World Affairs

World Affairs

Volume 8, Number 2 (April-June 2004)

The Black Budget of the United States: The Engine of a "Negative Return Economy"
Chris Sanders and Catherine Austin Fitts

An analysis of the federal financial records reveals shocking evidence that a very large proportion of the nation's wealth is being illegally diverted since several decades into secret, unaccountable channels and programmes with unspecified purposes, including covert operations and subversions abroad and clandestine military R&D at home. Public institutions have been infiltrated and taken over by shadowy groups in the service of powerful private and vested interests, often at the expense of the common good.

Keep the people frightened
Of things they cannot know
Is the secret of the Tomb
If they knew what you and I know
They would know it is just men
Who rob them, cheat them, kill them
Then start it all again
         - Orville X


The United States government has operated a secret budgeting and spending programme for decades outside the framework of the American Constitution. The institutional and political roots of this system of clandestine finance go back at least a century. The turn of the nineteenth century saw the consolidation of American industry and banking under the control of a restrictive cartel that for all practical purposes assumed control of the economy. The great magnates of American industry and finance in the late nineteenth century were superb practitioners of covert operations. Witness to this fact are the institutions set up during the twentieth century through which their descendants still maintain control.

What follows is a summary of the structure of the American political economy which fits the facts better than the official model. Officially, American capitalism is characterised by democracy, opportunity, self-improvement, open and free markets, and constructive regu-lation for the public good, in short, happiness. Under this construct, America has never fought a war of aggression and harbours no designs to do so. Its leaders have the nation's interests at heart, and its politicians listen to their constituencies. But the truth is different.

Why the United States is so widely misunderstood is due in part to a controlled educational system and media. As the system evolved over the decades, time lent it legitimacy spanning the political spectrum. Gustavus Meyers, author of the seminal work History of the Great American Fortunes and no panegyrist, believed—following Marx as did many of the Left—that the consolidation of American industry was inevitable and that the men who accomplished it were acting their part in a predetermined historical evolution. Once monopoly control had been achieved, the proletariat would rise and its dictatorship would begin. We shy away from such determinism; nothing happens but as a consequence of what men do and choose to do. If Meyers were alive today, he would still be waiting.

Black Budget? What Black Budget?

At the time of the attack on the World Trade Center and the Pentagon in September 2001 according to the Government Accounting Office (GAO), the Pentagon had incurred $3.4 trillion of "undocumentable transactions", that is to say that there were $3.4 trillion worth of financial transactions for which there was no discernible purpose. The day before the attack, Secretary of Defense Donald Rumsfeld warned that the lack of control over the budget was a greater danger to the national security of the United States than terrorism. After the attacks, the government stopped publicly disclosing information about "undocumentable transactions".

Blame The Bookkeeper

The problem is not restricted to the Pentagon but affects the entire spectrum of government agencies and departments from the Bureau of Indian Affairs to the Defense Department. For a number of years the GAO has compiled a parallel set of books for the federal government called the Financial Report of the United States. This report attempts to impose "Generally Accepted Accounting Principles" to the government's financial reporting process in order to give a clearer picture of the government's actual assets and liabilities and thereby enable better planning. Neither the Pentagon nor the Department of Housing and Urban Development (HUD), to name just two, have ever been able to pass a GAO audit on this basis.

Significantly, the government does not employ double-entry bookkeeping in the preparation of its accounts. This has been standard accounting practice since the seventeenth century, for classifying and tracking sources and uses of funds to create an accurate picture of a business (or public) enterprise. Today the Pentagon utilises no accountable means of tracking money authorised by Congress from its initial authorisation to its use, say in developing a fighter plane. Running a twenty-first-century military machine using antique accounting methods is an anomalous situation with interesting implications, not least of which is that government agencies cannot, or will not, explain what they are doing with the money that is appropriated for their operations by Congress.

A similar state of affairs prevails in HUD. It exists primarily, at least in law, to ensure that low-income Americans have access to affordable housing, which HUD provides both through credit as well as through credit insurance on a nationwide scale. Yet HUD has never compiled information on its activities, so no one can figure out whether it is making money, losing money, or is simply irrelevant.

