Blogger won't allow comments longer than 4096 characters, so I publish this as a post from reader Wendy...
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Nice find and good question, Robb.
When the financial crisis happened, I made a serious inquiry into its causes and determined that the mark-to-market accounting regime was the absolute and sole cause of the crisis, that factor without which there would have been no financial crisis. The evidence is overwhelming. I won't go into the model here because I hope to publish it in more detail soon on RealClearMarkets.com. It is true that mark-to-market is just an accounting method, there is nothing wrong with it per se, and it is appropriate for certain types of situations. The problem is that it was made mandatory on the private sector and encompassed a significant portion of all securities. The regime causes a positive feedback loop of financial losses, which is essentially synonymous with a self-reinforcing contraction of the credit supply. The IMF has done a simulation of the regime and verified this effect as well.
I regard every other model of the crisis, including the housing bust, the Fed, the GSEs, the CRA, deregulation, etc., to be phony, irresponsible, and extremely damaging to the cause of capitalism. It is widely believed among actual market players that the mark-to-market regime was responsible for the crisis, but the incompetariat has largely ignored the story (with some notable exceptions, including Steve Forbes). Here is a history.
The Financial Accounting Standards Board (FASB), a quasi-autonomous non-governmental organization, is the authority which sets the accounting rules and put the mark-to-market regime in place. It operates under the aegis of the SEC, which enforces the accounting dictates uncritically on the financial industry. Early adoption of the regime was effective for all years beginning after September 2006, i.e., starting January 1, 2007. Most of the major commercial and investment banks did adopt it early out of reputational concerns, apparently oblivious to the threat. Asset prices began dropping immediately, and though most big banks gamed the new regime fairly well that year, a credit crunch still ensued. You may remember the sudden market plunge on August 19 of that year as institutions sold off assets in a scramble for capital. The regime became mandatory for everyone on November 15, 2007. Then there was serious trouble. Sometime in Q2:2008, losses began to exceed capital raisings in the financial system. The financial system as a whole was effectively insolvent. The critical event occurred when John Thain decided to look out for his investors and sell the failing Merrill Lynch's assets for 22 cents on the dollar in the last week of July 2008, forcing everyone else to mark down their assets to the same catastrophic level. A crisis was formally recognized when Lehman collapsed a little over a month later, causing between $100 and $200 billion in lost value.
Mark-to-market as a method has been around for ages. I haven't researched its history yet, but I do know it was in effect as a regime during the Great Depression until Roosevelt suspended it in 1938. It was enforced by the New York Federal Reserve in those days. Given that the Great Depression and the Great Recession seem to belong to the same category of crisis based on their characteristics, I highly suspect that the mark-to-market regime caused the former as well, although there were certainly other aggravating factors brought into play, including the Smoot-Hawley Tariff Act.
The mark-to-market ideological movement revived several decades later and has been taking hold since at least the late 1980s. Alan Greenspan among others warned against it in 1993, so when the FASB decreed mark-to-market in effect in 1994, the moral force was not with them. They thus had to concede the practical execution to the pro-market factions, who quickly adopted a discounted cash-flow method, used to reflect the long-term economic value of the asset, on the theory that since markets are efficient, market prices should be the same as the economic value anyway. When leftists try to tell you that mark-to-market has been in place since 1994 and hasn't caused any problems so why would it be responsible for the crisis, remember that leftists shamelessly lie like rugs. This is out-and-out deception on their part. They can call it whatever they want, but it was a discounted cash-flow method, not mark-to-market, that was in place prior to 2007.
Mark-to-market was eased significantly when Congress intervened and threatened the FASB. When conditions became undeniably hopeless during Q1:2009, the anti-regime factions, both among the financial industry and the general public, gained political momentum. Warren Buffett, previously a cavalier supporter of the regulatory state, had become noticeably more humble as he watched his investment in Goldman Sachs inexplicably going toward zero. Despite the Goldman Sachs CEO's psychotic and suicidal support for the mark-to-market regime, Buffett decided to face reality and, along with other key players, testified against it to Congress. On March 10, 2009, Fed Chairman Bernanke reversed his previous unconditional support for the regime, announcing that substantial improvements needed to be made. These developments caused the sudden reversal of the crisis seen in March 2009 as markets began pricing in relief and write-ups.
The ruling and the market reversal precipitated a bout of existential rage among the left, who had been hoping for a total collapse and who wanted to use a collapse as a pretext to nationalize the banks. The humiliated FASB, headed by a malicious crypto-Marxist named Bob Herz, quickly determined to bring mark-to-market back with a vengeance in 2012-2013. It is a religion for them, and a FASB board member has actually labelled it as such. The FASB intends to force not only all the securities that were previously covered back into the regime, but all loans as well. Combined with the worldwide implementation of the new Basel II capital accounting regime, I can say in all seriousness and with no exaggeration that if they succeed, it will cause the collapse of Western civilization.
George Soros cannot possibly be ignorant of the effects of mandatory mark-to-market, and neither can the FASB. I do not know if they have some sort of closet relationship, but because they share the same ideology, they can probably be counted on to cooperate in this endeavor without a word spoken between them.
Wendy
Friday, June 18, 2010
The Hand of Soros?
“Regime change” in the United States entails a paradigm shift away from free enterprise capitalism and the establishment of a socialist government ...will make it forever impossible for the U.S. to reinstate the free enterprise capitalist system, as every political and social act will be dictated by the elite in Washington."It would be really interesting to do some investigation into the origins of the the "mark to market" accounting rules change. Who initiated the idea? Who promoted it? I would not in the least be surprised that a puppetmaster like George Soros was behind it, because only someone like him could fully appreciate the devastating effects it would have. I emphasize "fully".
"Such “regime change” was facilitated by the government’s stealth regulatory change on November 9, 2007, from "hold to maturity" accounting to “mark-to-market” accounting, which caused the collapse in private sector capital formation and access to credit in 2008 and 2009..."
"Without the mark-to-market regulatory change, the markets would not have collapsed and we would still have a booming economy. Instead, we have a loss of over $10 trillion in private sector wealth and a shifting of private sector ownership and control of capital to the government and Fed... "
Many people could see it would be "bad". But not many could predict the detailed consequences and timing of events. I would bet hard money that Soros was positioned to make a lot of money on the collapse when it finally happened -- and I'm sure he could pull the strings of Bush's treasury chief Paulsen (a Democrat) to trigger the crisis once he determined the conditions were ripe. (If you go public with a request for a trillion dollars to "save" the economy, I submit that you know you're going to trigger a wave of selling and destroy it.)
As I said, it would take someone of Soros's sophistication to know that "mark to market" rules would cripple American businesses and precipitate a severe banking crisis. If Soros made a boatload on the collapse, I'd bet our intelligence agencies could determine that very quickly, and it would be a smoking gun for going after him -- if you didn't have a communist in the White House, a communist in the Justice Department, etc.
http://www.aim.org/aim-column/obama%E2%80%99s-%E2%80%9Cregime-change%E2%80%9D-of-socialist-control/
Obama’s “Regime Change” of Socialist Control
By Pieter Samara | June 17, 2010
Cap & Trade, involving a Chicago carbon exchange and other companies that Obama and/or his associates may have financial interests in, was all but dead in the water until the BP oil blowout crisis renewed “hope” that he could revive it again.
