Moody's Downgrades China

Doug Nolan


Marie Diron, Moody’s associate managing director, Sovereign Risk Group, commenting Wednesday on Moody’s Chinese downgrade (Bloomberg Television): “It is likely to be a very medium-term and gradual erosion of credit metrics and we are looking at the policies that the government is implementing. The authorities have recognized the risks that come with high leverage and have a very broad agenda of structural reforms and we take that into account to the point that we think leverage will increase more slowly than it has in the past. But still these measures will not be enough to really reverse the increase in leverage.”

I’ve always felt the rating agencies got somewhat of a bum rap after the mortgage finance Bubble collapse. Sure, their ratings methodologies were flawed. In hindsight, Trillions of so-called “AAA” MBS were anything but pristine Credits. And, again looking back, it does appear a case of incompetence - if not worse. Yet reality at the time was one of home prices that had been inflating for years with a corresponding long spell of low delinquencies and minimal loan losses, along with GDP and incomes seemingly on a steady upward trajectory. The GSEs had come to dominate mortgage finance, while the Fed had market yields well under control. 


Washington surely wouldn’t allow a housing crisis, which ensured that markets were absolutely enamored with anything mortgage related. So the mortgage market enjoyed bountiful liquidity conditions, and it was just difficult for anyone – including the ratings firms – to see what might upset the apple cart.

The ratings agencies were basically oblivious to the key issue of deepening structural maladjustment throughout the mortgage finance Bubble period. They were inattentive to what a major de-leveraging episode could unleash. But so were the Federal Reserve, Wall Street and the world. Analysis and models did not incorporate latent (financial and economic) fragilities that had compounded from years of rapid credit growth and asset inflation. These days there’s a similar inability to comprehend the myriad global risks associated with the runaway Chinese Bubble.

The Moody’s downgrade spurred a bevy of articles this week examining China’s debt issues (i.e. “Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008”; “$9 trillion local bond market”; “debt has been increasing lately by an amount equal to about 15% of the country’s output each year”). Interestingly, I saw no mention that Chinese debt growth this year will likely approach $3.5 TN. Not only will this exceed U.S. 2017 debt growth, it will significantly surpass even peak annual U.S. debt expansion from the mortgage finance Bubble period.

May 23 – New York Times (Keith Bradsher): “China has gone on a spending spree, borrowing money to build cities, create manufacturing giants and nurture financial markets — money that has helped drive the economic powerhouse in recent years. But the debt-fueled binge now threatens to sap the energy of the world’s second-largest economy. With its economy maturing, China has to pile on ever more debt to keep its growth going, at a pace that could prove unsustainable. And the money is increasingly flowing through opaque channels that operate outside the regulated banking system, leaving China vulnerable to blowups. A major credit agency sounded the alarm on Wednesday, saying the steady buildup of debt would erode China’s financial strength in the years ahead… China’s debt has been increasing lately by an amount equal to about 15% of the country’s output each year, to keep the economy growing from 6.5% to 7%.”

The world has never witnessed such a Credit expansion. Moody’s noted the Chinese economy’s ongoing dependency on stimulus measures. I would argue that the key issue has evolved into China’s systemic addiction to ever-increasing expansions of “money” and Credit. The almost singular focus on debt to GDP ratios understates Chinese fragilities. They succumbed to the debt trap: massive ongoing expansion of Credit - or bust. How sound is this Credit? How stable is the Chinese financial sector? And, perhaps most pressing, how vulnerable is their currency?

May 24 – New York Times (Keith Bradsher): “Moody’s… downgraded its rating of China’s sovereign debt one notch on Wednesday, citing concerns over growing debt in the country, which has the world’s second-largest economy. In recent years, as China’s stunning economic performance of past decades has become difficult to sustain, the country has used debt to fuel growth… When it comes to pumping money into a financial system, China has made the Federal Reserve in the United States and the European Central Bank look almost lackadaisical. It has expanded its broadly measured money supply by more than the rest of the world combined since the global financial crisis. Now it has 70% more money sloshing around its economy than the United States does, even though the American economy is bigger… China has accumulated its towering debt remarkably quickly. Goldman Sachs looked last year at how fast debt had accumulated relative to the size of the economy in 55 countries since 1960. It found that by the end of 2015, China was already in the top 2% of all credit expansions — and its debt shot up even higher last year. All of the other large expansions occurred in very small economies, some of which essentially lost control of their finances.”

Moody’s report focused on the risk of further leveraging. This is clearly an issue. Corporate debt is at very high levels ($18 TN, or 170% of GDP) and corporations (many with earnings and cash-flow issues) continue to pile on additional borrowings. Much of this debt is “non-productive,” as companies borrow to meet rising debt service and to plug expanding cash-flow deficits. Even more alarming, the bloated financial sector continues to balloon, issuing risky loans while creating new deposit “money”. From the NYT (Keith Bradsher) article above, China “has 70% more money sloshing around its economy than the United States.” Even more than “leverage,” China’s Wild West Risk-Intermediation Mayhem has created momentous systemic risk. Much of the risky “Terminal Phase” debt growth – financing inflated apartment values, uneconomic enterprises, economic maladjustment and chicanery – is being transformed into perceived safe and liquid “money” and money-like financial instruments.

The bulls were quick to downplay the importance of Moody’s action, stating both that China has minimal dependence on external financing and that the country still enjoys $3.0 TN of international reserve assets. I would view the issue differently. Yes, China has an extraordinarily large international reserve cushion, though holdings have declined $1.0 TN from June 2014. Most importantly, this large hoard has allowed authorities to prolong the Bubble and delay the type of harsh measures required to rein in Credit, speculation and now deeply imbedded boom-time psychology. Chinese savers are accumulating wealth they never dreamed of, backed by an economy with serious deficiencies and a financial sector of dubious standing.

Moody’s and others – certainly including Wall Street generally - handle China with kid gloves. 

Chinese authorities have backed away from needed reforms. The late-2015/early-2016 scare forced Beijing to effectively impose capital controls. Rather than promoting open and effective market-based mechanisms, the game has turned to only more zealous interventions: stabilize financial markets and promote rapid Credit growth necessary to sustain 6-7% GDP expansion, while cajoling and controlling to limit the capacity of all this Chinese “money” to flow out of the country.

Chinese authorities have also been pressing Chinese corporations and financial institutions to borrow in overseas markets. This kills two birds... China can offload some high-risk, late-cycle Credit to international investors, while also attracting needed financial inflows. The problem is that foreign investors fear capital control measures and don’t trust the renminbi. So much of this borrowing is done in dollar-denominated debt. And the large issuance of dollar-denominated debt only exacerbates systemic vulnerability to an abrupt renminbi devaluation.

May 24 – Reuters (Adam Jourdan and Samuel Shen): “The decision by Moody's… to downgrade China's credit rating is ‘illogical’ and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper… Mei Xinyu, a researcher at China's Ministry of Commerce, wrote in a front page editorial of the paper's overseas edition the downgrade… overstated China's reliance on stimulus and the country's debt levels. Moody's downgraded China's credit ratings… for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise. China's Finance Ministry said… the downgrade overestimated the risks to the economy and was based on ‘inappropriate methodology’. China's state planner said debt risks were generally controllable.”

I’ve closely monitored China for years now. I recall reading some years back how Chinese officials had studied and learned from the Japanese Bubble experience. I’ve been waiting patiently for China to wrestle control of a precarious Credit Bubble. They have instead repeatedly taken tepid steps to curb various sectoral excesses – real estate, local government debt, stock market, corporate debt and, of late, shadow banking and insurance. Attempts to tamp down excess in one spot have only ensured it pops out elsewhere. The gravest policy misstep has been their failure to take a more systemic approach to Credit growth and asset inflation.

