In any system of social accounting, it is necessary to reconcile revenues with expenditures. Private firms do so because they fear insolvency and bankruptcy. Public institutions don’t have the option of bankruptcy, so they invoke three related strategies to avoid the inevitable: raise taxes, print money, or incur debt to meet their obligations.
Done prudently, it is possible for governments to keep their books in balance. But not when these three tools are in the hands of modern progressives and would-be socialists who use them to save the world from environmental disaster, to equalize income and wealth, to codify an ever-widening class of positive rights, and to rectify an ever-greater set of supposed grievances through private lawsuits or government regulation.
These goals may look plausible—even tempting—when taken in isolation. It might seem churlish to argue anyone should be denied a cleaner environment, a college education, universal health care, or guaranteed housing. Perhaps cost should be no object. These proposals are often strategically vague on matters of detail so as to make it impossible to put a price tag on each separate initiative, let alone all of them in combination. The excuse is then made that wealth production is best handled by a combination of monetary and fiscal policy. The first makes credit cheap, and the second uses government purchases to pick up any slack.
How then are these gargantuan expenditures to be funded? The first problem is that the private sector will be so debilitated that government revenues will fall even if tax rates are kept at their current rate. But taxes won’t stay at their current rate, because the progressive mindset ignores incentives and treats all wealth transfers as zero-sum. They assume that no amount of taking will ever lead to less earning and that the top 1 percent of Americans, who earn about 20 percent of total income, comprise a deep well.
But that well has already been tapped; today these same rich people also pay 40 percent of federal and state taxes. Some of that money generates return benefits in the form of government goods and services. But today, Social Security, Medicare, Medicaid, and lesser entitlement programs consume an ever-larger fraction of public wealth. We are on the wrong side of the Laffer curve, where higher taxes will generate even smaller revenues. Foreign investors will stay away or pull up stakes and move elsewhere. Many older professionals will choose to retire rather than take a cut in after-tax income. Meanwhile, everyone else will lobby to get on the government gravy train.
None of these prospects seem to deter progressives, who insist, despite strong evidence to the contrary, that they can fund annual trillion-dollar deficits with increased taxes on billionaires and near-billionaires.
Look at the roster of proposed reforms: Cut the estate tax exemption from its current level of $11.4 million to about one-third that amount. Next, make the income tax more progressive. Finally, enact something along the lines of Elizabeth Warren’s annual wealth tax of 2 percent on personal estates worth between $50 million and $1 billion, and 3 percent on estates over that amount. These numbers are just a starting point, of course. Proponents will soon say, now that the principle of the wealth tax is established, that the numbers are a mere detail and can be adjusted upward without any serious constitutional limitation.
Should this economic coalition succeed, the American system will fall into the kind of death spiral that has characterized so many socialist regimes. Wealth will flee, revenue will fall, and the entitlements will become nominal, not real. You will have a right to education, health care, and housing, Just not today. Wait obediently on a queue until your name is called, at which point it may be too late. But never even dream that you should be allowed to escape the clutches of a well-intentioned monopoly that demands exclusive public support. Forget those pesky charter schools that provide better education at lower costs.
Trust that government-run firms will continue the private sector’s legacy of tech and transportation innovations. Rest easy knowing that America’s most powerful and productive companies will be governed by boards of directors with members chosen by government bodies that champion “responsible” investing.
For the past 80 years, the United States has managed to balance the trade-off between innovation and equity without imposing any mortal threat to our social institutions. Not anymore. The progressive agenda, if enacted with full rigor, will create massive economic dislocation that will threaten our democratic institutions to their cores.
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In any system of social accounting, it is necessary to reconcile revenues with expenditures. Private firms do so because they fear insolvency and bankruptcy. Public institutions don’t have the option of bankruptcy, so they invoke three related strategies to avoid the inevitable: raise taxes, print money, or incur debt to meet their obligations.
Done prudently, it is possible for governments to keep their books in balance. But not when these three tools are in the hands of modern progressives and would-be socialists who use them to save the world from environmental disaster, to equalize income and wealth, to codify an ever-widening class of positive rights, and to rectify an ever-greater set of supposed grievances through private lawsuits or government regulation.
These goals may look plausible—even tempting—when taken in isolation. It might seem churlish to argue anyone should be denied a cleaner environment, a college education, universal health care, or guaranteed housing. Perhaps cost should be no object. These proposals are often strategically vague on matters of detail so as to make it impossible to put a price tag on each separate initiative, let alone all of them in combination. The excuse is then made that wealth production is best handled by a combination of monetary and fiscal policy. The first makes credit cheap, and the second uses government purchases to pick up any slack.
How then are these gargantuan expenditures to be funded? The first problem is that the private sector will be so debilitated that government revenues will fall even if tax rates are kept at their current rate. But taxes won’t stay at their current rate, because the progressive mindset ignores incentives and treats all wealth transfers as zero-sum. They assume that no amount of taking will ever lead to less earning and that the top 1 percent of Americans, who earn about 20 percent of total income, comprise a deep well.
But that well has already been tapped; today these same rich people also pay 40 percent of federal and state taxes. Some of that money generates return benefits in the form of government goods and services. But today, Social Security, Medicare, Medicaid, and lesser entitlement programs consume an ever-larger fraction of public wealth. We are on the wrong side of the Laffer curve, where higher taxes will generate even smaller revenues. Foreign investors will stay away or pull up stakes and move elsewhere. Many older professionals will choose to retire rather than take a cut in after-tax income. Meanwhile, everyone else will lobby to get on the government gravy train.