With all the solutions available from the private sector and from around the world since day one, to deal with the oil spill, President Obama has stalled on allowing any of these going forward for the following reasons:
To increase the power of government over the private sector. To allow the private sector to solve the problem would defeat and undermine Obama’s assertion that only government and government-owned companies, bureaucracies and labor unions can provide the solution. Obama sees the private sector as inherently evil, as reflected in the fact that he refused to meet with BP to establish a working relationship with the company to cut through all the bureaucratic red tape.
While BP attempts to cap the Deep Water Horizon well, it has to be remembered that the government forced BP to drill at a depth of 5,000 feet, one of the deepest wells ever drilled, creating the crisis. BP had wanted to drill at a depth of 500 feet. The result of the blowout has been that the government, Obama, and Democrats in Congress have threatened and talked down BP and its efforts. On the one hand, they require BP to obtain approvals from the government to move forward, while on the other hand they vilify the BP president and CEO during Congressional hearings, due to the government’s own delays.
Meanwhile, the Obama Administration failed to grant requested waivers to the 1920 Jones Act that would allow foreign ships and skimmers to enter U.S. water, refusing international assistance from 33 countries and stalling and minimizing Louisiana’s creation of sand barriers, as well as stalling numerous private sector solutions that the Administration has refused to take heed of. One such example offered on May 3 was from Dr. Henry Crichlow, the leading oil blowout specialist worldwide, who developed the blowout engineering after Gulf War I for 800 or more wells in Kuwait, who provided quick relatively inexpensive solutions to either recover the oil with the Crichlow connector from the pipe a mile down or to “Kill the Spill” completely.
As part of the orchestration of the crisis, liberals in Congress threatened to put BP into receivership, while Obama played to the radical left with a threat to take over BP’s assets, if they could not force BP to allocate $20 billion in an escrow for a government appointee to administer. The result was that despite BP’s balance sheet, the U.S. government has succeeded to cause a FITCH downgrade of BP’s unsecured debt from AA to BBB, with BP shares losing a market cap value of $90 billion. The Obama Administration demanded that BP make payments it had already agreed to make, thus financially weakening the very company the government asserts it wants to be able to shoulder the burden of the fines, the oil cleanup and claims of lost revenues for the Gulf states.
Force Obama’s Cap & Trade bill and energy tax through Congress. Under the Obama policy of “don’t let a good crisis go to waste,” such stalling and delaying mentioned above allowed the crisis to get bad enough for Obama to have the “audacity” in his Oval Office speech to the nation to contrive and justify his Cap & Trade climate bill. Since the beginning of the blowout, the private sector and the States have been fighting with the Administration to get approvals to take action. However, the longer the Administration could stall, the worse the situation would become for BP, the States and Gulf coast businesses, exacerbating a crisis further by creating a moratorium on current and new shallow water drilling threatening hundreds of thousands of jobs.
Cap & Trade, involving a Chicago carbon exchange and other companies that Obama and/or his associates may have financial interests in, was all but dead in the water until the BP oil blowout crisis renewed “hope” that he could revive it again. Cap & Trade is designed to increase the cost of energy to the private sector by more than 10 percent, lowering GDP in the process.
Organization for Economic Cooperation and Development (OECD) studies have demonstrated that for every 1% reduction in the cost of energy there will be a 3% increase in manufacturing and industrial output. This occurred when President Reagan deregulated the oil industry, creating an economic boom. Obama is moving in the opposite direction—that of higher taxes and more federal government control on a permanent basis.
To effect “regime change” toward statism. Why would the Administration willfully let the Coastal region be damaged, destroying revenues and lives to create a crisis, as an “end justifies the means” call for Cap & Trade? The answer is that we just need to look at the cause of the systemic financial crisis itself, which was intended to achieve, as Mohamed El Erian, CEO of PIMCO, himself called it , “regime change” in the U.S. and globally. “Regime change” in the U.S. means an inexorable shift of control and ownership of private sector capital and productivity of the populous to the federal government and Federal Reserve.
“Regime change” in the United States entails a paradigm shift away from free enterprise capitalism and the establishment of a socialist government which assumes ownership and control of capital and human resources. Its projected culmination to a “New Normal” of slow economic growth and bigger government within four years will make it forever impossible for the U.S. to reinstate the free enterprise capitalist system, as every political and social act will be dictated by the elite in Washington.
Such “regime change” was facilitated by the government’s stealth regulatory change on November 9, 2007, from "hold to maturity" accounting to “mark-to-market” accounting, which caused the collapse in private sector capital formation and access to credit in 2008 and 2009, unless accompanied by government ownership or guarantees that allow such debt to be reclassified under the government’s sole right hold to maturity valuation.
Without the mark-to-market regulatory change, the markets would not have collapsed and we would still have a booming economy. Instead, we have a loss of over $10 trillion in private sector wealth and a shifting of private sector ownership and control of capital to the government and Fed. Thus, clearly, if the government and “special interests” are willing to orchestrate an unmitigated economic collapse allowing over $10 trillion in private sector savings to be lost to effect a “regime change” to a “New Normal” culminating in their total ownership and control of financial and human resources, then government stalling in its response to the oil spill to create a crisis to justify the resurrection of Cap & Trade to further such “regime change” is small potatoes by comparison.
To start the nationalization of oil and other major industries. An outright government takeover of BP and other oil companies could be the next phase of Obama’s “regime change” policy.
To read a longer version of the points covered in this article, please go to “Regime change <http://admc24-7city.com/files/V/the_new_normal_which_completes_the_regulatory_regime_change_that_started_november_9_2007_8.5x11_061710.doc> .”
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Pieter Samara is a citizen of the United States of America who currently lives in Bangkok, Thailand, and has been an entrepreneur his entire working career, developing and managing his own businesses. He is currently the CEO of Asset Development and Management Company Private Limited and Chairman & CEO of American Asset Acquisition Corporation.
Thursday, June 17, 2010
Obama's communist past
A link to a youtube video was passed on to me, summarizing in a rather chilling way the main facts about Obama's long association with communists and killers. The facts I knew about in this video are correct, and other facts I was pretty sure about. The video also alleges a history of identity fraud which I am otherwise unfamiliar with. Verified or not, the video is worth watching and provocative, and because some people I know in other regions of the country seem unable to view it directly at youtube for some reason, I'm embedding it here. (I have to keep replacing the embed on this video because youtube keeps removing the video. If you can't see it, search youtube for "OBAMA DOESN'T WANT YOU TO SEE THIS" and someone will probably have re-uploaded it.)
Sunday, June 13, 2010
The Pied Piper of DC
The document at bottom is one of the scariest things I have ever read. I looked it up while researching my "turkey" post, and realized it had to be read. It does. In here, in 2002, Federal Reserve Chairman Ben Bernanke outlines a very broad range of means the Federal Reserve and the U.S. Government will use to stop an economic collapse, which he charitably calls "deflation", meaning, a severe drop in "aggregate demand" -- meaning, no one is buying any damned thing because they got no jobs and no money. He describes the exact conditions of our current crisis, but says the chances of it happening are "extremely remote". He is clearly sympathetic to every single policy measure he outlines, even though he often hedges by saying they might be "undesirable".
