- The financial foundations of the American Century
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- The ongoing and deepening global financial crisis, nominally
triggered in July 2007 by an event involving a small German bank holding
securitized assets backed by USA sub-prime real estate mortgages, can best
be understood as an essential part of an historical process dating back
to the end of the Second World War-the rise and decline of the American
Century.
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- The American Century, proudly proclaimed by Time-Life
founder and establishment insider, Henry Luce in a famous 1941 Life magazine
editorial, was built on the preeminent role of New York banks and Wall
Street investment banks which had by then clearly replaced the City of
London as the center of gravity of global finance. Luce's American Century
was to be built in a far more calculated manner than the British Empire
it replaced.
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- A then top-secret Council on Foreign Relations postwar
planning group, The War & Peace Studies Group, led by Johns Hopkins
President and geo-political geographer, Isaiah Bowman, laid out a series
of studies designed to lay the foundations of their postwar world, already
beginning 1939, well before German tanks had rolled into Poland. The American
Empire was to be an empire indeed. But it would not make the fatal mistake
of the British or other European empires before, namely to be an empire
of open colonial conquest with costly troops in permanent military occupation.
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- Instead, the American Century would be packaged and sold
to the world, above all the emerging countries of Africa, Latin America
and Asia, as the guardian of liberty, democracy. It would clothe itself
as the foremost advocate of end to colonial rule, a stance which uniquely
benefited the only major power without large colonies-namely, the United
States.
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- The new American Century world was to be led by the champion
of free trade everywhere, which also uniquely benefited the strongest economy
in the early postwar years, the United States. It was a brilliant, if fatally
flawed concept. As State Department planning head, George F. Kennan wrote
in a confidential internal memo in 1948, "We have about 50% of the
world's wealth but only 6.3% of its populationOur real task in the coming
period is to devise a pattern of relationships which will permit us to
maintain this position of disparity without positive detriment to our national
security."
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- The core of the War & Peace Studies, which were designed
for and implemented by the US State Department after 1944, was to be the
creation of a United Nations organization to replace the British-dominated
League of Nations. A central part of that new UN organization, which would
serve as the preserver of the US-friendly postwar status quo, was creation
of what were originally referred to as the Bretton Woods institutions-the
International Monetary Fund and the International Bank for Reconstruction
and Development or World Bank. The GATT multinational trade agreements
were later added.
- The US negotiators in Bretton Woods New Hampshire, led
by US Treasury deputy Secretary Harry Dexter White, imposed a design on
the IMF and World Bank which insured the two would remain essentially instruments
of an "informal" US empire, an empire, initially based on credit,
and later, after about 1973, on debt.
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- New York and the New York Federal Reserve Bank were the
heart of the new empire in 1945. The United States held the overwhelming
majority of world central bank monetary gold reserves. The postwar Bretton
Woods Gold Exchange Standard uniquely benefited the role of the US dollar,
then and even now world reserve currency.
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- All IMF member country currencies were to be fixed in
value to the US dollar. In turn, the US dollar, but only the US dollar
was fixed to a preset weight of gold at $35 per ounce of gold. At this
fixed rate, foreign governments and central banks could exchange dollars
for gold.
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- Bretton Woods established a system of payments based
on the dollar, in which all currencies were defined in relation to the
dollar. It was ingenious and uniquely favorable to the emerging financial
power of New York, whose bankers actively shaped the final agreements.
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- In those days, in stark contrast to the present, the
dollar was "as good as gold." The US currency was effectively
the world currency, the standard to which every other currency was pegged.
As the world's key currency, most international transactions were denominated
in dollars.
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- Maintaining the role of the US dollar as world reserve
currency has been the foremost pillar of the American Century since 1945,
related to but more strategic even than US military superiority. How that
dollar primacy has been maintained to now encompassed the history of countless
postwar wars, financial warfare, debt crises, and threats of nuclear war
to the present.
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- Important to place the emergence of the asset securitization
revolution in global finance which is now impacting the world financial
system in wave after wave of new shocks and dislocations, and to appreciate
Alan Greenspan's substantial contribution to preserving the dominance of
the dollar as world reserve well beyond the point the US economy ceased
being the world's most productive industrial manufacturer, a brief review
of the distinct phases in postwar dollar hegemony is useful.
