http://www.zerohedge.com/fullrss2.xml en Meet ICREACH: The NSA's Own Secret "Google" http://www.zerohedge.com/news/2014-08-26/meet-icreach-nsas-own-secret-google <p><em>Authored by Ryan Gallagher, <a href="https://firstlook.org/theintercept/article/2014/08/25/icreach-nsa-cia-secret-google-crisscross-proton/">originally posted at The Intercept</a>,</em></p> <p><strong>The National Security Agency is secretly providing data to nearly two dozen U.S. government agencies with a &ldquo;Google-like&rdquo; search engine built to share more than 850 billion records about phone calls, emails, cellphone locations, and internet chats, according to classified documents obtained by <em>The Intercept</em>.</strong></p> <p>The documents provide the first definitive evidence that the NSA has for years made massive amounts of surveillance data directly accessible to domestic law enforcement agencies. Planning documents for ICREACH, as the search engine is called, cite the Federal Bureau of Investigation and the Drug Enforcement Administration as key participants.</p> <p>ICREACH contains information on the private communications of foreigners and, it appears, millions of records on American citizens who have not been accused of any wrongdoing. Details about its existence are contained in the archive of materials provided to <em>The Intercept</em> by NSA whistleblower Edward Snowden.</p> <p><strong>Earlier revelations sourced to the Snowden documents have exposed a multitude of NSA programs for collecting large volumes of communications. </strong>The NSA has acknowledged that it shares some of its collected data with domestic agencies like the FBI, but details about the method and scope of its sharing have remained shrouded in secrecy.</p> <p><img alt="architecture" class="alignnone size-full wp-image-3647" src="https://prod01-cdn02.cdn.firstlook.org/wp-uploads/sites/1/2014/08/architecture.png" style="width: 600px; height: 450px;" /></p> <p><strong>ICREACH has been accessible to more than 1,000 analysts at 23 U.S. government agencies that perform intelligence work, according to <a href="https://firstlook.org/theintercept/document/2014/08/25/cia-colleagues-enthusiastically-welcome-nsa-training">a 2010 memo</a>.</strong> A planning <a href="https://firstlook.org/theintercept/document/2014/08/25/sharing-communications-metadata-across-u-s-intelligence-community">document</a> from 2007 lists the DEA, FBI, Central Intelligence Agency, and the Defense Intelligence Agency as core members. Information shared through ICREACH can be used to track people&rsquo;s movements, map out their networks of associates, help predict future actions, and potentially reveal religious affiliations or political beliefs.</p> <p>The creation of ICREACH represented a landmark moment in the history of classified U.S. government surveillance, according to the NSA documents.</p> <p><strong>&ldquo;The ICREACH team delivered the first-ever wholesale sharing of communications metadata within the U.S. Intelligence Community,&rdquo;</strong> noted <a href="https://firstlook.org/theintercept/document/2014/08/25/icreach-wholesale-sharing-2007">a top-secret memo</a> dated December 2007. &ldquo;This team began over two years ago with a basic concept compelled by the IC&rsquo;s increasing need for communications metadata and NSA&rsquo;s ability to collect, process and store vast amounts of communications metadata related to worldwide intelligence targets.&rdquo;</p> <p><strong>The search tool was designed to be the largest system for internally sharing secret surveillance records in the United States, capable of handling two to five billion new records every day, including more than 30 different kinds of metadata on emails, phone calls, faxes, internet chats, and text messages, as well as location information collected from cellphones. Metadata reveals information about a communication&mdash;such as the &ldquo;to&rdquo; and &ldquo;from&rdquo; parts of an email, and the time and date it was sent, or the phone numbers someone called and when they called&mdash;but not the content of the message or audio of the call.</strong></p> <p>ICREACH does not appear to have a direct relationship to the large NSA database, previously <a href="http://www.theguardian.com/world/2013/jun/06/nsa-phone-records-verizon-court-order">reported by <em>The Guardian</em></a>, that stores information on millions of ordinary Americans&rsquo; phone calls under Section 215 of the Patriot Act. Unlike the 215 database, which is accessible to a small number of NSA employees and can be searched only in terrorism-related investigations, ICREACH grants access to a vast pool of data that can be mined by analysts from across the intelligence community for &ldquo;foreign intelligence&rdquo;&mdash;a vague term that is far broader than counterterrorism.</p> <p><img alt="large-scale-expansion" class="alignnone size-full wp-image-3654" src="https://prod01-cdn01.cdn.firstlook.org/wp-uploads/sites/1/2014/08/large-scale-expansion.png" style="width: 600px; height: 450px;" /></p> <p>Data available through ICREACH appears to be primarily derived from surveillance of foreigners&rsquo; communications, and planning documents show that it draws on a variety of different sources of data maintained by the NSA. Though <a href="https://firstlook.org/theintercept/document/2014/08/25/cia-colleagues-enthusiastically-welcome-nsa-training">one 2010 internal paper</a> clearly calls it &ldquo;the ICREACH database,&rdquo; a U.S. official familiar with the system disputed that, telling <em>The Intercept</em> that while &ldquo;it enables the sharing of certain foreign intelligence metadata,&rdquo; ICREACH is &ldquo;not a repository [and] does not store events or records.&rdquo; Instead, it appears to provide analysts with the ability to perform a one-stop search of information from a wide variety of separate databases.</p> <p>In a statement to <em>The Intercept</em>, the Office of the Director of National Intelligence confirmed that the system shares data that is swept up by programs authorized under Executive Order 12333, a <a href="http://www.nytimes.com/2014/08/14/us/politics/reagan-era-order-on-surveillance-violates-rights-says-departing-aide.html">controversial</a> Reagan-era presidential directive that underpins several NSA bulk surveillance operations that monitor communications overseas. The 12333 surveillance takes place with no court oversight and has received minimal Congressional scrutiny because it is targeted at foreign, not domestic, communication networks. But the broad scale of 12333 surveillance means that some Americans&rsquo; communications get caught in the dragnet as they transit international cables or satellites&mdash;and documents contained in the Snowden archive indicate that ICREACH taps into some of that data.</p> <p><strong>Legal experts told <em>The Intercept</em> they were shocked to learn about the scale of the ICREACH system and are concerned that law enforcement authorities might use it for domestic investigations that are not related to terrorism.</strong></p> <p><strong>&ldquo;To me, this is extremely troublesome,&rdquo; said Elizabeth Goitein, co-director of the Liberty and National Security Program at the New York University School of Law&rsquo;s <a href="http://www.brennancenter.org/">Brennan Center for Justice</a>. &ldquo;The myth that metadata is just a bunch of numbers and is not as revealing as actual communications content was exploded long ago&mdash;this is a trove of incredibly sensitive information.&rdquo;</strong></p> <p>Brian Owsley, a federal magistrate judge between 2005 and 2013, said he was alarmed that traditional law enforcement agencies such as the FBI and the DEA were among those with access to the NSA&rsquo;s surveillance troves.</p> <p>&ldquo;This is not something that I think the government should be doing,&rdquo; said Owsley, an assistant professor of law at Indiana Tech Law School. &ldquo;Perhaps if information is useful in a specific case, they can get judicial authority to provide it to another agency. But there shouldn&rsquo;t be this buddy-buddy system back-and-forth.&rdquo;</p> <p>Jeffrey Anchukaitis, an <a href="http://www.dni.gov">ODNI</a> spokesman, declined to comment on a series of questions from <em>The Intercept</em> about the size and scope of ICREACH, but said that sharing information had become &ldquo;a pillar of the post-9/11 intelligence community&rdquo; as part of an effort to prevent valuable intelligence from being &ldquo;stove-piped in any single office or agency.&rdquo;</p> <p>Using ICREACH to query the surveillance data, &ldquo;analysts can develop vital intelligence leads without requiring access to raw intelligence collected by other IC [Intelligence Community] agencies,&rdquo; Anchukaitis said. &ldquo;In the case of NSA, access to raw signals intelligence is strictly limited to those with the training and authority to handle it appropriately. The highest priority of the intelligence community is to work within the constraints of law to collect, analyze and understand information related to potential threats to our national security.&rdquo;</p> <h2>One-Stop Shopping</h2> <p><strong>The mastermind behind ICREACH was recently retired NSA director Gen. Keith Alexander,</strong> who outlined his vision for the system in<a href="https://firstlook.org/theintercept/document/2014/08/25/decision-memorandum-dni-icreach"> a classified 2006 letter</a> to the then-Director of National Intelligence John Negroponte. The search tool, Alexander wrote, would &ldquo;allow unprecedented volumes of communications metadata to be shared and analyzed,&rdquo; opening up a &ldquo;vast, rich source of information&rdquo; for other agencies to exploit. By late 2007 the NSA reported to its employees that the system had gone live as a pilot program.</p> <p>The NSA described ICREACH as a &ldquo;one-stop shopping tool&rdquo; for analyzing communications. The system would enable at least a 12-fold increase in the volume of metadata being shared between intelligence community agencies, the documents <a href="https://firstlook.org/theintercept/document/2014/08/25/sharing-communications-metadata-across-u-s-intelligence-community">stated</a>. <strong>Using ICREACH, the NSA planned to boost the amount of communications &ldquo;events&rdquo; it shared with other U.S. government agencies from 50 billion to more than 850 billion, bolstering an older top-secret data sharing system named CRISSCROSS/PROTON, which was launched in the 1990s and managed by the CIA.</strong></p> <p>To allow government agents to sift through the masses of records on ICREACH, <strong>engineers designed a simple &ldquo;Google-like&rdquo; search interface</strong>. This enabled analysts to run searches against particular &ldquo;selectors&rdquo; associated with a person of interest&mdash;such as an email address or phone number&mdash;and receive a page of results displaying, for instance, a list of phone calls made and received by a suspect over a month-long period. <strong>The documents suggest these results can be used reveal the &ldquo;social network&rdquo; of the person of interest&mdash;in other words, those that they communicate with, such as friends, family, and other associates.</strong></p> <p><img alt="increases-number" class="alignnone size-full wp-image-3656" src="https://prod01-cdn02.cdn.firstlook.org/wp-uploads/sites/1/2014/08/increases-number.png" style="width: 600px; height: 450px;" /></p> <p><strong>The purpose of ICREACH, projected initially to cost between $2.5 million and $4.5 million per year, was to allow government agents to comb through the NSA&rsquo;s metadata troves to identify new leads for investigations, to predict potential future threats against the U.S., and to keep tabs on what the NSA calls &ldquo;worldwide intelligence targets.&rdquo;</strong></p> <p>However, the documents make clear that it is not only data about foreigners&rsquo; communications that are available on the system. Alexander&rsquo;s memo states that &ldquo;many millions of&hellip;minimized communications metadata records&rdquo; would be available through ICREACH, a reference to the process of &ldquo;minimization,&rdquo; whereby identifying information&mdash;such as part of a phone number or email address&mdash;is removed so it is not visible to the analyst. NSA documents define minimization as &ldquo;specific procedures to minimize the acquisition and retention [of] information concerning unconsenting U.S. persons&rdquo;&mdash;making it a near certainty that ICREACH gives analysts access to millions of records about Americans. The &ldquo;minimized&rdquo; information can still be retained under NSA rules for up to five years and &ldquo;unmasked&rdquo; at any point during that period if it is ever deemed necessary for an investigation.</p> <p>The Brennan Center&rsquo;s&nbsp;Goitein said it appeared that with ICREACH,<strong> the government &ldquo;drove a truck&rdquo; through loopholes that allowed it to circumvent restrictions on retaining data about Americans</strong>. This raises a variety of legal and constitutional issues, according to Goitein, particularly if the data can be easily searched on a large scale by agencies like the FBI and DEA for their domestic investigations.