
through the Baku-Novorossiysk oil pipeline for 11 months of 2001. SOCAR intends
pumping 2.5 million tons of oil in 2001. AIOC exported 5.38 million tons of oil through
the Baku-Supsa oil pipeline in January-November 2001. -OK/20:36 06.12.2001/ Oil Company/Yugoslavia/delivery
Tyumen Oil Company will deliver oil to Yugoslavia
Moscow, December 6. 2001. (CNA). The Tyumen Oil Company (TOC) and Nafta
Insdustry Serbia (NIS) Yugoslavian State Company signed contract on delivery of
Russian oil to Yugoslavia. The agreement foresees delivery of 660,000 tons of oil within
6 months, starting from January 2002, with the right of automatic prolongation till the
end of the year.
The deliveries will be carried out by TOC-Trade company. The deal is financed by
Raiffeisenbank (Austria). This agreement is the first stage of direct cooperation of the
Russian producers with the Yugoslavian state company.
Terminate America: message from a
mother in mourning
Date: 08/12/2001
By Tasgola Karla Bruner in Quetta, Pakistan
The talk on Thursday of an accord in Kandahar means little to Rukia. She has given up
on peace in Afghanistan.
She has five reasons, one for each of her dead children.
Rukia, 39, who like many Afghans uses only one name, lost her family five days ago
when she says a United States bomb hit her Kandahar neighbourhood. Wounded in the
stomach and with her left arm shattered, she had to flee before she could bury her
children.
She was nearly bombed again, while a relative was driving her to a hospital in Pakistan
"They're bombing anything that moves," she said. "It's not true that they bomb civilians
by accident. They're targeting the innocent people instead of Osama bin Laden."
US officials have said that they are doing everything possible to minimise civilian
casualties as warplanes continue to pound Taliban and al-Qaeda positions in Kandahar
and in the mountains near Jalalabad.
But accidents happen, evident earlier this week when three US servicemen died and 20
were injured near Kandahar when a "smart" bomb from a B-52 went awry. Six allied
Afghan fighters also were killed and 17 injured.
The international aid agency Médicins sans Frontières (Doctors Without Borders) said on
Wednesday that its workers picked up more than 80 dead in villages of eastern
Afghanistan, near Jalalabad, heavily bombed by US planes.
The civilian toll is difficult to gauge because of the Muslim custom to quickly bury the
dead, international aid workers say.
What is clear in the Sandeman Provincial Hospital in Quetta, near the Afghan border, are
the raw emotions and anger directed at the US.
Rukia covered her face and started to cry when asked what she wanted to tell the
Americans about the loss of her five children. She thought a while before responding:
"Destroy, finish, terminate America."
"It is our wish - the elders, the women, the children - to have peace, but it is impossible.
First we had the war with Russia, then the Taliban came and now the United States
attacking us again and again," she said.
Rukia shares a hospital room with a 10-year-old girl who lost half her leg in a US
bombing attack. In another room, another Kandahar victim, Abdul Qadir, 33, writhes in
pain with stomach wounds from bomb shrapnel.
"I'm very angry against America," said his brother, Rahmat Ullah, 28. "What was his
fault? He was an innocent man working in his shop."
Cox Newspapers
______________________________________________________________________
Exclusive: The porous Afghan border
By Arnaud de Borchgrave
UPI Editor at Large
Published 12/14/2001 12:06 PM
OGHAZ PASS, Pakistan, Dec. 14 (UPI) -- (Along the Pakistan-Afghanistan border)
Pakistan's tribal areas are free passage zones for Taliban and al Qaida's foreign legionnaires
escaping from Afghanistan, a UPI team has verified in a weeklong investigation.
The Pakistan army has announced that two brigades, each made up of three battalions of 850
men each, or a total of 5,100, have been deployed along a 30-mile stretch of jagged, zigzag
mountainous and totally porous border and have now "sealed the frontier tight." Helicopter
gunships, military authorities have assured the United States, are surveilling mountain passes
against infiltration. Presidential spokesman Gen. Rashid Qureshi went so far as to publicly deny
that any al Qaida fighter had made it across the border into Pakistan.