None of these prospects seem to deter progressives, who insist, despite strong evidence to the contrary, that they can fund annual trillion-dollar deficits with increased taxes on billionaires and near-billionaires.
Look at the roster of proposed reforms: Cut the estate tax exemption from its current level of $11.4 million to about one-third that amount. Next, make the income tax more progressive. Finally, enact something along the lines of Elizabeth Warren’s annual wealth tax of 2 percent on personal estates worth between $50 million and $1 billion, and 3 percent on estates over that amount. These numbers are just a starting point, of course. Proponents will soon say, now that the principle of the wealth tax is established, that the numbers are a mere detail and can be adjusted upward without any serious constitutional limitation.
Should this economic coalition succeed, the American system will fall into the kind of death spiral that has characterized so many socialist regimes. Wealth will flee, revenue will fall, and the entitlements will become nominal, not real. You will have a right to education, health care, and housing, Just not today. Wait obediently on a queue until your name is called, at which point it may be too late. But never even dream that you should be allowed to escape the clutches of a well-intentioned monopoly that demands exclusive public support. Forget those pesky charter schools that provide better education at lower costs.
Trust that government-run firms will continue the private sector’s legacy of tech and transportation innovations. Rest easy knowing that America’s most powerful and productive companies will be governed by boards of directors with members chosen by government bodies that champion “responsible” investing.
For the past 80 years, the United States has managed to balance the trade-off between innovation and equity without imposing any mortal threat to our social institutions. Not anymore. The progressive agenda, if enacted with full rigor, will create massive economic dislocation that will threaten our democratic institutions to their cores.
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US Surpasses Saudi Arabia, Russia To Become World’s Top Oil Exporter
The US has once again surpassed Saudi Arabia and Russia to reclaim the No. 1 spot as the world’s largest oil exporter, according to data from the International Energy Agency.
Record shale production helped the US ship nearly 9 million barrels of crude and other oil products a day in June, surpassing Saudi Arabia, Bloomberg reports. And as more companies build the infrastructure necessary to transport oil from fields in Texas and New Mexico to the coast, the amount of oil exported by the US is expected to climb.
The increase in US crude exports in June was helped by a surge in crude-oil shipments to more than 3 million barrels a day, according to the IEA report. Meanwhile, Saudi Arabia was cutting exports in line with the OPEC+ agreement on production cuts, while Russia’s output was hampered by the Druzhba pipeline crisis.
As OPEC members adhere to an agreement to cut production for the third year, swelling US output is hampering the cartel’s effort to drain stockpiles and ‘rebalance’ the global energy market in a way that drives up prices.
Rising American output, combined with concerns about global demand fueled by the ongoing US-China trade war have prompted a nearly 20% drop in Brent crude prices – the global benchmark – from the April high.
However, the US’s spot at the top of the global oil-exporting heap already appears to be short-lived. Saudi Arabia appears to have reclaimed the top spot for July and August as hurricanes disrupted US production, while the trade dispute “made it more difficult for shale shipments to find markets,” according to the IEA.
But in the coming months, the US could easily wind up back in the No. 1 spot as American crude exports are expected to climb by one-third from June levels to as much as 4 million barrels a day as new infrastructure is being built to handle more oil flows.
The meeting of the foreign and defense ministers of Russia and France in the 2+2 format in Moscow on September 9 signified not only a warming up of relations between the two countries but a reset in Russia’s ties with the West.
The last time a Franco-Russian event in the 2+2 format took place was in October 2012 in Paris. A year later, the conflict erupted in Ukraine and the European Union imposed sanctions against Russia. The trajectory since then appears to be reversing its course.
The first signs appeared during the G7 summit in Biarritz on 24-26 August where the schism between the West and Russia significantly narrowed. The US President Donald Trump announced that he intended to invite Russian President Vladimir Putin to next year’s G7 at Miami.
In the run-up to the Biarritz summit and immediately thereafter, the host, French President Emmanuel Macron underscored that reversing the trend of distrust between the West and Russia is in the common interest. (See my blog Macron’s Carolingian Renaissance of the G7.)
Antagonism in Europe toward Russia has been steadily giving way to a new thinking that isolating Moscow is not a viable strategy on the global stage. German Foreign Minister Heiko Maas declared in July that “without Russia, we will not find answers to the pressing issues in global politics.”
Italy, of course, pioneered the new thinking and has sought the removal of the EU’s sanctions against Russia. In July, Prime Minister Giuseppe Conte described EU restrictions as “sad,” and “not good for Russia, nor for the EU, nor for Italy.”
However, it is France’s role that becomes crucial today. Despite Moscow’s backing for Marine Le Pen, the far-right candidate in France’s 2017 presidential election, Macron seemed a model of moderation no sooner than he assumed office to invite Putin to visit him. Putin gleefully accepted the invitation (although Macron was seen in Moscow as the least desirable presidential candidate for Russian interests.)
In a summit at the highly-symbolic and sumptuous setting of Château de Versailles in May 2017, Macron held a “frank exchange” with Putin where they discussed “disagreements”. At a joint news conference, both leaders said there were opportunities to work together more closely.
