Thoughts from the Frontline: The Last Argument of Central Banks

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Posted on 11th November 2014 by Administrator in Economy |Politics |Social Issues

Thoughts from the Frontline: The Last Argument of Central Banks

By John Mauldin

 

For a central banker, deflation is one of the Four Horsemen of the Apocalypse: Death, Famine, Disease, and Deflation. (We will address later in this letter why War, in the form of a currency war, is not in a central banker’s Apocalypse mix.) It is helpful to understand that, before a person is allowed to join the staff or board of a central bank, he or she is taken into a back room and given DNA replacement therapy, inserting a gene that is viscerally opposed to deflation. Of course, in fairness, it must be noted that central bankers don’t like high inflation, either (although, looking around the world, we see that the definition of high inflation can vary). In the developed world, 2% inflation seems to be the common goal. You wouldn’t think that 2% a year is a significant change in the overall price structure, but the panic among economists that would ensue with a 2% price deflation would border on hysteria.

Inflation and deflation are often topics of discussions as I travel, but I find that there is general confusion about what inflation and deflation actually are. This is understandable, since many economists don’t agree on the definitions, so they are often talking about totally different phenomena. In this week’s letter I have for you a brief essay on the topic of deflation. Depending on your view, you might find some of my thoughts controversial, but I will try to make my case clear, at least. Please note this is the 30,000-foot view and is nowhere close to definitive. If you want great detail, I suggest you get my good friend Gary Shilling’s latest book on deflation (of four that I know of), called The Age of Deleveraging. (It’s only $11.49 on Kindle.)

Definitions of Inflation and Deflation

Generally speaking, there are two schools of thought about inflation. The Austrian school of economic theory, founded by Ludwig von Mises, sees inflation as an increase in the money supply and deflation as a contraction in the money supply. Somewhat similarly (but not entirely!), the monetarist school of economic theory tends to see money supply as the chief determinant of GDP in the short run and of the price level over the long run.

Mainstream economics (generally Keynesian) tend to refer to rising or falling prices as inflation or deflation. They tend to see deflation as a general price decline, often brought about by reductions in available credit, money, or reserves or by the government’s restraint of spending programs.

So when we talk about inflation/deflation, it is important to know whether we’re talking about monetary inflation or price inflation. As we have seen recently, a rising money supply is not necessarily accompanied by rising prices (although there is a certain long-term rhythm to the two different measures).

When I talk to the general public about deflation being something to be avoided, I get confused looks. Don’t we like it when the price of something goes down? Who doesn’t love a sale on something they want to buy? Since the beginning of the First Industrial Revolution, the general tendency for the prices of manufactured goods (in real inflation-adjusted terms) has been to go down as productivity has gone up. This is what Gary Shilling and others refer to as “good deflation.”

You can actually have solid productivity, GDP growth, wealth creation, a general increase in the standard of living, and a buoyant economy during a period of overall price deflation such as we had in the late 1800s – if it is the good kind of deflation.

What is the difference between good deflation and bad deflation? Good deflation is the general fall in prices that comes from an excess supply of goods due to increased productivity and product improvement. From 1870 to 1897 wheat prices fell from $1.06 to 63¢ a bushel, corn from 43¢ to 30¢ a bushel, and cotton from 15¢ to 6¢ a pound. Most of the time farmers received even less for their crops.

While farmers blamed all sorts of people for their falling prices, the primary cause of their problem was overproduction resulting from increases in the acreage of farms and increased yields per acre due to improved farming methods, as well as the advent of railroads that made it easy to get produce to Eastern markets. A farmer had to produce more just to stay even. It didn’t help that global competition from Argentina, Russia, and Canada was added into the mix, as increasingly large oceangoing steamboats made international transportation cheaper and ended an era of American agricultural export advantages.

This period of time saw one-third of farmers move to the cities for other work as they lost their employment on small family farms. That trend in falling farm employment continued until recent years, and farming has seen even greater increases in productivity (yield per acre) in recent decades. Farm and ranch families are just 2% of the US population today. Only 15% of the US workforce produces, processes, and sells the nation food and fiber. Today’s farmers produce almost three times more food with 2% lower inputs than farmers did 60 years ago. A third of American agriculture is strictly for exports.

The late 1800s was a particularly contentious period of history in the United States as farmers blamed railroads, bankers, and industrialists for their problems – a situation not unlike the income inequality debate we have today. And while falling prices weren’t fun for the farmers, the general public enjoyed lower food costs and higher-quality food.

The easiest way to illustrate this trend in the modern area is by looking at the cost of a gigabyte of storage. You can see an interactive version of this chart here. Prices for a gigabyte of storage dropped from $500-700,000 in the early 1980s (depending on what you were buying) to about $0.03 today. Put another way, a gigabyte cost about 2 million times more 35 years ago than it does today. And it has fallen by 50% every few years. The good deflationary fall in prices for data storage has enabled all sorts of industries and products, creating millions of jobs. And we could find dozens of other, similar products whose prices have been falling dramatically.

Measuring Inflation/Deflation

Each month we are greeted by the announcement of the Consumer Price Index (CPI), telling us what the level of general price inflation has been for the previous month and year. I’ve written about CPI extensively in past letters, but basically we need to understand that the CPI is an artificial amalgamation of the prices of various products and services. The composition of the CPI has changed significantly over the last 40 years. As John Williams at Shadow Stats demonstrates, if we used the same measurement methodology that was in force during the Reagan years or the early Clinton years, inflation would be almost 4 percentage points higher now than it is currently calculated to be.

Contrary to some commentators, I do not see this is a conspiracy to mislead investors or consumers, or to slow down the rise in Social Security payments. We should all be grateful that there is a small band of economists who are consumed by the details of what inflation actually is. They go to conferences and vehemently argue with each other (well, vehemently for academic economists) over arcane topics that would bore 99%-plus of the population. They are passionate about trying to find the proper measure of inflation.

My personal feeling is that the adjustments that have been made in the calculation of inflation are generally quite reasonable, if somewhat controversial. With the prices of electronics and many other manufactured goods falling over the decades, how do you measure inflation in those items? Or rather deflation? I still spend about the same amount for a new phone today as I did 10 years ago, but my new iPhone 6+ is a major improvement over the Motorola flip phone I had 10 years ago, by any standard you want to apply. Both could make phone calls, but that is about where the similarity ends. Am I getting better value for my money? More bang for the buck? Absolutely.

Currently, the economists who determine inflation see that increase in value as an actual drop in inflation, and they use a somewhat controversial methodology called hedonics to adjust the prices of a myriad of products for quality. If anti-lock brake systems are now standard whereas before they were optional, then by this doctrine the price of your car went down. (Those who are interested can google hedonics and get a wealth of information on the definition and the controversy.)

Housing is a big component of our spending. Should we use actual housing prices or what the inflation economists call “owner’s equivalent rent prices” as our measure of housing cost increases? If we had used actual housing prices during the 2000s, the inflation figures would have gone through the roof, suggesting to the Federal Reserve that they should be raising interest rates rather than lowering them or keeping them too low. And again, if we had been using actual house prices to calculate inflation during the Great Recession, the economy would have been seen as being swamped by serious deflation. There would’ve been even more weeping and wailing and gnashing of teeth.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

Important Disclosures

Things That Make You Go Hmmm: Signing Off

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Posted on 19th December 2014 by Administrator in Economy |Politics |Social Issues

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Things That Make You Go Hmmm: Signing Off

By Grant Williams

On Christmas Eve 1979, 27 days before I became a teenager, in a suburban street in Moseley in Britain’s West Midlands, a group of musicians put the finishing touches on their debut album.The musicians — Brian Travers, Astro, James Brown (no, not that one), Earl Falconer, Norman Hassan, Mickey Virtue, and twins Ali and Robin Campbell — had a unique approach to the music business.Eighteen months prior to completing their first album, Ali Campbell and Travers had plastered the streets of Birmingham with leaflets promoting the band, which had taken its name from the document issued to people claiming unemployment benefits from the UK government’s Department of Health and Social Security (DHSS). The name of the form — and thus the band — was UB40.

Having advertised themselves and with dreams of making a big splash on Britain’s reinvigorated music scene running wild in their heads, the band had just one remaining item on their to-do list — learn to play their instruments.

The members of UB40 made an agreement to spend the next year doing nothing other than learning their instruments and practising their songs until they felt they were good enough.

(I know, I know! This IS analagous to many modern-day Central Bank policy efforts, but that’s not where I’m going with this, so stop jumping ahead.)

Anyway, after about a year, the band felt competent enough to play in public; and they made their debut on the 9th of February, 1979, in an upstairs room at the Hare & Hounds, a small pub in King’s Heath. They had been “booked” by a friend to celebrate his birthday.

Following on the success of their first gig (apparently, the birthday boy was delighted), the band secured a series of similar shows, all in local pubs, at which they planned to unleash their blend of reggae and dub onto an unsuspecting public who, though they didn’t realise it, had been waiting for UB40 for years.

Remarkably, at one of these pub gigs, Chrissie Hynde just happened to be in attendance, no doubt supping a couple of pints of Throgmorton’s Dubious Explanation (a real ale so thick it’s served by the slice); and she liked what she saw so much, she offered the band a supporting slot on The Pretenders’ upcoming tour of the UK.

Simple.

Fast-forward to Christmas 1979, and the story of the recording of the band’s debut album burnishes the legend yet further:

(Wikipedia): The band approached local musician Bob Lamb as he was the only person they knew with any recording experience. Lamb had been the drummer with the Steve Gibbons Band for much of the 1970s and was a well-known figure within the Birmingham music scene…. However, as the band were unable to afford a proper recording studio, the album was recorded in Lamb’s own home at the time, a ground-floor flat in a house on Cambridge Road in Birmingham’s Moseley district….

Brian Travers recalled just how basic the recording facilities of the original Cambridge Road “studio” really were:

Because we couldn’t afford a studio and he was the only guy we knew who knew how to record music, we did the album in his bedsit. I remember he had his bed on stilts. So underneath the bed was a sofa and mixing desk. And so we recorded the album there on an eight-track machine, with the same 50p coin going through the electric meter continually because we’d booted the lock off it. And, with it being a bedsit and us being eight in the band, we’d record the saxophone in the kitchen — because there was a bit of resonance off the walls, a bit of reverb — before putting the machine effects on it. While the percussion — the tambourines, the congas, the drums — we’d do in the back yard. Which is why you can hear birds singing on some of the tracks! You know, because it was in the daytime we’d be shouting across the fences “Keep it DOWN! We’re RECORDING!”

Lamb remembered the process fondly:

Nothing was hard work about that album, it was a bit of a dream that sort of fell out of the sky… It was almost effortless to make in that they were so good at the time, and so happy at the time with the success that they got, there was no effort in it.

The title of the album, “Signing Off,” was inspired by the process of the band members ending their claim on UK unemployment benefits — and becoming pop stars.

The LP (Google it, Gen Y-ers), released on August 29, 1980, spent 71 weeks on the UK albums chart, peaking at number 2 and turning platinum (when doing such a thing used to mean something). It was greeted with rapture by Britain’s music press:

(Sounds): Five stars out of five. It is an (almost) perfect album…. It’s rare to find a debut album so detailed, so excellently played and so packed with bite — I sometimes think it hasn’t really happened since The Clash.

The album would go on to make Q Magazine’s “100 Greatest British Albums Ever” (#83, if you’re interested) and is featured in a book somewhat somberly titled 1001 Albums to Hear Before You Die.

I think it’s fair to say I played my part in the success of the band by spending the pocket money I had saved up on a copy of “Signing Off” (though the band have so far not publicly acknowledged my involvement).

Anyway, as I am now signing off from Mauldin Economics, I felt it would be appropriate to take stock of a few of the issues I have covered ad nauseum repeatedly during my two-plus years working with John and his team; and I thought I’d also take those of you unfamiliar with UB40’s debut album through a few of the tracks (and remind those of you who know the band just how spectacular that album was).

Track 2. King — 4:35

The “King” referred to in the second track on “Signing Off” was, of course, Martin Luther King, Jr. The song was short on lyrics but big on impact; however, the undoubted “King” in markets today is once again King Dollar, and the world’s reserve currency is making some serious waves right now, which threaten to cause chaos in world markets.

At this point I’ll throw things over to my friend and partner in Real Vision Television and author of The Global Macro Investor, Raoul Pal, who has been warning of the likelihood of a major move in the dollar for longer than just about anybody. In his most recent report, he explained the ramifications of a dollar bull market in the clearest, most concise way possible:

(Raoul Pal): Debt dynamics, deflation, positioning and technicals all suggest that a dollar bull market of some considerable velocity and length is underway.

When dollar bull markets occur, emerging markets get hit.

When dollar bull markets occur, carry trades get unwound.

When dollar bull markets occur, they tend to usher in disinflationary forces as commodities and goods get re-priced.

The preceding three factors lead to a self-reinforcing of the dollar bull market, creating more of the same in a cycle of liquidation and bad debts, creating more demand for US dollars.

As I said, clear and concise.

I watched Raoul present at the iCIO Summit this past week, and his presentation was compelling, to say the least. As he pointed out in a panel discussion with Mark Yusko, Dennis Gartman, David Rosenberg, and myself, “When currencies begin to trend, they can do so for decades.”

A sobering thought.

A look at the long-term charts of the DXY Index shows just how massive the potential reversal of this trend is; and based on Raoul’s roadmap, the sheer size of the reversal gives us a strong hint of the degree of carnage that will be wrought upon a world in which the dollar carry trade has reached somewhere between $5 trillion and $9 trillion.