There isn't one single correct principle of sound economics that Bernanke endorses in this document. He holds up 1934, in the midst of the lowest point of the Great Depression, as the single greatest moment in stock market history! I kid you not.
The paragraph that earned him the title "Helicopter Ben" caps this:
I've highlighted the scariest comments, and if you don't understand them, try to, because the real meaning isn't always obvious. View everything in light of this fact: in a healthy, pure capitalist, gold-backed economy, long-term interest rates are very low, and the general rate of "inflation" (as measured by an average of all prices) is always mildly negative as production efficiencies accrue. Bernanke, however, calls this a threatening "deflation" that must be attacked with monetary policy such as the TARP bill. For instance, he refers to the terrible debts piled on people in 1896 as
Now, some of you might be thinking, "but we don't have deflation. Aren't we at risk for inflation?"
What is inflation? It is *NOT* simply increasing prices of things. You can have inflation with falling prices. "Inflation" is one of those loaded terms with a lot of baggage from intellectual incompetents like Bernanke. A proper definition means: falling value of the dollar (or whatever currency). That can cause a new car to be more expensive... but if demand is falling and incomes are falling, the price of the car could still be falling, cause no one can afford the damned thing.
I don't want to go into a treatise on economics here, but the key is always to keep your mind focused on *real* value of things rather than surrogates like paper bills: how much of your productive effort does it take to buy a car? Say, a percent of your annual income. If that percentage is going up, you have inflation in real terms. And note: inflation (in the absence of credit expansion) always means you have declining demand. What gets so scary (and what we've experienced) is the government created phenomena of people getting artificially high present incomes by borrowing against the future. Artificial demand created by artificial ability to buy. Only we get insulated from cause and effect (truth and consequences) because the government has been artificially reducing prices for years by borrowing in a giant game of monetary musical chairs. Gross oversimplification, but it points you in the right direction.
What does this mean for the future? Contemplate: Every single instance of monetary policy by our government is in exactly the wrong direction. Every one. You can decide whether Bernanke is Wrong Way Corrigan (http://en.wikipedia.org/wiki/Douglas_Corrigan) who did it intentionally, or Wrong Way Marshall (http://en.wikipedia.org/wiki/Jim_Marshall_%28American_football%29) who was just really, really confused, but either way, you know something really bad has to happen before long.
Whither goest thou, America? After the pied piper, Helicopter Ben Bernanke.
(P.S.: The real pied piper was a serial killer of children. http://en.wikipedia.org/wiki/Pied_Piper_of_Hamelin "In 1284, while the town of Hamelin was suffering from a rat infestation, a man dressed in pied clothing appeared, claiming to be a rat-catcher. ...One hundred thirty boys and girls followed him out of the town, where they were lured into a cave and never seen again." Or 300 million.)
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm#fn18
Since World War II, inflation--the apparently inexorable rise in the prices of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency.
A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.
Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4
The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
Preventing Deflation
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.
Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.7
Curing Deflation
Let me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities.
Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9
There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
Japan
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
Conclusion
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.19
(See original link for references and footnotes. )
There isn't one single correct principle of sound economics that Bernanke endorses in this document. He holds up 1934, in the midst of the lowest point of the Great Depression, as the single greatest moment in stock market history! I kid you not.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.It hardly gets worse than that, until you realize that Bernanke is now in charge of the most powerful monetary agency in the world, and every single one of the "anti-deflationary" means he outlines is now being implemented. I include
the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations,In other words, if things aren't bad enough over here, let's buy the bad debt of Greece, Spain, Portugal, Britain, ad infinitum, with the paper dollars we're printing out of thin air. They aren't admitting it, but as I said in a previous post, I'd bet hard money that they're already doing it. (And now you know the real meaning of "credit default swaps", even though it's not called that when governments do it.)
The paragraph that earned him the title "Helicopter Ben" caps this:
Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.Do you understand what he's saying? It's a theme in his entire speech. He regards reducing the value of the dollar as a *good* thing in the pursuit of achieving inflation to increase demand. To say that this man is a moron is being unkind to morons everywhere. This can only be the product of advanced higher education.
I've highlighted the scariest comments, and if you don't understand them, try to, because the real meaning isn't always obvious. View everything in light of this fact: in a healthy, pure capitalist, gold-backed economy, long-term interest rates are very low, and the general rate of "inflation" (as measured by an average of all prices) is always mildly negative as production efficiencies accrue. Bernanke, however, calls this a threatening "deflation" that must be attacked with monetary policy such as the TARP bill. For instance, he refers to the terrible debts piled on people in 1896 as
the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4The fault is the gold, you see. The poor devils needed a Federal Reserve to save them.
Now, some of you might be thinking, "but we don't have deflation. Aren't we at risk for inflation?"
What is inflation? It is *NOT* simply increasing prices of things. You can have inflation with falling prices. "Inflation" is one of those loaded terms with a lot of baggage from intellectual incompetents like Bernanke. A proper definition means: falling value of the dollar (or whatever currency). That can cause a new car to be more expensive... but if demand is falling and incomes are falling, the price of the car could still be falling, cause no one can afford the damned thing.
I don't want to go into a treatise on economics here, but the key is always to keep your mind focused on *real* value of things rather than surrogates like paper bills: how much of your productive effort does it take to buy a car? Say, a percent of your annual income. If that percentage is going up, you have inflation in real terms. And note: inflation (in the absence of credit expansion) always means you have declining demand. What gets so scary (and what we've experienced) is the government created phenomena of people getting artificially high present incomes by borrowing against the future. Artificial demand created by artificial ability to buy. Only we get insulated from cause and effect (truth and consequences) because the government has been artificially reducing prices for years by borrowing in a giant game of monetary musical chairs. Gross oversimplification, but it points you in the right direction.
What does this mean for the future? Contemplate: Every single instance of monetary policy by our government is in exactly the wrong direction. Every one. You can decide whether Bernanke is Wrong Way Corrigan (http://en.wikipedia.org/wiki/Douglas_Corrigan) who did it intentionally, or Wrong Way Marshall (http://en.wikipedia.org/wiki/Jim_Marshall_%28American_football%29) who was just really, really confused, but either way, you know something really bad has to happen before long.
Whither goest thou, America? After the pied piper, Helicopter Ben Bernanke.
(P.S.: The real pied piper was a serial killer of children. http://en.wikipedia.org/wiki/Pied_Piper_of_Hamelin "In 1284, while the town of Hamelin was suffering from a rat infestation, a man dressed in pied clothing appeared, claiming to be a rat-catcher. ...One hundred thirty boys and girls followed him out of the town, where they were lured into a cave and never seen again." Or 300 million.)
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm#fn18
| Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002 Deflation: Making Sure "It" Doesn't Happen Here |
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency.
A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.
Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4
The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
Preventing Deflation
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.
Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.7
Curing Deflation
Let me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities.
Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9
There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
Fiscal Policy
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.18
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
Japan
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
Conclusion
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.19
(See original link for references and footnotes. )
Turkey's Away
This is a rather belated post on the economy and government policy, with a slant that's been on my mind for some time.
The video excerpt is from a famous "WKRP in Cincinnati" episode in which radio station manager, Arthur Carlson, arranged a Thanksgiving Day advertising stunt to have live turkeys dropped from a helicopter.
Ben Bernanke got the monicker "Helicopter Ben" some years before becoming Federal Reserve chairman, in a speech where he referred to Milton Friedman's metaphor of a helicopter dropping money on everyone as a way to prevent "deflation" (and by implication, economic collapse), and alluded to the power of the government printing presses to accomplish this end, for which he received a lot of criticism from more sensible people. According to ace reporter Les Nesman,
WKRP Turkey Drop from Mitch Cohen on Vimeo.
(http://vimeo.com/7824102)
I think the metaphor is perfect. With real unemployment (not the bogus government statistics) hovering somewhere near 20% or more, Helicopter Ben and all the other whirlybirds in D.C. are beginning to see how well that idea is flying.
(If you want to see the entire episode, go to http://www.hulu.com/watch/322/wkrp-in-cincinnati-turkeys-away )
The video excerpt is from a famous "WKRP in Cincinnati" episode in which radio station manager, Arthur Carlson, arranged a Thanksgiving Day advertising stunt to have live turkeys dropped from a helicopter.
Ben Bernanke got the monicker "Helicopter Ben" some years before becoming Federal Reserve chairman, in a speech where he referred to Milton Friedman's metaphor of a helicopter dropping money on everyone as a way to prevent "deflation" (and by implication, economic collapse), and alluded to the power of the government printing presses to accomplish this end, for which he received a lot of criticism from more sensible people. According to ace reporter Les Nesman,
[Les] ...What has been described as the greatest Thanksgiving Day event in history. A lot of happy people out here! ...and I think I hear something now! The crowd is moving out into the parking area. Oh yes, I can see it now! It's a helicopter! And it's coming this way! It's flying something behind it, I can't quite make it out, it's a large banner and it says, uh - Happy... Thaaaaanksss... giving! ... From ... W ... K ... R... P!!
What a sight, ladies and gentlemen, what a sight. The copter seems to be circling the parking area now, I guess it's looking for a place to land. No, something just came out of the back of the helicopter. It's a dark object, perhaps a skydiver, plummeting to the Earth from only 2000 feet in the air. There's a second... a third... There's no parachutes yet. ...Those can't be skydivers. I can't tell just yet what they are but -- Oh my God! They're turkey's! Oh my God, Johnny, can you get this? They're crashing into the Earth right in front of our eyes! One just went through the windshield of a parked car! This is terrible! Everyone is running around pushing each other! Oh, my goodness! Oh, the humanity! People are running about, the turkeys are hitting the ground like sacks of wet cement! The crowd is running for their lives! I can't stay out here and watch this any longer! [Turns towards the doorway of the shop of a merchant who told him to get lost.] Oh, I can't go in there! Children are searching for their mothers! Not since the Hindenberg tragedy has there been anything like this! I don't know how much longer I can hold my position here, Johnny, I... [cuts out][D.J. "Johnny Fever" at the station] For those of you who have just tuned in, the Pinedale Shopping Mall has just been bombed with live turkeys.
WKRP Turkey Drop from Mitch Cohen on Vimeo.
(http://vimeo.com/7824102)
I think the metaphor is perfect. With real unemployment (not the bogus government statistics) hovering somewhere near 20% or more, Helicopter Ben and all the other whirlybirds in D.C. are beginning to see how well that idea is flying.
(If you want to see the entire episode, go to http://www.hulu.com/watch/322/wkrp-in-cincinnati-turkeys-away )
Friday, June 11, 2010
Believe it... or Not
Congress votes to strengthen FBI successor
Today at 16:55 | Reuters
Washington, July 4 (Reuters) - Congress on Friday voted to extend the Patriot Act and boost the powers of the new appointee to the FBI, allowing him to summon people believed to be about to commit a crime and threaten jail for those who disobey its orders.
Rights groups said the proposed regulations could be used by the FBI to detain opposition activists and independent journalists and undermine President Obama's promises to foster civil rights.
"It's a step toward a police state," said Betsy Ross, a member of the opposition Tea Party. "It is effectively a ban on any real opposition activity."
The bill, which would allow the FBI to issue a legally binding summons to anyone whose actions it considers as "causing or creating the conditions for committing a crime," was passed in the first voice vote in the House.
All Democrats present voted in favor, while some Republicans joined with the smaller Tea Party in opposing the bill. Senate leader Newt Gingrich, whose fellow Republican's rarely opposes government-backed legislation, described it as "a left-over order from the Soviet Union, but he believes Republicans can reach a satisfactory compromise."
He said he would lobby for changes to the bill before the second reading. It also needs approval by the Senate, though Mr. Obama has promised to sign it if it isn't watered down too much during reconciliation.
The bill would set a penalty of up to 15 days in prison for anyone who "disobeys a legitimate order" from an FBI agent. Rights groups say the changes taken together could allow the FBI to detain anyone it likes without any judicial process.
"A warning sounds benign, but under U.S. law it can have serious consequences," said Allison Gill, Moscow director of New York-based Human Rights Watch. "It is a significant increase in power for the FBI that hearkens back to the old KGB in this country."
TACKLING EXTREMISM
The bill, submitted in secret to the House by Nancy Pelosi weeks after the Times Square bombing attempts, was kept under tight wraps until 5 minutes before the 2AM vote to minimize debate. It is aimed at tackling a growing number of "extremist crimes," according to an addendum to the law.
An existing law under which slander of a state official can be treated as extremism has also been used against critics of the Obama Administration.
Activists have compared the proposed FBI legislation to the decision by Obama, a former KGB officer, to scrap direct elections for governors and tighten other electoral laws after recent primary defeats and other hostage-taking.
But Obama portrays himself as a champion of civil rights and commentators say he may feel pressure to veto the bill.
The addendum also accused print and electronic media outlets of "effectively dragging youth into extremist activity," raising fears among media rights groups that the law will be used to caution and possibly detain opposition journalists. This comes on the heels of recent attempts by the Obama FCC to "re-invent" American journalism with a government takeover of struggling major media outlets and the imposition of new taxes on "new" media.
The Committee to Protect Journalists, a New York-based media watchdog, said the bill would give the Administration authorities "Soviet-style power to censor information" and called for it to be immediately scrapped.
The FBI has dismissed the criticism from rights groups, saying the measures are simply aimed at bringing down crime and preventing terrorism.
"This is a very humane preventative measure aimed at preventing people from committing more serious misconduct in the future," said the new FBI Director appointee, Yuri Putin.
http://www.kyivpost.com/news/russia/detail/69373/
Russia parliament votes to strengthen KGB successor
Today at 16:55 | Reuters
MOSCOW, June 11 (Reuters) - Russia's parliament on Friday voted to boost the powers of the successor to the Soviet KGB, allowing it to summon people it believes are about to commit a crime and threaten jail for those who disobey its orders.
