23 Theses and One Piece of Investment Advice – A View from the Kremlin Towers

towers 300x225 23 Theses and One Piece of Investment Advice   A View from the Kremlin Towers

Martin Luther nailed up no fewer than 95 theses and changed the world – but his was a time before the internet, and he didn’t have a portfolio to manage. We have thus confined ourselves to a mere 23…

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Earthquake Season

Earthquake season 300x168 Earthquake Season

May you live in interesting times!

— Old Chinese curse (alas, mythical — though someone surely should have said it!)

“Insanity is doing the same thing — over and over again — and expecting a different outcome.”

— Attributed to virtually everyone Continue reading

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  • Predicting the Tsunami – by Dylan Grice

    Japan faces the weather 300x222 Predicting the Tsunami   by Dylan Grice

    Three years ago (admittedly not such a ‘Recent View’) Dylan Grice wrote the following paper on Japan and the Nikkei – and for the most part it is becoming true. Keep an eye out for the 63m!

    Click here to read the paper – Nikkei 63m

  • DSK: The Counter-History – by Edward Jay Epstein

    DSKs fate could have been very different 300x210 DSK: The Counter History – by Edward Jay Epstein

    The recent Greek election could have led to Greece’s exit from the Euro, and set off the Doomsday clock for the global financial system. Could this potential scenario have been averted if Dominique Strauss-Kahn had kept his appointment  in Berlin instead of going to jail?

    The 1998 movie Sliding Doors illustrates the contingent nature of reality. At the outset of the film, the character Helen, played by Gwyneth Paltrow, rushes to the subway after she’s fired from her job, but when she reaches it, the train’s doors slide closed. If she’d gotten there one second earlier, she would have caught the train. The movie then splits into two separate stories. In the first, Helen slips onto the train before the doors shut. She then gets home to find her lover with another woman, which causes her to leave him, move out, and find a new lover. In the second story, Helen misses the train, which causes her to have a minor accident, and, as she gets home too late to discover her lover’s infidelity, she stays with him.

    The Sliding Doors principle could similarly have changed the story for those in the presidential suite at the Sofitel at 12:06 P.M. on May 14, 2011. At that moment, DSK had been taking a shower. The maid, Nafissatou Diallo, was making her second entry into the suite without her cleaning equipment. If DSK had stayed in the shower for just a few more seconds, Diallo might have heard the shower or seen other signs that the suite was occupied. Since maids at the Sofitel are not supposed to clean rooms while guests are in them, she presumably would have exited the suite before he emerged from the bathroom. She would then have returned to room 2820, where she had left her cleaning cart, and, as the guest in that suite had checked out, she would have finished cleaning it. She would not have encountered DSK, nor would she have had a degrading sexual experience between 12:06 and 12:13 P.M. She would not have had to wait more than an hour near the employee entrance. She would not have been taken to Roosevelt-St. Luke’s Hospital to be examined. She would not have testified before a grand jury, told falsehoods under oath, or had her creditability impugned by prosecutors and the judge, who dismissed the charges against DSK. Nor would she have seen her photograph on the cover of Newsweek, been interviewed on Good Morning America, or filed a civil suit against DSK, which, if successful, could result in a multi-million-dollar payment to her. Instead, if the sliding shower door had opened differently, she would likely still be cleaning rooms on the 28th floor of the Sofitel.

    DSK’s story would also be very different. But how? On April 13, 2012, I met with him at the elegant Pavillon de la Reine in the Place des Vosges to discuss what might have happened if that sliding door had opened. He a had a very clear memory of what he had planned to do on that fateful day. He said he’d been rushing to get dressed when he opened the bathroom door and encountered the maid. But what if he had stayed in the bathroom a few more seconds and not encountered the maid? I asked.

    He would have gotten dressed, finished packing his single suitcase, and left, which would have taken about five minutes. Since it then would have only been 12:11 P.M., he would not have been running behind schedule, so he would not have had to call his daughter Camille on the IMF BlackBerry that he usually kept in his jacket pocket. If he had not called her, he might not have left the phone in a place from which it would go missing. He would have checked out, caught a taxi on 44th Street, and gone to the designated restaurant to meet his daughter and her new boyfriend. After lunch, he would have caught a cab to JFK in time to catch Air France Flight 23, which left at 4:50 P.M. He would then have tried to sleep on the transatlantic flight, since he had a busy agenda on Sunday.

