Sunday, July 20, 2014

When Propaganda And Surveillance Intersect!

For decades a so-called anti-propaganda law prevented the U.S. government's mammoth broadcasting arm from delivering programming to American audiences. But on July 2, 2013 that taboo came silently to an end with the implementation of a new law passed in January. This unleashes thousands of hours per week of government-funded radio and TV programs for domestic U.S. consumption. This "reform" was criticized by many human rights activist as a green light for U.S. domestic propaganda efforts. Prior to that time the massive amount of U.S. programming produced by the Broadcasting Board of Governors such as Voice of America, Radio Free Europe/Radio Liberty, and the Middle East Broadcasting Networks could only be viewed and broadcast in foreign countries. The programming varies in tone and quality, but its breadth is vast and it is sent out to more than 100 countries in 61 languages.
Government Propaganda And Surveillance Don't Mix

Unleashing propaganda is a slippery slope and blurs the definition of truth. Propaganda is a form of communication that is aimed towards influencing the attitude of a community toward some cause or position by presenting only one side of an argument. Propaganda is usually repeated and dispersed over a wide variety of media in order to create the chosen result in audience attitudes. The message is often created by spinning, scrubbing, molding, and shaping it until it resembles little in the way of truth before sending it out to the public. It can go as far as to encourage a "call to action" where those listening are asked to push forward the agenda. The saying "power corrupts and absolute power absolutely corrupts" is well rooted in examples of abuse throughout history.

I like the saying concerning pornography that it is hard to define but we all know it when we see it. The problem with propaganda is that often goes undetected or is accepted as truth. With media such a dominate force in shaping our thoughts and opinions we should be very concerned as to who controls it and the agenda it pursues. One of the ugly realities of modern communication is the ability to send out millions of messages directly and unfiltered, this lends itself to be used in unsavory ways or to gain advantage. This becomes a real problem when one person or a small group controls the message and uses an army of tax paid employees to shape, spin, and send it forth. When government takes an active role in creating these programs both government accountability and the role of free press and media is directly diminished.

While I'm uncertain as to where my distrust of authority figures stems from this feeling has been reinforced by many incidents that I have witnessed over the years. An ugly example of how propaganda or a government shaped message can do massive harm is how the euphoria over the "victory" in Iraq has now been replaced by increasing doubts about how the Bush administration justified and reported on the war. No weapons of mass destruction were found and the Iraqi people we were to liberate did not greet American troops with open arms. Letters to the editor in major newspapers complain that the Bush administration lied about the war. Many in the press are now suggesting that the pro-war arguments of the administration were deceitful and that the public was duped by propaganda into supporting a phony war. 

Americans' suspicions of propaganda by their own government have a long history. World War I which ended America's isolation from major European conflicts, was modern propaganda's launching pad. Both sides in this global conflict, especially the Allies, employed this method of mass persuasion to defeat their enemy. In April 1917, shortly after declaring war on Germany, the Wilson administration established the Committee on Public Information (CPI), which at its peak employed 150,000 people. Its goal was the creation of a "war will" among an ethnically diverse American population. Abroad, its purpose was to convince the public that a reliable, honest, and invincible America would defeat German militarism making the world safe for democracy.

When countries wrestle each other for dominance on the world stage, government-sponsored propaganda can get pretty intense. Some of the anti-American stuff that came out of North Korea during the Korean War was brutal and make the American soldiers out to be monsters that enjoyed torturing women and children. A major point of this article is to show how disruptive to truth propaganda can be. North Korean propaganda doesn’t simply attack the U.S. for past failings but instead it accuses U.S. servicemen of engaging in some pretty messed up acts that terrify the people of Korea into blind obedience to their “protective” government. The more restrictive a government and the less information that flows, the less aware its people become. 

Once this starts occurring it becomes easier for a government to set the agenda according to its own interests. The sole aim of any form of propaganda is to influence an audience in an emotional rather than rational manner. This week the U.K. government defended its surveillance activities within the country in front of a special tribunal that heard complaints from privacy and human-rights groups. Without confirming that snooping was taking place they said that there were sufficient safeguards including the tribunal itself that made sure the government wasn't abusing its spying power. They added that the Regulation of Investigatory Powers Act, a law enacted in 2000 that lays out the framework for surveillance, was clear in setting out what type of interception could take place.

