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The Baseline Scenario

What happened to the global economy and what we can do about it

How Are the Kids? Unemployed, Underwater, and Sinking

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This guest post is contributed by Mark Paul and Anastasia Wilson. Both are members of the class of 2011 at the University of Massachusetts-Amherst.

In some cultures asking how the kids are doing is a colloquial way of asking how the individual is faring, acknowledging that the vitality of the younger generation is a good metric for the well-being of society as a whole. In the United States, the state of the kids should be an important indicator. Young workers bear the significant burden of funding intergenerational transfer programs and maintaining the structure of payments that flow in the economy. Today, the kids’ outlook is almost as bleak as the housing market; they are unemployed, underwater on student debt, and out of luck from a reluctant political system.

Currently, even after a slight boost in jobs growth, unemployment for 18-24 year olds stands at 24.7%. For 20-24 year olds, it hovers at 15.2%. These conservative estimates, using the Bureau of Labor Statistics U3 measure, do not reflect the number of marginally attached or discouraged young workers feeling the lag from a nearly moribund job market.

The U3 measure also does not count underemployment, yet with only 50% of B.A. holders able to find jobs requiring such a degree, underemployment rates are a telling index of the squeezing of the 18-30 year old Millennial generation. While it appears everyone is hurting since the financial collapse, young adults bear a disproportionate burden, constituting just 13.5% of the workforce while accounting for 26.4% of those unemployed. Even with good credentials, it is difficult for young people to find work and keep themselves afloat.

If companies are unwilling to hire bright young college graduates even at a relatively low salary and minimal benefits, will they ever be willing to hire anybody at all?

Jobs aren’t the whole story. Recent college graduates, those in the labor force with the freshest batch of knowledge and skills, are currently underwater and sinking fast with unprecedented student loan and personal debt. Average student debt for the class of 2008 was $23,200, an increase over four years of about 25%, meaning that students are knee deep in negative equity between their educational investment and actual earnings.

Between inflated student debt and the lack of available jobs for qualified graduates, students are defaulting at an all time high level of 7.2%. From 2008 to 2009, student debt defaults jumped about 30% to $50.8 billion. This earning-to-debt gap not only hurts lending institutions, but also may affect students’ future abilities to borrow – a significant hurdle in our credit driven economy.

If student debt and job stagnation continue, younger workers will face real structural unemployment (as opposed to the fake kind that had been suspected by some economists, but was recently debunked by the San Francisco Fed).  The more time these young workers spend unemployed and underemployed, the greater chance for future structural unemployment due to deteriorating human capital.

High debt, high defaults, and low family earnings will prevent many students from finishing college at all. High unemployment for those who do manage to graduate with a degree will create barriers for those unable to start their careers. As economists have shown, most current deficits can actually be attributed to the decrease in tax revenues ­­- a debilitating trend that will continue without well-targeted action.

In order to combat such structural problems, the need for investment in education and jobs is clear. This investment will act as an insurance policy against persisting future structural unemployment and subsequent government revenue declines. This investment can take the form of direct funding for public higher education, increased financial aid to students, and expanded federally guaranteed loan and grant programs. As many states have slashed and burned public higher education budgets, as in Massachusetts, federal attention should be directed towards this crisis. The 2009 stimulus funding provided only two years’ worth of support to sustain public higher education in the Commonwealth, where universities have historically been a top priority. The need for a long-term restructured investment plan in public higher education is obvious, not just in Massachusetts, but the other forty-nine states as well.

At the same time, insurance against the impending doom of climate change could be taken out in the form of a green jobs bill, providing work and an outlet for innovation for recent college graduates. As Robert Pollin and Dean Baker have suggested, long-term investments in rebuilding a green energy industrial base, complete with manufacturing and R&D, could revitalize the entire economy if funded as part of a 10-year plan to the tune of $50-100 billion. Such investment could create 660,000-1.3 million jobs per year – the kind of growth that seems to have escaped our collective memory.

Green collar industry would naturally target the young workers who are up to date on the high-tech nature of green jobs, and much research and development would, as with most budding industries, take place at academic research institutions like public universities – a two-for-one stimulus in both jobs and education.

In order to solve future structural problems in the United States and ensure a future for the sandwich generation, fiscal policy focused on educational and job growth is crucial. While deficit hawks may squawk about the costs, the burden of repayment is on younger people Without adequate education and careers for students, we will never be able to balance the budget. In the long run, it makes more fiscal sense to create jobs and collect tax revenue than to rely on a model that merely waits for the private sector to invest.

While the political feasibility of such a measure is questionable, the incentives are there no matter on what side of the aisle you may sit. Jobs investment will improve employment. Education will increase productivity (and profits too), increasing tax revenues from businesses and personal incomes and helping balance the budget. Crisis is not the time for austerity, and these types of investments in the viability of the U.S. economy should be done when money is at its cheapest.

In a dire job market, facing imminent climate change, and lagging aggregate demand, keeping the younger generation afloat will inevitably be a decision to sink, swim, or at least throw out some life jackets.


