Budget Preview: Chancellor Philip Hammond"s Impossible Task To "Square The UK"s Circle"

At lunchtime today, Philip Hammond will give the weakened Conservative government’s first budget in the new parliament.

Against a likely backdrop of downgrades for the economy from the OBR, the Chancellor will be under immense pressure to provide a sound plan going forward on many issues. As Statista"s Martin Armstrong notes, the NHS has already had its call for an emergency boost of £4 billion rejected, but there will need to be at least some answers to the problems surrounding health and public services funding.

As a new survey by ComRes shows, this topic is one of particular importance to the public, with 67 percent saying that there should be more investment in these services, with a slight majority even saying they would personally be prepared to pay more taxes to enable it.

Clearly, this is a highly significant budget and we would be greatly surprised if it’s considered a success. As we noted yesterday, Reuters columnist and former European economics editor of The Economist, Paul Wallace, believes:

Few British budgets have mattered as much as the one that Philip Hammond will deliver to the House of Commons on Nov. 22. The chancellor of the exchequer must shore up Theresa May’s perilously shaky government ahead of a vital Brexit summit of European leaders in mid-December. At the same time Hammond has to keep a grip on the public finances.

However, it’s worse than that, as the Chancellor is also under pressure from senior members of the Conservative party, never mind UK citizens, to increase spending amid widespread fatigue with austerity. Here is the Financial Times on the stiff challenge Hammond is facing.

UK Chancellor Philip Hammond is under pressure from all sides as he prepares to deliver his second Budget on Wednesday. The first Budget of a new parliament is traditionally the time for chancellors to take bold decisions about taxes and spending. But the economic forecasts are likely to be difficult, public services are under strain, and pro-Brexit MPs are increasingly turning on the chancellor over his support for a “soft Brexit”. If Mr Hammond produces a safety-first Budget, he squanders his opportunity to decisively shape Britain’s future. But boldness risks backfiring, and steering a middle course threatens to satisfy nobody.

The FT notes that the Chancellor’s statement will “serve a cold dish of downgrades for the UK economy” from the independent “Office for Budget Responsibility” (OBR). This year’s growth forecast is expected to be cut from 2.0% to 1.6% and for 2018 from 1.6% to 1.4%. The medium-term forecasts depend on the OBR’s assumptions on productivity growth, which it has already flagged will be cut “significantly”. The FT expects that.

That means growth figures for 2020 and beyond will be closer to 1.5 per cent a year, compared with the 2 per cent that the fiscal watchdog had previously forecast.

Paul Wallace highlighted productivity as Hammond’s biggest problem.

But the gravest challenge he faces is economic: Britain’s persistent productivity blight…

 

Other advanced economies have also experienced setbacks to productivity growth following the financial crisis. Where Britain stands out is in the severity of its reverse. The shortfall in productivity is the main reason real wages are now 4 percent lower than 10 years ago, a potent reason why the leave campaign prevailed in the Brexit referendum.

While public finances look slightly more robust in the near-term, the outlook is deteriorating 3-4 years out, as the  FT explains"

Tax revenues have been stronger than expected this year, alongside lower-than-expected public spending. As a result, this year’s expected public borrowing will fall by about £8bn. The debt burden will begin to fall next year, giving Mr Hammond the opportunity to boast that he has turned the corner on public finances. But good news in the short term disappears towards the end of the forecast horizon, as weaker economic forecasts bear down on projected tax revenues. Before any accounting or tax changes, the deficit forecast in 2020-21 is likely to rise by more than £10bn compared with the March forecast. The government has already said it wants to reduce borrowing to under 2 per cent of national income by 2020-21, but Mr Hammond’s headroom is likely to roughly halve, from £26bn to about £13bn, in that year.

However, he does have one thing up his sleeve…an off-balance sheet accounting gimmick.

The chancellor wants to signal that after a difficult year, things are looking up, with debt falling and Brexit-related uncertainties lifting. To offset bad news in the medium-term public finances, he will use a £5bn-a-year accounting change — by taking housing associations’ borrowing off the government’s books — to free up more money for housing, wages and healthcare.

