Fears of a million layoffs a month in corporate America

As many as a million American jobs could be lost every month by next spring as businesses struggle to raise capital in financial markets consumed by fear, according to a new analysis.

November was the worst month in the US labour market since the oil crisis of 1974, as more than 500,000 US workers were laid off, according to official figures released on Friday.

But Graham Turner, of consultancy GFC Economics, says the rising cost of corporate debt is now flashing a red warning signal that far worse is to come over the next few months and job losses are heading for levels last seen in the 1930s Great Depression.

Corporate bond yields have rocketed since the credit crisis began as investors flee risky assets in search of safe havens such as US Treasuries. That effectively means many firms are being forced to pay eye-watering interest rates to borrow funds.

Turner says when the gap between the yield on high-risk company bonds and US Treasuries widens sharply, unemployment tends to shoot up - and current credit conditions are pointing to a doubling in the pace of layoffs, to more than a million workers a month, by spring.

'The correlation is holding up all too well,' he said. 'It's very disconcerting.' He added that the pace of layoffs already happening in the US 'is indicative of panic'. During the 1970s oil crisis the panic was relatively short-lived, he says. 'But the worry now is that this will just roll on and on.'

On Friday alone, embattled car firm General Motors, fund manager Legg Mason, and motor parts supplier Gentex announced plans to shed staff.

November's jobs figures were so much worse than analysts had expected that the Dow Jones share index actually rallied by 259 points, more than 3 per cent, as investors bet that Washington would have to launch a major new rescue package for the economy even before President-elect Barack Obama takes over the White House in January.

The scale of the layoffs in the US, which pushed unemployment to 6.7 per cent, could also point towards a further deterioration in conditions in the UK: David Blanchflower, an independent member of the Bank of England's Monetary Policy Committee and labour market specialist, warned recently: 'What happens in the US tends to be repeated six to nine months later in Britain'.

David Frost, director-general of the British Chambers of Commerce, believes Britain's companies are gearing up for large-scale layoffs.

'There will be a huge raft of redundancies. I am sensing that talking to firms. The worry is that next year the job losses will be just horrendous. All sectors are taking the hit. In the middle of the year it was construction and estate agencies. Now it is services, the automotive industry, retailers. Firms are waiting for Christmas and if they can't see any improvement they will cut their payrolls.'

Woolworths administrators made 450 of its office staff redundant on Friday, but the future of the 25,000 staff who work in its stores remains uncertain.

Wall Street: It's payback time

An angry mob of investors and taxpayers is assembling, and they want to see some executives' heads on pikes. The question for the courts will be, Who was just foolish with our money - and who was lying, cheating, and stealing?

By Roger Parloff, senior editor

January 6, 2009: 9:15 AM ET

(Fortune Magazine) -- In today's dire financial climate, what exactly should a CEO say when it's time to hold that quarterly earnings call with analysts and the media?

On the one hand, he could try refreshing candor and say, "Look, let's be honest. This sucker could go down." The problem with this approach is that it tends to ensure that the company will indeed go down - that afternoon. The stock price will plummet, lenders will call in their loans, banks and customers will freeze the company out, credit agencies will downgrade it, and soon our commendably honest CEO will notice a half-dozen satellite television trucks - those modern-day vultures - double-parked outside the lobby.

Or there's Plan B. The executive could exude confidence and willfully paint a disingenuously rosy picture featuring lots of gilded lilies. The problem with this tack is that, while it might get the company through a rough patch, the executive is certainly committing civil fraud, and if the company crashes and burns anyway, he may also go to prison.

It's no defense for an executive who bends the truth to say that he did so only to prevent a run-on-the-bank-type situation, says one criminal-defense lawyer. (The lawyer requests anonymity because in this climate, he notes, such an on-the-record statement might lose him some business opportunities.) Even if the executive thinks that short-sellers are spreading lies about his company, he can't respond in kind. If he does, this lawyer says, "he's betting the farm. He's betting his life."

Today's crisis has placed under the forensic microscope scores of reassuring assertions made by CEOs and CFOs during earnings calls or "investor day" gatherings or breezy, on-camera flirtations with Maria Bartiromo that have proved, sometimes within hours, breathtakingly off the mark. Were the officials honestly relying on flawed business models - or lying through their teeth?