Conflict of Interests

Few Americans are probably aware that Lockheed Martin, builder of the F-22 air superiority fighter, is also a major outside contractor supplying financial control and accounting systems to the Pentagon. The Pentagon for its part is Lockheed Martin's biggest customer. This example is by no means unique. Lockheed also has a subsidiary employed by HUD to administer housing in American cities, an unusual diversification for a corporation the majority of whose business is done with the military and intelligence agencies.

Similarly, Dyncorp (recently acquired by Computer Sciences Corporation) is another contractor which, like Lockheed, derives almost all its revenue from government security and military contracts. It is also a contractor supplying information technology to a variety of government agencies including the Pentagon, HUD, the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). At the DOJ it operates the case management software used by the department's lawyers to run investigations.

A prime example of overlapping interests is Herbert "Pug" Winokur. Not only was he on Dyncorp's board of directors but he is also the Enron director in charge of that company's risk management committee, and a long-standing board member of the Harvard Management Corporation, which invests in HUD projects.

AMS Inc., a computer software firm hired by HUD in 1996 to take over the management of its internal software for accounting and financial control, presided in two short years over an explosion in undocumentable transactions of nearly $76 billion. AMS violated fiduciary and control practices by installing its own equipment and software with no parallel runs against the legacy software and accounting system. In the same two years, HUD's management more than tripled the volume of loan and insurance business being pushed through the system. Anyone familiar with running such systems in a bank or an insurance company immedia-tely understands that a decision such as this (for it had to be a decision) would result in huge losses. Is this incompetence or design? Only the credulous would believe this was an accident: the reward for Charles Rossotti, president of AMS, was to be named Internal Revenue Service (IRS) Commissioner at the Department of the treasury, from which position he oversaw significant treasury contract amendments to AMS. He was a direct beneficiary of this as a special White House waiver permitted Rossotti and his wife to retain their AMS stock.

Government's Response to Criticism

The reaction of many people to the sort of facts related above is to dismiss them as no more than evidence of incompetence and accident. The government does little to resist this sort of interpretation; on the contrary, it encourages it. For example, in response to calls for an investigation of its financial control process, the Pentagon countered with an offer to investigate credit card abuse. Complaints about the performance of outside contractors such as AMS have been answered by a Pentagon contract award to IBM for standardisation of IT systems and practices. IBM, in turn, has awarded subcontracts to AMS, Lockheed, Dyncorp, SAIC and Accenture (formerly spun out from Arthur Andersen of Enron fame). It is these firms that have failed to provide systems that can pass a GAO audit. This manoeuvring and the government's justifications affront common sense and are unethical. As private sector firms, they have to pass audits before their own accounts can be approved and reported to shareholders. Yet they routinely fail to meet the same standard for the government.

Often the government blames the previous, outgoing administration. However, consider that the incoming Bush administration replaced all the senior Clinton political appointees except the Comptroller of the Currency, John D Hawke; IRS Commissioner Charles Rossotti (formerly of AMS); Comptroller General David Walker (formerly of Arthur Andersen - see; and CIA Director George Tenet. In short, the key positions necessary for the control of federal credit, financial control, audit and intelligence were retained.

This undisturbed transition from Democratic to Republican administrations represents a remarkable cross-party consensus, and highlights the real positions of power. With the exception of Rossotti, all these men are still in place in 2004. And Rossotti? He left the IRS to become a senior adviser to the Carlyle Group for information technology. A more richly symbolic and meaningful job move could scarcely be imagined. Carlyle's business is global venture capital, which is to say it invests in corporate acquisitions all over the world with a speciality in arms manufacturing and technology. The large number of undocumentable transactions at HUD and the Department of Defense inevitably inspire curiosity. Where is the money associated with those transactions? It is no great leap of imagination to wonder equally where the Carlyle Group raises the money to finance its acquisitions (The Iron Triangle, Inside the Secret World of the Carlyle Group, John Wiley & Sons, Hoboken).