</p> <p>&ldquo;The idea with minimization is that the government is basically supposed to pretend this information doesn&rsquo;t exist, unless it falls under certain narrow categories,&rdquo; Goitein said. &ldquo;But functionally speaking, what we&rsquo;re seeing here is that minimization means, &lsquo;we&rsquo;ll hold on to the data as long as we want to, and if we see anything that interests us then we can use it.&rsquo;&rdquo;</p> <p>A key question, according to several experts consulted by <em>The Intercept</em>, is whether the FBI, DEA or other domestic agencies have used their access to ICREACH to secretly trigger investigations of Americans through a controversial process known as &ldquo;parallel construction.&rdquo;</p> <p>Parallel construction involves law enforcement agents using information gleaned from covert surveillance, but later covering up their use of that data by creating a new evidence trail that excludes it. This hides the true origin of the investigation from defense lawyers and, on occasion, prosecutors and judges&mdash;which means<strong> the legality of the evidence that triggered the investigation cannot be challenged in court.</strong></p> <p>In practice, this could mean that a DEA agent identifies an individual he believes is involved in drug trafficking in the United States on the basis of information stored on ICREACH. The agent begins an investigation but pretends, in his records of the investigation, that the original tip did not come from the secret trove. Last year, Reuters <a href="http://www.reuters.com/article/2013/08/05/us-dea-sod-idUSBRE97409R20130805">first reported</a> details of parallel construction based on NSA data, linking the practice to a unit known as the Special Operations Division, which Reuters said distributes tips from NSA intercepts and a DEA database known as DICE.</p> <p>Tampa attorney James Felman, chair of the American Bar Association&rsquo;s criminal justice section, told <em>The Intercept</em> that parallel construction is a &ldquo;tremendously problematic&rdquo; tactic because law enforcement agencies &ldquo;must be honest with courts about where they are getting their information.&rdquo; The ICREACH revelations, he said, &ldquo;raise the question of whether parallel construction is present in more cases than we had thought. And if that&rsquo;s true, it is deeply disturbing and disappointing.&rdquo;</p> <p>Anchukaitis, the ODNI spokesman, declined to say whether ICREACH has been used to aid domestic investigations, and he would not name all of the agencies with access to the data. &ldquo;Access to information-sharing tools is restricted to users conducting foreign intelligence analysis who have the appropriate training to handle the data,&rdquo; he said.</p> <div class="wp-caption alignnone" id="attachment_3810"><img alt="CIA headquarters in Langley, Virginia, 2001." class="size-full wp-image-3810 " src="https://prod01-cdn01.cdn.firstlook.org/wp-uploads/sites/1/2014/08/langley.jpg" style="width: 600px; height: 394px;" /><br /> <p class="wp-caption-text">CIA headquarters in Langley, Virginia, 2001.</p> </div> <h2>Project CRISSCROSS</h2> <p><strong>The roots of ICREACH can be traced back more than two decades.</strong></p> <p>In the early 1990s, the CIA and the DEA embarked on a secret initiative called Project CRISSCROSS. The agencies built a database system to analyze phone billing records and phone directories, in order to identify links between intelligence targets and other persons of interest. At first, CRISSCROSS was used in Latin America and was &ldquo;extremely successful&rdquo; at identifying narcotics-related suspects. It stored only five kinds of metadata on phone calls: date, time, duration, called number, and calling number, according to <a href="https://firstlook.org/theintercept/document/2014/08/25/metadata-sharing-memorandum-2005">an NSA memo</a>.</p> <p><strong>The program rapidly grew in size and scope.</strong> By 1999, the NSA, the Defense Intelligence Agency, and the FBI had gained access to CRISSCROSS and were contributing information to it. As CRISSCROSS continued to expand, it was supplemented with a system called PROTON that enabled analysts to store and examine additional types of data. These included unique codes used to identify individual cellphones, location data, text messages, passport and flight records, visa application information, as well as excerpts culled from CIA intelligence reports.</p> <p>An NSA memo <a href="https://firstlook.org/theintercept/document/2014/08/25/crisscross-proton-point-paper">noted</a> that PROTON could identify people based on whether they behaved in a &ldquo;similar manner to a specific target.&rdquo; The memo also said the system &ldquo;identifies correspondents in common with two or more targets, identifies potential new phone numbers when a target switches phones, and identifies networks of organizations based on communications within the group.&rdquo; In July 2006, the NSA estimated that it was storing 149 billion phone records on PROTON.</p> <p>According to the NSA documents, PROTON was used to track down &ldquo;High Value Individuals&rdquo; in the United States and Iraq, investigate front companies, and discover information about foreign government operatives. CRISSCROSS enabled major narcotics arrests and was integral to the CIA&rsquo;s rendition program during the Bush Administration, which involved abducting terror suspects and flying them to secret &ldquo;black site&rdquo; prisons where they were brutally interrogated and sometimes tortured. <a href="https://firstlook.org/theintercept/document/2014/08/25/metadata-sharing-memorandum-2005">One NSA document</a> on the system, dated from July 2005, noted that the use of communications metadata &ldquo;has been a contribution to virtually every successful rendition of suspects and often, the deciding factor.&rdquo;</p> <p><strong>However, the NSA came to view CRISSCROSS/PROTON as insufficient, in part due to the aging standard of its technology. The intelligence community was sensitive to criticism that it had failed to share information that could potentially have helped prevent the 9/11 attacks, and it had been strongly criticized for intelligence failures before the invasion of Iraq in 2003. For the NSA, it was time to build a new and more advanced system to radically increase metadata sharing.</strong></p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_icreach1.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_icreach1_0.jpg" style="width: 600px; height: 208px;" /></a></p> <p>&nbsp;</p> <h2>A New Standard</h2> <p><strong>In 2006, NSA director Alexander drafted his <a href="https://firstlook.org/theintercept/document/2014/08/25/decision-memorandum-dni-icreach">secret proposal</a> to then-Director of National Intelligence&nbsp;Negroponte.</strong></p> <p>Alexander laid out his vision for what he described as a &ldquo;communications metadata coalition&rdquo; that would be led by the NSA. His idea was to build a sophisticated new tool that would grant other federal agencies access to &ldquo;more than 50 existing NSA/CSS metadata fields contained in trillions of records&rdquo; and handle &ldquo;many millions&rdquo; of new minimized records every day&mdash;indicating that a large number of Americans&rsquo; communications would be included.</p> <p>The NSA&rsquo;s contributions to the ICREACH system, Alexander wrote, &ldquo;would dwarf the volume of NSA&rsquo;s present contributions to PROTON, as well as the input of all other [intelligence community] contributors.&rdquo;</p> <p>Alexander explained in the memo that NSA was already collecting &ldquo;vast amounts of communications metadata&rdquo; and was preparing to share some of it on a system called GLOBALREACH with its counterparts in the so-called Five Eyes surveillance alliance: the United Kingdom, Australia, Canada, and New Zealand.</p> <p>ICREACH, he proposed, could be designed like GLOBALREACH and accessible only to U.S. agencies in the intelligence community, or IC.</p> <p><strong>A top-secret <a href="https://firstlook.org/theintercept/document/2014/08/25/sharing-communications-metadata-across-u-s-intelligence-community">PowerPoint presentation from May 2007</a> illustrated how ICREACH would work&mdash;revealing its &ldquo;Google-like&rdquo; search interface and showing how the NSA planned to link it to the DEA, DIA, CIA, and the FBI. Each agency would access and input data through a secret data &ldquo;broker&rdquo;&mdash;a sort of digital letterbox&mdash;linked to the central NSA system. ICREACH, according to the presentation, would also receive metadata from the Five Eyes allies.</strong></p> <p>The aim was not necessarily for ICREACH to completely replace CRISSCROSS/PROTON, but rather to complement it. The NSA planned to use the new system to perform more advanced kinds of surveillance&mdash;such as &ldquo;pattern of life analysis,&rdquo; which involves monitoring who individuals communicate with and the places they visit over a period of several months, in order to observe their habits and predict future behavior.</p> <p><strong>The NSA agreed to train other U.S. government agencies to use ICREACH.</strong> Intelligence analysts could be &ldquo;certified&rdquo; for access to the massive database if they required access in support of a given mission, worked as an analyst within the U.S. intelligence community, and had top-secret security clearance. (According to <a href="http://fas.org/sgp/othergov/intel/clear-2013.pdf">the latest government figures</a>, there are more than 1.2 million government employees and contractors with top-secret clearance.)</p> <p>In November 2006, according to the documents, the Director of National Intelligence approved the proposal. ICREACH was rolled out as a test program by late 2007. <strong>It&rsquo;s not clear when it became fully operational, but <a href="https://firstlook.org/theintercept/document/2014/08/25/cia-colleagues-enthusiastically-welcome-nsa-training">a September 2010 NSA memo</a> referred to it as the primary tool for sharing data in the intelligence community. &ldquo;ICREACH has been identified by the Office of the Director of National Intelligence as the U.S. Intelligence Community&rsquo;s standard architecture for sharing communications metadata,&rdquo; the memo states, adding that it provides &ldquo;telephony metadata events&rdquo; from the NSA and its Five Eyes partners &ldquo;to over 1000 analysts across 23 U.S. Intelligence Community agencies.&rdquo; It does not name all of the 23 agencies, however.</strong></p> <p>The limitations placed on analysts authorized to sift through the vast data troves are not outlined in the Snowden files, with only scant references to oversight mechanisms. According to the documents, searches performed by analysts are subject to auditing by the agencies for which they work. The documents also say the NSA would conduct random audits of the system to check for any government agents abusing their access to the data. <em>The Intercept</em> asked the NSA and the ODNI whether any analysts had been found to have conducted improper searches, but the agencies declined to comment.</p> <p><strong>While the NSA initially estimated making upwards of 850 billion records available on ICREACH, the documents indicate that target could have been surpassed, and that the number of personnel accessing the system may have increased since the 2010 reference to more than 1,000 analysts</strong>. The intelligence community&rsquo;s top-secret &ldquo;Black Budget&rdquo; for 2013, also obtained by Snowden, <a href="https://firstlook.org/theintercept/document/2014/08/25/black-budget-extracts">shows</a> that the NSA recently sought new funding to upgrade ICREACH to &ldquo;provide IC analysts with access to a wider set of shareable data.&rdquo;</p> <p>In December last year, a surveillance review group appointed by President Obama <a href="http://www.whitehouse.gov/sites/default/files/docs/2013-12-12_rg_final_report.pdf">recommended</a> that as a general rule &ldquo;the government should not be permitted to collect and store all mass, undigested, non-public personal information about individuals to enable future queries and data-mining for foreign intelligence purposes.&rdquo; It also recommended that any information about United States persons should be &ldquo;purged upon detection unless it either has foreign intelligence value or is necessary to prevent serious harm to others.&rdquo;</p> <p>Peter Swire, one of the five members of the review panel, told <em>The Intercept</em> he could not comment on whether the group was briefed on specific programs such as ICREACH, but noted that the review group <strong>raised concerns that &ldquo;the need to share had gone too far among multiple agencies.&rdquo;</strong></p> <p><em>Documents published with this article</em>:</p> <ul> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/cia-colleagues-enthusiastically-welcome-nsa-training">CIA Colleagues Enthusiastically Welcome NSA Training</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/sharing-communications-metadata-across-u-s-intelligence-community">Sharing Communications Metadata Across the U.S. Intelligence Community</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/crisscross-proton-point-paper">CRISSCROSS/PROTON Point Paper</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/decision-memorandum-dni-icreach">Decision Memorandum for the DNI on ICREACH</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/metadata-sharing-memorandum-2005">Metadata Sharing Memorandum</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/sharing-sigint-metadata-icreach">Sharing SIGINT metadata on ICREACH</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/metadata-policy-conference">Metadata Policy Conference</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/icreach-wholesale-sharing-2007">ICREACH Wholesale Sharing</a></li> <li><a href="https://firstlook.org/theintercept/document/2014/08/25/black-budget-extracts">Black Budget Extracts</a></li> </ul> <p><a href="https://firstlook.org/theintercept/article/2014/08/25/icreach-nsa-cia-secret-google-crisscross-proton/"><u><strong><em>Read more here...