Incidentally, one of those estimates is Raoul’s, and one belongs to the BIS, and I bet your first guess as to which is which would have been wrong.

A closer look at a shorter-term chart demonstrates the recent break clearly:

The BIS report to which I refer was published last week, and it was astounding in terms of the sheer size of the dollar carry trade it depicted.

According to the BIS, US dollar loans to China’s banks and companies have jumped to $1.1 trillion — that’s TRILLION — from virtually zero just five short years ago. The annual rate of increase of those loans is a mind-boggling 47%.

However, the fun doesn’t stop there.

Consider Brazil, for example, where cross-border dollar credit now stands at $461 billion, or roughly 20% of GDP. For Mexico those numbers are even more eye-watering. A country with a GDP of just $1.1 trillion has outstanding cross-border dollar credit of $381 billion — or roughly 30% of GDP. Frightening.

Meanwhile, in Russia the same metric has reached $751 billion. Why does this matter? Well, the charts below, which show the appreciation of the US dollar against those three currencies in the last five years, highlight the danger to countries that have been able to borrow seemingly endless amounts of (relatively) stable dollars to finance business operations and expansion.

Lastly — and perhaps most importantly — witness the change in direction of the Chinese renminbi which, after trending higher against the dollar for many years (and, in the process, moving virtually everybody to the same side of the boat in the belief that a stronger Chinese currency was a given), has suddenly started to look as if it may also succumb to the renewed strength of the dollar. The only difference here being that the Chinese may actively be looking now to devalue their currency in light of the ongoing attempt by the Japanese to devaluetheir way back to competitiveness. Few thought this a likely scenario until very recently; consequently, few are positioned accordingly; and when things like that happen in the macro world, you can get some REALLY funky moves.

When currency wars break out, they can get very nasty very quickly.

Under no circumstances should you take your eyes off the US dollar, folks. The sheer number of places where you will witness the knock-on effects of a soaring dollar — chief amongst them emerging markets and the commodity space — will be breathtaking.

I will write at greater length on the likely effects of the dollar’s move on gold in a few weeks, as it warrants a piece all its own; so stay tuned for that one.

In a series of conversations I’ve been fortunate to have had with some of the best macro traders in the world in recent months through Real Vision Television, there has been one overarching takeaway from every one of them: macro is back, and 2015 is shaping up to be an epic year for the guys who trade these fundamental shifts. To a man, after several years of little action in the macro world, they are positively licking their lips at the potential opportunities that are headed their way next year.

One person’s opportunity is another person’s crisis. You have been warned.

3. 12 Bar — 4:24

Track 3 was an instrumental number called “12 Bar,” a reggae reimagining of the 12-bar blues that highlighted Brian Travers’ remarkably good saxophony skills (given his lack of attention to learning to play the instrument before forming the band).

Obviously, during my time with Mauldin Economics, the “bars” which have preoccupied me have been those of the gold variety — and for the most part, their constant movement in an easterly direction.

I have written article after article and given presentation after presentation about the dichotomy between paper and physical gold and have regularly highlighted the magnitude of the flow of gold out of the West and into strong Eastern hands. In the previous edition of this publication (“How Could It Happen?”), I imagined a future in which this stunning relocation of physical gold had finally mattered; and between publishing that piece and penning this one, a couple of interesting things have happened. Firstly, my friend Barry Ritholtz took a big, fat shot at me in a Bloomberg column entitled “The Gold Fairy Tale Fails Again.” Barry’s article (which was entirely consistent with his very public and oft-stated thinking and was, as is always the case with Barry, very well-written) took apart what he sees as the various failed narratives in the gold markets. He began with gold’s link to QE:

(Barry Ritholtz): [T]he most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time…

… moved on to the recent SGI:

Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20 percent of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77 percent to 23 percent, by the electorate….

… then hit upon the recent Indian import restrictions and reports of gold shortages, which Barry clearly feels are spurious, before eventually finding his way to yours truly:

Perhaps the most egregious narrative failure came from Grant Williams of Mauldin Economics. He imagined a conversation 30 years from now about China’s secret three-decade-long gold-buying spree, dating to November 2014. Well, we only need to wait 30 years to see if this prediction is correct.

Now, in response to the lighting up of my Twitter feed after Barry’s article was posted (and my thanks to all those who kindly pointed it out to me), I would say this: Barry is right on all counts.

For now.

I am delighted to be able to call Barry a friend and have absolutely no problem with his calling me out on what I said. Those of us who possess sufficient hubris to deem our thoughts worthy of distribution wider than the inside of our own heads are absolutely there to be taken to task should others disagree with us. We make ourselves fair game the second we hit the wires.

Sadly, none of us actually KNOW anything. How could we? We all take whatever inputs we find and then use them to reach our own conclusions based mostly on probability, and more often than not those conclusions are wrong.

HOWEVER… if your logic is sound and your thought processes rigorous, being wrong is often a temporary state — something that can also be said about being right, of course. In my humble opinion, the issue with gold today is not one of narrative, as Barry suggests, but rather that the extent of the current interference in markets by our friends at the various central banks around the world has meant that being wrong (no matter which part of the financial jigsaw puzzle you may be concerned with) has never been easier — even though being right has never, in my own mind at least, been more assured in the long term, certainly as far as gold is concerned.

As I slumped against the literary ropes, Barry threw one more punch when he suggested that the reader would “only need to wait 30 years to see if this prediction is correct,” but this is where I stop covering up and finally flick a jab or two of my own.

I think the chances of having to wait 30 years to see the gold conundrum resolve itself (in materially higher prices, I might add) lie close to those of Barry’s being invited to give the opening address at the next GATA conference. The evidence is crystal clear that significant quantities of physical gold have been pouring into Eastern vaults (due to both private- and public-sector activity); and gold is, after all, a finite resource. Not only that, but the “weakness” in gold (which remains roughly 500% above its turn-of-the-century low, despite the recent 30% correction) is confined to the paper market.

Whilst this distinction between paper and real gold hasn’t mattered up until now, there will come a day when it absolutely does — to everybody — and at that point, anyone not positioned correctly will be in a world of hurt.

(Charts above and below courtesy of Nick Laird at Sharelynx and Koos Jansen)

Tightness in the physical market has increased consistently as the likes of Russia continue to stockpile ever-increasing amounts of gold and as Chinese imports as well as withdrawals from the Shanghai Gold Exchange maintain a torrid pace. The only missing piece of the puzzle is the lack of any official acknowledgement that the Chinese have been doing the same thing to a far greater degree; and, as I wrote in “How Could It Happen?”, there is a curious demand for absolute proof from those who dispute official figures, whilst the principle of reasonable doubt continues to hold sway on the other side of the argument.

I suspect that imbalance will right itself — possibly very soon — and when it does there will be absolutely no putting the genie back into the bottle.

In the meantime, as Barry so confidently predicted, the Swiss Gold Initiative failed, but that was overshadowed (in my mind at least) by a couple of very interesting developments that were covered beautifully by two of my buddies, Willem Middelkoop (author of The Big Reset — a phenomenal read) and Koos Jansen.

Firstly, Koos reported on the increasing drive to allocate the gold held within the Eurosystem:

(Koos Jansen): [M]ost of the Eurosystem official gold reserves are allocated, and since January 2014 (which is as far as the more detailed data goes back) the unallocated gold reserves are declining, as we can see in the next chart.

Unfortunately we do not know what happened prior to 2014.

Note, allocated does not mean the gold is located on own soil, but it does mean the gold is assigned to specific gold holdings, including bar numbers, whether stored on own soil or stored abroad. Unallocated gold relates to gold held without a claim on specified bar numbers; often these unallocated accounts are used for easy trading… The fact the Eurosystem discloses the ratio between its allocated and unallocated gold and, more important, the fact that the portion of allocated gold is far greater and increasing, tells me the Eurosystem is allocating as much gold as they can.

Secondly, another repatriation request was unearthed — this time made by perhaps the least likely source imaginable:

(Koos Jansen): In Europe, so far, Germany has been repatriating gold since 2012 from the US and France, The Netherlands has repatriated 122.5 tonnes a few weeks ago from the US, soon after Marine Le Pen, leader of the Front National party of France, penned an open letter to Christian Noyer, governor of the Bank of France, requesting that the country’s gold holdings be repatriated back to France; and now Belgium is making a move. Who’s next? And why are all these countries seemingly so nervous to get their gold ASAP on own soil?

Funnily enough, the answer to Koos’ rhetorical question about who’s next was answered just a few days later:

(Bloomberg): The Austrian state audit court says central bank should address concentration risk of storing 80% of its gold reserves with the Bank of England, Standard reports, citing draft audit report. Court advises central bank to diversify storage locations, contract partners.

Austrian central bank reviewing gold storage concept, doesn’t rule out relocating some of its gold from London to Austria: Standard cites unidentified central bank officials. Austria has 280 tons gold reserves, according to 2013 annual report. Austrian Audit Court Will Review Nation’s Gold Reserves in U.K.

Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the “6,000-year bubble,” as Citi’s Willem Buiter recently termed it; but know this: gold is an insurance policy — not a trading vehicle — and the time to assess gold is when people have a sudden need for insurance. When that day comes — and believe me, it’s coming — the price will be the very last thing that matters. It will be purely and simply a matter of securing possession — bubble or not — and at any price.

That price will NOT be $1200.

A “run” on the gold “bank” (something I predicted would happen when I wrote about Hugo Chavez’s original repatriation request back in 2011) would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore.

It is also a phenomenon which will begin quietly before suddenly exploding into life.

If you listen very carefully, you can hear something happening…

Click here to continue reading this article from Things That Make You Go Hmmm… – a free newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore.

The article Things That Make You Go Hmmm: Signing Off was originally published at mauldineconomics.com.

The Burning Questions for 2015

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Posted on 19th December 2014 by Administrator in Economy |Politics |Social Issues

Outside the Box: The Burning Questions For 2015

By John Mauldin

 

Louis Gave is one of my favorite investment and economic thinkers, besides being a good friend and an all-around fun guy. When he and his father Charles and the well-known European journalist Anatole Kaletsky decided to form Gavekal some 15 years ago, Louis moved to Hong Kong, as they felt that Asia and especially China would be a part of the world they would have to understand. Since then Gavekal has expanded its research offices all over the world. The Gavekal team’s various research arms produce an astounding amount of work on an incredibly wide range of topics, but somehow Louis always seems to be on top of all of it.

Longtime readers know that I often republish a piece by someone in their firm (typically Charles or Louis). I have to be somewhat judicious, as their research is actually quite expensive, but they kindly give me permission to share it from time to time.

This week, for your Outside the Box reading, I bring you one of the more thought-provoking pieces I’ve read from Louis in some time. In Thoughts from the Frontline I have been looking at world problems we need to focus on as we enter 2015. Today, Louis also gives us a piece along these lines, called “The Burning Questions for 2015,” in which he thinks about a “Chinese Marshall Plan” (and what a stronger US dollar might do to China), Abenomics as a “sideshow,” US capital misallocation, and whether or not we should even care about Europe. I think you will find the piece well worth your time.

Think about this part of his conclusion as you read:

Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder.

Wise words indeed.

A Yellow Card from Barry

What you don’t often get to see is the lively debate that happens among my friends about my writing, even as I comment on theirs. Barry Ritholtz of The Big Picture pulled a yellow card on me over a piece of data he contended I had cherry-picked from Zero Hedge. He has a point. I should have either not copied that sentence (the rest of the quote was OK) or noted the issue date. Quoting Barry:

Did you cherry pick this a little much?

“… because since December 2007, or roughly the start of the global depression, shale oil states have added 1.36 million jobs while non-shale states have lost 424,000 jobs.”

I must point out how intellectually disingenuous this start date is, heading right into the crisis – why not use December 2010? Or 5 or 10 years? This is misleading in other ways:

It is geared to start before the crisis & recovery, so that it forces the 10 million jobs lost in the crisis to be offset by the 10 million new jobs added since the recovery began. That creates a very misleading picture of where growth comes from.

We have created 10 million new jobs since June 2009. Has Texas really created 4 million new jobs? The answer is no.

According to [the St. Louis Fed] FRED [database]:

PAYEMS – or NFP – has gone from 130,944 to 140,045, a gain of 9,101 over that period.
TXNA – Total Nonfarm in Texas – has gone from 10,284 to 11,708, for a gain of 1,424.

That gain represents 15.6% of the 9.1MM total.

Well yes, Barry, but because of oil and other things (like a business-friendly climate), Texas did not lose as many jobs in the recession as the rest of the nation did, which is where you can get skewed data, depending on when you start the count and what you are trying to illustrate.

My main point is that energy production has been a huge upside producer of jobs, and that source of new jobs is going away. And yes, Josh, the net benefit for at least the first six months until the job non-production shows up (if it does) is a positive for the economy and the consumer. But I was trying to highlight a potential problem that could hurt US growth. Oil is likely to go to $40 before settling in the $50 range for a while. Will it eventually go back up? Yes. But it’s anybody’s guess as to when.

By the way, a former major hedge fund manager who closed his fund a number of years ago casually mentioned at a party the other night that he hopes oil goes to $35 and that we see a true shakeout in the oil patch. He grew up in a West Texas oil family and truly understands the cycles in the industry, especially for the smaller producers. From his point of view, a substantial shakeout creates massive upside opportunities in lots of places. “Almost enough,” he said, “to tempt me to open a new fund.”

On a different note, everyone is Christmas shopping and trying to find the right gift. Two recommendations. First, the Panasonic wet/dry electric razor (with five blades). I just bought a new set of blades and covers for mine after two years (you do have to replace them every now and then); and the new, improved shave reminded me how much I was in love with it when I bought it. Best shaver ever.