Gold Standard Time

Howard Katz

The expression, “gold bug,” has two meanings. In politics, a gold bug is someone who favors the gold standard. The phrase was first used in the election of 1896 to indicate the supporters of William McKinley, who favored the gold standard, as opposed to the supporters of William Jennings Bryan, who favored adding silver to the system to increase the money supply. On July 9, 1896, Bryan gave a famous speech at the Democratic convention in Chicago in which he said:

“You shall not crucify mankind upon a cross of gold.”

Then he went down to flaming defeat, not once but three times.

In the 1960s, the phrase “gold bug” acquired a meaning in the speculative markets. It referred to a speculator who believed that the price of gold was going up. In this sense, James Dines was “the original gold bug.” As it happened, most gold bugs in the speculative sense were also gold bugs in the political sense, but it is important to distinguish between the two meanings.

Readers of the articles in this web site are gold bugs in the speculative sense; however, we are about to enter a new period in American history where the two meanings become intertwined, and this is extremely important for anyone who wants to understand the financial markets. The decisive event occurred on November 17, 2010 when the Wall Street Journal ran an editorial entitled, “Ron Paul’s Golden Opportunity.” (WSJ, 11-17-10, p. A-19.)

Now you all know what has been going on in the markets over the past few weeks. The Fed has begun another program of the massive printing of money, this one labeled QE2 and estimated to amount to $600 billion (although larger numbers are mentioned). If we consider the (more than) doubling of the U.S. money supply which has occurred between mid-2008 and November 2010, then QE2 will bring the total increase in money up to approximately a triple. And this leads me to expect an increase in consumer prices (from current levels) to approximately triple over the next 3 years. First, commodity prices will rise. Second, producer prices will rise. And finally, consumer prices will rise. The first phase of this has already started.

As we all know, Bernanke’s QE2 has provoked a world-wide protest. Central bank heads and prominent (establishment) economists around the world have condemned it. There has been talk (in the Financial Times) of restoring the role of gold in the world monetary system. Most important, the Wall Street Journal has taken a number of pro-gold positions, the most important of which is the Nov. 17 article, mentioned above.

The economic environment over the coming 3 years will be in turmoil. The rise in prices will create great public dissent. I can remember the rise in prices of 1979 (13.3%) and the public outrage it occasioned. As a result of that outrage, the Democrats were defeated in 1980, and the nation entered (what is called) a conservative era. Unfortunately, the conservative movement, which had based itself on the balanced budget, was betrayed by Ronald Reagan, who instituted massive government deficits, doubled the U.S. money supply and violated his promise to adhere to Milton Friedman’s rule (2%-6% growth in money supply per year).

Now a tripling of the money supply over 3 years computes (when the compounding factor is reversed) to about 40% increase per year. If 13% got people outraged in 1979, then we can surmise what 40% will do. The country will be up in arms, and the chances for Democratic revival, now very slim, will become non-existent. There is even a possibility that the Democratic Party will cease to exist and that the Republicans will split in two (perhaps a Tea Party Republican and an establishment Republican), thus completely changing the political landscape of America.

But what does this mean for speculators in the precious metals? Let us take a look at the long term chart of the S&P 500.

Here are the last almost 30 years of the advance in the S&P 500, from 100 to 1500. Note that after 18 years to the upside the S&P 500 has stalled, and there has been a small decline over the past decade (while gold has multiplied by more than a factor of 5). What is this telling us?

It is always important to keep in mind von Mises’ principle that an economic system high on paper money and easy credit is like a person high on drugs. As his body adjusts to the drug, he gets less high from the same dose. To get a bigger high he needs a much bigger dose. That is what is going on with QE2. It is the bigger dose of money and credit which is now necessary to bring increased profits to the paper aristocracy. Can it bring the U.S. stock market to new highs? Perhaps, but it is a fundamentally losing battle. The world is now against Ben Bernanke. He can fight for a limited time, but remember that the entire argument of his side of the debate is that the world is on the verge of an imminant “deflation.” As prices rise by 40% per year, this argument will become laughable. It will be cited in the economic books as the ultimate in human stupidity. Bernanke’s supporters, few now, will become non-existent. They will be seen as being like the people who were still bullish on stocks in early September 1929.

As the movement against Bernanke builds steam, it may take many forms. It is now being suggested that the Fed drop its commitment to reduce unemployment and adopt a single commitment (to reduce “inflation”) like the European Central Bank. As a point of information, the U.S. from 1793 to 1933 had 140 years of stable prices (WPI). For much of that time, unemployment was so low that there was no word for it. And the American economy, with no central bank for most of this period, became the greatest, not only in the world but in all human history. Indeed, it was precisely at the time that we abolished the second central bank (1836) that we started to overtake Britain for the economic leadership of the world. Both countries had a basic free economy (undercut in the U.S. by human slavery in the South), but Britain retained her central bank while the U.S. abolished hers, and that was the difference. This shows the wisdom of Thomas Jefferson in making the decision to fight the bank in 1791. Thank you Mr. Jefferson. To you America owes an important part of her greatness.