Junior officers --- all officers and most non-coms speak English --- speculate that such
assurances are given to make "the Americans feel good." Border tribal zone populations have
long been pro-Taliban and pro-al Qaida as countless painted slogans and posters of Osama bin
Laden are visible in towns and villages throughout the three key tribal "agencies" --- Kurram,
Orazkai and Kohat.
Tribal elders, over post-fast Iftar dinner, told this reporter, accompanied by a Pakistani friend and
a multilingual guide, that while the army had established interlocking fields of fire at four key
mountain passes, it could not possibly check dozens of other routes invisible from the air. A
Pakistani captain, who asked that his name not be used, shared the same assessment.
As the UPI team walked over a three-mile strip of foothills on the Pakistan side of the Spin Ghar
range, one crest over from Tora Bora mountain, two helicopters flew overhead at about 3,000 feet
in poor visibility and could not have seen anyone on the ground. During the 2 ½-hour walk,
several dozen tribesmen were seen coming from the direction of Afghanistan.
Scanning snow-capped Spin Ghar with binoculars revealed a wide range of ravines, crevasses,
valleys and dry river beds, so many potential exfiltration routes for bin Laden's Arab fighters.
Dressed in khameez shalwar and pie-shaped hats, the UPI party did not attract attention as it
moved in local buses through border towns and villages. Bin Laden's picture, inscribed "Father of
the Revolution," covered half the rear window of one bus that passed through army and frontier
constabulary checkpoints without so much as an ID check of the passengers.
Scores of pickup trucks loaded to the gunwales with civilians similarly drove through
unchallenged. Rubber-wheeled donkey carts with three or four passengers also were part of the
traffic pattern. UPI was stopped once and when the U.S. passport was produced, the civilian
security official made clear Americans were "not welcome." When asked whether that went for
Taliban, too, he answered, "Taliban always welcome."
From Kohat, army headquarters for some of the tribal areas, to Parachinar, on the western edge
of the frontier under surveillance, rock formations along the road had been daubed with slogans
glorifying terrorist organizations and vilifying President Pervez Musharraf as an "American agent."
Towns like Dera Adam Khel, Hangu, Doaba and Thall, headquarters for one of the army brigades
deployed along the frontier, are identical to towns across the border in Afghanistan. The men look
the same because they are the same. The few women spotted --- fewer than six in Thall, a town
of 250,000 --- wore head-to-foot burkas. The men were doing the sopping for the four-day Eid
holiday that starts Sunday and marks the end of Ramadan.
Bin Laden's poster picture was pinned to shutters and windows. Open air markets also displayed
it on the side of stalls. Sipah-e-Sahaba, or Army of the Friends of the Prophet, and
Shaish-e-Mohammed, are among the most extreme religious organizations in Pakistan. They are
particularly strong in the tribal belt and in Punjab, the country's largest province. One rockface
advertisement said, "For Commando Training, Contact Shaish-e-Mohammed." Another one
proclaimed, "Shaish-e-Mohammed and Al Qaida are Bubbling Blood Brothers."
"Kill America" was painted on the outer wall of the "Handyside" army fort (named after a
prominent colonial during the British Raj) before the narrow road twists and turns alongside an
ochre-colored, shrub-pocked limestone mountain one side and a 3,000-foot precipice on the
other. Five-ton 10-wheelers manage to squeeze by in both directions, many adorned with bin
Laden's face.
Shopkeepers and a cot-and-breakfast employee told our interpreter, an English-speaking native
of the North Waziristan Tribal Agency, that al Qaida has "an extensive network in the region."
They did not believe that bin Laden would be turned over if he resurfaced in Kurram tribal turf.
Resident "Political Agents," the eyes and ears of federal authorities, have made monetary deals
--- U.S. covert funds greased the relays --- with four major tribal chiefs. If bin Laden shows, they
agreed to lure him into a false sense of hospitality and total security. But these deals, according
to local "fundos" (Pakistani jargon for fundamentalist extremists), did not include them and they
proudly say they would give sanctuary to bin Laden or any of his "freedom fighters." The
pro-Taliban, pro-al Qaida feelings of Afridi and Orakzai tribesmen are openly expressed in
random conversations.
One pharmacist who simply gave his name as Amir explained that the mullahs and bin Laden had
the same agenda. "Even if you pay them, they won't serve America's cause. At the end of the
day, the tribal chiefs will go with the mullahs."
