False Jobs Report Shows 7.8% Unemployment

Wow. Lies, damn lies, and statistics is right. Completely contradicting private sector unemployment estimates from earlier in the week (which showed little to no change in the unemployment rate), the BLS reported today that 873,000 people were hired in September and the U-3 unemployment rate has plunged to 7.8%. The fact aside that U-6 is a far better indicator of unemployment than U-3 and the methodology of the federal government's unemployment surveys is fundamentally flawed, it's simply impossible that 873,000 people were hired last month (even if the majority of hires were for part-time positions), given that the Philly Fed reported 3 weeks ago that 20 states are indicating recession. It doesn't matter how little they're paid. 873,000 people are not hired when nearly half the country is indicating recession. Period.

By the way, GDP was growing at a 9.3% clip last time 873,000 jobs were added in a month. Today's GDP growth? 1.7% Nah, the books weren't cooked to favor Obama...

ECOMINOES Radio With Thomas DiLorenzo

We have a special treat this week. At 4 PM EST on kinetichifi.com Eric and I will speak with the brilliant (and controversial) economist Dr. Thomas DiLorenzo. Dr. DiLorenzo is best known for his controversial publications about Abraham Lincoln, whom the professor has criticized for violating the Constitution. After we speak with him, Eric and I will cover some of the stories from the week from ecominoes.com and then speak with local gun range owner Arlyn Pendergast of ATP Gunshop and Range about encroaching local firearms ordinances. Don't miss this show!

Listen here at 4 PM EST.

Market Wants Obama To Win

Since March, the performance of the S&P has been correlating extremely well (76%) with Obama's reelection chances on InTrade. In fact, the correlation is so good that even a short-term plummet in reelection chances saw the S&P plummet as well. We'll see what Obama's chances are after all the dust is settled from the first debate, but it appears that the market wants Obama to win. And why might it want him to win? Could it be because Obama, unlike Romney, has made of no mention of nominating a new Fed chairman next year? Lest we forget that stocks would likely be 50% lower if it weren't for Bernanke's liquidity pumping.

Clinton's Prosperity Was A Greenspan Bubble, Mr. Obama

Early in this evening's presidential debate, Obama twice brought up the economic success of Bill Clinton's presidency. Let it be known that Clinton's 2nd term, the term to which people refer when they talk about "Bill Clinton's economy", took place during the period of time in which the "beneficial" effects of Alan Greenspan's first great liquidity pumping came to fruition. (Books have been written about this. I suggest Greenspan's Bubbles: The Age Of Ignorance At The Federal Reserve). While Democrat politicians love to point to Bill Clinton's economic record, the truth is that the prosperity we saw during Clinton's 2nd term can be largely attributed to Greenspan's Fed.

A nutshell economics lesson: Following the 1991 recession, Greenspan's Fed pushed down the Fed Funds Rate (the rate at which the Fed loans to banks) to near-historic lows and kept them there for the better part of the decade. The FFR had been lower before (as you can see in the following chart prior to 1965); however, Greenspan's Fed pumped fiat currency (more likely to pool in speculative markets) whereas Fed presidents prior to 1965 lent gold-backed currency (less likely to pool in speculative markets). As you can see from the red trendline on the chart, Greenspan's Fed Funds Rate was far below where the FFR had been for the majority of time after August 15, 1971, the date on which the dollar was decoupled from gold. The FFR during the 1990's wasn't as low as it was during the 2000's (those low rates helped lead us to this economic depression), but it was low enough to help inflate a then-historic speculative bubble (dot-coms and technology in general) and juice the economy, which highly benefited the legacy of one William Jefferson Clinton.

Another way of looking at Greenspan's first great liquidity pumping is to look at the sudden drop in the personal savings rate during the late 1990's. Nearly a decade of record-low post-gold-decoupling Fed Funds Rates lead to abnormally low savings rates, which enticed people to spend more money, much of it on the technology (and technology stocks) created by the speculative-driven tech market. The wealth effect of major market bubbles intensified this spending trend, which made the economy--and Bill Clinton--look good.

And how much did the tech speculation benefit the economy? During Clinton's 2nd term, the NASDAQ alone "created" nearly $2 trillion in new wealth and made tens of thousands of Americans instant millionaires. The trickle-down effect was immense, and millions of Americans were lifted out of poverty. (Clinton's 2nd term is a testament to the benefits of trickle-down economics.) Bill Clinton wasn't responsible for all that wealth creation. People throwing piles of fiat dollars at technology was.