Affordable housing is a major problem for Hammond and Prime Minister Theresa May. According to the FT:

Fixing the “broken housing market” is the government’s biggest domestic priority. The chancellor wants to make rents more affordable and ease the path to home ownership for younger adults who have deserted the Conservative party in recent elections. Mr Hammond has already set a target of 300,000 new homes per year, but has also insisted there is no “single magic bullet” to solving housing problems.

He will announce a housing package on Wednesday that is likely to include commissioning of new building on public land and funding for local authorities to construct homes. He will also reaffirm the Tories’ promise from last month’s party conference to commit £10bn more of Help to Buy equity loans, and set out plans to lower stamp duty for some first-time buyers. There will be no big reform of planning laws for the “greenbelt” of protected area outside of London, but local authorities could be given more powers for compulsory purchase of land.

In its budget preview, the left-leaning Guardian newspaper highlights the deteriorating outlook for public finances due to the productivity problem.

Lower expectations for the output per worker will have an impact on the gross domestic product, cutting the amount of economic output available for taxation. The Institute for Fiscal Studies reckons the downgrade will contribute to a £20bn black hole in the public finances, limiting Hammond’s spending power if he wants to stick to his pledge to remove the deficit by the mid-2020s. John McDonnell, the Labour shadow chancellor, seized on the October data to argue that seven years of spending cuts had “caused pain and misery for millions with little to show for it”.

As if “Fiscal Phil” Hammond didn’t have enough on his plate, he’s also been lambasted for his gaffe that “there are no unemployed people” in Britain, in a television interview at the weekend. Disliked by the pro-Brexit side of his party, Hammond’s budget speech is being viewed by some as the “make or break” moment of his career. We concur.

Meanwhile, Bloomberg has been doing some sleuthing on budget preparations by government departments and think tanks. It identifies six things to look out for when Philip Hammond stand up in parliament to deliver his speech.

The U.K. budget is usually a mixture of measures that have been heavily trailed in the run-up by various government ministers, with a liberal sprinkling of surprises. In the past six months there have been myriad consultations and papers on everything from the offshore oil to air pollution that hint at possible measures in the works. Bloomberg trawled through that documentation, as well as recent announcements, to identify six areas that are likely to get a mention when Chancellor of the Exchequer Philip Hammond lays out his economic blueprint.

1. Stamp Duty and the Housing Crisis
Prime Minister Theresa May last week pledged that it’s her personal mission to “build more homes, more quickly.” To that end, the budget is likely to include a number of measures to encourage construction and enable younger people to get on the housing ladder. Asked on the BBC on Sunday about whether the home-buying tax known as stamp duty would be cut for younger buyers, Hammond declined to discuss tax matters, but didn’t deny he was looking at the measure.

“We recognize the challenge for young first-time buyers, that in many parts of the country deposits are now very large,” Hammond said. “Nobody is saying we’ve done enough. We must do more. We recognize there’s a challenge there and on Wednesday I shall set out how we intend to address it.”

2. North Sea Oil and Gas
Whilst remaining committed to its climate-change goals, the U.K. is also trying to extract as much value from its waning oil and gas fields in the North Sea. The industry is crucial to the economy in Scotland, which would be grateful for any assistance to a financial lifeline even as it remains angry at the Conservatives for taking it out of the European Union.

At the last budget in March, the government published a “discussion paper” that examined allowing transfers of tax history between buyers and sellers of oil and gas assets -- a measure designed to make it easier to buy and sell the fields, and keep them producing for longer. It would allow buyers to get a tax refund as a result of any costs incurred decommissioning the field at the end of its life.

Hammond told the Sunday Times he’s “looking at” a possible change in the tax rules, which is “the No. 1 ask of my Scottish colleagues.” Even so, he did issue a note of caution, adding that the Treasury needs to ensure the reform “is robust and that we don’t inadvertently create scope for gaming on a grand scale in the tax system."

3. Boosting Research & Development
May on Monday said the government aims to increase public and private research and development spending to 2.4 percent of economic output by 2027, and beyond that to 3 percent. “This could mean about 80 billion pounds ($106 billion) of additional investment in the next decade,” she said.