The proceedings in front of the special court that investigates complaints against intelligence agencies stemmed from disclosures last year by former American NSA contractor Edward Snowden that the U.K. Government Communications Headquarters tapped into cables carrying world-wide communications data. Soon after human-rights groups filed complaints that said the government was circumventing laws designed to protect residents' privacy. Ironically this all plays out the same week that with little debate the U.K. government passed an emergency bill requiring telecom companies to retain information about customers' communications for up to a year. The five-day trial this week was unusual because the arguments were made in public and created challenges because many of the arguments were theoretical.

Lawyers for the government said several times that they could neither confirm nor deny whether any of the surveillance  programs existed. The government said confirming or denying allegations contained in the complaints could expose holes in intelligence systems and make future "no comment" responses seen essentially as a confirmation. All this then becomes a bit of speculation as Tribunal panel members would layout examples of how the law would apply to people who were searching the Internet or communicating with others about making bombs. The human-rights groups, however paint scenarios in which people's sexual preferences or choices of reading material would unwittingly come under the scope of government surveillance. 

  When governments spy on their people and government propaganda programs intersect it is very dangerous and the potential of abuse is huge. This leads down a road towards less freedom and is paved with the bones of all those who have failed to be outraged by governments slowly removing their liberties This leaves all of us open to both blackmail or abuse by those in power for what they claim is a greater good as they determine just what that might be. Never overestimate the sophistication and ability of our government to clarify exactly what is happening anywhere and at any time. The recent score of scandals plaguing Washington makes it clear that more fact-free confusion and speculation the fuel of propaganda-based reporting system is in no shortage.

Saturday, July 19, 2014

Ukraine Crash A Propaganda Gem

The area where the Malaysian passenger jet MH17 fell in Ukraine is a crash site not a crime site! Painting it as a crime site does not make it so. Whether shot down by accident or intentionally, most of the evidence on how and why this occurred will most likely come from sources other than where the flight went down. I for one feel total disgust and find myself seriously distressed that this tragedy has become nothing more than a propaganda gem to be exploited by those who what to galvanize public opinion against Russia and demonize Vladimir Putin. 
MH17 Is A Human Tragedy

Anyone that has had dealings with so called authorities descending upon their community with ridicule and an agenda can understand the angst of the locals in the crash area. On one hand the locals are told to leave the bodies and all things alone while no real help arrives to set things right. A group of suits flown into a city miles away who visit the crash site for a very short time to view evidence but not collect bodies would rile anyone having to deal with such a bunch of clowns masquerading as help. 

From my experience I suspect many of these investigators and officials could not speak the language and were busy making unrealistic demands on the locals. This would extend to criticizing those who did not bend over to do their bidding and labeling them as uncooperative. A few years ago a large dog that had gotten away from its owner somewhere in the area was hit and killed in front of a building that I owned. A motorist pulled the 90 pound animal up on the city sidewalk leaving him only feet from my front door.

Upon calling the city to have the body of the dead dog picked up they informed my that if the animal was on the sidewalk I would have to dispose of it. The dispatcher suggested I check again to see if it was indeed in the street and not on the sidewalk, to my surprise it was. Not to say the body of a person falling from the sky is like a dog hit by a car I will say neither should be left for days in the sun or where animals are able to feast on the remains. A strong case can be made that it is disrespectful to not cover or move the body to a safe area. 

An article on MSN said ( Fighting flared in eastern Ukraine overnight. The government said it was pressing its offensive near Donetsk and Luthansk.. Malaysia, whose national airline has been battered by its second major disaster this year, said it was "inhumane" to bar access to the site around the village of Hrabove, near Donetsk, but said Russia was doing its "level best" to help.) I would think Ukraine would halt action if they really wanted inspectors and clean up crews to be able to do their work. 

