The Carnage of Peace: Hamas vs. Israel

The kidnapping and torture of three Israeli teens in Hebron by Hamas and its regional allies ushers in a much needed strategic, moral contrast between an uber-utopian U.S. policy and the Machiavellian realists of Iran and its proxies.  The sad part is no one at State sees this for what it is:  an Israeli recognition that the peace process is irrevocably broken.

The mother of the 16 year old Naftali Fraenkel from Brooklyn says it all:  “Rest in Peace, my child.  We will learn to sing without you.”

The regions lone democracy is alone as it grapples with Iranian proxies.  America continues its retreat while State mingles forward, only in liberal democracies can we find entire bureaucratic fiefdoms commited to illiberal acts of wanton violence.

Syria is being carved up along with Iraq, Jordan’s borders are already porous from terrorist incursions; Pakistan’s proxies continue to act unabated.

Hamas knows whose responsible for this cold blooded murder:  Marwan Kawasama & Amar Abu Issa, both members of the Kassam Brigades of Hamas.

Anarchy has risen in a land once tamed by the Pax Americana.

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China: Currency Wars & Liberalization

China is best studied geographically as an island cut off from the world, its geography constitutes a political, social challenge as Beijing begins its own tapering in hope of liberalizing central banking to the effect of moving its domestic economy off from simple manufacturing.  This will not be easy, for China lacks strong institutional, cultural bulwarks that sustain a robust civil society.  By actually permitting a real civilian led market to develop, Beijing’s Communists want real price discovery so as to permit a stronger more authoritarian market to evolve.  My guess is this will fail.  But if Beijing wants taut strings to touch why should American’s blame them when we’ve already abandoned our own market based political economy.  If anyone thinks we’ve got an efficient market, their deluding themselves.

As Beijing continues to offer real deposit rates, it hopes to permit a level of manageable capital/equity formation among its citizens.  It’s also found the need to acknowledge that a managed economy is not an efficient one.  If China wishes to procure a real indigenous capitalist culture, its going to do so in a decentralized fashion.  This threatens Beijing, ironically its committed to a version of ‘fatal conceit’ that IT thinks Beijing can manage.

Let’s wait and see.

Here’s the consensus:  the case for further economic liberalization cannot be conceived in isolation.  This is the crux of Beijing’s problem.  Beijing conceives that economic liberalization through internationalizing its yuan, making it convertible, will incentivize its citizenry to deposit massive savings outside the ‘mainland’.

This will weaken the yuan!!

Another currency path of a depreciated yuan is China’s current account surplus, especially since most of China’s currency reserves our invested in foreign assets!!

The solution?

Beijing should seek the creation of private capital markets, deep international bond markets, embrace a true ‘cultural revolution’ by seeking the rule of law in the sanctity of contracts effectively permitting massive capital inflows.  Under this scenario, China’s real exchange rate would appreciate and China’s balance of payments would normalize.

Why is it that THIS scenario will NOT happen?

Because Communist Beijing will not tolerate the social/political impact of free market capitalism or free ideas; both which are necessary for a robust financial market.

What does the immediate future of China look like?

A managed socialist economy without true capitalist reforms will be a disaster for China and anyone participating in it; the slightest opening of capital markets in China risks a massive capital outflow depriving Chinese banks of funding.  We should note that as of this writing, the People’s Bank of China continues to accumulate foreign exchange reserves while supplying a pegged yuan at a predetermined level effectively sterilizing excess domestic reserves preventing inflation.

Beijing can expect to manage small changes in its political economy, but it will NEVER permit any political/social idea to threaten its hegemony.

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Beijing: The Challenge of Managing New Growth Cycles

The ‘boys’ in Beijing are about to undertake a grand initiative, they know that cheap manufacturing in their Southern Hemisphere cannot go on forever.  They also know that  to really compete they must transform their entire political economy away from ‘petty’ manufacturing toward a consumption based political economy.  This  is fraught with difficulties that very few nations have succeeded in doing.  Think of Thatcher’s monetarist revolution, which nearly capsized in that her ministers targeted the wrong monetary aggregates.  Given that most never explicitly knew how to implement monetarism, they were ‘sort-of’ winging it.  Explicitly, monetarists know that a ‘policy-mix’ is intrinsic to successful transition.  This requires an adroitness uncommon to Keynesians.  It was of course known and expected from pre-Keynesians.  That’s another essay for another time.  Can Communist’s in Beijing handle/manage the social/political threats that will emerge in a managed transformation away from a centralized political economy?  My answer is simple.  The Chinese people will gladly permit being hustled about.  Regarding the political/social impact of this experiment; we’re going to have to wait and see.

