The Cardinal Sin Of International Finance

Authored by Nick Giambruno via InternationalMan.com,

As Doug Casey has correctly noted, the prime directive of any organism - whether it’s an amoeba or a person or a corporation or a government - is to survive.

That’s why the US government protects the petrodollar so zealously. It needs the system to survive.

Why Everyone Uses the US Dollar… for Now

In the 1970s, the US government struck a series of deals with Saudi Arabia, creating the petrodollar system. The US promised to coddle and protect the Saudi kingdom. And, in exchange, Saudi Arabia would use its dominant position in OPEC to ensure that all oil transactions happened in US dollars.

 

Until recently, virtually anyone who wanted to import oil from any country needed US dollars to pay for it.

 

The dollar is just a middleman here. But countries and businesses use it in countless transactions amounting to trillions of dollars that have nothing to do with US products or services.

 

Plus, if foreign countries are already using dollars for oil, it’s just easier to use the dollar for other international trade. That’s why, in addition to oil sales, the US dollar is used for about 80% of all international transactions.

World leaders who have challenged the petrodollar recently have ended up dead…

Take Saddam Hussein and Muammar Gaddafi, for example. Each led a large oil-producing country—Iraq and Libya, respectively. And both tried to sell their oil for something other than US dollars, before US military interventions led to their deaths.

In October 2000, Saddam had started to sell Iraqi oil for euros only. Iraq said it would no longer accept dollars for oil because it did not want to deal “in the currency of the enemy.”

A little over two years later, the US invaded. Immediately after Baghdad fell to US forces, all Iraqi oil sales were switched back to dollars.

Thanks to WikiLeaks’ release of Hillary Clinton’s emails, we know that protecting the petrodollar—not humanitarian concerns—was a primary reason for overthrowing Libya’s Gaddafi.

According to her leaked emails, the US (and France) feared that Gaddafi would use Libya’s vast gold reserves to back a pan-African currency. This gold-backed currency would have been used to buy and sell oil in global markets. Also, it would have likely displaced a version of the French franc that’s used in Central and Western Africa.

The US and France backed a rebellion, both militarily and financially, that overthrew Gaddafi in 2011.

After Gaddafi’s death, plans for the gold-backed currency—along with Libya’s 4.6 million ounces of gold—vanished.

Of course there were other reasons the US toppled Saddam and Gaddafi. But protecting the petrodollar was a serious consideration, at the very least.

Putin Is a Tougher Adversary

The dollar’s special status gives Uncle Sam tremendous leverage. So it’s no surprise that Russia wants to undermine the petrodollar system.

Russian President Vladimir Putin summed it up this way:

Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.

Essentially, Putin is saying they all want to ditch the dollar.

That’s largely because the US uses the dollar as a political weapon. For example, the US tried to sanction Russia for its actions in Crimea and Ukraine. These sanctions made it harder for Russia to access the US dollar–based financial system. So of course Russia is going to push for an alternative.

Shortly after the sanctions, Russia struck a massive deal to sell oil and gas to China for yuan. The deal totally bypassed the US financial system… and any sanctions.

China’s Permanent Bypass Around the US Dollar

Russia is the world’s largest energy producer. China is the world’s largest energy importer. Normally, they would trade with each other exclusively in US dollars.

But, as I’ve told you in recent weeks, China is now introducing a more permanent way around that.

I call it China’s “Golden Alternative” to the petrodollar. It’s a streamlined way for Russia and everyone else to sell oil to China for yuan—or effectively gold.

China’s “Golden Alternative” to the Petrodollar

China is launching a practical and attractive alternative to the petrodollar system. It will allow anyone in the world to trade oil for gold. It will also totally bypass the US dollar.

 

Here’s how it will work…

 

The Shanghai International Energy Exchange (INE) is introducing a crude oil futures contract denominated in Chinese yuan. It will allow oil producers to sell their oil for yuan.

 

Of course, China knows most oil producers don’t want a large reserve of yuan. So producers will be able to efficiently convert it into physical gold through gold exchanges in Shanghai and Hong Kong.

Bottom line, two of the biggest players in the global energy market are totally bypassing the petrodollar system.

Informed observers say Russia is already converting a large portion of its yuan earnings to gold.

Of course, other countries are interested in sidestepping the US financial system and US sanctions, too. China’s Golden Alternative will give anyone the option to do just that.

This will make the US dollar a much less effective political weapon.

Other countries on Washington’s naughty list are enthusiastically signing up. Iran, another major oil producer, is accepting yuan as payment. So is Venezuela, which has the world’s largest oil reserves.

I think others will soon follow. From the perspective of an oil producer, it’s a no-brainer.