Remember this is a war zone and it does not seem prudent to fly directly over the center of a war zone at only one thousand feet above the official limit. While it may later be proven otherwise most likely the jet was shot down by a missile by accident over a war zone. It is possible more sinister motives exist and the act was intentional but if so a strong argument can be made that Putin had far more to lose by this event than  he could ever hope to gain. Sadly, the deaths of hundreds of innocent people is being used by those who want to fan the flames of war. For them flight MH17 is merely a propaganda gem that has fallen from the sky.

Monday, July 14, 2014

Putin Holds All The Cards

After America was caught spying on its Europeans friends it is little wonder they are less than enthusiastic about trusting the Obama administration. Now Germany is in a new uproar concerning more ongoing spy activity by America. This happens while still fresh in the minds of many Europeans is Obama to his discredit backing down and away from his words about a "red line in the sand" during the Syria fiasco. None of this inspires great confidence in Washington. In a display of self-righteousness President Obama continues to scold Russia for intervening in the affairs of Ukraine. Secretary of State John Kerry even went so far as to declaring it unacceptable to invade another country on a "completely trumped-up pretext," or just because you don't like its current leadership.

It's difficult to say if the double standards exhibited by the White House or what appears to be a total lack of self-awareness by U.S. officials is the most surprising part of the unfolding Ukraine saga. While Obama  continues to charge his Russian counterpart, Vladimir Putin, with violating Ukraine's sovereignty and territorial integrity in breach of international law, it is difficult to forget this comes after the infamous "Fuck the EU" comment by Assistant Secretary of State Victoria Nuland in the run-up to Ukraine's revolution. The comment revealed the extent to which Washington was recklessly maneuvering to undermine Ukraine's elected pro-Russian president, Viktor Yanukovych, by backing the Kiev street protesters' demands.

In reality America has few military options in Russia's backyard unless it has the backing of a full and enthusiastic NATO and that is very unlikely. Europe has reason to be unexcited about a possible long and expensive conflict. While still trying to recover from a recession Europe would face fuel shortages and a massive spike in the price of natural gas. Currently Russia supplies much of the gas used in Europe, this gives Putin a great deal of leverage. If an actual ground attack were to occur few see the Russians as likely to rollover as other armies have when America approaches.

It appears Russia has been thinking several steps ahead and was prepared for being squeezed out of the Group of 8 for some time. With the recent exclusion of Russia what is now known as the Group of 7 and is made up of mostly insolvent nations has seen its global influence wane. A major shift in the geopolitical axis towards the east is taking place. As the days of summer past and we move towards fall the thought of a long cold winter will begin to weigh heavily upon the Euro-zone. Time appears on the side of Putin who has not taken the lead in promoting violence in Ukraine but instead left it to those in Kiev who insist on holding the fractured and bankrupt country together by force.

Putin has sat back and allowed violence to fester and to his credit he holds the trophy of a bloodless Russian annexation of Crimea. Obama would give his eye teeth for such a victory. All the self-righteous huffing and puffing in Washington over Ukraine jars on European and especially Russian ears after the multiple U.S. led invasions and interventions into several countries in recent years. Not stopping after attacking Osama bin Laden and his al Qaeda training camps after the 9/11 attacks, Bush opted for full-scale regime change. The lamentable consequences of that decision are still being felt 13 years later in a crumbling Iraq and by the ever growing numbers of Afghan civilians dying as the final NATO withdrawal approaches.

Europe is furiously scrambling to find alternative sources of energy should Gazprom pull the plug on natural gas exports to Germany and Europe. The surge in Ukraine gas prices is probably the best indication of what Europe faces. A cutoff by Russia would severely disrupt supplies. The EU, Turkey, Norway, Switzerland, and the Balkan Countries received 30% of the natural gas they burned last year from Russia according to the U.S. Energy Department "We have to be very careful not to hurt ourselves more than we hurt the other side," the Polish Foreign Minister said recently in Brussels. This comes after Russia announced what many have called the "Holy Grail" energy deal with China that has geopolitical implications for the whole world by binding the two nations in a commodity-backed axis. 