As part of an announcement the same day linked to her government’s Industrial Strategy -- due to be published next week -- she said that would begin with a commitment for an extra 2.3 billion pounds of investment in the 2021-2022 tax year, taking total public investment to 12.5 billion pounds that year. The government also signaled plans for a 1.7 billion-pound fund focused on improving regional transport links.

4. Shale Wealth Fund
In another measure aimed at boosting the fossil-fuel industry -- in this case by making it more palatable to local communities -- the government promised at the last election to overhaul a pledged fund worth as much as 1 billion pounds to distribute some of the profits from hydraulic fracturing.

The aim is to ensure “a greater percentage of the tax revenues from shale gas directly benefit the communities that host extraction sites.” The government last week responded to a consultation on the issue pledging the fund will initially consist of as much as 10 percent of tax revenues from shale-gas extraction, with proceeds to be spent on projects ranging from play parks for children to improved transport links and restoring historical sites.

5. Air Pollution Tax
Diesel vehicles have become a political football of late. For years, governments ignored evidence that diesel is worse for air quality and encouraged its use because the fuel is less damaging to the climate than gasoline. With air pollution now under the microscope in London in particular, the government published an air-quality plan over the summer and is likely to include measures in the budget designed to help clean up the air in Britain’s cities by encouraging cleaner vehicles.

Possible measures include raising the sales tax on diesel cars, known as vehicle excise duty, or raising taxation on diesel fuel itself, which is currently taxed at the same level as gasoline, at about 58 pence per liter. The government has also said it will consider programs to encourage motorists to trade in their older, more polluting cars, for newer, cleaner ones. Ministers also stepping up efforts to encourage the use of more electric vehicles by supporting the development of batteries and the deployment of charging points.

6. Fund for Start-Ups
In August, the government proposed a new National Investment Fund that would help start-ups access the “patient capital” funding they need to develop into so-called “unicorns” -- innovative companies valued at over $1 billion. A consultation on the proposal closed in September, and Hammond is likely to propose a confirmed plan of action in the budget.

The consultation suggested funding should come from the British Business Bank, replacing the backing currently received from the European Investment Fund. One of the reasons this could get a mention is that the the government is keen to demonstrate that London can attract Big Tech even when it’s no longer in the European Union.

Although the view is hardly unique to this government, a mere 22 percent said that they feel taxpayers" money is currently being spent wisely.

Whether this percentage will go up or down after the Chancellor"s statement today, remains to be seen.

Meotti: The Migrant Crisis Upended Europe

Authored by Giulio Meoti via The Gatestone Institute,

• "The migrant crisis is the 9/11 of the European Union... That day in 2001, everything changed in the US. In a minute, America discovered its vulnerability. Migrants had the same effect in Europe... The migration crisis profoundly undermines the ideas of democracy, tolerance and... the liberal principles that constitute our ideological landscape." — Ivan Kratsev, Chairman of the Center for Liberal Strategies in Sofia and a member of the Institute of Humanities in Vienna, Le Figaro.


• The European public now looks at EU institutions with contempt. They perceive them -- under multiculturalism and immigration -- not only as indifferent to their own problems, but as adding to them.


• "We are a cultural community, which doesn"t mean that we are better or worse -- we are simply different from the outside world... our openness and tolerance cannot mean walking away from protecting our heritage". — Donald Tusk, President of the European Council.

A few weeks after Germany opened its borders to over a million refugees from the Middle East, Africa and Asia, Hungarian Prime Minister Viktor Orbán said that the migration crisis would "destabilize democracies". He was labelled a demagogue and a xenophobe.

Two years later, Orbán has been vindicated. As Politico now explains, "[M]ost EU leaders echo the Hungarian prime minister" and the Hungarian PM can now claim that "our position is slowly becoming the majority position".

Many in Europe seem to have understood what Ivan Krastev, the Chairman of the Center for Liberal Strategies in Sofia and a member of the Institute of Humanities in Vienna, recently explained to Le Figaro:

"The migrant crisis is the 9/11 of the European Union... That day in 2001, everything changed in the US. In a minute, America discovered its vulnerability. Migrants had the same effect in Europe. It is not their number that destabilizes the continent... The migration crisis profoundly undermines the ideas of democracy, tolerance and progress as well as the liberal principles that constitute our ideological landscape. It is a turning point in the political dynamics of the European project".

