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The Crime Money Bubble

| 17 Comments
We've touched on organized crime issues before here at Winds of Change.NET. My own research via authors like Guilhem Fabre, Claire Sterling, James Mills et. al. has convinced me that the organized crime sector is indeed big enough to affect major economies. Japan's "Yakuza recession" may offer one example already. The points I made in "Terror, Inc." [Part 1 | Part 2 | The SPECTRE of Terror Inc.] are a different kind of data point. Is M. Simon correct? That's not clear - but I think it's possible. What's very clear to me, is that we can no longer treat organized crime as invisible when we analyze either the global economy or geopolitical security. Why We Must Not End Prohibition by M. Simon
"The Latin American drug cartels have stretched their tentacles much deeper into our lives than most people believe. It's possible they are calling the shots at all levels of government."    - William Colby, former CIA Director, 1995
I know that enforcing prohibition sounds just like the opposite of what I have been preaching for years in my personal life, and for the last year in my blog posts and writings. There is a very sound reason for this new attitude. It is a very old reason: money. If we end the drug war, a lot of people whose livelihoods depend on it will get hurt. You might even be one of them...
I'm not talking your average street level drug dealer here, or the police officer who might not find a job because of reduced crime. I'm not even talking about the lawyers who will be looking for a new set of clients when the million or so people arrested for drug possession every year become rather ordinary citizens again. I'm talking about your mother or grandmother whose stocks will drop like rocks when drug money no longer supports the stock market. Let us do what Deep Throat suggested and follow the money. The kind of money we are talking about is not your billion here and hundred million there. I'm talking big money. A trillion dollars a year. Or more. This is not your Cayman Island Bank type money or even Swiss Bank type money. This requires some place to dump the money where it won't be noticed. The biggest money laundering island in the world. Manhattan. Why are stocks still selling at outrageous multiples despite a recession? Boom or bust the hot money has to go somewhere. The US of A has two things the hot money people desire, a stable currency and the ability to enforce its laws around the world. Think of what the hot money means to the American economy. A lot of ill thought out projects that turn out to be resource wasters get funded. But to the hot money people a decline of fifty percent means they still have laundered half their money. What a disaster for an honest business. What a great deal for hot money. But America is addicted to this hot money. The ability to tolerate so much failure means America has to advance economically faster than any where else because we get efficient faster. This is one great American advantage over the rest of the world. We can let go of our failures. This is what bankruptcies and hot money do for the economy. So we have this great engine for economic progress but it is fueled at its core by narco dollars. Do we root out the drug business by legalizing all drugs (with certain ones still under a doctors supervision) or do we keep prohibition with all its attendant miseries and racism going so our stock market and economic system doesn't collapse? Does the money mean more to us than doing the right thing? Is our world power so important that we need to keep this vicious game going? Would giving up this game hurt our enemies more than it would hurt us? I first got turned on to these questions by reading a series of articles written by Catherine Austin Fitts. She is a former Assistant Secretary of the Federal Housing Commissioner under Bush 1, a former managing director and member of the board of directors of Dillon Read & Co, Inc. She is currently the President of an investment advisory firm Solari, Inc. The articles can be read here: # http://www.narconews.com/narcodollars1.html # http://www.narconews.com/narcodollars2.html # http://www.narconews.com/narcodollars3.html This week's saying: If the 1920s plus the 1990s teaches one thing it is this: "It's not the drugs stupid, its the prohibition." If the 2000s teach us nothing else, they will teach us: "Its not the drugs stupid, its the money." Maybe it's time to start asking politicians: bq. "Do you support drug prohibition because it finances criminals at home, or because it finances terrorists abroad?" This week's politician: Senator Arlen Specter (Rep.) PA Tel: 202-224-4254 fax: 202-228-1229 he also has an obnoxious web form instead of an e-mail. (c) M. Simon - All rights reserved. Permission granted for one time use in a single periodical publication. Permission also granted for concurrent publication on the periodical's www site. M.L. Simon is an industrial controls designer and independent political activist

17 Comments

I don't think you are counting all the costs the "War on Drugs" is inflicting on America.
This is not meant to be a complete list (and the itenms aren't in any particular order), but it should be enough to make my point for now. If I find the time I'll post a more complete version on Chicago Boyz.

The lion's share of prisoners are drug-offenders, so you have to chalk up a lot of the the cost for building and maintaining prisons, also paying guards and the upkeep of the prisoners ect.

Most drug-offenders are non-violent and don't stand a chance against hardened "regular" cons., who victimize them in every possible way. The leave prison traumatized and often as mental and physical wrecks. They frequently become criminals or homeless, or burden society in other ways. At the very least they are disenfranchised, giving them much less of a stake in society.

