- Will We Never Learn? The Economic Lessons From Venezuela's Current Collapse
Shops are being looted as Venezuela's citizens, who live on top of the world’s largest oil reserves, are literally starving and dying for lack of food and medicine; all while the country’s gold reserves are being sold to finance its debt. With 1.8 million signatures on a petition for a referendum on Nicolas Maduro’s presidency, the country is threatening to become a failed state.
Venezuela is in crisis…
So, Ricardo Hausmann, former minister of planning for Venezuela, explains (via Project Syndicate) how too much heteredoxy (read – monetary policy experimentation and central planning and control) can kill you…
Ever since the 2008 financial crisis, it has been common to chastise economists for not having predicted the disaster, for having offered the wrong prescriptions to prevent it, or for having failed to fix it after it happened. The call for new economic thinking has been persistent – and justified. But all that is new may not be good, and that all that is good may not be new.
The 50th anniversary of China’s Cultural Revolution is a reminder of what can happen when all orthodoxy is tossed out the window. Venezuela’s current catastrophe is another: A country that should be rich is suffering the world’s deepest recession, highest inflation, and worst deterioration of social indicators. Its citizens, who live on top of the world’s largest oil reserves, are literally starving and dying for lack of food and medicine.
While this disaster was brewing, Venezuela won accolades from the United Nations Food and Agricultural Organization, the Economic Commission for Latin America, British Labour Party leader Jeremy Corbyn, former Brazilian President Luiz Inácio Lula da Silva and the US Center for Economic Policy Research, among others.
So what should the world learn from the country’s descent into misery? In short, Venezuela is the poster child of the perils of rejecting economic fundamentals.
One of those fundamentals is the idea that, to achieve social goals, it is better to use – rather than repress – the market. After all, the market is essentially just a form of self-organization whereby everyone tries to earn a living by doing things that others find valuable. In most countries, people buy food, soap, and toilet paper without incurring a national policy nightmare, as has happened in Venezuela.
But suppose you do not like the outcome the market generates. Standard economic theory suggests that you can affect it by taxing some transactions – such as, say, greenhouse-gas emissions – or giving money to certain groups of people, while letting the market do its thing.
An alternative tradition, going back to Saint Thomas Aquinas, held that prices should be “just.” Economics has shown that this is a really bad idea, because prices are the information system that creates incentives for suppliers and customers to decide what and how much to make or buy. Making prices “just” nullifies this function, leaving the economy in perpetual shortage.
In Venezuela, the Law of Just Costs and Prices is one reason why farmers do not plant. For that reason, agro-processing firms shut down. More generally, price controls create incentives to flip goods into the black market. As a result, the country with the world’s most extensive system of price controls also has the highest inflation – as well as an ever-expanding police effort that jails retail managers for holding inventories and evencloses the borders to prevent smuggling.
Fixing prices is a short dead-end street. A longer one is subsidizing goods so that their price remains below cost.
These so-called indirect subsidies can quickly cause an immense economic mess. In Venezuela, subsidies for gasoline and electricity are larger than the budget for education and health care combined; exchange-rate subsidies are in a class of their own. With one daily minimum wage in Venezuela, you can buy barely a half-pound (227 grams) of beef or 12 eggs, or 1,000 liters (264 gallons) of gasoline or 5,100 kWh of electricity – enough to power a small town. With the proceeds of selling a dollar at the black market rate, you can buy over $100 at the strongest official rate.
Under these conditions, you are unlikely to find goods or dollars at official prices. Moreover, since the government is unable to pay providers the necessary subsidy to keep prices low, output collapses, as has happened with Venezuela’s electricity and health sectors, among others.
Indirect subsidies are also regressive, because the rich consume more than the poor – and hence appropriate more of the subsidy. This is what underpins the old orthodox wisdom that if you want to change market outcomes, it is better to subsidize people directly with cash.
Another bit of conventional wisdom is that creating the right incentive structure and securing the necessary know-how to run state-owned enterprises is very difficult. So the state should have only a few firms in strategic sectors or in activities that are rife with market failures.
Venezuela disregarded that wisdom and went on an expropriation binge. In particular, after former President Hugo Chávez was reelected in 2006, he expropriated farms, supermarkets, banks, telecoms, power companies, oil production and service firms, and manufacturing companies producing steel, cement, coffee, yogurt, detergent, and evenglass bottles. Productivity collapsed in all of them.
Governments often struggle to balance their books, leading to over-indebtedness and financial trouble. Yet fiscal prudence is one of the most frequently attacked principles of economic orthodoxy. But Venezuela shows what happens when prudence is frowned upon and fiscal information is treated as a state secret.
Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. This caused the currency to lose 98% of its value in the last three years. By the time oil prices fell in 2014, the country was in no position to take the hit, with collapsing domestic production and capacity to import, leading to the current disaster.
Orthodoxy reflects history’s painfully acquired lessons – the sum of what we regard to be true. But not all of it is true. Progress requires identifying errors, which in turn calls for heterodox thinking. But learning becomes difficult when there are long delays between action and consequences, as when we try to regulate the water temperature while in the shower. When reaction times are slow, exploring the heterodox is necessary, but should be done with care. When all orthodoxy is thrown out the window, you get the disaster that was the Chinese Cultural Revolution – and that is today’s Venezuela.
* * *
So what should the world learn from the country’s descent into misery? In short, Venezuela is the poster child of the perils of rejecting economic fundamentals.
- As Short Interest Soars To Record Highs, Chinese Stock Futures Flash-Crash 12.5%
Shortly after 1042am local, Chinese stock futures (CSI-300) flash-crashed over 12.5% on extreme heavy volume (while the cash CSI-300 remained unch). This move erased 3 months of gains but within 1 minute was back in the green with stocks up over 2.5%. The shocking collapse, exaggerated by a major lack of liquidity, was made more surprising by the fact that the last week has seen a record short position in the major Chinese stock ETF. Simply put, the heavy hand of market-central-planning has erased any and all depth in futures markets and positioning has become so tilted that price vacuums are likely to continue to occur.