As Bernanke is forced to tighten credit, it must be kept in mind that commodities are responsive to the money creation power of the Fed while stocks are more responsive to the credit easing/tightening power of the Fed. Therefore, as Bernanke tightens, first stocks will go down, but gold and silver will continue up for some time. A good example of this is 1973-74 when gold continued higher while stocks had a serious bear market. Another example is 1979.

With the Paul family, father and son, putting pressure on the Fed to tighten, the astute speculator will be watching the Fed closely. However, do not make the mistake of anticipating the tightening. The markets are so stupid that they do not discount a Fed tightening (or easing). As a result, you don’t need to guess. You can wait for the Fed to act and still lose very little of the move. As a result, I intend to maintain a bullish position in silver and gold until the facts tell me otherwise. But at some point I expect to switch from a bullish position in the precious metals (which will probably have a blow-off top) to a bearish position on stocks.

Interestingly, stock bear markets are easy to play. Stocks round over slowly and go into a steeper and steeper decline. One simply waits until the pattern is unmistakable and then lays out one’s line. But today hardly anyone has any experience with bear markets. They just hold on tight and wish. They buy and hold for the long pull because they are idiots whose heads are screwed on backwards and who were born in 1982. Well, from 1885 (the earliest that we have real-time records) to 1933, when the U.S. left the gold standard, the DJI was flat (usually moving back and forth between 40 and 100). There is no long term uptrend in stock prices. When the Fed was given the money printing power in 1933, this allowed it to steal from bondholders and give to stockholders. It is this power which puts stocks up. Since most people who buy stocks also buy bonds, the Fed is taking money out of their back pocket and putting it into their front pocket. And they are too stupid to figure this out.

A Fed tightening raises interest rates. Since the earnings yield on stocks is competitive with the interest rate on bonds, this earnings yield must go up, which means that P:E ratios must go down. Woops. This is the explanation for the low P:E ratio on the DJI in 1982.

The Fed tries like the dickens to steal from bondholders and give to stockholders, and this is what gives the appearance of a long term uptrend in stock prices. But since the great majority of stockholders consider it responsible to “balance” their portfolios with bonds, they are simply treading water. They are victims of the paper money illusion, and they think they are getting richer while they are getting poorer. The recent depreciation of the Zimbabwe currency is a case in point. Prices went up by over a trillion times. The unemployment rate rose to 90%. Starvation swept the country, and the expected lifespan fell from 60 years to 40 years over a decade. The system finally collapsed when doctors and nurses quit their jobs (because they were not being paid in money of any value) and a cholera epidemic swept the country. This finally got people mad enough to stop the paper money. If this happens in the U.S., I am sure Bernanke will call it “economic growth.” (Notice the complete blackout on this in the U.S. media. This is because it is information the paper aristocracy does not want you to know.)

So over the next few years the speculative gold bugs have to pay close attention to the political gold bugs and chart their successes and failures. If the political gold bugs can force Bernanke into a tightening, then the whole ball game will change, and at some point a bearish position on stocks may be even better than a bullish position on gold or silver. (In our example above, early 1973 was such a time.)

A word to those who think that it is the job of the Fed or the Government to make the stock market go up. This is a widespread view, and Fed chairmen are rated according to whether the market went up on their watch. As above, during the period when the country was on a gold standard and had real time stock market indexes the market was flat. That is, if a given company made an extra profit, it did so by superior productive achievement. Customers switched over to the successful company and away from its competitor. Thus one stock would go up and the other down. This is why after almost 50 years on a gold standard (1885-1933) stock prices (the DJI and its predecessors) were unchanged. But as soon as we abandoned gold, stocks began an incredible advance. Thus, F.D.R. instituted a policy of robbing from the American working man and giving his wealth to the big corporations; however, the nation’s media lied to the people and told them the exact opposite. The media are still lying, but judging by the results of the Nov. 2 election the people seem to be waking up.

Thank you for your interest.

Jeff Rubin, another economist who doesn’t get economics

Nicole M. Foss

In all the talks I have done, there has been only one person who has been critical to the point of dismissiveness, and that is Jeff Rubin, former chief economist of the CIBC Bank in Canada. When asked at the 2010 ASPO-USA conference in Washington DC about his opinion of my work, he called it (paraphrased) “a bastardized form of monetarism devised by a non-economist”. I did not have a chance to respond at the conference, although I have challenged Mr Rubin to a debate on monetary theory on Jim Puplava’s Financial Sense Newshour programme.

My critique of Mr Rubin’s statement would begin with his labeling of my position as a form of monetarism. While I do regard the monetary supply as a critical factor, I define it very differently than do monetarists. In my opinion, monetarists disregard the elephant in the room in their dismissal of the vital role of credit in the effective money supply.

In my opinion, they correctly identify the importance of the money supply, and specifically changes to it as a vital driver of prices, but then fail to recognize that the overwhelming percentage of the money supply is composed of credit. As it is the collapse of credit that defines the bursting of a financial bubble, neglecting this element means not understanding where we are going and why. As Ben Barnanke is a monetarist, the implications of this lack of understanding are significant.