Prisoners are one of the main venue for the spread of Aids.

Prisoners are used as cheap labor, crowding out "regular" workers.

Enforcing prohibition is expensive and drives up spending. This gives police forces and the various agencies an incentive to rely on highly unjust property forfeiture laws (remember, you don't have to be convicted of anything to have your property takean away from yourself). Once they have got used to the revenues from that
they get an incentive to increase the number of suspects with deep pockets to keep the money rolling in.

Fundamental rights are eroded, and so is rule of law. Less freedom menas less people who are willing to become entrepreneurs. What's the use to be your own boss if the government is increasingly acting as if it were your boss?

In the long run it increases the percentage of GDP government at all levels collects as taxes, which chokes of growth.

Drug companies are subjected to much closer supervision, and so are doctors and patients with chronic pain (what if a drug makes them feel good besides taking the pain away? The horror!).

Agents and police officers know that getting promoted depends on the number of drug-offenders they bring in. They'll neglect anything else, including terrorism, to catch them.

Investment in inefficient ventures isn't as harmless as you think. They tie up physical resources (machinery, real estate etc)) that would go to much better used elsewhere.

I disagree quite strongly with this post.

Herr Goergens raises good points. Here's a few more.

The War on Drugs is slowly infringing on our civil liberties. Every item in the Bill of Rights (Amendments I - X of our Constitution) has been damaged to a greater or lesser degree by the War on Drugs. Can RICO laws really be justified?? Free societies generally have better economies, because people are free to think and act on thier own. In the long term, if we give up more and more rights, we are weakening our economy.

In the short term, what about narcotics funding for terrorist groups? Sure, we might benefit from hot money, but so does al Qaeda with their poppies in Afghanistan and Pakistan. Hezbollah is messing around in Colombia. I'm sure they're not there for the coffee. The IRA's been linked to that, too. And then there is the whole question of North Korea. Legalization and regulation would end the artificially high prices, and weaken these destabilizing sources.

>>A lot of ill thought out projects that turn out to be resource wasters get funded.<<

In order to keep the gods of Capitalism happy, we must offer sacrifices of inefficient businesses. Inefficient businesses are ultimately a burden on our society. If narco money is pumping up bad ideas, sooner or later the only growth industry will be illegal narcotics. (See Joe's article on the Yakuza recession.)

To sum it up, legalization would probably mean a big hit to our economy. I don't care. I'd rather be poor and free than wealthy and in chains.

as Bob Herzog might say, "LET THE DICE FALL WHERE THEY MAY!"

Look, this is actually one issue that I'm ambivalent on. I don't use drugs (except for the occasional alcoholic beverage) and have no interest in using drugs, but I can see the case for legalizing some, at least. But I'm hardly enthusiastic (nor am I an enthusiastic supporter of prohibition - I mean, at least in the '20s it was done honestly; they understood that a Constitutional amendment was needed before the Federal Government could enact prohibition on alcohol). And all the costs accounted for by other commenters that I won't repeat (the costs that worry me most are the broader Liberty-related ones. People harp on how the War on Terrorism is eroding our Liberties - the War on Drugs has eroded them more, government has gained more powers to investigate and intrude into our private transactions using Drugs as the rationale and the War on Terror rationales just follow in this wake).

But lets just say that this is correct and on balance our economy is built on "hot money" from the black market drug trade.

I don't see that as a reason to perpetuate it. That, indeed, is a reason to end it sooner rather than later; the economic distortions would only get worse.

We're economically better off with alcohol legal, not illegal - despite the costs (drunk drivers, alcohol-related diseases, the costs of alcoholism and the like. Costs don't exist only on the illegal side of the ledger).

Economic distortions like this are better being lanced sooner than later. Waiting only makes the problem worse. So if our economy really is (an argument I'm going to call "unproven" atm, but lets assume it is) dependent to this degree on infusions of drug-related capital, better to lance the boil and drain the infection now than let it fester, let the gangrene spread further, just to avoid the pain that operating now would cause.

Btw, legalized drugs will still cause profits that will then be invested in something, and the American economy is still, by and large, the best bet in the long run. Especially since we do tend, at least to a degree relatively greater than others, to not let major economic distortions go on and on (I know there are counter-examples; no need to throw Farm subsidies at me, for instance; I'm talking in general).

LET THE DICE FALL WHERE THEY MAY!

Pete Stanley, Porphyrogenitus, etc.

My suggestion that we not end the drug war was sarcasm. And I did not cover all the costs of the war because I wanted to focus on the hot money aspects.