The madrassa (religious schools) network, according to local interlocutors over Iftar dinners with
the UPI team, could easily hide bin Laden and his top lieutenants indefinitely or until they could
organize his clandestine passage by truck to Karachi, 1,000 miles south, where he could set sail
for another part of the world. This religious network works closely with the Inter-Services
Intelligence agency, an organization long known for its pro-Taliban culture. Majority opinion
among those UPI talked to is that bin Laden would rather die in the current battle for Tora Bora
and Spin Ghar than quietly slip away to fight another day. "There will be many more bin Ladens,"
said one old man. Others around the table nodded agreement.
The tribal belt is also Massoud Azher territory, an Indian-born terrorist who was exiled and
remerged in this part of Pakistan where perpetrators of major crimes in government-run Pakistan
find safe haven.
Fazul Reman, a major religious extremist firebrand, currently under house arrest, also enjoys an
abundance of laudatory posters. Mullah Rehman used his mobile phone this week to try to
negotiate the return of several thousand Pakistani "volunteers" who crossed the border in the
closing weeks of the Northern Alliance's campaign against Taliban. Some 500 Pakistani prisoners
have been returned. About 8,000 are still missing. They are a source of embarrassment to
Musharraf and his new alliance with the United States.
Indian accusations that Kashmiri terrorists were responsible for this week's attack on the Indian
parliament will lend weight to U.S. pressure to close down Pakistan's fedayeen, or "freedom
fighters," operations against India in Kashmir. These are would-be suicide bombers who were
trained in bin Laden's training camps in Afghanistan.
______________________________________________________________________
Hard Times, Easy
Money?
Countercyclical
Stabilization in
an Uncertain
Economy
Robert E. Carpenter
Robert E. Carpenter is a Levy
Institute research associate and
assistant professor of economics
at UMBC.
The tools of countercyclical monetary policy have been brought fully to
bear on a potentially severe recession. This note argues, however, that
such a policy is less effective in times such as these-that is, when
uncertainty is especially high-and so is likely to be particularly ineffective
in combating the current economic slowdown.
Looking ahead, the members generally saw a relatively mild and short contraction
followed by a gradual recovery next year as a plausible forecast but one that was subject
to an unusually wide range of uncertainty, notably in the direction of a potentially much
weaker outcome in the nearer term.
-Minutes of the Federal Open Market Committee, October 2, 2001
Heightened uncertainty and concerns about deterioration in business conditions both
here and abroad are dampening economic activity. -Statement by the Federal Reserve
Board, November 6, 2001
Current Federal Reserve policy could hardly be more expansionary. By early November
2001, interest rates were at their lowest point in 40 years. The current target rate for
federal funds is 2 percent, and the discount rate 1.5 percent. There have been 10 rate cuts
in as many months, and some predict more are on the way ("Federal Reserve Cuts Rate
Half Point," Wall Street Journal, November 7, 2001, A2).
The Fed's reaction has been based on clearly deteriorating U.S. economic conditions.
Even before September 11, the U.S. economy was slowing markedly. The National
Bureau of Economic Research (NBER) business cycle dating committee announced on
November 26 that a recession began in March 2001. Growth of consumption
expenditures steadily declined beginning in the fourth quarter of 2000, led by nondurable
goods and services, and by the third quarter of 2001, durable goods expenditures growth
had also declined sharply (see Table 1). Robust gains in consumption expenditures were
thought by many to be an important source of the long U.S. expansion, and the slowdown
in this component of GDP was a cause for worry.
Table 1 shows that gross private domestic investment also began to exhibit a pronounced
cyclical decline in late 2000. Beginning in the third quarter of that year, gross investment
growth was negative and stayed that way for the next six consecutive quarters. The
decline in investment spending has sharpened since the first quarter of 2001: during the
first three quarters of this year, investment growth has declined at double-digit rates.
Over the past immediate two quarters, the decline in investment cut across all categories
of nonresidential fixed investment; by the third quarter, residential investment appeared
to be softening as well.