Clearly, within ten days of assuming office as president, Macron was on the ball to bring Putin back in from the cold. Macron kept the lines open with Putin and even invited the Russian leader for talks at his residence on August 19 just days ahead of the G7 summit in Biarritz.
Russian President Vladimir Putin (L) meets with French President Emmanuel Macron (R) at Fort Bregancon near the village of Bormes-les-Mimosas, France, Aug 19, 2019.
Macron sees that it is upto him to grab a leadership role for France. He has attempted to play the role of a mediator in Libya’s civil war, the Syrian conflict, Ukraine and the situation around Iran. As Tatiana Kastoueva-Jean at the French Institute of International Relations recently told the AFP:
“The stars are aligning a bit for Emmanuel Macron. He has the presidency of the G7 and the Council of Europe; Germany is no longer playing an active role in these matters; and London is paralysed by Brexit. He’s the de facto leader of Europe, and can legitimately speak for the West.”
Macron senses that a breakthrough is possible over Ukraine where the new president Volodymyr Zelensky appears determined to improve relations with Russia, which is also what his massive electoral mandate expects from him.
On the other hand, Putin is eager to encourage Zelensky to push ahead to unlock the stalemate in Donbas by exploring the potentials of the Minsk agreements regarding some degree of autonomy for the breakaway regions.
To be sure, the growing rapprochement between Moscow and Kiev resulted in the swap of dozens of prisoners in each other’s custody on Saturday, which is a hugely emotive issue and clears the deck for a summit meeting of the Normandy format (France, Germany, Russia and Ukraine) to accelerate a peace process in Donbas.
Meanwhile, a trilateral meeting is also expected to take place within the year between Russia, European Union and Ukraine to discuss a new framework for Russian gas supplies to Ukraine.
Indeed, the ground beneath the feet is shifting. Trump struck the right cord by promptly welcoming Saturday’s prisoner swap: “Russia and Ukraine just swapped large numbers of prisoners. Very good news, perhaps a first giant step to peace. Congratulations to both countries!”
Relatives of Ukrainian prisoners arriving from Russia at Borispil Airport, outside Kiev, September 7, 2019
Unlike his predecessor Barack Obama, Trump doesn’t see any vital US interests at stake in pitting Kiev against Moscow. Trump’s detached attitude is making a difference. He understands that only by easing tensions over Ukraine, a meaningful rapprochement with Russia becomes possible.
On his part, Putin too knows that in order for Russia to play the optimal role as an independent power centre on the global stage and as a balancer in big-power politics — as well as for sustaining Russia’s resurgence in the medium and long-term — the strengthening of the European vector of its “Eurasianism” becomes imperative.
Putin hopes to secure an easing of EU sanctions and a possible return to the G7. On the other hand, he is acutely conscious that the divergences among the Europeans and the discords within the transatlantic alliance strengthen Moscow’s hand in negotiations.
However, there is going to be robust opposition from the western camp to any dismantling of sanctions against Russia. Britain will oppose tooth and nail any moves to give ground against Russia. (See an acerbic piece by the British think tank Chatham House titled On Russia, Macron Is Mistaken.)
Again, how far Trump succeeds in forcing his will on the Russia policies remains to be seen. Fundamentally, the US establishment is nowhere near willing to accept the growing multipolarity in the world order. The US’ dual containment strategy against Russia and China is cast in stone, as the speech by the US Defence Secretary Mark T. Esper at London’s Royal United Services Institute last week reminds us.
But then, the Chinese have a saying — ‘Dripping water can pierce a stone.’ The Russian-Ukrainian swap of prisoners and the resumption of the Franco-Russian meeting in the 2+2 format signal a high degree of perseverance on the part of Macron and Putin — with tacit support from Trump. One can hear the sound of dripping water.
The French Foreign Minister Jean-Yves Le Drian said in Moscow after the 2+2 talks, “The time has come, the time is right, to work toward reducing the distrust between Russia and Europe, who ought to be partners on a strategic and economic level. It’s not yet the time to lift sanctions. (But) we are seeing a new state of mind compared to that of the last few years, which we are pleased about.”
The point is, Russia will never give back Crimea and France’s European allies may have to consider that to be an acceptable price to end the Ukraine conflict. Such a strategic adjustment is entirely conceivable but it takes time to mature.
If the British Labour Party returns to power, it plans to seize some £300 billion (about $370 billion) of shares in some of the nation’s largest companies and turn them over to workers, according to the Financial Times. The party’s plans for “inclusive ownership funds” would force every company with more than 250 employees to transfer 10 percent of its shares to workers over 10 years. Those workers would get up to £500 (about $615) each year in dividends from those shares. Any income above that would be kept by the government.
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EU Accused Of Fascism After “Protecting Our European Way Of Life” Commissioner Announced
The creation of a UN “Commissioner for Protecting our European Way of Life” has sparked outrage across Europe, after the new role which will oversee immigration policy was announced by incoming EU commission president Ursula von der Leyen.
The new position, to be filled by Greece’s EU commissioner, Margaritis Schinas, was unveiled along with the rest of von der Leyen’s new cabinet at a Tuesday press conference in Brussels.