Essentially, there are two kinds of inflation. As inflation is defined as an increase in the supply of money and credit relative to available goods and services, one can achieve inflation either by increasing the money component (as in Weimar Germany or modern Zimbabwe) or the credit component. In the former case, one divides the underlying real wealth pie into smaller and smaller pieces. In the latter case, which represents our situation, one does not subdivide the real wealth pie, but instead creates multiple and mutually exclusive claims to the same pieces of pie.

A credit expansion thus creates excess claims to underlying real wealth, and we have just lived through the largest credit expansion in human history. In other words, we are all playing a giant game of musical chairs, only there is perhaps one chair for every hundred people playing the game. You can imagine what will happen when the music stops. The free-for-all grab for an available chair represents the extinguishing of excess claims to underlying real wealth, and is deflation by definition. This will represent the end of extend-and-pretend, and the recognition that there is only so much to go around.

In addition, Mr Rubin took exception to my discussion of the velocity of money as an important factor determining how financial crisis will play out in practice. The velocity of money is in fact a critical factor. It is an expression of how rapidly money circulates in an economy. If very little money is at rest, and most of the effective money supply is in circulation, many transactions will occur, it will be simple to connect buyers and sellers, and the economy will be healthy.

The problem in a depression is that the small number of people who still have access to money (after the collapse of credit) will be hanging on to it for dear life, as they will have no idea when they will earn any more in an era of high unemployment and instability. This means that very little of the small amount of existing cash will be in circulation. Most of it will be at rest, being hoarded by people, and companies and banks.

Money is the lubricant in the economy in the same way that motor oil is the lubricant in our cars. Without sufficient lubricant, the engine will seize up. This is exactly what happened in the 1930s – the economy had a seizure. When this happens, it is almost impossible to connect buyers and sellers for lack of a medium of exchange.

In the 1930s we had plenty of everything – energy, resources, labour etc – except money. Perverse things happen under such circumstances. In the 1930s it was very difficult to connect farmers with a product to sell with the hungry people who wanted that product. Since demand is not what one wants, but what one can pay for, under conditions of little circulating money, there is very little demand. In the 1930s, farmers dumped milk in ditches while people were starving to death down the road. Perverse things happen during an economic seizure. This is where we are headed again, and we need to be aware of the implications in order to prepare for them.

A dramatic fall in the velocity of money will greatly compound the collapse of the money supply due to the evaporation of credit. This is a dynamic that everyone needs to understand.

Mr Rubin, unlike most economists, does understand that resource limitations are real, and hence writes about peak oil. This is an important element of understanding. However, it is equally important to understand that a credit expansion brings forward aggregate demand, borrowing it from the future. Because our access to cheap credit put so much extra purchasing power in our hands, we can purchase many things we could not otherwise have done.

The debt created by this additional purchasing power must be repaid though, and when it is, it will be subtracted from future aggregate demand. This is a critical part of the dynamic leading to economic depression, yet it is a factor that modern economists cannot seem to understand. If we are to understand how the world works, we will have to discard the neo-classical model of economics that comprehensively fails to reflect reality, and has become a religion rather than the science it purports to be.

A Full Body Scan of American Corruption

Gonzalo Lira

In the United States, if a policeman stops you for a traffic violation, and you offer him a $20 bill to forget about the whole thing, you’ll likely end up in jail.

But if you leave your Federal government job and go work as a consultant to the very industry you used to regulate, you won’t go to jail – you’ll grow rich. Very rich.

Michael Chertoff is the poster boy for this institutionalized corruption going on in America today. He is not unique. He is not an outlier of any bell curve.

If anything, Chertoff’s form of corruption is average – it’s ordinary. It’s what everyone is doing: Everything within the law, everything that the law says he ought to be doing – yet the net effect is a blatant corruption that is personally despicable, and socially disastrous.

Michael Chertoff

Michael Chertoff was the head of the Homeland Security Agency from February of 2005, to January of 2009. But after he left, he formed an outfit called The Chertoff Group – and was promptly hired by an obscure company called Rapiscan Systems.

The Chertoff Group, according to their website, “provides strategic security advice and assistance, risk management strategy and business development solutions for commercial and government clients on a broad array of homeland and national security issues.”

That sounds . . . impressively vague. Slippery as a greased stripper’s pole, actually. So let’s approach this a different way:

What does Michael Chertoff do?

Well, as of late, Michael Chertoff has been a one-man media tsunami: There isn’t a single talk show on all the networks on which he has not appeared – and in every single one of them, he is singing the praises of the airport body scanners that are being deployed throughout the United States.

These body scanners are supposed to spot explosives, weapons, and other “tools of terrorism”. As in the picture to the right, you get zapped by magic rays, and the Transportation Security Administration (TSA) worker checks the monitor to make sure you haven’t brought a bomb on board the plane.

On its face, airport body scanners seem eminently sensible: A way to thoroughly make sure that no terrorist gets on board a plane with all the makings of a bomb.