You are all correct. The Drug War is a terrible burden on all of us for so many reasons. I just wanted to point out why politicians might talk out of both sides of their mouth on this subject. The Drug War is an octopus strangling the world and especially America. Ending it will not be all benefit - at least initially. It is going to hurt. Widows and orphans too.

Who wants to be remembered as the one who cut the American economy by 30% or 50%? A lot of people will be devastated when we give up this one. As William Burroughs once said: the money is more addictive than the drugs.

Would it really cut it by 30% or 50%?

Unlikely. Even if you add up what's believed to be the total proceeds of organized crime, it's not 50% of the US economy.

On the other hand, even a 5-10% excision would set of a chain of events and secondary effects that you'd absolutely notice in a painful way.

M. Simon, Joe -

This makes a much stronger case when you add to it the other forms of 'hot money' - the billions looted by the kleptocracies in the Third World...

...the impact of these dollars (and euros) on the pool of 'ready' investments is doubtless pretty significant.

A.L.

Small changes in demand can have a very large effect on percieved value. And it can compound in what is called a sell off.

Imagine if our current P/E went from >30 to around 6 or 7 (normal for a severe recession).

The Dow goes from 9,000 to about 2,000.

Or think about the housing bubble. What happens if say 70% of the houses in America suddenly became worth significantly less than the mortgage? A 30% drop in house values would be devastating to the banking system not to mention the economy.

There is no doubt that our system left to its own devices would right itself over time. There would be significant pain. And of course the pain gets worse as the disease progresses.

==========================================

A.L. stopping the looting by the kleptocracies would be difficult. What we can do in that respect is to stop paying them ourselves unless paying them is cheaper than the alternative. The very easiest thing we can do against the hot money system is to end drug prohibition.

America long term seems to be headed in the direction of regulating consensual vices rather than prohibiting them. This is good.

Faster please. :-)

We can't stop the looting, but we can make banking the proceeds a bit more difficult and costly...it should be a cornerstone of any liberal foreign policy (but the investment banker-donors/shareholders might get unhappy).

A.L.

Sorry, my reading comprehension needs a little work. :)

The drug business is all cash, mainly dollars, and no one really knows how much of it is out there. Add to that the fact that 2/3 of the US paper currency is circulated outside this country. We found at least $1 billion in cash in piddly little Iraq. Just imagine the stashes of Saudi princes, Russian mobsters, the Cali cartel, and Chinese industrialists.
Ending drug prohibition is fine but it won't flush out all this cash. What would really shake things up is a scrip change. The greenback dollar becomes a blueback dollar tommorrow and the first $10K is changed straight up. While we're at it we could recalibrate the currency to, say, circa 1960. The new blue dollar would be worth about five current green dollars.
Just a thought.

M. Howell,

It is not necessary to flush out all the cash. Just stopping the new inflows would put a serious crimp in the hot money system within 6 months.

Actually we don't really want the money back. It represents the fact that we got stuff and they got paper. Making a lot of mattress money come back all at once is not a good idea.

We must not forget too that the #1 recipient of hot money in terms of American investment in the 60s and 70s was Silicon Valley and the software industries. Hot money gave us a real head (pun intended) start.

Quite an interesting discussion and post here guys. Unfortunately I have not much to add here but I wanted to say that this is actually an issue that is not publicized by the news media nearly enough, and I am glad to see discussion of it whenever and whereever.

You are overlooking an important detail.

The money used to purchase drugs (whatever it is), had to come from the pockets of millions of consumers.

Ending the war on drugs will drastically lower the price, since there will no longer be any risk in selling them.

The millions of drug consumers will now have additional money for cars, better clothes, homes, whatever.

http://bastiat.org/en/twisatwins.html

Wasn't the era of the greatest growth in the mind-altering chemical market (late '60s to early '80s) also an era with a stagnant stock market?

On the other hand, it was also a period with rising commodity prices. Maybe the drug dealers bought gold and oil instead of stocks.

EarlW is quite right. The other question: Where is that trillion dollars ultimately coming from? How many drug users are financing their habit through more or less legal work, how many through welfare payments, how many through crime? It is wrong to assume the money would not have better uses.

If a drug user steals my bike in order to pay for the habit, I am a few hundred bucks poorer and will have less money to consume or save. If the money is then washed through inefficient investments, how exactly does it support the economy? This is about as beneficial as a tax raised by an especially corrupt and inept government. And thatīs before we look at all the additional problems pointed out by Ralf Goergens and other commenters.

So, in countries where the drugs are legal, do they have enormous problems with drug addiction? Does it spill out into a larger percentage of the population than it would be otherwise? If drugs were legalized, would this remove much of the attraction people have for them? Would we begin treating them like cigarrettes and the people who use them like pariahs?

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