Rights groups said the proposed regulations could be used by the FSB security service to detain opposition activists and independent journalists and undermine President Dmitry Medvedev's promises to foster civil rights.
"It's a step toward a police state," said Vladimir Ulas, a member of the opposition Communist Party. "It is effectively a ban on any real opposition activity."
The bill, which would allow the FSB to issue a legally binding summons to anyone whose actions it considers as "causing or creating the conditions for committing a crime," was passed in the first of three required readings in the State Duma.
All 313 members of Prime Minister Vladimir Putin's United Russia party present voted in favour, while the Communists joined the smaller pro-Kremlin parties, Fair Russia and the Liberal Democrats, in opposing the bill.
Gennady Gudkov, whose Fair Russia party rarely opposes government-backed legislation, described it as "a left-over order from the Soviet Union."
He said he would lobby for changes to the bill before the second reading. It also needs approval by the United Russia-dominated upper house and Medvedev's signature.
The bill would set a penalty of up to 15 days in prison for anyone who "disobeys a legitimate order" from an FSB agent. Rights groups say the changes taken together could allow the FSB to detain anyone it likes without any judicial process.
"A warning sounds benign, but under Russian law it can have serious consequences," said Allison Gill, Moscow director of New York-based Human Rights Watch. "It is a significant increase in power for the FSB."
TACKLING EXTREMISM
The bill, submitted to parliament by Putin's government weeks after two suicide bombings blamed on Islamists killed 40 people in Moscow's metro, is aimed at tackling a growing number of "extremist crimes," according to an addendum to the law.
An existing law under which slander of a state official can be treated as extremism has been used against Kremlin critics.
Activists have compared the proposed FSB legislation to the decision by Putin, a former KGB officer, to scrap direct elections for governors and tighten other electoral laws after 331 people died in the 2004 Beslan school hostage-taking.
But Medvedev portrays himself as a champion of civil rights and commentators say he may feel pressure to veto the bill.
The addendum also accused print and electronic media outlets of "effectively dragging youth into extremist activity," raising fears among media rights groups that the law will be used to caution and possibly detain opposition journalists.
The Committee to Protect Journalists, a New York-based media watchdog, said the bill would give Russian authorities "Soviet-style power to censor information" and called for it to be immediately scrapped.
The FSB has dismissed the criticism from rights groups, saying the measures are simply aimed at bringing down crime.
"This is a very humane preventative measure aimed at preventing people from committing more serious misconduct in the future," said FSB Deputy Director Yuri
Today at 16:55 | Reuters
Washington, July 4 (Reuters) - Congress on Friday voted to extend the Patriot Act and boost the powers of the new appointee to the FBI, allowing him to summon people believed to be about to commit a crime and threaten jail for those who disobey its orders.
Rights groups said the proposed regulations could be used by the FBI to detain opposition activists and independent journalists and undermine President Obama's promises to foster civil rights.
"It's a step toward a police state," said Betsy Ross, a member of the opposition Tea Party. "It is effectively a ban on any real opposition activity."
The bill, which would allow the FBI to issue a legally binding summons to anyone whose actions it considers as "causing or creating the conditions for committing a crime," was passed in the first voice vote in the House.
All Democrats present voted in favor, while some Republicans joined with the smaller Tea Party in opposing the bill. Senate leader Newt Gingrich, whose fellow Republican's rarely opposes government-backed legislation, described it as "a left-over order from the Soviet Union, but he believes Republicans can reach a satisfactory compromise."
He said he would lobby for changes to the bill before the second reading. It also needs approval by the Senate, though Mr. Obama has promised to sign it if it isn't watered down too much during reconciliation.
The bill would set a penalty of up to 15 days in prison for anyone who "disobeys a legitimate order" from an FBI agent. Rights groups say the changes taken together could allow the FBI to detain anyone it likes without any judicial process.
"A warning sounds benign, but under U.S. law it can have serious consequences," said Allison Gill, Moscow director of New York-based Human Rights Watch. "It is a significant increase in power for the FBI that hearkens back to the old KGB in this country."
TACKLING EXTREMISM
The bill, submitted in secret to the House by Nancy Pelosi weeks after the Times Square bombing attempts, was kept under tight wraps until 5 minutes before the 2AM vote to minimize debate. It is aimed at tackling a growing number of "extremist crimes," according to an addendum to the law.
An existing law under which slander of a state official can be treated as extremism has also been used against critics of the Obama Administration.
Activists have compared the proposed FBI legislation to the decision by Obama, a former KGB officer, to scrap direct elections for governors and tighten other electoral laws after recent primary defeats and other hostage-taking.
But Obama portrays himself as a champion of civil rights and commentators say he may feel pressure to veto the bill.
The addendum also accused print and electronic media outlets of "effectively dragging youth into extremist activity," raising fears among media rights groups that the law will be used to caution and possibly detain opposition journalists. This comes on the heels of recent attempts by the Obama FCC to "re-invent" American journalism with a government takeover of struggling major media outlets and the imposition of new taxes on "new" media.
The Committee to Protect Journalists, a New York-based media watchdog, said the bill would give the Administration authorities "Soviet-style power to censor information" and called for it to be immediately scrapped.
The FBI has dismissed the criticism from rights groups, saying the measures are simply aimed at bringing down crime and preventing terrorism.
"This is a very humane preventative measure aimed at preventing people from committing more serious misconduct in the future," said the new FBI Director appointee, Yuri Putin.
http://www.kyivpost.com/news/russia/detail/69373/
Russia parliament votes to strengthen KGB successor
Today at 16:55 | Reuters
MOSCOW, June 11 (Reuters) - Russia's parliament on Friday voted to boost the powers of the successor to the Soviet KGB, allowing it to summon people it believes are about to commit a crime and threaten jail for those who disobey its orders.
Rights groups said the proposed regulations could be used by the FSB security service to detain opposition activists and independent journalists and undermine President Dmitry Medvedev's promises to foster civil rights.
"It's a step toward a police state," said Vladimir Ulas, a member of the opposition Communist Party. "It is effectively a ban on any real opposition activity."
The bill, which would allow the FSB to issue a legally binding summons to anyone whose actions it considers as "causing or creating the conditions for committing a crime," was passed in the first of three required readings in the State Duma.
All 313 members of Prime Minister Vladimir Putin's United Russia party present voted in favour, while the Communists joined the smaller pro-Kremlin parties, Fair Russia and the Liberal Democrats, in opposing the bill.
Gennady Gudkov, whose Fair Russia party rarely opposes government-backed legislation, described it as "a left-over order from the Soviet Union."
He said he would lobby for changes to the bill before the second reading. It also needs approval by the United Russia-dominated upper house and Medvedev's signature.
The bill would set a penalty of up to 15 days in prison for anyone who "disobeys a legitimate order" from an FSB agent. Rights groups say the changes taken together could allow the FSB to detain anyone it likes without any judicial process.
"A warning sounds benign, but under Russian law it can have serious consequences," said Allison Gill, Moscow director of New York-based Human Rights Watch. "It is a significant increase in power for the FSB."