Second, and I know this is a little odd, but for a number of years I’ve been recommending a face cream that contains skin stem cells, which I and quite a number of my readers have noticed really helps rejuvenate our older skin. (I came across the product while researching stem-cell companies with Patrick Cox.) It clearly makes a difference for some people. I get ladies coming up all the time and thanking me for the recommendation, and guys too sometimes shyly admit they use it regularly. (It turns out that just as many men buy the product as women.) The company is Lifeline Skin Care, and they have discounted the product for my readers. If you can get past the fact that this is a financial analyst recommending a skin cream for a Christmas gift, then click on this link.

It is time to hit the send button. I trust you are having a good week. Now settle in and grab a cup of coffee or some wine (depending on the time of day and your mood), and let’s see what Louis has to say.

Your trying to catch up analyst,

John Mauldin, Editor
Outside the Box
[email protected]

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The Burning Questions For 2015

By Louis-Vincent Gave, GavekalDragonomics

With two reports a day, and often more, readers sometimes complain that keeping tabs on the thoughts of the various Gavekal analysts can be a challenge. So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.

1. A Chinese Marshall Plan?

When we have conversations with clients about China – which typically we do between two and four times a day – the talk invariably revolves around how much Chinese growth is slowing (a good bit, and quite quickly); how undercapitalized Chinese banks are (a good bit, but fat net interest margins and preferred share issues are solving the problem over time); how much overcapacity there is in real estate (a good bit, but – like youth – this is a problem that time will fix); how much overcapacity there is in steel, shipping, university graduates and corrupt officials; how disruptive China’s adoption of assembly line robots will be etc.

All of these questions are urgent, and the problems that prompted them undeniably real, which means that China’s policymakers certainly have their plates full. But this is where things get interesting: in all our conversations with Western investors, their conclusion seems to be that Beijing will have little choice but to print money aggressively, devalue the renminbi, fiscally stimulate the economy, and basically follow the path trail-blazed (with such success?) by Western policymakers since 2008. However, we would argue that this conclusion represents a failure both to think outside the Western box and to read Beijing’s signal flags.

In numerous reports (and in Chapters 11 to 14 of Too Different For Comfort) we have argued that the internationalization of the renminbi has been one of the most significant macro events of recent years. This internationalization is continuing apace: from next to nothing in 2008, almost a quarter of Chinese trade will settle in renminbi in 2014:

This is an important development which could have a very positive impact on a number of emerging markets. Indeed, a typical, non-oil exporting emerging market policymaker (whether in Turkey, the Philippines, Vietnam, South Korea, Argentina or India) usually has to worry about two things that are completely out of his control:

1)   A spike in the US dollar. Whenever the US currency shoots up, it presents a hurdle for growth in most emerging markets. The first reason is that most trade takes place in US dollars, so a stronger US dollar means companies having to set aside more money for working capital needs. The second is that most emerging market investors tend to think in two currencies: their own and the US dollar. Catch a cab in Bangkok, Cairo, Cape Town or Jakarta and ask for that day’s US dollar exchange rate and chances are that the driver will know it to within a decimal point. This sensitivity to exchange rates is important because it means that when the US dollar rises, local wealth tends to flow out of local currencies as investors sell domestic assets and into US dollar assets, typically treasuries (when the US dollar falls, the reverse is true).

2)   A rapid rise in oil or food prices. Violent spikes in oil and food prices can be highly destabilizing for developing countries, where the median family spends so much more of their income on basic necessities than the typical Western family. Sudden spikes in the price of food or energy can quickly create social and political tensions. And that’s not all; for oil-importing countries, a spike in oil prices can lead to a rapid deterioration in trade balances. These tend to scare foreign investors away, so pushing the local currency lower and domestic interest rates higher, which in turn leads to weaker growth etc…

Looking at these two concerns, it is hard to escape the conclusion that, as things stand, China is helping to mitigate both:

  • China’s policy of renminbi internationalization means that emerging markets are able gradually to reduce their dependence on the US dollar. As they do, spikes in the value of the US currency (such as we have seen in 2014) are becoming less painful.
  • The slowdown in Chinese oil demand, as well as China’s ability to capitalize on Putin’s difficulties to transform itself from a price-taker to a price-setter, means that the impact of oil and commodities on trade balances is much more contained.

Beyond providing stability to emerging markets, the gradual acceptance of the renminbi as a secondary trading and reserve currency for emerging markets has further implications. The late French economist Jacques Rueff showed convincingly how, when global trade moved from a gold-based settlement system to a US dollar-based system, purchasing power was duplicated. As the authors of a recent Wall Street Journal article citing Reuff’s work explained: “If the Banque de France counts among its reserves dollar claims (and not just gold and French francs) – for example a Banque de France deposit in a New York bank – this increases the money supply in France but without reducing the money supply of the US. So both countries can use these dollar assets to grant credit.” Replace Banque de France with Bank Indonesia, and US dollar with renminbi and the same causes will lead to the same effects.

Consider British Columbia’s recently issued AAA-rated two year renminbi dim sum bond. Yielding 2.85%, this bond was actively subscribed to by foreign central banks, which ended up receiving more than 50% of the initial allocation (ten times as much as in the first British Columbia dim sum issue two years ago). After the issue British Columbia takes the proceeds and deposits them in a Chinese bank, thereby capturing a nice spread. In turn, the Chinese bank can multiply this money five times over (so goes money creation in China). Meanwhile, the Indonesian, Korean or Kazakh central banks that bought the bonds now have an asset on their balance sheet which they can use to back an expansion of trade with China…

Of course, for trade to flourish, countries need to be able to specialize in their respective comparative advantages, hence the importance of the kind of free trade deals discussed at the recent APEC meeting. But free trade deals are not enough; countries also need trade infrastructure (ports, airports, telecoms, trade finance banks etc…). This brings us to China’s ‘new silk road’ strategy and the recent announcement by Beijing of a US$40bn fund to help finance road and rail infrastructure in the various ‘stans’ on its western borders in a development that promises to cut the travel time from China to Europe from the current 30 days by sea to ten days or less overland.

Needless to say, such a dramatic reduction in transportation time could help prompt some heavy industry to relocate from Europe to Asia.

That’s not all. At July’s BRICS summit in Brazil, leaders of the five member nations signed a treaty launching the US$50bn New Development Bank, which Beijing hopes will be modeled on China Development Bank, and is likely to compete with the World Bank. This will be followed by the establishment of a China-dominated BRICS contingency fund (challenging the International Monetary Fund). Also on the cards is an Asian Infrastructure Investment Bank to rival the Asian Development Bank.

So what looks likely to take shape over the next few years is a network of railroads and motorways linking China’s main production centers to Bangkok, Singapore, Karachi, Almaty, Moscow, Yangon, Kolkata. We will see pipelines, dams, and power plants built in Siberia, Central Asia, Pakistan and Myanmar; as well as airports, hotels, business centers… and all of this financed with China’s excess savings, and leverage. Given that China today has excess production capacity in all of these sectors, one does not need a fistful of university diplomas to figure out whose companies will get the pick of the construction contracts.

But to finance all of this, and to transform herself into a capital exporter, China needs stable capital markets and a strong, convertible currency. This explains why, despite Hong Kong’s pro-democracy demonstrations, Beijing is pressing ahead with the internationalization of the renminbi using the former British colony as its proving ground (witness the Shanghai-HK stock connect scheme and the removal of renminbi restrictions on Hong Kong residents). And it is why renminbi bonds have delivered better risk-adjusted returns over the past five years than almost any other fixed income market.

Of course, China’s strategy of internationalizing the renminbi, and integrating its neighbors into its own economy might fall flat on its face. Some neighbors bitterly resent China’s increasing assertiveness. Nonetheless, the big story in China today is not ‘ghost cities’ (how long has that one been around?) or undercapitalized banks. The major story is China’s reluctance to continue funneling its excess savings into US treasuries yielding less than 2%, and its willingness to use that capital instead to integrate its neighbors’ economies with its own; using its own currency and its low funding costs as an ‘appeal product’ (and having its own companies pick up the contracts as a bonus). In essence, is this so different from what the US did in Europe in the 1940s and 1950s with the Marshall Plan?

2. Japan: Is Abenomics just a sideshow?

With Japan in the middle of a triple dip recession, and Japanese households suffering a significant contraction in real disposable income, it might seem that Prime Minister Shinzo Abe has chosen an odd time to call a snap election. Three big factors explain his decision:

1)   The Japanese opposition is in complete disarray. So Abe’s decision may primarily have been opportunistic.

2)   We must remember that Abe is the most nationalist prime minister Japan has produced in a generation. The expansion of China’s economic presence across Central and South East Asia will have left him feeling at least as uncomfortable as anyone who witnessed his Apec handshake with Xi Jinping three weeks ago. It is not hard to imagine that Abe returned from Beijing convinced that he needs to step up Japan’s military development; a policy that requires him to command a greater parliamentary majority than he holds now.

3)   The final factor explaining Abe’s decision to call an election may be that in Japan the government’s performance in opinion polls seems to mirror the performance of the local stock market (wouldn’t Barack Obama like to see such a correlation in the US?). With the Nikkei breaking out to new highs, Abe may feel that now is the best time to try and cement his party’s dominant position in the Diet.

As he gets ready to face the voters, how should Abe attempt to portray himself? In our view, he could do worse than present himself as Japan Inc’s biggest salesman. Since the start of his second mandate, Abe has visited 49 countries in 21 months, and taken hundreds of different Japanese CEOs along with him for the ride. The message these CEOs have been spreading is simple: Japan is a very different place from 20 years ago. Companies are doing different things, and investment patterns have changed. Many companies have morphed into completely different animals, and are delivering handsome returns as a result. The relative year to date outperformances of Toyo Tire (+117%), Minebea (+95%), Mabuchi (+57%), Renesas (+43%), Fuji Film (+33%), NGK Insulators (+33%) and Nachi-Fujikoshi (+19%) have been enormous. Or take Panasonic as an example: the old television maker has transformed itself into a car parts firm, piggy-backing on the growth of Tesla’s model S.

Yet even as these changes have occurred, most foreign investors have stopped visiting Japan, and most sell-side firms have stopped funding genuine and original research. For the alert investor this is good news. As the number of Japanese firms at the heart of the disruptions reshaping our global economy – robotics, electric and self-driving cars, alternative energy, healthcare, care for the elderly – continues to expand, and as the number of investors looking at these same firms continues to shrink, those investors willing to sift the gravel of corporate Japan should be able to find real gems.

Which brings us to the real question confronting investors today: the ‘Kuroda put’ has placed Japanese equities back on investor’s maps. But is this just a short term phenomenon? After all, no nation has ever prospered by devaluing its currency. If Japan is set to attract, and retain, foreign investor flows, it will have to come up with a more compelling story than ‘we print money faster than anyone else’.

In our recent research, we have argued that this is exactly what is happening. In fact, we believe so much in the opportunity that we have launched a dedicated Japan corporate research service (GK Plus Alpha) whose principals (Alicia Walker and Neil Newman) are burning shoe leather to identify the disruptive companies that will trigger Japan’s next wave of growth.

3. Should we worry about capital misallocation in the US?

The US has now ‘enjoyed’ a free cost of money for some six years. The logic behind the zero-interest rate policy was simple enough: after the trauma of 2008, the animal spirits of entrepreneurs needed to be prodded back to life. Unfortunately, the last few years have reminded everyone that the average entrepreneur or investor typically borrows for one of two reasons:

  • Capital spending: Business is expanding, so our entrepreneur borrows to open a new plant, or hire more people, etc.
  • Financial engineering: The entrepreneur or investor borrows in order to purchase an existing cash flow, or stream of income. In this case, our borrower calculates the present value of a given income stream, and if this present value is higher than the cost of the debt required to own it, then the transaction makes sense.

Unfortunately, the second type of borrowing does not lead to an increase in the stock of capital. It simply leads to a change in the ownership of capital at higher and higher prices, with the ownership of an asset often moving away from entrepreneurs and towards financial middlemen or institutions. So instead of an increase in an economy’s capital stock (as we would get with increased borrowing for capital spending), with financial engineering all we see is a net increase in the total amount of debt and a greater concentration of asset ownership. And the higher the debt levels and ownership concentration, the greater the system’s fragility and its inability to weather shocks.

We are not arguing that financial engineering has reached its natural limits in the US. Who knows where those limits stand in a zero interest rate world? However, we would highlight that the recent new highs in US equities have not been accompanied by new lows in corporate spreads. Instead, the spread between 5-year BBB bonds and 5-year US treasuries has widened by more than 30 basis points since this summer.

Behind these wider spreads lies a simple reality: corporate bonds issued by energy sector companies have lately been taken to the woodshed. In fact, the spread between the bonds of energy companies, and those of other US corporates are back at highs not seen since the recession of 2001-2002, when the oil price was at US$30 a barrel.

The market’s behavior raises the question whether the energy industry has been the black hole of capital misallocation in the era of quantitative easing. As our friend Josh Ayers of Paradarch Advisors (Josh publishes a weekly entitled The Right Tale, which is a fount of interesting ideas. He can be reached at [email protected]) put it in a recent note: “After surviving the resource nadir of the late 1980s and 1990s, oil and gas firms started pumping up capex as the new millennium began. However, it wasn’t until the purported end of the global financial crisis in 2009 that capital expenditure in the oil patch went into hyperdrive, at which point capex from the S&P 500’s oil and gas subcomponents jumped from roughly 7% of total US fixed investment to over 10% today.”

