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Topic: The steaming economic reality we try to ignore. Soup in the Kitchen? (Read 1181 times) |
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Hermit
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The steaming economic reality we try to ignore. Soup in the Kitchen?
« on: 2008-02-24 23:20:42 » |
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Queue for the soup kitchen may start here
Hefty interest rate cuts do not seem to be arresting slide towards recession
Source: The Guardian Authors: Larry Elliott (economics editor, The Guardian) Dated: 2008-02-25
Economic crises go through four distinct stages. First, there is the bubble-induced mania when markets rocket skywards and the word on the street is that the good times will last for ever.
That was where the world was a year ago, when the private equity boom was in full swing and Ben Bernanke was taking a tough line on US interest rates for fear of being the poor man's Alan Greenspan.
After bubble comes denial. This is the period when it is obvious to any independent-minded observer that the party is over but policymakers and the financial markets can't bring themselves to admit it. We hit this phase in spring 2007, when the received wisdom was that the crisis in the US sub-prime mortgage sector was a little localised difficulty that would be comfortably contained. There were no wider implications for the rest of the US economy, let alone the stability of the financial markets or the global economy as a whole.
Denial is followed by panic when it becomes clear that nothing has really changed since Dutch tulips in the 17th century and that the latest period of speculative excess will end in tears, just like all the others. At this point there is a fork in the road. Policymakers act to allay the panic by cutting interest rates and throwing money at the financial system. If the measures work, it is back pretty much to business as usual within a few months. Lenders start lending again; borrowers start borrowing; economic activity recovers.
All the experience of the past 25 years mirrors this sort of pattern. The US recessions of the early 1990s and 2001 lasted for only eight months; there was barely a pause for breath when the Federal Reserve took pre-emptive action to prevent recession in 1987 and 1998.
Sometimes, and only rarely, markets discover that what they had believed to be a miracle cure was, in fact, a placebo. The crisis is so serious that there is little or no response to the easing of policy; in these circumstances panic is followed by capitulation. Seven months into the credit crunch, we have now arrived at the fork in the road.
As ever, the assumption is that the world economy will take the road to rapid recovery. History suggests that this is a reasonable assumption, since few slowdowns end in recession, and recessions that turn into slumps are once in a lifetime occurrences. It is a sign of how serious the current situation is that those who argue that there is a risk of a 1930s-style slump are no longer treated as stark, staring mad. Indeed, the argument in the US is not over whether there is going to be a recession, but how long and deep the recession will be.
Nouriel Roubini, professor of economics at Columbia University in New York, is one of those sceptical about the idea that the US will suffer only a short, shallow downturn. For one thing, America is enduring the biggest housing market bust in its history, and prices are likely to carry on falling sharply. Then there is the credit crunch, which is far more severe than in the early 1990s or early 2000s, both as a result of being the inevitable legacy of not one but two previous bubbles but also the consequence of financial innovation that straddled the line between recklessness and criminality.
Far from easing, the credit crunch may be getting worse. In the UK, the past week has seen lenders withdraw certain products from the market, meaning that the sort of 125% mortgages favoured by the pre-crash Northern Rock are a thing of the past. Given that 125% home loans were the only way first-time buyers could afford to get on the housing ladder, this is not exactly bullish news for house prices.
It is a similar story in America. Paul Ashworth, chief US analyst for Capital Economics, notes: "The credit crunch is entering a dangerous new phase with even previously creditworthy borrowers now affected.
"Despite a 125 basis point reduction in the Fed funds rate over the past month, borrowing costs for financially healthy firms and households have actually risen by as much as 50 basis points."
Monetary policy, in other words, has lost its traction. Keynes talked about exceptional circumstances when cutting interest rates was like pushing on a piece of string. This may well be one of them, since the third big difference between now and the downturns of the early 90s and the early part of this decade is that consumers are far more indebted. Falling house prices, credit that is harder to come by and more expensive, years of living on the never-never - all in all, it's a potentially explosive cocktail.