Fed Econ Models Predict "Explosive Inflation"

In a staff report published today by the New York Fed (.pdf), economists Mark Del Negro, Marc Giannoni, and Christina Patterson came to the shocking conclusion that key Fed economic models must be wrong...because they predict severe consequences (extremely high inflation 2 years from now) as a result of manipulating the monetary system. From the report, discussing the challenge of predicting economic performance 8 quarters out:

Given that policymakers seldom if ever experimented with forward guidance this far in the future, there is little data to guide them. The problem, however, is that these DSGE models appear to deliver unreasonably large responses of key macroeconomic variables to central bank announcements about future interest rates.

Carlstrom et al. show that the Smets and Wouters model would predict an explosive inflation and output if the short-term interest rate were pegged at the ZLB (Zero Lower Bound) between eight and nine quarters. This is an unsettling fi nding given that the current horizon of forward guidance by the FOMC is of at least eight quarters.

In English, the report is saying the Fed's models must be wrong because they predict "explosive inflation" 2 years out. Interesting that Philly Fed president Charles Plosser recently came to the same conclusion.

Intelligence Effort Targeted Innocent Citizens

It gets scarier every today. Yesterday the AP reported that a Senate study on homeland security spending has concluded that so-called federal "fusion centers", a multi-billion dollar information-sharing network used by law enforcement agencies of all levels (created in the aftermath of 9/11 of course), have improperly collected information about innocent Americans. From the AP:

What began as an attempt to put local, state and federal officials in the same room analyzing the same intelligence has instead cost huge amounts of money for data-mining software... The report underscores a reality of post-9/11 Washington: National security programs tend to grow, never shrink, even when their money and manpower far surpass the actual subject of terrorism.

The federal government's appetite for data mining knows no bounds. I reported back in April that William Binney, former technical director of the National Security Agency, made the bold claim that his prior employer collects, stores, and data mines personally-identifiable electronic communications of American citizens using a system he helped create. Filmmaker Laura Poitras made a must-see documentary about the NSA's supposed program, known as "Stellar Wind", and received reprisal from the federal government because of it. Now it appears that the feds' data mining efforts are assisted by local and state law enforcement agencies, knowingly or not.

Tax System More Progressive, Rigged

Maybe it's just a function of the rich getting richer and the poor getting poorer (but getting more handouts), but, according to taxfoundation.org, the federal tax system has been getting more progressive over the past 3 decades. In fact...

...today, the system is progressive (and rigged well) even after credits and deductions. A few things about this next chart: The jump between the $100,000-250,000 and $250,000-1,000,000 brackets is disproportionally large (stick it to the successful small businessman or senior-level corporate employee!), and the jump between the $250,000-1,000,000 and $1,000,000+ brackets is disproportionally small (the wealthy can afford top-dollar accounting and legal services). Also, the fall between the $15,000-30,000 and $1-15,000 brackets is below trendline, reflecting the impacts of the EITC and the welfare state. Clearly, the tax system has evolved to become more progressive and to benefit the wealthy (only an increase in effective tax rate of 1% between $999,999 and $999,999,999), and the poor, who pay progressive negative effective tax rates.

High Inflation Leads To Societal Collapse

The West has seen at least 4 periods of currency debasement lead to social unrest. With 4+ years of chronic, socially-destructive long-term unemployment in this country and even the president of the Philly Fed going on record saying that 3 years of Quantitative Easing will "end badly", the seeds of social unrest have been sewn here. What might we expect if/when inflation takes off in tandem with a depressed economy? SocGen's Dylan Grice gives us a glance through the prism of Western history:

Third Century Roman inflation (and implicit currency debasement) sparked a rapid turnover of emperors as the scapegoating over the systemic debasement saw Romans turned on Christians with a great violence which lasted throughout the period of the currency debasement but peaked with Diocletian's edict of 303 AD. The edict decreed, among other things, that Christian meeting places be destroyed, Christians holding office be stripped of that office, Christian freedmen be made slaves once more and all scriptures be destroyed. Diocletian's earlier edict, of 301 AD, sought to regulate prices and set out punishments for 'profiteers' whose prices deviated from those set out in the edict.

A similar dynamic seems evident during Europe's medieval inflations, only now, the confused and vain effort to make sense of the enveloping turmoil saw the blame focus on suspected witches. The following chart shows the UK price index over the period with the incidence of witchcraft trials. Note the peak in trials coinciding with the peak of the price revolution.