</em></strong></u></a></p> http://www.zerohedge.com/news/2014-08-26/meet-icreach-nsas-own-secret-google#comments Australia FBI Google Indiana Iraq national intelligence national security New Zealand President Obama Reuters United Kingdom Wed, 27 Aug 2014 02:35:32 +0000 Tyler Durden 493562 at http://www.zerohedge.com WTF White House Statement Of The Day: Syria Airstrikes Edition http://www.zerohedge.com/news/2014-08-26/wtf-white-house-statement-day-syria-airstrikes-edition <p>When <a href="http://www.zerohedge.com/news/2014-08-26/president-obama-slams-cynics-tells-world-nobody-else-can-do-what-we-do-live-feed">President Obama bragged earlier </a>that &quot;The United States is and will remain the one indispensable nation in the world...&quot; adding that &quot;no other nation can do what we do,&quot; we should have guessed some more war-mongering was coming... and sure enough. <a href="http://m.apnews.com/ap/db_268798/contentdetail.htm?contentguid=HhRZK0ku">As AP reports</a>, it appears Syrian airstrikes are on their way.. but there&#39;s a mind-blowing twist in US foreign policy: <strong><em>&quot;In an effort to avoid unintentionally strengthening the Syrian government, the White House could seek to balance strikes against the Islamic State with attacks on Assad regime targets.&quot;</em></strong> In the words of the Guinness commercial, Brilliant.</p> <p><a href="http://m.apnews.com/ap/db_268798/contentdetail.htm?contentguid=HhRZK0ku"><em>As AP reports,</em></a></p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>The intelligence gathered by U.S. military surveillance flights over Syria <strong>could support a broad bombing campaign against the Islamic State militant group, but current and former U.S. officials differ on whether air power would significantly degrade what some have called a &quot;terrorist army.&quot;</strong></p> <p>&nbsp;</p> <p>&quot;<strong><span style="text-decoration: underline;">Air power needs to be applied like a thunderstorm, not a drizzle</span></strong>,&quot; Deptula said, entailing &quot;24-7 overwatch with force application on every move of ISIL personnel.&quot;</p> </blockquote> <p>Further complicating the plans,<strong> any military action against Islamic State militants in Syria would also have the effect of putting the U.S. on the same side as Syrian President Bashar Assad, whose ouster the Obama administration has sought for years</strong>.</p> <p>So first Iran and now Syria are best buddies with America?&nbsp; Well we can&#39;t have that...</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p><strong>The U.S. is not cooperating or sharing intelligence with the Assad government, Pentagon and State Department spokesmen said. </strong>But the U.S. flights are occurring in eastern Syria, away from most of Syria&#39;s air defenses. And experts expressed doubt that Syria would attempt to shoot down American aircraft that are paving the way for a possible bombing campaign against Assad&#39;s enemies.</p> <p>&nbsp;</p> <p>...</p> <p>&nbsp;</p> <p><span style="text-decoration: underline;"><strong>In an effort to avoid unintentionally strengthening the Syrian government, the White House could seek to balance strikes against the Islamic State with attacks on Assad regime targets. However, that option is largely unappealing to the president given that it could open the U.S. to the kind of long-term commitment to Syria&#39;s stability that Obama has sought to avoid.</strong></span></p> <p>&nbsp;</p> </blockquote> <p>*&nbsp; *&nbsp; *</p> <p>So to summarize:</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>...the limited airstrikes in Iraq (which the Iraqi government did not ask for) now appear to be expanding into &#39;24/7 carpet-bombing&#39; of ISIS targets in Syria (which the US are not asking permission or forgiveness for) and in the interests of &quot;fairness doctrine&quot; America will bomb al-Assad&#39;s military installations to maintain some &#39;balance&#39; between the moderate terrorists, extreme terrorists (and national armies), and scary-as-shit terrorists...</p> </blockquote> <p>Is there something we missed?</p> <blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>White House spokesman Josh Earnest on Monday tried to tamp down the notion that action against the Islamic State group could bolster Assad, saying, <strong>&quot;We&#39;re not interested in trying to help the Assad regime.&quot; However, he acknowledged that &quot;there are a lot of cross pressures here.&quot;</strong></p> </blockquote> <p>&quot;Cross-pressures&quot; indeed. And all humanitarian.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="294" height="249" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20140826_obama1.jpg?1409101282" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/wtf-white-house-statement-day-syria-airstrikes-edition#comments Iran Iraq Obama Administration President Obama White House Wed, 27 Aug 2014 02:02:34 +0000 Tyler Durden 493561 at http://www.zerohedge.com Forget Geopolitical De-Escalation - Here's The Real Reason Why Oil Is Tumbling http://www.zerohedge.com/news/2014-08-26/forget-geopolitical-de-escalation-heres-real-reason-why-oil-tumbling <p>As with&nbsp; every other asset-class in the world now, fundamentals have taken a very distant back-seat to both liquidity (flow) and positioning (technicals) as traders are increasingly (in one way or another) on the same side of the same trade. Mainstream media will proclaim US energy "independence", US sanctions 'winning' over Putin, or US airstrikes 'calming' down Middle East uncertainty; but <strong>the real reason oil is plunging is... the biggest mass liquidation of speculative longs in recorded 30 year history over the last few weeks</strong>...</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140825_WTILong.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140825_WTILong_0.jpg" width="600" height="302" /></a></p> <p>&nbsp;</p> <p>Obviously speculators remain massively - unprecedentedly long oil futures still...</p> <p>&nbsp;</p> <p><em>Chart: Bloomberg</em></p> <p><em>h/t Sean Corrigan </em></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="960" height="483" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20140825_WTILong.jpg?1409103160" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/forget-geopolitical-de-escalation-heres-real-reason-why-oil-tumbling#comments Middle East Wed, 27 Aug 2014 01:32:42 +0000 Tyler Durden 493560 at http://www.zerohedge.com The Retail Trader Lockout - Today's 'Market' "Issues" Were Worse Than The Flash Crash http://www.zerohedge.com/news/2014-08-26/retail-trader-lockout-todays-market-issues-were-worst-flash-crash <p><strong>For 39 minutes today, as we noted earlier, the US stock &quot;market&quot; broke.</strong> <a href="http://www.nanex.net/aqck2/4673.html">As Nanex details</a>, a total of 1,384 symbols were affected as 100s of stocks trade with crossed NBBOs, <strong>practically eliminating any chance for retail traders to transact</strong>. Options market were frantic, volatility swung around like a Ukrainian border-patrol agent, and yet the US equity indices limped ever higher. For those who fear &#39;the big one&#39;, for those who understand market liquidity, for those who got a glimpse of what happens when large crowds meet small doors in the high-yield credit market, today&#39;s &quot;broken&quot; market was a cold hard lesson that few &#39;moms and pops&#39; would have noticed... but <strong><span style="text-decoration: underline;">from the perspective of &#39;ability to trade&#39; - today&#39;s market was worse than the Nasdaq Blackout and the Flash Crash</span></strong>... <em>Hedge accordingly.</em></p> <p>&nbsp;</p> <p><a href="http://www.nanex.net/aqck2/4673.html"><em>Via Nanex,</em></a></p> <h1><a href="http://www.nanex.net/aqck2/4673.html"><u>The Retail Lockout of 2014</u></a></h1> <h2><a href="http://www.nanex.net/aqck2/4673.html">Hundreds of symbols with crossed NBBOs</a></h2> <p><strong><u>1. Count of symbols with a crossed NBBO each second.&nbsp;</u> Event started at 11:58:25 and ended at 12:37:27. Over symbols were affected during several seconds of time. <u>A total of 1,384 symbols were affected.</u></strong></p> <hr /> <p><img src="http://www.nanex.net/aqck2/4673/20140826.BBOSRngSumR.4s.1s.11_53.gif" style="border-width: 0px; border-style: solid; height: 567px; width: 600px;" /></p> <hr /> <p><strong>2. Final impact at the end of the day:<u> higher count of instances of symbols with a crossed NBBO each second than Nasdaq blackout or Flash Crash!</u></strong></p> <p> <hr /> </p><p><img src="http://www.nanex.net/aqck2/4673/CrossedQuoteInstances.png" style="border-width: 0px; border-style: solid; height: 454px; width: 600px;" /></p> <hr /> <p><strong>3. BITA - trades color coded by reporting exchange and NBBO (red indicates where it was crossed).</strong></p> <p> <hr /> </p><p><img src="http://www.nanex.net/aqck2/4673/20140826_12.01.47.000_1000ms_eBITA.3.gif" style="border-width: 0px; border-style: solid; height: 400px; width: 600px;" /></p> <hr /> <p><strong>4. Showing Retail trades - note how these trades only occur when the NBBO is not locked (dark gray).<u> In other words, a crossed NBBO shuts down retail order matching.</u></strong></p> <p> <hr /> </p><p><img src="http://www.nanex.net/aqck2/4673/20140826_12.01.47.000_1000ms_eBITA.0.gif" style="border-width: 0px; border-style: solid; height: 400px; width: 600px;" /></p> <hr /> <p><strong>5. <u>Retail selling - gets the worst prices when the NBBO returns to normal.</u></strong></p> <p> <hr /> </p><p><img src="http://www.nanex.net/aqck2/4673/20140826_12.01.47.000_1000ms_eBITA.2.gif" style="border-width: 0px; border-style: solid; height: 400px; width: 600px;" /></p> <hr /> <p><strong>6. Retail buying.</strong></p> <hr /> <p><img src="http://www.nanex.net/aqck2/4673/20140826_12.01.47.000_1000ms_eBITA.1.gif" style="border-width: 0px; border-style: solid; height: 400px; width: 600px;" /></p> <p>&nbsp;</p> <p>*&nbsp; *&nbsp; *</p> <p>But apart from that... and the year&#39;s lowest trading volume... stocks are at all-time highs so that must be good right... until someone decides to sell that is... to lock in that &#39;wealth effect&#39;... now we leave it to the game theorists to decide, is first mover advantage net positive now so close to the end of QE?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="810" height="616" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20140826_nanex.jpg?1409100001" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/retail-trader-lockout-todays-market-issues-were-worst-flash-crash#comments NASDAQ Volatility Wed, 27 Aug 2014 01:06:30 +0000 Tyler Durden 493559 at http://www.zerohedge.com The Real Threat http://www.zerohedge.com/news/2014-08-26/real-threat <p>Presented with no comment...</p> <p>&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_obama_1.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_obama_0.jpg" width="600" height="416" /></a></p> <p>&nbsp;</p> <p><a href="http://news.investors.com/photopopup.aspx?id=714460"><em>Source: Investors</em></a></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="788" height="547" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20140826_obama.jpg?1409074514" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/real-threat#comments Wed, 27 Aug 2014 01:02:28 +0000 Tyler Durden 493537 at http://www.zerohedge.com An Interview With Ambrose Evans-Pritchard http://www.zerohedge.com/news/2014-08-26/interview-ambrose-evans-pritchard <p>In this first of a series of London interviews that Lars Schall conducted for Matterhorn Asset Management this summer, Lars met up with the Telegraph's Ambrose Evans-Pritchard to discuss geopolitical tensions in the world, China's challenges, threats to the global economy and the expectations for gold. </p> <p>Ambrose Evans-Pritchard, is the international business editor of the British newspaper The Telegraph. He was the Telegraph’s Washington bureau chief in the 1990s. While he hardly needs an introduction to regular Zero Hedge readers, whose recent statement encapsulating the global economy, from July 25, is as follows: "In the 30 years or so that I have been writing about world affairs and the international economy, I have never seen a more dangerous confluence of circumstances, or more remarkable complacency." </p> <p><iframe src="//www.youtube.com/embed/a3tPljeiT-Y" width="560" height="315" frameborder="0"></iframe></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="317" height="321" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/ambrose.jpg?1409099552" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/interview-ambrose-evans-pritchard#comments Evans-Pritchard Global Economy Matterhorn Asset Management Newspaper Wed, 27 Aug 2014 00:33:25 +0000 Tyler Durden 493558 at http://www.zerohedge.com Ron Paul: "Americans Must Choose Non-Interventionist Free Markets For Peace & Prosperity" http://www.zerohedge.com/news/2014-08-26/americans-must-choose-non-interventionist-free-markets-peace-prosperity <p><em>Originally posted at <a href="http://www.voicesofliberty.com/article/americans-must-choose-non-intervention-for-peace-prosperity/">Voices Of Liberty, powered by Ron Paul</a>,</em></p> <p><strong>Ron Paul and Mark Spitznagel are passionate about non-interventionism, free markets, and Austrian economics. In spite of their years, these passions former Congressman Paul and Mr. Spitznagel hold dear are growing in popularity among the youth of our nation</strong>.