    The plane would have arrived at Charles de Gaulle airport at 6:01 A.M. on Sunday, May 15. That morning, he would have given his BlackBerry, assuming he still had possession of it, to security experts arranged by his advisor Stéphane Fouks. Two months earlier, his security team had installed encryption software on the phone, but then, for an unknown reason, the phone began to fail, so the software had recently been removed. But he now feared his phone had been compromised, and, if the experts found concrete evidence of sophisticated tampering, he would know that he was under surveillance and take appropriate counter measures.

    Because DSK had a 3:00 P.M. appointment with German Chancellor Angela Merkel, he would then have boarded a fight to Berlin that morning. Merkel does not often hold meetings on Sunday, but DSK had insisted on it when he was in Washington, DC. He urgently needed to discuss “Comprehensive,” the code name for a secret plan he had been working on at the IMF to avert the Greek financial crisis.  The plan essentially provided an IMF mask for the members of the euro zone to absorb the entire Greek government debt.

    DSK knew that Germany was the key to solving the Greek problem: Once Germany agreed to his plan, Sarkozy, who DSK knew enjoyed dramatic rescues, would join Merkel. The other countries in the euro zone would follow suit. Over the past year, DSK had developed a close working relationship with Merkel. They could discuss their complex issues in German, a language he was fluent in. He also understood the German abhorrence to incurring debt that could not be repaid. As he explored the political scenario with Merkel that January, it had become clear to him that Merkel would need time to overcome this barrier.

    But time was running out that Spring. Yes, he agreed with her, Greece was only two percent of the economy of the euro zone, but even so this unpayable debt was a “cancer” that, if allowed to metastasize, would destroy credibility in the financial markets of other member countries, including Spain, Italy, and Portugal, and could unravel the entire euro zone. Greece could not solve the problem itself: No matter how much it cut expenditures, it could not repay the debt, which would only grow as interest rates rose. Providing Greece with loans was also not the answer.  So pragmatism had to replace ideology.

    This was not just a dilemma in which there were two choices—increased debt or increased austerity. DSK termed it a “trilemma,” because the seventeen-nation euro zone, which shared a common currency, the euro, and a common central bank, the European Central Bank (ECB), lacked the political means to enforce any decisions it made. The ECB could loan money on various conditions, but, as Greece was sovereign, it could not guarantee that they would be carried out. Yet, if the euro zone made it evident to the marketplace that it could not solve such problems, the financial players in the market would realize that the other heavily indebted countries, such as Italy, Spain, and Portugal, could also default. The contagion would spread, interest rates would soar, banks would be unable to retain their deposits, governments would topple, and the fragile financial edifice of the euro zone would collapse.

    Merkel understood this “trilemma,” but that did not make it any less politically repugnant to ask German taxpayers to pay for Greek over-spending. Her finance minister, Wolfgang Schäuble, had taken the position that if there was to be a bailout, this should be accomplished by the private holders of Greek debt, most of which were German and French banks, writing off part of what was owed them, rather than by governments using money paid by their taxpayers. But that would lead to an effective default, and negotiating with banks could itself add to the growing unease in the marketplace.

    DSK had the pragmatic solution. Since the amount of money involved was then relatively small—about 60 to 70 billion euros—most of it could be paid by Germany, France, and other euro zone members, with a small portion paid by the banks. The alternative was that the contagion would spread to Spain and Italy and become an unsolvable multi-trillion-euro problem.

    Then, that May, the Greek finance minister George Papaconstantinou proposed a quixotic program under which Greece would raise 50 billion euros by privatizing government assets such as airports and monuments. This was so unrealistic that the market feared an imminent default.

    The credit rating services, led by Moody’s, moved toward cutting Greece’s credit into junk territory. This in itself would make it too expensive for Greece to borrow to refinance its debt, which was coming due. Nor could Greece print money, since it had ceded that power, as had all the other members in the euro zone, to the ECB. And the ECB made it clear that it was not allowed to subsidize a member. So Europe was now at a dangerous impasse.