Roubini says that the Fed is, belatedly, alive to the danger. "To understand the Fed actions one has to realise that there is now a rising probability of a 'catastrophic' financial and economic outcome, ie, a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe. The Fed is seriously worried about this vicious circle and about the risks of a systemic financial meltdown.
"That is the reason the Fed had thrown all caution to the wind - after a year in which it was behind the curve and under-playing the economic and financial risks - and has taken a very aggressive approach to risk management; this is a much more aggressive approach than the Greenspan one in spite of the initial views that the Bernanke-led Fed would be more cautious than Greenspan's in reacting to economic and financial vulnerabilities."
Bernanke clearly feels that the clock has turned back 78 years to the early months of 1930. He is slashing interest rates because he fears that the Great Depression is just around the corner.
Yet having got just about every judgment wrong over the past five years - and that's being generous - there is a risk that the Fed has got it wrong again.
Consider. Until the early 1970s, the linchpin of the global economy was the Bretton Woods system of fixed exchange rates. Gold was fixed at $35 an ounce and other currencies were pegged against the greenback.
Rising US inflationary pressure in the late 1960s led to the break-up of the Bretton Woods system, and that was followed by a plunging dollar, leading to sharply higher import prices. To make matters worse, oil producers raised the price of crude, with the result that inflation went through the roof.
Flipside
What we are now seeing is the break-up of Bretton Woods mark 2. The linchpin of this looser and less comprehensive system was the fixed exchange rate between the dollar and the Chinese yuan. By keeping its currency low, Beijing flooded the world with cheap goods and kept US inflation muted. That pushed down interest rates, but led to a massive US trade deficit with China and pushed up asset prices.
Politicians in Washington demanded that Beijing allow its currency to rise. And over the past two and a half years this is what the Chinese have done, in small and gradual steps. It's not really surprising that they have done so, since the flipside of lower inflationary pressure in the west has been a build-up of inflationary pressure in China.
As a result, the writing is on the wall for Bretton Woods 2. Bernanke has sent out the signal that he cares far more about boosting growth than he does about fighting inflation, which is why the dollar has fallen and gold has gone up. So a return to soup kitchens and dustbowl economics should not be ruled out.
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With or without religion, you would have good people doing good things and evil people doing evil things. But for good people to do evil things, that takes religion. - Steven Weinberg, 1999
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MoEnzyme
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Re:The steaming economic reality we try to ignore. Soup in the Kitchen?
« Reply #1 on: 2008-02-26 13:05:53 » |
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Today I heard that US housing prices have plummeted more than any time in the last twenty years; oil prices are going though the roof, and the dollar is hitting unheard of lows against other currencies . . . and still when the media "economic-news" talking heads come on they talk like its just a temporary bump . . . yes a recession, but possibly not so bad. It is starting to sound suspiciously as deluded as Bush declaring "mission accomplished" in 2003, only worse . . . I think any idiot listening to the rest of the news knows that the talking heads are full of shit RIGHT NOW, whereas it took a few months for the world to figure out that the mission was anything but accomplished. I think by the time the media "economists" fess up to how bad it really is getting, many of us will already be in the soup lines. On the upside, if this leads to a truly worldwide economic collapse, it may cut down on almost everyone's "carbon footprints" to the point that global warming problem becomes slightly more manageable.
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I will fight your gods for food, Mo Enzyme
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Blunderov
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Re:The steaming economic reality we try to ignore. Soup in the Kitchen?