It's not just the Securities and Exchange Commission, New York State attorney general Andrew Cuomo, and hordes of civil plaintiffs lawyers who want to find out. According to understated disclosures in SEC filings or newspaper reports, federal criminal prosecutors in Manhattan, Brooklyn, Newark, Los Angeles, San Francisco, Seattle, and Alexandria, Va., are all poring over e-mails and other records right now trying to answer that question in regard to high-level officers at such formerly blue-chip companies as Lehman Brothers, AIG, Washington Mutual, Countrywide Financial, Fannie Mae, and Freddie Mac.

To be clear, we're not talking here about sensational, not conceivably legal, out-and-out Ponzi schemes, like the $50 billion one that former Nasdaq chairman Bernard L. Madoff has been arrested for, or brazen forgery and criminal impersonation, like the $100 million spree that glitzy New York litigator Marc S . Dreier has been accused of. Crimes like those typically have only one of two defenses: (a) "It wasn't me," or (b) "Okay, it was me, but I was sleepwalking on Ambien at the time." This article is, rather, about an entirely different category of accusation. The probes being discussed here concern statements that ultimately proved incorrect, but which reasonable, straight-faced people can, and vigorously do, contend were honest when made.

The level of fury surrounding these inquiries is of a different order from what we saw with, say, the backdating scandals or the Enron and WorldCom failures. Today's credit collapse has already vaporized about $9 trillion in investment capital, while ripping another trillion in assorted bailout money from the pockets of enraged taxpayers - also sometimes known as "jurors."

So there's an angry mob with pitchforks assembling, and they want to see some heads on pikes. While former Enron CEO Jeff Skilling could at least try to have his case transferred out of Enron-devastated Houston, the credit-crisis targets will have no such card to play. This time the corporate shenanigans have wrecked the globe. "This is the ugliest enforcement environment I've ever seen in my professional career," says one criminal- defense lawyer, who also asks for anonymity.

"People are hot," observes John Dowd, who heads the white-collar unit of Akin Gump Strauss Hauer & Feld. "It can get toxic pretty quickly."

People have a right to be angry, but anger is not the best frame of mind in which to mete out due process. Here, the process that is due requires distinguishing foolish mistakes from lies and fraud - a line that can get surprisingly fine. To the chagrin of John Q. Public, there will be serious defenses in most of these cases.

To begin with, bad business models - even business models that in retrospect look like prescriptions for disaster - are not crimes as long as they are fully disclosed to investors. And the fact that lenders were hawking outlandishly risky mortgages to people who were terrible credit risks was, in fact, no secret in America: It was bipartisan national policy. The fact that exotic mortgages (like "pick a payment option" AR Ms and "Alt-A" loans with no documentation of the buyer's assets or income) were then being packaged into complex derivative securities - some rated AAA by Moody's, S &P, and Fitch - was not just well known but also hailed as ingenious by some of the putatively best financial minds in the country.

If CEOs did not foresee the imminent train wreck that, looking back, seems so inevitable, neither did former Federal Reserve chairman and erstwhile "maestro" Alan Greenspan, who has recently, if self-servingly, termed our predicament a "once-in-a-century credit tsunami."

Accordingly, Carl "Chip" Loewenson Jr., cohead of Morrison & Foerster's white-collar defense unit in New York City, sees an impending collision of two powerful opposing forces. "No one - not Fannie, not Freddie, not Lehman, not AIG, not [SEC chairman Christopher] Cox, not [Federal Reserve chairman Ben] Bernanke - thought it would get as bad as it has gotten," he says. "This weighs against proving criminal intent.

"On the other hand," Loewenson continues, "there is a long populist tradition in our country that insists on finding villains in any economic downturn."

The job of the prosecutors is not to ferret out the root causes of what went wrong with the economy. That's a task for historians. The prosecutors are to look for unambiguous, intentional wrongdoing - and since a lay jury will be the official scorer here, the simpler the wrongdoing, the better. While it might be true, for instance, that investors were misled by the way companies handled mark-to-market accounting of derivatives, a prosecutor who makes that the centerpiece of his case will end up with a swearing contest between opposing accounting experts - a morass in front of a jury.

Investors dump $89B in U.S. securities in historic fire sale

By David J. Lynch, USA TODAY

The deep river of private money that helped knit together the global economy has abruptly dried up, new government figures show.

As the global financial crisis grew more severe this summer, foreigners sold almost $90 billion of U.S. securities — the greatest quarterly fire sale by overseas investors since the government began keeping track in 1960. U.S. investors also are retrenching; they unloaded about $85 billion worth of foreign holdings in the quarter, says the Commerce Department's Bureau of Economic Analysis.