With China’s Golden Alternative, an oil producer can participate in the world’s largest market and try to capture more market share. It can also easily convert and repatriate its proceeds into gold, an international form of money with no political risk.

But this doesn’t apply to one critical holdout… Saudi Arabia.

Twisting the Saudis’ Arm

Saudi Arabia is the world’s largest oil exporter. A lot of that oil goes to China, the world’s largest importer.

Beijing still reluctantly pays for Saudi crude in US dollars. The Saudis won’t have it any other way, at least for now.

This bothers China. It can only import Saudi crude by obtaining and then using US dollars. And that, of course, means it has to stay in Washington’s good graces.

Trump’s Treasury secretary really drove this point home recently. He threatened to kick China out of the US dollar system if it didn’t crack down on North Korea.

China would rather not depend on an adversary like this. This is one of the main reasons it’s launching the Golden Alternative.

Saudi Arabia, however, refuses to participate. It won’t sell its oil in anything but US dollars because that would break its longstanding petrodollar agreement with the US.

When China, Russia, and others trade oil for yuan, it’s a significant blow to the petrodollar. But if Saudi Arabia switched to yuan, it would take out the petrodollar… and cause an immediate financial panic in the US.

The truth is selling oil for yuan would cost Saudi Arabia a whole lot.

It would immediately lose American diplomatic and military protection. Then the media and think tanks would quickly start pounding the table for the US military to force democracy on Riyadh.

Last year Trump said, “If Saudi Arabia was without the cloak of American protection, I don’t think it would be around.”

He’s absolutely correct.

Of course, the Saudis know all of this. So they’ve been on a short leash… until recently.

In a surprise move, Saudi King Salman recently became the first sitting Saudi monarch to ever visit Russia.

Until recently, the visit would have been unthinkable. Saudi Arabia has been one of the US’ closest allies since the petrodollar system started in the 1970s.

Meanwhile, Russia and Saudi Arabia have been enemies for decades. Most recently, the Saudis and Russians have been on opposite sides of the Syrian Civil War.

That’s why King Salman’s historic visit to Moscow is so remarkable. The Saudis are clearly hedging their bets against the US and the petrodollar system.

Saudi Arabia is now drifting closer to Russia.

The Saudis have committed to invest up to $10 billion in various Russian sectors. But, even more significantly, they’ve agreed to buy the S-400 missile system, Russia’s top line air defense system, as part of a $3 billion weapons purchase.

This deal signals a geopolitical earthquake. The Saudis have never bought Russian military equipment before.

Ever since the birth of the petrodollar, the Saudis have depended on American military protection. After all, it’s what they get in return for pricing their oil in dollars.

The S-400 system deal suggests the Saudis are hedging their bets. First, they’re not buying an American system. Second, they’re buying a Russian system that’s capable of deterring an American attack.

Saudi Arabia is making significant moves to give itself alternatives to American protection.

At the same time, China is cutting back on Saudi crude.

A few years ago, Saudi oil made up over 25% of Chinese oil imports. They were Beijing’s No. 1 supplier. Today, the Saudis’ market share has dropped below 15%.

In other words, the Saudis are losing massive market share and getting pushed out of the biggest oil market in the world. This is mainly because they refuse to sell oil to China in yuan.

China has made itself clear. It’s willing to expand business with anyone who will accept yuan as payment.

Today, Russia has overtaken Saudi Arabia as China’s top supplier. Its share of the lucrative Chinese market has grown from 5% to over 15%.

Russia’s enthusiastic acceptance of yuan as payment is the main reason for this shift.

In the meantime, Angola, an African oil producer, has also come on board. The country now accepts yuan as payment for its oil exports to China. It even made the Chinese yuan its second legal currency in 2015.

Chinese imports from Angola have shot up since. It’s now China’s No. 2 supplier, after Russia.

None of this bodes well for the petrodollar system.

The Saudis have two choices… rip up the petrodollar or get shut out of the world’s most lucrative oil market.

One way or another—and probably soon—the Chinese will find a way to compel the Saudis to accept yuan. The sheer size of the Chinese market makes it impossible for Saudi Arabia to ignore China’s demands indefinitely.

What to Watch For…

China might not convince the Saudis to ditch the petrodollar system tomorrow. But it’s making significant progress.

A few months ago, Saudi Arabia announced it was willing to issue Panda bonds to finance its government spending deficit. (Panda bonds are yuan-denominated bonds from non-Chinese issuers that are sold in China.)

This is remarkable. The Saudis’ currency is pegged to the US dollar. Up until this point, they’ve exclusively used US dollars for all of their major financial initiatives.

Issuing debt in yuan—instead of US dollars—is a significant move. It means Saudi Arabia is drifting closer to China.