The large and persistent declines in key components of GDP led the Federal Reserve to
shift course on monetary policy on or about January 3, 2001, when the first of the
reductions in the federal funds rate occurred; the Fed turned even more sharply
expansionary after September 11. In response to what will almost surely be continued
economic weakness through the end of 2001, and in response to an unemployment rate
that jumped sharply to a five-year high of 5.4 percent in October 2001, the Fed cut rates
50 basis points on each of three occasions since September 17.
Economic contractions always have a level of uncertainty attached to them, as business
plans and profitability must be reassessed. It is clear, however, that an extraordinarily
high level of uncertainty exists in the current economy, partly due to the barbaric terrorist
attacks and the uneasy suspicion that attacks of a wider scale may be planned. Further
contributing to the level of uncertainty is a war in the Middle East that has vitally
important, but difficult-to-define final objectives that may widen with time. The Federal
Reserve Board, during its October 2, 2001, meeting of the Federal Open Market
Committee (FOMC), noted that forecasts of future economic conditions are "subject to an
unusually wide range of uncertainty, notably in the direction of a potentially much
weaker outcome in the nearer term" (Federal Reserve Board 2001b). At the November 6,
2001, meeting, they reemphasized their belief that uncertainty was an important factor in
the downturn, noting that "[h]eightened uncertainty and concerns about deterioration in
business conditions both here and abroad are dampening economic activity" (Federal
Reserve Board 2001a).
TABLE 1 Percent
Change from
Preceding Period in
Real Gross
Domestic Product,
Selected
Components
99
00:1
00:2
00:3
00:4
01:1
01:2
01:3
Gross Domestic
Product
4.1
2.3
5.7
1.3
1.9
1.3
0.3
-0.4
Personal
Consumption
Expenditures
5.0
5.9
3.6
4.3
3.1
3.0
2.5
1.2
Durable goods
12.5
19.0
-2.5
8.2
-2.1
10.6
7.0
1.7
4.7
5.1
4.7
4.2
0.6
2.4
0.3
0.6
Year
Nondurable goods
Services
3.7
3.7
4.4
3.5
Gross Private
Domestic Investment
6.6
-0.6
19.5
-2.8
Fixed investment
7.8
13.9
8.8
2.5
0.5
Nonresidential
8.2
15.8
12.2
7.1
1.0
-0.2 -14.6 -11.9
structures
-2.0
8.8
11.8
15.2
7.6
12.3 -12.2 -12.1
equipment and
software
11.8
18.1
12.4
4.7
-1.1
-4.1 -15.4 -11.8
6.7
8.5
-0.8 -10.4
-1.1
Residential
5.6
1.8
2.8
1.4
-2.3 -12.3 -12.1 -10.7
1.9
8.5
-9.7
5.9
-8.4
1.9
Source: Bureau of
Economic Analysis.
Figures are
seasonally adjusted
annual rates.
Uncertainty, political as well as economic, has led to a sharp decline in confidence about
the future of the economy. Indeed, Levy Institute senior scholar James K. Galbraith
(2001) states that we now face a potential economic "calamity." The Conference Board's
Consumer Confidence Index has declined over four consecutive months to a seven-year
low, and the Conference Board's Expectations Index indicates that consumers expect
future economic conditions to deteriorate. This uncertainty is also widespread in the
business sector: the National Association of Purchasing Managers reported sharp declines
in its October gauge of factory activity, and its nonmanufacturing activity index, which
tracks the service sector, fell to a record low in October ("Most Expect Fed Rate Cut,"
The Boston Herald, November 6, 2001; "New Signs of a Sharp Downturn; Activity
Plummeted in Manufacturing Sector Last Month," Washington Post, November 2, 2001,
E1). Uncertainty may magnify the normal cyclical processes associated with an economic
contraction and propagate them through time.
The tools of countercyclical monetary policy have been brought fully to bear on a
potentially severe recession. This Policy Note argues, however, that such policy is less
effective when uncertainty is especially high, and so is likely to be particularly ineffective
in combating the current economic slowdown. In what follows, I describe how monetary
policy works, or how it is "transmitted" to economic activity, and I explain how
uncertainty weakens its effects.