    DSK had meanwhile fine-tuned his “Comprehensive” plan to conform to the political restraints that were holding Germany back. Euro zone members, led by Germany, would replace most of the unpayable part of the Greek debt with Eurobonds. The balance would come from the banks, which would agree to a voluntary haircut, and a token amount would come from Greece.

    This would end the default threat, and, as the financial markets realized that the euro zone could solve default problems, there would be no spread of the malignancy to markets in Italy, Germany, and Portugal.

    DSK hoped that Merkel, after four months of conversations with him about the crisis, was finally ready to support his plan. He knew that this would take great political courage on her part, but he tried to convince her that there was no other option if the euro was to be saved. So he hoped when he saw her at 3:00 P.M. on May 15, she would sign onto this plan. If she did, the Greek crisis would likely be solved, or at least put on hold.

    But DSK never got to this critical meeting with Merkel. Instead, he was in prison in New York City on charges that would later be thrown out. The crisis was not contained. That Spring, the contagion spread to Italy—where Prime Minister Silvio Berlusconi was forced to resign—and to Spain. By 2012, most of Europe had been plunged into a recession, Spain had requested a euro bailout– and Greece was holding an election that could precipitate its exit from the euro.

    There was also a sliding door for Sarkozy in May. If DSK had not encountered the maid, he would have returned to France after his meeting with Merkel on May 15. He was by then leading Sarkozy in the polls by almost 20 percentage points. On June 15, he would announce his candidacy for the presidency of France, and the Socialist Party would nominate him as their candidate. He would run on his ability to solve economic problems, an area in which Sarkozy was weak. But would he win?

    Just two weeks before his arrival at the Sofitel in May, DSK told editors of Libération that one way his opponents might try to stop him was by inventing a rape scandal. This was clearly meant as a joke, as he affirmed to me. He did not believe that, even if it were the only way to win the election, his opponents would go to such lengths. He may have underestimated them.

    As it turned out, Sarkozy, a former Minister of the Interior, and his operatives were not without resources. French intelligence had a dossier on DSK that went back many years. The past March, Sarkozy’s staff had reportedly established a liaison with the DCRI, France’s domestic intelligence service, for the purpose of keeping track of DSK. If that is true, the surveillance had the means to transform the local investigation of a prostitution ring run out of the Carlton Hotel in Lille into a scandal that could ensnare DSK in the prostitution ring. According to a recent book on the French intelligence services, this scandal would have been leaked in October 2011 the midst of the Socialist primary. And so, even if DSK had avoided the sliding door at the Sofitel and had not been arrested in New York, and even if he had succeeded in his talks with Merkel in averting the euro crisis, he  might still have been brought down, and Sarkozy, instead of losing the election, might still be president of France.

  • America’s Failed (Bi-Partisan) Russia Policy – by Stephen F. Cohen

     Americas Failed (Bi Partisan) Russia Policy   by Stephen F. Cohen

    The United States and Russia are at a potentially fateful crossroads in their relations. Twenty years after the end of the Soviet Union, the relationship features more elements of cold-war conflict than of stable cooperation. Still more, recent developments, including presidential campaigns and other political changes under way in both countries, may soon make relations even worse.

    And yet, in the United States, there is virtually no critical discussion, certainly no debate, about American policy toward Russia. This failure of our own democratic process — particularly of our political and media establishments — is in sharp contrast to fierce debates over Russia policy that took place in Congress, the national media, academia, think tanks and even at grassroots levels in the 1970s and 1980s.

    As a result, serious criticism of Washington’s policies toward Moscow that should be stated publicly — by Americans, not Russians — is not being expressed in our mainstream politics or media. I will state that kind of criticism here today — very briefly and bluntly. I do so as a scholar who has studied Russia’s history and politics for fifty years — and as an American patriot. Most of what I have to say is not a matter of personal opinion but of historical and political fact. It can be summarized in five major points.

    First: Today, as before, the road to America’s national security runs through Moscow. No other U.S. bilateral relationship is more vital. The reasons should be known to every policymaker, though they seem not to be:

    – Russia’s enormous stockpiles of nuclear and other weapons of mass destruction make it the only country capable of destroying the United States as well as the only other government, along with our own, essential for preventing the proliferation of such weapons.