Long Live the Trusts

The cartelisation of the American economy was for all intents and purposes completed by the end of the first decade of the twentieth century. In 1889, America's leading banker J P Morgan held a meeting at his Fifth Avenue mansion in New York. Its purpose was to reach a consensus whereby the owners of America's railroads merged their competing interests (History of the Great American Fortunes, University Press of the Pacific, Honolulu). This was no mere group of transportation executives agreeing to fix prices. The railroads also controlled the nation's coalfields and oil supplies, and were tightly bound to the nation's largest banks. The creation of the Federal Reserve in 1914 completed this process of consolidation. In effect, Congress ceded control of the US currency system and federal credit to banks, thereby officially recognising the cartel. This placed a relatively small number of men in a position to set prices across the economy with a degree of control heretofore unknown in US history.

The Banking Cartel's Interest in War

American foreign policy and the wars that America has fought over the course of the twentieth century including the Spanish American War in 1898 (The Politics of War, Harper & Row, New York) and the present War on Terror have successfully extended the cartel's control over the world economy. The American Civil War was fought to determine control of the US economy. Most Americans would explain the last 150 years of warfare as sadly necessary for reasons beyond America's control. The implication is that America has accumulated its preponderant international position by some providential accident and not by design. Arguments for a contrary view elicit derisive accusations of falling victim to the "conspiracy theory". Reassuringly, they believe that self-interested individuals and organisations are incapable of collaboration to achieve common ends. When J P Morgan sat the owners of America's railroads around a table and hammered out a non-competition agreement, it was no accident. Similarly, neither have America's wars been accidents; they have been far more profitable than is widely understood. The US confiscated billions of dollars worth of German and Japanese war treasures at the end the Second World War. President Truman made a conscious decision not to reveal this to the public or repatriate it. Instead, it was used to finance covert operations.


Command Economy

Popular myth has it that the trusts were broken up in the first decade of the twentieth century thanks to the crusade of Theodore Roosevelt on behalf of the middle class. Roosevelt certainly used his public stance against "big business" to successfully bid for campaign money from the very businessmen whom he was attacking. This perhaps explains why he subsequently signed legislation repealing criminal penalties for those same businessmen. This is a common trait of "liberal" or "progressive" presidents. The second Roosevelt, Franklin, is remembered as the champion of the downtrodden, who put an end to the Great Depression. It was he who established the nation's social security system which in reality was (and is) funded by a highly regressive tax on its beneficiaries. Matching contributions from business were allowed to be deducted as a business expense before tax which simply extended the regressive nature of the programme by financing business's share out of foregone tax revenue. Roosevelt, a superb politician, won a landslide victory on a platform of reform which he adroitly avoided fulfilling. Instead, he declared a national economic emergency, short-circuiting any constitutional challenge to his power in the courts. He promptly defaulted on the gold clause in the government's bond contracts, and established the Exchange Stabilization Fund (ESF) in 1934. Ostensibly meant to promote dollar stability in the foreign exchanges, the fund in practice was and is something quite different. It is exempt from reporting to Congress and is answerable only to the president and secretary of the treasury. It is, in short, an undisclosed fund that can tap federal credit.

Apparatus of a Command Economy

The establishment of the ESF was an extension of the logic behind the creation of the Federal Reserve in 1914. The latter, the Fed, was also created in response to a crisis: the crash of 1907. The Wall Street legend credits Morgan's genius and patriotism with saving the nation. In reality, the crash and resulting depression enabled Morgan to destroy his competitors, buy up their assets and in the process revealed to the nation and the world just how powerful the banks and Morgan were. Not all were grateful, and some demanded legislative action to bring the federal credit and national monetary system under public oversight and control. In a campaign of masterful political legerdemain, the Federal Reserve was created in 1914 by an act of Congress to do just this. But by creating it as a private corporation owned by banks, Congress effecti-vely ceded to the banks a position even stronger than they had occupied before. Even today it is not widely understood that the Fed is a privately held business owned by the very interests that it nominally regulates. Thus the control of federal credit and the US monetary system and the rich flow of insider information that results from that control are veiled from public view and are privately held in secret which rather explains the Delphic nature of the Fed's chairman.