Expansionary fiscal policy becomes an especially important stabilization tool when there
are demand-side economic shocks that monetary policy can counter only weakly. Both
the president and the Congress appear to have recognized the importance of using fiscal
policy to stimulate a slowing economy, with President Bush urgently calling for the rapid
passage of a stimulus bill. The Senate and House of Representatives are now debating a
fiscal stimulus package, but have yet to agree on the mixture of tax cuts and spending
increases that the final bill will contain. Although tax cuts can have an important long-run
effect on incentives to work and invest in capital, the current high level of uncertainty
will result in spending increases being the more potent stabilization tool in the short run.
How Does Monetary Policy Affect Economic Activity?
What connects, or "transmits," monetary policy to economic activity? Traditional
explanations of the effects of monetary policy-repeated time after time in both the
popular press and textbooks-have focused on its effect on investment spending by firms.
According to this theory, when the Federal Reserve lowers interest rates, it stimulates
investment spending by lowering the real cost of capital; interest rates are thus an
important component of the cost of capital (taxes being another). Other things being
equal, lower interest rates increase the amount of desired capital (e.g., plant and
equipment) that firms wish to hold, because rate cuts by the Federal Reserve make it
cheaper for businesses to expand the size of their capital stock. Since investment is a
component of aggregate demand, the increase in investment causes aggregate economic
output to rise. \l "1"
According to this scenario, the traditional channel of monetary policy can be effective
only if there is a strong link between interest rates (and, hence, the user cost of capital)
and investment spending. The evidence that this is so, however, is by no means clear.
Many studies find quite the opposite-investment spending by firms appears to be only
weakly related to interest rates and the cost of capital. \l "2" Levy Institute senior scholar
Steven Fazzari (1999) summarizes the views of many economists, stating that "[d]espite
decades of study it has been difficult to establish any empirical link between the cost of
capital and investment."
Financial Channels for the Transmission of Monetary Policy
Monetary policy does have an effect on economic activity, despite the apparent weakness
of the traditional (interest rate) channel. \l "3" It may be that our inability to measure the
cost of borrowing at the individual firm level means that we cannot detect statistically
how interest rates affect investment. It may also mean that there are other channels that
complement the traditional channel.
Many researchers have come to believe that the effects of monetary policy are
transmitted through financial channels. These channels exist when information
asymmetries create important frictions in capital markets. In this context, asymmetric
information means that prospective borrowers cannot credibly and fully inform potential
lenders of the expected payoffs to their investment. The presence of these frictions means
that different sources of finance-bonds, loans, and internal funds-are not good substitutes
for one another. Variations in the supply of credit can therefore affect investment
spending. The research literature has emphasized two financial channels for monetary
transmission: the bank-lending channel and the balance sheet channel. While these
channels are well understood conceptually, their strength in relationship to one another is
not as well understood.
The bank-lending channel relies on the idea that banks have a comparative advantage in
providing loans to firms that face problems with asymmetric information. Small firms,
especially small, young firms, may be "bank-dependent" in the sense that they have poor
access to substitutes for bank loans. Expansionary monetary policy works through the
bank-lending channel by increasing bank reserves and increasing the supply of bank
loans. When the borrowing constraints faced by bank-dependent firms slacken, they
borrow and invest more, thereby increasing output. \l "4"
The balance sheet channel links the quality of a firm's balance sheet, or its
"collateralizable net worth," to the amount of external funds it will receive (Bernanke,
Gertler, and Gilchrist 1996). The firm's collateralizable net worth is related to the present
value of its assets. An additional component of collateral is the present value of the firm's
expected future cash flows. Other things being equal, when interest rates fall, the present
value of collateral rises. With higher net worth and a sounder balance sheet, lenders grant
the firm additional access to debt finance, allowing it to increase investment and
aggregate output.
The balance sheet channel is similar to the bank-lending channel, as both emphasize how
monetary policy can change the quantity of external finance available to the firm. The
specific transmission mechanisms are somewhat different. The balance sheet channel
takes a slightly broader perspective about outside sources of funds, and does not
emphasize bank loans to the same degree as the bank-lending channel. Implicitly, and
importantly for the conduct of monetary policy, is the fact that both channels assume that
there is a fringe of unsatisfied borrowers who would invest more in profitable projects if
it were not for the frictions in the capital markets that limited their access to outside
sources of funds.
Why Might Monetary Policy Be Weak When Uncertainty Is High?