"We've had a global panic. Everyone is pulling their money home," says economist Adam Posen of the Peterson Institute in Washington, D.C.

That's bad for economic growth in the U.S. because it threatens to starve capital-hungry companies and entrepreneurs. But it's especially serious for emerging-market countries that rely heavily on outside financing. Capital flows into countries such as South Korea, Turkey and Brazil were evaporating even before the mid-September Lehman Bros. bankruptcy made things worse.

The reversal of private capital flows signals an abrupt end to a nearly two-decades-long era of financial globalization, says economist Brad Setser of the Council on Foreign Relations. Private flows into and out of the U.S. for purchases of stocks, corporate bonds and federal agency bonds have dropped from around 18% of economic output to near zero "in a remarkably short period of time," Setser says.

FIND MORE STORIES IN: Washington | South Korea | Brazil | Turkey | United States Commerce Department | Brookings Institution | Foreign Relations | Treasuries | Bureau of Economic Analysis | Peterson Institute | Adam Posen | Eswar Prasad | Brad Setser

The past five quarters — roughly since the August 2007 onset of the financial crisis — private foreign investors have been net sellers of U.S. securities. The turnabout represents a dramatic change from the first half of 2007 when foreign purchases of U.S. securities other than Treasuries averaged about $250 billion per quarter.

The past two quarters also have seen an about-face in cross-border bank flows as institutional investors found lenders unwilling to extend credit. In the first quarter of 2008, foreigners deposited more than $79 billion with U.S. banks. That flow reversed in the second quarter, as foreigners withdrew a staggering $256 billion, and the outflow continued in the third quarter with an additional $147 billion. Likewise, banks in the U.S. brought home more than $151 billion in the quarter, as overseas institutions repaid loans.

"Institutional investors, including banks, across the board are pulling their capital back home," says economist Eswar Prasad of the Brookings Institution.

One bright spot: Foreign central banks continue to spend heavily on U.S. government securities, allowing the U.S. to finance the gap between what it produces and consumes.

Formerly soaring global trade suddenly comes to a halt

By David J. Lynch, USA TODAY

The unstoppable force has stopped.

Enlarge

With economies in the United States, Europe and Japan slowing simultaneously, the World Bank says that global trade will shrink next year by more than 2%. That will mark the first time in more than a quarter century that the seemingly inexorable tide of globalization will be in retreat.

"Trade tends to be extra responsive to changes in income. When the world economy contracts, trade contracts even more rapidly," says economic historian Douglas Irwin of Dartmouth College.

The trade slump is both symptom and cause of the current global economic distress. For the U.S. economy, which just a few months ago was getting almost all of its forward momentum from net exports, "Trade will be a substantial drag on … growth," Ian Shepherdson, chief economist of High Frequency Economics, told clients in a recent research note.

Compounding the recessionary gloom, trade is being choked by the credit crunch, which is drying up routine export financing. Entering 2009, the open trading system that has delivered low-cost goods to American consumers while lifting tens of millions of people in developing countries out of poverty faces the danger of protectionism in countries such as China, Russia, France and, potentially, the U.S.

FIND MORE STORIES IN: United States | Europe | Japan | Russia | France | New York | China | Brazil | India | World Bank | Institute for Supply Management | Paris-based | High Frequency Economics | Celent | Axel Pierron | Economist Intelligence Unit | International Finance Corp | Hans Timmer

Trade's turnaround has been abrupt. As recently as 2006, global trade was surging at an annual rate of nearly 10%. This year, the total volume is still expected to grow more than 6% to about $14 trillion. But, with the Economist Intelligence Unit forecasting 29 national economies will shrink next year, demand will slump for products worldwide.

"Everything is down significantly, across the board in all sectors," says Peter Keller, president of the North American operations of NYK Line, a 123-year-old Japanese shipping company. "The trenches are ugly."

Until recently, trade was virtually the sole bright spot in the U.S. economy, with net exports responsible for most second-quarter growth. But the global slowdown is taking its toll. In October, U.S. goods exports fell for the third-consecutive month to $120.8 billion, almost 14% below July's level. And there are signs that new orders are melting amid the economic tumult.

Bright spot no more

After 70 consecutive months of expansion, the Institute for Supply Management export index released Dec. 1 showed falling orders in both November and October. A few weeks ago, Keller's ships were mostly full, thanks to orders placed months ago. Then, business tanked. Now there are mounting worries about retailers' plans for post-holiday orders. NYK announced last week that it would defer plans to purchase 60 ships as it seeks to trim capacity.