Thousands of migrants arrive on foot at a railway station in Tovarnik, Croatia, September 17, 2015. (Photo by Jeff J Mitchell/Getty Images)

Migration is having a significant impact, for instance, on Europe"s public finances. Take the two countries most affected by it. Germany"s federal government spent 21.7 billion euros in 2016 to deal with it. Also reported was that Germany"s budget for security this year will grow by at least a third, from 6.1 billion to 8.3 billion euros.

In Italy, the Minister of Economy and Finance recently announced that the country will spend 4.2 billion in 2017 on migrants (one-seventh of Italy"s entire budget for 2016). Spain recently announced that in North Africa, the fence around its enclaves of Ceuta and Melilla, which keeps migrants out of the Spanish territory, will be funded through a further infusion of 12 million euros. Everywhere in Europe, states are allocating extra resources to deal with the migrant crisis, which has also changed Europe"s political landscape.

The recent election victories of Sebastian Kurz in Austria and Andrej Babis in the Czech Republic have potentially enlarged the group of Central and Eastern European countries that oppose Brussels -- countries that do not want to accept the number of migrants that the EU is demanding. The topic of immigration is fracturing Europe along ideological lines. Not only fences, but rivalry, mistrust and hate now divide the European project more deeply than ever before. The European public now looks at EU institutions with contempt. They perceive them -- under multiculturalism and immigration -- not only as indifferent to their own problems, but as adding to them.

Another political earthquake linked with the migration crisis is "the decline of social democracy in the West", as Josef Joffe, Editor and Publisher of Die Zeit, recently called it. Everywhere in Europe, the migration crisis has all but killed the social-democratic parties, long perceived as unable to cope with it. Twenty years ago, these left-liberal parties governed everywhere -- Spain, Britain, Germany, for instance -- but now they are in the opposition everywhere except Italy. From Norway to Austria, Europe is now led by conservative governments.

More than half the terror plots in Germany since the onset of the migrant crisis in 2014 have involved migrants, according to headlines as well as a study by the Heritage Foundation. In addition, ever since the Islamic State -- now defeated in Raqqa -- took advantage of the destabilization caused by Syria"s civil war to become a major driver of the migrant crisis, migration has been a major concern for Europe"s security. From the territory it conquered, ISIS launched major terror attacks on Europe.

The migration crisis has also led to the strategic strengthening in Europe of Turkish President Recep Tayyip Erdogan. He has been blackmailing European countries by threatening that if billions of euros and certain political concessions are not given to him, he will open Turkey"s borders to let millions more migrants flood into Europe. Erdogan has not only demanded that Europe jail writers and journalists; he has also tried to influence elections in the Netherlands and Germany by appealing to his Turkish constituencies there.

A Pew Research report shows how migration is reshaping European countries. In 2016 alone, Sweden"s population grew by more than 1%. The increase is ascribed to mass migration, the second-highest in the EU. The number of immigrants rose from 16.8% to 18.3% of Sweden"s population between 2015 and 2016.

Austria and Norway, two other countries with large immigrant populations (at least 15% percent in 2016), saw a 1% rise from 2015. The newspaper Die Welt recently reported that 18.6 million German residents -- one-fifth of Germany"s total population -- now come from migrant backgrounds.

The Machiavelli Center in Italy reported in a study, "How immigration is changing Italian demographics", that an "unprecedented" shift in Italy"s demography has been taking place due to the migration crisis.

The Pandora"s box of a demographic revolution has been opened.

Two years ago, Hungarian Prime Minister Viktor Orbán was the only voice in Europe speaking of the need to keep Europe "Christian". Now one of his most vocal opponents, Donald Tusk, President of the European Council, has said:

"We are a cultural community, which doesn"t mean that we are better or worse -- we are simply different from the outside world... our openness and tolerance cannot mean walking away from protecting our heritage".

In 2015, any talk about "culture" was condemned as "racism". Now it is becoming part of the mainstream.

In trying to cope with the Islamists" war on Western politics, culture and religion, and the cultural clash they created, Europe has been upended.

How Many Barrels Of Oil Are Needed To Mine One Bitcoin?