Also, the Saudis recently inaugurated the massive Yasref refinery in the Saudi city of Yanbu. The refinery is an $8.5 billion joint venture between Saudi Aramco and China’s Sinopec.

These are noticeable steps. But the Saudis still haven’t given China what it really wants—oil for yuan.

However, it could happen soon…

The Largest IPO in History

In the coming months, the Saudis plan to float a 5% stake in Saudi Aramco, the state oil company.

Saudi Aramco is the most valuable company in the world. It will likely be the biggest equity offering ever. It could triple, or even quadruple, Alibaba’s current record initial public offering (IPO) of $25 billion.

The IPO’s success will depend on Saudi Arabia recruiting big cornerstone investors. But so far, Western investors haven’t shown a lot of enthusiasm.

For China, however, it could be the perfect opportunity to buy political influence in Saudi Arabia.

If China bought a large stake in the Aramco IPO, it would help cement its relationship with Saudi Arabia. It would also put more distance between the Saudis and the Americans.

And critically, it would give the Chinese more leverage to compel the Saudis to accept yuan for oil.

China is in the process of negotiating not just a 5% stake, but potentially a larger one.

Bottom line…the Saudis haven’t made a clean break with the US yet. However, they are drifting toward China financially and Russia militarily.

The Saudis are clearly setting up the option to dump the petrodollar.

If the Saudis sell oil to China in yuan, it would kill the petrodollar overnight. However, short of that, things still look very dire for the petrodollar.

The petrodollar system is facing serious erosion, thanks in large part to China’s Golden Alternative. That’s already baked into the cake.

And with that, severe inflation in the US is a certainty.

This will likely be the tipping point…

After the collapse of the petrodollar, the US government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.

I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity… and possibly worse.

It’s probably not going to happen tomorrow. But we know where this trend is headed.

It’s possible that one day soon, Americans will wake up to a new reality. Once the petrodollar kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options.

The sad truth is, most people have no idea how bad things could get, let alone how to prepare…

Yet there are straightforward steps you can start taking today to protect your savings and yourself from the financial and sociopolitical effects of the collapse of the petrodollar.

We recently released a special Guide to Surviving and Thriving During an Economic Collapse. Click here to download the PDF now.

The Secret Reason Trump Is So Cozy With Saudi Arabia

Authored by Nick Giambruno via InternationalMan.com,

As a candidate, Donald Trump used uncommonly harsh language to criticize Saudi Arabia—the world’s largest oil exporter.

He called the Saudi regime the world’s biggest funder of terrorism.

He also said the Saudi government uses “our petro dollars—our very own money—to fund the terrorists that seek to destroy our people, while the Saudis rely on us to protect them!”

At another point, Trump said, “Who blew up the World Trade Center? It wasn’t the Iraqis, it was Saudi [Arabia].”

Trump also criticized Hillary Clinton for taking Saudi money for the Clinton Foundation. (They were its biggest “donors.”) He even challenged her to return the money.

He also famously got into a Twitter spat with a prominent member of the Saudi royal family, Alwaleed bin Talal.

As a candidate, Trump blasted the Saudis countless other times.

But, after he took office, Trump did a complete 180. He stopped criticizing the Saudis. In fact, he’s now singing their praises.

It’s bizarre… as if someone put a severed horse head in his bed.

Mere months after criticizing the Saudis, he was on Air Force One headed to Saudi Arabia to do the sword dance with his new friends.

It was his first foreign trip as president.

President Trump with King Salman

Trump’s about face was astounding. But his newly adopted deference to the Saudis is no different than Obama’s, Baby Bush’s, or any previous president’s.

President Obama with King Abdullah

President G.W. Bush with King Abdullah

Today, I’ll tell you why Trump made such an abrupt turnaround.

I’ll also explain why the Saudis get special treatment from the US Deep State.

“As Good As Gold” - From Bretton Woods to the Petrodollar

It’s been rightly said that he who holds the gold makes the rules.

After World War 2, the US had the largest gold reserves in the world, by far. Along with winning the war, this let the US reconstruct the global monetary system around the dollar.

The new system, created at the Bretton Woods Conference in 1944, tied the currencies of virtually every country in the world to the US dollar through a fixed exchange rate. It also tied the US dollar to gold at a fixed rate of $35 an ounce.

The dollar was said to be “as good as gold.”

The Bretton Woods system made the US dollar the world’s premier reserve currency. It effectively forced other countries to store dollars for international trade, or to exchange with the US government for gold.

However, this pseudo gold standard was doomed to fail.

Not surprisingly, runaway spending on warfare and welfare caused the US government to print more dollars than it could back with gold at the promised price.