Were the same dynamics at work during the French Revolution of 1789? The narrative of Madame Guillotine and her bloody role is well known. However, the execution of royalty by the Paris Commune didn't begin until 1792, and the Reign of Terror in which Robespierre's Orwellian sounding 'Committee of Public Safety' slaughtered 17,000 nobles and counterrevolutionaries didn't start until well into 1793. In the words of guillotined revolutionary Georges Danton, this is when the French revolution 'ate itself'. But the coincidence of these events to the monetary debasement is striking. The political violence was justified in part by blaming nobles and counter-revolutionaries for galloping inflation in food prices.

However, the most tragic of all the inflations in my opinion, and certainly the starkest example of a society turning on itself was the German hyperinflation. Like other Axis countries on the wrong side of the War and now in the grip of hyperinflation, Germany turned viciously on its Jews. It blamed them for the surrounding evil as Romans had blamed Christians, medieval Europeans had suspected witches, and French revolutionaries had blamed the nobility during previous inflations.

Killer (Unconstitutional?) Drones With Artificial Intelligence

Just days after the AP published a survey that suggests that 1/2 of Americans support the use of domestic surveillance drones, AFP is reporting that the Pentagon is developing drones with artificial intelligence that will be able to kill without human assistance. According to Mark Maybury, chief scientist for the U.S. Air Force, the drones are being designed as “ethical” warriors that could wage war in a more “humane” way than their human counterparts:

It is not my belief that an unmanned system will be able to be perfectly ethical in the battlefield, but I am convinced that they can perform more ethically than human soldiers are capable of.

While the probability of an unmanned system "going rogue" is smaller than an individual soldier, I'd make the case that allowing a computer to decide who lives and who dies is removing the Executive Branch (and the inherit chain of command from president to foot soldier) from such decisions, which would be unconstitutional. Waging war is the exclusive domain of the Executive Branch, which the Constitution defines in terms of people.

And how scary would these machines be if civilian law enforcement agencies started using them?

Iran Primed For Revolution

Here's another reason why Iran likely isn't an "imminent nuclear threat": economic sanctions are working extremely well against the Ahmadinejad regime. They're working so well, in fact, that they've primed the country for revolution. According to Steve Hanke of the Cato Institute, Iran's misery index (a measure of quality of life taking into consideration inflation, lending rates, unemployment, and change in GDP), has gone hyperbolic over the last year, reaching historic levels. By comparison, Egypt had a Hanke misery index of less than 40 in the days preceding the "Arab Spring" revolution.

Iran An "Imminent Nuclear Threat" For 30+ Years Now

Iran is a a sworn enemy of Israel and is no friend of the United States. But, for those who believe Iran is an "imminent nuclear threat", as Netanyahu has claimed, I present the following exhaustive timeline of false alarms from the Christian Science Monitor. People have been calling Iran a nuclear threat since the late 1970's:

1. Earliest warnings: 1979-84

Fear of an Iranian nuclear weapon predates Iran's 1979 Islamic revolution, when the pro-West Shah Mohammad Reza Pahlavi was deep in negotiations with the US, France and West Germany, on a nuclear-energy spending spree that was to yield 20 reactors.

Late 1970s: US receives intelligence that the Shah had "set up a clandestine nuclear weapons development program."

1979: Shah ousted in the Iranian revolution, ushering in the Islamic Republic. After the overthrow of the Shah, the US stopped supplying highly enriched uranium (HEU) to Iran. The revolutionary government guided by Ayatollah Ruhollah Khomeini condemned nuclear weapons and energy, and for a time stopped all projects.

1984: Soon after West German engineers visit the unfinished Bushehr nuclear reactor, Jane's Defence Weekly quotes West German intelligence sources saying that Iran's production of a bomb "is entering its final stages." US Senator Alan Cranston claims Iran is seven years away from making a weapon.

2. Israel paints Iran as Enemy No. 1: 1992

Though Israel had secretly done business with the Islamic Republic after the 1979 revolution, seeking to cultivate a Persian wedge against its local Arab enemies, the early 1990s saw a concerted effort by Tel Aviv to portray Iran as a new and existential threat.

1992: Israeli parliamentarian Benjamin Netanyahu tells his colleagues that Iran is 3 to 5 years from being able to produce a nuclear weapon – and that the threat had to be "uprooted by an international front headed by the US."

1992: Israeli Foreign Minister Shimon Peres tells French TV that Iran was set to have nuclear warheads by 1999. "Iran is the greatest threat and greatest problem in the Middle East," Peres warned, "because it seeks the nuclear option while holding a highly dangerous stance of extreme religious militanCY."

1992: Joseph Alpher, a former official of Israel's Mossad spy agency, says "Iran has to be identified as Enemy No. 1." Iran's nascent nuclear program, he told The New York Times, "really gives Israel the jitters."