As Bloomberg notes, the swing follows a similarly unexplained tumble in Hang Seng China Enterprises Index futures in Hong Kong on May 16, a move that added to nervousness over the prospects for Chinese stocks amid slowing economic growth and a weakening yuan. The CSI 300 has dropped 16 percent this year, versus a 2.2 percent gain in the MSCI Emerging Markets Index.
“It looks like a fat finger,” Fang Shisheng, Shanghai-based vice general manager at Orient Securities Futures Co., said by phone. “Liquidity in the market is really thin at the moment. So the market will very likely see big swings if a big order comes in. The order looks like it’s from a hedger.”
And for some context of what that move looks like longer term – it erased 3 months of gains instantly…
Still, positioning in Chinese Stock ETFs (FXI) has soared in the last week as volatility has been utterly suppressed in the major index…
The relative stability of the Chinese stock market in the last few weeks is oddly decoupled from the relative volatility in the Yuan and as Bloomberg notes, While the yuan’s losses have escalated in the past three weeks, the Shanghai Composite has been unmoved. The index has barely strayed from the 2,800 level amid speculation state-backed funds are preventing further losses, helping send 30-day volatility on the gauge to its lowest level since December 2014.
Some investors may be betting China’s domestic equities, known as A shares, will fall further if yuan losses deepen, according to Sam Chi Yung, senior strategist at South China Financial Holdings Ltd. in Hong Kong.
“Investors think there is some risk in A shares," the strategist said. “If the yuan keeps falling that would affect the value of Chinese shares."
But, as the following chart shows, this is a record level of relative short interest…
Seemingly creating the perfect opportunity for a plunge protection team to squeeze stocks higher… proving the Chinese economy is fixed once again (or is this time different, like in 2008 and 2015)
- The Endless Dodge – Why Washington Doesn't Come Clean On The Downing Of MH-17
Submitted by Roberty Parry via ConsortiumNews.com (h/t Contra Corner blog),
A newly posted video showing a glimpse of a Buk missile battery rolling down a highway in eastern Ukraine has sparked a flurry of renewed accusations blaming Russia for the July 17, 2014 shoot-down of Malaysia Airlines Flight 17 killing 298 people. But the “dash-cam video” actually adds little to the MH-17 whodunit mystery because it could also support a narrative blaming the Ukrainian military for the disaster.
The fleeting image of the missile battery and its accompanying vehicles, presumably containing an armed escort, seems to have been taken by a car heading west on H-21 highway in the town of Makiivka, as the convoy passed by heading east, according to the private intelligence firm Stratfor and the “citizen journalism” Web site, Bellingcat.
However, even assuming that this Buk battery was the one that fired the missile that destroyed MH-17, its location in the video is to the west of both the site where Almaz-Antey, the Russian Buk manufacturer, calculated the missile was fired, around the village of Zaroshchenskoye (then under Ukrainian government control), and the 320-square-kilometer zone where the Dutch Safety Board speculated the fateful rocket originated (covering an area of mixed government and rebel control).
In other words, the question would be where the battery stopped before firing one of its missiles, assuming that this Buk system was the one that fired the missile. (The map below shows the location of Makiivka in red, Almaz-Antey’s suspected launch site in yellow, and the general vicinity of the Dutch Safety Board’s 320-square-kilometer launch zone in green.)
Another curious aspect of this and the other eight or so Internet images of Buk missiles collected by Bellingcat and supposedly showing a Buk battery rumbling around Ukraine on or about July 17, 2014, is that they are all headed east toward Russia, yet there have been no images of Buks heading west from Russia into Ukraine, a logical necessity if the Russians gave a Buk system to ethnic Russian rebels or dispatched one of their own Buk military units directly into Ukraine, suspicions that Russia and the rebels have denied.
The absence of a westward-traveling Buk battery fits with the assessment from Western intelligence agencies that the several operational Buk systems in eastern Ukraine on July 17, 2014, were under the control of the Ukrainian military, a disclosure contained in a Dutch intelligence report released last October and implicitly confirmed by an earlier U.S. “Government Assessment” that listed weapons systems that Russia had given the rebels but didn’t mention a Buk battery.
The Netherlands’ Military Intelligence and Security Service (MIVD) reported that the only anti-aircraft weapons in eastern Ukraine capable of bringing down MH-17 at 33,000 feet on July 17 belonged to the Ukrainian government. MIVD made that assessment in the context of explaining why commercial aircraft continued to fly over the eastern Ukrainian battle zone in summer 2014.
MIVD said that based on “state secret” information, it was known that Ukraine possessed some older but “powerful anti-aircraft systems” capable of downing a plane at that altitude and “a number of these systems were located in the eastern part of the country,” whereas the MIVD said the ethnic Russian rebels had only MANPADS that could not reach the higher altitudes.
Ukrainian Offensive
On July 17, the Ukrainian military also was mounting a strong offensive against rebel positions to the north and thus the front lines were shifting rapidly, making it hard to know exactly where the borders of government and rebel control were. To the south, where the Buk missile was believed fired, the battle lines were lightly manned and hazy – because of the concentration of forces to the north – meaning that an armed Buk convoy could probably move somewhat freely.
Also, because of the offensive, the Ukrainian government feared a full-scale Russian invasion to prevent the annihilation of the rebels, explaining why Kiev was dispatching its Buk systems toward the Russian border, to defend against potential Russian air strikes.
Just a day earlier, a Ukrainian fighter flying along the border was shot down by an air-to-air missile (presumably fired by a Russian warplane), according to last October’s Dutch Safety Board report. So, tensions were high on July 17, 2014, when MH-17, flying from Amsterdam to Kuala Lumpur, broke apart over eastern Ukraine, believed downed by a surface-to-air missile although there have been other suggestions that the plane might have been hit by an air-to-air missile.