By the late 1960s, the number of dollars circulating had drastically increased relative to the amount of gold backing them. This encouraged foreign countries to exchange their dollars for gold, draining the US gold supply. It dropped from 574 million ounces at the end of World War 2 to around 261 million ounces in 1971.

To plug the drain, President Nixon “temporarily” suspended the dollar’s convertibility into gold in 1971. This ended the Bretton Woods system and severed the dollar’s last tie to gold.

The “temporary” suspension is still in effect today.

This is why the Fed can print as much paper money as it pleases.

The death of the Bretton Woods system had profound geopolitical consequences. Most critically, it eliminated the main reason foreign countries stored large amounts of US dollars and used the US dollar for international trade.

At this point, oil-producing countries began to demand payment in gold instead of rapidly depreciating dollars.

It was clear the US would have to create a new monetary system to stabilize to the dollar.

So, the US government concocted a new scheme—the petrodollar system. It gave foreign countries another compelling reason to hold and use the dollar.

The new arrangement preserved the dollar’s special status as the world’s top reserve currency.

For President Nixon and Secretary of State Henry Kissinger, it was a geopolitical and financial masterstroke.

From 1972 to 1974, the US government made a series of agreements with Saudi Arabia that created the petrodollar system.

The US handpicked Saudi Arabia because of the kingdom’s vast petroleum reserves and its dominant position in OPEC—and because the Saudi royal family was (and is) easily corruptible.

In essence, the petrodollar system was an agreement that the US would guarantee the House of Saud’s survival.

In exchange, Saudi Arabia would:

1. 
   

   Use its dominant position in OPEC to ensure that all oil transactions would only happen in US dollars.

   
   


2. 
   

   Recycle the many billions of US dollars from oil revenue into American weapons manufacturers and infrastructure companies—and critically, into US Treasuries. This let the US issue more debt and finance previously unimaginable budget deficits. By 1977, at least 20% of all Treasuries held abroad were in Saudi hands.

   
   


3. 
   

   Guarantee the price of oil within limits acceptable to the US and prevent another oil embargo.

   
   

Oil is the largest and most strategic commodity market in the world.

As you can see in the chart below, it dwarfs all other major commodity markets combined.

Every country needs oil. And if foreign countries need US dollars to buy oil, they have a very compelling reason to hold large dollar reserves.

Think about it… If Italy wants to buy oil from Kuwait, it has to purchase US dollars on the foreign exchange market to pay for the oil first.

This creates a huge artificial market for US dollars.

In part, this is what differentiates the US dollar from a purely local currency, like the Mexican peso.

The dollar is just a middleman. But it’s used in countless transactions amounting to trillions of dollars that have nothing to do with US products or services.

Since the oil market is so enormous, it acts as a benchmark for international trade. If foreign countries are already using dollars for oil, it’s just easier to use the dollar for other international trade.

In addition to nearly all oil sales, the US dollar is used for about 80% of all international transactions.

This gives the US unmatched geopolitical leverage.

The US can sanction or exclude virtually any country from the US dollar-based financial system at the flip of a switch. By extension, it can also cut off any country from the vast majority of international trade.

The petrodollar system is why people and businesses everywhere in the world take US dollars. Other countries have had little choice over this.

Today, the biggest US exports are dollars and government debt. The US government can create unlimited quantities of both… from nothing.

It requires no effort to create US dollars, which can then be exchanged for real things like French wine, Italian cars, electronics from Korea, or Chinese manufactured goods.

Ultimately, the petrodollar boosts the US dollar’s purchasing power. It entices foreigners to soak up many of the new currency units the Fed creates.

The system helps create a deeper, more liquid market for the dollar and US Treasuries.

It also helps the US keep interest rates artificially low. This allows the US government to finance enormous and permanent deficits. Otherwise, this would be impossible without destroying the currency through money printing and inflation.

The petrodollar allows the US to finance the world’s largest military, which is bigger than the next seven largest militaries combined.

The petrodollar has also allowed the US to spend astronomical amounts of money on welfare and other benefits for over half of its population. It gives Americans a much higher standard of living than they would have otherwise.

In short, the petrodollar is the ultimate enabler of big government.

The US government could never have become as powerful without it.

It’s hard to overstate how much the petrodollar system benefits the US. It’s the bedrock of the US financial system.

And it’s the reason the US political elite pamper the Saudis.

Bretton Woods lasted 27 years. So far, the petrodollar has lasted over 40 years.

I think we’re on the cusp of another paradigm shift in the international financial system. It will be at least as fundamental as the end of Bretton Woods in 1971.

For decades, the petrodollar system has allowed the US government and many Americans to live way beyond their means.