If Europe and the United States isolate Russia, Moscow will look east for new business, energy deals, military contracts, and political alliances. In a sign that Russia has the ability to use its economic power to drive a wedge between its former G20 allies, France’s government said this week it will deliver Mistral helicopter carrier warships to Russia as planned, thus rejecting requests from its European and U.S. allies to cancel the sale. There are also significant dependencies on Russian grain exports, particularly in the EU. It looks the pragmatists and non ideologues may be gaining the upper hand over the  more hawkish western voices who were risking conflict with Russia.

The recent huge fine levied upon a French Bank by the American government is viewed my some as financial blackmail and has reenforced the idea America has lost its moral compass. It appears Obama has been following in Bush's footsteps as America has repeatedly and cynically without U.N. security council authorization.launched or backed myriad armed attacks on foreign soil, in Libya, Somalia, Yemen and Pakistan to name a few. We should remember the expanded use of drones has made few friends for America in the international community. Critics say the Obama administration has continued to flout international law by refusing to join or recognize the International Criminal Court developed in 1945.

Nightmarish World War II memories linger in Moscow, Ukrainian neo-fascists were among those who seized control in the new government in Kiev yet the U.S. rushed to give its blessing to what the Kremlin later described as a "coup d'etat". While Sergei Lavrov, the Russian Foreign Minister, reflected these worries when he voiced "most serious concern" over Ukraine in phone calls to the French, German and Polish foreign ministers the EU, knowing this was what Washington wanted, just looked on. Little wonder the Russians were furious at what they saw as a western double cross. Don't hold your breath for Putin to back-off or back-down, he has put down his marker and is now playing both Obama and Kerry for fools in a contest that cost Russia little. It is likely that if If Putin doesn't get his way next week he will next month or next year at the latest.

Many people see Ukraine as the worst east-west crisis since the end of the Cold War and as the biggest foreign test of the Obama Presidency but with so many problems in the world eyes have shifted to the collapse of Iraq and turmoil in the Mideast. Putin is an unredeemed Cold War throwback and one tough cookie and he is prepared for the crisis to get very ugly. Similar battles elsewhere on Russia's periphery, in Georgia, Moldova, Armenia, Nagorno-Karabakh, and maybe Belarus and the Baltic states have hardened Putin. Whatever they think in Washington, and whatever the financial markets say, it's working for him  with polls showing his popularity soaring at home. One of these days western leaders will learn to stop under-estimating him, and recognize Russia's leader as the canny, dangerous, and unyielding opponent he is.

Sunday, July 13, 2014

Children at our border $72,000 each!

A much discussed issue over the last several weeks has been the large influx of children crossing the southern  border and entering America unaccompanied by an adult. Most of these kids are coming up from countries south of Mexico. In 2011, fewer than 4,000 children from Guatemala, Honduras and El Salvador were caught crossing the border. That number has surged to more than 40,000 of the 52,000 children caught or turning themselves in since October. A law passed in 2008 makes a distinction and requires that these children from countries other than Mexico and Canada be handled and processed differently. Reality on the ground has changed since that law was passed and altering or repealing it would change the way these kids are processed.

This problem has been building for years, a paper trail of funding request show that for months Washington knew this problem was forming but nothing was done. Now calling it a crisis President Obama has requested $3.7 billion in emergency funds from Congress to address the surge of unaccompanied children crossing into the United States from the south. The request for funds which is nearly twice as much as originally expected would be used to improve border security, care facilities for the children, additional immigration judges and agents, and efforts to help Central American nations curtail the exodus of children northward.

Lets cut to the chase and the reason I'm writing this article, it is to call attention to the money and the math behind it. Rounding it off for fun 50,000 goes into 3.7 billion 74,000 times. this means the government is asking for roughly $71,153 to cover "handling" each of these children. This does not include the cost of  paying for medical cost and schooling for a 15 year old boy allowed to join his undocumented father in Houston. This is only additional funding going to agencies that are "overwhelmed." Everyone seems to agree this influx of children is a problem. Yes, they are children. Yes, it must and should be handled but to an American who has worked all their life and now lives on a monthly social security check of under $1,000 a month the cost will most likely seem excessive.