    – There is also Russia’s disproportionate share of the world’s essential resources, not only oil and natural gas but metals, fertile land, timber, fresh water and more, which give Moscow critical importance in the global economy.

    – In addition, Russia remains the world’s largest territorial country. In particular, the geopolitical significance of its location on the Eurasian frontier of today’s mounting conflicts between Western and Eastern civilizations, as well as its own millions of Islamic people, can hardly be overstated.

    – Not to be forgotten are Russia’s talented and nationalistic people, even in bad times, and their state’s traditions in international affairs. This too means that Russia will play a major role in the world.

    – And, largely as a result of these circumstances, there is Moscow’s special capacity to abet or to thwart U.S. interests in many regions of the world, from Afghanistan, Iran, North Korea and China to Europe, the entire Middle East and Latin America.

    In short, these inescapable realities mean that partnership with Russia is an American national security imperative.

    Second: There is no real American-Russian partnership today. Nor has there been one since the Soviet Union ended in 1991, despite periodic (largely decorative) declarations to that effect in Washington. Indeed, there is less essential cooperation between Washington and Moscow today than there was during the late years of the Cold War under Presidents Ronald Reagan, the first George Bush and Mikhail Gorbachev. Still worse, important elements of cooperation that do exist — on Afghanistan, Iran and nuclear weapons — are fragile and may soon end.

    In short, the United States is farther from a partnership with Russia today than it was more than twenty years ago.

    Third: Who, it must be asked, is to blame for this historic failure to establish a partnership between America and post-Soviet Russia? In the United States, Moscow alone is almost universally blamed. The facts are different. There have been three compelling opportunities to establish such a partnership. All three were lost, or are being lost, in Washington, not in Moscow.

    – The first opportunity was following the end of the Soviet Union, in the 1990s. Instead, the Clinton administration adopted an aggressive triumphalist approach to Moscow. That administration tried to dictate Russia’s post-Communist development and to turn it into a U.S. client state. It moved the U.S.-led military alliance, NATO, into Russia’s former security zone. It bombed Moscow’s remaining European ally, Serbia. And along the way, the Clinton administration broke strategic promises made to Moscow.

    – The second opportunity for partnership was after 9/11, when the Bush administration repaid Russian President Vladimir Putin’s extraordinary assistance in the U.S. war against the Taliban in Afghanistan by further expanding NATO to Russia’s borders and by unilaterally withdrawing from the 1972 Anti-Ballistic Missile Treaty, which Moscow regarded as the linchpin of its nuclear security.

    – Now, since 2008, the Obama administration is squandering the third opportunity, its own “re-set,” by refusing to respond to Moscow’s concessions on Afghanistan and Iran with reciprocal agreements on Russia’s top priorities, NATO expansion and missile defense.

    In short, every opportunity for a U.S.-Russian partnership during the past twenty years was lost, or is being lost, in Washington, not in Moscow.

    Fourth: How to explain, we must also ask, such unwise U.S. policies over such a long period? The primary explanation is a policy-making outlook, or ideology, that has combined the worst legacy of the Cold War with the worst American reaction to the end of the Soviet Union.

    – Washington’s two most consequential (and detrimental) decisions regarding post-Soviet Russia have continued the militarized approach of the Cold War: to move NATO eastward; and to build missile defense installations near Russia’s borders.

    – At the same time, Washington’s triumphalist reaction to the end of the Soviet state produced a winner-take-all diplomatic approach that has been almost as aggressive. Consider the three primary components of this so-called diplomacy:

    1. Presumably on the assumption that Russia’s interests abroad are less legitimate than America’s, Washington has acted on a double-standard in relations with Moscow. The unmistakable example is that while creating a vast U.S.-NATO sphere of military and political influence around Russia, Washington adamantly denounces Moscow’s quest for any zone of security, even on its own borders.

    2. Similarly, U.S. negotiations on vital issues have been based on the premise (called “selective cooperation”) that Moscow should make all major concessions while Washington makes none. And on rare occasions when Washington did promise major concessions, it reneged on them, NATO’s eastward expansion being only the first instance. (Can anyone who doubts this generalization cite a single meaningful concession — any substantive reciprocity — that Moscow has actually gotten from the United States since 1992?)