</p> <p>Congressman Paul served many years as a U.S. Representative from Texas, spanning 1976 to 2013, and was a Republican presidential candidate in 2008 and 2012. He has written extensively on liberty and politics, including The Revolution: A Manifesto and End the Fed. Spitznagel is the founder of Universa Investments, an investment advisor that specializes in tail-hedging, and is the author of The Dao of Capital, for which Paul wrote the Foreword.</p> <p>The longtime friends (and friends of freedom) recently had the opportunity to catch up in person on topics ranging from the liberty movement and agricultural policy, to the consequences of Federal Reserve monetary policy. Here is a transcript of their conversation:</p> <p><strong>Mark Spitznagel:</strong> Ron, you have been the galvanizing force of a resurgent liberty movement in the United States. Yet, <u>we find ourselves in this world where interventionism is on the rise, and much of America remains complacent about it</u>. For instance, I think we would agree that<u> today&rsquo;s crony-capitalism and monetary-interventionism by central banks is at an unprecedented scale that will once again leave destruction in its wake</u>. Why is America letting this happen, and moving away from its Jeffersonian ideals? Moreover, I have to ask you, has the liberty movement stalled, or even failed?</p> <p><strong>Ron Paul:</strong> Mark, <u>on the surface and in Washington it may appear that interventionism is on the rise but in reality it&rsquo;s on the defensive, more so than ever</u>. Indeed there is a lot of complacency as that is frequently the rule for the majority of people regardless of the system. Where there is little complacency is with the intellectual leaders now leading the charge against the foreign and economic interventionists who have been in charge for decades and created the major crisis that we face today.<img alt="1419433321_82a893a11c_z" class="attachment-" height="480" src="http://www.voicesofliberty.com/wp-content/uploads/2014/08/1419433321_82a893a11c_z.jpg" style="float:right;padding:10px" width="640" /> It&rsquo;s never easy politically to turn off bad policies and many times we have to wait until the policies self-destruct. <u>The philosophy of non-intervention is growing significantly and that is crucial since ideas do have consequences</u>. The obvious failure of the current system, and the current intellectual leaders of the younger generation who are more favorably inclined toward non-intervention, provide the encouragement we need to clean up the mess. During my presidential campaigns, I was always quite pleased when students held up signs saying: &ldquo;You cured my apathy.&rdquo;</p> <p>A question for you, Mark: I know you and a very few others like Jimmy Rogers know about authentic non-intervention in the economy, but what are Wall Street traders and investors like? Are they helpful in exposing crony-capitalism or are they part of the problem?</p> <p><strong>Mark:</strong> <u>Unfortunately, Wall Street can&rsquo;t help but respond to monetary intervention, like puppets to the Federal Reserve puppet master. Not only has the Fed turned just about every investor into a crazed gambler desperate for any yield above today&rsquo;s artificially low interest rates, for professional investors the desperation is compounded by the career risk associated with underperforming in the very next period. If you&rsquo;re fired for not having played the Fed&rsquo;s game in the next round, who cares about what will happen in future rounds, and who cares about the long-run implications of this crony-capitalist game?</u></p> <p><img alt="11213428415_250e025a2d_o" class="attachment-" height="240" src="http://www.voicesofliberty.com/wp-content/uploads/2014/08/11213428415_250e025a2d_o.jpg" style="float:left;padding:10px" width="435" /></p> <p><u>I see this temporal myopia at the very heart of Washington politics as well.</u> If politicians don&rsquo;t get reelected each period, then from a career standpoint any concern for the future was for naught. It ranges far and wide, from corporate managers to, even more significantly, farmers: Think of how debt and farm policy distortions induce wringing out everything that we can from each harvest, even at the expense of future harvests (such as with soil erosion).</p> <p>Frédéric Bastiat said it best when he condemned the pursuit of a small present good that will be followed by a great evil to come, rather than a great good to come at the risk of a present small evil. The latter is extraordinarily difficult today. To me, your ability to focus away from the present and truly see the great good or evil to come was really so astonishing about your political career. What was your secret, Ron, and what kept you from losing sight of that?</p> <p><strong>Ron:</strong> The simple answer (and there&rsquo;s a more detailed one) about my not &ldquo;losing sight&rdquo; is that I detest the current political process. Originally, I never expected to be elected and had one goal in mind: promote the cause of Liberty. I firmly believed our country was headed in the wrong direction. I was confident that the Freedom Philosophy and the non-aggression principle offered the solutions to our problems. I had no interest in being molded or manipulated by those who held different views.</p> <p><u>Your views on political myopia are correct. This myopia, fueled by self-serving politicians and justified by economic mysticism, is at the heart of the problem. This myopia dictates that politicians, the day after they&rsquo;re elected, start concentrating on the next election. The lobbyists love the system. They receive high rewards for getting benefits that frequently benefit a Member&rsquo;s district. The lobbyists convince the voters that the system can be used for their benefit and the Member gets the credit. Good economic policy, moral principle, the Constitution, or challenging one&rsquo;s party&rsquo;s leadership rarely enters into the equation. At times I think the myopia approaches blindness.</u></p> <p>Your point about how the government farm program greatly distorts the market is a perfect example of how long bad policies can last when some people immediately benefit at the often gradual expense of others. It happens with all government programs. Dairy farmers and dairies, in protecting their interests, have made it difficult, if not impossible, to drink raw milk&mdash;hardly a policy that a free society would endorse.</p> <p><strong>Mark:</strong> Oh yes, a subject near and dear to my heart! There&rsquo;s a parallel between the case where benefits from policies are concentrated in the few and the costs dispersed among the many, and the case where benefits are concentrated early on while the costs are dispersed over time. In both cases, for many people it&rsquo;s not an obvious fight worth fighting. But of course it is worth fighting. When the State gives special privileges to certain crops, for instance, the result is an artificial, disease- and pest-prone monoculture and a distorted ecosystem and food system around those crops. CAFOs (Concentrated Animal Feeding Operations), corn syrup and the corn-fed-everything industries are products of government favoritism. More long-term, natural, and sustainable agricultural systems like organic or pasture-based are made to look impractical. It&rsquo;s crazy how much bureaucrats determine what we grow and what we eat.<br /><img alt="5972693831_942471594f_z" class="attachment-" height="400" src="http://www.voicesofliberty.com/wp-content/uploads/2014/08/5972693831_942471594f_z-e1409062813511.jpg" style="float:left;padding:10px" width="300" /></p> <p>Sustainable farmers should all be libertarians. The problem is that many &ldquo;hippie&rdquo; types coming from the Left see big agricultural companies implementing these harmful policies, and they understandably conclude, &ldquo;That&rsquo;s pure capitalism at work, that&rsquo;s how the profit motive leads to disaster when it comes to food.&rdquo; But no, that&rsquo;s cronyism at work, that&rsquo;s how government intervention leads to disaster. The very same thing happens with financial crises, of course&mdash;capitalism is always wrongly accused. We blame the system when we interfere with its natural homeostatic functioning.</p> <p><strong>Ron:</strong> Sustainable farming and libertarianism are a natural mix. I know that you yourself, in addition to being a hedge fund manager, are a pasture-based dairy goat farmer and artisanal cheese maker. Sustainable farming recognizes the perils of tinkering with the complex interactions of natural systems. And it rejects the notion of dependency on the government and emphasizes the principle of self-reliance. Of course, if this principle were to be followed in all areas of the economy we wouldn&rsquo;t have to worry about prosperity or a shrinking middle class.</p> <p><strong>Mark:</strong> Do you think your background as a physician has influenced your acceptance of the idea of having reverence for a system&rsquo;s natural resiliency, and not messing with that through tinkering?</p> <p><strong>Ron:</strong> There is no doubt that it did. I kept a copy of the Hippocratic Oath hanging on the wall at my medical practice of about 35 years. We know that today the government has little reverence for the economy&rsquo;s natural resiliency, what Adam Smith referred to as the &ldquo;invisible hand&rdquo; of the market. Interestingly, in modern times the Hippocratic Oath has been changed to be more in tune with today&rsquo;s legal system. The Oath now shows less reverence for life than it did originally. Maybe it&rsquo;s a sign of the times.<u> Once we restore the principles of a free, self-adjusting market, we&rsquo;ll have to check and see if the Hippocratic Oath has been restored to its original form.</u></p> <p>Speaking of doing no harm, I followed the story last June when you were blocked from trying to help a struggling, blighted neighborhood in Detroit by bringing in a herd of goats from your farm in Michigan, Idyll Farms. The goats would have cleared the neglected overgrowth, and the project was providing jobs and education to the community. But the Detroit City Hall chose to enforce an ordinance banning all livestock and immediately kicked your goats right out.</p> <p><strong>Mark:</strong> I&rsquo;m a big believer in urban farming, especially for large open and economically-challenged areas like parts of Detroit. Call it a return to Jefferson&rsquo;s yeoman farmer. One of the previously unemployed people I hired there told me he wanted to use his earnings from the summer to purchase a house. It was a win-win. By the way, we didn&rsquo;t ask the city for permission to bring in the goats&mdash;and the local community encouraged us not to ask&mdash;because we knew what their answer would be. Hopefully we provided some momentum to change this bad ordinance.</p> <p><strong>Ron:</strong> What is your opinion of political action versus the importance of education?</p> <p><strong>Mark:</strong> They go together. How could our utterly failed public education system not have something to do with today&rsquo;s complacency? Of course<u> our system requires a thinking electorate, one that can see through the central planners&rsquo; economic mysticism you mentioned. As you know, Ludwig von Mises argued that all governments&mdash;even dictatorships&mdash;ultimately rest on public opinion. We can complain about the politicians and central bankers, but ultimately the only reason they can get away with these outrageous and wealth-destroying policies like corporate bailouts and asset inflation is that the public assumes they do something good. With our current state of economic ignorance and political apathy among the general public, we&rsquo;re left with the lowest common denominator of plundering&mdash;not only of ourselves, but especially of those who are most powerless: future generations who, sadly, cannot yet vote.</u> When you think about it, this is a huge burden on an electorate. Would you agree?</p> <p><strong>Ron:</strong> Definitely.<u> It&rsquo;s a safe bet that the quality of education in this country is inversely proportional to the increase in the Federal government&rsquo;s involvement in it.</u> Government schools have a predictable agenda: justifying the government and its programs. I was warned never to try to educate in a campaign yet that was always my goal. The understanding that public opinion is crucial to all political change recognizes that the intellectual leaders are key to a country&rsquo;s future, both good and bad. But for the most part politicians aren&rsquo;t interested in changing people&rsquo;s minds. Their concern is to put their finger up to the wind to see which way it&rsquo;s blowing and accommodate. I have always had an interest in working to change public opinion regarding the proper role for government in a free society, such as my efforts with my own FREE Foundation for 38 years and currently with the Ron Paul Curriculum for K-12.