Basically, whenever tightening policies began to bite, Beijing would in short-order reverse course and stimulate. After a while, Chinese tightening measures lacked credibility. Moreover, the greater the inflation of Credit, financial institutions and perceived wealth, the more confident the Chinese population (including investors in real estate and financial assets, bankers, and corporate CEOs) became that Beijing would never tolerate a bust. Beijing these days essentially backs local government debt, the big state banks, corporate debt and apartment prices, not to mention $22 TN of “money” (“M2) and trillions more of money-like “wealth management products” and such. The scope of Beijing’s contingent liabilities is unparalleled.

The Moody’s executive stated that “It is likely to be a very medium-term and gradual erosion of credit metrics.” The Credit “metric” that matters most is my hypothetical chart of systemic risk that turned parabolic with the rapid acceleration of Credit of rapidly deteriorating quality. This “Terminal Phase” Dynamic unfolds during a period of momentous structural maladjustment, with government policies invariably exacerbating already deep structural impairment. It’s worth recalling that the Japanese enjoyed incredible economic growth and restructuring for more than three decades before blowing up their Credit system during the final four years of the boom. The Chinese situation is much more precarious.

I found myself this week thinking back to Dallas Fed President Robert McTeer’s 2001 comment, “Let's all hold hands and buy an SUV.” It was at the time a rather ridiculous central banker prescription for recovery from recession. Things, however, turned only more outrageous the following year, with the arrival of the Bernanke Doctrine at the Federal Reserve (and central banking more generally). Since then policy floodgates have been thrown wide open. What passes these days for reasonable policy would have been unimaginable fifteen years ago.
Chinese authorities apparently believe they can grow out of debt and structural issues. No matter what, they can always stimulate. And no need to dig holes and then refill them. Just tear down old apartments and structures and fabricate glossy tall new ones. Throw “money” at any problem, always plenty freely available. And there’s always endless new enterprises and technologies to support. Lend money around the world so buyers can afford to buy Chinese products. The quantity of debt doesn’t really matter all that much; just keep growing.

May 21 – Bloomberg (Alfred Liu, Moxy Ying, and Enda Curran): “In 1997, the Asian financial crisis touched off a six-year property bust in Hong Kong that shaved more than two-thirds off prices and saddled the city with a stagnant economy and deflation. As Hong Kong gets ready to celebrate the 20th anniversary of its handover to China, which happened just as Asia’s crisis began to unfold, that pain seems all but forgotten. Prices are at all-time highs. Mortgage borrowing is booming. Developers are bidding up the cost of land to records. People young and old are lining up to buy newly built apartments. In short, the kind of fervor that preceded the last bust is back. That’s got experts fretting about the potential fallout should the city of about 7.4 million people experience another crash. By several measures, Hong Kong looks more vulnerable this time around.”

The global government finance Bubble has “gone to unimaginable extremes - and then doubled.” And there are various elements of previous Bubbles that have coalesced into something that somehow masks inherent fragilities and the risk of devastating collapse. I think back to the commercial real estate Bubbles, junk bonds and LBOs from the late-eighties. Bond market leverage (“government carry trade”) and derivatives (mortgage IOs and POs) from the early-nineties. There was Mexico, SE Asia and EM from the mid-nineties. Russia and LTCM fiascos later in the decade. The “tech” and corporate debt Bubbles, followed by the great mortgage finance Bubble. Individually, we’ve seen these kinds of things before and we know they end badly. But as one gigantic, comprehensive, almost all-inclusive Bubble garnering the attention and support from policymakers around the world, it’s different enough this time that risks are dismissed or downplayed. Greed trumps fear.

I look around the world and see an unprecedented Bubble in Chinese Credit and investment. EM more generally has borrowed enormous amounts of debt, much of it in dollars and foreign currencies. European securities markets have inflated into historic Bubbles. Bond markets around the global are mispriced like never before. Almost everything providing a yield – from commercial real estate to corporate debt to dividend stocks – trades today at inflated values. Especially considering the Trillions that have been issued – and Trillions more in the offing – Treasury prices are detached from market pricing mechanisms.

The Trillions of central bank “money” that has spurred a historic Bubble in “risk free” securities has worked similar magic on risk assets, notably corporate Credit, equities and EM debt. The reckless abandon that took derivatives markets by storm during the mortgage finance Bubble period has gone to even greater extremes, this time on a global basis. 
 
Everywhere, it seems market perceptions are more detached than ever from reality. I continue to see confirmation that China is a major global Bubble weak link.

May 26 – Bloomberg (Chris Anstey and Enda Curran): “Chalk up another win for the visible hand in China’s markets over the principle of the private sector determining prices. A move by authorities to smooth out daily changes in the yuan’s fixing versus the dollar, taken on its own, suggests a shift away from any eventual float of the currency. The news comes in a week when officials were suspected of having intervened in the stock market to limit damage to sentiment after Moody’s… downgraded China’s sovereign credit rating. Both developments underscore the importance the Communist Party leadership places on specific outcomes, rather than the embrace of free markets that Western nations once pressed on China. President Xi Jinping has every interest in avoiding turmoil in the currency and equity markets this year as he oversees a critical reshuffle of top officials. While relatively minor, the change ‘is surely a negative step for financial openness,’ said George Magnus, an associate at Oxford University’s China Centre and former adviser at UBS Group AG. It’s ‘another step by Xi Jinping and the leadership to exert control where the deference to market forces was making at least limited headway.’”

May 25 – Wall Street Journal (Lingling Wei and Saumya Vaishampayan): “China’s central bank is effectively anchoring the yuan to the dollar, a policy twist that has helped stabilize the currency in a year of political transition and market jitters about China’s economic management. The yuan weakened more than 6% against the dollar in 2016; this year, it is up roughly 1%, and the expectation that the currency will fluctuate—a gauge known as implied volatility—is around its lowest in nearly two years.”

After a brief bout of selling in Chinese and Asian equities, there was little market reaction to the Moody’s downgrade. Perhaps telling, Chinese authorities revalued the renminbi higher both Thursday and Friday, with the Chinese currency gaining a notable 0.43% for the week. 
 
With my belief that China’s currency may prove their system’s weak link, I find it intriguing that officials would be compelled to move immediately to manipulate its value higher. I believe Beijing prefers a weaker currency to support its massive export sector and to stoke moderately higher inflation. And while their currency policy may be somewhat posturing to the new U.S. administration, I suspect they are more fearful of an unwind of foreign-financed leveraged “carry trades” that have accumulated in higher-yielding Chinese Credit. In the past I’ve referred to the Chinese renminbi as a “currency peg on steroids.” There’s never been an EM currency with the potential for such massive outflows from domestic savers and international speculators alike.

May 26 – Bloomberg: “For ever yuan that the People’s Bank of China injects into the nation’s financial system, it’s up to the banks to decide how far they stretch it in the form of loans to the economy. Right now, they’re working overtime. China’s money multiplier -- the ratio between the broadest measure of money in use, M2, and base money created by the central bank -- has climbed to the highest on records that date to 1997, data compiled by Bloomberg show. Each yuan of base money is being turned into more than 5 in the real economy. The turbocharged multiplier is helping compensate for the drainage of cash caused by Chinese savers and companies venturing abroad. It’s also helping economic growth…”


Donald Trump’s pluto-populism laid bare

For all the sound and fury, the president is governing like a traditional Republican

by: Martin Wolf


 

The first 100 days of Donald Trump’s presidency have brought some good news and some bad news. The good news is that, albeit chaotically, he is governing more as an orthodox post-Reagan Republican than most expected. The bad news is that he is governing more as an orthodox Republican than most expected. This now seems true in all the main policy areas, both domestic and international. It is clearly true in economic policy.

The idea of rebuilding US infrastructure has faded. The trade protectionism looks halfhearted.

But deregulation is still an objective. So is tax reform, with the familiar combination of unfunded giveaways and magical thinking on deficits. Mr Trump’s policies look ever more like Reagan’s, but from a more unfavourable starting point.