    3. Meanwhile, presumably on the assumption that Russia’s political sovereignty at home is less than our own, Washington has pursued intrusive “democracy-promotion” measures that flagrantly trespass on Moscow’s internal affairs. This practice began in the 1990s with actual directives from Washington to Moscow ministries and with legions of onsite U.S. “advisers” and it continues today — recently, for example, with the American vice president lobbying in Moscow against Putin’s return to the Russian presidency and with the new U.S. ambassador’s profoundly ill-timed meeting with leaders of Moscow’s street protests.

    In short, blaming Putin for anti-Americanism in Russia, as the U.S. State Department and media do, ignores the real cause: Twenty years of American military and diplomatic policies have convinced a large part of Russia’s political class (and intelligentsia) that Washington’s intentions are aggressive, aggrandizing and deceitful — anything but those of a partner. (In that context, part of the Russian elite has criticized Putin for being “pro-American.”)

    Fifth: None of these unwise, counter-productive U.S. policies toward Russia since the 1990s have been specifically Democratic or Republican. They have been bipartisan, enacted and supported by Democratic and Republican presidents and congresses alike. They have been, that is, a fully bipartisan failure of American leadership and policymaking.

    To which must be added the complicit role of the American media:

    – Since the 1990s, mainstream press coverage of Russia has been woefully less professional than it was when the Soviet Union existed. It has been more ideological; less diverse in its sources and perspectives; less receptive to non-standard opinions; less observant of the necessary distinction between reporting and news analysis; and, worse yet, less factual and accurate.

    – Press coverage has also been less independent of U.S. policy than it was in Soviet times. In the 1990s, the mainstream media narrative hardly differed from that of the Clinton White House, cheerleading for Russian President Boris Yeltsin. In recent years, the media narrative, like Washington’s, has been overwhelmingly anti-Putin.

    – Indeed, press analysis of Russian politics has been all but replaced by reflexive Putin-bashing equating him with Saddam, Qaddafi and even Stalin, and based on a welter of non- factual or unsubstantiated allegations.

    – For example, the dismantling of Russian democracy, the creation of a corrupt financial oligarchy (which is the main obstacle to democracy) and the killing of journalists did not begin under Putin, who assumed the presidency in 2000, but under Yeltsin in the 1990s. And there are no facts or logic to support standard U.S. press assertions that Putin was personally responsible for the murders of the journalist Anna Politkovskaya, the supposed KGB defector in London, Aleksandr Litvinenko or any of his other Russian political opponents.

    Nor is this journalistic malpractice unrelated to U.S. policy-making. It has polluted American public discussion of Russia in ways that encourage the worst impulses of our politicians and that all but prohibit any reconsideration of U.S. policy.

    Toward a New Russia Policy

    Clearly, the United States needs a fundamentally different policy toward Russia. Given the right approach, partnership with Moscow is still possible, no matter who is in the White House or Kremlin after this year’s presidential elections. But the window of opportunity is closing, not only because of the factors I mentioned earlier but because Moscow is increasingly mistrustful of Washington and because Moscow no longer needs anything from the United States except military security. Everything else, including modernizing funds, technology and markets, Russia can get from its flourishing partnerships with China and Europe.

    The Russia policy America urgently needs requires at least four fundamental changes, each based on new thinking. Again, briefly stated:

    1. The policy must be de-militarized in favor of political diplomacy. And the guiding diplomatic tenet must be recognition of Russia’s parity with the United States as a sovereign nation and legitimate great power. This means, in particular, that the same rules of international behavior apply equally to Washington and Moscow and that negotiations require reciprocal concessions, as befit partners. Such a U.S. approach would almost certainly lead to new and expanded areas of cooperation.

    2. Vital cooperation will not be possible (or stable), however, as long as Washington continues to promote NATO expansion along Russia’s borders. This must stop, which means no longer encouraging membership for Georgia or Ukraine. Membership for either would cross Moscow’s declared “red lines.” The proxy American-Russian war in Georgia, in August 2008, which risked a nuclear confrontation like the 1962 Cuban Missile Crisis, was an unmistakable warning. (Russia has a right, as the United States asserted for itself in that crisis, to be free of menacing foreign military bases near its territory.)