Trade's rise and fall can be traced on the Baltic Dry index, a measure of shipping demand. The index more than quadrupled from the end of 2005 through May of this year, reaching a high of 11,793 on May 20. Since then, as demand for container vessels and cargo ships evaporated, it has dropped an astonishing 94%.

It's not just slumping demand that explains traders' woes. Exporters are finding it difficult to obtain the letters of credit and insurance needed to ship goods between countries. "The subprime crisis has resulted in a liquidity crunch and, hence, bank finance for trade has decreased," said an October report from Celent, a financial consultancy.

Latin American exporters were the first to feel the chill, in September. In countries such as Brazil, companies found they couldn't obtain financing from New York banks that were feverishly reducing their credit exposure amid the worsening crisis.

Some of the affected trade even involved cases in which the International Finance Corp., the private sector arm of the World Bank, had signed contracts to provide the trade financing. The deals fell through because the money wasn't available from the U.S. banks, according to Hans Timmer, lead economist for the World Bank's global trends unit.

Since then, the problem has spread to other top emerging markets, such as India, according to the World Bank. Even companies in the U.S. and Europe shipping to customers in emerging markets face difficulties. Today's more volatile environment has prompted many companies to move away from so-called open-account or pay-on-delivery trade to the use of letters of credit, in which banks guarantee a customer's payment.

But even as demand for such bank guarantees has surged, the supply has been pinched by the overall credit crunch.

"Now even for corporations with long relationships, trust is not there anymore. … It's affecting almost everyone," says Axel Pierron, Paris-based senior vice president at Celent.

Long a financial backwater, trade finance is drawing increased attention from policymakers: The U.S. Treasury and the Chinese government agreed earlier this month to jointly make available $20 billion to facilitate their companies' sales to emerging markets. That move followed a $3 billion initiative announced last month by the International Finance Corp.

"There's been an aggressive intensification of the crisis over the past five or six weeks. Especially in emerging markets, credit is just drying up," says Harvard University's Kenneth Rogoff, former chief economist for the International Monetary Fund.

The frozen trade credit market is attracting new financial players, Pierron says. A handful of hedge funds, seeing prospects for attractive investment returns elsewhere vanishing, are considering getting involved in trade finance, he says.

Last month, at the Washington summit on financial markets and the world economy, leaders of the Group of 20 nations promised to refrain from erecting new barriers to trade or investment for the next 12 months. Left unsaid was what would happen in the 13th month. The last thing the already enfeebled global economy needs is a trade war.

Ebbing enthusiasm

Many industry representatives are apprehensive about the new year. With unemployment rising, the new Democratic-controlled Congress is expected to be less amenable to new trade agreements than was its predecessor. Public Citizen's Global Trade Watch says the ranks of trade liberalization opponents had a net gain of 28 votes in the House and six in the Senate, figures business community representatives, such as the National Foreign Trade Council, dispute.

Still, there is little argument over the fact that enthusiasm for further trade expansion along the lines of the agreements pursued by both parties in recent years is at low ebb. A trio of bilateral trade deals with Colombia, Panama and South Korea, continue to idle in Congress. And the Doha Round of global trade talks sputtered to a halt this month when WTO Director General Pascal Lamy opted not to convene a last-ditch negotiating session in Geneva.

The U.S. recession — the economy is shrinking in the fourth quarter by an estimated 4% to 6% — provides a potentially receptive environment for anti-trade measures. "As time goes on and the jobless rate goes up everywhere, we will see a growing trend toward protectionism," says Sung Won Sohn, an economist at California State University.

The Doha Round's failure also means countries will be free to impose tariffs that could shrink global trade volumes by $728 billion to $1.7 trillion, according to a new report by the International Food Policy Research Institute.

Countries typically apply lower tariffs than are permitted by the last global trade agreement, the Uruguay Round. They could legally increase them at any time.

Other arguments will come into play. Already one prominent U.S. economist, Dani Rodrik, has pointed out on his blog that the Obama administration's planned economic stimulus would pack a greater punch if the U.S. raised import tariffs to make sure the money is spent here and not on goods from abroad.

A $1 trillion shot of economic adrenaline, for example, would boost gross domestic product by $1.8 trillion, assuming consumers spent 20 cents of every dollar on imports. If tariffs, by raising the price of imported goods, encouraged them to buy only made-in-the-USA goods, the economic gains would rise to $2.8 trillion.