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- The Golden Years of America's Century
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- The first phase, which we might call the postwar "golden
years," saw the US emerge from the ashes of World War II as the unchallenged
global economic Colossus. The US was the dominant world power; no one even
came close. Over half of all international money transactions were financed
in terms of dollar. The US produced more than half the world output. The
US also owned about two thirds of the official gold reserves in the world
in 1940.
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- When various European countries had reserve surpluses,
they converted the surpluses into dollar reserves rather than gold because
they could earn interest on dollar assets such as US Treasury bonds and
dollars could always be converted into gold at $35 per ounce whenever it
became necessary. The US dollar was at the center of this system.
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- American industry, led by General Motors, Ford and Chrysler
Motors, the Big Three, were the world class leaders-no one was even close
back then. US Steel (before it became USX), machine tool manufacture, aluminum,
aircraft and related industries all set the benchmark for global excellence
well into the 1950's.
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- Above all, the American oil giants-Mobil, Standard Oil
of New Jersey, Texaco, Gulf Oil-those key companies dominated the unique
energy source which was to become essential to unprecedented postwar growth
rates in Europe, Japan and the rest of the postwar world-petroleum.
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- In this early postwar period demand for dollars in the
world to finance reconstruction was so great that the primary economic
problem faced in the 1950's in Europe, Japan, South Korea and elsewhere
was dollar shortages to finance imports of needed US capital equipment,
its oil, its consumer products.
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- The US monetary gold stocks reached a record $24.6 billion
in 1949, a huge sum that was comparable today to $211 billion, as gold
from abroad poured into the US to pay the deficits in trade run up by foreign
nations. New York, backed by gold reserves, was the unchallenged world
banker.
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- This process began to deteriorate after a steep postwar
recession in 1957-58. That recession should have been the alarm bell to
US economic policy planners and industry that the unique period of profiting
from the relative economic dislocation of a war-torn world was at its outer
limits. Beginning 1957 the US economy was in need of a substantial regeneration,
were it to remain globally competitive. That was not to happen.
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- By the time of the November 1967 British Sterling crisis,
where the British Government was forced to violate IMF rules and devalue
Sterling by 14% to maintain their economy amid severe recession, the focus
turned on the fact that President Lyndon Johnson's Great Society and disastrous
Vietnam War costs were causing the US government to run record budget deficits.
The dollar was vulnerable to a run on US gold for the first time since
the 1930's.
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- To hide the extent of those deficits, the Johnson Administration
introduced creative accounting. For the first time the Budget director
added the funds paid by working Americans into the Federal Social Security
Trust Fund, a surplus that was to have been set aside to pay future retirement
and related benefits for most Americans, to the Consolidated General Budget-a
start to budget fakery which by the early years of the next century were
to become huge.
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- Johnson also began manipulation of key government economic
statistics used to compute everything from unemployment to inflation to
GDP. The statistical manipulations, for reasons of obvious if fateful political
opportunism, were endorsed silently by every succeeding Administration,
the most egregious of them being the present Bush-Cheney Administration.
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- The 1971 dollar coup
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- Despite all the manipulations, by 1971 US monetary gold
reserves had reached a precarious low as foreign trade surplus nations,
led by France, had demanded payment in hard gold from the US Federal Reserve
for their dollar surpluses. Reality could not so easily be manipulated
as government statistics. Europe had emerged, along with Japan, as powerful
trade surplus, modern, fast-growing economies.
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- The United States was becoming a vast rustbelt of decaying,
obsolescent manufacture. The spin-doctors of Wall Street and select think-tanks
such as the Ford and Rockefeller foundations came up with a linguistic
euphemism calling it the "post industrial society," but linguistics
did not change the reality. By the late 1960's America's once-booming industrial
centers from Detroit to Pittsburgh to Chicago had become sprawling slums
of decay, crime and rising unemployment.
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- Were the United States to lose its last gold reserves,
the role of the dollar as unique world reserve currency-the pillar, along
with US military superiority, of its postwar American Century imperium-would
end abruptly.