There is no important role for uncertainty in the standard transmission channel of
monetary policy. An assumption of the standard model is that a firm can sell all of the
output that it desires at the prevailing market price. In the standard channel, firms equate
the marginal product of capital (the additional output that can be produced by expanding
the firm's capital stock slightly) with the real user cost of capital. Monetary policy works
by changing those user costs.
Keynesian theories of investment and basic corporate finance provide a mechanism for
uncertainty to potentially influence investment. In these models, firms invest in projects
for which the present discounted value of cash flows exceeds the price of investment
(investments with positive net present values). Where Keynes parted company with
corporate finance is that for many years finance textbooks modeled firms as though they
behaved in a "risk-neutral" fashion. A risk-neutral firm cares only about the expected
cash flows (the average) and not about the uncertainty of the cash flows (the variance). It
is well known that Keynes believed that uncertainty about the future had a first-order
effect on investment spending. Some recent explanations of the factors that influence
investment have reemphasized this basic Keynesian insight. \l "5"
Uncertainty about the payoffs from investment may magnify asymmetric information
problems in the capital markets, increasing the frictions and decreasing the availability of
credit for investment, irrespective of the fact that monetary policy is expansionary.
Although expansionary monetary policy might increase the supply of bank loans,
uncertainty might reduce bankers' willingness to make loans, rendering monetary policy
working through the bank-lending channel ineffective. Likewise, a high level of
uncertainty means that the cash flows (and asset values) that form firms' collateralizable
net worth become more uncertain, reducing the quality of firms' balance sheets and their
access to bank loans and other forms of debt finance. \l "6" The reduction in lenders'
willingness to make loans when there are information asymmetries and the environment
is uncertain may weaken both the bank-lending and balance sheet transmission channels.
As a result, expansionary monetary policy may be less effective at stimulating aggregate
demand.
Reinforcing the decline in the availability of credit, uncertainty about payoffs may
decrease investment demand, depressing investment spending at each level of the user
cost of capital. Many investments made by firms have a substantial degree of
irreversibility. For example, machines or facilities may be highly specific to their
intended use, with little value for other uses or to other users. Together, a high degree of
uncertainty and irreversibility may make it worthwhile for a firm to postpone investment.
This decision is sometimes referred to as exercising a "real option." The price of the
option is related to the expected profits forgone by not investing today, and the option's
payoff is related to the value of being able to make a potentially more profitable
investment in the future, when the uncertainty is lower or has been resolved. The
empirical evidence is relatively clear that uncertainty depresses investment. \l "7" The
uncertainty-driven decline in investment also reduces the demand for loans to finance
investment, and may more than offset the effect that expansionary monetary policy has
on lowering user costs. Both factors-the uncertainty-driven reduction in the demand and
supply of loans-suggest that monetary policy may not be effective at stimulating
aggregate demand when uncertainty is high.
A Role for Fiscal Policy
Fiscal policy has been deemphasized as a countercyclical policy tool in the United States
in part because of past large federal budget deficits. These deficits were considered a
problem because they were thought to increase the demand for loanable funds and cause
high real interest rates that depressed, or "crowded out," private investment. Opponents
of expansionary fiscal policy often mention the potential for negative effects on capital
formation as an important reason to limit deficit spending (Office of the President 2001,
24). President Clinton paid careful attention to interest rates and how they might be
affected by the size of the federal deficit, and, in the most recent Economic Report of the
President (2001, 3), cited the decline of both as a major accomplishment of his
administration.
Whether the superior economic performance of the United States during the 1990s was
caused by the decline in the federal budget deficit or whether the decline in the budget
deficit was caused by the superior economic performance of the United States during the
1990s is a question beyond the scope of this note. If "crowding out" can be a problem
caused by budget deficits, it is quite unlikely to be an issue affecting the current
economy. The federal budget was still $127 billion dollars in surplus at the end of the last
fiscal year ("Federal Surplus Declines by Half," The Atlanta Journal and Constitution,
October 30, 2001, A1), and private investment demand is slack because of poor economic
conditions and a high level of economic and political uncertainty.