At the time, Ukraine also was the epicenter of an “information war” that had followed a U.S.-backed coup on Feb. 22, 2014, which ousted democratically elected President Viktor Yanukovych and replaced the Russian-friendly leader with a fiercely nationalistic and anti-Russian regime in Kiev. The violent coup, in turn, prompted Crimea to vote 96 percent in a hasty referendum to secede from Ukraine and rejoin Russia. Eastern Ukraine and its large ethnic Russian population also revolted against the new authorities.
The U.S. government and much of the Western media, however, denied there had been a coup in Kiev, hailed the new regime as “legitimate,” and deemed Crimea’s secession a “Russian invasion.” The West also denounced the eastern Ukrainian resistance as “Russian aggression.” So, the propaganda war was almost as hot as the military fighting, a factor that has further distorted the pursuit of truth about the MH-17 tragedy.
Immediately after the MH-17 crash, the U.S. government sought to pin the blame on Russia as part of a propaganda drive to convince the European Union to join in imposing economic sanctions on Russia for its “annexation” of Crimea and its support of eastern Ukrainians resisting the Kiev regime.
However, a source briefed by U.S. intelligence analysts told me that the analysts could find no evidence that the Russians had supplied the rebels with a sophisticated Buk system or that the Russians had introduced a Buk battery under their own command. The source said the initial intelligence suggested that an undisciplined Ukrainian military team was responsible.
Yet, on July 20, 2014, just three days after the tragedy, Secretary of State John Kerry appeared on all Sunday morning talk shows and blamed the Russian-backed rebels and implicitly Moscow. He cited some “social media” comments and – on NBC’s “Meet the Press” – added: “We picked up the imagery of this launch. We know the trajectory. We know where it came from. We know the timing. And it was exactly at the time that this aircraft disappeared from the radar.”
Two days later, on July 22, the Obama administration released a “Government Assessment” that tried to bolster Kerry’s accusations, in part, by listing the various weapons systems that U.S. intelligence believed Russia had provided the rebels, but a Buk battery was not among them. At background briefings for selected mainstream media reporters, U.S. intelligence analysts struggled to back up the administration’s case against Russia.
For instance, the analysts suggested to a Los Angeles Times reporter that Ukrainian government soldiers manning the suspected Buk battery may have switched to the rebel side before firing the missile. The Times wrote: “U.S. intelligence agencies have so far been unable to determine the nationalities or identities of the crew that launched the missile. U.S. officials said it was possible the SA-11 [Buk anti-aircraft missile] was launched by a defector from the Ukrainian military who was trained to use similar missile systems.”
However, after that July 22 briefing — as U.S. intelligence analysts continued to pore over satellite imagery, telephonic intercepts and other data to refine their understanding of the tragedy — the U.S. government went curiously silent, refusing to make any updates or adjustments to its initial rush to judgment, a silence that has continued ever since.
Staying Silent
Meanwhile, the source who continued receiving briefings from the U.S. intelligence analysts told me that the reason for going quiet was that the more detailed evidence pointed toward a rogue element of the Ukrainian military connected to a hardline Ukrainian oligarch, with the possible motive the shooting down of President Vladimir Putin’s plane returning from a state visit to South America.
In that scenario, a Ukrainian fighter jet in the vicinity (as reported by several eyewitnesses on the ground) was there primarily as a spotter, seeking to identify the target. But Putin’s plane, with similar markings to MH-17, took a more northerly route and landed safely in Moscow.
Though I was unable to determine whether the source’s analysts represented a dissenting or consensus opinion inside the U.S. intelligence community, some of the now public evidence could fit with that narrative, including why the suspected Buk system was pushing eastward as close to or even into “rebel” territory on July 17.
If Putin was the target, the attackers would need to spread immediate confusion about who was responsible to avoid massive retaliation by Moscow. A perfect cover story would be that Putin’s plane was shot down accidentally by his ethnic Russian allies or even his own troops, the ultimate case of being hoisted on his own petard.
Such a risky operation also would prepare disinformation for release after the attack to create more of a smokescreen and to gain control of the narrative, including planting material on the Internet to be disseminated by friendly or credulous media outlets.
The Ukrainian government has denied having a fighter jet in the air at the time of the MH-17 shoot-down and has denied that any of its Buk or other anti-aircraft systems were involved.
Yet, whatever the truth, U.S. intelligence clearly knows a great deal more than it has been willing to share with the public or even with the Dutch-led investigations. Last October, more than a year after the shoot-down, the Dutch Safety Board was unable to say who was responsible and could only approximate the location of the missile firing inside a 320-square-kilometer area, whereas Kerry had claimed three days after the crash that the U.S. government knew the launch point.
Earlier this year, Fred Westerbeke, the chief prosecutor of the Dutch-led Joint Investigative Team [JIT], provided a partial update to the Dutch family members of MH-17 victims, explaining that he hoped to have a more precise fix on the firing site by the second half of 2016, i.e., possibly more than two years after the tragedy.
Westerbeke’s letter acknowledged that the investigators lacked “primary raw radar images” which could have revealed a missile or a military aircraft in the vicinity of MH-17. That apparently was because Ukrainian authorities had shut down their primary radar facilities supposedly for maintenance, leaving only secondary radar which would show commercial aircraft but not military planes or rockets.
Russian officials have said their radar data suggest that a Ukrainian warplane might have fired on MH-17 with an air-to-air missile, a possibility that is difficult to rule out without examining primary radar which has so far not been available. Primary radar data also might have picked up a ground-fired missile, Westerbeke wrote.
“Raw primary radar data could provide information on the rocket trajectory,” Westerbeke wrote. “The JIT does not have that information yet. JIT has questioned a member of the Ukrainian air traffic control and a Ukrainian radar specialist. They explained why no primary radar images were saved in Ukraine.” Westerbeke said investigators are also asking Russia about its data.