In announcing the tax plan, the White House did in an essential respect reinforce experience with this administration. It is hard to think of another government that would announce radical reforms of the tax system in a one-page document as sketchy as this one. It would be laughable if it were not so damaging to the US reputation for competent policymaking. The plan must be dead on arrival in Congress, in large part because it is not alive in the first place.




The single page released by the White House last week does, however, contain very similar ideas to those announced by candidate Trump. This makes it possible for us to go back to the analysis published by the Tax Policy Center in October. While we have little reason to expect a plan just like this to be enacted, that earlier analysis does help us understand how far the administration’s starting point remains from common sense on fiscal policy.

Start with the effects on the fiscal deficit. According to the TPC, the plan would raise the federal deficit (even after allowing for beneficial macroeconomic effects) by a little under 3 per cent of gross domestic product for as long as it remains in place. But, according to the International Monetary Fund, the US is already running a general government structural deficit of 4 per cent of GDP, forecast to rise to just under 6 per cent of GDP in the early 2020s.






With the addition of the proposed tax cuts, a structural general government deficit of well over 8 per cent of GDP might emerge in the 2020s. This would cause an explosive rise in debt. That could not be allowed to happen, particularly since US general government net debt is now more than 80 per cent of GDP, up from 45 per cent before the crisis and far lower when Reagan came to office. The structural deficit needs to be reduced, not increased. Yet this fiscal boost is not intended to be temporary and would also occur when unemployment is at 4.5 per cent of the labour force. It would be of the wrong kind, at the wrong time.

Defenders suggest, in response, that the plan might pay for itself, via increased activity. Given the low unemployment rate, this seems quite unlikely. Yet US Treasury secretary Steven Mnuchin has even suggested that, in combination with other administration policies, tax cuts could raise US trend growth to 3 per cent, from the current trend of slightly below 2 per cent.




Such a rise in growth would help. But it is very unlikely, for reasons explained by Jason Furman, former chairman of the Council of Economic Advisers. For it to happen, he argues, it would be far from sufficient for the decline in labour force participation to reverse. There would also be a need for a rise in the growth of output per hour from the 1.2 per cent achieved in the last decade to 2.8 per cent. That rate of productivity growth has been extremely rare in the past, over any extended time period. It would be mad for policymakers simply to assume this will happen (See charts.)

The question then is whether these huge tax cuts could be offset elsewhere. The border tax adjustment to corporation tax now seems to be a dead idea. So the only solution would be huge cuts in spending. To reduce spending by, say, 2.5 per cent of GDP would mean a cut in federal spending of about 12 per cent. But nearly 90 per cent of that spending goes on defence, health, income security, veterans’ benefits, social security and interest. On the assumption that these items will be protected, every other item of federal spending would have to be eliminated. The federal government would, in many areas, vanish.

The tax proposals also look astoundingly regressive. According to the TPC’s analysis, the top 0.1 of the income distribution might receive an average tax cut approaching 14.2 per cent of after-tax income, while middle-income households would receive an average tax cut of 1.8 per cent. Among the startlingly regressive changes would be repeal of the alternative minimum tax, repeal of estate taxes and huge reductions in corporate tax rates, including on so-called pass-through businesses. To those that have it shall be given. That is the doctrine of Mr Trump. It is also the old Republican trickle-down doctrine in purest form.

Mr Trump won the nomination by promising to be a different sort of Republican. He is not.

What he has achieved is to make the “bait and switch” yet more obvious. Post-Reagan Republicans reached out to the base by campaigning on cultural issues, while legislating for the upper 1 per cent. That is “pluto-populism”. Mr Trump added infrastructure spending, trade protectionism and support for Medicare and social security. But he too plans to deliver for the top 1 per cent.

Pluto-populism is highly politically effective. But it works by making the base ever angrier and more desperate. That is playing with political fire. The republic may survive Mr Trump. But what comes after?


Damn the Deficits, Huge Tax Cuts Ahead!

By: Peter Schiff


Donald Trump has made good on one of his most audacious campaign promises by submitting what he describes as the biggest tax cut in U.S. History. For once, at least, this does not appear to be Trumpian braggadocio. It really may be the mother of all tax cuts. But if passed, what may this bunker buster do to the economy? While I have rarely met a tax cut I didn’t like, this one just may be more likely to send the economy into a downward spiral than it is to send up to orbit.

As I mentioned in my January commentary, Donald Trump’s big-spending, tax-cutting campaign rhetoric threatened to make him the biggest borrower in presidential history. He comes to office at a particularly vulnerable time for budget dynamics. After contracting by nearly two thirds from 2010 to 2015 (from the mind-bending $1.3 trillion to the merely enormous $438 billion), the Federal deficit started expanding again in 2016, moving up to $587 billion (Govt. Publishing Office, Office of Management & Budget (OMB). Current projections have it going up nearly every year over the next two decades. The Congressional Budget Office expects it to permanently surpass $1 trillion annually by 2021 or 2022. But these ominous forecasts were made well before anyone thought Trump had a snowball’s chance of ever becoming president. Now that he is in the office, those projections will be the floor. The ceiling is anyone’s guess.

The forecasts assume that the taxing and spending laws in place during the Obama Administration won’t change. The steep increase in projected deficits towards the end of this decade and into the next is largely driven by the retirement of the Baby Boom generation, which will lead to simultaneous increases in entitlement spending and decreases in tax revenue.

This brick wall has been hiding in plain sight for decades but the can-kickers in Washington have serially failed to do anything to avert the inevitable collision.

(These forecasts also optimistically assume that the economy never again enters recession, inflation never again rears its ugly head, and that our creditors never get concerned enough about our growing debt to demand a premium for the risk of financing it.)

But now that Trump occupies the Oval office, this date with destiny may come much sooner…and she will definitely be ordering the lobster.

Before I go negative, let me give credit to Trump for picking the right taxes to cut. He kills the estate tax, an ugly beast that should have been euthanized years ago. Some may see this simply as a gift to the very rich. But legal wizards have long since devised strategies that offer almost complete protection from the death tax. None of these structures offer any real benefit to the businesses these millionaires typically own, or to the economy in general. Killing the tax will cost the government almost nothing, but it will remove tremendous impediments that have prevented family-run companies from growing over generations. He also kills the Alternative Minimum Tax, a complex parallel system of taxation that few understand but somehow manages to ensnare more and more taxpayers every year.

Most importantly, he brings down the corporate tax rate from the globally non-competitive rate of 35% to the much more manageable 15%. Taxing corporations has always been a bad way to raise revenue. Corporations, after all, don’t pay taxes, which are simply treated as a cost of doing business. The real costs are borne by customers, who must pay higher prices, and employees, who must suffer with lower wages. But high domestic corporate taxes have hamstrung U.S. corporations and greatly contributed to the decline of American manufacturing. A more competitive corporate sector will shower benefits on all manner of consumers and employees.

On the individual tax side, his decisions are much more problematic. Although Trump makes the sensible decision of compressing the seven individual tax brackets into just three (10%, 25%, and 35%), and doubles the standard personal deductions (thereby saving many people from the hassles of itemization), the headline-grabbing component of the proposals has to do with the lowering of the “pass-through” tax rate to the same 15% level that applies to corporations. This means that wealthy business owners, highly paid freelancers, and partners at law firms, medical groups, and management consultancies, will qualify for the 15% rate.

This will be a huge windfall to some of the richest people in the country, who typically pay the highest marginal tax rate (currently 39%). And since the top one percent account for nearly 50% of tax revenue, this one provision promises to cost Uncle Sam plenty and to dramatically shake up the corporate landscape.