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- To avert such a calamity, in August 1971 President Nixon
huddled with his closest advisers, among them a US Treasury official named
Paul Volcker, then Under-Secretary of the Treasury for International Monetary
Affairs, and a long-time associate of David Rockefeller and the Rockefeller
family.
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- Their task was to come up with a solution. Volcker's
"solution" to the massive demand to redeem US dollars for gold
was to be as simple as it was to prove destructive to world economic health.
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- Nixon announced to a startled world on August 15, 1971
that from that day, the United States would not longer honor its international
treaty obligations under the Bretton Woods Agreement. Nixon had suspended
convertibility of the dollar into gold. The New York Fed's Gold Discount
Window was locked shut. World currencies went into a free float against
an uncertain dollar, a so-called fiat currency. The dollar now was not
backed by gold or even silver but only the "full faith and credit"
of the US government, a commodity whose marketable value was beginning
to be questioned.
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- Debt becomes the vehicle
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- Soon, with the implicit threat of withdrawing its nuclear
shield as its prime persuasion, successive US Administrations realized
that rather than depending on its role as the world's creditor as it had
until 1971, the American Century could theoretically thrive as the world's
greatest debtor, so long as American finance and the dollar dominated world
finance.
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- As long as major US postwar satrapies such as Japan,
South Korea or Germany, were forced to depend on the US security umbrella,
it was relatively simple to pressure their Treasuries into using their
US dollar trade surpluses to buy US government debt. In the process, the
US bond or debt markets became far and away the world's largest. Wall Street
primary bond dealers were replacing Pittsburg steel and Detroit car manufacture
as the "business of America."
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- To paraphrase the famous quip of former GM president
Charles Wilson from the 1950's, the new mantra was, "What's good for
Wall Street is good for America." It wasn't. The name financial "industry"
even became commonplace, as if to designate money as the legitimate successor
to production of real physical wealth in the economy.
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- Debt-dollar debt-was to be the vehicle for a new role
of New York banks, led by David Rockefeller's Chase Manhattan and Walter
Wriston's Citibank. Their idea was to extend hundreds of billions of dollars
in newly acquired OPEC and other petrodollars, which they "persuaded"
Saudi and other OPEC governments to bank their new oil surpluses in London
or New York banks. Then those dollar deposits from OPEC, called by Henry
Kissinger and others at the time, "petrodollars" went in the
form of recycled loans to oil importing and dollar-starved Third World
economies.
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- The Carter dollar confidence crisis
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- This second phase, the post-gold era, fuelled by the
manipulated 1973 oil shock and US pressure on Saudi Arabia and OPEC to
price oil exclusively in dollars, Kissinger's "petro-dollar recycling,"
rolled along without major trouble until early 1979 when the dollar faced
a major foreign sell-off during the end of the Jimmy Carter Presidency.
The American Century faced one of its greatest challenges at that juncture.
German, Japanese even Saudi Arabian central banks began dumping US Treasury
holdings in what was called a loss of "confidence" in Carter's
world leadership role.
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- In August 1979, to restore world "confidence"
in the dollar, President Jimmy Carter, himself a hand-picked protégé
of David Rockefeller's Trilateral Commission, was forced by the big New
York banks, led by David Rockefeller's Chase Manhattan, to accept Paul
Volcker, a protégé of Rockefeller's from Chase Manhattan
Bank, as new Chairman of the Federal Reserve with an open mandate to do
what was necessary to save the dollar as reserve currency.
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- On taking office, Volcker bluntly announced, "the
standard of living for the average American has to decline." He was
Rockefeller's hand-picked choice to save the New York financial markets
and the dollar at the expense of the nation's welfare.
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- The Volcker 'shock therapy'
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- Volcker's shock therapy, begun in October 1979, lasted
until August 1982. Interest rates shot through the roof to double digits.
The US and world economies were plunged into a monster recession, the worst
since World War II. Within a year, the prime rate had shot up to the unheard-of
level of 21.5%, compared to an average of 7.6% for the fourteen previous
years, a more than threefold rise in weeks. Official US unemployment peaked
at 11%, while unofficially when those who simply had given up seeking work
were counted, it was far higher.