But Rodrik also says a coordinated international effort to stimulate spending would be a better option than raising tariffs, which would invite retaliation by other countries and risk a 1930s-style trade war.

What happened in the '80s

The last time the U.S. faced a severe recession, the early 1980s, it imposed import limits to protect the domestic auto, steel and textiles industries. Will a similar pattern unfold next year?

Not necessarily, Irwin says. The dollar was strong in the early '80s, so there was more pressure on domestic companies from foreign products. And U.S. manufacturers were not as globalized as they are today, with cross-border ownership stakes and supply chains that span the globe.

"Globalization has really defused a lot of protectionist pressures. Stopping trade at the border won't help as it did in the '80s," he said. "Things might be different this time."

Or they might not.

New year nightmare brings spectre of 1930s-style depression to eurozone

• David Gow in Brussels
• The Guardian, Thursday 1 January 2009

Riot police in Athens before Christmas. People were protesting about the death of a teenager, but underlying woes about jobs and the economy helped to fuel discontent. Photograph: Katerina Mavrona/EPA

Europeans, the young above all, greeted the deepest economic recession for half a century and an apparently bottomless financial crisis with riots from Athens to Kiev in late 2008. Manufacturing workers walked disconsolately out of car, tyre, steel, chemicals, plastics and cement plants that closed down behind them for two, three, even four weeks from Antwerp to Zaragoza.

Mainland Europe, which kidded itself in the autumn that it was immune from the worst excesses and subsequent heart failure of Anglo-Saxon capitalism, felt dark, depressed and downtrodden by Christmas. Only in the brightly lit street markets did shoppers, fuelled by mulled wine and strong euros in their wallets, delude themselves into short-lived festive celebrations.

If the eurozone and the rest of Europe ended 2008 on a fearful note, 2009 is shaping up to confirm the worst nightmares of the EU-27's 500 million citizens. The spectre of a 1930s-style depression is foremost in many people's minds. Analysts are forecasting an economic contraction of as much as 3% despite the likelihood of the European Central Bank (ECB) cutting interest rates close to zero during the year.

Unemployment could leap by millions this year and in 2010 as business leaders, their confidence at 15- to 30-year lows, shut down entire companies or several plants or offices. Consumer spending, buoyed up so far by pay increases and low inflation in some countries, will freeze in all likelihood.

Four decades after the Paris events of 1968 drove General de Gaulle to seek temporary refuge in Baden-Baden, fears have seeped into the souls of political leaders that students and others will confront the ruling order on the streets in a "hot" spring of protests.

Anxieties about mounting social and economic tensions are strongest in southern Europe where the recession, already under way, threatens to be longer and deeper. Long-delayed structural reforms have been put on ice.

They surfaced at the mid-December EU summit when Italy's Silvio Berlusconi and Spain's José Luis Rodriguez Zapatero voiced them to chairman Nicolas Sarkozy, the French president, who immediately put reform of the lycées on hold for at least a year. "When you have such an economic depression, such social despair, all it takes is a match," said Laurent Fabius, former socialist premier of France.

Apocalyptic

It makes for an apocalyptic background to the celebrations - probably muted privately, if over-hyped publicly - of the 10th anniversary of the euro today, when Slovakia becomes the 16th country to embrace the single currency. The ECB will from now set monetary policy, including borrowing costs, for 328 million Europeans.

The economic bloodbath of 2009, more than likely to be prolonged into 2010, will inevitably prompt eurosceptic politicians and analysts to warn of the impending implosion of the eurozone. Divergences, exacerbated by Germany's regained competitiveness and fiscal thrift, will become unsustainable, it will be argued. Most rational economists doubt this for political as well as economic reasons. But the EU's claim that the euro, an infant currency moving towards adulthood, has brought economic stability, low inflation, 16m new jobs, lower unemployment, reduced budget deficits, will be overturned by events. Germany, the eurozone's biggest economy, witnessed at year-end what Tom Mayer, Deutsche Bank chief European economist, calls a "competitive devaluation" of forecasts. Leading institutes pointed to a contraction of between 2 and 2.7% while the federal economics ministry admitted to a memo envisaging at worst a 3% downturn.

Unemployment, at a historic low, could grow by 1 million people by the end of 2010 as the country experiences the worst recession since the federal republic was founded in 1949. In France, the eurozone's second-largest economy, where youth unemployment, especially among immigrants, prompted the 2005 riots, recession has already taken hold.