China was mortally threatened by  our near suicide in 2008.  We have yet to address these policies. My guess is that will take far longer to do than anyone willing to admit.  Beijing is moving forward at an unsettling pace.  Beijing knows that its current threats are domestic.  Its monetary and fiscal policy is completely unsustainable.

What Beijing knows is this:  they need growth driven by productivity gains, not cheap labor and coddled exchange rates. It must stop currency serialization, open up its banks to reform, permit a savings rate and allow its citizens access to global markets.

Only South Korea and Taiwan succeeded in evading this trap.  Its to early to know if Beijing will succeed. Gross capital formation, along with profits are being squeezed.  Its dollar is appreciating and costs are rising.  As I write, Beijing’s total debt exceeds 200% of its GDP.  To repay loans and prevent default, Chinese industries need REAL GROWTH.  Beijing has never really had real growth.  Experts who study Beijing have always known that Beijing ‘makes-up-the-numbers’.   Where does Beijing begin?

The Reds know that the age of high leveraging is over!  They must permit financial reform, deleveraging or the challenge that they now face will consume them.  In other words, how China got into its current mess AND HOW IT RESOLVES IT, ARE TWO DIFFERENT REALITIES.

Liberalizing deposit rates for the next two years is a start.  It implicitly means that financial repression is over. Beijing will no longer pay low interest rates to depositors in the hope of sustaining cheap borrowing.  By suppressing consumption, by forbidding the ability of its citizens to enjoy capital/equity formation, Beijing created a lopsided political economy in which public (state-owned) investment was 50% of GDP.

That’s over.

In fairness to Adam Smith and Hayek, Beijing permitted a ‘shadow banking sector’ to in effect permit price discovery.  By grafting this relation on to new enterprises, Beijing may well succeed where ‘middle income nations’ failed.  State owned banks were experiencing excess loss of profit margins from loans to state owned enterprises, so banks created financial instruments, sold them for profit and used these profits to lend at still higher rates to private companies.  BY PERMITTING A MARKET TO FUNCTION, THE STATE DISCOVERED REAL PRICE/RISK.  They also created solid relations that allocated capital efficiently.

Over the last fifteen years, demographic trends pushed up wages faster than productivity gains.  This will permit Beijing to sell off un/nonproductive state owned enterprises.  Remember Thatcher?

Other than ‘ghost cities’ that populate China’s interior, the side effect of liberalization may well be the reform of a dysfunctional capital market as more Chinese households put money into competing firms.

The real challenge to Beijing IS NOT WHAT IS OUTLINED ABOVE!!

China’s challenge is political, moral, even spiritual.  CHINA PRODUCES NO INNOVATIVE FIRMS, NO GLOBAL BRANDS.  Did you read that right??!!!

This is a cultural problem that cannot be addressed through centralized means.

A problem the ‘boys in Beijing’ simply cannot acknowledge.

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Chinese Strategy In Foreign Aid Expansion: Encirclement & Defense

Dr. Charles Wolf Jr., is the distinguished chair in international economics at the RAND Corp., and is professor of policy analysis at the Pardee RAND Corp., graduate school.  He continues as a senior research fellow at Hoover, Stanford University.  Dr. Wolf was instrumental in the fielding of a two year research study published recently by RAND titled “China’s Foreign Aid & Government-Sponsored Investment Activities.”  Any read will detail to the reader the mind of a dominant Chinese minister of commerce responsible for administering such largess.

In today’s dollars, Chinese foreign aid is $189.3 billion and growing.

Beijing does NOT conceive of this as the west does, for it finances this aid through loans.  Beijing also see’s its foreign commitment abroad as a way of securing Chinese economic and political advances while developing the very nations that it seeks will serve Beijing’s domestic needs.  Beijing does not give aid away like the west.  Instead it consigns specific production and resource development for export to China alone!  Proceeds from these exports are deposited in two escrow accounts established by ‘The China Development Bank of China’ & ‘The Export-Import Bank of China’.  The loans are quite simple really, a 3% rate of interest over 15 years with a five year grace period.