The US takes this unique position for granted. But it will disappear once the petrodollar system breaks down.

When that happens, I expect severe inflation.

This will likely be the tipping point…

Afterward, the US government will be desperate enough to implement capital controls, people controls, nationalization of retirement savings, and other forms of wealth confiscation.

I urge you to prepare for the economic and sociopolitical fallout while you still can. Expect bigger government, less freedom, shrinking prosperity… and possibly worse.

It probably won’t happen tomorrow. But it’s clear where this trend is headed.

One day soon, Americans may wake up to a new reality.

Once the petrodollar system kicks the bucket and the dollar loses its status as the world’s premier reserve currency, you will have few, if any, options.

The sad truth is, most people have no idea how bad things could get, let alone how to prepare…

Yet there are straightforward steps you can start taking today to protect your savings and yourself from the financial and sociopolitical effects of the collapse of the petrodollar.

We recently released a special Guide to Surviving and Thriving During an Economic Collapse. Click here to download the PDF now.

Why Did Ukraine Nationalize Its Largest Private Bank?

Authored by John Mills via The Mises Institute,

In December 2016, the National Bank of Ukraine (NBU) nationalized Ukraine’s largest private bank for what we now know was an incorrect understanding of the facts. It remains unclear who benefitted from this expropriation...

But it wasn’t just a misunderstanding. The nationalization of PrivatBank very likely was the result of a still-unexplained refusal by the NBU to accept the financial reality of the situation.

This extraordinary government takeover has made the banking and economic situation in Ukraine much worse rather than better, and is an almost classic case of government overreach.

The NBU’s inappropriate and unnecessary nationalization has hurt the Ukrainian economy, stolen millions from PrivatBank’s owners and is forcing Ukraine’s taxpayers to bear a substantial additional burden.

The NBU took its action in large part because of what it said was an unacceptable level of related-party loans: 90 percent or more was the number it frequently used.

But Ernst & Young, the global “Big Four” accounting firm the NBU hired to undertake an audit of PrivatBank at the end of 2016, said the actual level of related-party loans at PrivatBank was merely 4.7 percent.

And that very low level (an astounding almost 95 percent less than what the NBU used to justify its nationalization) is itself lower than the level of related-party loans reported a year earlier in a separate audit conducted by yet another Big Four firm: PWC.

Perhaps to protect itself from what will undoubtedly be withering criticism, the NBU is now considering suspending PWC from auditing Ukrainian banks, has accused one of the most renowned and highly esteemed auditors in the world of being “unprofessional,” and is at least hinting that its audits contributed to the situation.

The NBU has claimed that PrivatBank siphoned a majority of its equity to related party loans to enrich the bank’s shareholders. Operating activities show that the cash flow for 2016 was 21 billion Ukrainian hryvnia to client funds, but not to the issuance of loans to related parties.

Similarly, the NBU made an arbitrary, erroneous and harmful decision to regard PrivatBank’s collateral as unacceptable even though a significant amount of the loans that were classified as “impaired” should have been acceptable under IFRS standards.

But it’s not just the NBU’s decision to nationalize PrivatBank that’s questionable; serious issues have now been raised about the way the NBU carried out the nationalization once it decided to move forward.

The NBU’s capitalization of PrivatBank after the nationalization was a transfer of government bonds, rather than cash, that effectively was worthless.

Up to then, the NBU always required the valuation of collateral from independent appraisers so that its value would be recorded appropriately on the balance sheet. But, as E&Y stated in its 2016 audit report, ten days after the nationalization, there was a sudden increase of investments in government bonds that were never valued. Who will buy those bonds now?

But the biggest issue is why the NBU ever thought that government control through nationalization of Ukraine’s largest privately owned bank was appropriate in the first place. PrivatBank had a strong vote of confidence from its customers with 40 percent of the country’s private deposits and serving 44% of corporate clients. It had a strong positive track record of supporting Ukraine’s economy and creating jobs. And, as a report by E&Y (the auditors chosen by the NBU) subsequently confirmed, according to IFRS standards its financials were far stronger than the NBU was charging.

All of this makes the NBU’s nationalization of PrivatBank more of an unnecessary expropriation – a taking by the government – than a good banking practice. That is the textbook definition of a scandal.

Buchanan: Is Secession A Solution To Cultural War?

Submitted by Patrick Buchanan via Buchanan.org,

As the culture war is about irreconcilable beliefs about God and man, right and wrong, good and evil, and is at root a religious war, it will be with us so long as men are free to act on their beliefs.

Yet, given the divisions among us, deeper and wider than ever, it is an open question as to how, and how long, we will endure as one people.