</p> <p><u>Mark, when did you first get interested in Austrian Economics?</u> Was it before you became a professional investor? How long did you contemplate writing your book The Dao of Capital? Do you issue any guarantees with its purchase?</p> <p><strong>Mark:</strong> Ha! Yes, the one guarantee is that you will incur much psychological trauma by practicing what I preach. Seriously, my book is about the thinking behind my way of investing, what I call &ldquo;roundabout&rdquo; investing (after the Austrian economics concept of roundaboutness)&mdash;so I&rsquo;ve basically been contemplating it my entire adult life. But it took me about a year or so to actually write down.</p> <p><img alt="2879039015_079c9d2e5e_z" class="attachment-" height="281" src="http://www.voicesofliberty.com/wp-content/uploads/2014/08/2879039015_079c9d2e5e_z-e1409064673844.jpg" style="float:left;padding:10px" width="400" /></p> <p><u>Roundabout investing is all about delaying gratification and taking small setbacks now for enormous positional advantage later.</u> I regularly fall behind other asset classes during monetary expansions in order to maintain a position that eventually soundly passes them all by when the stock market crashes. The key is that the strategy (which I run in my hedge funds) pairs with a stock portfolio to robustly protect it against large losses&mdash;a &ldquo;tail hedge.&rdquo; The whole necessity of this protection specifically follows the bubble-blowing distortions of the Fed&rsquo;s monetary policy. Austrian economics has always been central to my awareness of this. I happened upon the Austrians in college from Henry Hazlitt&rsquo;s magisterial Economics in One Lesson which then turned me on to Bastiat and Mises&mdash;and my career would have been entirely different without them.</p> <p><u>Mises will ultimately be right yet again about the inevitable final collapse of the current asset boom brought about by credit expansion. The term &ldquo;black swan&rdquo; (the surprising, unforeseen event) used for bursting financial bubbles has been and will remain a misnomer&mdash;we can and, indeed, should expect such tumults to occur at some point as a consequence of massive central bank intervention and economic distortion. Given the unprecedented scale of the Fed&rsquo;s market manipulation this time around, how do you think this next one will play out, and will the Fed stop at anything to continue to delay the inevitable? Might they ever be politically restrained?</u></p> <p><strong>Ron:</strong> I agree with you that these &ldquo;black swan&rdquo; events should be anticipated, though timing is a different matter. The fact that you say you&rsquo;re willing to &ldquo;fall behind&rdquo; other asset classes, it seems to me, means you have to practice patience, accept some losses, and be prepared. Since these are not usual human characteristics, do you think this gives us some insight into why those who understand Austrian economics are not necessarily good at market investing?</p> <p>When Mises got married, he told his wife Margit that she would hear him talk a lot about money but they would never have a lot. I once asked Hans Sennholz, one of the few who got a PhD under Mises, whether Mises dealt with investments. His answer was that he did not. Sennholz believed that if the theories were correct one should participate and prove it. I know in the &lsquo;70s Sennholz highly favored real estate investments. I pressed him a little on Mises&rsquo;s apparent disinterest in personal investments and his response was that Mises&rsquo;s responsibility was &ldquo;to write and explain economics for the ages,&rdquo; and leave it for another generation, the Mark Spitznagels, to prove the theories correct. I have tried to follow Mises&rsquo;s admonition that it is our responsibility to make the economic theories &ldquo;palatable&rdquo; to the general public through persuasion.</p> <p><u>As to the unwinding of this mess, I&rsquo;m convinced that when the current expansion ends it will be abrupt, gigantic, and worldwide. The 43-year expansion of Fed credit and debt, delivered to us by a fiat dollar standard, and held together artificially by an undeserved trust will end badly. Though I&rsquo;m optimistic on the long run because of the ideological groundwork being laid, I anticipate both serious economic and political crises. No one should expect Congress to cut spending or the deficits.</u></p> <p>Unfortunately, the welfare/warfare state is alive and well.<img alt="children for ron paul" class="attachment-" height="360" src="http://www.voicesofliberty.com/wp-content/uploads/2014/08/children-for-ron-paul.jpg" style="float:left;padding:10px" width="640" /> They will continue to write regulations that are supposed to correct the previous regulatory mistakes and all the malinvestment generated by the Fed&rsquo;s easy money policy.<u> I can&rsquo;t conceive of [Fed Chair Janet] Yellen ever persistently lightening up on the monetary pedal, despite her tapering to date. It is my belief that a dollar crisis will result from a major loss of confidence in it as a reserve currency.</u></p> <p>What do you think the odds are for a &ldquo;soft landing&rdquo; for the economy? Am I overstating the seriousness of the problems we face?</p> <p><strong>Mark:</strong> I don&rsquo;t think you are, Ron. <u>I cannot see how a soft landing would be possible here. Net corporate debt is at all-time highs (so don&rsquo;t let anyone tell you that corporate balance sheets are strong), interest rates are essentially pinned at zero, and the Fed&rsquo;s balance sheet has exploded. Based on the Q-ratio&mdash;the most robust and predictive valuation measure there is&mdash;the stock market is more overvalued today than it was at every major top over the past century, save 2000. How could this get corrected in an orderly way?</u></p> <p>As for your comments about Austrian economics, yes, it&rsquo;s one thing to get it, quite another thing to practice it. Patience is everything. Everything. Unfortunately, human beings are wired to do the opposite of what we really need to do. In some ways I think of my investing just as you describe: a test to prove the Austrian theories correct. Of course this notion of &ldquo;proof&rdquo; is something that no deductive Austrian would accept. But I look at it from an entirely practical, rubber-meets-the-road vantage point.</p> <p><strong>Ron:</strong> <u>What kind of preparations should average folks be taking? Should they own gold? Maybe some farmland?</u></p> <p><strong>Mark:</strong> <u>Today&rsquo;s environment is a quagmire for retail mom and pop investors out there.</u> This is part of what is so insidious about the Fed&rsquo;s trap. I believe&mdash;and history is entirely on my side&mdash;that retaining &ldquo;dry powder&rdquo; (capital to be invested later) and thus playing the roundabout will be the victorious strategy here.<u> One way or another, we need to position ourselves for much greater opportunities to come. Gold has proven a sound store of value over the long term&mdash;with a good degree of trading noise thrown in just to make it difficult</u>. Most stocks, credit, or long duration treasuries are clearly not a terrific idea when these markets are pricing in today&rsquo;s very artificial, unsustainable economy. Productive, real assets that make things that people need and are reasonably priced regardless of interest rates, inflation, and the state of the economy are, to me, the best store of value these days. So farmland would be a terrific example, at least where prices haven&rsquo;t already spiked. The economics, demographics, and ecological implications of agriculture will be profound.</p> <p>I see you haven&rsquo;t lost a step now that you are a non-Congressman, Ron. I have one final pressing question for you: Is your political career really over? Will you be personally involved in a political race in 2016? You will be sorely needed in order to direct the conversation on both sides. How can the presumed free market Republican Party nominate another candidate who favors bailouts and market manipulation? More than anything else, Americans need to be provided a clear choice between intervention and non-intervention.</p> <p><strong>Ron:</strong> Thank you for that word of confidence. But for me it looks rather clear that <u>electoral politics is not on my agenda</u>. There are no plans for<img alt="ron-paul-revolution" class="attachment-" height="434" src="http://www.voicesofliberty.com/wp-content/uploads/2014/08/ron-paul-revolution-e1409065905577.png" style="float:right;padding:10px" width="400" /> my personal involvement in a political race in 2016. My continual campaign for liberty, nevertheless, will remain active. The exact format will be determined by the market. The financial support for the different activities I&rsquo;m involved in will indicate which vehicle I should use to continue the &ldquo;R3VOLUTION.&rdquo; For me this campaign has been going on since 1973.</p> <p>Five months after your birth, Mark, on August 15, 1971, Nixon announced that the gold standard was dead. That event motivated me to start speaking out about the serious problems I anticipated would result. Hazlitt, whose book you mentioned earlier as your first exposure to Austrian economics, predicted this would happen from the time the Bretton Woods Agreement was signed in 1945. This event convinced me that Austrian economists were right and motivated me to get involved. My first race for Congress was in 1974.</p> <p>My political success was modest and surprising. The reception by the current Millennials was well beyond my expectations. I especially enjoy reaching out to the young people on college campuses and see only the positive signs of their interest in the liberty movement. That is the campaign I can&rsquo;t imagine abandoning. As you have been motivated to &ldquo;prove&rdquo; the validity of Austrian economics with your financial success, I, in a somewhat similar way, have used politics for promoting the same ideological principle through political action.</p> <p><u>Your challenge that Americans must choose between intervention and non-intervention is precisely the issue. When pressed for a political label to describe myself, my favorite is &ldquo;non-interventionist.&rdquo; This must be in all areas: social, economic, and in foreign affairs. All intervention condones the initiation of force; non-intervention requires voluntarism and persuasion. The latter is the only road to peace and prosperity.</u></p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="257" height="201" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20140826_paulnagel.jpg?1409086848" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/americans-must-choose-non-interventionist-free-markets-peace-prosperity#comments Black Swan Central Banks Cronyism Demographics Detroit Federal Reserve Janet Yellen Ludwig von Mises Mark Spitznagel Market Manipulation Michigan Monetary Policy Real estate Reality Reserve Currency Ron Paul Universa Investments Wed, 27 Aug 2014 00:03:40 +0000 Tyler Durden 493547 at http://www.zerohedge.com It Begins: Council On Foreign Relations Proposes That "Central Banks Should Hand Consumers Cash Directly" http://www.zerohedge.com/news/2014-08-26/it-begins-council-foreign-relations-proposes-central-banks-should-hand-consumers-cas <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>... A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers.<strong> A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money</strong></p> </blockquote> <p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; - <em>Ben Bernanke, <a href="http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm">Deflation: Making Sure "It" Doesn't Happen Here</a>, November 21, 2002</em></p> <p><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/08/Bernanke%20chopper.jpg" width="278" height="278" style="float: left; margin-right: 10px;" />A year ago, when it became abundantly clear that all of the Fed's attempts to boost the economy have failed, leading instead to a record divergence between the "1%" who were benefiting from the Fed's aritficial inflation of financial assets, and everyone else (a topic that would become one of the most discussed issues of 2014) and with no help coming from a hopelessly broken Congress (who can forget the infamous plea by a desperate Wall Street lobby-funding recipient "Get to work Mr. Chariman"), we wrote that "<a href="http://www.zerohedge.com/news/2013-09-13/bernankes-helicopter-warming-larry-summers-first-pilot"><strong>Bernanke's Helicopter Is Warming Up</strong></a>."</p> <p>The reasoning was very simple: in a country (and world) drowning with debt, there are only two options to extinguish said debt: inflate it away or default. Anything else is kicking the can while making the problem even worse. Because while the Fed has been successful at recreating the world's biggest asset bubble (in history), it has failed to stimulate broad, "benign" demand-pull inflation as the trickle down effects of its "wealth effect" have failed to materialize 6 years after the launch of the Fed's unconventional monetary policies.