The nations exporting the most for China are Latin America and Africa, third is the Middle East, last is Southeast Asia.

For South America, Venezuela, Brazil & Argentina lead.

In Africa, largest programs are in Nigeria, Ghana.

In Asia, largest is in Indonesia, Thailand and Malaysia.

What is sought are energy deposits like coal, oil, gas along with ferrous and non-ferrous metals.

By the way, this is how North Korea stay’s afloat.  More on that another time.

Exporters get developed infrastructure, developed export regimes, limited availability of its own natural resources, economic growth, new technology and an emergent class of sufficient manufacturers.  China gets an expanded supply line, payback in commodities, as well as diplomatic leverage against the U.S.

However, both parties are exposed to risks and hidden costs.  Let’s go over a few.

The export lead country experiences massive environmental damage, no rule of law, social blight, aggressive social-ethnic tensions as well as massive corruption.  At the least, these nation states remain prostrate to permanent port of call entry for Beijing’s Navy.

Unspoken in this report is how vulnerable China’s Navy is to protecting its own delivery commons in war.

The unintended and perverse social, political, environmental consequences have yet to play out.

Beijing, the colonizer does NOT care.

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Why the Debt Ceiling Matters: Currency & Goverance Regime Matters

In national emergencies Congress can exceed tax expenditures and run deficits.  What Reagan taught was simple, the deficit itself is not the problem, but the depth, the reach and scope of government on civil society IS.

This is why confiscatory taxation, or more importantly, the philosophy animating the convictions of progressives is so dangerous.  Their’s no limiting principal.  Taxes will never catch up to the spendthrift mores of any political class.  This is why conservatives often use moral terminology when criticizing excessive annual spending, we lose more of our sovereignty each time.  Just ask State Governers.

This is why raising the debt ceiling is such a bad idea.  Raising the debt limit allows Congressional members “a way out” from having to accept responsibility for large public expenditures.  We’ve surpassed $17 trillion this year alone.  And that dosen’t even mention the social mandates which are around $50 trillion.  Do the math.  We don’t have an economy THAT LARGE.

Debt ceilings provide a false sense of security.  But this sentiment never acknowledges the reason why we SURPASS the ceiling every year.  We run chronic deficits because our economy isn’t growing.

The Federal Reserve has helped in keeping interest rates low.  The interest paid to U.S. Treasury holders (U.S. bondholders) determines that requisite revenue needed to service such debt.  By keeping the rate low, the Central Bank is helping a spendthrift Congress continue financing mandates/expenditures that are clearly broken.  If the interest rate should rise, more debt instruments must be issued.

The debt burden on the economy is measured in relation to GDP.  The CBO now states that our current account of issued debt is 70% of annual GDP.  Before the 2007 recession it was 39%.

Ok, so what’s the problem?

A growing and unsustainable debt level manifests an expansion of government.  Philosophically, this means that government must confiscate more sovereignty from civil society to fuel its expansion.

The debt ceiling has not been an effective instrument in controlling debt.  It has lead to a dreadful complacency.

Most states require a balanced budget, the growth of federal mandates to the exclusion of federalism only exacerbates state budgets.  All that’s left are budgetary gimmicks.

A real debt ceiling limit would control spending directly.  A rule would be to bring government outlays into historic ratios relative to GDP.

Let’s start there.

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The State Pension Blow Out

When Meridith Whitney, the Chief Investment Officer for Kenbelle Capital CP published “Fate of the States:  The New Geography of American Prosperity”, most folks never really questioned the contractual obligations states have; the mantra out of union leadership was that such obligations were safe from bankruptcy.

Imagine that.

Well, it turns out, that the vast majority of states throughout our Union haven’t funded pension obligations.  That’s called bankruptcy.  And the same union officals continue to shield this nasty reality behined rhetoric that really is propaganda.  Because states have the Constitutional and legal authority to tax, they cannot file bankruptcy.  So as union officials continue to mask paper thin obligations behined a mask of opaque rhetoric, let’s keep in mind that bankruptcy proceedings are about restructuring the very obligations unions erroneously think are safe.