« Reply #2 on: 2008-02-26 15:54:45 » |
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Quote from: MoEnzyme on 2008-02-26 13:05:53 <snip>On the upside, if this leads to a truly worldwide economic collapse</snip> |
[Blunderov] A rather brutal snip of Mo's words and what follows is tangential to his point but not unrelated I hope. The other day I came across the expression "the over-developed nations"! What a difference a word/phrase can make. Post Modernism has received, in many cases fully deservedly, a rather bad press. But its central premise, that of the way in which power structures are contained and coddled in accepted language usages is a strong idea IMO. This - "the over developed nations" - is a good example of this very thing. Viewed from this not usually available vantage we see the gross destruction that has been wrought by an idea formerly conceived as incontrovertibly virtuous; economic development.
Economic development is not synonymous with human development.
Time to rethink stuff. Cuba, coincidentally, is topical and pertinent in this regard. What do we mean by a "functional economy" anyway?
New modes of thinking are required if we are to get out of this enormous pickle. Matters are far more serious than is generally realised.
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Mermaid
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Re:The steaming economic reality we try to ignore. Soup in the Kitchen?
« Reply #3 on: 2008-02-27 14:02:17 » |
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not recession.
think stagflation.
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MoEnzyme
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Re:The steaming economic reality we try to ignore. Soup in the Kitchen?
« Reply #4 on: 2008-02-27 15:10:12 » |
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Quote from: Mermaid on 2008-02-27 14:02:17 not recession.
think stagflation.
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Stagflation is actually worse, but I'm thinking both. They aren't mutually exclusive. Recession alone would respond to economic stimulus, but attempts at stimulus only makes stagflation worse.
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I will fight your gods for food, Mo Enzyme
 (consolidation of handles: Jake Sapiens; memelab; logicnazi; Loki; Every1Hz; and Shadow)
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Mermaid
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Re:The steaming economic reality we try to ignore. Soup in the Kitchen?
« Reply #5 on: 2008-02-27 23:36:23 » |
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you are right..thats why there is a chance that they'll yank away all those interest rate cuts.
which makes me wonder about the housing crisis. how is america going to get out of his hole? nobody is talking about it with as much alarm as it deserves...this is beyond seriously fucked up....
Quote from: MoEnzyme on 2008-02-27 15:10:12
Quote from: Mermaid on 2008-02-27 14:02:17 not recession.
think stagflation.
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Stagflation is actually worse, but I'm thinking both. They aren't mutually exclusive. Recession alone would respond to economic stimulus, but attempts at stimulus only makes stagflation worse.
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Blunderov
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Re:The steaming economic reality we try to ignore. Soup in the Kitchen?
« Reply #6 on: 2008-02-28 06:59:13 » |
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[Blunderov] I remarked previously that economic development is not synonymous with human development and that it is time to rethink our values. I have little hope that we will do so. Greed is the creed.
http://www.opednews.com/articles/opedne_nafeez_m_080228_capitalism_2c_consumer.htm
February 28, 2008 at 04:55:35
Capitalism, Consumerism and Materialism: The Value Crisis
by Nafeez Mosaddeq Ahmed
http://www.opednews.com The Continuum of Crisis
The global economic, ecological and energy crises we face – as well as associated crises (terrorism, conflict, and so on) -- are not separate but fundamentally interlinked: at the source of our ills is an excessive exploitation of hydrocarbon resources that is tied to the escalation of CO2 emissions with no recognition of limits or boundaries, fuelling global warming and the acceleration of climate change, devastating eco-systems, facilitating the deaths of millions of people and the extinction of thousands of species.
The logic of “growth” is simultaneously driving us to deplete hydrocarbon and other natural resources at unprecedented, and unsustainable, rates – such that oil and gas are for all intents and purposes running dry. Both climate change and energy crises are impacting on our ability to sustain global food production. Water shortages and hotter weather are destroying the viability of agriculture, while portended fuel shortages are set to undermine the continuity of agribusiness which is heavily dependent on oil and gas. The increasing inability of food production to meet consumer demand is also linked to the destructive “growth”-driven technologies of a hierarchical agribusiness industry monopolized by short-sighted corporate conglomerates, within a skewered international system of food distribution that marginalizes two-thirds of the world population.