Margaritis Schinas
While Von der Leyen said the new Commission cabinet was “as diverse as Europe is,” critics have noted that all of its members are white, while calling the new commissioner position “fascist,” according to The Independent– which couldn’t find a single person in support of the new role for a quote.
“This looks like the portfolio to fight back against the rise of the fascists, but only by adopting their divisive rhetoric around ‘strong borders’,” British Green MEP Molly Scott Cato told The Independent.
“What Greens value about our European way of life is our role as a beacon of compassion and diversity. We will continue our work to ensure that Europe remains a safe harbour for those fleeing persecution and to champion global human rights.”
Many of the posts in Ms Von der Leyen’s new cabinet, which will serve for five years, have avoided traditional ministerial titles for more goal-orientated names like Commissioner for “A Stronger Europe in the World” and “An Economy that Works for People”.
Liberal Dutch MEP Sophie in ‘t Veld told The Independent “The very point about the European way of life, is the freedom for individuals to chose their own way of life. We do not need a Commissioner for that, thank you very much,” adding “The implication that Europeans need to be protected from external cultures is grotesque and this narrative should be rejected.”
“The only threat to “our way of life” is autocrats and populists like Orbán, Kaczinsky or Johnson trampling all over the rule of law, fundamental rights and democracy. Instead of creating fake portfolios, the Commission should show some more guts in upholding the values we have laid down in our treaties, laws and case law.” –The Independent
The controversial new commissioner, Margaritis Schinas, said in a statement “I am trilled to be nominated for the position of Vice-President for Protecting Our European Way of Life.”
“From better protecting our citizens and borders and modernising our asylum system, to investing in Europeans’ skills and creating brighter future for our youth, I am confident that we can take great strides over the next five years to both protect and empower Europeans.”
If the British Labour Party returns to power, it plans to seize some £300 billion (about $370 billion) of shares in some of the nation’s largest companies and turn them over to workers, according to the Financial Times. The party’s plans for “inclusive ownership funds” would force every company with more than 250 employees to transfer 10 percent of its shares to workers over 10 years. Those workers would get up to £500 (about $615) each year in dividends from those shares. Any income above that would be kept by the government.
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Thanks to negative interest rates, Germans’ interest income has plunged towards zero.
Counterproductive Interest Rate Policy
Eric Dor, Director of Economic Studies at the IESEG School of Management in Paris emailed an article with some interesting charts regarding the Counterproductive Interest Rate Policy of the ECB.
What follows is a guest post by Dor, with my comments at the end. I added or changed some subtitles.
Collapse of Interest Income in Germany
The extremely accommodating monetary policy of the ECB has had huge redistributive consequences. The disposable income of savers has been hit by the collapse of the average return on their accumulated wealth invested in interest products. Low interest rates have benefited borrowers. By boosting asset prices, the decline of interest rates has also favoured the small segment of wealthy households who own securities, potentially increasing inequality.
ECB Monetary Policy
The ECB has used various instruments to push down market and bank interest rates in the euro area. The instruments used by the ECB are its traditional key interest rates, hereafter summarized by the deposit facility interest rate, recent unconventional tools like massive asset purchases known as QE, and forward guidance about the expected path of its policy. All these instruments have a decisive impact on market short term and long term interest rates, as shown on the following chart.
Money Lost and Gained
It is interesting to compute what German savers have lost by comparing their effective interest income to a hypothetical situation where they would have remained at their level of 2012. It is easily computed by adding up the difference between effective gross interest income and their level of 2012.
The monetary policy conducted after 2012 has implied a cumulative loss of gross interest income of euro 158 billion for German households until 2019.
Of course, the monetary policy has benefited German borrowing households. After 2012 and until 2019, German borrowing households “saved” a cumulative 99 billion of interest expenses. It is computed by adding up, for all the years after 2012, the difference between effective interest expenses and their initial level.
The net result is a loss of euro 58 billion to German households.
Counterproductive Policy
The ECB has been engineering an overall decrease of interest rates hoping that cheap credit opportunities would lead households and companies to increase their spending. The problem is that this policy may lead to the opposite result, if households decide to offset declining returns on savings by saving more.
Evidence shows that it is what happens in Germany. The saving rate of households has been continuously increasing since 2014.
German Savings Rate
Banks Harmed
Low or negative interest rates are also decreasing the net interest income of banks. It threatens their profitability perhaps decreasing their supply of loans to the private sector.
Rome Needs “A Little Bit More Time” To Reduce Italy’s Debt, Conte Tells Brussels
In his first comments to Brussels since being sworn in to his second act as prime minister, Italy’s Giuseppe Conte, who is now leading a coalition of the Democratic Party and the anti-establishment Five-Star Movement, told the incoming president of the European Commission that Italy would need “a little bit of time” to cut its debt.
According to the FT, Conte told Urusla von der Leyen, the incoming head of the commission, that Italy wouldn’t “risk financial stability” – i.e., risk triggering another bond-market-rattling showdown with Brussels by insisting on blowing out its federal budget deficit – but that the country would need to make investments that set it back on the path toward economic growth.
“We must make investments that allow us to direct growth towards greater employment, and we want to make a transparent pact with the EU on what is our programme,” Mr Conte said. “Our objective is the reduction of debt,” he said. “We are not saying that we do not want our accounts in order, but we want to do it through a reasonable growth and productive investments.”