</p> <p>In other words, a world stuck in the last phase before complete Keynesian collapse, had no choice but to gamble "all in" with the last and only bluff it had left before admitting the economic system it had labored under, <em>one which has borrowed so extensively from the future to fund the present that there is no future left,</em> has failed.</p> <p>The only question left was when would the trial balloons for such monetary paradrops start to emerge.</p> <p><strong>We now know the answer, and it is today. </strong></p> <p>Moments ago a stunning article appearing in the "Foreign Affaird" publication of the influential and policy-setting Council of Foreign Relations, titled "<strong>Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People</strong>."&nbsp;</p> <p>In it we read the now conventional admission of failure by Keynesians, who however, unwilling to actually admit they have been wrong, urge the even more conventional solution: do more of the same that has lead to the current financial cataclysm, only in this case the authors advocate no longer pretending that the traditional monetary channels work but to, literally, <strong>paradrop money</strong>. To wit:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>To some extent, low inflation reflects intense competition in an increasingly globalized economy. But it also occurs <strong>when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. </strong>In the eurozone, inflation has recently dropped perilously close to zero. And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.</p> <p>&nbsp;</p> <p>Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, <strong>central banks, such as the Fed, should hand consumers cash directly.</strong> In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. <strong>The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income.</strong> Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.</p> </blockquote> <p>A third, and most important outcome, would be the one we have forecast from the beginning of this ridiculous central bank experiment: "hyperinflation" (which is not simply runaway inflation as it is often incorrectly designated -&nbsp; it is outright evisceration of the prevailing monetary system), which has been avoided for now, but which is inevitable in a world in which only the wholesale destruction of the fiat reserve currency is the one option left to inflate away the debt overhang.</p> <p><em>So without further ado, here is the first official trial balloon - the article that one day soon will be seen as the canary in the paradropmine, and the piece that will finally get the rotor of Bernanke's, now Yellen's infamous helicopter finally spinning. Highlights ours:</em></p> <p><span style="text-decoration: underline;"><strong>Print Less but Transfer More: Why Central Banks Should Give Money Directly to the People</strong></span></p> <p><em>From <a href="http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more">Foreign Affairs</a></em><a href="http://www.foreignaffairs.com/articles/141847/mark-blyth-and-eric-lonergan/print-less-but-transfer-more"></a>, <em>by Mark Blyth and Eric Lonergan </em></p> <p>In the decades following World War II, Japan’s economy grew so quickly and for so long that experts came to describe it as nothing short of miraculous. During the country’s last big boom, between 1986 and 1991, its economy expanded by nearly $1 trillion. But then, in a story with clear parallels for today, Japan’s asset bubble burst, and its markets went into a deep dive. Government debt ballooned, and annual growth slowed to less than one percent. By 1998, the economy was shrinking.</p> <p>That December, a Princeton economics professor named Ben Bernanke argued that central bankers could still turn the country around. Japan was essentially suffering from a deficiency of demand: interest rates were already low, but consumers were not buying, firms were not borrowing, and investors were not betting. It was a self-fulfilling prophesy: pessimism about the economy was preventing a recovery. Bernanke argued that the Bank of Japan needed to act more aggressively and suggested it consider an unconventional approach: give Japanese households cash directly. Consumers could use the new windfalls to spend their way out of the recession, driving up demand and raising prices.</p> <p>As Bernanke made clear, the concept was not new: in the 1930s, the British economist John Maynard Keynes proposed burying bottles of bank notes in old coal mines; once unearthed (like gold), the cash would create new wealth and spur spending. The conservative economist Milton Friedman also saw the appeal of direct money transfers, which he likened to dropping cash out of a helicopter. Japan never tried using them, however, and the country’s economy has never fully recovered. Between 1993 and 2003, Japan’s annual growth rates averaged less than one percent.</p> <p>Today, most economists agree that like Japan in the late 1990s, <strong>the global economy is suffering from insufficient spending, a problem that stems from a larger failure of governance</strong>. Central banks, including the U.S. Federal Reserve, have taken aggressive action, consistently lowering interest rates such that today they hover near zero. <strong>They have also pumped trillions of dollars’ worth of new money into the financial system. Yet such policies have only fed a damaging cycle of booms and busts, warping incentives and distorting asset prices, and now economic growth is stagnating while inequality gets worse</strong>. <span style="text-decoration: underline;"><strong>It’s well past time, then, for U.S. policymakers -- as well as their counterparts in other developed countries -- to consider a version of Friedman’s helicopter drops</strong></span>. In the short term, such cash transfers could jump-start the economy. Over the long term, they could reduce dependence on the banking system for growth and reverse the trend of rising inequality. The transfers wouldn’t cause damaging inflation, and few doubt that they would work. The only real question is why no government has tried them.</p> <p><strong>EASY MONEY</strong></p> <p>In theory, governments can boost spending in two ways: through fiscal policies (such as lowering taxes or increasing government spending) or through monetary policies (such as reducing interest rates or increasing the money supply). But over the past few decades, policymakers in many countries have come to rely almost exclusively on the latter. The shift has occurred for a number of reasons. Particularly in the United States, partisan divides over fiscal policy have grown too wide to bridge, as the left and the right have waged bitter fights over whether to increase government spending or cut tax rates. More generally, tax rebates and stimulus packages tend to face greater political hurdles than monetary policy shifts. Presidents and prime ministers need approval from their legislatures to pass a budget; that takes time, and the resulting tax breaks and government investments often benefit powerful constituencies rather than the economy as a whole. Many central banks, by contrast, are politically independent and can cut interest rates with a single conference call. Moreover, there is simply no real consensus about how to use taxes or spending to efficiently stimulate the economy.</p> <p>Steady growth from the late 1980s to the early years of this century seemed to vindicate this emphasis on monetary policy. The approach presented major drawbacks, however. Unlike fiscal policy, which directly affects spending, monetary policy operates in an indirect fashion. Low interest rates reduce the cost of borrowing and drive up the prices of stocks, bonds, and homes. But stimulating the economy in this way is expensive and inefficient, and can create dangerous bubbles -- in real estate, for example -- and encourage companies and households to take on dangerous levels of debt.</p> <p>That is precisely what happened during Alan Greenspan’s tenure as Fed chair, from 1997 to 2006: Washington relied too heavily on monetary policy to increase spending. Commentators often blame Greenspan for sowing the seeds of the 2008 financial crisis by keeping interest rates too low during the early years of this century. But Greenspan’s approach was merely a reaction to Congress’ unwillingness to use its fiscal tools. <strong>Moreover, Greenspan was completely honest about what he was doing</strong>. In testimony to Congress in 2002, he explained how Fed policy was affecting ordinary Americans:</p> <p>"Particularly important in buoying spending [are] the very low levels of mortgage interest rates, which [encourage] households to purchase homes, refinance debt and lower debt service burdens, and extract equity from homes to finance expenditures. Fixed mortgage rates remain at historically low levels and thus should continue to fuel reasonably strong housing demand and, through equity extraction, to support consumer spending as well."</p> <p><strong>Of course, Greenspan’s model crashed and burned spectacularly when the housing market imploded in 2008. <span style="text-decoration: underline;">Yet nothing has really changed since then</span></strong><span style="text-decoration: underline;">.</span> <strong>The United States merely patched its financial sector back together and resumed the same policies that created 30 years of financial bubbles. </strong>Consider what Bernanke, who came out of the academy to serve as Greenspan’s successor, did with his policy of “quantitative easing,” through which the Fed increased the money supply by purchasing billions of dollars’ worth of mortgage-backed securities and government bonds. <strong>Bernanke aimed to boost stock and bond prices in the same way that Greenspan had lifted home values</strong>. Their ends were ultimately the same: to increase consumer spending.</p> <p>The overall effects of Bernanke’s policies have also been similar to those of Greenspan’s. Higher asset prices have encouraged a modest recovery in spending, but at great risk to the financial system and at a huge cost to taxpayers. Yet other governments have still followed Bernanke’s lead. Japan’s central bank, for example, has tried to use its own policy of quantitative easing to lift its stock market. So far, however, Tokyo’s efforts have failed to counteract the country’s chronic underconsumption. In the eurozone, the European Central Bank has attempted to increase incentives for spending by making its interest rates negative, charging commercial banks 0.1 percent to deposit cash. But there is little evidence that this policy has increased spending.</p> <p>China is already struggling to cope with the consequences of similar policies, which it adopted in the wake of the 2008 financial crisis. To keep the country’s economy afloat, Beijing aggressively cut interest rates and gave banks the green light to hand out an unprecedented number of loans. The results were a dramatic rise in asset prices and substantial new borrowing by individuals and financial firms, which led to dangerous instability. Chinese policymakers are now trying to sustain overall spending while reducing debt and making prices more stable. Like other governments, Beijing seems short on ideas about just how to do this. It doesn’t want to keep loosening monetary policy. But it hasn’t yet found a different way forward.</p> <p><strong>The broader global economy, meanwhile, may have already entered a bond bubble and could soon witness a stock bubble. </strong>Housing markets around the world, from Tel Aviv to Toronto, have overheated. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. Over the past 15 years, the world’s major central banks have expanded their balance sheets by around $6 trillion, primarily through quantitative easing and other so-called liquidity operations. Yet in much of the developed world, inflation has barely budged.</p> <p>To some extent, low inflation reflects intense competition in an increasingly globalized economy<strong>. But it also occurs when people and businesses are too hesitant to spend their money, which keeps unemployment high and wage growth low. In the eurozone, inflation has recently dropped perilously close to zero.</strong> And some countries, such as Portugal and Spain, may already be experiencing deflation. At best, the current policies are not working; at worst, they will lead to further instability and prolonged stagnation.</p> <p><strong>MAKE IT RAIN</strong></p> <p>Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, <strong>central banks, such as the Fed, should hand consumers cash directly</strong>. In practice, this policy could take the form of giving central banks the ability to hand their countries’ tax-paying households a certain amount of money. The government could distribute cash equally to all households or, even better, aim for the bottom 80 percent of households in terms of income. Targeting those who earn the least would have two primary benefits. For one thing, lower-income households are more prone to consume, so they would provide a greater boost to spending. For another, the policy would offset rising income inequality.