    3. But the thirteen-year expansion of NATO to Russia’s borders has already institutionalized the worst geo-political, and potentially military, U.S.-Russian conflict. The new NATO members cannot be expelled, but Washington should now honor its promise, also broken, that those countries would not host any NATO or U.S. military installations. Honoring that pledge would, in effect, de-militarize NATO expansion and considerably lessen Moscow’s anxieties, resentments and resistance to new forms of security cooperation, including on missile defense and deeper nuclear reductions on both sides.

    4. Finally, “democracy-promotion” measures inside Russia also must stop. Many proponents of this two-decade U.S. policy sincerely believe in it, but it is wrong on all counts:

    – We, the United States, do not have the right, wisdom or power to intervene so directly or deeply in the internal workings of another great nation, especially one whose history is older, different and no less proud than our own. (Russians have shown they know how to democratize their country. To suggest that they do not is contemptuous and an ethnic slur.)

    – Here too the proof is in the factual record. Since the 1990s, U.S.-sponsored “democracy-promotion” inside Russia has done more to undermine democratic prospects there than to promote them.

    – Even worse, “democracy-promoters” and leaders of opposition groups they sponsor are moving in a profoundly reckless direction. Increasingly, they speak of “delegitimizing” and “de-stabilizing” Russia’s political system, even of a “revolution,” but without asking what that might mean for a vast state with uncertain control over its enormous, sprawling quantities of devices of mass destruction. When the Russian state suddenly disintegrated in 1991, this kind of catastrophe was averted. But miracles rarely, if ever, happen twice.

    The policy changes I propose are, of course, unlikely to be adopted. After twenty years, many powerful American interests are invested in the existing policy, however badly it has failed. But it is not enough to blame the U.S. political and media establishments. American critics of Washington’s longstanding approach to Moscow also bear some responsibility: They have not fought for the nation’s best interests.

    This too was different forty years ago, when there was such an organization, The American Committee on East-West Accord. Based in Washington, with a Board composed of CEOs of major corporations, academics, policy intellectuals, nuclear scientists, journalists and representatives of grass-roots movements, the Committee fought our cold warriors of that time on many fronts, from Congress to the media. In the end, the struggle helped to make possible the historic breakthrough achieved by Reagan and Gorbachev in the 1980s. Where are such Americans and organizations today, when perhaps the last chance for a U.S.-Russian partnership is being lost?

    This post is adapted from remarks by Stephen F. Cohen to the World Russia Forum in Washington, DC on February 27, 2012.

    Original article posted at:

  • John R. Bradley on Syria and Russia

  • Romney’s Useless Posturing on Russia

    Romneys Russian ruse 300x225 Romneys Useless Posturing on Russia

    A guest of T&B’s provided this recent anonymous view on potential Republican presidential nominee, Mitt Romney, and his stance vis-a-vis Russia:

    I think Romney is just a sellout Establishment RINO who thinks somehow the U.S. foreign policy was stronger or more credible in the wake of supporting a client state’s useless assault on a Russian exclave in August 2008. It wasn’t, and no Republican other than Ron Paul is going to admit that our ‘reset’ with Russia was mainly about the fact that we had no other credible options AND had become massively in debt to foreign countries, led by China, but were also going begging hat in hand to Russia to keep putting money into Fannie, Freddie, and U.S. steel mills from 2007 on.


    And of course, there’s also the incoherence of saying the Turks are increasingly going ‘Islamist’ and ‘anti-Israel’ under Erdogan but we want to invest hundreds of millions at least on putting highly sensitive missile defense radars and interceptors in their country. Seems those two notions are incompatible as well.