There’s a chance that Brussels might prove more receptive this time around (last year, the showdown between the anti-establishment coalition and Brussels reignited speculation about the possibility that Italy might leave the euro). Brussels eventually caved and allowed Italy to pursue a number close to its original request of around 2% of GDP. Though it was later revealed that the country’s estimates were way off, and that its budget deficit would like be much larger than anticipated.
Conte and outgoing European Commission President Jean-Claude Juncker
For one, the new coalition has already been rattled by internal conflict that has prompted some analysts to speculate about a possible election later this year.
But Conte’s relationships with several key figures in Brussels should help negotiations go more smoothly.
Expectations that public spending negotiations between Rome and Brussels will be smoother this autumn – when the Italian budget for next year is drawn up – were boosted by the appointment of Roberto Gualtieri, a veteran member of the European Parliament, as Italy’s new economy minister. Another Italian, Paolo Gentiloni, a former prime minister and foreign minister, was this week nominated as Brussels’ new European Commissioner for the economy by Ms von der Leyen.
Last year, Italy’s ruling coalition was threatened with sanctions by the commission. But with Germany reportedly considering a “shadow budget” – fiscal stimulus that many analysts believe would help right-size the European economy, it’s likely that the Commission won’t risk doing anything that could further destabilize the bloc’s third-largest economy.
When Soviet president Mikhail Gorbachev received his peace prize in 1990, the Nobel Prize committee declared that “the two mighty power blocs, have managed to abandon their life-threatening confrontation” and confidently expressed that “It is our hope that we are now celebrating the end of the Cold War.” Recently, U.N. General Secretary António Guterres funereally closed the celebrations with the realization that “The Cold War is back.”
In a very short span of history, the window that had finally opened for Russia and the United States to build a new international system in which they work cooperatively to address areas of common interest had slammed back closed. How was that historic opportunity wasted? Why was the road from the Nobel committee’s hope to the UN’s eulogy such a short one?
The doctrinal narrative that is told in the U.S. is the narrative of a very short road whose every turn was signposted by Russian lies, betrayal, deception and aggression. The American telling of history is a tale in which every blow to the new peace was a Russian blow. The fact checked version offers a demythologized history that is unrecognizably different. The demythologized version is also a history of lies, betrayal, deception and aggression, but the liar, the aggressor, is not primarily Russia, but America. It is the history of a promise so historically broken that it laid the foundation of a new cold war.
But it was not the first promise the United States broke: it was not even the first promise they broke in the new cold war.
The Hot War
Most histories of the cold war begin at the dawn of the post World War II period. But the history of U.S-U.S.S.R. animosity starts long before that: it starts as soon as possible, and it was hot long before it turned cold.
The label “Red Scare” first appeared, not in the 1940s or 50s, but in 1919. Though it is a chapter seldom included in the history of American-Russian relations, America actively and aggressively intervened in the Russian civil war in an attempt to push the Communists back down. The United States cooperated with anti-Bolshevik forces: by mid 1918, President Woodrow Wilson had sent 13,000 American troops to Soviet soil. They would remain there for two years, killing and injuring thousands. Russian Premier Nikita Khrushchev would later remind America of “the time you sent your troops to quell the revolution.” Churchill would record for history the admission that the West “shot Soviet Russians on sight,” that they were “invaders on Russian soil,” that “[t]hey armed the enemies of the Soviet government,” that “[t]hey blockaded its ports, and sunk its battleships. They earnestly desired and schemed for its downfall.”
When the cause was lost, and the Bolsheviks secured power, most western countries refused to recognize the communist government. However, realism prevailed, and within a few short years, by the mid 1920s, most countries had recognized the communist government and restored diplomatic relations. All but the US It was not until several years later that Franklin D. Roosevelt finally recognized the Soviet government in 1933.
The Cold War
It would be a very short time before the diplomatic relations that followed the hot war would be followed by a cold war. It might even be possible to pin the beginning of the cold war down to a specific date. On April 22 and 23, President Truman told Soviet foreign minister Vyacheslav Molotov to “Carry out his agreement” and establish a new, free, independent government in Poland as promised at Yalta. Molotov was stunned. He was stunned because it was not he that was breaking the agreement because that was not what Roosevelt, Churchill and Stalin had agreed to at Yalta. The final wording of the Yalta agreement never mentioned replacing Soviet control of Poland.
The agreement that Roosevelt revealed to congress and shared with the world – the one that still dominates the textbook accounts and the media stories – is not the one he secretly shook on with Stalin. Roosevelt lied to congress and the American people. Then he lied to Stalin.
In exchange for Soviet support for the creation of the United Nations, Roosevelt secretly agreed to Soviet predominance in Poland and Eastern Europe. The cold war story that the Soviet Union marched into Eastern Europe and stole it for itself is a lie: Roosevelt handed it to them.
So did Churchill. If Roosevelt’s motivation was getting the UN, Churchill’s was getting Greece. Fearing that the Soviet Union would invade India and the oil fields of Iran, Churchill saw Greece as the geographical roadblock and determined to hold on to it at all cost. The cost, it turned out, was Romania. Churchill would give Stalin Romania to protect his borders; Stalin would give Churchill Greece to protect his empire’s borders. The deal was sealed on October 9, 1944.