Small business owners and independent contractors will in fact receive the benefit of the 15% pass through rate. But “Mom and Pop” entrepreneurs rarely have income that is high enough to be taxed at the higher rates. These smaller earners will likely be be trading a 15% tax for a 15% tax. All the big benefits will go to the really big fish. Whereas the vast majority of Tom Cruise’s income would have been taxed at the 39% rate, it will now be taxed at just 15%. His taxes will be reduced by nearly 60% from current law. The same holds true, in lesser degree, to lawyers, doctors, and consultants making more than a few hundreds of thousands of dollars annually.

Is there any reason that could justify why a hedge fund manager making a million dollars per year should pay 15%, but a full time CEO at a corporation making half that would be subject to the highest marginal rate of 35%? It’s absurd. Now I’m not a big fan of the “progressive” tax system, whereby the tax rate goes up with income. I think a “flat” tax system, in which everyone paid the same rate, would be better. (Ideally I would like to see income taxes replaced by far less onerous and intrusive consumption taxes). But I certainly don’t believe in a “regressive” tax system in which lower-earning citizens pay higher rates than those at the top.

But that’s exactly what Trump is trying to do.

Given this wide disparity in tax rates, we can assume that the employment landscape will adjust dramatically. We should expect that legions of highly-paid full-time employees will start to form Limited Liability Corporations (LLCs) to work freelance rather than as employees. There are few barriers that would prevent such a shift, and the growth of internet-based work scenarios will continue to break down the traditional barrier between employee and freelancer.

Yes, there are some labor rules that seek to separate employees from freelancers, but those rules may be easily circumvented, especially when the reward is so great. Rather than envy the lawyer earning more and paying less, the CEOs of the country will likely incorporate and sell their services freelance to their former employers.

This shift will mean that a great many of the country’s highest earners will be paying taxes at the lowest rate. As a result, the reductions in tax revenue would likely be far greater than what is predicted in the standard modeling.

But unlike most prior tax cuts, the Trump version does not even make any attempt to balance the cuts with corresponding cuts in government spending. If Trump’s tax cuts don’t immediately generate sustained 4% growth or more, we may be staring down the barrel of $2 annual deficits. Is this an experiment that we really want to try?

But even if the reforms can kick the economy into higher gear, thereby creating higher revenues with lower rates (The Laffer Curve), our current low interest rate environment provides significant obstacles to permit that growth to be sustained. If growth kicks up to the 4% range, the Federal Reserve will have to accelerate its rate increase schedule to keep interest rates in line with GDP growth and to prevent inflation, already above its official 2% target, from running out of control. Plus the markets will also act to adjust interest rates higher due to greater demand for credit and rising inflation. These higher rates will act as a stiff headwind to an economy that has grown increasingly dependent on ultra low rates.

But increases in rates would also cost the economy in another way. Our current bonded national debt is ready to surge past the $20 trillion mark. The Trump tax cuts will push it beyond that very quickly. If the Fed raises rates to keep pace with higher growth, then the Government will have to pay much more to finance the outstanding debt. At $20 trillion, every point of increase in interest rates will cost the government $200 billion annually. At that level, if interest rates were at 3.75%, instead of the current .75%, then the Federal Government would have to come up with about another $600 billion per year in interest payments. (That number will be much higher when the debt grows past $20 Trillion).

But it's not just Uncle Sam that is over-loaded with debt. Corporations and households would see their interest costs surge as well with rising interest rates. So what lower taxes giveth, higher interest rates will taketh away.

Consider the housing market. Not only will higher interest rates substantially increase the cost of home ownership (through higher mortgage rates), but Trump’s tax proposals will dramatically increase the cost of ownership for those living in high tax states. Under the proposal, homeowners will no longer be able to deduct property taxes, and a doubling of the standard deduction means a much larger percentage of homeowners will not be able to deduct mortgage interest from their federal income tax. Plus, with the top tax rate reduced from 39.6% to 15%, the mortgage interest deduction will be far less valuable to those higher earners who can still take advantage of it. Higher mortgage rates and lower tax subsidies will increase the cost and decrease the appeal of home ownership. This could lead to a crash in real estate prices, especially in the high end of the market. Falling prices could wipe out what little home equity many Americas have left, and lead to another wave of foreclosures. The losses to Fannie Mae and Freddie Mac could be significant, with the costs falling directly on the Federal government, further driving up annual deficits.

The reality is that years of massive deficits, runaway government spending, artificially low interest rates, and three rounds of quantitative easing, have left the economy so sick that any tax cut large enough to revive it may actually kill it instead. If the Fed tries to keep it on life-support a bit longer by suppressing interest rates with a massive QE4 program, we risk run-a-way inflation and a dollar crisis with economic consequences far more profound than those of the financial crisis of 2008. The only silver lining to this cloud may be that the coming fiscal train wreck leaves lawmakers no choice but to slash government spending. If the real Republican agenda is to starve the beast, its success is assured.


Lessons from the Anti-Globalists

Joseph E. Stiglitz
.Macron French Elections

 

NEW YORK – The likely victory of Emmanuel Macron in the French presidential election has elicited a global sigh of relief. At least Europe is not going down the protectionist path that President Donald Trump is forcing the United States to take.
 
But advocates of globalization should keep the champagne on ice: protectionists and advocates of “illiberal democracy” are on the rise in many other countries. And the fact that an open bigot and habitual liar could get as many votes as Trump did in the US, and that the far-right Marine Le Pen will be in the run-off vote with Macron on May 7, should be deeply worrying.
 
Some assume that Trump’s poor management and obvious incompetence should be enough to dent enthusiasm for populist nostrums elsewhere. Likewise, the US Rust Belt voters who supported Trump will almost certainly be worse off in four years, and rational voters surely will understand this.
 
But it would be a mistake to conclude that discontent with the global economy – at least how it treats large numbers of those in (or formerly in) the middle class – has crested. If the developed liberal democracies maintain status quo policies, displaced workers will continue to be alienated. Many will feel that at least Trump, Le Pen, and their ilk profess to feel their pain.
 
The idea that voters will turn against protectionism and populism of their own accord may be no more than cosmopolitan wishful thinking.
 
Advocates of liberal market economies need to grasp that many reforms and technological advances may leave some groups – possibly large groups – worse off. In principle, these changes increase economic efficiency, enabling the winners to compensate the losers. But if the losers remain worse off, why should they support globalization and pro-market policies? Indeed, it is in their self-interest to turn to politicians who oppose these changes.
 
So the lesson should be obvious: In the absence of progressive policies, including strong social-welfare programs, job retraining, and other forms of assistance for individuals and communities left behind by globalization, Trumpian politicians may become a permanent feature of the landscape.
 
The costs imposed by such politicians are high for all of us, even if they do not fully achieve their protectionist and nativist ambitions, because they prey on fear, inflame bigotry, and thrive on a dangerously polarized us-versus-them approach to governance. Trump has leveled his Twitter attacks against Mexico, China, Germany, Canada, and many others – and the list is sure to grow the longer he is in office. Le Pen has targeted Muslims, but her recent comments denying French responsibility for rounding up Jews during World War II revealed her lingering anti-Semitism.
 
Deep and perhaps irreparable national cleavages may be the result. In the US, Trump has already diminished respect for the presidency and will most likely leave behind a more divided country.
 
We must not forget that before the dawn of the Enlightenment, with its embrace of science and freedom, incomes and living standards were stagnant for centuries. But Trump, Le Pen, and the other populists represent the antithesis of Enlightenment values. Without blushing, Trump cites “alternative facts,” denies the scientific method, and proposes massive budget cuts for public research, including on climate change, which he believes is a hoax.
 
The protectionism advocated by Trump, Le Pen, and others poses a similar threat to the world economy. For three-quarters of a century, there has been an attempt to create a rules-based global economic order, in which goods, services, people, and ideas could move more freely across borders.
 
To the applause from his fellow populists, Trump has thrown a hand grenade into that structure.
 