The extension of secret control was not limited to finance. The National Security Act of 1947 created the Central Intelligence Agency (CIA) and the National Security Council (NSC) and consolidated control of the three armed services under one roof at the Pentagon. This merely served to extend the principle of secrecy to the field of "national security". Like the ESF, the CIA was exempted from public disclosure of its budget and was given budgetary control over the entire intelligence community, while the NSC was set up as a policy-making body separate from the existing organs of state policy such as the State Department and the military commands reporting directly to the president.

The CIA Act of 1949 created a budget mechanism that allowed the CIA to spend as much money as it wanted "without regard to the provisions of law and regulations relating to the expenditure of government funds". In short, the CIA has a way to fund anything—legal or illegal—behind the protection of national security law.


Having created the bureaucratic means to conceive and make policy in secret, the next development was to create the means to implement it. The main issue was how to control money flows in the national economy. The government's solution was to assume a commanding position in the credit markets. To that end, it created first the Federal Housing Authority in 1934 (forerunner of HUD and now part of HUD) and subsequently Ginnie Mae and then Fannie Mae and Freddie Mac, which are government- sponsored enterprises (GSEs) to supply mortgage finance and insurance for home buyers. The underlying political purpose is more subtle. Combined with the power of the Federal Reserve (that is the cartel) to set the price of money, the ESF, the GSEs, and latterly HUD, have proved to be powerful forces for regulating money flows and demand in the US economy.

The military, too, was reformed with the adoption for the first time in American history of a wartime military budget and force structure in peacetime. In the early 1960s this was fine-tuned with the adoption of an explicit cost-plus acquisition process. The justification for this was, as usual, national security. This military budget has proved to be as effective in regulating the industrial sector as control over home finance has proved in regulating credit. Together they confer virtual control over the economy as conventionally measured in terms of money GDP.

Credit, Credit, and More Credit

A few moments' reflection on the institutional structure briefly outlined above makes clear the central importance of federal credit in underwriting it. The federal government underwrites GSEs by extending to them a subsidised line of credit from the treasury. An additional indirect subsidy in the form of lower borrowing costs flows from the belief in the marketplace that this constitutes an implicit government guarantee of their solvency. While this subject from time to time excites controversy, the truth is that the GSEs are not the only corporate entities benefiting from government support. Since the failure of Continental Illinois in the early 1980s, the government has informally made it clear that it stands behind the banking system. This was made even more explicit with the bailout of Citibank in the early 1990s and the implicit subsidy that the entire banking industry received as a result. Nor are financial institutions the only ones to enjoy this kind of support. Both Lockheed Martin and Chrysler have been effectively saved from insolvency by the taxpayer in the past, presumably due to their status as major defence contractors.

Such a system places a significant value premium on sheer size, if for no other reason than what the banking system cheerfully and disingenuously refers to as the "too-big-to-fail" doctrine. But for industrial firms, too, there is significant value in having a contracting relationship with the Pentagon. Not only is there the economic nirvana of cost-plus contracting but, if you are big enough, your fundamental business risk is underwritten for national security reasons. Thus, there is a tendency for firms to migrate their businesses to military rather than purely civilian markets; today the Boeing Company is a perfect case study of this in action. And the result is that civilian business in sector after sector has been driven into insolvency or into acquisition by the very national security industry that is ostensibly protecting them.

The dynamics of cost-plus contracting are such that profits rise as costs rise. This explains a great deal about the size of American military budgets, which have risen inexorably over the years even as military preparedness has fallen. But as we have seen, the losses in terms of lower productivity are felt across wide swaths of the economy as non-military contracting competition is squeezed out or acquired. Obviously these losses in the real economy have to be financed, producing a higher demand for credit than would otherwise be the case. Given declining productivity and a narrowing production base, it was inevitable that at some point net exports would become negative, a condition that the US entered into in 1982 and which has since intensified. Today the US net foreign debt is of the order of $3500 billion (32 per cent of GDP) and is increasing at the rate of about $550 billion per year (five per cent of GDP).