So it has in Italy, Spain, Ireland and the Netherlands where Nout Wellink, ECB president, is now contemplating a 2% contraction before a partial recovery in 2010. Eastern Europe, which has enjoyed stellar growth since eight former communist states joined the EU in 2004, is being sucked into the vortex.

Spain, where new car sales plunged by half in November, is being forced by the collapse of its construction boom, which brought in 3.5 million migrant workers, to slap new restrictions on incomers. Ireland, Celtic Tiger turned Deflated Baboon, is reckoning with a 4% contraction and 10% unemployment.

Eurozone governments, which have committed more than €1tn (now about £1tn) to bail out banks and guarantee liabilities, seem flummoxed by their unwillingness to lend to the real economy and preference for earning interest by parking the money overnight with the ECB.

The result is that fiscal and monetary easing will continue this year. January will see the start of the general election campaign in Germany and a new stimulus package of between €40bn and €50bn after the sharp criticism of the earlier €12bn programme. Sarkozy will almost certainly increase his government's €26bn package soon. Both will continue to be focused on public works such as roads and schools and to eschew British-style boosts to consumer spending via cuts in VAT - Sarkozy is a late convert to German-style fiscal probity.

Mayer, who favours "temporary, targeted and timely" cuts in taxes, believes the €25bn cuts demanded by the German economy minister, Michael Glos, are politically off-limits. But he warns: "The trouble with infrastructure projects is the time it takes to implement them."

Howard Archer, of Global Insight, will revise his eurozone forecast in January to a 1.5% contraction. He says: "Germany is the one country where consumers have the money to spend and the government has the room to do a bigger stimulus. But ministers seem so far out of synch - even in denial."

Despite lingering doubts about the effectiveness of interest rates at near-zero as in the US, Japan and, coming soon, Britain, both forecast that the ECB will cut further. Archer sees a 0.5% cut in January and says: "I'm not certain they will bring them down to zero. The consensus is for 1.5% but the consensus is moving down all the time."

Doldrums

Mayer has pencilled in 0.75% as the ECB's bottom line. "They'll grind out cuts - not voluntarily but simply because they will be pushed down by the data; so far they have simply been overwhelmed by events." He argues that the tougher the ECB sounds on inflation and stability compared with the Fed, the stronger the euro will become and, with it, the worse the economic outlook will be. "A 10% appreciation is equivalent to a 1% rate increase," he says.

For Germany, world champion exporters, that threatens much of its manufacturing, already in the doldrums with the euro at $1.40. And the cry from its neighbours will get louder for measures to stimulate demand at home and in the rest of the EU.

Almost two decades after unification, Germany's political elite has been tempted to reverse the Kohl/Genscher motto of a "European Germany" for one of a "German Europe," refusing to bail out its partners and adding to the economic and social tensions along the way. But that should change this year.

German ECB hawks such as Jürgen Stark, its chief economist, worry that eurozone stability is threatened by fiscal "laxity". There may even be temptations to create a "hard currency" zone instead around a new Deutsche Mark. But Mayer, a native German, insists the economic and, above all, political costs will be too high to bear - especially in the knowledge that the economic nationalism of the 1930s brought that Great Depression.

As if Things Weren't Bad Enough, Russian Professor Predicts End of U.S.

By ANDREW OSBORN

MOSCOW -- For a decade, Russian academic Igor Panarin has been predicting the U.S. will fall apart in 2010. For most of that time, he admits, few took his argument -- that an economic and moral collapse will trigger a civil war and the eventual breakup of the U.S. -- very seriously. Now he's found an eager audience: Russian state media.

Igor Panarin

In recent weeks, he's been interviewed as much as twice a day about his predictions. "It's a record," says Prof. Panarin. "But I think the attention is going to grow even stronger."

Prof. Panarin, 50 years old, is not a fringe figure. A former KGB analyst, he is dean of the Russian Foreign Ministry's academy for future diplomats. He is invited to Kremlin receptions, lectures students, publishes books, and appears in the media as an expert on U.S.-Russia relations.

But it's his bleak forecast for the U.S. that is music to the ears of the Kremlin, which in recent years has blamed Washington for everything from instability in the Middle East to the global financial crisis. Mr. Panarin's views also fit neatly with the Kremlin's narrative that Russia is returning to its rightful place on the world stage after the weakness of the 1990s, when many feared that the country would go economically and politically bankrupt and break into separate territories.