Churchill says that in their secret meeting, he asked Stalin, “how would it do for you to have ninety percent predominance in Romania, for us to have ninety percent predominance in Greece? . . .” He then went on to offer a fifty-fifty power split in in Yugoslavia and Hungary and to offer the Soviets seventy-five percent control of Bulgaria. The exact conversation may never have happened, according to the political record, but Churchill’s account captures the spirit and certainly captures the secret agreement.
Contrary to the official narrative, Stalin never betrayed the west and stole Eastern Europe: Poland, Romania and the rest were given to him in secret. Then Roosevelt lied to congress and to the world.
That American lie raised the curtain on the cold war.
The New Cold War
Like the Cold War, the new cold war was triggered by an American lie. It was a lie so duplicitous, so all encompassing, that it would lead many Russians to see the agreement that ended the cold war as a devastating and humiliating deception that was really intended to clear the way for the US to surround and finally defeat the Soviet Union. It was a lie that tilled the soil for all future “Russian aggression.”
At the close of the cold war, at a meeting held on February 9, 1990, George H.W. Bush’s Secretary of State, James Baker, promised Gorbachev that if NATO got Germany and Russia pulled its troops out of East Germany, NATO would not expand east of Germany and engulf the former Soviet states. Gorbachev records in his memoirs that he agreed to Baker’s terms “with the guarantee that NATO jurisdiction or troops would not extend east of the current line.” In Super-power Illusions, Jack F. Matlock Jr., who was the American ambassador to Russia at the time and was present at the meeting, confirms Gorbachev’s account, saying that it “coincides with my notes of the conversation except that mine indicate that Baker added “not one inch.” Matlock adds that Gorbachev was assured that NATO would not move into Eastern Europe as the Warsaw Pact moved out, that “the understanding at Malta [was] that the United States would not ‘take advantage’ of a Soviet military withdrawal from Eastern Europe.” At the February 9 meeting, Baker assured Gorbachev that “neither the President or I intend to extract any unilateral advantages from the processes that are taking place.”
But the promise was not made just once, and it was not made just by the United States. The promise was made on two consecutive days: first by the Americans and then by West German Chancellor Helmut Kohl. According to West German foreign ministry documents, on February 10, 1990, the day after James Baker’s promise, West German Foreign Minister Hans-Dietrich Genscher told his Soviet counterpart Eduard Shevardnadze “‘For us . . . one thing is certain: NATO will not expand to the east.’ And because the conversation revolved mainly around East Germany, Genscher added explicitly: ‘As far as the non-expansion of NATO is concerned, this also applies in general.’”
A few days earlier, on January 31, 1990, Genscher had said in a major speech that there would not be “an expansion of NATO territory to the east, in other words, closer to the borders of the Soviet Union.”
Gorbachev says the promise was made not to expand NATO “as much as a thumb’s width further to the east.” Putin also says mourns the broken promise, asking at a conference in Munich in February 2007, “What happened to the assurances our Western partners made after the dissolution of the Warsaw Pact? Where are those declarations today? No one even remembers them.”
Putin went on to remind his audience of the assurances by pointing out that the existence of the NATO promise is not just the perception of him and Gorbachev. It was also the view of the NATO General Secretary at the time: “But I will allow myself to remind this audience what was said. I would like to quote the speech of NATO General Secretary Mr. [Manfred] Woerner in Brussels on 17 May 1990. He said at the time that: ‘The fact that we are ready not to place a NATO army outside of German territory gives the Soviet Union a firm security guarantee.’ Where are those guarantees?”
Recent scholarship supports the Russian version of the story. Russian expert and Professor of Russian and European Politics at the University of Kent, Richard Sakwa says that “[r]ecent studies demonstrate that the commitment not to enlarge NATO covered the whole former Soviet bloc and not just East Germany.” And Stephen Cohen, Professor Emeritus of Politics at Princeton University and of Russian Studies and History at New York University, adds that the National Security Archive has now published the actual documents detailing what Gorbachev was promised. Published on December 12, 2017, the documents finally, and authoritatively, reveal that “The truth, and the promises broken, are much more expansive than previously known: all of the Western powers involved – the US, the UK, France, Germany itself – made the same promise to Gorbachev on multiple occasions and in various emphatic ways.”
That key promise made to Gorbachev was shattered, first by President Clinton and then subsequently supported by every American President: NATO engulfed Poland, Hungary and the Czech Republic in 1999; Estonia, Latvia, Lithuania, Bulgaria, Romania, Slovakia and Slovenia in 2004, Albania and Croatia in 2009 and, most recently, Montenegro.
It was this shattered promise, this primal betrayal, this NATO expansion to Russia’s borders that created the conditions and causes of future conflicts and aggressions. When, in 2008, NATO promised Georgia and Ukraine eventual membership, Russia saw the threat of NATO encroaching right to its borders. It is in Georgia and Ukraine that Russia felt it had to draw the line with NATO encroachment into its core sphere of influence. Sakwa says that the war in Georgia was “the first war to stop NATO enlargement; Ukraine was the second.” What are often cited as acts of Russian aggression that helped maintain the new cold war are properly understood as acts of Russian defense against US aggression that made a lie out of the promise that ended the Cold War.
When Clinton decided to break Bush’s promise and betray Russia, George Kennen, father of the containment policy, warned that NATO expansion would be “the most fateful error of American foreign policy in the entire post-cold-war era.” “Such a decision,” he prophesied, “may be expected to . . . restore the atmosphere of the cold war in East-West relations . . ..”