Finally, the world economy on its own terms is on the verge of self-imploding. Geared to serve the interests of corporate profit maximization, the world economy systematically generates widening inequalities that result not only in the deprivation of the majority of the world’s population, but death-by-deprivation on an increasing scale. But in doing so, the economic system ignores its own internal contradictions, even while leading financial analysts from within the IMF to Morgan Stanley are now warning of an imminent global economic meltdown.
So we are nearing critical points simultaneously on four fronts – the climate, our energy dependence, our economy, and even our food supply. The scale of these crises has been sorely underestimated by officials, and even some experts, because their cumulative impact is not properly understood. Western experts tend to look at these crises as separate processes, and thus to offer separate analyses and solutions. The problem is that these crises are not separate at all – they are fundamentally tied into the way the global political economic system functions, and as they accelerate they are, and will, feed into and exacerbate one another.
The worst thing is, amidst the chorus of condemnation suddenly coming from Western governments themselves about the catastrophic dangers and costs of climate change, there has been a gigantic obfuscation of the true extent, scale and impact not only of climate change, but of its intimate interrelationship with other global crises.
The Matrix: Dysfunction and Disorder
The “Matrix of Control”, made up of special interests linked largely to powerful financial actors, through its dominance-by-donations of the political party system, is able to influence the agendas of our mainstream political parties on issues we really care about like education, health, social welfare, and so on. Corporate imperatives mean that the government is pressured by its key donors to rollback all sorts of social spending, privatize public services, and open up society to the rampaging whirlwind of corporate financial speculation: Profit over people.
The rollback of social welfare has undermined standards of living and well-being while escalating social tensions and crime, across the West. Simultaneously, the prevalence of consumer culture that is also promulgated by the corporate-owned, advertising-driven mass media has led to dangerous, skewered lifestyle choices. Although consumer goods and services are often sold on the premise that they make life easier and more fulfilling, hidden costs lie beneath the surface.
Take a dream home in the suburbs. A study of more than 200,000 people in 448 US counties found that those living in low-density suburban communities weighed 6 pounds more on average than those living in densely populated areas. Suburbanites were also found to be as likely as cigarette smokers to have high blood pressure. Fast food or highly processed food is typically marketed as saving time and money. Yet, in the US, an estimated 65 percent of adults are overweight or obese, leading to an annual loss of 300,000 lives and to at least $117 billion in health care costs in 1999.
Here in Britain, we now know that the majority of British citizens will be obese at current trends within twenty years; and not even the state-backed media hype around Jamie Oliver’s food revolution seems to be working. We’ve also just heard about how alcohol consumption is at “dangerous” levels among the more affluent middle-class. Those are just two simple examples.
But things look grim from a deeper perspective, the question of well-being. Does money make you happy? Findings from the World Values Survey, an assessment of “life satisfaction” in more than 65 countries conducted between 1990 and 2000, indicate that income and happiness tend to track well until about $13,000 of annual income per person. After that, additional income appears to yield rather modest additions in self-reported happiness, to put it mildly. Although most governments make ongoing growth in the gross domestic product (GDP) a leading priority, under the assumption that wealth delivers well-being, the truth is that undue emphasis on generating wealth -- particularly by encouraging heavy consumption -- is hardly working. Overall quality of life is suffering in some of the world’s richest countries as people experience greater stress and time pressures, along with less satisfying social relationships.
Based on World Health Organization data, British psychologist Oliver James showed that English-speaking nations are twice as likely to suffer from mental illness as mainland European ones over a twelve month period. Deeper analysis exposes a direct link between mental illness and social inequalities generated in the context of neo-liberal capitalism, “which largely explains the greater prevalence among English-speaking nations”, according to James. “By this I mean a form of political economy that has four core characteristics: judging a business’s success almost exclusively by share price; privatisation of public utilities; minimal regulation of business, suppression of unions and very low taxation for the rich, resulting in massive economic inequality; the ideology that consumption and market forces can meet human needs of almost every kind.”