“It’s no secret that a decade’s worth of higher global oil prices justified much of the early ramp-up in capex, but a more thoughtful look at the underlying data suggests we’re now deep in the malinvestment phase of the oil and gas business cycle. The second chart (above) displays both the total annual capex and the return on that capex (net income/capex) for the ten largest holdings in the Energy Select Sector SPDR (XLE). The most troublesome aspect of this chart is that, since 2010, returns have been declining as capex outlays are increasing. Furthermore, this divergence is occurring despite WTI crude prices averaging nearly $96 per barrel during that period,” Josh noted.

The energy sector may not be the only place where capital has been misallocated on a grand scale. The other industry with a fairly large target on its back is the financial sector. For a start, policymakers around the world have basically decided that, for all intents and purposes, whenever a ‘decision maker’ in the financial industry makes a decision, someone else should be looking over the decision maker’s shoulder to ensure that the decision is appropriate. Take HSBC’s latest results: HSBC added 1400 compliance staff in one quarter, and plans to add another 1000 over the next quarter. From this, we can draw one of two conclusions:

1)   The financial firms that will win are the large firms, as they can afford the compliance costs.

2)   The winners will be the firms that say: “Fine, let’s get rid of the decision maker. Then we won’t need to hire the compliance guy either”.

This brings us to a theme first explored by our friend Paul Jeffery, who back in September wrote: “In 1994 Bill Gates observed: ‘Banking is necessary, banks are not’. The primary function of a bank is to bring savers and users of capital together in order to facilitate an exchange. In return for their role as [trusted] intermediaries banks charge a generous net spread. To date, this hefty added cost has been accepted by the public due to the lack of a credible alternative, as well as the general oligopolistic structure of the banking industry. What Lending Club and other P2P lenders do is provide an online market-place that connects borrowers and lenders directly; think the eBay of loans and you have the right conceptual grasp. Moreover, the business model of online market-place lending breaks with a banking tradition, dating back to 14th century Florence, of operating on a “fractional reserve” basis. In the case of P2P intermediation, lending can be thought of as being “fully reserved” and entails no balance sheet risk on the part of the service facilitator. Instead, the intermediary receives a fee- based revenue stream rather than a spread-based income.”

There is another way we can look at it: finance today is an abnormal industry in two important ways:

1)   The more the sector spends on information and communications technology, the bigger a proportion of the economic pie the industry captures. This is a complete anomaly. In all other industries (retail, energy, telecoms…), spending on ICT has delivered savings for the consumers. In finance, investment in ICT (think shaving seconds of trading times in order to front run customer orders legally) has not delivered savings for consumers, nor even bigger dividends for shareholders, but fatter bonuses and profits for bankers.

2)   The second way finance is an abnormal industry (perhaps unsurprisingly given the first factor) lies in the banks’ inability to pass on anything of value to their customers, at least as far as customer’s perceptions are concerned. Indeed, in ‘brand surveys’ and ‘consumer satisfaction reports’, banks regularly bring up the rear. Who today loves their bank in a way that some people ‘love’ Walmart, Costco, IKEA, Amazon, Apple, Google, Uber, etc?

Most importantly, and as Paul highlights above, if the whole point of the internet is to:

a) measure more efficiently what each individual needs, and

b) eliminate unnecessary intermediaries,

then we should expect a lot of the financial industry’s safe and steady margins to come under heavy pressure. This has already started in the broking and in the money management industries (where mediocre money managers and other closet indexers are being replaced by ETFs). But why shouldn’t we start to see banks’ high return consumer loan, SME loan and credit card loan businesses replaced, at a faster and faster pace, by peer-to-peer lending? Why should consumers continue to pay high fees for bank transfers, or credit cards when increasingly such services are offered at much lower costs by firms such as TransferWise, services like Alipay and Apple Pay, or simply by new currencies such as Bitcoin? On this point, we should note that in the 17 days that followed the launch of Apple Pay on the iPhone 6, almost 1% of Wholefoods’ transactions were processed using the new payment system. The likes of Apple, Google, Facebook and Amazon have grown into behemoths by upending the media, advertising retail and entertainment industries. Such a rapid take- up rate for Apple Pay is a powerful indicator which sector is likely to be next in line. How else can these tech giants keep growing and avoid the fate that befell Sony, Microsoft and Nokia? On their past record, the technology companies will find margins, and growth, in upending our countries’ financial infrastructure. As they do, a lot of capital (both human and monetary) deployed in the current infrastructure will find itself obsolete.

This possibility raises a number of questions – not least for Gavekal’s own investment process, which relies heavily on changes in the velocity of money and in the willingness and ability of commercial banks to multiply money, to judge whether it makes sense to increase portfolio risk. What happens to a world that moves ‘ex-bank’ and where most new loans are extended peer-to-peer? In such a world, the banking multiplier disappears along with fractional reserve banking (and consequently the need for regulators? Dare to dream…). As bankers stop lending their clients umbrellas when it is sunny, and taking them away when it rains, will our economic cycles become much tamer? As central banks everywhere print money aggressively, could the market be in the process of creating currencies no longer based on the borders of nation states, but instead on the cross-border networks of large corporations (Alipay, Apple Pay…), or even on voluntary communities (Bitcoin). Does this mean we are approaching the Austrian dream of a world with many, non government-supported, currencies?

4. Should we care about Europe?

In our September Quarterly Strategy Chartbook, we debated whether the eurozone was set for a revival (the point expounded by François) or a continued period stuck in the doldrums (Charles’s view), or whether we should even care (my point). At the crux of this divergence in views is the question whether euroland is broadly following the Japanese deflationary bust path. Pointing to this possibility are the facts that 11 out of 15 eurozone countries are now registering annual year-on-year declines in CPI, that policy responses have so far been late, unclear and haphazard (as they were in Japan), and that the solutions mooted (e.g. European Commission president Jean-Claude Juncker’s €315bn infrastructure spending plan) recall the solutions adopted in Japan (remember all those bridges to nowhere?). And that’s before going into the structural parallels: ageing populations; dysfunctional, undercapitalized and overcrowded banking systems; influential segments of the population eager to maintain the status quo etc…

With the same causes at work, should we expect the same consequences? Does the continued underperformance of eurozone stocks simply reflect that managing companies in a deflationary environment is a very challenging task? If euroland has really entered a Japanese-style deflationary bust likely to extend years into the future, the conclusion almost draws itself.

The main lesson investors have learned from the Japanese experience of 1990-2013 is that the only time to buy stocks in an economy undergoing a deflationary bust is:

a)   when stocks are massively undervalued relative both to their peers and to their own history, and

b)   when a significant policy change is on the way.

This was the situation in Japan in 1999 (the first round of QE under PM Keizo Obuchi), 2005 (PM Junichiro Koizumi’s bank recapitalization program) and of course in 2013-14 (Abenomics). Otherwise, in a deflationary environment with no or low growth, there is no real reason to pile into equities. One does much better in debt. So, if the Japan-Europe parallel runs true, it only makes sense to look at eurozone equities when they are both massively undervalued relative to their own histories and there are expectations of a big policy change. This was the case in the spring of 2012 when valuations were at extremes, and Mario Draghi replaced Jean-Claude Trichet as ECB president. In the absence of these two conditions, the marginal dollar looking for equity risk will head for sunnier climes.

With this in mind, there are two possible arguments for an exposure to eurozone equities:

1)   The analogy of Japan is misleading as euroland will not experience a deflationary bust (or will soon emerge from deflation).

2)   We are reaching the point when our two conditions – attractive valuations, combined with policy shock and awe – are about to be met. Thus we could be reaching the point when euroland equities start to deliver outsized returns.

Proponents of the first argument will want to overweight euroland equities now, as this scenario should lead to a rebound in both the euro and European equities (so anyone underweight in their portfolios would struggle). However, it has to be said that the odds against this first outcome appear to get longer with almost every data release!

Proponents of the second scenario, however, can afford to sit back and wait, because it is likely any outperformance in eurozone equities would be accompanied by euro currency weakness. Hence, as a percentage of a total benchmark, European equities would not surge, because the rise in equities would be offset by the falling euro.

Alternatively, investors who are skeptical about either of these two propositions can – like us – continue to use euroland as a source of, rather than as a destination for, capital. And they can afford safely to ignore events unfolding in euroland as they seek rewarding investment opportunities in the US or Asia. In short, over the coming years investors may adopt the same view towards the eurozone that they took towards Japan for the last decade: ‘Neither loved, nor hated… simply ignored’.

Conclusion:

Most investors go about their job trying to identify ‘winners’. But more often than not, investing is about avoiding losers. Like successful gamblers at the racing track, an investor’s starting point should be to eliminate the assets that do not stand a chance, and then spread the rest of one’s capital amongst the remainder.

For example, if in 1981 an investor had decided to forego investing in commodities and simply to diversify his holdings across other asset classes, his decision would have been enough to earn himself a decade at the beach. If our investor had then returned to the office in 1990, and again made just one decision – to own nothing in Japan – he could once again have gone back to sipping margaritas for the next ten years. In 2000, the decision had to be not to own overvalued technology stocks. By 2006, our investor needed to start selling his holdings in financials around the world. And by 2008, the money-saving decision would have been to forego investing in euroland.

Of course hindsight is twenty-twenty, and any investor who managed to avoid all these potholes would have done extremely well. Nevertheless, the big question confronting investors today is how to avoid the potholes of tomorrow. To succeed, we believe that investors need to answer the following questions:

  • Will Japan engineer a revival through its lead in exciting new technologies (robotics, hi-tech help for the elderly, electric and driverless cars etc…), or will Abenomics prove to be the last hurrah of a society unable to adjust to the 21st century? Our research is following these questions closely through our new GK Plus Alpha venture.
  • Will China slowly sink under the weight of the past decade’s malinvestment and the accompanying rise in debt (the consensus view) or will it successfully establish itself as Asia’s new hegemon? Our Beijing based research team is very much on top of these questions, especially Tom Miller, who by next Christmas should have a book out charting the geopolitical impact of China’s rise.
  • Will Indian prime minister Narendra Modi succeed in plucking the low-hanging fruit so visible in India, building new infrastructure, deregulating services, cutting protectionism, etc? If so, will India start to pull its weight in the global economy and financial markets?
  • How will the world deal with a US economy that may no longer run current account deficits, and may no longer be keen to finance large armies? Does such a combination not almost guarantee the success of China’s strategy?
  • If the US dollar is entering a long term structural bull market, who are the winners and losers? The knee-jerk reaction has been to say ‘emerging markets will be the losers’ (simply because they were in the past. But the reality is that most emerging markets have large US dollar reserves and can withstand a strong US currency. Instead, will the big losers from the US dollar be the commodity producers?
  • Have we reached ‘peak demand’ for oil? If so, does this mean that we have years ahead of us in which markets and investors will have to digest the past five years of capital misallocation into commodities?
  • Talking of capital misallocation, does the continued trend of share buybacks render our financial system more fragile (through higher gearing) and so more likely to crack in the face of exogenous shocks? If it does, one key problem may be that although we may have made our banks safer through increased regulations (since banks are not allowed to take risks anymore), we may well have made our financial markets more volatile (since banks are no longer allowed to trade their balance sheets to benefit from spikes in volatility). This much appeared obvious from the behavior of US fixed income markets in the days following Bill Gross’s departure from PIMCO. In turn, if banks are not allowed to take risks at volatile times, then central banks will always be called upon to act, which guarantees more capital misallocation, share buybacks and further fragilization of the system (expect more debates along this theme between Charles, and Anatole).
  • Will the financial sector be next to undergo disintermediation by the internet (after advertising and the media). If so, what will the macro- consequences be? (Hint: not good for the pound or London property.)
  • Is euroland following the Japanese deflationary-bust roadmap?

The answers to these questions will drive performance for years to come. In the meantime, we continue to believe that a portfolio which avoids a) euroland, b) banks, and c) commodities, will do well – perhaps well enough to continue funding Mediterranean beach holidays – especially as these are likely to go on getting cheaper for anyone not earning euros!

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Mucks’ Minute (or maybe two)

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Posted on 17th December 2014 by MuckAbout in Economy |Politics |Social Issues |Technology

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The Argument for Fiat Money

 

Now that title got your attention, didn’t it?

Here in the middle of governmental chaos and confusion, political bickering and turmoil, moral decay and dishonesty, debt through the roof with mathematical proof that there is no way to pay it back and that will, at any rate, result in a Depression worse than the last “Great One” and before we’re through, if history is a guide, it will likely be a world wide Depression of a size never before seen or experienced.  The killer drop in oil prices is simply the next bubble in line to pop!  And there are dozens more right there in line to follow.

So,  I am making a case for fiat money…

No, I’m not nuts, just trying making a point.

First, as we all know, all debt must be paid – all over the world.  The debt may be repaid in real goods (gold, silver, productive output, etc)  Most countries of lesser stature – but the group is growing by leaps and bounds-  merely thumb their noses at creditors and default.  Ireland just did that by offering (and getting ) payment of $0.10 on the dollar for the Bank of Irelands debt to the Euro-banks (which never made the Main Street Media in any form or fashion and only Reuters carried the story – to this day!).

Iceland, on the other hand, just told their European creditors to bugger off and defaulted on the whole debt.  After suitable screams and wails from the EU Banks, Iceland is now on the healthy road to recovery, albeit with a greatly reduced (and temporary) access to debt markets.  But they are growing again from a lower base which is better than sinking to a lower base yet through “austerity” and going deeper in debt and juggling fiat money loans while building an even more fragile pile which WILL FALL DOWN in the future.