Michael Chertoff is currently making the rounds of all the TV and cable talk shows, giving the song-and-dance routine about airport body scanners, and how they are “an effort to prevent terrorism” – how they bring about “enhanced levels of security” – how they are “a proactive approach to safety and security” – all the same old tired bullshit that is the same empty, hysterical clarion call that we’ve heard over the last decade: Safety!-Safety!-Safety!-Safety!

Samuel Johnson said that patriotism was the last refuge of the scoundrel – but I would say that, in today’s day and age, public safety is the last refuge of the scoundrel.

The reason I dismiss Mr. Chertoff’s media appearances – and dismiss everything he has to say on the subject – is because the airport body scanners he is singing the praises of? They are manufactured by Rapiscan – The Chertoff Group’s biggest client.

In other words, Michael Chertoff is not some kindly old éminence gris, looking after what’s best for the United States out of his boundless patriotism –

No: He is the paid spokesman for the manufacturer of the airport body scanners. And he stands to profit from the implementation of these airport body scanners. Profit directly.

Even back when he was in office as Secretary of Homeland Security, Chertoff kept pushing the TSA to adopt full body scans – even though there were a host of problems with the policy:

• Body scanners are not inherently superior to other methods of preventing unlawful items from being taken on board an airplane. The very fact that an individual can (currently) “opt out” of a body scan, and instead be manually patted down proves that scanners do not have an inherent advantage over low-tech solutions.

• Body scanners are extraordinarily expensive – $150,000 each – a cost which might be better applied to hiring more TSA workers, and thereby increasing the flow-rate of passengers through security, which currently has reached bottle-neck proportions.

• Body scanners represent an as yet unquantified but real health danger. (I will discuss the specifics below).

• Body scanners are an obvious breach of civil liberties – a clear violation of the Fourth Amendment (unlawful search and seizure) and the rule of probable cause . . . unless we are going to redefine “probable cause” as meaning all airplane passengers by definition are likely engaged in criminal activity, and therefore there is probable cause to essentially strip-search each and every one of them.

But even in the face of these very obvious, very reasonable objections, Chertoff kept pushing the body scans during his tenure as head of the Homeland Security Agency.

Which would have been fine – if Chertoff hadn’t immediately upon resigning his post created The Chertoff Group, and then gone to work for Rapiscan: The manufacturer of these body scans.

Was there a “relationship” between Chertoff and Rapiscan before he exited the Federal government? I don’t know – and I would guess that Chertoff is too shrewd to have been on the pay of Rapiscan back when he was Secretary of HSA.

But certainly as the head of The Chertoff Group, Michael Chertoff is in the pay of Rapiscan now. What, you think high-powered lobbying comes for free?

Before continuing, let’s make a necessary pit-stop: We have to know what we’re talking about, when we say “airport body scanners”. So let’s get that out of the way.
There are essentially two types:

Backscatter X-ray Scanners: These fire x-rays which, rather than going through the body, bounce off the skin and other objects. A computer interprets this reflection (“backscatter”), and creates an image.

Millimeter Wave Scanners: These fire microwaves in the 0.1 mm to 1 mm range, between microwaves and the infrared spectrum. Some marketers claim that millimeter waves are different from Terahertz radiation (which sounds very scary) – but they are essentially one and the same. Exactly as backscatter x-rays, millimeter waves go through clothes but reflect off of skin. Similarly, a computer interprets this reflection, and creates an image.

Both of them present health concerns – not hippy-dippy faggotty-assed pussy concerns, but reasonable health concerns any sensible person would be foolish not to take seriously.

To start with the first: Backscatter x-ray scanners fire low levels of x-rays – much less energy than the kind normally used to x-ray a broken limb in a hospital, for instance.

Proponents of backscatter x-ray scanners argue that the x-rays of this type of scanner do not penetrate the skin – so therefore, harmful x-ray radiation does not build up in the body.

This is bullshit. To be fair, at this time, it is not clear from the current evidence if this type of low-level x-ray radiation does not build up inside the body – but it certainly bombards the skin of the subject. That’s the whole point of the backscatter x-ray scanner: To have x-rays bounce off the subject’s skin, and thereby create an image of what they might be carrying beneath their clothes.

Therefore, the concentration of x-rays on the skin is much higher than a more powerful x-ray passing completely through the body. Here is a letter from a group of biochemistry and biophysics professors from the University of California San Francisco, raising precisely this concern, discussing the physics in detail.

Regardless of whether x-rays build up on the skin or in the body itself, there is no question that, just like medical x-rays, repeated uses of backscatter x-ray scanners leads to build up of harmful radiation, which will eventually – and inevitably – lead to cancer. That’s because x-rays have a cumulative effect: Each dose of x-rays adds to the effect of a previous dose.

The ways x-rays cause cancer is, the photons ionize atoms in cells. The chemical bonds therefore break down – the cells literally rip apart, including DNA. This can in time lead to cancer. The direct causal link between excessive doses of x-rays and cancer and/or leukemia is a non-controversial statement.