TACKLING EXTREMISM
The bill, submitted to parliament by Putin's government weeks after two suicide bombings blamed on Islamists killed 40 people in Moscow's metro, is aimed at tackling a growing number of "extremist crimes," according to an addendum to the law.
An existing law under which slander of a state official can be treated as extremism has been used against Kremlin critics.
Activists have compared the proposed FSB legislation to the decision by Putin, a former KGB officer, to scrap direct elections for governors and tighten other electoral laws after 331 people died in the 2004 Beslan school hostage-taking.
But Medvedev portrays himself as a champion of civil rights and commentators say he may feel pressure to veto the bill.
The addendum also accused print and electronic media outlets of "effectively dragging youth into extremist activity," raising fears among media rights groups that the law will be used to caution and possibly detain opposition journalists.
The Committee to Protect Journalists, a New York-based media watchdog, said the bill would give Russian authorities "Soviet-style power to censor information" and called for it to be immediately scrapped.
The FSB has dismissed the criticism from rights groups, saying the measures are simply aimed at bringing down crime.
"This is a very humane preventative measure aimed at preventing people from committing more serious misconduct in the future," said FSB Deputy Director Yuri
Tuesday, June 1, 2010
Struck Out by Too Much Tech
I've been bothered for some time that the U.S. military is becoming so dependent on not just GPS -- you've got to believe it's easily jammed or satellites destroyed -- but by high-tech weaponry overall. Is it safe to have only a few super-capable aircraft or ships or missiles which can be taken out in either a first-strike or by overwhelming low-tech?
Arthur Clarke wrote a sci-fi story with this idea in 1948, where one side put all their cards on one fancy weapon which ultimately didn't work, and they were defeated. The story is "Superiority", in his collection, "The Nine Billion Names of God", but available online here http://www.mayofamily.com/RLM/txt_Clarke_Superiority.html. Ironically, the story involves a Professor Norden, which is a veiled reference to the Norden bombsight which vastly improved the accuracy of our bombing in WWII. Likewise, GPS improves the accuracy of our bombing today.
It is certainly true that high-tech gives a helluva an advantage when it works --but in a protracted war against a major adversary (or adversaries) it may get depleted very quickly. There's still a lot to be said for sheer numbers.
The problem isn't just GPS guided bombs or missiles -- consider the new fad, UAVs. Effective, yes, when your enemy is 7th century barbarians, but what if someone more sophisticated jams them? Then what do you do? EMP or radiation will take out the electronics pretty easy.
Submarines don't use GPS, but we're now on the verge of converting all our sub-based nuclear ballistic missiles to plain old bombs, on the premise that GPS makes them accurate enough to take out a hardened silo. Uh-huh. Even if the GPS works, there isn't very much explosive power you can lob 12,000 miles across the planet from a submarine. I've got to believe that a hardened silo designed to resist a 200kiloton nuclear warhead inside a radius of 100 yards isn't going to be terribly affected by a 5000 lb conventional explosive. Assuming GPS still works for a such an accurate counterstrike -- not.
Even if you keep the nukes on our subs, technology is advancing so much, it's hard to keep missile boats hidden these days (the seabed is getting cluttered with sensors), and at any one time, 1/3 of our subs are in port. Bombers? A measily 20 B2s. Based at Whiteman, Guam, maybe Diego Garcia. Don't quite remember. A few bases. And 94 B52's at bases hither and thither (Grand Forks, Minot, etc).
The first strike problem is one reason I'm so against depleting our nuclear stockpile as Obama is now doing.
Consider the math: You've got 14 Trident subs (288 SLBMs), 20 B2 bombers, 94 B52s (1083 warheads all bombers, but B1's are no longer used for nukes), 488 ICBMs on land (50 year old Minuteman III's). Say, 5 of those subs are in port at one time. Realistically, assume a first strike takes out all the bombers and the subs in port. Easy pickings. But even if all the bombers on alert aren't taken out, you've got to believe a lot of the B52s won't ever reach a target -- they're so damned slow, big and visible. (Even during the Cold War, 1/3 of bombers were typically in maintenance, and only 1/3 on alert -- I know, I spent 4 years on SAC bases, and I remember when we scrambled for the '73 Arab-Israeli conflict, DEFCON 3.)
As a really bad case, suppose the Chinese and Russians have tracked our subs at sea and they've taken them all out in the same strike. So we're down to 488 ICBMs on land -- that's it. How many of those will be taken out in a first strike? Guessing -- probably 2/3 (you have to allow for failures in the enemy's own systems). The Russians or Chinese would have GPS before the action starts. That makes most of their missiles very accurate.
So that leaves us with 160 missiles. Single warhead missiles, cause the Lefties wouldn't let us have MIRV. How many of those work when we launch? Let's say, 2/3. 108 missiles. How many hit their targets? Let's so 2/3 of those. 72. What military targets are you going after? Too many. There will still be a lot left over, and let's be real -- nukes aren't as destructive as you've been told. The radius of total destruction goes down roughly as a 5th power of the radius. The world won't have ended (that was all part of KGB psyops to promote nuclear non-proliferation treaties), and there will be plenty of enemy left.
This is all very pessimistic, to be sure, but even then, it assumes Obama or whoever will order the launch of what survives. I can easily imagine Obama deciding against launching anythign. We can't attack the enemy! All the innocent civilian lives that will be lost. Etc. Probably to get the Congressional Medal of Courageous Restraint for the Cowardly Lion.
So a total arsenal of 5400 nuclear weapons can go away very quickly in a first strike. To almost zero. And then you're down to more primitive weapons. War then gets ugly very quickly. Hang onto your musket.
Think about all this while you follow Obama's nuclear disarmament talks. And remember, his chief negotiator, Rose Gottemueller (some kind of Russian mole -- http://robbservations.blogspot.com/2009/04/next-phase-in-obamas-rush-towards.html) also wants to eliminate those conventional SLBMs for Trident.
By the way, as a really sour note, I think we're on a collision course with another world war very soon. Obama is almost guaranteeing it. I make no hard predictions of timing. But clearly there are forces trying to provoke something right now on the premise that Obama won't do anything.
http://apnews.myway.com/article/20100601/D9G2G6IO0.html
Glitch shows how much US military relies on GPS
Jun 1, 8:55 AM (ET)
By DAN ELLIOTT
DENVER (AP) - A problem that rendered as many as 10,000 U.S. military GPS receivers useless for days is a warning to safeguard a system that enemies would love to disrupt, a defense expert says.
The Air Force has not said how many weapons, planes or other systems were affected or whether any were in use in Iraq or Afghanistan. But the problem, blamed on incompatible software, highlights the military's reliance on the Global Positioning System and the need to protect technology that has become essential for protecting troops, tracking vehicles and targeting weapons.
"Everything that moves uses it," said John Pike, director of Globalsecurity.org, which tracks military and homeland security news. "It is so central to the American style of war that you just couldn't leave home without it."
The problem occurred when new software was installed in ground control systems for GPS satellites on Jan. 11, the Air Force said.