Concentrating Capital

To finance such a large foreign borrowing requirement without currency depreciation requires both the ability to control as much of the national cash flow as possible as well as the collaboration of at least a few key foreign countries to achieve the same sort of control over international cash flows. In the latter case, this takes the form, in part, of ever greater intervention on the part of those countries running dollar surpluses and having strong net export positions to prevent the markets from driving the dollar lower. In practice this means that they accumulate more and more dollars, which in turn they invest in US Treasury securities. Foreigners now own some 45 per cent of US Treasury outstanding debt. In January 2004, the Bank of Japan intervened in the currency markets on behalf of Japan's Ministry of Finance, purchased a whopping $69 billion in that month alone, or more than 30 per cent of its total intervention in 2003 which was itself a record year.

Current Trends

All of this may seem to have little to do with the black budget, which most people associate with intelligence covert "black" operations. The truth, however, is that the black budget cannot be understood in isolation without understanding the political, historical and economic context from which it springs. One way of understanding this is by comparing trends. For example, in 1950 the Dow Jones Industrials stood at 200, and today the Dow is at 10,600. In 1950 narcotics trafficking was a relatively unknown crime in the United States. Today it is endemic, and not only in cities but in smaller towns and rural communities as well. In 1950 the US possessed most of the world's gold and was the world's biggest creditor. Today it is the world's biggest debtor. In 1950 the US was a major exporter of industrial goods to the rest of the world. On current trends the US is not self-sufficient in manufactured goods and will not even have a manufacturing industry worth the name by 2020.

Narcotics Trafficking and the Stock Market

Is there a connection between these trends or are they random? It may seem strange to think of a positive correlation between narcotics trafficking and the stock market, but consider: in the late 1990s the US DOJ estimated that the proceeds of such trade entering the US banking system were between $500 and $1000 billion annually, or more than 5-10 per cent of the GDP. Now the proceeds of crime need to find a way into legitimate, that is, legal, channels or they are worthless to the holders. If one further imagines that the banking system earns a fee of one per cent for handling this flow (rather low considering that money laundering is a seller's market) then the profits for banks from this activity are of the order of $5 to $10 billion. Applying Citigroup's current stock market multiple of 15 or so to this yields a market capitalisation of anywhere from $65 to $115 billion. One can thus readily see the importance of the illegal drug trade to the financial services industry. As it happens, this trade in illegal profits is concentrated in four states—Texas, New York, Florida and California—or four Federal Reserve districts - Dallas, New York, Atlanta and San Francisco. Can anyone seriously suppose that the Fed is unaware of this if the DOJ is? After all, it handles the flows.

Narcotics Trafficking and the National Interest

One reason for the Fed's silence is that agencies of the government itself have been involved in drug trafficking for 60 years or more (The Politics of Heroin in South East Asia, Lawrence Hill Books, Brooklyn). For the purposes of understanding the black budget, one needs to be aware of the American practice of opening the American consumer market for drugs to foreign exporters in order to pursue strategic objectives abroad. The portability of narcotics and the huge price mark-up from production to point of sale makes them a particularly useful source of financing for covert operations. Even more important is that the proceeds from narcotics sales fall completely outside conventional, constitutional channels of funding. This helps explain the ubiquitous presence of narcotics trafficking in zones of conflict around the world, from Colombia to Afghanistan.

Little examined, however, is the impact of narcotics trafficking on communities and economies at the point of sale. Consider, for example, the impact on real estate markets and financial services. Real estate is an attractive area in which to employ the cash surplus resulting from narcotics sales because it is, as an industry, entirely unregulated with respect to money laundering. Because cash is an acceptable and in some places familiar method of payment, large sums can be disposed of easily and with little comment. This can and does result in considerable distortion of local demand and in turn provide fuel for real estate speculation and increased credit demand to finance it along with considerable opportunities for speculation and fraud. The Iran Contra episode during the 1980s contained all these elements; although many are familiar with the sale of arms to Iran to provide cash to finance CIA-backed guerrillas in Nicaragua and death squads in El Salvador, less well known is the systematic looting of local financial institutions and narcotics sales in the US. Banking allows the application of leverage to the cash that is generated by "illegal" activity while simultaneously making it possible to launder the funds. And when a bank fails, it is the shareholders, uninsured depositors and the taxpayers who pick up the bill. The point here is that narcotics trafficking creates a milieu in which the incentives to engage in uneconomic activity are greater than those to engage in economic activity. In a word, the profits from stealing are higher than the profits from playing by the rules.