Westerbeke added that the JIT had “no video or film of the launch or the trajectory of the rocket.” Nor, he said, do the investigators have satellite photos of the rocket launch.
“The clouds on the part of the day of the downing of MH17 prevented usable pictures of the launch site from being available,” he wrote. “There are pictures from just before and just after July 17th and they are an asset in the investigation.”
Though Westerbeke provided no details, the Russian military released a number of satellite images purporting to show Ukrainian government Buk missile systems north of the eastern Ukrainian city of Donetsk before the attack, including two batteries that purportedly were shifted 50 kilometers south of Donetsk on July 17, the day of the crash, and then removed by July 18.
Russian Lt. Gen. Andrey Kartopolov called on the Ukrainian government to explain the movements of its Buk systems and why Kiev’s Kupol-M19S18 radars, which coordinate the flight of Buk missiles, showed increased activity leading up to the July 17 shoot-down.
Necessary Secrets?
Part of the reason that the MH-17 mystery has remained unsolved is that the U.S. government insists that its satellite surveillance, which includes infrared detection of heat sources as well as highly precise photographic imagery, remains a “state secret” that cannot be made public.
However, in similar past incidents, the U.S. government has declassified sensitive information. For instance, after a Soviet pilot accidentally shot down Korean Airlines Flight 007 over Russian territory in 1983, the Reagan administration revealed the U.S. capability to intercept Soviet ground-to-air military communications in order to make the Soviets look even worse by selectively editing the intercepts to present the destruction of the civilian aircraft as willful.
In that case, too, the U.S. government let its propaganda needs overwhelm any commitment to the truth, as Alvin A. Snyder, who in 1983 was director of the U.S. Information Agency’s television and film division, wrote in his 1995 book, Warriors of Disinformation.
After KAL-007 was shot down, “the Reagan administration’s spin machine began cranking up,” Snyder wrote. “The objective, quite simply, was to heap as much abuse on the Soviet Union as possible. … The American media swallowed the U.S. government line without reservation.”
On Sept. 6, 1983, the Reagan administration went so far as to present a doctored transcript of the intercepts to the United Nations Security Council. “The perception we wanted to convey was that the Soviet Union had cold-bloodedly carried out a barbaric act,” Snyder wrote.
Only a decade later, when Snyder saw the complete transcripts — including the portions that the Reagan administration had excised — would he fully realize how many of the central elements of the U.S. presentation were lies.
Snyder concluded, “The moral of the story is that all governments, including our own, lie when it suits their purposes. The key is to lie first.” [For more details on the KAL-007 deception and the history of U.S. trickery, see Consortiumnews.com’s “A Dodgy Dossier on Syrian War.”]
In the MH-17 case, the Obama administration let Kerry present the rush to judgment fingering the Russians and the rebels but then kept all the evidence secret even though the U.S. government’s satellite capabilities are well-known. By refusing to declassify any information for the MH-17 investigation, Washington has succeeded in maintaining the widespread impression that Moscow was responsible for the tragedy without having to prove it.
The source who was briefed by U.S. intelligence analysts told me that the Obama administration considered “coming clean” about the MH-17 case in March, when Thomas Schansman, the Dutch father of the only American victim, was pleading for the U.S. government’s cooperation, but administration officials ultimately decided to keep quiet because to do otherwise would have “reversed the narrative.”
In the meantime, outfits such as Bellingcat have been free to reinforce the impression of Russian guilt, even as some of those claims have proved false. For instance, Bellingcat directed a news crew from Australia’s “60 Minutes” to a location outside Luhansk (near the Russian border) that the group had identified as the site for the “getaway video” showing a Buk battery with one missile missing.
The “60 Minutes” crew went to the spot and pretended to be at the place shown in the video, but none of the landmarks matched up, which became obvious when screen grabs of the video were placed next to the scene of the Australian crew’s stand-upper. [See Consortiumnews.com’s “Fake Evidence Blaming Russia for MH-17.”]
Yet, reflecting the deep-seated mainstream media bias on the MH-17 case, the Australian program reacted angrily to my pointing out the obvious discrepancies. In a follow-up, the show denounced me but could only cite a utility pole in its footage that looked similar to a utility pole in the video.
While it’s true that utility poles tend to look alike, in this case none of the surroundings did, including the placement of the foliage and a house shown in the video that isn’t present in the Australian program’s shot. [For details, see Consortiumnews.com’s “A Reckless Stand-upper on MH-17.”]
But the impact of the nearly two years of one-sided coverage of the MH-17 case in the mainstream Western media has been considerable. In the last few days, a lawyer for the families of Australian victims announced the filing of a lawsuit against Russia and Putin in the European court for human rights seeking compensation of $10 million per passenger. Many of the West’s news articles on the lawsuit assume Russia’s guilt.
In other words, whatever the truth about the MH-17 shoot-down, the tragedy has proven to be worth its weight in propaganda gold against Russia and Putin, even as the U.S. government hides the actual proof that might show exactly who was responsible.
- Mizuho CEO Warns Japan Sales Tax Delay Is "Admission Abenomics Has Failed"
It has not been a good “second coming” for Shinzo Abe, whose first stint as prime minister of Japan ended in disgrace in 2007 after an allegedly crippling bout of explosive diarrhea forced the then-prime minister to resign. To say that Abenomics has been a dismal failure would be an understatement: unable to boost inflation, unable to boost wages, plummeting trade with both exports and imports crashing to post crisis lows…
… and lately failing miserably to boost the stock market after Kuroda’s epic debacle with Japan’s NIRP lunacy, Kuroda had one loophole: a tiny fiscal stimulus in the form of delaying the once-already delayed sales tax.
The only problem: over the past few months, Kuroda had trapped himself when he said that the only conditions under which he would delay the sales tax would be only if “another global economic contraction or Lehman-style market shock jolted the Japanese economy.“
That explains why Abe was desperate to get the G-7 to warn of the risk of a global economic crisis in the final communique issued as the summit wrapped up last Friday in Japan.