That’s the honest way out of debt.  Default, bankruptcy, a few mea culpa’s, a few years of suffering from depreciated currency and, followed by the start of honest growth (if that is at all possible in a world of depleting resources), all is well and things get better.  Falling availability of resources is a whole ‘nuther story..

Down Central America and South of the equator they have this default business down pat.  North of the Equator not so much.  Oh sure, Russia did it – but they had so many natural resources nobody noticed much except the banks that got bailed out.  Further more the crash (and that is what it is) of oil prices will shortly see Russia and their captive cronies default again to much greater and world wide devastation  than, say Zimbabwe or Greece (Greece is in a state of continuously defaulting under a “tent” of obfuscation)  who tried a simple default but thanks to the EU who will nail their feet to the floor and torture them for years to come (unless they pull a typical Grecian reaction and burn the place down to stop it).  For some reason they can’t bring themselves to give up the dole and work for a living.

Russia is a different bag.  When they default this time, (after a likely crack-up first), all their dependent annexed countries will find the subsidies gone.  Cuba will go very hungry as they now subsist on Russian handouts. Venezuela, a doomed country with nothing but oil between it and universal poverty will, shortly, go up in a poof of smoke and disintegrating civility and drop into a medieval existence of subsistence farming , small feudal villages and a 500% increase in the numbers of street vendors.

The current not so comedic problems with debt and budget in our own battered, dinged and buried beyond the neck (we’re barely breathing now!) in debt U.S.A. will continue into  yet another “kick the can” attempt which will eventually (if not now) fail.  I’d like for it to fail now and get it over with that’s a personal wish.

That doesn’t address the title of this article, does it?  The Austrians want to return to the gold standard.  The Republicans want to stop (all of a sudden, I might add) excessive Government spending, the Democrats desperately want to “kick that can” (at least past the 2016 Presidential farce) so that things can continue as they were/are – which isn’t going to happen.

Well, what the Republicans and Democrats want to happen will probably both happen – one after the other – and then game over.  Or maybe sooner.  The world will not allow the Democratic no-plan and the American people will throw out of office every Republican in Washington if the Republican’s really cut back spending to where it matters! Neither political party has the guts or statesmanship or leadership to do what’s necessary, so we will, very likely, follow Russia (at a slower and more painful rate) into and maybe under the pit of at least partial hyper-inflation  before the deflationary bullet is not bitten but fired!  Either way, we are well and truly doomed to a Depression of much greater extent than that of the 1930’s and world-wide at that – but no one wants to admit it.

BUT – big but..  what happens then?  Most likely, the pendulum will swing and inflation will (properly) get blamed for all our problems and we’ll reset the economy by going to some sort of commodity money – based on gold and silver most likely, but it could be carrots, or wheat or something else our “new” Government figures they can control.  (We will never, sadly, punish the real villains, ourselves, for allowing it to happen for the umpteenth time).  Let’s assume it to be old style bi-metalism and an attempt to  restate our medium of exchange (the dollar) to whatever the current world price of gold happens to be with silver priced at some fraction to that of gold.

Ah – says a large part of the audience, heaven is upon us and all will be well.

Which probably will not be a truism for the first few years to a decade or two.

But then we struggle up from our debtor/defaulter dungeon, climb back over the edge  of the pit and wonder of wonders – start to grow economically speaking!  After all, after an inflationary crash and depression, there are a lot of poor people, sadly in this case, probably fewer people as well, and a little bit of growth goes a long way in that situation.  With or without resources.

One problem.  Where does the “real” money come from to allow the growth that is so badly needed?  I know the commodity money fans will say that we don’t need more money – prices will naturally fall as production slowly rises all with the same amount of money (thanks to better technology and higher productivity) – and that is true in the small limited sense.  A fixed money supply does not, however encourage anything. This situation of “encouraging” things is handled by those who run the government at the behest of monied, influential PTB to their own benefit with no thought to the general public or economy at large.

Entrepreneurship is sometimes muzzled for lack of credit (after all, credit is just money that’s advanced on the premise that interest will be paid on it and it will be paid back in a set period of time, right?).  Credit keeps you from spending years and years saving up a stake for a new business you just “know” will (maybe) be successful so monetary growth in a fixed money supply economy is limited to the growth of the commodity that the money is “fixed to”.

Now, from the human view, this is unacceptable because it just to damn slooooooow.   We humans are “speed balls” when it comes to inventiveness and entrepreneurial ability provided we stop paying people not to work and knock off paying welfare moms (and their sperm suppliers)  money for children produced.   I doubt government will exist by then in any significant size other than local, perhaps state and bare bones federal so we may be able to get on with it anyway.

But we’re not talking small stuff here, either.  We’re talking about dragging 150- 200 million people – and much more if you consider the world at large – out of a much poorer place back up the human conditional ladder into some kind of higher location. (Please note the smaller population quoted for the US..  Scary? Bet your bippy it is)

Voila! We need more money!  Fractional banking and more money/credit will do it as it will encourage borrowing for those with good ideas and allow people to buy more things and spend and increase demand for all sorts of good stuff like sofas and cars and houses and flat screens and transport and a replacement for that tent we’ve been living it and perhaps a diet that would include more than potatoes and dandelion greens and new shoes for the kids and – and – maybe with the new money we can restart the school down the road in the next town so we can stop home schooling the brats!  In addition, with just a little more money to go around, Johnny Smith can borrow a little of it and start that wood cutting business he’s been wanting to do out on his property!   What a wonderful idea and all it needs is more money than is allowed by locking in the supply of it to the “Cross of Gold” (and where have I heard that before?).  Let’s print some!

Now we come to the crux of the problem.  Commodity money doesn’t work fast enough because it limits the ability of the economy to grow by other means than technology and productivity improvements reducing the prices of goods and services.  Commodity money is rigid.  It doesn’t encourage anything, good or bad.

Please read that paragraph again.

Fiat money, which one gets when not using a commodity based money works fine for a little while.  A little while.  From the get-go the citizens get screwed because he who pockets and spends fiat currency first (i.e. governmental entities and banks) gets the most use out of it —– unless the issuance of said fiat currency is limited to no more than the HONEST value of the gross production of goods and services of the Country (or the State, or the local community) minus the outstanding debt that needs to be paid off sometime real soon now.

I’ll spell it out,  P-R-O-D-U-C-T-I-O-N.

Not government spending (National, State or local), not welfare, not social programs of any kind, not education, not health and welfare – NOTHING but productive earnings of a country (and I include all three of the above whenever I say “country”).  If the country actually earns more than it consumes, then it is able to tax itself a bit to handle things like national defense, interstate and international commerce negotiations, even local police if you’ve got some problem drunks.  No fair counting anything other than production of goods and services required for those things that are in demand for both domestic and international use.

Also (and this will bring some boo-blahs), so called free trade where intelligence is hauled overseas and mixed with fiat money to put people to work at 1/20th the cost of domestic labor sucks and I am no fan of this destructive commercial behavior. Tariff the  products when they return to our shores or what you end up with eventually is what we have today:  We produce next to nothing, most all important production has moved off shore and all we have is the mathematically unworkable system of buying products produced in foreign countries by selling them debt that will never be paid back to get money to buy their products –  a Ponzi scheme larger, by far, and enormous proportions never seen before that is now coming home to roost with our unstoppable unemployment, , ever lowering wages (compared to ever rising prices), skill loss, our manufacturing capability mostly dead, a consumer driven society dying from debt that can’t be paid and a future that will be a depression of far Greater Proportion than the last one.

We are and have been exporting our fiat financing to the rest of the world.  So far they take it.  Later, they won’t.

Now to get back on subject, a purely commodity form of money will not work efficiently for an advanced (if smaller) technological society.  It hasn’t worked in the past and it won’t work in the future.  Commodity money will arrest inflationary problems overnight once the general public see and understand that it will arrest inflation of the money supply.  True. Overnight.  The human race has been there and done that a number of times.

Fiat money, unanchored to anything, on the other hand, always destroys a civilization in which it is used as over time, venial rulers, kings, despots, tribal chiefs, emperors, presidents and congressmen find that it’s so much easier to print more fiat money (in the form of cash or credit – which is the same thing in two different siren suits) than it is to explain to the citizens why they should give up their hard earned “productive” money to the government to do things they don’t care about or want.  This way, the government (of any sort or variety) can spend more than the country can produce and tax away to the government in the form of scalping excess production.  These “upper caste rulers” can then buy votes (in a democracy) and fund huge police forces.  Remember the TSA ordering a billion rounds of ammo?  Has your local police force got a tank yet?  My town does and I live in a little calm community on a lake in Central Florida.  And, of course,  in not so democratic countries, it’s easy.  These politicians (and anonymous corporations and contributors who fund them) can stuff the pockets of favored people including those “governing” the country and their cronies and do all manner of mischief with money they have no business having.  Especially now that there is virtually no limit to anonymous fiat cash that can be funneled to political parties with the newly passed “bribery special” funding bill that cleared both houses of Congress last weekend.  Now we look forward to who can purchase the most crooked Congressional, Executive and Judicial people. As if we needed more of that crap anyway.  Turns out that who spends the most wins the elections, determines the judicial appointments and who gets screwed and who doesn’t.

The result of this is slow (don’t be too speedy, now!) depreciation of the fiat money doesn’t kill the golden goose very quickly as an excess of money encourages growth that is not necessarily productive, not necessarily safe (hence a percentage of the growth is false!) i.e serial bubbles; so standards of living usually climb for a while – sometimes a long while – thanks to technological progress and productivity gains that technology brings.  This can go on for a long time – think five generations for the United States – not too shabby an effort even if it has now run off the tracks.

But sooner or later, the ruling scions, bankers, scam artists, politicians, stock sellers and check loan artists get greedy.  Why?  Because every time you add to the debt of the country, you cut down on the productivity of the country.  The more debt you have to roll over and suffer paying the interest for it, the less money is available for productive (REAL production) purposes.  So the gross production (and true products) of the country starts to fall. ROI falls. Savings crunch. The middle class is decimated by such bizarre policies as ZIRP (another name for paying for things by the government and keeping banks from folding up without really having to pay for it (which is a proven failed method that goes back to the Roman Empire with coin shaving et al)

THIS IS A POINT THAT WE HAVE ALREADY PASSED.. Mark that on your calendar.

Things tend to go to pot pretty fast after that happens because every fiat dollar of debt incurred beyond that point actually reduces production capability that much more and it is not linear.  Mathematically,  it turns out to be exponential so the curves of doom rise ever faster until they are unsustainable as they are now.  So crash already and get it over with..

Now what do we do on the other side? What kind of money are we going to use when all the dung has been flung, the depressing future is in the past and we see the light of day and start thinking of eating more than one meal a day?  (I apologize for the doomer slant – but I am not optimistic about the comfort of the coming period of time.)

First, our problem is not with start up money as we can cobble together a commodity based money to dig our way up the side of the pit.  It may very well be that commodity money will be the only way we can do so.  Time will tell.

Sooner or later, we will, once again, need more money than commodity money allows us to have because of the ever limited supply of the base commodity and that is the question.  What can we use?  History is not kind here.  And further (as in Germany today) the memory still lives of worthless “money” (i.e. fiat), hardships unbelievable and a tough row to hoe to get themselves back into a decent level of prosperity (only 75 years of hard work and a large saving rate)..

Our problem is not money, you see, it is human nature.  Human nature is what drives fiat money based systems into disaster, not what is used for the “money” or medium of exchange.   Yes, I know the “real” requirements of money – intrinsic value, small, divisible, retains value over time, readily acceptable in trade, blah, blah, blah.….  Fiat money fills all those requirements if we would just stop printing so damn much of it in paper currency and issue of credit (be it loans or bonds or derivatives or whatever) all based on a nebulous “fractional” banking and credit system.  I have ten bucks so I can loan out $100 because no one will ever want all their money back at one time ; a fairy tale that has sunk many a nation and oh so many individuals.

So, fellow voyagers,  after exploring a good part of the in and outs of fiat money and credit I have come to the conclusion there is no valid reason to create a medium of exchange (paper and credit) that is not rigidly capped by the amount of gold, silver, increasing productivity and technological enhancements of the country involved.

Which kind of blows away the title of this Mucks’ Five Minutes piece (but that was to suck you into reading it in the first place!).  There is truly no case for fiat money at all.  Period.

One exception.  In the event of true National Emergency (invasion or an asteroid) or someone nukes us that requires the Last World War to commence.  Then, sadly, all bets are then off and we are in the soup again.  That has happened time after time after time in history and history will always repeat – usually with different timing, flavors and smells and even outcomes, but repeat it will.

As for today’s debt problems?  Forgetaboutit. The end game is baked in the cake.  We are all going to get poorer by and by and as to investments, he who looses least wins!

But we still need to think about and discuss the other side of it all.  Just in case there is another side.

 

MA

New Poll Finds 59% Of Americans Support Post-9/11 Torture – Propaganda, Cultural Sickness, Or Both?

7 comments

Posted on 17th December 2014 by Administrator in Economy |Politics |Social Issues

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Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Ever since the torture report was released last week, U.S. television outlets have endlessly featured American torturers and torture proponents. But there was one group that was almost never heard from: the victims of their torture, not even the ones recognized by the U.S. Government itself as innocent, not even the family members of the ones they tortured to death. Whether by design (most likely) or effect, this inexcusable omission radically distorts coverage.

 

Whenever America is forced to confront its heinous acts, the central strategy is to disappear the victims, render them invisible. That’s what robs them of their humanity: it’s the process of dehumanization. That, in turns, is what enables American elites first to support atrocities, and then, when forced to reckon with them, tell themselves that – despite some isolated and well-intentioned bad acts – they are still really good, elevated, noble, admirable people. It’s hardly surprising, then, that a Washington Post/ABC News poll released this morning found that a large majority of Americans believe torture is justified even when you call it “torture.” Not having to think about actual human victims makes it easy to justify any sort of crime.