What counts from a public policy point of view in the cartelised economy is the ability to control and concentrate cash flows of any kind. To this end, it is less important that a bank fails than that federal credit is available to make good the losses. In doing so, the cash cost of losses is shifted, or socialised, to the national taxpayer base. Therefore, as long as there are willing lenders to the federal government, the game can go on.

Technology Gives an Edge

Government's power combined with advancing computer technology has over the last 30 years vastly simplified the task of managing the national—and by extension the international—cash flow. Politically, the American victory in the Second World War meant that the entire West and its dependents were co-opted into the International Monetary Fund (IMF) negotiated at Bretton Woods in 1944. Forty-five years later, the collapse of the Soviet Union in 1989 meant that for the first time in history there was no alternative monetary or political choice in the international arena. The British empire had surrendered to the Americans precisely because America represented an alternative to the sterling, namely, the dollar.

Today the US presides over a more or less fully closed global monetary system centred on the dollar. In practice this means that those countries within the system must exchange real value in the form of manufactures and commodities with the US cartel in exchange for dollars, which are no more than an accounting entry created out of thin air. This is analogous to a company with no assets exchanging watered stock for cash, and indeed this is no accident. It was a favoured technique by which the J P Morgans of the nineteenth century successfully financed the consolidation of American industry and finance. Today their heirs are busily doing the same thing, but on a global scale.

Technology has transformed the possibilities for creative management in banking. Its sheer number-crunching power has rendered the cost of iterative calculations to more or less zero. This has enabled the creation of a new sector in the industry, the derivatives business, which is nothing more than the breaking down of financial instruments such as stocks and bonds into their constitutive parts. This has increased the power of banks manifold, thanks to the cooperation of the Federal Reserve and Congress, which have allowed banks to not only self-regulate their derivatives portfolios and businesses but have enacted rules to force other banks to use derivatives to "control" risk. In practice this has meant that the most profitable business of the banks has been moved off balance sheet, in effect creating a high level of secrecy in their business. It also confers a huge advantage to the largest banks to whom the others have to come for their derivatives. This has, in part, fuelled the manic consolidation in banking over the last 25 years and has been applied with tremendous success internationally, thanks to the imposition of the Basel Accords on money and banking which have forced other country's financial institutions to either cooperate, which in practice means to be acquired, or go out of business.

The banks' tactics have been copied and refined by industry. An excellent example of this is the case of Enron, nominally an industrial company engaged in the production and transport of petroleum and natural gas, which was transformed into a highly leveraged financial operation with a huge off-balance-sheet business trading derivatives. It secured a release from regulatory oversight by the time-tested method of purchasing lawmakers and by corrupting its auditors. This gave it the power to restate earnings, virtually at will, simply by changing the assumptions on future interest rates embedded in the options, swaps and futures contracts constituting its unregulated derivatives book. Enron is a model also of the increasingly blurred distinction between the public and private sectors. It employed as many as 20 CIA officers. One of its senior executives, Thomas White, was an army general before joining Enron and then left Enron to become Secretary of the Army. Enron executives were intimately involved with Vice President Richard Cheney's energy task force. It is difficult to avoid concluding that Enron was anything but a money-laundering operation employed in the interest of "national security" on behalf of the cartel (The Real Deal About Enron, Catherine Austin Fitts and Daniel Armstrong).

The US has embarked on a costly global military adventure the outcome of which is anything but certain. This marks the culmination of more than 50 years of nearly continuous overt and covert warfare. In this it is supported by the most sophisticated financing apparatus in history, capable of mobilising the cash generated from a wide variety of activities both open and covert. The price has been the progressive hollowing out of the American economy itself, and the progressive erosion of civil liberties and the rule of law. The black budget is not the cause of this but the means.