He failed. In fact, the final statement went the other way and declared that G-7 countries “have strengthened the resilience of our economies in order to avoid falling into another crisis. The global recovery continues, but growth remains moderate and uneven, and since we last met downside risks to the global outlook have increased,” the statement says. “Weak demand and unaddressed structural problems are the key factors weighing on actual and potential growth.”
Ironically, Abe is actually quite right, and the world remains in a state of post-Lehman shock: after all why would central banks need to engage in a “secret” Shanghai Accord more than 7 years after the global financial crisis to prevent markets from crashing? The answer: because nothing has been fixed and the entire world remains on edge day after day. However, as we also noted citing economist Glenn Maguire, “the G-7 is obviously aware of the ‘announcement effect’ the official communique has” and “in such a situation, warning of negative risks and sentiment can become self-fulfilling.“
Hence, Abe was snubbed.
Unfortunately for the Japanese premier, there simply was no other choice, and as leaked repeatedly by virtually all Japanese media sources, Japan’s sales-tax hike scheduled to take place in early 2017 will be delayed after all, with or without a Lehman style shock: for Abe there simply is no other choice.
This is where the problems for Japan begin, because as the chief of Mizuho Financial Group said over the weekend, Japan risks a credit-rating downgrade if Prime Minister Shinzo Abe delays a scheduled sales-tax increase without explaining how the government plans to cut its deficit. Actually not if, but when; and as we know, the “when” is likely to be as soon as this week, when Abe admits fiscal failure and that Japan simply has no hope of ever containing its ridiculous debt load.
And here is why Abe was so desperate to get the G-7 to “validate” his worldview as one where things are on the brink: as otherwise it would mean Japan’s economy is in far more dire shape than realized, and it will need to incur much more debt in the coming years.
Quoted by the WSJ, Yasuhiro Sato, president of Mizuho, Japan’s second-largest bank by assets, said Abe’s framing of such a decision would determine whether it sparked concerns about the government’s credibility regarding its plans for fiscal consolidation.
“The worst scenario is [the government] will just announce a delay in the tax increase. That could send a message that Abenomics has failed or Japan is heading for a fiscal danger zone and then it will harm Japanese government bonds’ credit ratings,” Sato said in an interview, referring to the prime minister’s growth program.
As the WSJ adds, Abe acknowledged for the first time Friday that he was considering delaying an increase in the sales tax to 10% from 8% scheduled to take effect in April next year. He said he would decide before an upper house election to be held in July, but Japanese media have reported that a decision could come this week.
Abe has delayed the tax increase once, after the rise to 8% in April 2014 derailed an economic recovery. Consumer spending has yet to fully rebound, and some economists say the prospect of another tax increase next year is already weighing on spending.
Sato acknowledged that raising the tax again would pose a risk to Japan’s economy, although the alternative – admission that Abenomics has failed – is just as bad, which is why Abe is now in a pickle, and why we anticipate his bathroom runs will become increasingly more frequent… just in case a rerun, pardon the pun, of 2007 is in the works and Abe has to quit due to some new scapegoat.
“There will be a risk in either case of raising the tax or not, so as long as the government demonstrates a clear road map for fiscal reconstruction, Japanese credibility likely won’t be hurt so much,” Sato said, although sadly for Japan, there just is no such road map.
Some bankers say Japan could damage its international credibility if it fails to raise taxes on schedule. The tax increases are part of long-standing efforts to reach a primary government surplus by 2020. A primary surplus is a balanced budget excluding interest payments on government debt. Japan’s government debt, when including corporate and personal debt, is the largest in the world relative to the size of its economy, standing at over 400% of GDP.
Worse, a dwbt downgrade for Japan will be merely a formality once Abe delays the sales tax. Moody said in a March report that “postponing the next [sales-tax] increase regardless of the reason would pose a big fiscal burden for Japan.” Moody already downgraded Japan’s credit rating by one notch to A1 from Aa3, the same rating it has assigned to Israel and the Czech Republic, after Abe decided in November 2014 to delay the tax increase the first time. It will do so again.
Standard & Poor’s and Fitch Ratings have also lowered Japan’s credit rating in the past two years, but investors continue to accept near record-low yields on the government’s debt.
On Sunday, Yasufumi Tanahashi, a senior member of the ruling Liberal Democratic Party, explained why the tax increase might need to be delayed.
“If tax revenue doesn’t grow despite increasing the tax rate, then from a medium-to-long term perspective it’s necessary to respond flexibly,” he said during a political TV program. Mr. Tanahashi said a delay would require a law to be amended and debate within the ruling coalition to reach a consensus.
Back to Mizuho’s Sato, who didn’t take a position on whether the tax increase should proceed as scheduled, said Japanese banks’ dollar-funding costs could rise further if a credit-ratings firm downgrades them again.
“We’ve seen a rise in dollar-funding costs since the second half of 2014,” he said. “There is no way lending will boost our profitability.” To balance weakness in lending, Mizuho has focused on income from fees, including from its M&A advisory and underwriting businesses. Mizuho aims to increase its fee income from 54% to 60% of the total in the three years through March 2019.
Of course, downgrade or not, what is left unsaid is that as long as the BOJ continues to monetize all net issuance of JGBs, as it does now, yields on Japan’s Treasuries will remain record low, and mostly negative. However, if enough official red flags accumulate against the monetary lunatics in Tokyo – who are merely a decade ahead proxy for the rest of the world as Japan is a decade ahead of everyone in the global race to the bottom but also has the most deflationary demographics to boot – in the form of rating downgrades, not even the BOJ buying up all the Japanese bonds, stocks, REITs and ETFs will prevent a global revulsion to Japanese assets as the world finally realizes, and admits, that Japan is finished. That process could start as soon as this week with Abe’s sales tax delay announcement.