 

– From Glenn Greenwald’s latest piece: U.S. TV Provides Ample Platform for American Torturers, but None to Their Victims

After reading about a new poll that shows 59% of Americans support post 9/11 torture, I’ve spent the entire morning thinking about what it means. Does this confirm the total degeneration of American culture into a collective of chicken-hawk, unthinking, statist war-mongering automatons? Alternatively, does it merely reflect the effectiveness of corporate-government propaganda? Is it a combination of both? How does the poll spilt by age group?

These are all important questions to which I do not have definitive answers, but I have some thoughts I’d like to share. First, here are some of the observations from the Washington Post:

A majority of Americans believe that the harsh interrogation techniques used on terrorism suspects after the Sept. 11, 2001, attacks were justified, even as about half the public says the treatment amounted to torture, according to a new Washington Post-ABC News poll.

 

By an almost 2-1 margin, or 59-to-31 percent, those interviewed support the CIA’s brutal methods, with the vast majority of supporters saying they produced valuable intelligence.

 

In general, 58 percent say the torture of suspected terrorists can be justified “often” or “sometimes.”

 

The new poll comes on the heels of a scathing Senate Intelligence Committee investigation into the CIA’s detention and interrogation program, which President Obama ended in 2009. The report concluded that controversial interrogation techniques — including waterboarding detainees, placing them in stress positions and keeping them inside confinement boxes — were not an effective means of acquiring intelligence.

This is important, because despite the Senate Report showing torture was not effective in acquiring intelligence (see: Revelations from the Torture Report – CIA Lies, Nazi Methods and the $81 Million No-Bid Torture Contract), the American public thinks it was. This is the power of mainstream media spin and propaganda.

Fifty-three percent of Americans say the CIA’s harsh interrogation of suspected terrorists produced important information that could not have been obtained any other way, while 31 percent say it did not.

 

In a CBS poll released Monday, nearly seven in 10 considered waterboarding torture, but about half said the technique and others are, at times, justified. Fifty-seven percent said harsh interrogation techniques can provide information that can prevent terrorist attacks.

While the above is disturbing, if I felt that the culture is lost beyond hope and that my fellow American is akin to a zombified sociopath with no hope of awakening, I wouldn’t be writing on this website. I would have renounced my citizenship long ago and moved somewhere else. In contrast, I think there’s a lot to fight for in these United States and I think the war for freedom, civil rights and the rule of law can and will prevail. After all, I was admittedly more or less a zombie during the years immediately following 9/11 and for most of my time on Wall Street. If I was able to make such a profound transition (and countless of my friends have as well ), then there is always hope.

I continue to think that the vast majority of human beings are not particularly ethical or unethical. They are basically somewhere in the middle and thus very easily molded by propaganda. History pretty much proves this to be the case. My sentiments on the subject can be best summarized by something I wrote back in 2012 in the post: Humanity is Rising.

I have always felt that human disposition lies on a bell curve.  So let’s say for the sake of argument that 1% is just extraordinarily wicked, selfish, mentally deranged so along the lines of a Stalin like character.  Then let’s say the 1% on the other side is gentle, enlightened, and moral almost to a fault so a Gandhi like character.  Then the masses in the middle are not of any extreme disposition in either way, but are easily malleable and generally just “go along to get along.”  Well as far as recorded human history is concerned, the 1% of nasty, immoral parasites have dominated humanity through the various playbooks strategies that I and many others have outlined.  The 1% on the other side have generally been silenced or ostracized systematically by the control freak “leaders” and if that fails to work, they are simply murdered.  I mean even up until the 20th Century think about the kinds of guys that have been murdered.  Gandhi.  Martin Luther King Jr.  John Lennon.  Oh and if we want to go back a couple thousand years there was Jesus.  The list is endless.  Guys that talk about a higher level of consciousness and love and actually make inroads in society are murdered.  Yet no one ever seems to take a shot at the genocidal, sociopaths that run our lives through politics and banking (nor would I ever want that as I do not condone violence as a solution to a violent system).  Interesting isn’t it?  I think it is pretty obvious why this is the case.  The 1% on the decent side of the bell curve aren’t murderers.  The guys on the other side of it are.  

While certainly not giving the middle of the bell curve a pass for its unquestioned apathy and ignorance, I am convinced that the key variable here is information, which is why it is so imperative to conduct alternative narratives, and is why I spend most of my time working on this site. Glenn Greenwald’s recent piece in the Intercept helped to reinforce the impact of media propaganda in shaping public perceptions. Here are some excerpts:

Ever since the torture report was released last week, U.S. television outlets have endlessly featured American torturers and torture proponents. But there was one group that was almost never heard from: the victims of their torture, not even the ones recognized by the U.S. Government itself as innocent, not even the family members of the ones they tortured to death. Whether by design (most likely) or effect, this inexcusable omission radically distorts coverage.

 

Whenever America is forced to confront its heinous acts, the central strategy is to disappear the victims, render them invisible. That’s what robs them of their humanity: it’s the process of dehumanization. That, in turns, is what enables American elites first to support atrocities, and then, when forced to reckon with them, tell themselves that – despite some isolated and well-intentioned bad acts – they are still really good, elevated, noble, admirable people. It’s hardly surprising, then, that a Washington Post/ABC News poll released this morning found that a large majority of Americans believe torture is justified even when you call it “torture.” Not having to think about actual human victims makes it easy to justify any sort of crime.

 

This self-glorifying ritual can be sustained only by completely suppressing America’s victims. If you don’t hear from the human beings who are tortured, it’s easy to pretend nothing truly terrible happened. That’s how the War on Terror generally has been “reported” for 13 years and counting: by completely silencing those whose lives are destroyed or ended by U.S. crimes. That’s how the illusion gets sustained.

 

Thus, we sometimes hear about drones (usually to celebrate the Great Kills) but almost never hear from their victims: the surviving family members of innocents whom the U.S. kills or those forced to live under the traumatizing regime of permanently circling death robots. We periodically hear about the vile regimes the U.S. props up for decades, but almost never from the dissidents and activists imprisoned, tortured and killed by those allied tyrants. Most Americans have heard the words “rendition” and “Guantanamo” but could not name a single person victimized by them, let alone recount what happened to them, because they almost never appear on American television.

 

It would be incredibly easy, and incredibly effective, for U.S. television outlets to interview America’s torture victims. There is certainly no shortage of them. Groups such as the ACLUCenter for Constitutional RightsReprieve, and CAGE UK represent many of them. Many are incredibly smart and eloquent, and have spent years contemplating what happened to them and navigating the aftermath on their lives.

 

I’ve written previously about the transformative experience of meeting and hearing directly from the victims of the abuses by your own government. That human interaction converts an injustice from an abstraction into a deeply felt rage and disgust. That’s precisely why the U.S. media doesn’t air those stories directly from the victims themselves: because it would make it impossible to maintain the pleasing fairy tales about “who we really are.”

 

When I was in Canada in October, I met Maher Arar (pictured above) for the second time, went to his home, had breakfast with his wife (also pictured above) and two children. In 2002, Maher, a Canadian citizen of Syrian descent who worked as an engineer, was traveling back home to Ottawa when he was abducted by the U.S. Government at JFK Airport, heldincommunicado and interrogated for weeks, then “rendered” to Syria where the U.S. arranged to have him brutally tortured by Assad’s regime. He was kept in a coffin-like cell for 10 months and savagely tortured until even his Syrian captors were convinced that he was completely innocent. He was then uncermoniously released back to his life in Canada as though nothing had happened.

 

When he sued the U.S. government, subservient U.S. courts refused even to hear his case, accepting the Obama DOJ’s claim that it was too secret to safely adjudicate.

 

There are hundreds if not thousands of Maher Arars the U.S. media could easily and powerfully interview. McClatchy this week detailed the story of Khalid al Masri, a German citizen whom the U.S. Government abducted in Macedonia, tortured, and then dumped on a road when they decided he wasn’t guilty of anything (US courts also refused to hear his case on secrecy grounds). The detainees held without charges, tortured, and then unceremoniously released from Guantanamo and Bagram are rarely if ever heard from on U.S. television, even when the U.S. Government is forced to admit that they were guilty of nothing.

 

This is not to say that merely putting these victims on television would fundamentally change how these issues are perceived. Many Americans would look at the largely non-white and foreign faces recounting their abuses, or take note of their demonized religion and ethnicity, and react for that reason with indifference or even support for what was done to them.

I’m not so sure this is the case, and in any event, we can’t know unless we try.

Keeping those victims silenced and invisible is the biggest favor the U.S. television media could do for the government over which they claim to act as watchdogs. So that’s what they do: dutifully, eagerly and with very rare exception.

Watching television is easy and addicting, particularly if you came of age before the internet. Television news is simply horrifying. On those rare instances when I catch a glimpse of it at the gym, I feel as if I have entered a bizarro world of idiocy and shamelessness.

Nevertheless, it remains true that a lot of the pre-internet generation still receives intellectual marching orders from the idiot-box. This is why I’m so curious to see how the Washington Post poll splits by age bracket. Either way, hope is never lost and the torch of liberty must remain lit and carried forward by those who care. That’s precisely what I try to do here at Liberty Blitzkrieg, and I ask you to do the same in whatever capacity you can.

Who’s Right … Torture Defenders Or Critics?

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Posted on 12th December 2014 by Administrator in Economy |Politics |Social Issues

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http://www.nps.gov/stli/historyculture/images/Statue-Scaffolding-Copy.jpg

The Senate says that torture didn’t produce any actionable intelligence.

The CIA and a handful of those who ordered torture say that it was necessary.

Who’s right?

We don’t have to guess, get in a personality conflict, or engage in a partisan fight.

There is an overwhelming consensus among top interrogation experts of all stripes …

Overwhelming Consensus: Torture Doesn’t Work

Virtually all of the top interrogation experts – both conservatives and liberals (except for those trying to escape war crimes prosecution) – say that torture doesn’t work:

“Experience indicates that the use of force is not necessary to gain the cooperation of sources for interrogation. Therefore, the use of force is a poor technique, as it yields unreliable results, may damage subsequent collection efforts, and can induce the source to say whatever he thinks the interrogator wants to hear.”

  • The C.I.A.’s 1963 interrogation manual stated:

Intense pain is quite likely to produce false confessions, concocted as a means of escaping from distress. A time-consuming delay results, while investigation is conducted and the admissions are proven untrue. During this respite the interrogatee can pull himself together. He may even use the time to think up new, more complex ‘admissions’ that take still longer to disprove.

  • According to the Washington Post, the CIA’s top spy – Michael Sulick, head of the CIA’s National Clandestine Service – said that the spy agency has seen no fall-off in intelligence since waterboarding was banned by the Obama administration. “I don’t think we’ve suffered at all from an intelligence standpoint.”
  • The Chief Prosecutor of the Guantanamo military commissions (Colonel Morris Davis) says:

As person responsible for prosecuting KSM [i.e. alleged 9/11 “master mind” Khalid Sheikh Mohammed], I spent 2 yrs immersed in the intel/evid. Torture did no good.

  • A 30-year veteran of CIA’s operations directorate who rose to the most senior managerial ranks (Milton Bearden) says (as quoted by senior CIA agent and Presidential briefer Ray McGovern):

It is irresponsible for any administration not to tell a credible story that would convince critics at home and abroad that this torture has served some useful purpose.

***

The old hands overwhelmingly believe that torture doesn’t work ….

  • The head of Army intelligence in 2006 (General John Kimmons) says:

No good intelligence is going to come from abusive practices. I think history tells us that. I think the empirical evidence of the last five years, hard years, tells us that.

  • A former high-level CIA officer (Philip Giraldi) states:

Many governments that have routinely tortured to obtain information have abandoned the practice when they discovered that other approaches actually worked better for extracting information. Israel prohibited torturing Palestinian terrorist suspects in 1999. Even the German Gestapo stopped torturing French resistance captives when it determined that treating prisoners well actually produced more and better intelligence.

  • Another former high-level CIA official (Bob Baer) says:

And torture — I just don’t think it really works … you don’t get the truth. What happens when you torture people is, they figure out what you want to hear and they tell you.

  • Michael Scheuer, formerly a senior CIA official in the Counter-Terrorism Center, says:

“I personally think that any information gotten through extreme methods of torture would probably be pretty useless because it would be someone telling you what you wanted to hear.”

  • A retired C.I.A. officer who oversaw the interrogation of a high-level detainee in 2002 (Glenn L. Carle) says:

[Coercive techniques] didn’t provide useful, meaningful, trustworthy information…Everyone was deeply concerned and most felt it was un-American and did not work.”

  • A former top Air Force interrogator who led the team that tracked down Abu Musab al-Zarqawi, who has conducted hundreds of interrogations of high ranking Al Qaida members and supervising more than one thousand, and wrote a book called How to Break a Terrorist writes:

As the senior interrogator in Iraq for a task force charged with hunting down Abu Musab Al Zarqawi, the former Al Qaida leader and mass murderer, I listened time and time again to captured foreign fighters cite the torture and abuse at Abu Ghraib and Guantanamo as their main reason for coming to Iraq to fight. Consider that 90 percent of the suicide bombers in Iraq are these foreign fighters and you can easily conclude that we have lost hundreds, if not thousands, of American lives because of our policy of torture and abuse. But that’s only the past. Somewhere in the world there are other young Muslims who have joined Al Qaida because we tortured and abused prisoners. These men will certainly carry out future attacks against Americans, either in Iraq, Afghanistan, or possibly even here. And that’s not to mention numerous other Muslims who support Al Qaida, either financially or in other ways, because they are outraged that the United States tortured and abused Muslim prisoners.