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- Source: AngryBearBlogspot.com
- The Shock Therapy of Volcker doubled US official unemployment
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- The Latin American debt crisis, an ominous foretaste
of today's USA sub-prime crisis, erupted as a direct result of the Volcker
shock. In August 1982 Mexico announced it could no longer pay in dollars
the interest rate service on its staggering debt. It, as most of the Third
World from Argentina to Brazil, from Nigeria to Congo, from Poland to Yugoslavia,
had fallen for the New York banks' debt trap. The trap was in borrowing
what amounted to recycled OPEC petrodollars invested in the major New York
and London banks, the Eurodollar banks, which lent the dollars to desperate
Third World borrowers initially at "floating rates" tied to London
LIBOR rates.
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- When Libor rose some 300% within months as a result of
the Volcker shock therapy, those debtor countries were unable to continue.
The IMF was brought in and the greatest looting binge in world history,
misnamed the Third World Debt Crisis, was on. Volcker's shock policy, predictably,
triggered the crisis.
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- After seven years of relentlessly high interest rates
by the Volcker Fed, sold to the gullible public as "squeezing inflation
out of the US economy," by 1986 the internal state of the US economy
was horrendous. Much of America came to resemble a Third World country,
with its growing slums, double-digit unemployment and growing crime and
drug addiction problems. A Federal Reserve study showed that 55% of all
American families were net debtors. Federal budget deficits were running
at then-unheard-of levels of more than $200 billion annually.
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- In reality, Volcker, a personal protégé
of David Rockefeller from Rockefeller's Chase Manhattan Bank, had been
sent to Washington to do one thing-save the dollar from a free fall collapse
that threatened the role of the US dollar as global reserve currency.
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- That dollar reserve currency role was the hidden key
to American financial power.
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- By letting US interest rates go through the roof, foreign
investors flooded in to reap the gains by buying US bonds. Bonds were and
are the heart of the financial system. Volcker's shock therapy for the
economy meant soaring profits for the New York financial community.
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- Volcker succeeded only too well in his mission.
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- The dollar rose to all-time highs against the currencies
of Germany, Japan, Canada and other countries from 1979 through the end
of 1985. The over-valued US dollar made US manufactured exports prohibitively
expensive on world markets and led to a dramatic decline in US industrial
exports.
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- Already high interest rates from the Volcker Fed since
October 1979 had led to a major decline in domestic construction, the ultimate
ruin of the US automobile industry and with it, steel, as American manufacturers
moved to outsource production offshore where the cost advantages were greater.
Referring to Paul Volcker and his free-market backers inside the Reagan
White House, Republican Robert O. Andersen, then chairman of Atlantic Richfield
Oil Co. complained, "they've done more to dismantle American industry
than any other group in history. And yet they go around saying everything
is great. It's like the Wizard of Oz."
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- By early 1987 the nation's traditional mortgage banks,
the Savings & Loan banks, were in a liquidity crisis that was to ultimately
cost US Taxpayers hundreds of billions in government bailouts. The Congress'
GAO watchdog agency declared that the Federal Savings & Loan Insurance
Corporation, the guarantor against S&L bank panic, was insolvent. Yet
under pressure from the S&Ls, huge bank losses were allowed to build
as insolvent institutions were allowed to remain open and grow, allowing
ever increasing losses to accumulate. The ultimate cost of the 1980's S&L
debacle came to more than $160 billion. Some calculated real costs to the
economy ran as high as $900 billion. Between 1986 and 1991, the number
of new homes constructed dropped from 1.8 to 1 million, the lowest rate
since World War II.
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- America's Second Revolution: the eyes on the Prize
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- Federal Reserve monetary policy has been typically misrepresented
as a series of ad hoc pragmatic responses to recurring crises in post-war
banking and finance. The reality is that it has faithfully followed a coherent
hidden thread of policy that was first laid out in 1973 by the spokesman
then for America's most powerful establishment family.
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- The policy was outlined in a little-noted book titled,
ominously enough, "The Second American Revolution." It was written
by John D. Rockefeller III, scion of the powerful Standard Oil and Chase
Manhattan Bank empire, and, along with his three brothers-David, Nelson
and Laurance-architect of the world arrangement after 1945 known as the
American Century.