- Do "Targeted" US Killings Of Militant Leaders Work? Not So Much
When Taliban leader Mullah Akhtar Mansour was killed recently in a US drone strike, we noted that experts cautioned that it would make local insurgents even less likely to participate in long-stalled peace efforts, and it would likely lead to an escalation of Taliban retaliation efforts.
Mullah Akhtar Mansour, Taliban militants’ leader
The key question around the US killings of militant leaders is do they even work? This is something the Wall Street Journal also pondered in a recent piece on just how effective US strikes on leaders of militant groups are in the long run.
On one hand, it does appear as though the killing of Osama bin Laden has hurt Al Qaeda; on the other, the killing of Mansour may not have much of an impact at all on the Taliban.
From the WSJ
Both the 2011 raid on Osama bin Laden’s compound in Pakistan and the targeting of Mullah Mansour on a Pakistani road were major successes for U.S. intelligence and the Pentagon.
Al Qaeda’s central command, a relatively tight international terror network now led by Ayman al-Zawahiri, has been in decline since bin Laden’s death. It has been unable to fully recover from the blow or to mount major attacks against the West.
But the experience is less encouraging for wide-scale insurgencies such as the Afghan Taliban. While such decapitations can provide a short-term gain, they rarely change the course of the conflict—and frequently backfire if not accompanied by a much broader, resource-intensive involvement of a kind the White House has been loath to pursue.
Unlike al Qaeda, the Taliban enjoy support from a significant swath of the Afghan population. The group’s military advances in 2013-15 weren’t impeded by the fact that its leader, Mullah Mohammad Omar, was secretly dead at the time, or by the assassinations of scores of commanders.
In announcing Mullah Mansour’s death, President Barack Obama said his killing “gives the people of Afghanistan and the region a chance at a different, better future.”
That optimistic assessment isn’t shared by many, in the region or in the U.S., who closely follow the Taliban.
“I don’t think it will weaken the Taliban, and it may strengthen them,” said Barnett Rubin, a former U.S. State Department official who worked on peace negotiations with the Taliban and who is now associate director of the Center on International Cooperation at New York University.
As we warned the death – which carried the added “benefit” of further infuriating Pakistan which accused the US of violating its sovereignty with the mission – will make peace talks next to impossible, while pushing the militants to an even more extreme fringe.
It is also far from certain that removing Mullah Mansour would make such peace talks—an avowed U.S. goal—any easier to resume.
The minister of aviation in the pre-2001 Taliban government, Mullah Mansour belonged to the original generation of Taliban leaders, was involved in the political outreach, and could influence field commanders. His successor named on Wednesday, Maulavi Haibatullah, is believed to represent a more uncompromising cast.
“After this killing, the Taliban will be more hard-line and the people who think that the war will solve all the problems will be more powerful. This is a blow to peace,” said Waheed Muzhda, a Kabul political analyst who served in the Taliban regime’s foreign ministry before 2001.
U.S. officials have argued that, with Mr. Mansour, there wasn’t any peace process to derail anyway.
Splinter groups, like ISIS which grew apart from Al Qaeda (with the careful grooming of Saudi Arabia, Qatar and of course, the CIA) prove resilient when it comes to the aftermath of leaders being killed, often times using violence more indiscriminantly than the parent group because of the need to recruit. Unlike killing leaders of the Pakistani Taliban, which helped the Pakistani government engineer further splits, groups such as ISIS will lead to a new cycle of attacks and create greater chaos.
That was, in effect, the behavior of Islamic State, which resorted to uninhibited violence as it grew apart from al Qaeda, a process accelerated by bin Laden’s death. The U.S. was successful in killing the group’s founder Abu Musab al-Zarqawi in 2006 and his successor Abu Omar al-Baghdadi in 2010.
But as long as the sectarian tension that originally fueled Islamic State’s growth in Iraq persisted, the organization proved resilient and was able to feed off the Syrian war to capture a sizable chunk of both countries in 2014.
Arguably, the record is better with the U.S. drone killings of the leaders of Pakistani Taliban, Baitullah Mehsud in 2009 and his successor Hakimullah Mehsud in 2013. These strikes and the climate of suspicion that they fomented provoked infighting among various factions of the group, known as Tehreek-e-Taliban Pakistan. That made it easier for the Pakistani military to launch a major ground offensive into the TTP stronghold of North Waziristan in 2014.
“Killing them has helped the Pakistani government to engineer further splits, and to drive the TTP where they are today—fragmented,” said Imtiaz Gul, executive director of the Center for Research and Security Studies in Pakistan.
The attack on Mullah Mansour came at a time when the U.S. military presence in Afghanistan has shrunk to just 9,800 troops, a fraction of the level a few years ago, and when Afghanistan’s embattled security forces struggle to counter Taliban offensives.
His death “would lead to a new cycle of attacks and counterattacks,” cautioned Vali Nasr, dean of the School of Advanced International Studies at Johns Hopkins University and a former U.S. State Department senior adviser on Afghanistan and Pakistan.
“All of this needs a much greater U.S. engagement in Afghanistan than the U.S. has troops for,“ Mr. Nasr said. ”It is extremely risky because it can actually create greater chaos. You cannot deal with a larger insurgency through the tactic of decapitation.”
While it is difficult to tell whether or not killing a militant group leader will help or hinder efforts to defeat such groups, by now the incontrovertible evidence is that such direct and deadly interventions do much more harm than good. Which may be precisely why the US continues to engage in such missions, knowing full well that selective killings will continue to splinter groups, create further chaos, and unleash the “need” for the “boots on the ground” as was the case in Syria.
Pardon, did we say, the US government? We meant the US military-industiral complex: after all everyone by now knows who calls the shots in the Pentago. As for the MIC’s facade, rest assured that if the US wants to start a war for any myriad of reasons, it knows precisely how to do just that.