3. US joins the warnings: 1992-97

The same alarm bells were already ringing in Washington, where in early 1992 a task force of the House Republican Research Committee claimed that there was a "98 percent certainty that Iran already had all (or virtually all) of the components required for two or three operational nuclear weapons."

Similar predictions received airtime, including one from then-CIA chief Robert Gates that Iran's nuclear program could be a "serious problem" in five years or less. Still, the bureaucracy took some time to catch up with the Iran threat rhetoric. 

1992: Leaked copy of the Pentagon's "Defense Strategy for the 1990s" makes little reference to Iran, despite laying out seven scenarios for potential future conflict that stretch from Iraq to North Korea.

1995: The New York Times conveys the fears of senior US and Israeli officials that "Iran is much closer to producing nuclear weapons than previously thought" – about five years away – and that Iran’s nuclear bomb is “at the top of the list” of dangers in the coming decade. The report speaks of an "acceleration of the Iranian nuclear program," claims that Iran "began an intensive campaign to develop and acquire nuclear weapons" in 1987, and says Iran was "believed" to have recruited scientists from the former Soviet Union and Pakistan to advise them.

1997: The Christian Science Monitor reports that US pressure on Iran's nuclear suppliers had "forced Iran to adjust its suspected timetable for a bomb. Experts now say Iran is unlikely to acquire nuclear weapons for eight or 10 years."

4. Rhetoric escalates against 'axis of evil': 1998-2002

But Iran was putting the pieces of its strategic puzzle together. A US spy satellite detected the launch of an Iranian medium-range missile, sparking speculation about the danger posed to Israel.

1998: The New York Times said that Israel was less safe as a result of the launch even though Israel alone in the Middle East possessed both nuclear weapons and the long-range missiles to drop them anywhere. "The major reaction to this is going to be from Israel, and we have to worry what action the Israelis will take," the Times quoted a former intelligence official as saying. An unidentified expert said: "This test shows Iran is bent on acquiring nuclear weapons, because no one builds an 800-mile missile to deliver conventional warheads."

1998: The same week, former Defense Secretary Donald Rumsfeld reports to Congress that Iran could build an intercontinental ballistic missile – one that could hit the US – within five years. The CIA gave a timeframe of 12 years.

2002: CIA warns that the danger from nuclear-tipped missiles, especially from Iran and North Korea, is higher than during the cold war. Robert Walpole, then a top CIA officer for strategic and nuclear programs, tells a Senate panel that Iran's missile capability had grown more quickly than expected in the previous two years – putting it on par with North Korea. The threat "will continue to grow as the capabilities of potential adversaries mature," he says.

2002: President George W. Bush labels Iran as part of the "axis of evil," along with Iraq and North Korea.

5. Revelations from inside Iran: 2002-05

In August 2002, the Iranian opposition group Mojahedin-e Khalq (MEK, a.k.a. MKO) announces that Iran is building an underground uranium enrichment facility at Natanz, and a heavy water reactor at Arak. It is widely believed that the evidence had been passed to the MEK by Israeli intelligence.

Enrichment and reactors are not forbidden to Iran as a signatory of the Nuclear Non-Proliferation Treaty (NPT), but the failure to disclose the work prompts an IAEA investigation and much closer scrutiny. Iran insists its efforts are peaceful, but is found in breach of its IAEA safeguards agreement, and accused by the IAEA of a "pattern of concealment."

2004: Then-Secretary of State Colin Powell tells reporters that Iran had been working on technology to fit a nuclear warhead onto a missile. "We are talking about information that says they not only have [the] missiles but information that suggests they are working hard about how to put the two together," he said.

2005: US presents 1,000 pages of designs and other documentation allegedly retrieved from a computer laptop in Iran the previous year, which are said to detail high-explosives testing and a nuclear-capable missile warhead. The “alleged studies,” as they have since been called, are dismissed by Iran as forgeries by hostile intelligence services.

6. Dialing back the estimate: 2006-09

2006: The drums of war beat faster after the New Yorker’s Seymour Hersh quotes US sources saying that a strike on Iran is all but inevitable, and that there are plans to use tactical nuclear weapons against buried Iranian facilities.

2007: President Bush warns that a nuclear-armed Iran could lead to "World War III." Vice President Dick Cheney had previously warned of "serious consequences" if Iran did not give up its nuclear program.

2007: A month later, an unclassified National Intelligence Estimate (NIE) on Iran is released, which controversially judges with "high confidence" that Iran had given up its nuclear weapons effort in fall 2003.