Given the insistence of Trump and his acolytes that borders do matter, businesses will think twice as they construct global supply chains. The resulting uncertainty will discourage investment, especially cross-border investment, which will diminish the momentum for a global rules-based system. With less invested in the system, advocates for such a system will have less incentive to push for it.
 
This will be troublesome for the entire world. Like it or not, humanity will remain globally connected, facing common problems like climate change and the threat of terrorism. The ability and incentive to work cooperatively to solve these problems must be strengthened, not weakened.
 
The lesson of all of this is something that Scandinavian countries learned long ago. The region’s small countries understood that openness was the key to rapid economic growth and prosperity. But if they were to remain open and democratic, their citizens had to be convinced that significant segments of society would not be left behind.
 
The welfare state thus became integral to the success of the Scandinavian countries. They understood that the only sustainable prosperity is shared prosperity. It is a lesson that the US and the rest of Europe must now learn.
 
 


The World That World War II Built

By George Friedman


On June 4-7, it will be 75 years since the Battle of Midway, the battle in which the United State won the war in the Pacific and prevented the defeat of Britain and Russia. Guadalcanal, El Alamein and Stalingrad followed, all mostly fought in the second half of 1942. Over two years of horror would remain – neither Japan nor Germany was prepared to concede the point – but the war was won by the beginning of 1943.

These were extraordinary battles in an extraordinary war. I want to devote some time this year to considering the battles on their anniversaries and, I want to try to explain how these battles were an interlocking whole – really a single, rolling, global battle that collectively decided the war. By the end of the year, my goal is to show that a single global battle, beginning at Midway and ending at Stalingrad, defined the fate of humanity.

Systemic Wars

This is not simply antiquarian interest, although surely June 1942 to February 1943 must rank with Salamis, where the Greeks stopped the Persian surge into Europe; Teutoburg, where the Germans halted the Roman advance; or Lepanto, where Christian Europe halted Muslim Ottoman expansion. These battles defined the future of a civilization; June 1942 to February 1943 defined the future of the entire world.

World War II defined the global civilization in which we now live. It ended Europe’s imperial project, opened the door to American global power, created what was called the Third World and set the stage for the emergence of the Asian mainland as a significant global player. The war also bred a distrust of nationalism, gave rise to multinational institutions and turned an interest in technology into an obsession with its redemptive powers. We live in the shadow of World War II and are now in a global revolt against the world it created.

All of this must be discussed, but to understand a war, we must understand it on its own terms, its own grammar. Many talk of wars without wanting to understand their logic, from the details of an artillery barrage to the tonnage of supplies that must flow to the battlefield. War, as all things, is a matter of detail, and the detail must be framed by both the logic of a war and its purpose. World War II had a unique logic. Many Americans long for the days when Americans were united in war. They mistake World War II as the way in which Americans once fought wars, with shared values. That was never the case. The American Revolution, the Mexican-American War, of course the Civil War, and the Spanish-American War were all fought with a vocal and angry faction opposing the war while it was underway. The dissent of Vietnam or Iraq was the norm of American warfighting, and World War II (and to a lesser extent World War I) was unique in its unity. That’s because it was a unique war.

I divide wars into two types: political wars, of which there are many, and systemic wars, of which there are only a handful. Political wars are those intended to achieve limited ends. The ends may be important but not existential. The loss of the war does not mean disaster for the nation. Most wars are like this, and many have idiosyncratic or diffuse ends. The Korean War was intended to demonstrate the will of the United States in resisting communism. The Vietnam War sought to shore up the U.S. position in Southeast Asia – a significant but not decisive goal – and to maintain the credibility of the U.S. commitment to the alliance system it depended on.

Throughout the history of all powerful nations, political wars abound. They are frequently not intended to be won in a conventional sense but to signal resolve or achieve limited political goals. A defeat is manageable. Such wars appear frivolous and unnecessary to segments of the population and therefore breed dissent – which is tolerated, since the wars are not worth the price of silencing dissenters.

Systemic wars differ in two ways. First, avoiding them is usually not an option. Second, losing them can be catastrophic. They aren’t rooted in transitory political interests but in tectonic shifts in the global system. The shifts are not driven by the intent of a nation but by the inevitable rise and decline of nations, the imbalances this creates, and the inevitable rebalancing, which frequently leads to wars. These wars are rare because tectonic shifts take a long time to occur, longer to mature, and longer still to lead to changes in power that are both widespread enough and consequential enough to end in war.

The Napoleonic Wars in Europe in the 19th century were systemic, as was the Seven Years’ War in the 18th century. Mongol invasions, European imperialism and the like all were systemic events containing decisive wars. World War II was a systemic war. Some argue that it was a continuation of World War I, and in Europe this was true. But World War II was different from World War I in an important way: The Pacific war between the Japanese and Americans added a new dimension.

Rebalancing the System

Yet both world wars flowed from the rise and fall of powers. In the 19th century, three new powers began to emerge: Germany, Japan and the United States. Germany destabilized Europe. Japan destabilized East Asia. The United States destabilized the world. The unification of Germany in 1871 created a power of enormous economic dynamism, but one extremely vulnerable to simultaneous military attack from Russia and France and to blockade by Britain.

Japan was also an economic dynamo but, bereft of natural resources, was unable to maintain its industrial base without imports of oil and other industrial minerals. Its access to these minerals depended on the willingness of suppliers to sell and ability to deliver them through waters controlled by the British and American navies. The newly emergent economic powers were both militarily insecure. This compelled them to seek a rectification of the balance of power against older and frequently weaker powers.



A U.S. Navy Ceremonial Band bugler salutes during an event to commemorate the 70th anniversary of the Allied forces victory in the Pacific and the end of World War II on Sept. 2, 2015, at the World War II Memorial in Washington, DC. Alex Wong/Getty Images


The rise of the United States was the most radical shift. The U.S. had become the leading economic power in the world in a startlingly short time. The United States’ only vulnerability was from the sea, and the major naval powers were the British and Japanese. The United States constructed a massive navy in response, which unsettle the Japanese in the extreme and made the British uneasy. But behind this was a fundamental reality. The European empires, and particularly the British, were built on a balance of power that was no longer in place. The existing system didn’t make room for the Germans and Japanese, but it also had no place for the Americans. The Americans did not seek formal empire, but they rejected the idea that they should be excluded from economic activities in the British and French empires. A system that marginalized the United States, Japan and Germany was unsustainable.

Systemic wars are complex. Alliances shift, and the motives of allies diverge. The Japanese fear of a U.S. blockade triggered the attack on Pearl Harbor. U.S. lend-lease to Britain was contingent on the British surrendering their naval bases in the Western Hemisphere to the United States. The British fought to preserve the empire. The U.S. was content to see it collapse.

The Soviet Union was intent on fomenting uprising in Britain and the United States, but both supported Soviet military operations against the Germans. I make no attempt here to write the story of World War II but rather to point out that systemic wars involve many nations, tend to be global and are complicated. Their outcome also determines the fate of nations and, for a while, of the world.

One measure of a systemic war is the degree to which the geopolitical systems change. The first change resulting from World War II was the collapse of all European empires in the 20 years following the war’s end. The second was the rise of the United States, not only as a major economic power but also as the dominant military power. Both Japan and Germany, the nations that rose along with the United States, collapsed after the war and then re-emerged as primarily economic powers, and as such, were limited forces in the world. The defeat of Japan opened the door for a communist regime in China that was succeeded by a more complex system that allowed China to emerge as a major economic power.

The next phase of history consisted of the global confrontation between the United States and the Soviet Union. That confrontation involved both a strategic cordon around the Soviet Union and a major contest between the United States and the Soviet Union for the domination of the remnants of Europe’s empire. It also consisted of a confrontation of nuclear forces, a weapon that emerged from World War II.

The Forces of Chance and Will

Powers rise and fall, but the process doesn’t happen quickly. It’s driven by shifts deep within the structures of societies. It takes generations or even centuries – too long to be decided by individual leaders or elections.