The broken promise restored the cold war. Though it is the most significant root of the new cold war, it was not the first. There was a prior broken promise, and this time the man who betrayed Russia was President H.W. Bush.
The end of the Cold War resulted from negotiations and not from any sort of military victory. Stephen Cohen says that “Presidents Reagan and George H.W. Bush negotiated with the last Soviet Russian leader, Mikhail Gorbachev, what they said was the end of the Cold War on the shared, expressed premise that it was ending ‘with no losers, only winners.’”
The end of the Cold War and the end of the Soviet Union occurred so closely chronologically that it permitted the American mythologizers to conflate them in the public imagination and create the doctrinal history in which the US defeat of the Soviet Union ended the cold war. But the US did not defeat the Soviet Union. Gorbachev brought about what Sakwa calls a “self-willed disintegration of the Soviet bloc.” The Soviet Union came to an end, not by external force or pressure, but out of Gorbachev’s recognition of the Soviet Union’s own self interest. Matlock flatly states that “pressure from governments outside the Soviet Union, whether from America or Europe or anywhere else, had nothing to do with [the Soviet collapse].” “Cohen demythologizes the history by reinstating the chronological order: Gorbachev negotiated the end of the cold war “well before the disintegration of the Soviet Union.” The Cold War officially ended well before the end of the Soviet Union with Gorbachev’s December 7, 1988 address to the UN
Matlock says that “Gorbachev is right when he says that we all won the Cold War.” He says that President Reagan would write in his notes, “Let there be no talk of winners and losers.” When Gorbachev compelled the countries of the Warsaw Pact to adopt reforms like his perestroika in the Soviet Union and warmed them that the Soviet army would no longer be there to keep their communist regimes in power, Matlock points out in Superpower Illusions that “Bush assured Gorbachev that the United States would not claim victory if the Eastern Europeans were allowed to replace the Communist regimes that had been imposed on them.” Both the reality and the promise were that there was no winner of the Cold War: it was a negotiated peace that was in the interest of both countries.
When in 1992, during his losing re-election campaign, President Bush arrogantly boasted that “We won the Cold War!” he broke his own promise to Gorbachev and helped plant the roots of the new cold war. “In psychological and political terms,” Matlock says, “President Bush planted a landmine under the future U.S.-Russian relationship” when he broke his promise and made that claim.
Bush’s broken promise had two significant effects. Psychologically, it created the appearance in the Russian psyche that Gorbachev had been tricked by America: it eroded trust in America and in the new peace. Politically, it created in the American psyche the false idea that Russia was a defeated country whose sphere of interest did not need to be considered. Both these perceptions contributed to the new cold war.
Not only was the broken promise of NATO expansion not the first broken American promise, it was also not the last. In 1997, when President Clinton made the decision to expand NATO much more than an inch to the east, he at least signed the Russia-NATO Founding Act, which explicitly promised that as NATO expanded east, there would be no “permanent stationing of substantial combat forces.” This obliterated American promise planted the third root of the new cold war.
Since that third promise, NATO has, in the words of Stephen Cohen, built up its “permanent land, sea and air power near Russian territory, along with missile-defense installations.” US and NATO weapons and troops have butted right up against Russia’s borders, while anti-missile installations have surrounded it, leading to the feeling of betrayal in Russia and the fear of aggression. Among the earliest moves of the Trump administration were the moving of NATO troops into Lithuania, Romania, Bulgaria and nearby Norway.
Mikhail Gorbachev, who offered the West Russia and cooperation in place of the Soviet Union and Cold War, was rewarded with lies, broken promises and betrayal. That was the sowing of the first seeds of the new cold war. The second planting happened during the Yeltsin years that followed. During this stage, the Russian people were betrayed because their hopes for democracy and for an economic system compatible with the West were both destroyed by American intervention.
The goal, Matlock too gently explains, “had to be a shift of the bulk of the economy to private ownership.” What transpired was what Naomi Klein called in The Shock Doctrine “one of the greatest crimes committed against a democracy in modern history.” The States allowed no gradual transition. Matlock says the “Western experts advised a clean break with the past and a transition to private ownership without delay.” But there was no legitimate private capital coming out of the communist system, so there was no private money with which to privatize. So, there was only one place for the money to come. As Matlock explains, the urgent transition allowed “privileged insiders[to] join the criminals who had been running a black market [and to] steal what they could, as fast as they could.” The sudden, uncompromising transition imposed on Russia by the United States enabled, according to Cohen, “a small group of Kremlin-connected oligarchs to plunder Russia’s richest assets and abet the plunging of some two-thirds of its people into poverty and misery.”
The rape of Russia was funded, overseen and ordered by the United States and handed over by President George H.W. Bush to the International Monetary Fund and the World Bank. Much of their advice, Matlock says generously, “was not only useless, but sometimes actually damaging.”