Both the president and Congress have recognized the importance of a fiscal stimulus bill
to combat the recession. A Senate bill that has not yet been voted on contains a
combination of tax rebates and subsidies for low-income individuals and additional
spending on enhanced unemployment benefits for dislocated workers. Senate majority
leader Tom Daschle (D-S. Dak.) also plans to introduce a homeland security bill that
would bring the size of the combined fiscal stimulus to roughly $86 billion. The House
narrowly passed a $100 billion package that would reduce business taxes and costs, cut
personal income tax rates, and increase spending on unemployed workers and tax rebates.
Distributional issues surrounding the targets of the tax cuts appear to have the strong
potential to delay the passage of a bill for the president's signature, and both houses
appear to be voting largely along party lines.
Both bills will contain a mixture of tax cuts and spending increases, but the tax cuts in
each bill are unlikely to stimulate aggregate demand as effectively in the short run as a
direct injection of government spending. An important way that business tax cuts may
increase aggregate demand is by lowering firms' cost of capital. \l "8" If businesses
exercise their option to postpone spending until the economic environment becomes more
certain, tax cuts may not provide a powerful short-run stimulus. In a similar way,
consumers can also exercise an option to wait before spending the proceeds of tax rebates
or the additional net income they receive as the result of a cut in income taxes. Shapiro
and Slemrod (2001) found that only 22 percent of households surveyed during August,
September, and October planned to spend the proceeds of the recent tax rebate, which
suggests that the plan may have only a slight effect on consumption.
In contrast to tax cuts, government expenditures have the advantage of directly injecting
spending into the economy to increase aggregate demand. While typically there are lags
between when spending increases are enacted and when they have an influence on
aggregate demand, once expenditure plans are announced, they may help reduce
uncertainty (by increasing expectations of a high future level of aggregate demand) and
restore confidence immediately. Because it helps to reduce uncertainty, fiscal spending
can indirectly stimulate demand, even before its direct effects are felt.
Spending increases may be easier to enact quickly because they may be less complicated
by distributional issues than tax cuts, and it may be easier to find agreement about some
types of spending programs. Federal transfers to state governments and municipalities
facing budget crises resulting from unexpected high spending for public safety are likely
to be widely supported, as are increased expenditures for public health and homeland
defense. To address concerns about fiscal discipline in the long run, spending could be
used for programs for which the bulk of the outlays are nonrecurring (such as for
prepositioned emergency medical and disaster supplies and logistical facilities and
security enhancements for public buildings, transportation hubs, public utilities, and
energy distribution systems). If the expenses are largely nonrecurrent, such disbursements
will not commit the government to a long-run stream of large payments that would
contribute to future deficits.
What should be the size of the stimulus package? There is no single right answer, but
some back-of-the-envelope calculations may be helpful to provide a context for
discussion. Real GDP was $9.342 trillion in the second quarter of 2000 (Bureau of
Economic Analysis 2001). Assuming that this was the peak value of GDP for the current
business cycle, then a relatively mild recession, similar to 1990-91, might cause a
peak-to-trough decline in real GDP of roughly 1.5 percent, or approximately $140 billion
in output.9 A more severe, 2.5 percent contraction (approximately the size of the 1981-82
recession) would cause a peak-to-trough decline of $233 billion. If the recession is of
average duration, the peak-to-trough decline would occur over roughly 12 months.
Suppose an $85 billion fiscal stimulus is added to the $60 billion in emergency spending
already passed by Congress ("Bush Urges New Tax Cuts," Baltimore Sun, October 25,
2001, A1). According to the forecasting firm Macroeconomics Advisors of St. Louis,
each dollar of additional spending and tax cuts would generate $1.50 of output over the
next 18 months ("Impasse on Stimulus Could Deepen Downturn," Washington Post,
November 8, 2001, E1). To put the likely timing of the recession and this estimated effect
of spending on a consistent basis, assume that the multiplied effect of expenditures is
spread equally over the 18-month period. \l "10" Fiscal spending will then increase
aggregate demand on approximately a dollar-for-dollar basis, and the stimulus package
will be enough to offset only the peak-to-trough decline in GDP under the mild recession
scenario. \l "11" Under the severe recession scenario, a $145 billion stimulus package
would offset roughly 60 percent of the $233 billion peak-to-trough decline in GDP.