After World War II, our judicial dictatorship began a purge of public manifestations of the “Christian nation” that Harry Truman said we were.

In 2009, Barack Obama retorted, “We do not consider ourselves to be a Christian nation.” Secularism had been enthroned as our established religion, with only the most feeble of protests.

One can only imagine how Iranians or Afghans would deal with unelected judges moving to de-Islamicize their nations. Heads would roll, literally.

Which bring us to the first culture war skirmish of the Trump era.

Taking sides with Attorney General Jeff Sessions against Education Secretary Betsy DeVos, the president rescinded the Obama directive that gave transgender students the right to use the bathroom of their choice in public schools. President Donald Trump sent the issue back to the states and locales to decide.

While treated by the media and left as the civil rights cause of our era, the “bathroom debate” calls to mind Marx’s observation, “History repeats itself, first as tragedy, second as farce.”

Can anyone seriously contend that whether a 14-year-old boy, who thinks he is a girl, gets to use the girls’ bathroom is a civil rights issue comparable to whether African-Americans get the right to vote?

Remarkably, there was vigorous dissent, from DeVos, to returning this issue to where it belongs, with state and local officials.

After yielding on the bathroom question, she put out a statement declaring that every school in America has a “moral obligation” to protect children from bullying, and directed her Office of Civil Rights to investigate all claims of bullying or harassment “against those who are most vulnerable in our schools.”

Now, bullying is bad behavior, and it may be horrible behavior.

But when did a Republican Party that believes in states rights decide this was a responsibility of a bureaucracy Ronald Reagan promised but failed to shut down? When did the GOP become nanny-staters?

Bullying is something every kid in public, parochial or private school has witnessed by graduation. While unfortunate, it is part of growing up.

But what kind of society, what kind of people have we become when we start to rely on federal bureaucrats to stop big kids from harassing and beating up smaller or weaker kids?

While the bathroom debate is a skirmish in the culture war, Trump’s solution — send the issue back to the states and the people there to work it out — may point the way to a truce — assuming Americans still want a truce.

For Trump’s solution is rooted in the principle of subsidiarity, first advanced in the 1891 encyclical Rerum Novarum by Pope Leo XIII — that social problems are best resolved by the smallest unit of society with the ability to resolve them.

In brief, bullying is a problem for parents, teachers, principals to deal with, and local cops and the school district if it becomes widespread.

This idea is consistent with the Republican idea of federalism — that the national government should undertake those duties — securing the borders, fighting the nation’s wars, creating a continental road and rail system — that states alone cannot do.

Indeed, the nationalization of decision-making, the imposition of one-size-fits-all solutions to social problems, the court orders emanating from the ideology of judges — to which there is no appeal — that is behind the culture wars that may yet bring an end to this experiment in democratic rule.

Those factors are also among the primary causes of the fever of secessionism that is spreading all across Europe, and is now visible here.

Consider California. Democrats hold every state office, both Senate seats, two-thirds of both houses of the state legislature, 3 in 4 of the congressional seats. Hillary Clinton beat Trump 2-to-1 in California, with her margin in excess of 4 million votes.

Suddenly, California knows exactly how Marine Le Pen feels.

And as she wants to “Let France Be France,” and leave the EU, as Brits did with Brexit, a movement is afoot in California to secede from the United States and form a separate nation.

California seceding sounds like a cause that could bring San Francisco Democrats into a grand alliance with Breitbart.

A new federalism — a devolution of power and resources away from Washington and back to states, cities, towns and citizens, to let them resolve their problems their own way and according to their own principles — may be the price of retention of the American Union.

Let California be California; let red state America be red state America.

Lagarde Urges Wealth Redistribution To Fight Populism

As we scoffed oveernight, who better than a handful of semi, and not so semi, billionaires - perplexed by the populist backlash of the past year - to sit down and discuss among each other how a "squeezed and Angry" middle-class should be fixed. And so it was this morning as IMF Managing Director Christine Lagarde, Italian Finance Minister Pier Carlo Padoan and Founder, Chairman and Co-CIO of Bridgewater Associates, Ray Dalio, espoused on what"s needed to restore growth in the middle class and confidence in the future.

The conclusions of the discussion are as farcical as the entire Davos debacle, as three people completely disconnected from the real world, sat down and provided these "answers"...

As Bloomberg reports, while International Monetary Fund chief Christine Lagarde urged a list of policies from programs to retrain workers to more social spending...

Lagarde said policy makers “really have to think it through and see what can be done” given the feedback from voters who say "No.” Among measures that could be implemented are fiscal and structural reforms, she added.

“But it needs to be granular, it needs to be regional, it needs to be focused on what will people get out of it and it probably means more redistribution than we have in place at the moment,” Lagarde told the panel.