What would you guess? Five…twenty five…fifty?

James Stafford, editor of Oilprice.com not only does the math, but explains the energy-driven geographic arbitrage currently driving bitcoin mining. 

The bitcoin boom is well and truly underway, and investors are constantly looking for new ways to gain an advantage in this space The best way to do this, it seems, is by cutting the energy costs of mining this precious commodity. The bitcoin mining industry consumes 22.5 TWh of energy annually, which amounts to 13,239,916 barrels of oil equivalent.

With 12.5 bitcoins being mined every 10 minutes, that means the average energy cost of one bitcoin would equate to 20 barrels of oil equivalent.

While it’s all about where you sit on the cost curve, Stafford provides us with some context on gross energy consumption.

To put this in perspective, the total energy consumption of the world’s Bitcoin mining activities is more than 40 times greater than that required to power the entire Visa network.

And it’s very profitable...

Mining bitcoin has the potential to be a wildly lucrative business, with a single Bitcoin now valued at more than 100 barrels of oil.

 

That kind of price makes it one of the most valuable commodities on the planet and, just like oil, this commodity is increasingly valuable to mine if the energy costs can be kept down. Bitcoin transactions are secured by computer miners, who are competing for rewards in the form of coins from the network.

 

The more computation power they use, the better their chances. The drill rig is a computer, and hydraulic fracturing is done with the tip of your fingers.

...if you’ve got bucket loads of cheap electricity.

It’s a phenomenally energy-intensive process. Cheap electricity is exactly what made China the Bitcoin mining king. The yearly cost of the energy necessary to mine Bitcoin determines its economics. But to get in on that you risk reputation because you’re either siphoning off surplus energy from somewhere else, or you’re partnering with the government. No matter how you look at it, it’s a very gray area. No one wants dirty coal fueling such a sophisticated endeavor, for example.

As we discussed recently, subsidized electricity and hyperinflation has led to rapid growth in Bitcoin mining in Venezuela, albeit from a low base.

When it comes to scale, however, the new Bitcoin mining hub - with a different type of energy advantage - is Iceland. James Stafford calls it the “New Ground (Below) Zero”, he continues.

That’s why HIVE Blockchain Technologies Ltd. - a gold-miner-turned-bitcoin-miner - has set up in Iceland. As one of the first public companies that lets you participate in the build-up and infrastructure of crypto mining, HIVE is taking advantage of Bitcoin’s favorite element: Ice. It’s freezing in Iceland, so the relative energy cost of mining there is lower. Mining hardware requires enormous power and creates tons of heat, and natural temperature is key: Iceland saves on cooling costs, making it one of the most potentially profitable places to mine Bitcoin.

He cites other examples of crypto companies moving to Iceland.

Giant ether mining start-up, BitFury Group, is there. BitFury, out of the Netherlands, generated over $90 million in revenue this year, and predicts it will be generating $585 million in revenue by 2021. While its flagship data center is in the Republic of Georgia, it’s also now tapping into the cool temperatures of Iceland. Emmanuel Abiodun, founder of Cloud Hashing, a company which owns a computing facility in Iceland, chose Iceland because of its cheap and plentiful geothermal and hydroelectric energy, and the “free Arctic air” that is piped in to cool the machines. Iceland is also ground zero for Hong-Kong-based Genesis Mining Ltd, which is building the largest ether mining facility in the world in Iceland. And HIVE has recently acquired a new data center from Genesis for $9 million and a 30 percent equity stake in HIVE, according to Bloomberg, which says HIVE shares have “Bitcoin investors buzzing”. Right next door to this landmark bitcoin facility in Reykajanes, Iceland, HIVE has just acquired a second data center from Genesis.

Stafford states that “The cold countries are now the home of what is being dubbed ‘geothermal gold’.” Talking of which.