Who are the ones who face a disproportionate risk of developing cancer and/or leukemia from backscatter x-ray scanners? Obviously, airplane crews: Because of the ridiculous TSA mandate that even the pilots of the planes have to be checked to make sure they’re not bomb-carrying terrorists, and since of course airplane crews have to wend their way through the airport body scanners multiple times per week in order to do their jobs, then obviously it is inevitable that they will develop cancer and/or leukemia from backscatter x-ray scanners. Inevitable.

But in perhaps some poetic justice, the people most likely to suffer cancer in the long term (and maybe not so long term) are the TSA workers operating the machines. You see, there is a reason that in every hospital, the x-ray room is sealed off, and x-ray operators always work behind lead shielding. Yet TSA employees stand around these backscatter x-ray scanners for hours on end, day after day, with no shielding or protection. It’s a safe bet to claim that TSA workers operating these machines will suffer disproportionate amounts of cancer and/or leukemia in the medium- to long-term future.

Poor dumb bastards

Millimeter wave scanners, on the other hand, use less energetic particles than backscatter x-ray scanners. And unlike x-rays, terahertz radiation does not seem to accumulate in the body.

This ought to sound like good news: The photons of millimeter wave scanners are less energetic, therefore unlikely to ionize atoms and therefore rip apart DNA – so no cancer. Right?


Well . . . It turns out, researchers at Los Alamos National Laboratory have discovered that terahertz radiation is not energetic enough to ionize atoms – but it is energetic enough to essentially “shake” DNA until the strands “unzip”, creating “bubbles” in the DNA strand, hindering replication.

These researchers discovered that the damage to DNA was “probabilistic rather than deterministic”, which explains why some (pro-scanner) experiments produced no damage to DNA, while other identical experiments did produce damaged DNA – sometimes terhertz radiation rips apart DNA, and some other times it doesn’t. Here is a layman’s explanation of their work, in the Technology Review of MIT from last October 30, 2009, and here’s their academic paper in PDF.

This means that, unlike backscatter x-ray scanners, millimeter wave scanners do not create a build up of harmful radiation in the body. However, the probability of terahertz radiation causing damage to DNA – and ultimately cancer and/or leukemia – is a numbers game: Sooner or later, your number’s up.

To put it simply: Imagine you have a revolver that, rather than six chambers, has a thousand chambers – and only a single bullet. You can play Russian Roulette with this gun quite confidently once, twice, three times, maybe even four times. But eventually, you’ll start getting nervous – because you know the odds will start to rise uncomfortably.

And if during a busy day, thirty or forty thousand people pass in front of this one-bullet-in-a-thousand-chambers gun, what will happen? Why, that’s easy: At the end of the day, thirty or forty people are going to be lying dead with a bullet between the eyes – because those are the odds.

Now, what are the odds of terahertz radiation producing cancer and/or leukemia? No one knows yet, because the technology is too new. Maybe it’s not one in a thousand – maybe it’s one in a million.

Fine: Would you like to be that one-in-a-million?

Or put it another way: During the upcoming Thanksgiving holiday, something like 24 million Americans are going to be flying. Therefore, with one-in-a-million odds, and since those 24 million Americans are likely flying round trip, at the end of Thanksgiving Weekend, 48 Americans will be dead – because of this technology.

Or put yet another way: In 2009, according to the Department of Transportation, 769 million passengers flew in the United States. With one-in-a-million odds, that would be 769 dead passengers – that would be two full jumbo-jets’ worth of passengers.

How many people died of airplane terrorism in 2009?

This, of course, is the calculus that must be made: What is the cost of this protection? And is the cost substantially less than what is being prevented?

If scanners had been in place in every airport in America in 2009, and assuming a one-in-a-million rate of lethal effects from either one of the two types of full body scanners, that would mean 769 Americans would die.

Yet in 2009, there were no deaths from airplane terrorism. In fact, since September 11, 2001, there haven’t been any deaths from airplane terrorism in the United States.

So imagine if during the nine years since 9/11, one in a million passengers going through the airport scanners had died as an effect of those scanners. That would be roughly 7,000 people who would have died of cancer and/or leukemia, in order to prevent . . .

. . . nothing.

Now on top of this cold-blooded, rational calculus as to the cost-effectiveness of the airport scanners, we have to face up to a particularly painful fact:

These scanners don’t work.

When I say, “The scanners don’t work”, I mean, the scanners don’t fulfill the function for which they were intended: They do not catch potential terrorists bringing bomb-making equipment on board an airplane.

Check out this video, from German TV:

The second half is spectacle – everyone loves seeing stuff blowing up on TV.

But the first half is chilling: Dr. Gruber, the physicist brought on the show, very easily smuggled the ingredients necessary to blow up a plane. He was fully scanned, yet he managed to smuggle a fuse, a lighter, a bottle of thermite – voilà. Enough to blow up an airplane.

The British operator of the scanner claimed that the test was incomplete, because the scanner on the TV studio did not do the sides, and because Dr. Gruber was wearing his jacket, where he had the thermite, which ordinarily would have gone separately through an x-ray machine. Fair enough.

But what I found chilling was what Dr. Gruber kept in his mouth – the fuse. Obviously, if he had been a real terrorist, he could have kept the fuse in his mouth and the thermite in his rectum, rather than his coat pocket. Furthermore, Dr. Gruber stuff a shiv in his sock, which was not spotted by the scanner.