What is decisive in the story are wars. War, particularly modern wars, are driven by necessity. Modern wars are wars of industrial production, and the size and creativity of the industrial plant shape the outcomes of wars, as does the ability to destroy the enemy’s industrial capability. At the same time, there appear to be moments in the systemic war that don’t seem tied to the underlying structure of war-making but much more to the durability of a social order, the commitment of warriors and the chances of war.

Geopolitics is, as I have argued and tried to show, predictable. If you consider the deep structure and the imperatives and constraints of the nation-states, and ignore personalities and the public opinion of the moment, you can discern the process that is underway and see where it might be going. You can predict who will be in a war and who is likely to win it. But it is in war that the eccentric forces of will and chance coalesce to create outcomes that, if not violating expectations, give it unexpected dimensions.

It was from June 1942 to February 1943 that those eccentric possibilities showed themselves. They allow us to be surprised, certainly by how the war turned out, but also by how close it came to not turning out as we might have expected. Seventy-five years after Midway, Guadalcanal, El Alamein and Stalingrad, there are few who fought in those battles who are still alive. That is a good point for us to consider during these months. We now have to gain perspective over what was, in retrospect, a little more than eight months that redefined the world.

It is one thing to see the deep structure of a thing. But in systemic wars, you must also master the battles, in the grammar of war itself. So, in contrast to history, which moves slowly from a human standpoint, battles are measured in seconds, minutes, hours and days. The long wars we speak about today are political wars. Systemic wars rip apart the world and redesign it in a matter of years, with the heart of the matter determined frequently in minutes. In two weeks, we will begin with what I regard as the single-most decisive battle of World War II for all combatant powers: Midway, where the allies could have lost but didn’t, all because of events that transpired in mere minutes.


After Last Week's Gold Drop, Speculative Traders Jump Back On Board This Week

by: Hebba Investments
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- Speculative gold longs rose and gold shorts covered by a large amount this week.

- In silver, the action was different as we saw major short-covering but no increase in speculative silver longs.

- Next week's big events are US jobs data related and investors can expect volatility in precious metals on Thursday and Friday.

- At this point, our short-term position on precious metals remains at neutral as we see no clear reasons to buy or sell here.

 
The latest Commitment of Traders (COT) report showed that speculative gold traders last week abandoned short positions and jumped into long positions at the highest rate we have seen in 2017. In silver, the action was quite different as almost all the move was attributed to short-covering, with longs actually declining slightly on the week.
 
The major (scheduled) event for precious metals next week with be the Non-farm Payrolls report. Though, of course, the ADP and jobless claims report on Thursday will also probably move markets in anticipation of a June Fed rate hike - or if the reports are really poor, maybe that hike (or future expected hikes) may be postponed.
 
We will get more into some of these details, but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
 
About the COT Report
 
The COT report is issued by the CFTC every Friday to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
 
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.
The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued, it has already missed a large amount of trading activity.
 
There are many ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the experts on it. What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
 
This Week's Gold COT Report
 
 
This week's report showed that after three straight weeks of declines, gold speculative positions rose - and by a significant amount. For the week, they rose 34,696 contracts, which was the largest rise in speculative longs for 2017 and you would have to go all the way back to June 2016 to see a similar rise. This week we also saw shorts close their own positions by 13,042 contracts which completely reversed last week's short rush and brought us back down to a 23% total short position.
 
Moving on, the net position of all gold traders can be seen below:
 
 
Source: GoldChartsRUS
 
 
The red line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, the net position of speculative traders increased by about 48,000 contracts to 118,000 net speculative long contracts. Based on the last 10 years' worth of data, we are around the average level of trader positioning in gold - so from a COT perspective, gold neither looks overbought or oversold.

As for silver, the week's action looked like the following:
 
Source: GoldChartsRUS
 
 
The red line, which represents the net speculative positions of money managers, showed an increase in the net-long silver speculator position as their total net position rose by around 12,000 contracts to a net speculative long position of 30,000 contracts.
 
What is interesting about this move in silver is that it has primarily been driven by short covering - actually all of it was short covering as speculative longs fell during the COT week.
 
Source: CFTC
 
 
As investors can see, silver speculators cut their short positions by 12,099 contracts on the week while speculative longs also cut their exposure by a minimal 712 contracts.
 
As we mentioned last week, our biggest concern with silver is the large amount of physical silver held in ETFs, which are at record-highs as seen in the graph below.
 
Source: GoldChartsRUS
 
 
Last week, total ETF/Fund silver holdings fell slightly by around 1 million ounces; we still worry that if ETFs and funds started selling physical silver in the market, it may be hard for the market to absorb especially considering the decline in silver bullion demand we have seen in 2017 compared to 2016.
 
On the other side of the coin, we do have to note that the total value of all ETF and fund silver holdings is around $16.8 billion. That is fairly low considering that the SPDR Gold Trust ETF (NYSEARCA:GLD) has a total value of $38 billion by itself. Additionally, the all-time value highs we saw in silver in 2011 and 2012 were over $30 billion - thus, from this angle, silver ETFs are not particularly near their all-time highs.
 
Our Take and What This Means for Investors
 
The big upcoming events for next week will be the US jobs reports on Thursday and Friday.
 
These will be key, at least in traders' minds, to determining the trajectory of the Federal Reserve's interest rate rises. A June rise is almost guaranteed, but the question will be whether the Fed will take it slow on future rises or will it move again a few months later.
 
We think there are clear issues with the real economy, but we really don't know what the data will show and we have little feeling. But what we do know is that the Fed is dead-set on raising rates for the June meeting, so data would have to be really bad for them not to at least meet those market expectations.
 
At this point, our short-term view is pretty neutral as we see even odds for metals to move in either direction. Thus, we move our short-term view on precious metals to Neutral on both gold and silver.
 
 
 
Due to our neutral position on precious metals but our bullish view for the intermediate and longer terms, we think short-term speculators should sit tight and not be too exposed one way or the other.
 
But investors with low exposure may want to take the opportunity to nibble away and add to their precious metals positioning in gold and silver positions (SPDR Gold Trust ETF, iShares Silver Trust (NYSEARCA:SLV), Sprott Physical Silver Trust (NYSEARCA:PSLV), and ETFS Physical Swiss Gold Trust ETF (NYSEARCA:SGOL), etc.). For those who already hold large positions in the precious metals, there may be better opportunities to add further at lower prices, so we would not be adding to large positions at this time.


The Hot-Air Model of Chinese Asset Markets

Chinese regulators are cracking down on stock and bond speculation. Real-estate markets are, however, suddenly doing just fine. This is unlikely to be a coincidence.

By Nathaniel Taplin


Talk to any young adult in a big Chinese city and the subject of yali, or pressure, will quickly come up. China is without a doubt a high-pressure society: Inequality is intense, pollution and traffic are often unavoidable and family obligations can be overwhelming.

A high-pressure environment is a good metaphor for Chinese markets too. Because of the nation’s capital controls, investment options are limited—and regulatory crackdowns have a tendency to push leverage around rather than get rid of it. The curious resurgence in 2017 of Chinese property prices, which spent most of late 2016 slowing only to shoot upward again in February and March, looks to be another example of this dynamic at play.

The property market rebound has coincided with two big domestic policy developments. First, as the economy has improved, regulators have become increasingly vocal about financial market “deleveraging,” though actual reduction or leverage ratios is unlikely. A two-year high in interbank interest rates, engineered by the central bank, has rattled bond markets and cut off an equity rally.

Meanwhile, stricter capital controls have helped choke off capital flight: Following two years of declines, China’s foreign-exchange reserves began rising again in February. Domestic credit growth has slowed, but remains elevated. Total financing to the real economy (including local government debt) was up more than 15% on the year in March, just marginally below the 17% peak in 2016.