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- In his book, Rockefeller declared the establishment's
determination to roll back concessions grudgingly granted by the wealthy
and powerful during the Great Depression. Rockefeller issued the call in
1973, long before Jimmy Carter or Margaret Thatcher came to office to implement
it. He called for a "deliberate, consistent, long-term policy to decentralize
and privatize many government functionsto diffuse power throughout the
society." The latter was a witting deception as his intent was not
to diffuse power, but just the opposite-to concentrate that economic and
banking power into the hands of a tight-knit elite.
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- Privatization of essential and socially useful government
functions that had been established often with great social agitation and
political pressure during the difficult crises of the 1930's, was the Rockefeller
agenda. In brief, it was the removal of Depression era government regulations
on all aspects of economic and social life in America.
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- Above all, deregulation of Wall Street and financial
markets was the goal, along with a radical reduction in the equalizing
of wealth, as seen by Rockefeller and friends, inherent in such programs
as Social Security. The George W. Bush "tax cuts for the wealthy"
were just a continuation of a three decade agenda of the powerful establishment
circles.
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- Hard as it may be to believe, all major US policy from
the 1970's through the misnamed sub-prime crisis today, had a connecting
continuous thread. Key Fed and Treasury and other US policymakers always
held their "eyes on the Prize."
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- The "Prize" was untold financial gains to be
won through a rollback of major concessions to the working blue collar
and middle income Americans, concessions granted during the Great Depression
by powerful establishment circles led by the Rockefeller and Morgan banking
groups, to forestall a more radical revolt.
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- Social Security was one target for rollback. Financial
deregulation and above all repeal of the 1933 Glass-Steagall Act, was another.
Here a well-connected Wall Street banker named Alan Greenspan was to play
the decisive role on behalf of the financial deregulation agenda in his
tenure as Federal Reserve Chairman lasting from 1987 through 2006. Securitization
of sub-prime or junk mortgages was to have been his crowning legacy. As
it looks at this writing, it certainly will be, though perhaps not as he
and others in Wall Street intended. It will more likely be a crown of disgrace.
-
- (Part III will deal with the Greenspan creation of the
securitization revolution and its subsequent demise)
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- Luce, Henry, The American Century, reprinted in The
Ambiguous Legacy, M. J. Hogan, ed. Cambridge, UK: Cambridge University
Press, 1999.
- Kennan, George F., 1948, "PPS/23: Review of Current
Trends in U.S. Foreign Policy", Foreign Relations of the United States,
Volume I.
- New York Council on Foreign Relations, undated, The
War & Peace Studies, <http://www.cfr.org>http://www.cfr.org.
- Engdahl, F. William, A Century of War: Anglo-American
Oil Politics and the New World Order, London, Pluto Press, 2004, pp. 88-9.
- For an excellent historical account of the impact of
those systematic government statistical manipulations, see John Williams'
<http://www.shadowstats.com>http://www.shadowstats.com/. John
has been tracking the manipulations for well over two decades, the only
systematic attempt I know of.
- The term "satrapy" to describe US relations
with Japan, Germany and other postwar allies is used by Zbigniew Brzezinski
in his book, The Grand Chessboard: American Primacy and its Geostrategic
Imperatives, New York, Basic Books, 1997.
- The best treatment of this new role of endless debt
creation backed by US military power as the foundation for the US domination,
see the excellent personal account in the remarkable work by Michael Hudson,
Super Imperialism: The Economic Strategy of American Empire, London, Pluto
Press, 2nd Ed.2003, www.michael-hudson.com. p.289 ff.
- See Engdahl, op.cit., pp.130-141 for an unusual account
of the role of then-Secretary of State Kissinger in the events leading
to the 400% OPEC oil price rise in 1974.
- Anderson, Robert O., cited in Greider, William, Secrets
of the Temple: How the Federal Reserve runs the country, Simon & Schuster,
New York, 1987, p. 648.
- Rockefeller, John D. III, The Second American
Revolution, Harper & Row, New York, 1973.
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- Contact at: www.engdahl.oilgeopolitics.net
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- Author, A Century of War: Anglo-American Oil Politics
and the New World Order,Pluto Press; and Seeds of Destruction:
The Hidden Agenda of Genetic Manipulation, Global Research.ca.
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