HIVE’s backers include mining mavericks Frank Giustra and Frank Holmes. Giustra built up Goldcorp (NYSE:GG) in 2000 and today it trades at a market cap of nearly $11 billion, and is one of the largest gold-mining companies in the world. He was also behind Silver Wheaton, which is now Wheaton Precious Metals Corp. (NYSE:WPM), the biggest silver and gold streaming company in the world. Giustra’s 20-oscar-winning entertainment behemoth, Lion’s Gate, also took in $2.4 billion in revenue in 2015. And these are just a few of his multi-billion-dollar hits. Holmes is the CEO of San Antonio-based US Global Investors, which has $2.6 billion in assets under management and is one of the definitive top precious metals funds. Both have backed HIVE, and Holmes is now its chairman. Both still love gold because gold will always be gold, but they’re not old-fashioned. Bitcoin is huge, and they won’t be left out of the wave.

A two-pronged strategy of gold and crypto, we’re not going to argue with that.

"Tired Mountain Syndrome" - North Korea"s Nuclear Test Site Is Headed For A Deadly Collapse

UN Security Council sanctions aside, one of the reasons China has closed much of its border with North Korea and imposed emergency measures to monitor radiation flowing across the mountainous terrain is because the country’s scientists worry that the mountain under which North Korea has held five of its six nuclear tests is in danger of collapsing and unleashing a devastating cloud of radiation on the surrounding terrain.

And just in case anybody doubted the veracity of China’s warnings, a slew of independent analysts have confirmed what Beijing has long feared: North Korea’s Mount Mantap, a 7,200-foot-peak under which North Korea has carried out most of its recent nuclear tests, is suffering from “tired mountain syndrome,” according to the Washington Post.

Satellite images captured during the North’s Sept. 3 test of a purported hydrogen bomb, Mt Mantap could be seen visibly shifting during the enormous detonation which triggered a 6.3 magnitude earthquake in North Korea’s northeast.

And since that test, the region - which is not known for seismic activity - has experienced several landslides and no fewer than three more earthquakes."

The North, which carried out its first nuclear test more than ten years ago in 2006, has built a complex system of tunnels underneath the mountain that’s known as the Punggye-ri Nuclear Test Facility. According to WaPo, intelligence analysts use satellites to monitor the three known entrances to Punggye-ri to try and anticipate when another test might be coming.

Arms Control Wonk describes the site in more precise detail.

North Korea’s nuclear test site comprises a number of tunnel complexes in mountains surrounding a main support area. Following an initial nuclear explosion in 2006, subsequent nuclear tests have been conducted in a tunnel complex to the North of the support area, under Mt. Mantap. The site contains additional tunnel complexes that may be suitable for nuclear explosions to the south and west of the support area. The Punggye-ri site is capable of hosting nuclear explosions in tunnels with yields of up to a few hundred kilotons.

The tremors unleashed by the North’s last test shook homes in northeastern China. And eight minutes after the initial quake subsided, there was a 4.1-magnitude earthquake that appeared to be a tunnel collapsing at the site.

 

Punggye-ri Tunnels by JamesMartinCNS on Sketchfab

 

Images captured by Airbus showed the mountain trembling during the test. An 85-acre area on the peak of Mount Mantap visibly subsided during the explosion, an indication of both the size of the blast and the weakness of the mountain.

Anybody who was around in the 1950s and 1960s will remember that “tired mountain syndrome” was a diagnosis last applied to the Soviet Union’s atomic test sites. To be sure, earthquakes also occurred at the US nuclear test site in Nevada after detonations there.

“The underground detonation of nuclear explosions considerably alters the properties of the rock mass,” Vitaly V. Adushkin and William Leith wrote in a report on the Soviet tests for the United States Geological Survey in 2001. This leads to fracturing and rocks breaking, and changes along tectonic faults.

Analysts Frank V. Pabian and Jack Liu worry that the blasts have caused substantial damage to the North’s tunnel network.

“Based on the severity of the initial blast, the post-test tremors, and the extent of observable surface disturbances, we have to assume that there must have been substantial damage to the existing tunnel network under Mount Mantap,” they wrote in a report for the specialist North Korea website 38 North.

Of course, just because the mountain is literally crumbling doesn’t mean the North will stop using it as a test site. As WaPo notes, the US didn’t abandon the Nevada test site after earthquakes there, they said. Instead, the US kept using the site until a nuclear test moratorium took effect in 1992. For that reason, analysts will continue to keep a close eye on the Punggye-ri test site to see if North Korea starts excavating there again — a sign of possible preparations for another test.