Thanks to Q.E., public penion benefits are really well capitalized.  Asset classes remain well capitalized.  However, public pension costs have soared.  Let’s look at two landmines.

California, Detroit, Chicago.  Chicago must make one billion dollar pension contribution this year alone, a third of the cities operating budget!  Just this year.  There pension debt is $19.4 billion.  Chicago just released a massive amount of unsecured debt.  It issued $500 million in commercial paper and $900 million in general obligations.  Can you believe that!!

Detroit is worse.  The city is expecting to go broke by 2020.  As a city, Detroit is expecting to repay its general obligation bondholders 20 CENTS on the dollar while suing to invalidate $1.4 billion in certificates of participation which were used to backfill 2005 pension costs.  Try not to laugh.  The banks that fostered this merely asked Detroit to perform an interest rate swap.  These banks will now only be paid 30% of their investments. Oh yeah, unions refuse to support a readjustment plan to repay the banks in total.

Througout the city, Detroit is cutting pension benefits 34%, although these retiree’s can recoup their losses if the market performs well.

California:  The city of Stockton filed for bankruptcy in 2012.  The Franklin Templeton Investments is only recovering $94,000 from its initial $35 million investment. Its investors will receive about 50 cents on the dollar. See where this is going; bankruptcies remain the venue of choice for debt obligations BUT pensions remain untouched.  Why is this a problem?  Cities throughout California contiue to muddle through each year with most having to restructure again.  Refusal to face the political third rail of pensions isn’t a sound fiscal strategy going forward anymore.

Unions throughout this nation continue to placate everyone/anyone to the mantra that pension obligations are protected by State & Federal Constitutions protecting them from impairment.

Come again??


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GOP: Autopsy. . .

Now the CPAC is over its time for an assessment of where/what the GOP is?  Identity development is significant, for no institution can surmount challenges without sufficient formation of an articulated self understanding.  Florida’s recent Congressional win favoring the GOP need not introduce opacity, however, the consultant class never had the imperatives that make strong conservatives win. Why?  Because paid punditry matters not governance.

As WSJ Daniel Henninger recently wrote in his column ‘Republican Roulette’, the parading of past Presidential candidates isn’t helpful either.  Why?  Because, such people are political free agents for whom the party is largely a legal necessity only.

Did we forget that politics and its glamorized free agency are nothing more than high rollers running “arcane strategies to fill auditoriums.”  Sad isn’t it, especially given the gravity of our problems.

None of these candidates ever make the sale.

Why is that?  My gut tells me most of it rests on failure of articulation and execution of message.  Any future Republican message must be connected to something real.  Have we forgotten that Johnson’s Entitlement State was politicked.  The arduous labor needed to punch through contemporary narcosis is missing.

In a sentence:  creating and sustaining an idea of critical mass to govern must define today’s GOP.

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U.S. Foreign Policy: Ideal vs. Real

To the vast majority of foreign policy specialists, the golden age of collaboration and consensus remains WWII, more specifically, the political union that existed between the U.S. and Britain.  The problem with this interpretation is that its grounded in pure sentiment, for any sufficient review of the actual policy achievements of Truman, Acheson, Marshall, Roosevelt and Churchill must be conceived within the limits of power itself and the consequent acrimony that relations exert on any union.

There never really was a golden age of collaboration and consensus.

The history of American foreign policy is the history of what presidents and their advisors do once they conclude that others are not likely to be of much help.

Remember that when partisans fillet G.W. Bush over Iraq.

Realism includes a marked measure of public condescension and mistrust, even among Allies.  Consider the Marshall Plan.  Yes, it means American Unilateralism!  There are numerous examples of this happening throughout WWII.  Its just glossed over in favor of sentiment.

How about the acrimony over U.S. -Soviet detente beginning in 1972 ending with Regean?  Or the time the U.S. threatened to kill a successful implemented Marshall Plan to threaten French resistance to an American backed German Deutschmark, paving the way for a pro-western Federal Republic of Germany?