    “Does Romney have any comment on the missile defense sites that are being installed [by the Obama Administration] in Romania, Poland, and even Turkey? I realize that he likes his talking points from 2009, but he might want to look into what has happened since then. If Romney still believes New START puts the U.S. at a disadvantage, is he proposing that the U.S. withdraw from the treaty? Given that Romney’s understanding of the issues related to the treaty is shoddy at best, I’d be interested to see him answer that question. Does Romney know what the word annexation means? If he did, he wouldn’t apply it to what Russia is doing in South Ossetia and Abkhazia right now. They do have de facto control in these areas, and they have recognized the nominal independence of the separatists to keep them as Russian satellites, but there are no other examples of the empire-building that Romney thinks is going on. Perhaps Romney agrees with the slogan that ignorance is strength? “

  • Ben Bernanke Realised Printing Yet More Money Would Look Desperate – by Liam Halligan

    Bernanke ponders 300x225 Ben Bernanke Realised Printing Yet More Money Would Look Desperate   by Liam Halligan

    Why didn’t Ben Bernanke signal a third round of quantitative easing on Friday at the long-anticipated Jackson Hole summit? After all, at the same event last year, the US Federal Reserve chairman made it pretty explicit another funny money missile would be launched.

    After Bernanke’s 2010 late-summer missive, and the resulting release of yet more “virtual money”, equities surged on Western markets, the price of all “risk assets” rising by a third over the subsequent six months. By the time QE2 ended two months ago, the Fed had “expanded its balance sheet” by an astonishing $2,300bn since mid-2009.

    During last year’s Jackson Hole summit, Bernanke made it clear the biggest economy on earth would be fed another economic sugar rush. The Fed, he signalled, was “prepared to provide additional monetary accommodation through unconventional measures”.

    Friday’s speech, though, spent almost no time discussing such measures. There was a cursory mention that the Fed remains “willing to act to promote a stronger economy” but only “as appropriate” and only “in a context of price stability”. The overall impression was that America’s central bank is now rather reluctant to reboot the virtual printing press, certainly compared with last year.

    Why is this? The stated aim of QE is to bolster economic confidence and promote growth. Well, the US economy now looks far weaker than last summer. Just before Bernanke’s 2010 speech, figures showed the American economy expanded an annualised 1.6pc during the second quarter. Last week’s effort was presaged by much worse news – the second quarter of 2011 saw US annualised growth of just 1pc.

    American weekly jobless claims just hit 417,000, some 10,000 more than expected. Unemployment is rising sharply. The US is “now dangerously close to recession”, says Morgan Stanley, a verdict borne out by surveys of consumer confidence. The dreaded “double-dip” looms much larger than in August 2010.

    On top of that, financial markets are now far shakier than this time last year. During the month before the previous Jackson Hole summit, the S&P 500 dropped 5pc. Over the same period this year, America’s bellwether stock index has endured a rather more shocking 10pc fall. So why no QE3?

    One of the given explanations, made clear in Bernanke’s speech, is that US inflation is now rising. So-called “core inflation” hit a 19-month high of 1.8pc in July. That’s admittedly tricky for the Fed, seeing as one of the official justifications for previous doses of QE, is that the US Fed (and the Bank of England) have released virtual money in order to “fight deflation”.

    The real motivation behind QE, of course, has been to allow essentially insolvent but politically connected financial institutions to recapitalise themselves. Many QE proceeds have been used to rebuild bank balance sheets rather than stimulate the broader economy. By propping up US Treasury and UK gilt prices, QE has also allowed weak governments, for now, to keep on spending, rather than genuinely tackling our fiscal predicament.

    In addition, QE is part of a deliberate but still largely unspoken ploy to gradually weaken the dollar (and pound), so debasing the enormous debts of the US (and UK) governments. “Fighting deflation” has, for the most part, been an intellectual conceit – a deception now made more difficult by the latest inflation numbers. Having said that, if the US authorities had really wanted more QE, they wouldn’t have let a few awkward inflation statistics stop them.

    Another reason the Fed has put forward for its new QE reluctance, sotte voce, is politics. The mainstream consensus previously backing QE has collapsed. Republican presidential candidate, Rick Perry, declared that “further money printing” would be “treasonable” – a capital offence. Perry was talking, of course, with an eye on the Tea Party, a political grouping previously dismissed as a joke by beltway politicos. Having made some stunning gains, and getting ever stronger in the run-up to the November 2012 Presidential election, the Tea Party is now taken very seriously indeed.