</p> <p><strong>Such an approach would represent the first significant innovation in monetary policy since the inception of central banking, yet it would not be a radical departure from the status quo. </strong>Most citizens already trust their central banks to manipulate interest rates. And rate changes are just as redistributive as cash transfers. When interest rates go down, for example, those borrowing at adjustable rates end up benefiting, whereas those who save -- and thus depend more on interest income -- lose out.</p> <p>Most economists agree that cash transfers from a central bank would stimulate demand. But policymakers nonetheless continue to resist the notion. In a 2012 speech, Mervyn King, then governor of the Bank of England, argued that transfers technically counted as fiscal policy, which falls outside the purview of central bankers, a view that his Japanese counterpart, Haruhiko Kuroda, echoed this past March. Such arguments, however, are merely semantic. <strong>Distinctions between monetary and fiscal policies are a function of what governments ask their central banks to do. In other words, cash transfers would become a tool of monetary policy as soon as the banks began using them.</strong></p> <p><strong>Other critics warn that such helicopter drops could cause inflation</strong>. The transfers, however, would be a flexible tool. Central bankers could ramp them up whenever they saw fit and raise interest rates to offset any inflationary effects, although they probably wouldn’t have to do the latter: in recent years, low inflation rates have proved remarkably resilient, even following round after round of quantitative easing. Three trends explain why. First, technological innovation has driven down consumer prices and globalization has kept wages from rising. Second, the recurring financial panics of the past few decades have encouraged many lower-income economies to increase savings -- in the form of currency reserves -- as a form of insurance. That means they have been spending far less than they could, starving their economies of investments in such areas as infrastructure and defense, which would provide employment and drive up prices. Finally, throughout the developed world, increased life expectancies have led some private citizens to focus on saving for the longer term (think Japan). <strong>As a result, middle-aged adults and the elderly have started spending less on goods and services</strong>. These structural roots of today’s low inflation will only strengthen in the coming years, as global competition intensifies, fears of financial crises persist, and populations in Europe and the United States continue to age. If anything, policymakers should be more worried about deflation, which is already troubling the eurozone.</p> <p>There is no need, then, for central banks to abandon their traditional focus on keeping demand high and inflation on target. Cash transfers stand a better chance of achieving those goals than do interest-rate shifts and quantitative easing, and at a much lower cost. <span style="text-decoration: underline;"><strong>Because they are more efficient, helicopter drops would require the banks to print much less money. </strong></span>By depositing the funds directly into millions of individual accounts -- spurring spending immediately -- central bankers wouldn’t need to print quantities of money equivalent to 20 percent of GDP.</p> <p>The transfers’ overall impact would depend on their so-called fiscal multiplier, which measures how much GDP would rise for every $100 transferred. In the United States, the tax rebates provided by the Economic Stimulus Act of 2008, which amounted to roughly one percent of GDP, can serve as a useful guide: they are estimated to have had a multiplier of around 1.3. That means that an infusion of cash equivalent to two percent of GDP would likely grow the economy by about 2.6 percent. Transfers on that scale -- less than five percent of GDP -- would probably suffice to generate economic growth.</p> <p><strong>LET THEM HAVE CASH</strong></p> <p>Using cash transfers, central banks could boost spending without assuming the risks of keeping interest rates low. But transfers would only marginally address growing income inequality, another major threat to economic growth over the long term. In the past three decades, the wages of the bottom 40 percent of earners in developed countries have stagnated, while the very top earners have seen their incomes soar. The Bank of England estimates that the richest five percent of British households now own 40 percent of the total wealth of the United Kingdom -- a phenomenon now common across the developed world.</p> <p><strong>To reduce the gap between rich and poor, the French economist Thomas Piketty and others have proposed a global tax on wealth. But such a policy would be impractical</strong>. For one thing, the wealthy would probably use their political influence and financial resources to oppose the tax or avoid paying it. Around $29 trillion in offshore assets already lies beyond the reach of state treasuries, and the new tax would only add to that pile. In addition, the majority of the people who would likely have to pay -- the top ten percent of earners -- are not all that rich. Typically, the majority of households in the highest income tax brackets are upper-middle class, not superwealthy. Further burdening this group would be a hard sell politically and, as France’s recent budget problems demonstrate, would yield little financial benefit. Finally, taxes on capital would discourage private investment and innovation.</p> <p><strong>There is another way: instead of trying to drag down the top, governments could boost the bottom. </strong>Central banks could issue debt and use the proceeds to invest in a global equity index, a bundle of diverse investments with a value that rises and falls with the market, which they could hold in sovereign wealth funds. The Bank of England, the European Central Bank, and the Federal Reserve already own assets in excess of 20 percent of their countries’ GDPs, so there is no reason why they could not invest those assets in global equities on behalf of their citizens. After around 15 years, the funds could distribute their equity holdings to the lowest-earning 80 percent of taxpayers. The payments could be made to tax-exempt individual savings accounts, and governments could place simple constraints on how the capital could be used.</p> <p>For example, beneficiaries could be required to retain the funds as savings or to use them to finance their education, pay off debts, start a business, or invest in a home. Such restrictions would encourage the recipients to think of the transfers as investments in the future rather than as lottery winnings. The goal, moreover, would be to increase wealth at the bottom end of the income distribution over the long run, which would do much to lower inequality.</p> <p>Best of all, the system would be self-financing. <strong>Most governments can now issue debt at a real interest rate of close to zero. If they raised capital that way or liquidated the assets they currently possess, they could enjoy a five percent real rate of return -- a conservative estimate, given historical returns and current valuations. </strong>Thanks to the effect of compound interest, the profits from these funds could amount to around a 100 percent capital gain after just 15 years. Say a government issued debt equivalent to 20 percent of GDP at a real interest rate of zero and then invested the capital in an index of global equities. After 15 years, it could repay the debt generated and also transfer the excess capital to households. <span style="text-decoration: underline;"><strong>This is not alchemy</strong></span>. It’s a policy that would make the so-called equity risk premium -- the excess return that investors receive in exchange for putting their capital at risk -- work for everyone.</p> <p><strong>MO' MONEY, FEWER PROBLEMS</strong></p> <p>As things currently stand, the prevailing monetary policies have gone almost completely unchallenged, with the exception of proposals by Keynesian economists such as Lawrence Summers and Paul Krugman, who have called for government-financed spending on infrastructure and research. Such investments, the reasoning goes, would create jobs while making the United States more competitive<strong>. And now seems like the perfect time to raise the funds to pay for such work: governments can borrow for ten years at real interest rates of close to zero.</strong></p> <p>The problem with these proposals is that infrastructure spending takes too long to revive an ailing economy. In the United Kingdom, for example, policymakers have taken years to reach an agreement on building the high-speed rail project known as HS2 and an equally long time to settle on a plan to add a third runway at London’s Heathrow Airport. Such large, long-term investments are needed. But they shouldn’t be rushed. Just ask Berliners about the unnecessary new airport that the German government is building for over $5 billion, and which is now some five years behind schedule. Governments should thus continue to invest in infrastructure and research, but when facing insufficient demand, they should tackle the spending problem quickly and directly.</p> <p>If cash transfers represent such a sure thing, then why has no one tried them? <strong>The answer, in part, comes down to an accident of history: central banks were not designed to manage spending. </strong>The first central banks, many of which were founded in the late nineteenth century, were designed to carry out a few basic functions: issue currency, provide liquidity to the government bond market, and mitigate banking panics. They mainly engaged in so-called open-market operations -- essentially, the purchase and sale of government bonds -- which provided banks with liquidity and determined the rate of interest in money markets. <strong>Quantitative easing, the latest variant of that bond-buying function, proved capable of stabilizing money markets in 2009, but at too high a cost considering what little growth it achieved.</strong></p> <p>A second factor explaining the persistence of the old way of doing business involves central banks’ balance sheets. <strong>Conventional accounting treats money -- bank notes and reserves -- as a liability</strong>. So if one of these banks were to issue cash transfers in excess of its assets, it could technically have a negative net worth. <strong>Yet it makes no sense to worry about the solvency of central banks: after all, <span style="text-decoration: underline;">they can always print&nbsp; more money.</span></strong></p> <p><strong>The most powerful sources of resistance to cash transfers are political and ideological. </strong>In the United States, for example, the Fed is extremely resistant to legislative changes affecting monetary policy for fear of congressional actions that would limit its freedom of action in a future crisis (such as preventing it from bailing out foreign banks). Moreover, <strong>many American conservatives consider cash transfers to be socialist handouts. </strong>In Europe, which one might think would provide more fertile ground for such transfers, the German fear of inflation that led the European Central Bank to hike rates in 2011, in the middle of the greatest recession since the 1930s, suggests that ideological resistance can be found there, too.</p> <p><strong>Those who don’t like the idea of cash giveaways, however, should imagine that poor households received an unanticipated inheritance or tax rebate. </strong>An inheritance is a wealth transfer that has not been earned by the recipient, and its timing and amount lie outside the beneficiary’s control. <strong>Although the gift may come from a family member, in financial terms, it’s the same as a direct money transfer from the government. Poor people, of course, rarely have rich relatives and so rarely get inheritances -- but under the plan being proposed here, they would, every time it looked as though their country was at risk of entering a recession.</strong></p> <p><span style="text-decoration: underline;"><strong>Unless one subscribes to the view that recessions are either therapeutic or deserved, there is no reason governments should not try to end them if they can, and cash transfers are a uniquely effective way of doing so. </strong></span>For one thing, they would quickly increase spending, and central banks could implement them instantaneously, unlike infrastructure spending or changes to the tax code, which typically require legislation. And in contrast to interest-rate cuts, cash transfers would affect demand directly, without the side effects of distorting financial markets and asset prices. They would also would help address inequality -- without skinning the rich.</p> <p>Ideology aside, <span style="text-decoration: underline;"><strong>the main barriers to implementing this policy are surmountable.</strong></span> And the time is long past for this kind of innovation. Central banks are now trying to run twenty-first-century economies with a set of policy tools invented over a century ago. By relying too heavily on those tactics, they have ended up embracing policies with perverse consequences and poor payoffs. All it will take to change course is the courage, brains, and leadership to try something new.