A polite and cheerful man with a buzz cut, Mr. Panarin insists he does not dislike Americans. But he warns that the outlook for them is dire.

"There's a 55-45% chance right now that disintegration will occur," he says. "One could rejoice in that process," he adds, poker-faced. "But if we're talking reasonably, it's not the best scenario -- for Russia." Though Russia would become more powerful on the global stage, he says, its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.

Mr. Panarin posits, in brief, that mass immigration, economic decline, and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces -- with Alaska reverting to Russian control.

In addition to increasing coverage in state media, which are tightly controlled by the Kremlin, Mr. Panarin's ideas are now being widely discussed among local experts. He presented his theory at a recent roundtable discussion at the Foreign Ministry. The country's top international relations school has hosted him as a keynote speaker. During an appearance on the state TV channel Rossiya, the station cut between his comments and TV footage of lines at soup kitchens and crowds of homeless people in the U.S. The professor has also been featured on the Kremlin's English-language propaganda channel, Russia Today.

Mr. Panarin's apocalyptic vision "reflects a very pronounced degree of anti-Americanism in Russia today," says Vladimir Pozner, a prominent TV journalist in Russia. "It's much stronger than it was in the Soviet Union."

Mr. Pozner and other Russian commentators and experts on the U.S. dismiss Mr. Panarin's predictions. "Crazy ideas are not usually discussed by serious people," says Sergei Rogov, director of the government-run Institute for U.S. and Canadian Studies, who thinks Mr. Panarin's theories don't hold water.

Mr. Panarin's résumé includes many years in the Soviet KGB, an experience shared by other top Russian officials. His office, in downtown Moscow, shows his national pride, with pennants on the wall bearing the emblem of the FSB, the KGB's successor agency. It is also full of statuettes of eagles; a double-headed eagle was the symbol of czarist Russia.

The professor says he began his career in the KGB in 1976. In post-Soviet Russia, he got a doctorate in political science, studied U.S. economics, and worked for FAPSI, then the Russian equivalent of the U.S. National Security Agency. He says he did strategy forecasts for then-President Boris Yeltsin, adding that the details are "classified."

In September 1998, he attended a conference in Linz, Austria, devoted to information warfare, the use of data to get an edge over a rival. It was there, in front of 400 fellow delegates, that he first presented his theory about the collapse of the U.S. in 2010.

"When I pushed the button on my computer and the map of the United States disintegrated, hundreds of people cried out in surprise," he remembers. He says most in the audience were skeptical. "They didn't believe me."

At the end of the presentation, he says many delegates asked him to autograph copies of the map showing a dismembered U.S.

He based the forecast on classified data supplied to him by FAPSI analysts, he says. He predicts that economic, financial and demographic trends will provoke a political and social crisis in the U.S. When the going gets tough, he says, wealthier states will withhold funds from the federal government and effectively secede from the union. Social unrest up to and including a civil war will follow. The U.S. will then split along ethnic lines, and foreign powers will move in.

California will form the nucleus of what he calls "The Californian Republic," and will be part of China or under Chinese influence. Texas will be the heart of "The Texas Republic," a cluster of states that will go to Mexico or fall under Mexican influence. Washington, D.C., and New York will be part of an "Atlantic America" that may join the European Union. Canada will grab a group of Northern states Prof. Panarin calls "The Central North American Republic." Hawaii, he suggests, will be a protectorate of Japan or China, and Alaska will be subsumed into Russia.

"It would be reasonable for Russia to lay claim to Alaska; it was part of the Russian Empire for a long time." A framed satellite image of the Bering Strait that separates Alaska from Russia like a thread hangs from his office wall. "It's not there for no reason," he says with a sly grin.

Interest in his forecast revived this fall when he published an article in Izvestia, one of Russia's biggest national dailies. In it, he reiterated his theory, called U.S. foreign debt "a pyramid scheme," and predicted China and Russia would usurp Washington's role as a global financial regulator.

Americans hope President-elect Barack Obama "can work miracles," he wrote. "But when spring comes, it will be clear that there are no miracles."

The article prompted a question about the White House's reaction to Prof. Panarin's forecast at a December news conference. "I'll have to decline to comment," spokeswoman Dana Perino said amid much laughter.

For Prof. Panarin, Ms. Perino's response was significant. "The way the answer was phrased was an indication that my views are being listened to very carefully," he says.