Did we forget the Presidencies of Nixon, Ford, Carter’s attempt to stabilize foreign relations with Communist states, only to be hampered at home by a coalition of hawks, neoconservatives, anti-communist liberals, the AFL-CIO George Meany, not to mention Henry Scoop Jackson, Daniel Patrick Moynihan and numerous media conglomerates ALL STRUGGLING to hamstring an American Executive.

Remember, it was Moynihan who taught that the cold realpolitik of detente meant nothing less than abandoning  the defense of liberty itself.

All this was before Reagan.

Have we forgotten that diplomatic engagement with U.S. enemies is useless unless aimed at achieving a deeper strategic purpose.  While Reagan talked to Gorbachev he never gave up anything of substance.  He never failed to sustain his resolve for Pershing missiles in Europe, Soviet dissidents or the moral superiority of capitalism.

We should remember, the U.S. have NEVER achieved STRATEGIC CONTINUITY.  Remember Reagan, ‘we win, they lose.’  There was no moral equivalency or zero sum engagement to be managed, but an encounter with an enemy requiring defeat.

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Why We Have The World’s Poor

I cannot turn this entry into a disputation of diverging cultural achievements between Islam and Christendom.  I would need to begin with the glaring philosophical achievement of the Church Fathers as they grappled with the Christological heresy known as Arius, specifically the wests ontological, epistemological success in countering nominalist tendencies intrinsic to the Semitic mind/culture.  The west’s achievement in coupling a cosmology to ethics in the unique discovery that became humanness was and remains unqualified in Islam.  To engage this topic without preparing readers for difficult terrain would only enrage those who may very well like the Church and the distinct achievements that Islam rendered to the west in the Middle Ages.

Instead, why do regions of the world have the poor?

Why did the achievement of property rights as the distinct cultural repository permitting empirical western achievement out pace the civilizations of the east?

The answer is found when you discern the impact of the specificity of christian ethics.

In other words, by not permitting social, political institutions the very ability to discover, discern, possess and transmit ACHIEVED CAPITAL is why we have the poor.

I’ve spent time in Africa.  I’ve noticed the differences between nation states and cultures that had contact with an emergent mercantile Anglo Enlightenment.

Why do we have regions of poor?

Answer:  The poor live in nation states/regions of the world that are lawless tribal societies, that do not permit nor allow the discovery, acquisition, maintenance, transmission of capital.  The source of this conflict is the repression of emerging capital intrinsic to meaningful labor.

Here’s the good news?

Digital technology is coupling the very social, political and institutional bonds that were severed by the Anglo Enlightenment which always saw a division between labor and capital.  Digital technology unites what Marx torn asunder.

Watch African nation states and numerous others emerge from a tribal night, welcoming the unity denied them for centuries.

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The Fatal Conceit of the West

The fatal conceit of the west is discerned when academics affiliated to the intellectual mores of German idealism begin to conceive of power relations outside of history.  Think Kissenger, Hegel or worse yet, Francis Fukuyama’s ‘End of History’ charade.

Let’s face it, the west’s pool of idealist alternatives has grown to the detriment of our international standing.

How does this affect Russia or Putin?

We fail to acknowledge that the seizure of Crimea or eastern Ukraine is really not ideological nor purely historical, its national.

It means that the focus or foci to study is the four decades prior to 1947.  Think Barbara Tuchman.

Instead, what the west seeks to transcend are the very social, political and national vortices of expressed power that continue to dominate autocracies.  And land based regimes, especially those deep in the ‘Heartland’ or Spyke’s ‘Rimland’ always shape their forward moving policies from within interior lines of engagement.

Why does this hurt the west?

Because we’re foolish enough to believe that disarmament, the sanctity of international law, coalitions and nuclear deterrents don’t matter.

Remember the ‘Carthaginian Peace’ or how about Japan’s pincer movement south along China’s littoral region from Manchuria toward Nanking.  The examples are legion.  Liberal democracies cannot envision a repeat of history because philosophically we’re tied to the lie of an every forward moving positivism, especially one that continually divorces the demands of ethics from value.

Let me spell it out, for only one taught to comprehend synoptically can discern the movement of power outside the positivist lie; the connection between U.S. capitulation in Syria and Crimea isn’t casual.  Its organic.

Don’t worry though, the west is invested in the moral opprobrium of idealized winners only.

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