So to me, the test is valid: Dr. Gruber, without much of a to-do about it, handily defeated the body backscatter x-ray scanner, with materials which were unequivocably deadly on an airplane.

(By the way: Some critics of airport scanners have a cow over the privacy concern – images of naked people which could be copied and distributed, oh my! But really, who gives a shit about privacy, when the fucking things aren’t doing what they were meant to be doing? At this stage, privacy is so far down the list of reasonable objections to airport body scanners that I’m not even going to bother with it.)

So, what does this all mean?

It means that airport body scanners are ineffective by any metric you care to apply:

• They are medically dangerous.

• They potentially cause more deaths than they would save.

• They can be easily defeated.

This has not prevented Michael Chertoff from going on every television show, pleading how these devices are necessary to protect the Homeland from the terrorist threat.

It’s as if Mr. Chertoff had been on a mission

– but then again, at $150,000 a pop, and with a minimum order of 1,000 units necessary to put body scanners in each and every airport in the United States, this represents $150 million dollars to Rapiscan. (Which by the way, is fully owned by OSI Systems, which is headed by none other than Deepak Chopra, who founded the company.)

Furthermore, if we assume a very conservative yearly maintenance cost of 10%, and a yearly attrition rate of 5%, that’s an additional $22.5 million for Rapiscan per year. Over five years, this adds up to something like $262 million for Rapiscan. Add another “full upgrade” every five years or so, and you’re talking serious money.
Only God and Chertoff’s accountant know how much this represents to Michael Chertoff personally. Say he gets 5% commission? You’re talking $7.5 million to $13 million.

So for $7.5 million or more, Chertoff is doing like the song says: Doing his little dance, making a little love, getting down tonight with the mainstream media – big time.

Now, why is Mr. Chertoff’s lobbying so effective? Two fronts: Current Homeland Security Agency employees, and public relations credibility.

First, current Homeland Security Agency employees: They will never ever contradict the fervent recommendation of their former boss, Michael Chertoff – not out of loyalty, but because Chertoff represents future employment to these people.

These current high-ranking HSA employees – the very ones who could credibly contradict Michael Chertoff and say that these scanners aren’t necessary – will exit government service at some point. Will these current high-ranking HSA employees contradict their former boss? No – because after their stint with the Federal government, they want a job in the private sector, not a place in the unemployment lines.

They won’t contradict Chertoff today, so as not to hurt their chances for employment tomorrow. It doesn’t matter if these HSA employees will not work for either The Chertoff Group or Rapiscan – the contacts and influence Chertoff wields will naturally affect these former HSA employees’ employment prospects.

So they will never contradict Chertoff as he makes his rounds – they’ll be too worried about protecting tomorrow’s job. On the contrary, if they’re shrewd, they’ll fully agree with Chertoff’s recommendation of buying as many airport body scanners as possible, so as to curry favor for the future.

The second advantage Chertoff brings as a lobbyist is his credibility: He was the former head of the Homeland Security Agency, so he could not possibly be advocating something that would be bad for people – could he?

Of course not!

Though his relationship with Rapiscan is public knowledge, the American mainstream press rarely if ever mentions the fact that Chertoff is a paid lobbyist for the company manufacturing the airport body scanners. When he goes on a show, he is identified merely as a former Homeland Security Agency head. Maybe he’s identified as head of “The Chertoff Group” –

– but no one in the mainstream media says the truth when they introduce him: “Michael Chertoff represents the guys who stand to make the most money off the deployment of these contraptions.

Why not? Because the mainstream media are in bed with guys like Chertoff: They are all so afraid of antagonizing the people who ought to be serving the public good, that they wind up letting these “public servants” serve their own private good – like they let Michael Chertoff shill for body scanners, with nary a peep about his Rapiscan masters.

Chertoff’s corruption is average and ordinary – in point of fact, I would say that Chertoff’s corruption is the model for the kind of corruption endemic in the United States: The Chertoff Corruption Model. The Chertoff Scheme. We see it with all sorts of departments and agencies. The military? Every retired general winds up a paid consultant for some weapons manufacturer or other. Same with Congerssional staffers, same with FDA scientists – hell, it’s the New American Way!

It is indisputably legal – Chertoff is not breaking any law, as far as I know. Yet what he is doing is indisputably immoral and despicable nevertheless – Chertoff is preying on the citizenry’s fear and desire for impossible standard of safety, in order to enrich himself.

And Michael Chertoff is ordinary.

Now, like I’ve said before in other posts: I’m like Wayne Gretzky – I never bother with where the puck has been, I look for where the puck is going to be.

So in that spirit, I’ll let other people start looking through the rolls of former government employees, trying to catch other scoundrels carrying out their own versions of the Chertoff Scheme.

Ray LaHood

Instead, I will point you to the next likely example of the Chertoff Scheme – before it happens:

Transportation Secretary Ray LaHood.

Ray LaHood is the man most likely to carry out a Chertoff Scheme the second he leaves office.