There"s "a crisis of the middle class in advanced economies," Christine Lagarde says https://t.co/72GgBmZQxV #wef17 pic.twitter.com/bBiHRZ3bSz

— Bloomberg TV (@BloombergTV) January 18, 2017

The establishment academics also had plenty of textbook declarations and jabs to make...

“We need to go to a system where we are protecting workers, not jobs, and society will help people retrain or reorient,” Richard Baldwin, professor of international economics at the Graduate Institute of International and Development Studies in Geneva, said in an interview in Davos. “There may just be a need to man up. We have to pay for the social cohesion that we need to keep our societies advancing, and accept that this may be a higher tax burden on people.”

The panel saw former U.S. Treasury Secretary Lawrence Summers attacking Donald Trump saying populism is “invariably counter-productive” for those it claims to help.

“Our President-elect has made four or five phone calls to four or five companies, largely suspending the rule of law, and extorting them into relocating dozens or perhaps even a few hundred jobs into plants in the United States,” Summers said.

Summers’s recipe for dealing with populism twisted Trump’s campaign slogan. “Our broad objective should be to make America greater than ever before,” Summers said. “That’s very different from making it great again.”

He suggested three major steps. First, “public investment on an adequate scale starting from infrastructure” also embracing technology and education; second, “making global integration work for ordinary people” and third, “enabling the dreams of every young American” including education, finding work and home purchasing.

And ironically, the wealthiest of all the panel members was perhaps the clearest...

Hedge Fund billionaire Ray Dalio warned on a panel chaired by Bloomberg Television’s Francine Lacqua that “we may be at a point where globalization is ending, and provincialization and nationalization is taking hold.”

“I want to be loud and clear: populism scares me,” Dalio said. “The No. 1 issue economically as a market participant is how populism manifests itself over the next year or two.”

So, to sum up - a bunch of rich, disconnected elites in Switzerland believe the world"s "middle class" will be better off if policy-makers "man-up" and increase taxes on the "wealthy" in order to redistribute wealth to the masses to "pay for social cohesion." Yeah, that will work... we suspect echoes of "Four more years" will be heard in 2020 if they follow that path.

Full discussion available here.

Chinese Multibillionaire Defaults On Retail Bonds Due To "Severe Cash Crunch"

Italy"s Monte Paschi isn"t the only institutions that is about to soak retail investors who thought that two bailouts for Italy"s third biggest bank in two years wouldn"t be followed by a third nationalization in year #3. According to the South China Morning Post, a Chinese multi-billionaire businessman has defaulted on bonds worth a paltry 100 million yuan ($14.4 million) that he raised from retail investors, citing "tight cash flow", according to reports.

Wu Ruilin, chairman of the Guangdong based telecom company Cosun Group, has a personal fortune of 98.2 billion yuan, or just over $14 billion, China Business News (CBN) reported citing an audit by a third party. That makes Wu wealthier than Baidu’s founder Robin Li, who has 98 billion yuan and is ranked 8th on the Hurun Rich List 2016.

And yet, despite the founder"s personal fortune, according to a notice put up by the Guangdong Equity Exchange on Tuesday, two subsidiaries of Cosun Group are each defaulting on seven batches of privately raised bonds they issued in 2014. According to the notice, “the issuer had sent over a notice on December 15, claiming not to be able to make the payments on the bonds on time, due to short-term capital crunch.”

The good news, is that Wu is allegedly making unlimited guarantees for the principal and interest on the bonds with, what SCMP calls, "all of his legitimate wealth." Meanwhile, Zheshang Property and Casualty Insurance Company is responsible for the bonding insurance that guarantees scheduled payments of interest and principal on the bond, the notice said.

The bad news is that neither Wu nor the insurer had put the payments into the relevant account by 5 pm on Tuesday, according to the exchange notice. Although the bourse did not specify the value of the bonds, CBN said they were together worth around 100 million yuan.

SCMP adds that calls to Cosun went unanswered on Wednesday.

Philip Sun, an analyst with central China based JZ Securities, said it made no sense for Wu to “purposely defaults on the bonds” as it would “severely affect his credit and make institutional investors panic”, which would create bigger problems for him.

“Either he was building his business on high leverage, or he is determined to count on the insurer, but it is for sure he really has a severe cash crunch,” said Sun. CBN reported, somewhat redundantly, that some investors said they would sue Cosun and Wu Ruilin himself.

Still, one wonders if the (formerly) prosperous company of a Chinese billionaire is on the verge of bankruptcy due to a "severe cash crunch", just how bad is the cash crunch behind the scenes in China, and how much longer can the PBOC keep keep the charade that all is well going?