All that money needs somewhere to go. And with stocks and bonds under pressure, and sending money abroad to buy Italian soccer clubs and dollar bonds getting tougher, cash is instead heading back into Chinese investors’ old standby: real estate.

If the renewed momentum in the property market were sustainable, that would be a big shot in the arm for China. The problem is that all the money being squeezed into real estate and out of stocks and bonds could just as easily run out once the current crackdown loses steam and regulatory spotlights focus again squarely on curbing real estate speculation—as they did toward the end of 2016.

And the fundamentals for Chinese property look more mixed than justified by the recent price rally. Actual real-estate investment ticked up marginally in March to 9.4% growth on the year, but remained well below its October 2016 peak of over 13%. Steel and other commodity prices have also been under pressure in recent weeks, raising questions about the strength of real demand in China, which consumes around half the world’s steel. Weak purchasing managers indexes out this week add to these worries.

Too much pressure inevitably leads to cracks.


The Horror! The Horror!

By: The Burning Platform
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The Horror


I'm constantly amazed by the ability of those in power to create a narrative trusted by a gullible non-critical thinking populace. Appealing to emotions, when you have millions of functionally illiterate, normalcy bias ensnared, iGadget distracted, disciples of the status quo, has been the game plan of the Deep State for the last century. Americans don't want to think, because thinking is hard. They would rather feel. For decades the government controlled public education system has performed a mass lobotomy on their hapless matriculates, removing their ability to think and replacing it with feelings, fabricated dogma, and social indoctrination.

Their minds of mush have been molded to acquiesce to the narrative propagandized by their government keepers.
"The problem isn't that Johnny can't read. The problem isn't even that Johnny can't think. The problem is that Johnny doesn't know what thinking is; he confuses it with feeling." - Thomas Sowell

With a majority confused, distracted, malleable, willfully ignorant, and easily manipulated by false narratives, heart wrenching images, and fake news, the Deep State henchmen have been able to control the masses with relative ease. The unanticipated rise of Donald Trump to the most powerful role in the world gave many critical thinking, anti-big government, skeptical curmudgeons hope he could drain the swamp and begin to deconstruct the massive out of control Federal bureaucracy.

His rhetoric during the campaign about repealing the disastrous Obamacare abortion, cutting taxes, dismantling Federal regulatory red tape, making Mexico pay for the wall, dumping Yellen, favoring higher interest rates, and not interfering militarily in countries who are not threatening the United States, appealed to many libertarian minded people.

I've watched with disgust over the last month as the promises of non-interventionism by a presidential candidate have been broken by the third consecutive president. George W. promised a humble foreign policy with no nation building. He had criticized the Clinton-Gore Administration for being too interventionist:
"If we don't stop extending our troops all around the world in nation-building missions, then we're going to have a serious problem coming down the road. And I'm going to prevent that."

With 9/11 as a convenient excuse, he invaded sovereign countries based on flawed data, passed the 4th Amendment destroying Patriot Act, allowed neo-cons to create a Orwellian surveillance state, and permitted the military industrial complex to regain its power and control over the political apparatus in Washington D.C. With no Cold War to fill their coffers, neo-cons in Congress, warmongering think tank co-conspirators, military brass and their arms dealer cronies needed to create a new war to keep the racket going.

The War on Terror is unwinnable because you can't defeat a tactic, and that is just what the Deep State is counting on. An unwinnable war, like the War on Drugs and War on Poverty, results in never ending funding, no evaluation of success or failure, continuous propaganda designating new enemies whenever convenient, and a narrative questioning the patriotism of anyone who argues against foreign interventionism.

After Bush's reign of error, the election of a liberal community activist as president surely would result in a dramatic reduction in military intervention around the world. It was so certain, Obama was awarded the Nobel Peace Prize for just being elected for promising hope and change. He ran against neo-con tool McCain who never met a country he didn't want to invade. Obama's words as a candidate echoed those of Bush Jr. before he was placed on the throne by the powers that be.

"We continue to be in a war that should never have been authorized. I am proud of the fact that way back in 2002, I said that this war was a mistake."

After being elected Obama immediately changed his tune about the business of war. He withdrew troops from Iraq as required by the agreement signed by Bush with the Iraq puppet government, but he ramped up the never ending Afghanistan war - now sixteen years old and still not won. The vacuum left by our epic failure in Iraq allowed the rise of ISIS. Obama essentially created ISIS by providing arms to "moderate" rebels fighting Assad in Syria.

By the end of his term, troops were back in Iraq and more are on the way. Obama and a Secretary of State named Clinton decided to overthrow Gaddafi even though he posed no threat to U.S. interests. They have left a lawless chaotic failed state, now home to ISIS, Al Qaeda, and various other terrorist factions.

Obama should have won the Nobel Drone Prize as he launched ten times as many attacks as Bush, killing thousands, blowing up wedding parties, and murdering hundreds of innocent civilians. He bombed seven countries even though we are not officially at war with anyone. He renewed all aspects of the unconstitutional Patriot Act. Edward Snowden revealed the mass surveillance on all Americans by Obama's spy agencies.

His continued support for the overthrow of Assad, so Saudi Arabia and Qatar could build a natural gas pipeline to Europe, was thwarted by Putin. Hysterically, after eight years of war mongering and expansion of the warfare/welfare surveillance state, Obama is now portrayed as a pacifist. The fact is Obama, like Bush, filled his role in the imperial empire, policing the world, enriching the military industrial complex, and doing the bidding of his Deep State sponsors.

Now we have Donald Trump, the billionaire champion of the common man, who campaigned on getting out of the nation building business. Where have I heard that before? Exactly one year ago, Trump gave a foreign policy speech laying out his vision for the U.S. role in the world.
"We're getting out of the nation-building business and instead focusing on creating stability in the world. However, unlike other candidates for the presidency, war and aggression will not be my first instinct. You cannot have a foreign policy without diplomacy. A superpower understands that caution and restraint are really truly signs of strength. Although not in government service, I was totally against the war in Iraq, very proudly, saying for many years that it would destabilize the Middle East. Sadly, I was correct, and the biggest beneficiary has been has been Iran, who is systematically taking over Iraq and gaining access to their very rich oil reserves, something it has wanted to do for decades."
He scorned Obama and Bush's foolish attempt at creating western style democracies in 3rd world den of snakes, inhabited by factions of Muslim religious fanatics. He railed against the trillions wasted fighting worthless wars, leaving countries in anarchy, and allowing terrorists organizations like ISIS to fill the vacuum. His arguments sounded like they were being spoken by Ron Paul. He clearly ran as a non-interventionist.
"We went from mistakes in Iraq to Egypt to Libya, to President Obama's line in the sand in Syria. Each of these actions have helped to throw the region into chaos and gave ISIS the space it needs to grow and prosper. Very bad. It all began with a dangerous idea that we could make western democracies out of countries that had no experience or interests in becoming a western democracy. 
We tore up what institutions they had and then were surprised at what we unleashed. Civil war, religious fanaticism, thousands of Americans and just killed be lives, lives, lives wasted. Horribly wasted. Many trillions of dollars were lost as a result. The vacuum was created that ISIS would fill. Iran, too, would rush in and fill that void much to their really unjust enrichment."

Trump rationally promised to have peaceful relations with the other two nuclear superpowers. He was diplomatic, lucid and non-confrontational when talking about the two countries neo-cons love to hate.

His promises of improved relations lasted about as long as it took the Deep State to create a blatant false flag in Syria.

"We desire to live peacefully and in friendship with Russia and China. We have serious differences with these two nations, and must regard them with open eyes, but we are not bound to be adversaries. We should seek common ground based on shared interests. Russia, for instance, has also seen the horror of Islamic terrorism. I believe an easing of tensions, and improved relations with Russia from a position of strength only is possible, absolutely possible. Common sense says this cycle, this horrible cycle of hostility must end and ideally will end soon. Good for both countries."