Officials said between 8,000 at 10,000 receivers could have been affected, out of more than 800,000 in use across the military.
In a series of e-mails to The Associated Press, the Air Force initially blamed a contractor for defective software in the affected receivers but later said it was a compatibility issue rather than a defect. The Air Force didn't immediately respond to a request for clarification.
The Air Force said it hadn't tested the affected receivers before installing the new software in the ground control system.
One program still in development was interrupted but no weapon systems already in use were grounded as a result of the problem, the Air Force said. The Air Force said some applications with the balky receivers suffered no problems from the temporary GPS loss.
An Air Force document said the Navy's X-47B, a jet-powered, carrier-based drone under development, was interrupted by the glitch. Air Force officials would not comment beyond that on what systems were affected.
Navy spokeswoman Jamie Cosgrove confirmed the X-47B's receivers were affected but said it caused no program delays.
At least 100 U.S. defense systems rely on GPS, including aircraft, ships, armored vehicles, bombs and artillery shells.
Because GPS makes weapons more accurate, the military needs fewer warheads and fewer personnel to take out targets. But a leaner, GPS-dependent military becomes dangerously vulnerable if the technology is knocked out.
James Lewis, a senior fellow at the Center for Strategic and International Studies, said the glitch was a warning "in the context where people are every day trying to figure out how to disrupt GPS."
The Air Force said it took less than two weeks for the military to identify the cause and begin devising and installing a temporary fix. It did not say how long it took to install the temporary fix everywhere it was needed, but said a permanent fix is being distributed.
All the affected receivers were manufactured by a division of Trimble Navigation Limited of Sunnyvale, Calif., according to the Air Force. The military said it ran tests on some types of receivers before it upgraded ground control systems with the new software in January, but the tests didn't include the receivers that had problems.
The Air Force said it traced the problem to the Trimble receivers' software. Trimble said it had no problems when it tested the receivers, using Air Force specifications, before the ground-control system software was updated.
Civilian receivers use different signals and had no problems.
Defense industry consultant James Hasik said it's not shocking some receivers weren't tested. GPS started as a military system in the 1970s but has exploded into a huge commercial market, and that's where most innovation takes place.
"It's hard to track everything," said Hasik, co-author of "The Precision Revolution: GPS and the Future of Aerial Warfare."
The Air Force said it's acquiring more test receivers for a broader sample of military and civilian models and developing longer and more thorough tests for military receivers to avoid a repeat of the January problem.
The Air Force said the software upgrade was to accommodate a new generation of GPS satellites, called Block IIF. The first of the 12 new satellites was launched from a Delta 4 rocket Thursday after several delays.
In addition to various GPS guided weapons systems, the Army often issues GPS units to squads of soldiers on patrol in Iraq and Afghanistan. In some cases a team of two or three soldiers is issued a receiver so they can track their location using signals from a constellation of 24 satellites.
Space and Missile Systems Center spokesman Joe Davidson said in an e-mail to The Associated Press that the system is safe from hackers or enemy attack.
"We are extremely confident in the safety and security of the GPS system from enemy attack," he said, noting that control rooms are on secure military bases and communications are heavily encrypted.
"Since GPS' inception, there has never been a breach of GPS," Davidson said. He added that Air Force is developing a new generation of encrypted military receivers for stronger protection.
The military also has tried to limit the potential for human error by making the GPS control system highly automated, Davidson said.
GPS satellites orbit about 12,000 miles above Earth, making them hard to reach with space weapons, said Hasik, the defense industry consultant. And if the GPS master control station at Schriever Air Force Base, Colo., were knocked out, a backup station at Vandenberg Air Force Base, Calif., could step in.
Iraq tried jamming GPS signals during the 2003 U.S. invasion, but the U.S. took out the jammer with a GPS-guided bomb, Hasik said.
The technology needed to jam GPS signals is beyond the reach of groups like the Taliban and most Third World nations, Hasik said. Jamming is difficult over anything but a small area.
"The harder you try to mess with it, the more energy you need. And the more energy you use, the easier it is for me to find your jammer," Hasik said.
More worrisome, Hasik said, is the potential for an accident within U.S. ranks that can produce anything from an errant bomb to sending troops or weaponry on the wrong course.
In 2001, a GPS-guided bomb dropped by a Navy F-18 missed its target by a mile and landed in a residential neighborhood of Kabul, possibly killing four people. The military said wrong coordinates had been entered into the targeting system.
Arthur Clarke wrote a sci-fi story with this idea in 1948, where one side put all their cards on one fancy weapon which ultimately didn't work, and they were defeated. The story is "Superiority", in his collection, "The Nine Billion Names of God", but available online here http://www.mayofamily.com/RLM/txt_Clarke_Superiority.html. Ironically, the story involves a Professor Norden, which is a veiled reference to the Norden bombsight which vastly improved the accuracy of our bombing in WWII. Likewise, GPS improves the accuracy of our bombing today.
It is certainly true that high-tech gives a helluva an advantage when it works --but in a protracted war against a major adversary (or adversaries) it may get depleted very quickly. There's still a lot to be said for sheer numbers.
The problem isn't just GPS guided bombs or missiles -- consider the new fad, UAVs. Effective, yes, when your enemy is 7th century barbarians, but what if someone more sophisticated jams them? Then what do you do? EMP or radiation will take out the electronics pretty easy.
Submarines don't use GPS, but we're now on the verge of converting all our sub-based nuclear ballistic missiles to plain old bombs, on the premise that GPS makes them accurate enough to take out a hardened silo. Uh-huh. Even if the GPS works, there isn't very much explosive power you can lob 12,000 miles across the planet from a submarine. I've got to believe that a hardened silo designed to resist a 200kiloton nuclear warhead inside a radius of 100 yards isn't going to be terribly affected by a 5000 lb conventional explosive. Assuming GPS still works for a such an accurate counterstrike -- not.
Even if you keep the nukes on our subs, technology is advancing so much, it's hard to keep missile boats hidden these days (the seabed is getting cluttered with sensors), and at any one time, 1/3 of our subs are in port. Bombers? A measily 20 B2s. Based at Whiteman, Guam, maybe Diego Garcia. Don't quite remember. A few bases. And 94 B52's at bases hither and thither (Grand Forks, Minot, etc).
The first strike problem is one reason I'm so against depleting our nuclear stockpile as Obama is now doing.
Consider the math: You've got 14 Trident subs (288 SLBMs), 20 B2 bombers, 94 B52s (1083 warheads all bombers, but B1's are no longer used for nukes), 488 ICBMs on land (50 year old Minuteman III's). Say, 5 of those subs are in port at one time. Realistically, assume a first strike takes out all the bombers and the subs in port. Easy pickings. But even if all the bombers on alert aren't taken out, you've got to believe a lot of the B52s won't ever reach a target -- they're so damned slow, big and visible. (Even during the Cold War, 1/3 of bombers were typically in maintenance, and only 1/3 on alert -- I know, I spent 4 years on SAC bases, and I remember when we scrambled for the '73 Arab-Israeli conflict, DEFCON 3.)