Under neither scenario will a $145 billion stimulus package offset the cumulative decline
in output. Furthermore, as argued above, tax cuts may have a smaller stimulative effect in
an uncertain environment, which would make the effective size of the stimulus package
smaller than it appears. Without a larger fiscal stimulus than the ones currently proposed,
it seems likely that the economy will have to suffer lost GDP, and the losses are
potentially large.
Conclusion
Stabilization policy is important because it can help to eliminate the economic and social
costs of a recession. The U.S. economy has been hit by a series of adverse shocks, and it
is especially vulnerable to additional spending shocks and downside risk because of the
current high level of uncertainty. Monetary policy may be ineffective in the current
environment and the fiscal stimulus packages being debated may be too small to fully
offset the decline in aggregate demand. Despite criticisms of fiscal fine-tuning, and even
at the risk of "overshooting" the target level of GDP, it is especially important to get the
economics right and limit the damage to our economy for an additional, strategic reason.
The goal of terrorism is to inflict a large amount of damage at very little cost. Enemies of
the United States will almost surely not distinguish between the cyclical contraction that
was already underway in 2001 and the spending shocks that occurred after September 11.
If economic policy is unsuccessful at limiting the depth and duration of the current
recession, the recession could provide additional, powerful incentives for others to
conduct large-scale attacks on our population and economic infrastructure in the future.
Notes
1. Economists recognize that other types of expenditures, such as consumers'
expenditures on housing or durable goods, are similar to investment. Housing and durable
goods provide consumers with a flow of services over a long period of time and are
conceptually quite similar to an investment by a firm. Consumers also often borrow to
finance housing and durable goods purchases, and that borrowing may also be influenced
by interest rates. The tendency to emphasize investment in both discussion and analysis,
however, occurs because investment is one of the most procyclical components of
aggregate demand.
2. For an example of a study that shows a fairly strong relationship between the user cost
of capital and investment, see Cummins, Hubbard, and Hassett (1994).
3. For a recent survey, see Friedman (1997).
4. For a discussion of the bank-lending channel, see Kashyap and Stein (1994).
5. For several papers that address the basic issues surrounding the relationship between
uncertainty and investment, see the proceedings of a recent conference, "New
Perspectives on Fixed Investment: Where Is the Research Agenda Leading?" (City
University Business School, London 2001).
6. The explanation linking uncertainty to the supply of credit is similar for both channels.
Debt commits a firm to a fixed stream of interest payments. The lender receives the
interest payments in the "good" state of nature, and receives the collateral in the "bad"
state of nature (when the firm defaults). Greater uncertainty means that a higher
probability exists that the firm will not be able to meet its interest obligations and will
default. As a result, the expected costs of financial distress faced by the lender rise and
the expected return of the loan falls.
7. While I am not aware of analogous research on consumption, much of the expansion
was fueled by spending on consumer durable goods, which is conceptually similar to
business investment. Admittedly, however, strong automobile sales apparently fueled by
0 percent financing programs are a piece of counterevidence to this hypothesis.
8. Tax cuts may also provide those firms with poor access to external sources of funds
with additional finances for expansion. See Carpenter and Petersen (forthcoming) for a
discussion.
9. A survey of forecasters conducted by the Wall Street Journal (November 14, 2001, A2)
indicated a recession of this size or milder to be a likely scenario.
10. If the $1.50 effect estimated by Macroeconomics Advisors is distributed equally over
time, the effect over 12 months is $1.50 x (12/18). This assumption may be generous and
overstate the potency of fiscal policy, given lags in its effects on aggregate demand.
11. The decline in peak-to-trough GDP understates the full costs of a recession, though,
because it does not consider how losses accumulate over time. Each quarter of activity
below potential GDP represents lost potential production, or lost trend growth. Summing
the difference between potential and actual GDP during the period when GDP is below
its potential value (which includes the contraction and a portion of the recovery) captures
more of a recession's costs, but is difficult to estimate.
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Robert E. Carpenter is a Levy Institute research associate and
assistant professor of economics at UMBC. He can be
contacted at UMBC, Department of Economics, 1000 Hilltop
Circle, Baltimore, MD 21250 or "mailto:[email protected]". He
thanks Alessandra Guarigilia for her helpful and timely
comments and Lele Tang for her excellent and prompt research
assistance.