Of the 3.7 billion dollars 1.8 are slated to go to Health and Human Services. Secretary Sylvia Mathews Burwell says it would assist their efforts to humanely treat the needs of the children at the border. "We don't have enough beds," Burwell urged "a robust and compassionate approach" noting many of the children crossing the border are often fleeing personal danger in their respective countries. HHS also provides basic medical and mental health exams to the children, as well as some education resources. The goal of this special outlay is to speed up the processing of these immigrants, with an eye toward sending as many as possible back to their countries of origin and improving the detention conditions while they are here. The White House said that without supplemental funding agencies do not have sufficient resources to adequately address this situation.

Obama's request includes $1.6 billion for the departments of Homeland Security and Justice to support more aggressive deterrence and enforcement. Immigration and Customs Enforcement would get $1.1 billion. Most of it would pay for detention and removal of undocumented adults traveling with children, expansion of alternatives to detention programs, and “additional prosecution capacity” for adults with children who cross into the US illegally. Customs and Border Protection would receive $433 million and an additional $300 million will go to State governments and international programs for efforts to counteract misinformation campaigns in Central America and to discourage these children from making the trip north.

This is a dangerous trip and many children have climbed upon the top or hang on to the side of a train known as "the beast" for a free ride north. Experts say they are fleeing exploding violence in their homelands, and are often under the misconception that once here, they'll be permitted to stay. Others come because their parents are conned by smugglers who promise families their children will be safe after they cross the border. The horrors that the children are fleeing are real. According to the UN Office on Drugs and Crime, Honduras has the highest murder rate in the world outside of a war zone, with 90.4 homicides per 100,000 people. Much of the killing is concentrated in poor neighborhoods, where families will do anything to get their children to safety.

This violence, combined with an ambiguous White House policy, has created the current situation according to Scott Stewart, vice president of tactical analysis at Texas-based intelligence firm Stratfor. In June 2012, President Obama signed a memo called Deferred Action for Childhood Arrivals. It permits teen illegal immigrants to stay in the US for up to two years. It also provided new discretion to ICE in enforcement of immigration laws. While DACA does not grant illegal immigrants permanent status, the policy is not well understood in Central America. In fact, we are seeing reports of teenagers showing up at the border with cheat sheets designed to help them gain DACA status and make it more difficult to be deported, such as  claiming their parents are dead, or that they are fearful for their security.

The fact is many of the thousands of children will get to stay, despite warnings to the contrary. The Wall Street Journal reports that data, as well as interviews with the children and their advocates, show that very few children are sent home, and many are allowed to stay in the US for years, if not permanently. Justice Department figures show that in fiscal year 2013, immigration judges ordered 3,525 children to be deported, with an additional 888 allowed to return home voluntarily. These numbers pale in comparison with the number of juveniles apprehended, amounting to between 23,000 and 47,000 children apprehended annually in each of the last five years.

The reasons children are staying included backlogged courts, winning the right to stay, and simply ignoring orders to appear in court. In recent months, the US has been overwhelmed with finding shelter for children entering the country illegally. President Obama repeatedly said that they won’t be allowed to stay but the reality is very different and until this changes more are going to come because they're achieving what they want, safety and reunification with their families. The head of the immigration court system told a Senate hearing that 46 percent of juveniles failed to appear at their hearings during the last eight months. The problem is expected to get worse, due to growing backlogs. As of June 30, there were 41,832 pending juvenile cases, up from about 30,000 nine months earlier and it is common for court dates to be set two or three years out.

This is a bad situation not a humanitarian catastrophe and many ways exist to ease the cost and resolve it in a way that diminishes governments role as the ultimate solution. First thing that must be done is retroactively change the 2008 law that gives these children special treatment. Other ideas include funding a  massive advertising campaign to let people know the borders are not open. At little cost the National Guard and Military can rotate troops to the border regions and aid in the round up of these youngsters. Refugee camps or centers to hold them can be ran and overseen by groups like the Red Cross and other NGOs. It is important we do what we can to help these children but this should not be another reason to expand government to clean up a mess government created.