In addition, torture and abuse has made us less safe because detainees are less likely to cooperate during interrogations if they don’t trust us. I know from having conducted hundreds of interrogations of high ranking Al Qaida members and supervising more than one thousand, that when a captured Al Qaida member sees us live up to our stated principles they are more willing to negotiate and cooperate with us. When we torture or abuse them, it hardens their resolve and reaffirms why they picked up arms.

He also says:

[Torture is] extremely ineffective, and it’s counter-productive to what we’re trying to accomplish. When we torture somebody, it hardens their resolve … The information that you get is unreliable. … And even if you do get reliable information, you’re able to stop a terrorist attack, al Qaeda’s then going to use the fact that we torture people to recruit new members.

And he repeats:

I learned in Iraq that the No. 1 reason foreign fighters flocked there to fight were the abuses carried out at Abu Ghraib and Guantanamo.

And:

They don’t want to talk about the long term consequences that cost the lives of Americans…. The way the U.S. treated its prisoners “was al-Qaeda’s number-one recruiting tool and brought in thousands of foreign fighters who killed American soldiers.

  • The FBI interrogators who actually interviewed some of the 9/11 suspects say torture didn’t work
  • Another FBI interrogator of 9/11 suspects said:

I was in the middle of this, and it’s not true that these [aggressive] techniques were effective

  • The FBI warned military interrogators in 2003 that enhanced interrogation techniques are “of questionable effectiveness” and cited a “lack of evidence of [enhanced techniques’] success.
  • The Senate Armed Services Committee unanimously found that torture doesn’t work, stating:

The administration’s policies concerning [torture] and the resulting controversies damaged our ability to collect accurate intelligence that could save lives, strengthened the hand of our enemies, and compromised our moral authority.

  • General Petraeus says that torture is unnecessary
  • Retired 4-star General Barry McCaffrey – who Schwarzkopf called he hero of Desert Storm – agrees
  • Former Navy Judge Advocate General Admiral John Hutson says:

Fundamentally, those kinds of techniques are ineffective. If the goal is to gain actionable intelligence, and it is, and if that’s important, and it is, then we have to use the techniques that are most effective. Torture is the technique of choice of the lazy, stupid and pseudo-tough.

He also says:

Another objection is that torture doesn’t work. All the literature and experts say that if we really want usable information, we should go exactly the opposite way and try to gain the trust and confidence of the prisoners.

  • Army Colonel Stuart Herrington – a military intelligence specialist who interrogated generals under the command of Saddam Hussein and evaluated US detention operations at Guantánamo – notes that the process of obtaining information is hampered, not helped, by practices such as “slapping someone in the face and stripping them naked”. Herrington and other former US military interrogators say:

We know from experience that it is very difficult to elicit information from a detainee who has been abused. The abuse often only strengthens their resolve and makes it that much harder for an interrogator to find a way to elicit useful information.

  • Major General Thomas Romig, former Army JAG, said:

If you torture somebody, they’ll tell you anything. I don’t know anybody that is good at interrogation, has done it a lot, that will say that that’s an effective means of getting information. … So I don’t think it’s effective.

  • The first head of the Department of Homeland Security – Tom Ridge – says we were wrong to torture
  • The former British intelligence chairman says that waterboarding didn’t stop terror plots
  • A spokesman for the National Security Council (Tommy Vietor) says:

The bottom line is this: If we had some kind of smoking-gun intelligence from waterboarding in 2003, we would have taken out Osama bin Laden in 2003.

In researching this article, I spoke to numerous counterterrorist officials from agencies on both sides of the Atlantic. Their conclusion is unanimous: not only have coercive methods failed to generate significant and actionable intelligence, they have also caused the squandering of resources on a massive scale through false leads, chimerical plots, and unnecessary safety alerts … Here, they say, far from exposing a deadly plot, all torture did was lead to more torture of his supposed accomplices while also providing some misleading “information” that boosted the administration’s argument for invading Iraq.

  • Neuroscientists have found that torture physically and chemically interferes with the prisoner’s ability to tell the truth
  • An Army psychologist – Major Paul Burney, Army’s Behavior Science Consulting Team psychologist – said (page 78 & 83):

was stressed to me time and time again that psychological investigations have proven that harsh interrogations do not work. At best it will get you information that a prisoner thinks you want to hear to make the interrogation stop, but that information is strongly likely to be false.

***

Interrogation techniques that rely on physical or adverse consequences are likely to garner inaccurate information and create an increased level of resistance…There is no evidence that the level of fear or discomfort evoked by a given technique has any consistent correlation to the volume or quality of information obtained.

  • An expert on resisting torture – Terrence Russell, JPRA’s manager for research and development and a SERE specialist – said (page 209):

History has shown us that physical pressures are not effective for compelling an individual to give information or to do something’ and are not effective for gaining accurate, actionable intelligence.

Indeed, it has been known for hundreds of years that torture doesn’t work:

  • As a former CIA analyst notes:

During the Inquisition there were many confessed witches, and many others were named by those tortured as other witches. Unsurprisingly, when these new claimed witches were tortured, they also confessed. Confirmation of some statement made under torture, when that confirmation is extracted by another case of torture, is invalid information and cannot be trusted.

  • The head of Britain’s wartime interrogation center in London said:

“Violence is taboo. Not only does it produce answers to please, but it lowers the standard of information.”

  • The national security adviser to Vice President George H.W. Bush (Donald P. Gregg) wrote:

During wartime service with the CIA in Vietnam from 1970 to 1972, I was in charge of intelligence operations in the 10 provinces surrounding Saigon. One of my tasks was to prevent rocket attacks on Saigon’s port. Keeping Saigon safe required human intelligence, most often from captured prisoners. I had a running debate about how North Vietnamese prisoners should be treated with the South Vietnamese colonel who conducted interrogations. This colonel routinely tortured prisoners, producing a flood of information, much of it totally false. I argued for better treatment and pressed for key prisoners to be turned over to the CIA, where humane interrogation methods were the rule – and more accurate intelligence was the result.

The colonel finally relented and turned over a battered prisoner to me, saying, “This man knows a lot, but he will not talk to me.”

We treated the prisoner’s wounds, reunited him with his family, and allowed him to make his first visit to Saigon. Surprised by the city’s affluence, he said he would tell us anything we asked. The result was a flood of actionable intelligence that allowed us to disrupt planned operations, including rocket attacks against Saigon.

Admittedly, it would be hard to make a story from nearly 40 years ago into a definitive case study. But there is a useful reminder here. The key to successful interrogation is for the interrogator – even as he controls the situation – to recognize a prisoner’s humanity, to understand his culture, background and language. Torture makes this impossible.

There’s a sad twist here. Cheney forgets that the Bush administration followed this approach with some success. A high-value prisoner subjected to patient interrogation by an Arabic-speaking FBI agent yielded highly useful information, including the final word on Iraq’s weapons programs.

His name was Saddam Hussein.

  • Top interrogators got information from a high-level Al Qaeda suspects through building rapport, even if they hated the person they were interrogating by treating them as human

Senator John McCain explains, based upon his own years of torture:

I know from personal experience that the abuse of prisoners sometimes produces good intelligence but often produces bad intelligence because under torture a person will say anything he thinks his captors want to hear — true or false — if he believes it will relieve his suffering. Often, information provided to stop the torture is deliberately misleading.

According to the experts, torture is unnecessary even to prevent “ticking time bombs” from exploding (see this, this and this). Indeed, a top expert says that torture would fail in a real ‘ticking time-bomb’ situation. (And, no … it did NOT help get Bin Laden).

As shown above, torture doesn’t produce actionable intelligence …

But even if it did, the specific type of torture used by the U.S. is famous for producing false evidence.

Moynihan Was Right In 1965: A Monograph On The 50-Year Decline Of The Two Parent Family

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Posted on 10th December 2014 by Administrator in Economy |Politics |Social Issues

Via David Stockman’s ContraCorner

By Sara McLanahan and Christopher Jencks at Education Next

In his 1965 report on the black family, Daniel Patrick Moynihan highlighted the rising fraction of black children growing up in households headed by unmarried mothers. He attributed the increase largely to the precarious economic position of black men, many of whom were no longer able to play their traditional role as their family’s primary breadwinner. Moynihan argued that growing up in homes without a male breadwinner reduced black children’s chances of climbing out of poverty, and that the spread of such families would make it hard for blacks to take advantage of the legal and institutional changes flowing from the civil rights revolution.

Moynihan’s claim that growing up in a fatherless family reduced a child’s chances of educational and economic success was furiously denounced when the report appeared in 1965, with many critics calling Moynihan a racist. For the next two decades few scholars chose to investigate the effects of father absence, lest they too be demonized if their findings supported Moynihan’s argument. Fortunately, America’s best-known black sociologist, William Julius Wilson, broke this taboo in 1987, providing a candid assessment of the black family and its problems in The Truly Disadvantaged. Since then, social scientists have accumulated a lot more evidence on the effects of family structure. This article will offer some educated guesses about what that evidence means.

What Has Changed?

Moynihan was clearly prescient in thinking that America’s black families were changing in fundamental ways. In 1965, when Moynihan’s report was released, roughly 25 percent of black children and 5 percent of white children lived in families headed by an unmarried mother. These percentages rose rapidly over the next two decades, reaching about 50 percent among blacks and 15 percent among whites by the early 1980s. After that, the rate of increase among blacks slowed. Fifty-four percent of black children were being raised by an unmarried mother in the early 1990s; about 50 percent were in 2003. The level has remained close to 50 percent since 2003. Among whites, the rate also rose slowly until the mid-1990s but has fluctuated between about 18 and 20 percent since then (see Figure 1).

ednext_XV_2_mclanahan_fig01-small

As whites constitute a substantial majority of Americans, whites also comprise the largest share of single-mother families. The racial makeup of single-mother families has not changed very much over time. In 1970, 31 percent of single-mother families were black, 68 percent were white, and 1 percent were “other race.” In 2013, the figures were 30 percent black, 62 percent white, and 8 percent “other.”

Readers should bear in mind that the terms “unmarried” and “single” refer to a mother’s marital status, not to whether she lives with a partner. Thus, living with a “single” mother does not necessarily mean that a child is living in a “fatherless household.” Unmarried couples living with children, that is, parents or partners who cohabit, were relatively rare in 1960. They have become increasingly common in the last 20 years. Recent estimates indicate that roughly one-quarter of all children living with an unmarried mother are living with a mother who has a live-in partner. This figure is about 33 percent among white children, 12 percent among black children, and 29 percent among Hispanic children.

Figure 1 shows children’s living arrangements in specific years, but it does not tell us what percentage of children ever live with a single mother while they are growing up. Demographers estimate that more than half of all American children are now likely to live with a single mother at some point before they reach age 18, even though only 24 percent live with a single mother in any one year. The difference between the two estimates reflects the fact that married mothers often separate, divorce, or (less often) become widows, while unmarried mothers often marry or remarry. As a result, many children live with a single mother for only a few years.

The transitory nature of marital status becomes even clearer if we compare the fraction of children born to unmarried mothers in a given year with the fraction living with an unmarried mother in subsequent years. Figure 2 shows trends in the percentage of mothers who were unmarried at the time they gave birth to a child. In 1960, only 5 percent of all births were to unmarried mothers. By 2010, the number was nearly 41 percent. The trend leveled off for all births in 1994 but rose again after 2000, with paths diverging by race and ethnicity.

ednext_XV_2_mclanahan_fig02-small

By 1990, roughly 70 percent of all black births were to unmarried mothers, and the figure has hovered near 70 percent since that time. Yet in 2013, only about 50 percent of black children under age 18 were living with an unmarried mother. Some of the “missing” 20 percent were living with their fathers, because their mother had married their father after the child was born. But in many cases, the mother had married someone else before her child’s 18th birthday. Although the fraction of children born to unmarried mothers has not risen among blacks since the 1990s, it has continued to increase among whites and Hispanics, nearing 36 percent for whites and topping 50 percent for Hispanics by 2012.

The meaning of single motherhood has also changed since the 1960s. Today’s single mothers are far less likely than their predecessors to have ever been married. In 1960, 95 percent of single mothers had been married at some point in the past. The major sources of single motherhood were separation from a spouse, divorce, and widowhood, in that order. By 2013, only half of all single mothers had ever been married.

The historical shift from formerly married to never-married mothers has meant that single motherhood usually occurs earlier in a child’s life. Mothers who marry and then divorce typically spend a number of years with their husband before separating. Today, many women become single mothers when their first child is born. The shift to never-married motherhood has probably weakened the economic and emotional ties between children and their absent fathers.