James encapsulates this specific tendency to generate mental illness linked to neo-liberal capitalism using the metaphor of a virus, which, he says, is actually a kind of disease: affluenza. “Selfish capitalism causes mental illness by spawning materialism, or, as I put it, the affluenza virus - placing a high value on money, possessions, appearances (social and physical) and fame. English-speaking nations are more infected with the virus than mainland western European ones. Studies in many nations prove that people who strongly subscribe to virus values are at significantly greater risk of depression, anxiety, substance abuse and personality disorder. Follow the logic? Selfish capitalism infects populations with affluenza; it fosters mental illness; English-speaking nations are more selfish capitalist - ergo, more prone to illness.” So what’s the bottom-line for us Brits? “Blair’s encouragement of free market capitalism has boosted spiralling levels of British mental illness. The net consequence for true Labour voters has been to force us to become more or less severely virus-infected.”
The New Fundamentalism
Thus, consumer culture, itself a product of neo-liberal economics, is encouraging us to make disastrous life-style choices that are systematically eroding our quality of life, and in fact potentially killing us. So while the question of values might seem a surprising one to start off with, it’s now becoming increasingly obvious that the global political and economic order operates on the basis of a very specific value system rooted in what Oliver James depicts as a rampant materialism. Some of the most vocal critics of globalization have recognized this.
Take Dr. David C. Korten, for instance, a Stanford University Business School graduate who went on to work for the US Agency for International Developent (USAID). After more than a decade of work at the agency, Korten grew increasingly disillusioned with official aid policies. He could no longer deny that the government of the United States “was actively promoting -- both at home and abroad -- the very policies” that were “deepening” regional deprivation: “For the world to survive, the United States must change.”
After writing his seminal book, When Corporations Ruled the World, Korten was quickly recognized around the world as a leader in “the movement of movements”; and he has followed it up with a series of books and educational programmes aimed at generating awareness of the dangers of globalization. One of Korten’s most intriguing observations, however, is his contention that behind the global economic system is not merely an ethical and ontological philosophy of life and human nature, but what borders on being a fundamentalist theology in which unlimited profit is the sole criterion of value:
“In the quest for economic growth, the free market ideology has been embraced around the world with the fervour of a fundamentalist religious faith. Money is its sole measure of value and its practices, advance policies that are deepening social and environmental disintegration everywhere. The economic profession serves as its priesthood, it champions values that demean the human spirit. It assumes an imaginary world divorced from reality and it is restructuring our institutions of governance in ways that make our most fundamental problems more difficult to resolve yet to question its doctrine has become virtual heresy.”
Korten’s indictment of free market ideology has important implications. But to understand them, we need to first make clear what we mean by “values”. And to do that, we also need to understand how “values” are embedded in social systems.
Any given social system is linked to its fundamental conception of nature, and a corresponding value-system. Energy is the bedrock of society. The way a society derives and makes use of energy defines its relationship to nature, because nature’s resources are our source of energy. In turn, the way a society exploits natural resources, produces, consumes and functions, is therefore inseparable from the way a society conceptualizes its relationship to nature, the way a society views both itself and nature. In other words, any given social system consists not only of a set of particular social, political and economic structures, but rests on a body of (often implicit) assumptions about human nature, the way nature works, and the way humankind ought to relate with nature. It is within these assumptions that one finds a set of (equally implicit) values about what is good and bad for human life.
This is where we get specifically to the notion of a moral or ethical “value”. One of the most interesting attempts to get to grips with the value-system underlying the neo-liberal politico-economic order is from the Canadian philosopher John McMurtry. Professor Emeritus-Elect at the University of Guelph in Ontario, McMurtry came to philosophy after a rich and diverse career as a professional football player, print and television journalist, academic English teacher, world-traveller and a student of Eastern philosophy. Selected by the United Nations as organizing editor of the philosophy volume of its Encyclopedia of Life Support Systems, he is a leading intellectual voice among those critical of the global market system, a system which, he argues, is deeply destructive precisely because of its deification of the market.