    Again, though, if the White House felt that more QE would have promoted growth and mortgage lending, while giving financial markets a boost, the President would have simply ordered Bernanke to do the business. After all, the economic “feel-good factor” is the ultimate political trump card.

    Yet that didn’t happen because there is now a dawning realisation among America’s political establishment that more QE would actually make a bad situation worse. The measures already implemented have been so radical, so unprecedented, that for the Fed to unleash even more QE could easily have been seen as a negative, not only by companies making investment and employment decisions, but even by myopic financial markets.

    The Fed may have “looked desperate” – which could have sparked a very serious loss of confidence indeed, another Lehman-style “Minsky moment”. That’s why Bernanke didn’t signal more QE, not squeamishness about inflation or politics.

    The reality is QE has already done an awful lot of damage. America has expanded its base money supply three-fold in two and a half years – from 6pc to 18pc of national income. But even this jaw-dropping measure hasn’t led to much of an expansion in monetary measures, such as M2 that include bank lending, precisely because the banks, for all the propaganda to the contrary, are still determined not to lend. They can make more money simply channelling QE money into stocks and other investments.

    Crucially, the banks also remain petrified of counter-party risk in the inter-bank market. Many of them, disgracefully, are still concealing vast sub-prime losses in off-balance-sheet vehicles. So they assume other banks are doing the same. Such mistrust between the banks – “we’re lying, so they must be lying” – gums up the wheels of finance and starves even creditworthy firms of the funds needed to invest and create jobs.

    That’s why M2 has remained flat, despite a massive expansion of base money. The way to break the deadlock, though, isn’t to do more QE, but to end inter-bank torpor by forcing “full disclosure” of bank losses. Such disclosure is barely happening, on either side of the Atlantic. The UK’s monetary base has also tripled, while producing – for the same non-disclosure reasons as in the US – only minimal growth in M2.

    “Full disclosure” will hurt. Some big names will fail, their depositors absorbed by more solvent institutions. Western banking sectors will need to be restructured, as loans are written off. But, as history shows, this process can be managed. “Creative destruction” really is the only way that capitalism can work.

    For several years now, QE has plastered over bank losses, so preventing this necessary purging. But the damage goes so much deeper. QE has made commodities more expensive, undermining Western recovery. Imposing “soft default” on the West’s creditors will generate higher future borrowing costs. By sparking justified accusations of foul play by the rest of the world, QE has sparked “currency” wars between West and East, which could yet spiral into tit-for-tat protectionism. And then, think of the future inflation we face, once that huge base money expansion fully enters circulation.

    Modern capitalism, at its core, relies on the public’s trust of fiat money and the sanctity of contract. QE, a form of state-sponsored theft, makes a mockery of both those cardinal concepts. That unavoidable truth, having been denied and denied, can no longer be avoided. Not even by the financial markets. And not even by our current crop of cowardly politicians.

    Liam Halligan is chief economist at Prosperity Capital Management

    This article first appeared in The Telegraph:

The Widening Gyre — and the Sarajevo Blues

Widening Gyre 300x200 The Widening Gyre — and the Sarajevo Blues

“Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world…

The best lack all conviction, while the worst

Are full of passionate intensity”

W.B. Yeats, “The Second Coming” Continue reading

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Ukraine: Truth – the First Casualty

353680 Ukraine Crisis 300x168 Ukraine: Truth – the First Casualty

How do wars begin?
Wars begin when, first, politicians lie to journalists, then they believe what they read in the press!
Karl Kraus, 1912

The bombastic and totally counterproductive Western response to the crisis which followed the nationalist coup d’état in Kiev, at least in part stage-managed from Washington and Brussels with that signature mix of arrogance and duplicity witnessed in the buildup to previous imperial exercises, represents a tragic failure of Western diplomacy, which has attained none of its presumed goals. Continue reading

Posted in Global Macro, Hot News, The Eternal Russia | 11 Comments

A Hard Rain (’s a-Gonna Fall)

Take cover 300x225 A Hard Rain (’s a Gonna Fall)

It has been quite some time since T&B put fingers to keyboard to enlighten, enthral, provoke, irritate… Continue reading

Posted in Global Macro, Newsletter, The Eternal Russia | 3 Comments