The report, meant to codify the received wisdom of America's 16 spy agencies, turns decades of Washington assumptions upside down. Iranian President Mahmoud Ahmadinejad calls the report a "victory for the Iranian nation." An Iranian newspaper editor in Tehran tells the Monitor, “The conservatives … feel the chance of war against them is gone."

June 2008: Then-US Ambassador to the United Nations John Bolton predicts that Israel will attack Iran before January 2009, taking advantage of a window before the next US president came to office.

May 2009: US Senate Foreign Relations Committee reports states: "There is no sign that Iran's leaders have ordered up a bomb."

7. Israel's one-year timeframe disproved: 2010-11

Despite reports and intelligence assessments to the contrary, Israeli and many US officials continue to assume that Iran is determined to have nuclear weapons as soon as possible.

August 2010: An article by Jeffrey Goldberg in The Atlantic's September issue is published online, outlining a scenario in which Israel would chose to launch a unilateral strike against Iran with 100 aircraft, "because a nuclear Iran poses the gravest threat since Hitler to the physical survival of the Jewish people."

Drawing on interviews with "roughly 40 current and past Israeli decision makers about a military strike" and American and Arab officials, Mr. Goldberg predicts that Israel will launch a strike by July 2011. The story notes previous Israeli strikes on nuclear facilities in Iraq and Syria, and quotes Israeli Prime Minister Benjamin Netanyahu saying, "You don't want a messianic apocalyptic cult controlling atomic bombs. When the wide-eyed believer gets hold of the reins of power and the weapons of mass death, then the world should start worrying, and that's what is happening in Iran."

2010: US officials note that Iran's nuclear program has been slowed by four sets of UN Security Council sanctions and a host of US and EU measures. The Stuxnet computer virus also played havoc through 2011 with Iran's thousands of spinning centrifuges that enrich uranium.

January 2011: When Meir Dagan steps down as director of Israel’s Mossad spy agency, he says that Iran would not be able to produce a nuclear weapon until 2015. "Israel should not hasten to attack Iran, doing so only when the sword is upon its neck," Mr. Dagan warned. Later he said that attacking Iran would be "a stupid idea.... The regional challenge that Israel would face would be impossible."

January 2011: A report by the Federation of American Scientists on Iran's uranium enrichment says there is "no question” that Tehran already has the technical capability to produce a "crude" nuclear device.

February 2011: National intelligence director James Clapper affirms in testimony before Congress that “Iran is keeping the option open to develop nuclear weapons in part by developing various nuclear capabilities and better position it to produce such weapons, should it choose to do so," Mr. Clapper said. "We do not know, however, if Iran will eventually decide to build nuclear weapons."

November 2011: The IAEA claims for the first time that Iran is has worked on weapons-related activities for years, publishing detailed information based on more than 1,000 pages of design information that is corroborated, it says, by data from 10 member states and its own investigation and interviews.

Not to say that Ahmadinejad would like to hold hands with Jews and sing "Kumbaya", but, with all of the history of false alarms regarding a nuclear Iran, I'm dumbfounded that people actually took seriously Netanyahu's "cartoon bomb" graphic at the U.N. Why exactly would Netanyahu's "imminent threat" warning be different from all of the other warnings that have proven false over the past 4 decades?

Why Are We Still In Afghanistan?

The AP reported today that US military deaths in Afghanistan passed 2,000 with 1.5 years of American military commitment to the country to go. While the number of American troop deaths in Afghanistan pales in comparison to the nearly 5,000 US servicemen who have died in Iraq, the sentiment of hopelessness in Afghanistan is much more pervasive than it is in Iraq. US military suicides have reached epidemic proportions in both countries, but, through August, 171 of the 212 suicides of 2012 have taken place in Afghanistan. (That's nearly 1 per day.) It's clear that morale is incredibly low there and a good number of US troops have no idea what they're fighting for. And what exactly are they fighting for? Bin Laden is dead (he wasn't even in the country), and Americans have made next to zero progress in establishing a stable government in Afghanistan.

Clearly, US military contractors, who profited to the tune of $25 billion last year from the 2 Middle Eastern wars, want us to remain there. And then there's the importance of the opium trade--a $70 billion dollar industry--to the US economy. (95% of the revenue in the trade is realized by banks and business syndicates, many of which are located in the US.) But, from the perspective of military strategy, is there any benefit to losing hundreds of American lives each year in Afghanistan, many of which are suicides? 11 years later having done little but increase anti-American sentiment in the region, the clear answer is no.