As a really bad case, suppose the Chinese and Russians have tracked our subs at sea and they've taken them all out in the same strike. So we're down to 488 ICBMs on land -- that's it. How many of those will be taken out in a first strike? Guessing -- probably 2/3 (you have to allow for failures in the enemy's own systems). The Russians or Chinese would have GPS before the action starts. That makes most of their missiles very accurate.
So that leaves us with 160 missiles. Single warhead missiles, cause the Lefties wouldn't let us have MIRV. How many of those work when we launch? Let's say, 2/3. 108 missiles. How many hit their targets? Let's so 2/3 of those. 72. What military targets are you going after? Too many. There will still be a lot left over, and let's be real -- nukes aren't as destructive as you've been told. The radius of total destruction goes down roughly as a 5th power of the radius. The world won't have ended (that was all part of KGB psyops to promote nuclear non-proliferation treaties), and there will be plenty of enemy left.
This is all very pessimistic, to be sure, but even then, it assumes Obama or whoever will order the launch of what survives. I can easily imagine Obama deciding against launching anythign. We can't attack the enemy! All the innocent civilian lives that will be lost. Etc. Probably to get the Congressional Medal of Courageous Restraint for the Cowardly Lion.
So a total arsenal of 5400 nuclear weapons can go away very quickly in a first strike. To almost zero. And then you're down to more primitive weapons. War then gets ugly very quickly. Hang onto your musket.
Think about all this while you follow Obama's nuclear disarmament talks. And remember, his chief negotiator, Rose Gottemueller (some kind of Russian mole -- http://robbservations.blogspot.com/2009/04/next-phase-in-obamas-rush-towards.html) also wants to eliminate those conventional SLBMs for Trident.
By the way, as a really sour note, I think we're on a collision course with another world war very soon. Obama is almost guaranteeing it. I make no hard predictions of timing. But clearly there are forces trying to provoke something right now on the premise that Obama won't do anything.
http://apnews.myway.com/article/20100601/D9G2G6IO0.html
Glitch shows how much US military relies on GPS
Jun 1, 8:55 AM (ET)
By DAN ELLIOTT
DENVER (AP) - A problem that rendered as many as 10,000 U.S. military GPS receivers useless for days is a warning to safeguard a system that enemies would love to disrupt, a defense expert says.
The Air Force has not said how many weapons, planes or other systems were affected or whether any were in use in Iraq or Afghanistan. But the problem, blamed on incompatible software, highlights the military's reliance on the Global Positioning System and the need to protect technology that has become essential for protecting troops, tracking vehicles and targeting weapons.
"Everything that moves uses it," said John Pike, director of Globalsecurity.org, which tracks military and homeland security news. "It is so central to the American style of war that you just couldn't leave home without it."
The problem occurred when new software was installed in ground control systems for GPS satellites on Jan. 11, the Air Force said.
Officials said between 8,000 at 10,000 receivers could have been affected, out of more than 800,000 in use across the military.
In a series of e-mails to The Associated Press, the Air Force initially blamed a contractor for defective software in the affected receivers but later said it was a compatibility issue rather than a defect. The Air Force didn't immediately respond to a request for clarification.
The Air Force said it hadn't tested the affected receivers before installing the new software in the ground control system.
One program still in development was interrupted but no weapon systems already in use were grounded as a result of the problem, the Air Force said. The Air Force said some applications with the balky receivers suffered no problems from the temporary GPS loss.
An Air Force document said the Navy's X-47B, a jet-powered, carrier-based drone under development, was interrupted by the glitch. Air Force officials would not comment beyond that on what systems were affected.
Navy spokeswoman Jamie Cosgrove confirmed the X-47B's receivers were affected but said it caused no program delays.
At least 100 U.S. defense systems rely on GPS, including aircraft, ships, armored vehicles, bombs and artillery shells.
Because GPS makes weapons more accurate, the military needs fewer warheads and fewer personnel to take out targets. But a leaner, GPS-dependent military becomes dangerously vulnerable if the technology is knocked out.
James Lewis, a senior fellow at the Center for Strategic and International Studies, said the glitch was a warning "in the context where people are every day trying to figure out how to disrupt GPS."
The Air Force said it took less than two weeks for the military to identify the cause and begin devising and installing a temporary fix. It did not say how long it took to install the temporary fix everywhere it was needed, but said a permanent fix is being distributed.
All the affected receivers were manufactured by a division of Trimble Navigation Limited of Sunnyvale, Calif., according to the Air Force. The military said it ran tests on some types of receivers before it upgraded ground control systems with the new software in January, but the tests didn't include the receivers that had problems.
The Air Force said it traced the problem to the Trimble receivers' software. Trimble said it had no problems when it tested the receivers, using Air Force specifications, before the ground-control system software was updated.
Civilian receivers use different signals and had no problems.
Defense industry consultant James Hasik said it's not shocking some receivers weren't tested. GPS started as a military system in the 1970s but has exploded into a huge commercial market, and that's where most innovation takes place.
"It's hard to track everything," said Hasik, co-author of "The Precision Revolution: GPS and the Future of Aerial Warfare."
The Air Force said it's acquiring more test receivers for a broader sample of military and civilian models and developing longer and more thorough tests for military receivers to avoid a repeat of the January problem.
The Air Force said the software upgrade was to accommodate a new generation of GPS satellites, called Block IIF. The first of the 12 new satellites was launched from a Delta 4 rocket Thursday after several delays.
In addition to various GPS guided weapons systems, the Army often issues GPS units to squads of soldiers on patrol in Iraq and Afghanistan. In some cases a team of two or three soldiers is issued a receiver so they can track their location using signals from a constellation of 24 satellites.
Space and Missile Systems Center spokesman Joe Davidson said in an e-mail to The Associated Press that the system is safe from hackers or enemy attack.
"We are extremely confident in the safety and security of the GPS system from enemy attack," he said, noting that control rooms are on secure military bases and communications are heavily encrypted.
"Since GPS' inception, there has never been a breach of GPS," Davidson said. He added that Air Force is developing a new generation of encrypted military receivers for stronger protection.
The military also has tried to limit the potential for human error by making the GPS control system highly automated, Davidson said.
GPS satellites orbit about 12,000 miles above Earth, making them hard to reach with space weapons, said Hasik, the defense industry consultant. And if the GPS master control station at Schriever Air Force Base, Colo., were knocked out, a backup station at Vandenberg Air Force Base, Calif., could step in.
Iraq tried jamming GPS signals during the 2003 U.S. invasion, but the U.S. took out the jammer with a GPS-guided bomb, Hasik said.
The technology needed to jam GPS signals is beyond the reach of groups like the Taliban and most Third World nations, Hasik said. Jamming is difficult over anything but a small area.
"The harder you try to mess with it, the more energy you need. And the more energy you use, the easier it is for me to find your jammer," Hasik said.
More worrisome, Hasik said, is the potential for an accident within U.S. ranks that can produce anything from an errant bomb to sending troops or weaponry on the wrong course.
In 2001, a GPS-guided bomb dropped by a Navy F-18 missed its target by a mile and landed in a residential neighborhood of Kabul, possibly killing four people. The military said wrong coordinates had been entered into the targeting system.
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