A second change is that unmarried motherhood has spread fastest among mothers who have not completed college. Between 1980 and 2010 the fraction of black children living with an unmarried mother rose from 55 to 66 percent (10 points) among those whose mother had not finished high school, from 43 to 50 percent (7 points) among those whose mother had finished high school but not college, and from 23 to 28 percent (5 points) among those whose mother had graduated from a four-year college. Among white children with mothers who had not finished high school, the estimated fraction living with an unmarried mother rose only from 16.9 percent in 1980 to 18.2 percent in 2010, but the 2010 estimate is based on a small sample, and we cannot rule out the possibility that the true increase was considerably larger. The increase was from 10 to 21 percent among white children with mothers who had finished high school but not college, and from 6.7 to 7.3 percent among white children whose mothers had completed college (see Figure 3).

ednext_XV_2_mclanahan_fig03-small

The fact that single motherhood is increasing faster among women with less than a college degree means that children growing up with a single mother are likely to be doubly disadvantaged. They spend less time and receive less money from their biological fathers than children who live with their fathers. At the same time, the primary breadwinner in the family—the mother—has lower earnings than the typical mother in a married-parent family. The official poverty rate in 2013 among all families with children was 40 percent if the family was headed by an unmarried mother and only 8 percent if the family was headed by a married couple (see Figure 4). Among blacks, the rates were 46 percent in single-mother families and 12 percent in married-parent families. Among Hispanics, the figures were 47 percent and 18 percent, and among whites the rates were 32 percent and 4 percent, respectively.

ednext_XV_2_mclanahan_fig04-small

The Fragile Family

Recent evidence on the impact of these trends comes from the Fragile Families and Child Wellbeing Study, which is following a cohort of nearly 5,000 children born in large U.S. cities between 1998 and 2000. Roughly three-quarters of these children were born to unmarried parents. Just under 50 percent of the parents are black, while about 35 percent are Hispanic. Researchers interview parents and assess children every few years to learn about family dynamics and gauge the health and well-being of the participants.

The study finds that couples who are cohabiting at the time of the child’s birth split up much sooner than couples who were married. Nearly half of cohabiting parents break up within five years of the child’s birth, compared to only 20 percent of married parents. Once a mother’s relationship with her baby’s father ends, she is likely to form relationships with new partners, and she typically has one or more children with a new partner. Of course, divorced mothers also form new partnerships and often have children with their new partners. But the interval before this occurs is usually longer among divorced mothers than among mothers who are cohabiting or living alone at the time of their child’s birth. Among the latter group, 61 percent live with a new partner and 11 percent live with three or more new partners before the child is five years old. Among mothers who are married at the time of a birth, those proportions are only 8 percent and 1 percent, respectively.

The high rate of partner turnover during a mother’s peak fertility years means not only that her children now experience more changes in the adults with whom they live, but also that they are now more likely to have half siblings, who have different fathers, paternal grandparents, and other relatives. Half siblings and their kin create additional complexity in children’s families. In the Fragile Families study, 60 percent of children born to unmarried mothers had a half sibling by the time they were five years old, and 23 percent had half siblings fathered by two or more different men. Among children born to married mothers, the comparable figures are 18 and 6 percent.

High levels of instability and complexity have important consequences for children’s home environment and the quality of the parenting they receive. Both the departure of a father and the arrival of a mother’s new partner disrupt family routines and are stressful for most children, regardless of whether the father is married to their mother or merely cohabiting with her. A nonresident father may also be less willing to keep paying child support if he believes his payments will be shared with another man’s child. Such problems are magnified in families with several nonresident fathers.

Among fathers in the study who were married to their child’s mother when the child was born but were not living with the child nine years later, three-quarters were still providing some economic support for their child, according to an analysis by Rutgers University professor Lenna Nepomnyaschy. Among fathers who were cohabiting with the mother when their child was born but were living elsewhere nine years later, only 60 percent were providing some economic support, the same as the percentage among fathers who had never lived with their child.

The Effect on Children

Was Moynihan right in suggesting that children whose parents divorce or never marry have more than their share of problems? This question has been hotly debated ever since the publication of Moynihan’s report. On the one hand, growing up without both biological parents is clearly associated with worse average outcomes for children than growing up with them. Specifically, children growing up with a single mother are exposed to more family instability and complexity, they have more behavior problems, and they are less likely to finish high school or attend college than children raised by both of their parents. On the other hand, these differences in children’s behavior and success might well be traceable to differences that would exist even if the biological father were present.

In recent years, researchers have begun to use what they call “quasi-experimental” approaches to estimate the causal impact of growing up apart from one’s biological father. Some studies compare the outcomes of children living in states with liberal versus restrictive divorce laws. Others compare siblings who were different ages in the year when their father moved out. Still others compare the same child before and after the father left the child’s household. One important limitation of these studies is that while they all focus on children who are not living with both of their biological parents, they differ with respect to their comparison group, whether it is children raised by their mother alone, by their mother and a new spouse, or by their mother and a new partner to whom she is not married. Nonetheless, when taken together these studies are beginning to tell a consistent story. A recent review of 45 studies using quasi-experimental methods concluded that growing up apart from one’s father does reduce a child’s life chances in many domains.

The review’s authors examined the effects of a father’s absence on outcomes in four domains: educational attainment, mental health, labor market performance, and family formation. Growing up with only one biological parent reduces a child’s chances of graduating from high school by about 40 percent, which is similar to the effect of having a mother who did not finish high school rather than one who did. The absence of one’s biological father has not been shown to affect a child’s verbal and math test scores, however.  The evidence for other indicators of educational performance, such as high school grades, skipping school, and college aspirations, is mixed, with some studies finding that father absence lowers school attendance and aspirations and others finding no effect. Most studies find larger effects on boys than on girls.

How might we reconcile the fact that a father’s absence affects high school graduation with the lack of evidence that it affects test scores? The answer appears to be that a father’s absence increases antisocial behavior, such as aggression, rule breaking, delinquency, and illegal drug use. These antisocial behaviors affect high school completion independent of a child’s verbal and math scores. Thus it appears that a father’s absence lowers children’s educational attainment not by altering their scores on cognitive tests but by disrupting their social and emotional adjustment and reducing their ability or willingness to exercise self-control. The effects of growing up without both parents on aggression, rule breaking, and delinquency are also larger for boys than for girls. Since these traits predict both college attendance and graduation, the spread of single-parent families over the past few decades may have contributed to the growing gender gap in college attendance and graduation. The gender gap in college completion is much more pronounced among children raised by single mothers than among children raised in two-parent families.

University of Chicago researcher Marianne Bertrand and Jessica Pan of the National University of Singapore investigated several mechanisms that might explain how a father’s absence could affect the educational attainment of sons more than daughters. They found that single mothers spend more time with girls and feel closer to girls than to boys, for example. More important, boys are far more sensitive than girls to parenting practices such as spending time with a child, emotional closeness, and avoiding harsh discipline. These practices, which are much more common in families that include a father, partly explain why boys with absent fathers have more behavior problems and are more likely to be suspended from school. Boys also respond more negatively than girls to having been raised by a teenage mother and to having grown up in a family with below-average income. Single motherhood is highly correlated with both teenage childbearing and low income, so these differences presumably help explain the unusually negative consequences for boys of growing up with a single mother.

There is no strong evidence that single motherhood has different effects on black children than on white children.

When we turn to black-white differences in the effects of single motherhood on children, we might expect the effects to be more negative for black than for white children, particularly for black boys, because single black mothers are younger, less educated, and poorer than single white mothers. Yet the fact that single motherhood has long been more common among blacks than whites could also have helped black families develop better systems for coping with a father’s absence. Consistent with these conflicting hypotheses, there is no strong evidence either that single motherhood has different effects on black children than on white children or that the effects are the same. A few studies find weaker effects for blacks, and other studies find no significant racial difference.

There is consistent evidence that a father’s absence reduces a child’s chances of employment, but the evidence on whether it affects the earnings of those who do find work is inconclusive. Similarly, there is solid evidence that absence of a father during childhood increases the chances that a child will divorce as an adult and that a daughter will have a nonmarital birth. The evidence on whether a father’s absence affects the likelihood that a child will marry is inconclusive.

Is Marriage the Solution?

These findings do not mean that children would necessarily be better-off if their biological parents were married. Children with unmarried mothers are more likely than other children to have a biological father who is in prison, beats his partner, cannot find or keep a steady job, and/or makes his living by selling drugs. None of these characteristics is associated with good outcomes for children. Sara Jaffee, professor of psychology at the University of Pennsylvania, and her colleagues found that living with a father who engages in high levels of antisocial behavior increases children’s conduct problems. While problems of this kind may sometimes diminish if a mother marries such a father—living with the mother and child may motivate the father to change his behavior, for example—there are also many instances in which that does not happen.

Furthermore, even when a child’s absent father is a model citizen, the mother often has problems that marriage cannot solve. Unmarried mothers have seldom done well in school, many lack even a high school diploma, and few have completed college. If these mothers find work, their earnings are usually lower than those of married mothers who work, and their hours are often long, erratic, or both. Unmarried mothers are also more likely than married mothers to have physical and mental health problems, and probably less likely to have habits or skills that help children escape from poverty. Of course, trying to raise children alone on a tiny budget is likely to exacerbate whatever problems a mother had initially. But marrying the man who fathered her child may magnify a mother’s problems rather than solve them.

What Can Be Done? 

Unmarried parents are not that different from married parents in their behavior. Both groups value marriage, both spend a long time searching for a suitable marriage partner, and both engage in premarital sex and cohabitation. The key difference is that one group often has children while they are searching for a suitable partner, whereas the other group more often has children only after they marry.

Changing this dynamic would require two things. First, we would need to give less-educated women a good reason to postpone motherhood. The women who are currently postponing motherhood are typically investing in education and careers. These women use contraceptive methods that are more reliable, and they use these methods more consistently. Postponing fertility in these ways would also have benefits for women who currently do not do so. They would be more mature when they became mothers, and they would probably do a better job of selecting suitable partners.

Nonetheless, postponing fertility will not solve the problem of nonmarital childbearing unless the economic prospects of the young men who father the children also improve. Women are not likely to marry men whom they view as poor providers, regardless of their own earning capacity. Thus, in addition to encouraging young women to delay motherhood, we also need to improve the economic prospects of their prospective husbands, especially those with no more than a high school diploma. This will not be easy. But it would improve the lives of the men in question, perhaps reduce their level of antisocial behavior, and improve the lives of their children, through all the benefits that flow from a stable home.

http://educationnext.org/was-moynihan-right/

Sara McLanahan is professor of sociology and public affairs at Princeton University. Christopher Jencks is professor of social policy at the Harvard Kennedy School.      

Totalitarians vs. Toadies

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Posted on 7th December 2014 by Administrator in Economy |Politics |Social Issues

Guest Post by Lawrence Sellin

To paraphrase the sage of Oklahoma, Will Rogers, liberals used to be people who did good with their own money.

 

To paraphrase former British Prime Minister, Margaret Thatcher, liberals learned that, by doing so, they would quickly run out of their own money. Whereas, through government, they could satisfy either their altruism or their guilt and do good on a much larger scale using other people’s money.

 

Unfortunately for them, implementing “social justice” by legal mandate, that is, transforming a liberal philosophy into liberal politics, forced them to swim in the same dogmatic waters as communists, where liberals had difficulty drawing a distinction between their policies and those endorsed by the communists.

That dilemma was temporarily resolved by the Great Depression, an economic calamity arguably caused by government through the inappropriate action of the Federal Reserve, which resulted in the “throw out the bums” election of liberal Democrat Franklin D. Roosevelt, who ironically promoted government as the solution. Knowing they could not be elected to high office by truthfully articulating their aims, American communists joined the Roosevelt Administration in droves.

As the Depression dragged on, the size and scope of government increased in a manner not unlike the humorous anecdote about business consultants “if you’re not part of the solution, there is good money to be made in prolonging the problem.”

Although liberal policies invariably failed and its theoretical basis collapsed, the rhetoric managed to survive, but becoming steadily more extreme in order to nourish a constituency of evolving grievances, from “Income Inequality” to the “War on Women” to the newly-minted “White Privilege.”

One subsidiary of the liberal grievance industry is the Congressional Black Caucus, a group seemingly driven by resentment and the desire for revenge, who exploit black “victimhood” to promote policies that, in the end, maintain the victim population and themselves in Congress. Often fervent to the point of hysteria, they are habitually wrong at the top of their lungs.

It is not injustice that troubles them so much about Ferguson, for example, but justice, and facts that do not validate their “Pre-Rage” or conform to their narrow, race-centric views.

Liberalism fosters a form of political solipsism, which is a philosophical theory where only the self exists, generating an extreme preoccupation with and indulgence of one’s feelings and desires.

It drives liberals to commit, as H.L. Mencken noted, the greatest and most costly of all human follies, to believe passionately in what is palpably not true.

The Obama Administration represents the final stage of liberal descent into totalitarianism with the adoption of 1960s radicalism as the core strategy, an approach that both then and now advocates a rapid fundamental transformation of the United States through confrontation with little respect for the Constitution or the democratic process.

That would not, however, be an issue if there were some resistance to such an ominous trend.

The Republican establishment, confining itself to token, emotionally satisfying gestures of opposition, does not contest that trend because they do not want to challenge the status quo; they want to remain part of it. They do not oppose Democrats, but seek to be more like them. The Republican leadership long ago jettisoned any semblance of principle in favor of election prospects as junior partners in a ruling class.

The federal government has become an entity unto itself operating outside of Constitutional constraints and unaccountable to the American people.

Power rests, not with the citizens, but with a relatively small group of politicians and financiers, who enhance their personal wealth and privilege by looting the country through a self-serving legislative process. They retain their authority by adjusting the levers of government and using the media to manipulate public perception and opinion to preserve the illusion of representative government.

It is what Israeli historian J. L. Talmon described as totalitarian democracy, a political system in which lawfully elected representatives rule a nation state whose citizens, although granted the right to vote, have little or no participation in the decision-making process of government.

Well on their way to despotism, our political and media elite have discarded truth and persuasion for the more expedient lies and coercion.

 

Lawrence Sellin, Ph.D. is a retired colonel with 29 years of service in the US Army Reserve and a veteran of Afghanistan and Iraq. Colonel Sellin is the author of “Restoring the Republic: Arguments for a Second American Revolution “. He receives email at [email protected].