- US Gold Market Infographic
The US Gold Market is best known as the home of gold futures
trading on the COMEX in New York. The COMEX has a literal monopoly on gold
futures trading volumes worldwide, but very little physical gold is actually
exchanged between COMEX trading participants, and gold inventories maintained
in COMEX vaults in New York are extremely low. This COMEX Gold Futures Market
infographic guides you through the largest gold futures market in the world,
COMEX.New York is also storage location for nearly 6000 tonnes of
central bank gold stored in the vaults beneath the New York Federal Reserve on
behalf of customers such as the International Monetary Fund, the central Bank
of Italy, Germany’s Bundesbank, and over 30 other countries. The infographic
visually profiles these gold vaults and their operators. Finally, the
infographic provides a snapshot of the US gold mining industry, centered in
Nevada.Did you, for example, know that only 1 in 2500 contracts on
COMEX goes to physical delivery whereas the other 2499 contracts are
cash-settled? This corresponds to a delivery percentage of 0.04% of all gold
contracts.The US government claims to hold a fair bit of gold in
reserves but how much is it really holding?In this infographic you will learn more about the COMEX gold
futures market considering:- COMEX Trading Volumes
- Fractionally Reserved Futures Trading
- Cash-settlement of COMEX Gold Futures Contracts
- Eligible and Registered Gold on COMEX
- US Treasury Gold Reserves
- Location of US Treasury Gold Reserves
- Foreign Gold at the Federal Bank of New York
- US Gold Mining
You can learn more about the US Gold Market at the
BullionStar Gold University.
US COMEX Gold Futures Market – An infographic hosted at BullionStar.com
To embed this infographic on your site, copy and past the code below
- Hey Democrats: A Vote For Hillary Clinton Is Actually A Vote For Donald Trump
With California finally mattering in an election season, it might be the final state primary before the Democratic race for president is set in stone. Regardless, recent developments have made one thing astoundingly clear: Donald Trump will almost surely defeat Hillary Clinton in a head to head matchup – and that’s why a vote for Hillary Clinton is a vote for Donald Trump.
It may seem crazy to many, but Donald Trump is now leading — for the first time — in an average of national polls pitting the presumptive Republican nominee against Hillary Clinton. These results come at a time when Trump hasn’t even started aggressively attacking her yet; after all, he just finished fending off over a dozen Republican primary challengers — a feat thought all but impossible by political experts the world over.
Trump is rising and Hillary is sinking, but this is not a new phenomenon for Clinton — she’s been sinking ever since she joined the race for the presidency. Operating almost exclusively on name recognition and gender identity alone, Clinton has seen her enormous lead in the polls over Bernie Sanders evaporate in the last several months, with some national polls even placing his popularity ahead of hers.
This should not be all that surprising in hindsight, with an unknown democratic socialist meteorically rising to catch one of the most well-known names in modern American politics. America is fed up with status-quo politics — and Clinton embodies this bad taste, which is now in a majority of Americans’ mouths. But Bernie Sanders and Donald Trump don’t. The all-but-guaranteed Clinton presidency now faces a fight from Bernie Sanders all the way to the Democratic convention.
Clinton, like Trump, faces a major favorability problem. Well over half of Americans view her unfavorably, and her honesty and likeability ratings are close to record lows. She’s got an ongoing FBI problem (read: email scandal). Trump is running to the left of her on foreign policy, trade, and economy — and to the right of her on immigration. These are all issues that are resonating well for Trump and lackluster for Clinton, who has taken flack for everything from her cozy ties to Wall Street and support of NAFTA to the 1994 crime bill she helped Bill Clinton pass when he was in office.
Trump has only been the presumptive nominee for a few weeks, but he’s already overtaken Hillary in the national polls. Considering her utter lack of momentum and enthusiasm, it doesn’t take a political scientist to understand this equation looks like a sure defeat for Hillary Clinton.
Let me get this straight. Trump can beat Hillary, but he can't beat Bernie? So by voting for Hillary…you're basically voting for Trump?
— Daily Show Jon (@DailyShowJon) May 22, 2016
Even so, experts are weighing in — and many of them are reaching the same conclusion presented here: if Democrats vote for Clinton, they are essentially voting for a Trump presidency. The only effective Democratic challenge to Trump is from Bernie Sanders, who has continuously polled double digits ahead of Trump in a head to head matchup. Democratic superdelegates may want to take note of this reality — or face a sure defeat to the Donald in November.
- Brazil's New Anti-Corruption Minister Quits After Leak Exposes His Involvement In Corruption Scandal
Our prediction that the cabinet of Brazil’s new president Michel Temer would not last long received its first validation just 10 days after the impeachment of Dilma Rousseff, when a recording was leaked in which Brazil’s new Planning Minister under Temer, Romero Juca, was overheard explaining how the removal of Rousseff would “prevent the wide corruption probe dubbed Carwash from proceeding.” This prompted many to wonder if Rousseff was indeed correct all along claiming a silent, US-sponsored coup had taken place in Brazil, one in which the cost of sweeping the Carwash scandal under the rug was her own scalp.
Incidentally, Juca quit shortly thereafter to preserve the new president’s reputation as corruption-free as possible.
Then earlier today, things for the new, just as corrupt as his predecessor president, Michel Temer got particularly awkward, not to mention painfully ironic, when none other than Brazil’s Transparency and Anti-Corruption Minister, Fabiano Silveira resigned on Monday after leaked recordings suggested he tried to derail a sprawling corruption probe, the latest cabinet casualty impacting interim President Michel Temer’s administration.
No amount of commentary can do justice to the gruesome farce that Brazilian economics is quickly devolving into. That said, it was perfectly predictable. On May 12, the day Rousseff was removed from power, we asked if Temer “can he avoid ouster himself“?
Among his documented transgressions, he signed off on some of the allegedly illegal budget measures that led to the impeachment drive against Rousseff and has been implicated, though never charged, in several corruption investigations.