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="280" height="281" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/Bernanke%20chopper.jpg?1409067181" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/it-begins-council-foreign-relations-proposes-central-banks-should-hand-consumers-cas#comments Bank of England Bank of Japan Ben Bernanke Ben Bernanke Bond Central Banks China Consumer Prices default European Central Bank Eurozone Federal Reserve fixed Global Economy Housing Market Hyperinflation Japan John Maynard Keynes Krugman Maynard Keynes Mervyn King Milton Friedman Monetary Policy Money Supply Paul Krugman Portugal Quantitative Easing Real estate Real Interest Rates Recession recovery Reserve Currency Risk Premium Testimony Unemployment United Kingdom Wed, 27 Aug 2014 00:02:52 +0000 Tyler Durden 493525 at http://www.zerohedge.com An American In ISIS: Meet Doug McCain, One Dead Jihadist http://www.zerohedge.com/news/2014-08-26/american-isis-meet-doug-mccain-one-dead-us-jihadist <p>Perhaps the only question emerging from this profile of the first document US citizen casualty fighting for the Islamic State, whose name earlier was revealed as Douglas McAuthur McCain, is whether he and John are related.</p> <p><a href="http://www.nbcnews.com/news/world/american-douglas-mcauthur-mccain-dies-fighting-isis-syria-n189081">From NBC</a>:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>The battle in itself seemed tragically normal. Two Syrian opposition groups fought and there were heavy casualties on both sides. Then victorious rebels rifled through the pockets of the dead. One contained about $800 in cash -- and an American passport.</p> <p>&nbsp;</p> <p><strong>Douglas McAuthur McCain, of San Diego, California, was killed over the weekend fighting for the Islamic State of Iraq and al-Sham (ISIS), according to the Free Syrian Army. Photos of McCain's passport and of his body -- which feature a distinctive neck tattoo -- have been seen by NBC News. </strong>According to an activist linked to the Free Syrian Army who also saw the body and travel document, McCain was among three foreign jihadis fighting with ISIS who died during the battle. </p> <p>&nbsp;</p> <p>Senior administration officials told NBC News they were aware that McCain was killed in Syria, adding that they believe dozens of Americans have gone there to fight with extremist groups - including, but not limited to, ISIS.</p> </blockquote> <p>Actually, on second thought it appears there is no relation.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/08/DMM.jpg"><img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/08/DMM_0.jpg" width="501" height="498" /></a></p> <script id="metamorph-53-start" type="text/x-placeholder"></script><p><iframe src="http://player.theplatform.com/p/2E2eJC/nbcNewsOffsite?guid=f_os_mccain_ISIS_140826" width="500" height="500" frameborder="0" scrolling="no"></iframe></p> <script id="metamorph-53-end" type="text/x-placeholder"></script><p>The spin cycle has already been engaged: McCain may be dead, but the treat that countless others like him have returned to the US to perpetrate, gasp, acts of terrorism on US soil is very much alive:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p><strong>"The threat we are most concerned about to the homeland is that of fighters like this returning to the U.S. and committing acts of terrorism," </strong>a senior administration official told NBC News. </p> <p>&nbsp;</p> <p>NBC News has contacted several members of McCain’s family and dozens of friends – including his mother, sister, aunts and cousins. A woman who said she was McCain's aunt confirmed that he had "passed" and referred calls to McCain’s mother.</p> <p>&nbsp;</p> <p>McCain, 33, called himself "Duale ThaslaveofAllah" on Facebook and his Twitter bio reads: "It's Islam over everything." </p> <p>...</p> <p>After he graduated, McCain stuck around the Twin Cities for at least a while. Public records searches show several run-ins with the law. One mugshot of a Douglas McAuthur McCain details an arrest in 2000 at the age of 19 in New Hope on charges of disorderly conduct. Another arrest record – also from New Hope - shows the same man was arrested again in 2006 and booked on charges of obstruction. The mugshot from that arrest also clearly appears to be McCain – and has the same neck tattoo that is seen in Facebook photos of McCain on his "Duale ThaslaveofAllah" account - and the body found on the Syrian battlefield. NBC News confirmed on Tuesday that he was convicted of both charges. </p> </blockquote> <p>Gradually the profile shifts to religion: "<em>Around 2004, McCain "reverted" to Islam, according to his Twitter feed</em>. "</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>McCain’s online life also painted the picture of a devout Muslim who deeply loved his family – along with Pizza Hut and hip-hop. His likes on Facebook ranged from “Quaran and Hadith” to “The Khilafah in Universe,” “A Way to Paradise” to “Craziest Street Fights,” “The American Comedy Co.” to “The Black Flag.”</p> <p>&nbsp;</p> <p>“Allah keeps me going day and night. Without Allah, I am no one,” read one photo post. Others took a darker turn – posts featured the black flag of ISIS and other militant propaganda photos. In September 2010, he posted an ominous image: “They are coming back soldiers of Allah.”</p> <p>&nbsp;</p> <p>A MySpace profile linked to Duale – and with the same images as elsewhere on social media – contains similar messages, with pictures of the sometime rapper striking poses. In one photo, he clutches a Quran. “The quran is all I need in this life of sin,” reads another caption. </p> </blockquote> <p>We also learn about his exciting crusade to reach the promised Islamic land:</p> <blockquote><div class="quote_start"> <div></div> </div> <div class="quote_end"> <div></div> </div> <p>On April 3, McCain retweeted the full English translation of the speech of Abu Muhammad al-Adnani – the spokesman for ISIS.</p> <p>&nbsp;</p> <p>Soon after, it appears that McCain’s travels took him to Turkey, a common jihadi route into Syria. Three people told NBC News that they met McCain – who they referred to as Duale – three months ago in in the Istanbul neighborhood of Sultanahmet. Two said they met him at the Burger King, where they ate and talked about the NBA.</p> <p>&nbsp;</p> <p>U.S. officials have said “a small handful” of Americans are believed to be fighting with ISIS. Earlier this month, a new ISIS propaganda video claimed to feature an American citizen. And in July, chilling video emerged purporting to show the first American to carry out a suicide attack in Syria burning his U.S. passport and issuing threats against the West. The video of Moner Mohammad Abusalha, who grew up in Florida, underscored concerns about the flow of foreign fighters to Syria. </p> </blockquote> <p>Finally NBC goes through McCain's social networking habits which readers can uncover on <a href="http://www.nbcnews.com/news/world/american-douglas-mcauthur-mccain-dies-fighting-isis-syria-n189081">their own here</a>. </p> <p>So the good news: unlike in the UK, so far there are no proposals to automatically assume that anyone traveling to Syria, or Iraq, or Turkey for that matter is a terrorist. </p> <p>As for the bad news: prepare to be inundated with many more such profiles, because one never knows when the "converted US Muslims" who have returned from the Islamic State, and mingle among the broader population, decide to strike. Which is why it is best to let Uncle Sam handle all of your personal security, and while at it, let's all just put that NSA "spying on everyone" nonsense in the past: after all without the constant threat that the US-created ISIS "scourge" will come to the US and blow building up and/or hijack airplanes, it may be problematic for the NSA to continue defending its ongoing existence made so public in the aftermath of the Snowden whistleblowing revelations.</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="796" height="792" alt="" src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/DMM_0.jpg?1409098746" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/american-isis-meet-doug-mccain-one-dead-us-jihadist#comments Florida Iraq Mohammad NBC Turkey Twitter Twitter Tue, 26 Aug 2014 23:54:34 +0000 Tyler Durden 493541 at http://www.zerohedge.com China Industrial Commodities Collapse As Sentiment Tumbles To 15-Month Lows http://www.zerohedge.com/news/2014-08-26/china-industrial-commodities-collapse-sentiment-tumbles-15-month-lows <p>Unlike the QE-lite-driven exuberance in Chinese stocks of the last few weeks (which faded dramatically overnight), <strong>China&#39;s industrial commodities (with near-record inventories) and seeing prices collapse</strong>. This may shock some who espy PMIs and government-created trade data and proclaim, China is fixed. In fact, as JPMorgan&#39;s <strong>China Sentiment Index (JSI)</strong> shows, things are anything but bright as it fell to the <strong>lowest since June last year</strong> (at 48.3 in August). Sales and margins are tumbling - despite supposedly lower input costs. Lastly, those focused on spot Yuan movements (strength in recent weeks) have suggested this also confirms China strength - inflows - but looking out 12-months shows the <strong>market is expecting a dramatic devaluation from current levels in the Chinese currency is coming</strong>.</p> <p>&nbsp;</p> <p>JPMorgan&#39;s China Sentiment gauge tumbled below 50 - to its lowest since last June..</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china7.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china7.jpg" style="width: 600px; height: 590px;" /></a></p> <p>&nbsp;</p> <p>JSI declined sharply to 48.3 in August, the lowest level since June last year. July was the recent high at 54.4. <strong>Output/ sales, order book and gross margins weakened in August.</strong></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china8.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china8.jpg" style="width: 558px; height: 753px;" /></a></p> <p>&nbsp;</p> <p>Dismal.. which appears to fit better with pricing of China&#39;s core industrial commodities... (via <a href="http://www.brecorder.com/markets/commodities/asia/190212-dalian-iron-ore-hits-contract-low-spot-slides-on-weak-steel-demand.html">Business Recorder</a>)</p> <p><strong>Chinese iron ore futures fell on Monday to their lowest since they were launched last year, </strong>while weaker buying interest pushed down prices for spot cargoes further on slower steel demand.</p> <p><strong>Benchmark spot iron ore is now trading close to this year&#39;s low of $89 a tonne and a further decline would take it to its weakest since September 2012</strong>, as top, low-cost miners lift output even more in a bid to take out smaller producers.</p> <p>&quot;<strong>When the price drops this fast, Chinese mills tend to wait and see and buying activity could slow down. Supply is still huge and we see various offers from miners, big mills and traders,</strong>&quot; said an iron ore trader in Shanghai.</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china1.jpg"><img height="310" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china1_0.jpg" width="600" /></a></p> <p>&nbsp;</p> <p>As inventories rise once again - and remain near record highs...</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china3.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china3_0.jpg" style="width: 600px; height: 314px;" /></a></p> <p>&nbsp;</p> <p>Weaker steel prices have weighed on iron ore as a slowing Chinese economy and sluggish property sector darkened the outlook for demand. <strong>The most-active January rebar contract on the Shanghai Futures Exchange fell to 2,961 yuan a tonne on Monday, its lowest since the exchange launched rebar futures in March 2009.</strong><br />&nbsp;</p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china2.jpg"><img height="316" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china2_0.jpg" width="600" /></a></p> <p>&nbsp;</p> <p>And The Baltic Dry - despite Cramer&#39;s hopes - remains <strong>mired in over-supply and under-demand...</strong></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china4.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china4_0.jpg" style="width: 600px; height: 313px;" /></a></p> <p>&nbsp;</p> <p>Perhaps the message is starting to sink in... <strong>SHCOMP&#39;s biggest drop in weeks...</strong></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china5.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china5_0.jpg" style="width: 600px; height: 304px;" /></a></p> <p>&nbsp;</p> <p>And despite recent strength in Spot CNY... <strong>the market&#39;s forward-looking perspective of the Yuan sees notable devaluation coming...</strong></p> <p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china6.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/08/20140826_china6_0.jpg" style="width: 600px; height: 315px;" /></a></p> <p><em>Charts: Bloomberg and JPMorgan</em></p> <p>*&nbsp; *&nbsp; *</p> <p>But apart from that... China is firing on all cylinders... right?</p> <div class="field field-type-filefield field-field-image-teaser"> <div class="field-items"> <div class="field-item odd"> <img class="imagefield imagefield-field_image_teaser" width="558" height="753" alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/20140826_china8.jpg?1409096124" /> </div> </div> </div> http://www.zerohedge.com/news/2014-08-26/china-industrial-commodities-collapse-sentiment-tumbles-15-month-lows#comments Baltic Dry China fixed Yuan Tue, 26 Aug 2014 23:35:28 +0000 Tyler Durden 493546 at http://www.zerohedge.com