Saturday, July 5, 2014

Government Pandering In Disasters A Great Disservice

High profile incidents covered by the media often reassures the public that the government stands ready to rush to our aid in case of a national disaster. Following a tornado or hurricane in the newscast we see FEMA workers spread-out and moving from door to door offering help to Americans in need. Be prepared that in the case of a major crisis or disaster if you find yourself in an large area of devastation the government will prove largely ineffective. If and when a really large Armageddon event does occur we will quickly become acutely aware that God helps those who help themselves.
During A Real Disaster Help Will Be Hard To find

The trend of pandering to victims that we have seen develop over the years may be a result of the battering former President Bush took in opinion polls following hurricane Katrina. The pictures that the media posted from slow response in handling Katrina haunt that administration and paint Bush as being insensitive and out of touch to the plight of poor Americans. At what point did government become responsible for dispensing sorrow and grief?  With the bar to show concern now set at such a high level little gets done in Washington.

Somehow the President has in a media driven world mistakenly adopted the role of consoler in chief and is expected to pour forth sympathy and cast out concern for every American following incidents of destruction or violence. It does not matter if it is an accident, shooting, or some natural disaster, in recent years all this has reached new heights where even in the case of a few deaths it is not uncommon to see the President leaping upon Air Force One and rushing to the scene to sympathize with families and friends. In this politically correct world it has even gone so far as to the President being expected to weigh in as to minor tragedies that occur throughout the world.

It should be noted that much time is wasted performing these acts that could be better used and focused to solve many of the real and pressing problems that face America. In reality this is a major disservice to Americans in that it fosters the impression that government will be there for you if you ever get into a pickle or jam. While reassuring to many the false illusion of a competent and effective government ready to come to your aid comes at the cost of raising unrealistic expectations. I suspect that with the formation of the massive Homeland Security Agency this may be a case of reassuring the masses that their tax money has not been wasted.

A perfect example would be the governments reaction to last years Boston Marathon bombing. It was overwhelming but in the end it was a homeowner checking the tarp on his boat noticing a spot of blood and not the thousands of law enforcement officers that brought the manhunt to an end. No matter how much planning is spent it is silly to think someone can quickly rush to an area they are totally unfamiliar with and institute actions to efficiently solve massive problems. Do not be fooled, in the case of a real disaster the government is generally not very effective, the real help will come from your neighbors, this has been the case throughout history.

All disasters are not created equal. In all reality the Federal government would be relatively ineffective and not much help in a major crisis that covered a large area and affecting tens of millions of Americans. Anyone who has even experienced the frustrations caused by a bad storm with power outages and such will tell you most help comes from nearby and government is not the answer. People who adopts a victim type attitude following a real disaster and simply wait for government to arrive to set things straight risk embracing the kiss of death.

Sunday, June 22, 2014

Exit Strategy From QE Remains Elusive

Regardless of what you name it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp. With a policy of loose and cheap money  and an inflation target of just 2% the Federal Reserve  continues to please those gambling that not fighting the Fed guarantees profits. As many Americans are forced to pay higher food, gasoline, and health insurance premiums, I wish someone would let the Fed know we have already exceeded their target. Any thought that inflation is not higher has come from the false illusion brought from lower payments on things like auto loans and mortgages, this is a one off and will not continue. 

America imports around five hundred billion dollars more from other countries every year than they export. This means we have a giant trade deficit, when we add this to our enormous government deficit it is easy to see that we are living far beyond our means. The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop. The Fed  must at some point begin to ponder a real exit strategy and end the massive and corrosive stimulus that the economy has come to expect. To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward.

The Federal Reserve has failed to take serious efforts in pushing the government to take the necessary reforms needed to move the economy forward. Policy makers aided by the media thrive at presenting simplistic answers that solve both economic and society’s problems with little or no effort required from the masses. What started as a program to support and prop up the economy has morphed into the main driver of economic data. Between the low interest rates that has propelled investors into high risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that investors will continue to pour money into the sky high equity market is flawed.