There seems to be a common theme when it comes to how all presidents end up doing the bidding of the military industrial complex as soon as they settle into the Oval Office, no matter what they said during their campaigns. Trump is the latest example of talking diplomacy, no nation building, non-interventionism, and not putting boots on the ground, and then doing the exact opposite within weeks of taking office.

The game plan is tried and true. The Deep State either creates or provokes a false flag event to set in motion the pressure to respond militarily. They utilize their propaganda emitting media mouthpieces to spread disinformation and create the opinions of the non-critical thinking masses. Dramatic visual images and a storyline with an evil villain are essential to properly influencing a pliable, easily misled, oblivious public.

The use of false flag events, fake news, and staged graphic photographs to control and manipulate public opinion has been utilized for decades by the Deep State to push the country into military conflict craved by the military industrial complex. We've known for almost a century war is a racket, as described by General Smedley Butler in 1935.

Smedley Darlington Butler
"War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives."

We were warned by the most respected general of the 20th Century about allowing the military industrial complex to gain control over our government and politicians. Eisenhower experienced the influence of the Deep State from the military perspective and firsthand as president. Sadly, his hopes for an alert and knowledgeable citizenry keeping the military industrial complex under wraps were dashed on the shoals of a purposefully failing public education system and a relentless propaganda campaign championing never ending war.

Eisenhower's Liberty Warning

"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together." - Dwight D. Eisenhower

Those controlling the levers of power have understood the power of propaganda since Edward Bernays taught them how to manipulate the public mind with his theories of propaganda in 1928. He believed the masses were driven by biological urges which needed to be channeled and guided by highly intelligent corporate elite overseers. His contempt for the masses was born out in his corporate fascist view of the world.

He believed our dangerous animalistic urges needed to be subdued to keep society sedate and controllable by those constituting the invisible government (aka Deep State). He trained the controllers to use propaganda in order to mold the minds of the masses in a way most beneficial to the state.
"The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. …We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. 
Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society. …In almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons…who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind." - Edward Bernays - Propaganda

The use of propaganda and the flogging of false flag narratives by the corporate media acting as mouthpieces for the Deep State has worked wonders and resulted in the deaths of hundreds of thousands of American boys and innocent victims (collateral damage according to neo-cons) around the world. An explosion that sunk the USS Maine was used by William Randolph Hearst and William McKinley to provoke a war with Spain in 1898.

The Gulf of Tonkin incident was a false flag used by LBJ and the war party in 1964 to kick off the Vietnam War, resulting in over 58,000 American deaths, 153,000 Americans wounded, hundreds of thousands mentally scarred for life, and the deaths of over 2 million Vietnamese.

For who? For what? The American boys sacrificed on the altar of the Deep State were nothing but cannon fodder in the warped minds of McNamara, LBJ, Westmorland and the rest of warmongering elitists. Only the military industrial complex benefited, as the burgeoning welfare/warfare state resulted in raging inflation during the 1970s.

As time passed, the propagandists have become immensely more sophisticated in their messaging, psychological assessment of a dumbed down American populace, and manipulation of patriotism, symbolism and emotions to run roughshod over those opposing nonsensical, illegal, and immoral military intervention around the world. The most successful technique utilized by the Deep State for the last few decades has been "atrocity propaganda". Appealing to the emotions of people who have been indoctrinated by government schooling to feel rather than think has been wildly successful in controlling the agenda.

Navirah

Atrocity propaganda was initially employed to sway public opinion to support the First Gulf War against Sadaam Hussein, engineered by Madison Avenue maggots from Hill & Knowlton on behalf of the Kuwaiti government. In emotional testimony before Congress an unidentified 15 year old girl, who happened to be the daughter of the Kuwaiti ambassador to the U.S., gave false testimony that she had witnessed Iraqi soldiers take babies out of incubators in a Kuwaiti hospital, take the incubators, and leave the babies to die.

This propaganda successfully convinced a clueless public to support our involvement in the Gulf War. With the end of the Cold War, how could the military industrial complex generate immense profits without enemies? Afterwards, Stormin Norman Schwarzkopf was glorified as the brilliant courageous hero. The masses need a hero to worship.

Whether 9/11 was a false flag or a monumental security blunder, it was hijacked by the neo-con faction within the government to wage perpetual war and turn our country into a surveillance state. A critical thinking citizen or honest journalist might wonder how the 342 page Patriot Act, which changed 15 existing laws and created entire new agencies, could be written, debated, and signed into law within 45 days of the 9/11 attack. It almost seemed like it was already written, awaiting the opportune time to implement. The War on Terror had begun. The Deep State managed to create a war against a tactic, which could never be won. It has done wonders for the military industrial complex, as arms industry stocks have risen 400% to 500% since 2001 versus the 100% rise in the S&P 500. War is a profitable racket.

The neo-cons immediately began their propaganda campaign to invade Iraq, even though they had absolutely nothing to do with 9/11. There were virtually no religious Muslim zealots inhabiting the country. Hussein hated bin Laden and his ilk. The propaganda machine, driven by Cheney and Wolfowitz, churned out false stories about 9/11 involvement and the imminent threat from Hussein using "WEAPONS OF MASS DESTRUCTION". The Colin Powell show on national TV convinced the fearful American populace to support the invasion of a country who threatened us in no way, without a declaration of war from Congress.

Colin Powell

The invasion of Iraq set the precedent that presidents can wage war around the globe with no legislative approval. The invasion became a reality TV show called Shock & Awe. In retrospect, the Iraq War was either a colossal error of judgement or exactly what the Deep State had in mind. The ultimate financial cost of our Middle East adventures will exceed $6 trillion, while 4,400 young men gave their lives, 32,000 were badly wounded, thousands more are afflicted with PTSD, and hundreds of thousands of Iraqis killed or maimed, all for a worthless cause. Iraq is now a failed state, with Muslim terrorists controlling large swaths of territory.

The warnings from men of stature, integrity and nobility like Smedley Butler, Dwight D. Eisenhower, and Ron Paul have gone unheeded by an increasingly dumbed down, iGadget absorbed, intellectually lazy, willfully ignorant, emotionally stunted populace. They question nothing. They believe whatever the boob tube tells them to believe. Their extreme level of normalcy bias allows the Deep State to maintain control and become outrageously bold in their lies, misinformation, and ability to convince the masses of the most ridiculous narratives. Only one voice in the wilderness remains. Speaking truth to power only creates change if an educated populace says enough is enough.

Ron Paul
"How did the American people ever reach this point where they believe that US aggression in the Middle East will make us safe when it does the opposite? How did the American people ever reach the point where they believe that fighting unconstitutional wars is required to protect our freedoms and our Constitution? Why do we allow the NSA, CIA, FBI, TSA, etc. to destroy our liberty at home, as part of the Global War on Terror, with a pretext that they are preserving our liberty? 
Why are the lying politicians reelected and allowed to bankrupt our country, destroy our money, and enter wars without the proper consent? Why do the American people suffer in silence and not scream "Enough is enough!"? We've had enough of the "humanitarian do-gooders" and the proponents of "American exceptionalism" who give us nothing but war, economic suffering, and less freedom. This can and must be stopped." - Ron Paul, Swords into Plowshares: A Life in Wartime and a Future of Peace and Prosperity
Apocalypse Now
"The offing was barred by a black bank of clouds, and the tranquil water-way leading to the uttermost ends of the earth flowed somber under an overcast sky-seemed to lead into the heart of an immense darkness." - Joseph Conrad, Heart of Darkness


In Part Two of this article I will detail various recent false flag and propaganda episodes which are being used by the Deep State to push the world toward war. The acceleration of events based on false narratives, appeals to patriotism, and fake news puts the lives of millions at risk, with no comprehension of how they are being manipulated through propaganda techniques refined to a science. Imperial empires always fall due to their hubris and military overreach.

We are being led into a heart of immense darkness.