The son of Lebanese immigrants, Temer is one of the country’s least popular politicians but has managed to climb his way to the top, in large part by building close relationships with fellow politicians as leader of the large but fractured Brazilian Democratic Movement Party.
Think Frank Underwood.
However, unlike Underwood, Temer may not last long, for the simple reason that the people who greeted him as a savior from Rousseff’s corruption may very soon turn on him just as fast.
Silveira, the man Temer tasked with fighting corruption since he took office on May 12, announced his plans to step down in a letter, according to the presidential palace’s media office. No replacement for Silveira has yet been named.
Silveira and Senate President Renan Calheiros became the latest officials ensnared by leaked recordings secretly made by a former oil industry executive as part of a plea bargain. The same tapes led to the resignation last week of the abovementioned Romero Juca, whom Temer had named as planning minister.
According to Reuters, in parts of the recordings, aired by TV Globo late on Sunday, Silveira criticizes prosecutors in the probe focused on state-controlled oil company Petróleo Brasileiro SA, known as Petrobras, which has already implicated dozens of politicians and led to the imprisonment of top executives.
In the conversation, recorded at Calheiros’ home three months before Silveira became a Cabinet minister, Silveira advises the Senate leader on how best to defend himself from the probe into Petrobras.
In the report, Globo TV also said some audio indicated that Silveira on several occasions spoke with prosecutors in charge of the Petrobras case to find out what information they might have on Calheiros, which he reported back to the Senate leader. Silveira is heard saying prosecutors were “totally lost.”
For those still wondering if Brazil’s anti-corruption minister just resigned less than three weeks after taking the post becuase he was busted for corruption – on the record – the answer is yes.
Where it gets better is that nobody knows how many other members of the Temer cabinet will fall as a result of the ongoing leaks of phone recordings.
The former head of the transportation arm of Petrobras, Sergio Machado, who is under investigation as part of the graft probe and has turned state’s witness, recorded the meeting and conversations with other politicians to obtain leniency from prosecutors. Silveira was a counsellor on the National Justice Counsel, a judicial watchdog agency, at the time of the meeting.
The reaction was swift: on Monday, Ministry of Transparency staff marched to the presidential palace in Brasilia to demand Silveira’s ouster and restoration of the comptroller general’s office, which Temer renamed to show his commitment to fighting corruption.
That particular “commitment” is not working out too great.
All employees with management duties at the ministry resigned their posts to press their demands, according to union leader Rudinei Marques.
Protesting employees had earlier prevented Silveira from entering the ministry building. They then washed its facade with soap and water to symbolize Temer’s need to clean up his government.
The only problem is that the corruption in Temer’s government starts with Temer himself, who according to many is far more corrupt than Rousseff ever was. Which is probably way Reuters adds that Temer will meet with Brazil’s prosecutor general later today to discuss the leaked recordings.
Several members of Temer’s cabinet are under investigation in the Petrobras probe. Rousseff, facing an impeachment trial in the Senate on charges of breaking budget laws, and others have said Temer plotted her downfall to stifle the investigation.
Temer has strongly denied the allegation, although with every new scandal and resignation, less and less people believe the false narrative.
As a result of the recordings, the new government could face declining support for Rousseff’s ouster by the Senate, which needs a two-thirds majority to convict her in a trial expected to last through August.The two-year probe into billions in graft at Petrobras has led to jail time for executives from Brazil’s top construction firms as well as investigations of dozens of politicians, including several members of Temer’s Brazilian Democratic Movement Party, or PMDB, and Rousseff’s Workers Party.
At the end of the day, everyone in Brazil’s political ruling class is corrupt: as such that is hardly grounds for dismissal as Brazil would simply have no politicians left. The question the people needs to answer is which politician is best suited to get the country out of the unprecedented economic depression it finds itself in less than two months before the Summer Olympics are set to begin in Rio.
Then again, the choice may already have been made: earlier today, Brazil’s FUP Oil Union, one of the two main oil labor unions in the country, said it plans a one-day national strike on June 10. It workers will protest against acting president Michel Temer, FUP said adding that Temer’s government lacks legitimacy. The FUP workers specifically are worried that they will lose benefits under the new administration, and Petrobras could be privatized.
The conclusion is that Temer’s honeymoon period has officially ran out, and at this point absent some dramatic shift in his administration, Temer himself may be impeached in very short notice. Perhaps it is not too late for the ambitious former vice president and current president to watch House of Cards from the beginning, just to reminds himself how these things are done… if only on Netflix.
- Here We Go Again: Wells Fargo Is Trying To Give Mortgages To Low-Income, Debt-Heavy Millennials Living At Home
Just last week we reported that Wells Fargo was reintroducing 3% down mortgages on its own, without going through the FHA. The reason we said, was that due to Wells' mortgage origination pipeline drying up, the bank was desperate to find new and innovative ways to boost lending.
Now we have direct confirmation that indeed Wells Fargo is desperate, and the plan to boost mortgage lending is to… drum roll… lure millennials out of the comfort of their parents home and into a house of their own.
The fact that millennials don't make much money and are drowning in debt apparently doesn't bother Franklin Codel, head of home lending for the bank.
Codel said Wells Fargo is now in a position to capitalize on the "very important" trend of millennials who have been unable or unwilling to buy property. "Demographics, ultimately, will win out and many of these folks will start families and want to become homeowners." said Codel, according to the Financial Times.
The target for Codel is understandable, with more millennials living at home today than at any other point in time since the great depression it's easy to see what would drive that discussion.
However, what shouldn't be forgotten is the fact that there is a reason that millennials are living at home, often times rent free. Millennials are making less money than prior generations, and student loan debt is so burdensome that it doesn't make it feasible to do otherwise.
Self-Help Ventures Fund decided to partner with Wells Fargo on insuring the 3% down mortgage program – let's hope $1.6 billion in assets is enough to cover what the bank is about to get into, otherwise another taxpayer bailout is going to be needed.
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