Sometimes damaging? In the first year, millions lost their entire life savings. Subsidy cuts meant that many Russians didn’t get paid at all. Klein says that by 1992, Russians were consuming 40% less than they were the year before, and one third of them had suddenly sunk below the poverty line. The economic policies wrestled onto Russia by the US and the transition experts and international development experts it funded and sent over led to, what Cohen calls, “the near ruination of Russia.” Russia’s reward for ending the Cold War and joining the Western economic community was, in Cohen’s words, “the worst economic depression in peacetime, the disintegration of the highly professionalized Soviet middle class, mass poverty, plunging life expectancy [for men, it had fallen below sixty], the fostering of an oligarchic financial elite, the plundering of Russia’s wealth, and more.” By the time Putin came to power in 2000, Cohen says, “some 75% of Russians were living in poverty.” 75%! Millions and millions of Russian lives were destroyed by the American welcoming of Russia into the global economic community.
But before Putin came to power, there was more Boris Yeltsin. Yeltsin was a necessity for Clinton and the United States because Yeltsin was the pliable puppet who would continue to enforce the cruel economic transition. But to continue the interference in, and betrayal of, the Russian people economically, it would now be necessary to interfere in and betray the Russian democracy.
In late 1991, after the fall of the Soviet Union, Boris Yeltsin won a year of special powers from the Russian Parliament: for one year, he was to be, in effect, the dictator of Russia to facilitate the midwifery of the birth of a democratic Russia. In March of 1992, under pressure from the, by now, impoverished, devastated and discontented population, parliament repealed the dictatorial powers it had granted him. Yeltsin responded by declaring a state of emergency, re-bestowing upon himself the repealed dictatorial powers. Russia’s Constitutional Court ruled that Yeltsin was acting outside the constitution. But the US sided – against the Russian people and against the Russian Constitutional Court – with Yeltsin.
Intoxicated with American support, Yeltsin dissolved the parliament that had rescinded his powers and abolished the constitution of which he was in violation. In a 636-2 vote, the Russian parliament impeached Yeltsin. But, President Clinton again sided with Yeltsin against the Russian people and the Russian law, backed him and gave him $2.5 billion in aid. Clinton was blocking the Russian people’s choice of leaders.
Yeltsin took the money and sent police officers and elite paratroopers to surround the parliament building. Clinton “praised the Russian President has (sic) having done ‘quite well’ in managing the standoff with the Russian Parliament,” as The New York Timesreported at the time. Clinton added that he thought “the United States and the free world ought to hang in there” with their support of Yeltsin against his people, their constitution and their courts, and judged Yeltsin to be “on the right side of history.”
On the right side of history and armed with machine guns and tanks, in October 1993, Yeltsin’s troops opened fire on the crowd of protesters, killing about 100 people before setting the Russian parliament building on fire. By the time the day was over, Yeltsin’s troops had killed approximately 500 people and wounded nearly 1,000. Still, Clinton stood with Yeltsin. He provided ludicrous cover for Yeltsin’s massacre, claiming that “I don’t see that he had any choice…. If such a thing happened in the United States, you would have expected me to take tough action against it.” Clinton’s Secretary of State, Warren Christopher, said that the US supported Yeltsin’s suspension of parliament in these “extraordinary times.”
In 1996, elections were looming, and America’s hegemonic dreams still needed Yeltsin in power. But it wasn’t going to happen without help. Yeltsin’s popularity was nonexistent, and his approval rating was at about 6%. According to Cohen, Clinton’s interference in Russian politics, his “crusade” to “reform Russia,” had by now become official policy. And so, America boldly interfered directly in Russian elections. Three American political consultants, receiving “direct assistance from Bill Clinton’s White House,” secretly ran Yeltsin’s reelection campaign. As Time magazine broke the story, “For four months, a group of American political consultants clandestinely participated in guiding Yeltsin’s campaign.”
“Funded by the US government,” Cohen reports, Americans “gave money to favored Russian politicians, instructed ministers, drafted legislation and presidential decrees, underwrote textbooks, and served at Yeltsin’s reelection headquarters in 1996.”
More incriminating still is that Richard Dresner, one of the three American consultants, maintained a direct line to Clinton’s Chief Strategist, Dick Morris. According to reporting by Sean Guillory, in his book, Behind the Oval Office, Morris says that, with Clinton’s approval, he received weekly briefings from Dresner that he would give to Clinton. Based on those briefings, Clinton would then provide recommendations to Dresner through Morris.
The US not only helped run Yeltsin’s campaign, they helped pay for it. The US backed a $10.2 billion International Monetary Fund (IMF) loan for Russia, the second-biggest loan the IMF had ever given. The New York Timesreported that the loan was “expected to be helpful to President Boris N. Yeltsin in the presidential election in June.” The Times explained that the loan was “a vote of confidence” for Yeltsin who “has been lagging well behind … in opinion polls” and added that the US Treasury Secretary “welcomed the fund’s decision.”
Yeltsin won the election by 13%, and Time magazine’s cover declared: “Yanks to the rescue: The secret story of how American advisers helped Yeltsin win”. Cohen reports that the US ambassador to Russia boasted that “without our leadership … we would see a considerably different Russia today.” That’s a confession of election interference.
Asserting its right as the unipolar victor of a Cold War it never won, betraying the central promise of the negotiated end of the cold war by engulfing Russia’s neighbors, arming those nations against its written and signed word and stealing all Russian hope in capitalism and democracy by kidnapping and torturing Russian capitalism and democracy, the roots of the new cold war were not planted by Russian lies and aggression, as the doctrinal Western version teaches, but by the American lies and aggression that the fact checked, demythologized version of history reveals.