Ukraine Nationalizes Its Largest Bank, Which Holds 36% Of All Domestic Deposits

It was just a few short days ago, on Wednesday of last week, that Ukraine"s largest lender, PrivatBank, said that reports it will be nationalized were "attempts to create panic and destabilize the political situation in the country."

Local media, quoted by Reuters, speculated that Privatbank, which is part-owned by one of Ukraine"s richest men, billionaire Ihor Kolomoisky, could be privatized if it does not meet a year-end deadline for Ukraine banks to reach a capital ratio requirement agreed under an International Monetary Fund bailout program. However, what made Privatbank unique, is that with some $6 billion in private deposits - or 36.5% of Ukrainian banks" total - it puts America"s own TBTF banks to shame: the bank is an absolute giant which controls nearly half of the local banking sector.

On Wednesady, the bank"s deputy chairman reaffirmed that there was nothing to worry about and said its customers had received phone calls and messages telling them the bank would be taken under state control due to a failure to meet the required capitalization level. "Exploiting the ignorance of citizens about nationalization, they stir up panic," Oleg Gorokhovsky said, without saying who was behind the reports.

Separately, the bank stated that "the information attack on Ukraine"s largest bank, Privatbank linked to the "pseudo-nationalisation" of the bank is primarily directed at clients of the bank and is an attempt to destabilize the political situation in the country." It added that the reports of its imminent nationalization were politically motivated.

* * *

Fast forward four days, when late on Sunday night, the "attempts to create panic and destabilize the political situation" in Ukraine turned out to be true after all, and whether politically motivated or otherwise, the Ukrainian government announced hours ago that it would nationalize the suddenly very ironically named PrivatBank, unleashing one of the biggest shake-ups of the banking system since the country plunged into political and economic turmoil two years ago.

In a statement late on Sunday, the government made no mention of the size of the potential burden to the state budget, but said it would ensure a stable transition and the smooth functioning of the bank.

According to Reuters, The Finance Ministry would take over PrivatBank, with Finance Minister Oleksandr Danylyuk adding that depositors" money was safe and secured by the state, and that the bank was functioning normally. It was not immediately clear if Ukraine had $6 billion in liquid funds to distribute to PrivatBank depositors should there be a run on the bank tomorrow, as some expect.

"The private shareholders of PrivatBank proposed to the government that it become the bank"s owner in the interests of its clients," the government said in a statement.

"The transition period begins on 19 December. The state will ensure a smooth transition and the stable functioning of the bank."

The unprecedented bailout could fuel instability in Ukraine, where opposition parties have repeatedly called for snap elections to unseat the pro-Western leadership that took power after the 2014 Maidan protests. As Reuters notes, the opposition has harnessed the anger of depositors from banks that were previously shut down in a sweeping cleanup of the financial system, mobilizing rallies and demanding the central bank chief"s resignation.

The nationalization announcement came just days before parliament was to vote on next year"s budget, which must stick to a shortfall of 3 percent of economic output, as agreed with Ukraine"s international backers.

There was no official statement from PrivatBank. Oleg Gorokhovsky, PrivatBank"s deputy chairman, wrote on Facebook that the bank had seen increased withdrawals in recent days of 2 billion hryvnia ($76 million) daily against previous peaks of around 1.5 billion hryvnia ($57 million). "Of course, the bank needed a capital increase and to improve the collateral for loans," he said.

The plan was to do this over a period to 2018. However, Gorokhovsky said after the outbreak of violence in the east and against the backdrop of a sinking economy, the bank experienced what he described as a series of "information attacks" that led to an outflow of funds from individuals and corporate clients.

"The decision on a voluntary and peaceful transfer of the bank to state ownership was made at a time when we realized that we could not survive the (latest) information attack," he wrote.

In other words, while the real reason for the nationalization, it appears the owners were eager to dump what remains of the bank into the lap of Ukraine"s taxpayers, most of whom also happen to be the bank"s depositors.

Incidentally, recapitalizing PrivatBank and other large lenders and reducing their lending to shareholders was one of the tasks mandated by a $17.5 billion IMF aid-for-reforms program.

Meanwhile, the political future of former PrivatBank owner, Kolomoisky, remains unclear: his control of strategic industries, including energy and media holdings, has put him at the center of ongoing power battles among the political elite since street protests ousted Moscow-backed Viktor Yanukovich and the pro-Russian rebellion erupted in the east.

PrivatBank"s nationalization is the culmination of the banking sector cleanup, which has closed dozens of lenders that were seen as little more than personal piggy banks for their owners. Should there be a major run on the bank in the coming days, Ukraine may once again emerge as a centra of financial and economic instability in the region, despite the IMF"s implicit backing