Moral values may well be human constructs. But they are more than just constructs. They are categories constructed to differentiate between the usefulness of different kinds of social behaviour. Value, in other words, is tied to action. But the essential core of the concept of “value” is exactly that: worth. Something is valuable if it’s worth doing. But if it’s not worth it, it’s not valuable. So value is all about worth. An ethical value is thus a category that implies certain types of action are intrinsically worth doing. Moral values therefore designate special kinds of social behaviour as having this sort of intrinsic worth.
All social systems are tied to values, because they encourage certain types of behaviour while discouraging and prohibiting others. So why certain types of behaviour are encouraged and others discouraged depends on the nature of that specific social system; it depends on the way that social system conceives human beings and nature; it depends, in summary, on a particular conception of life and nature – whether or not that conception is unconscious and implicit. There is therefore an objective dimension to values – which is whether they work or not, whether they lead to forms of behaviour that generate well-being, or do the opposite. Values are more likely be useful, if they reflect reality – human nature, the nature of the world, and the way their mutual interrelationship.
One of Professor McMurtry’s most well-known and disturbing areas of focus is his analysis of global markets as an ethical system. He points out that the global economic regime is based on “an unexamined and absolutist value system.”
Capitalist scientific technology, transnational trade apparatuses, Anglo-American wars and the intensifying suppression of civil liberties are all symptoms of a “new totalitarianism cumulatively occupying the world and propelling civil and ecological breakdowns.” Conventional neo-liberal economic theory is supposed to be value-free, objective, scientific. But it isn’t, at all:
“To the contrary, the positions of a ‘value-free’ or positivist economics still presuppose as given and self-evident the value system of private property rights, the pursuit of self-interest and profit, and the monetized production and exchange of needed goods as the foundational, regulating norms of their analyses…. The principle of self-serving for money accumulation in all conditions, with no constraining obligation to one’s own society or to use-value production, has become the overriding, abstract imperative of market doctrine. The promotion of the public interest, on the other hand, has become a token mantra with no demonstrated connection to money self-maximization.”
Like David Korten, John McMurtry sees in this free market ideology subtle but deeply engrained fundamentalist strains that elevate materialist market principles of self-interest and profit maximization to unquestionable levels of God-like status: “We find that government and their leadership now assume that the value system of the global market is to be the proper order to social organization and that societies must be made to adapt to this order as the needs and demands of the market requires. The market is not now seen as a structure to serve society, rather society is seen as an aggregate of resources to serve the global market.” He continues, “No traditional religion had declared more absolutely the universality and necessity of its laws and commandments than the proponents of the global market doctrine.”
So the question is, how do we overcome this hidden theology of market fundamentalism that is so deeply embedded in our dysfunctional social systems? Beyond our activism on the pressing issues of our times, this needs to be at the forefront of our thinking, as a matter of urgency.
Nafeez Mosaddeq Ahmed is executive director of the Institute for Policy Research & Development in London. He teaches undergraduate and postgraduate courses in International Relations, Globalisation, Empire, and 20th Century History, at Brunel University in West London and the University of Sussex in Brighton. Since 9/11, he has authored a critically acclaimed trilogy of books revealing the realpolitik behind the rhetoric of the "War on Terror", The War on Freedom, Behind the War on Terror, and The War on Truth: 9/11, Disinformation and the Anatomy of Terrorism. His fourth book is ,"The London Bombings: An Independent Inquiry" (Duckworth, 2006). In summer 2005, he testified as an expert witness in US Congress about his research on international terrorism. His work has been featured in the Sunday Times, The Independent, The Observer, Sky News, and Channel 4, among other outlets.
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