Even as many people have grown comfortable with the status quo this does not change the fact the Fed is in a difficult corner. A serious exit strategy from QE  that normalizes interest rates remains elusive. With higher interest rates the cost of mortgages will rise. The low interest rates that have discouraged savings and encouraged people to take high risks comes at a cost and does not lead to a healthy economy, but rather a story that will end in tears and regrets. When interest rates rise, as they will at some point, the value of these risky investments will decline, and these investors will be hurt. Also, as a double whammy, interest payments on the public debt will rise, increasing the budget deficit, which has averaged well over a trillion dollars a year for the past six years.

If all the money dumped into the economy would suddenly change direction and rush into hard assets, the shift would be devastating to our struggling economy. This thought also raises other questions, what can we define as a hard asset, what is really available, and in what quantities? This may be where inflation raises its ugly head. A unknown and surprising fact about inflation is how fast it can take root. With such a shift, interest rates would move higher and investors would flee government bonds. The crash of the bond market and what many have called a Bond Bubble will become a reality. Janet Yellen has shown no interest in coming up with a plausible exit strategy and even after developing a scheme making it work will be easier said than done.

Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,

Thursday, June 19, 2014

The Economic Efficiency Of Credit Can Collapse

It might soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates can no longer drive the economy forward. When this happens many of our economic policy options will vanish. This interesting concept may be soon put to the test as new problems emerge in China where we are seeing the extra GDP growth generated by each infusion of money drop from 0.85 to 0.15 over the last four years. This might be taken as a sign of exhaustion. The collapse of credit can pose major problems such as what we saw when many sellers were forced to demand payment up front before shipping goods in 2008.

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30% of GDP the typical threshold for financial crises. This means many companies will not be able to pay interest or repay principal. She warned that the country could be on the verge of a "Minsky Moment", when the debt pyramid collapses under its own weight. "The debt snowball is getting bigger and bigger, without contributing to real activity," she said. The total credit in China's financial system is estimated to be as high as  221% of GDP and has jumped almost eightfold over the last decade. This means companies will have to pay out $1 trillion in interest payments alone this year. Chinese corporate debt burdens are much higher than those of other economies.

Currently much of the liquidity that exist in China's economy is being used to repay debt and not to finance output. The fact that new investment in factories has slowed drastically is probably a good thing because China is awash in overcapacity. New factories sit idle because of weak demand. This also raises concerns over an exodus of hot money once the US Federal Reserve starts tightening. China might see a large-scale capital outflow if and when there is an exit from quantitative easing and the dollar strengthens. This maybe already starting with recent withdrawals from Chinese equity funds the highest since early 2008 and withdrawals from Hong Kong funds the highest in a decade.

Fortunately, China's Central government carries little debt on its books. This gives the central government the option to step in if a worse case scenario develops and bail companies out or put them on life support as Japan did so many years ago.  Many people think if things get worse China might have to take action to help real estate companies or even worse recapitalize the banking system, but this will not fix all the problems. I'm forced to reflect on how debt is directly effected by interest rates. In Europe the ECB has stepped in to halt the economic collapse of Spain, Italy and several other countries that were on the brink of collapse by instituting false super low interest rates. 

What you pay in interest on debt does matter except in the current manipulated land of  Modern Monetary Theory. Often referred to as MMT its believers see it as a way to remove much of the risk ahead and guarantee the economy will always be able to muddle forward by altering and changing the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems. Unfortunately, the part where you collect a debt that you are owed can be similar to a mirage that keeps moving away each time you approach it. Do not forget the small print that governs most contracts often tells us rules can be changed causing many people and companies to become instantly insolvent.

Why do you want to loan money if most likely you will never be repaid or repaid with something that is totally worthless? We are abusing the large amount of wiggle room in our economic system and our ability to put off the day of reckoning only proving that we will until we can't! Modern society has become very good at kicking the can down the road and delaying the consequences of bad policy.  This means that at some point the return on loaning money is simply not worth the risk! When this happens the only safe place to store wealth will be in "tangible assets" and the only lenders will be those who print the money that nobody wants.

Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.