He will not break a single law. He will not do anything that others have not done –

– but he will enrich himself immorally and despicably, by preying on the fear and worry of the American citizenry.

How do I know this?

Why, because I can read – I can read little missives like the following:

Transportation Secretary Ray LaHood said using a cell phone while driving is so dangerous that devices may soon be installed in cars to forcibly stop drivers – and potentially anyone else in the vehicle – from using them.

“There’s a lot of technology out there not that can disable phones and we’re looking at that,” said LaHood on MSNBC.

[. . .]

“I think it will be done,” said LaHood. “I think the technology is there and I think you’re going to see the technology become adaptable in automibiles to disable these cell phones. We need to do a lot more if we’re going to save lives.”

This was said by Secretary LaHood just last week.

How much you want to bet that, once he leaves office, Secretary LaHood will form a little consulting venture, The LaHood Group.

How much you want to bet that one of the biggest clients of this LaHood Group will be a company that manufactures cell phone signal blocking devices.

How much you want to bet that these devices will run a couple of hundred dollars a pop, and will be required by law to be installed in every automobile, new or used, or else face severe penalties for “non-compliance”.

How much you want to bet that hundreds of millions of dollars of revenue will depend on this little device.

How much you want to bet that, in order to work, these cell phone blockers will have to shroud every automobile in hundreds of times more electromagnetic radiation than cell phones currently emit – a barrage of frequencies whose ill-effects we still do not fully know, but which undoubtedly will be terrible.

How much you want to bet that – just as Secretary Chertoff did while he was in tenure – Secretary LaHood is already building a “relationship” with prospective clients for his post-government scheme.

How much you want to bet that, when he does his big media round once he is a private citizen, he will hammer home the same old tired bromides: Safety – security – protecting the children.

This is the shape of American corruption: It is not a folded $20 bill into the palm of the bureaucrat or the traffic cop. It’s not the $1,000 roll of bills tossed to the building inspector.

Rather, it is the “consulting” contract awarded to men like Michael Chertoff – a contract worth millions and millions, so long as the correct outcome is arrived at.

Chertoff keeps saying he is advocating the use of airport body scanners in order to “help save lives” – but as I hope I’ve shown, these devices do not save lives. They never have. And they will likely cost lives, in the not-too-distant future.

Does this matter to Chertoff? Does it matter to him that he is advocating a device that will likely kill far more people than it will ever save? No it does not. How do I know this? Because he is still out there in the media, shilling for a device that will kill Americans – which he knows will kill Americans – all the while claiming he is doing it in order to protect Americans.

What was it that Secretary LaHood said?

“We need to do a lot more if we’re going to save lives.”

Like I said: Public safety is the last refuge of the scoundrel.

What Would Kipling Do?

Thomas J. Smith

Rudyard Kipling’s epic Poem “If” begins with, “If you can keep your head when all about you are losing theirs and blaming it on you”. Those words can come in handy for those trying to deal with the increasingly whippy market. The pullback I have talked about in my last two pieces accelerated last week. We started last week with the S&P 500 at the 1199 level. I suggested we keep an eye on solid support of 1196/1195 and then the critical 1177 level for support. Tuesday saw a sharp selloff to start the day and the S&P went below the 1177 level intraday and closed just over 1178. The market held support and rallied for the rest of the week. The index started the week at 1199.21 and closed Friday at 1199.73. There was a lot of volatility last week, but we got virtually nowhere.

What caused all of the volatility? There were concerns that more restrictive policies in China would slow growth there. European sovereign debt concerns also surfaced again. Problems in Ireland hurt the markets early last week. As details for a loan package for Ireland came out that fear somewhat subsided. I am sure for the next few weeks this issue will continue to impact the markets as we all decide if and how this and other debt issues in Europe could influence things. Commodities were also volatile as the dollar continued its rally.

Last week I said that after the huge run we had in the market the technical picture was not as pristine as it was a few weeks ago. The 10 week run off the August low of 1039 to the November high of 1227 is similar to most of the rallies off the 2009 low. Rallies since the 2009 low have lasted between 9 and 10 weeks before pulling back or consolidating. The short term relative strength reading for the market at the recent high of 1227 was the highest it had been since January of 2004. Therefore, it is not surprising the market has run into tough sledding as we near the holiday season. Looking at a weekly chart of the S&P 500, the bulls still have the advantage. That advantage is not as decided as it has been but the bulls remain in charge. The index held above its 12 week (one quarter) moving average. Also, the weekly buy signal remains intact as the index closed above its 4 week and 12 week moving averages.

Continued strength in the dollar and uncertainty in Europe will continue to decrease confidence in the market. The action off the recent high remains orderly. Buyers have come in to support individual stocks and the market at key support levels. In my opinion the market will become far more selective and split as we go forward. Management teams that continue to deliver earnings in excess of expectations will see their stocks move higher. Companies that fail to deliver on guidance will be treated ruthlessly. The rising tide has seen all sectors work higher over recent months. I would be far more selective going forward. In this low growth environment earnings acceleration will be handsomely rewarded.