The professor says he's convinced that people are taking his theory more seriously. People like him have forecast similar cataclysms before, he says, and been right. He cites French political scientist Emmanuel Todd. Mr. Todd is famous for having rightly forecast the demise of the Soviet Union -- 15 years beforehand. "When he forecast the collapse of the Soviet Union in 1976, people laughed at him," says Prof. Panarin.

Tom Whipple: "We are likely to have concrete examples, shortly, of what happens in the 21st century when civil order breaks down . . ."

The Peak Oil Crisis: Civil Unrest
Written by Tom Whipple
Wednesday, 31 December 2008 13:49

Before grappling with 2009, it might be useful to remind ourselves that there is a dark side to what lies ahead.

There was a little flurry in the news last week when it was discovered that the Army War College had released a report talking about preparing for civil unrest in the U.S. When you read the report, it turns out to be yet another warning about generals preparing for the last war. It devotes only three pages to the idea that the Army might soon find itself so embroiled in helping local authorities cope with civil unrest that international commitments, such as the war on terrorism, could become secondary concerns.

Since the close of the Civil War, America has enjoyed nearly 150 years of domestic tranquility. There were, of course the Indian wars, some labor disputes and a handful of urban riots in recent decades, but these were isolated and did not last for long. Even during the great depression of the 1930's America's social fabric stayed largely intact. Signs that these idyllic decades may be coming to close are starting to arise. In the last few weeks the deteriorating economic situation has seen serious disturbances in Greece and Thailand. We are beginning to read of disturbances in Russia and China.

Most realists foresee that 2009 will be a bad year with stock markets declining, unemployment rising, real estate values falling, government bailouts continuing, deflation morphing into inflation, the dollar falling, and oil prices rising. Thus far the economic downturn has not had a serious social impact. However, food banks are running short, shoplifting and other property crimes are on the rise, child neglect is increasing as is infant mortality. However, considering the pace at which people have been thrown out of work during the last year most seem to be getting by - so far.

Of all the world's nations, America is probably the worst prepared to deal with deep, prolonged economic hardships, for more of us have disconnected from 19th century, rural, somewhat self-sufficient, lifestyles than in most other countries. In the 1930's many found that they could still return to the family farm, where food, shelter, and meaningful work was available. In 2010 that option exists for very few; we have become dependent on a complex infrastructure fueled by oil for our food, water, clothing and warmth. Start reducing the flow of oil and increasing numbers of us are going to become increasingly desperate.

There are too many turns in the twisting paths that the current economic and oil depletion crises could take to speculate on the details of what is likely to happen. However, there are many potential "failed states" around that we are likely to have concrete examples, shortly, of what happens in the 21st century when civil order breaks down.

It is clear that we are already seeing the opening ripples of what might turn out to be the major social problem of the century - caring for large numbers of destitute people. Most of the social nets in America such as unemployment insurance, charities or shelters have strict time or limited resources. Already charity and religious contributions are starting to drop.

As the situation worsens, it is going to be much cheaper for governments at all levels to provide essential food, shelter and other services, rather than wait for desperate people to start stealing and become ensnared in the criminal justice system. One of the key benchmarks of the next few years is how quickly governments will redeploy resources away from 20th Century priorities such as space travel, expensive weapons systems, and highways towards simply getting people through the decades of transition from current lifestyles. The change will not be an easy one.

Before we get to mobs in the streets, we are likely to go through a time of increasing petty crime and the ensuing pressures on the criminal justice system. Somebody is going to have to think through the appropriate response to major increases in shoplifting and burglaries by people who are trying to feed children after having exhausted all other avenues of assistance.

It is likely that who is kept in prison and for what is going to have to be rethought. State and local revenues are already dropping rapidly and the day is not far away when choices between funding school systems and maintaining vast prison systems will need to be addressed. Alternative forms of deterring criminal behavior and forms of punishment will need to be devised. Indeed the economic situation could deteriorate so rapidly that some of these changes may need to be made in months rather than years.

It is likely that part of the of the solution to getting hundreds of millions through decades of shortages will involve increasing infringement on what many now consider their civil liberties. Better forms of personal identification will be necessary. It is likely that rationing of many things we take for granted such as fuel, food, medical services and travel and even places of residence may become necessary. Other societies have found such measures necessary in times of crisis.

America has not faced a serious domestic crisis for 150 years. We have never faced a situation where 300 million of us bound up in a complex and interdependent society has had to make major involuntary changes in our lifestyles.