But as Chinese scientists have warned, one more test might be one too many.

Chinese scientists have warned that another test under the mountain could lead to an environmental disaster. If the whole mountain caved in on itself, radiation could escape and drift across the region, said Wang Naiyan, the former chairman of the China Nuclear Society and senior researcher on China’s nuclear weapons program.

 

“We call it ‘taking the roof off.’ If the mountain collapses and the hole is exposed, it will let out many bad things,” Wang told the South China Morning Post last month.

But perhaps equally as concerning as the collapse of Mantap is the possibility that another test could trigger an eruption at Mt. Paektu, an active supervolcano located on the North Korea-China border, about 80 miles from Pyungge-ri.

The mountain has not experienced a major eruption for centuries, and its last small rumble was in 1903. But an eruption could have devastating consequences - possibly causing more death and destruction than a nuclear blast.

And with a North Korean diplomat reiterating today that the North intends to continue with its nuclear program, while the country has also decried the military exercises happening in the waters east of the peninsula, where the USS Ronald Reagan is conducting training drills with the South Korean navy.

However, the North’s Oct. 10 holiday and the Oct. 18 beginning of China’s National Party Congress having come and gone without a new test. And signs of movement at some of the country’s missile test sites spotted in recent weeks have apparently been false alarms.

But given the amount of time that has elapsed since the North’s most recent missile test, it’s likely that the next provocative test - be it a test of a new long-range missile or a seventh nuclear test - isn’t too far off.
 

The Death Of Petrodollars & The Coming Renaissance Of Macro Investing

Authored by John Curran via Barrons,

The petrodollar system is being undermined by exponential growth in technology and shifting geopolitics. What comes next is a paradigm shift...

In the summer of 1974, Treasury Secretary William Simon traveled to Saudi Arabia and secretly struck a momentous deal with the kingdom. The U.S. agreed to purchase oil from Saudi Arabia, provide weapons, and in essence guarantee the preservation of Saudi oil wells, the monarchy, and the sovereignty of the kingdom. In return, the kingdom agreed to invest the dollar proceeds of its oil sales in U.S. Treasuries, basically financing America’s future federal expenditures.

Soon, other members of the Organization of Petroleum Exporting Countries followed suit, and the U.S. dollar became the standard by which oil was to be traded internationally. For Saudi Arabia, the deal made perfect sense, not only by protecting the regime but also by providing a safe, liquid market in which to invest its enormous oil-sale proceeds, known as petrodollars. The U.S. benefited, as well, by neutralizing oil as an economic weapon. The agreement enabled the U.S. to print dollars with little adverse effect on interest rates, thereby facilitating consistent U.S. economic growth over the subsequent decades.

An important consequence was that oil-importing nations would be required to hold large amounts of U.S. dollars in reserve in order to purchase oil, underpinning dollar demand. This essentially guaranteed a strong dollar and low U.S. interest rates for a generation.

[ZH: Still, the underlying concept of how Petrodollar recycling, or as some call it, petrocurrency mercantilism works, leaves some confusion. So in order to alleviate that, here courtesy of Cult State, is a quick and simple primer that should hopefully answer all questions. From CultState:

So what is petrocurrency mercantilism?

It’s when a national bank and an energy producer collude to generate artificial demand for a currency at the expense of the purchasing power of other currencies.

The flowchart below shows how it all works.

Given this backdrop, one can better understand many subsequent U.S. foreign-policy moves involving the Middle East and other oil-producing regions.

Recent developments in technology and geopolitics, however, have already ignited a process to bring an end to the financial system predicated on petrodollars, which will have a profound impact on global financial markets. The 40-year equilibrium of this system is being dismantled by the exponential growth of technology, which will have a bearish impact on both supply and demand of petroleum. Moreover, the system no longer is in the best interest of key participants in the global oil trade. These developments have begun to exert influence on financial markets and will only grow over time. The upheaval of the petrodollar recycling system will trigger a resurgence of volatility and new price trends, which will lead to a renaissance in macro investing.

Let’s examine these developments in more detail.

First, TECHNOLOGY is affecting the energy markets dramatically, and this impact is growing exponentially. The pattern-seeking human mind is built for an observable linear universe, but has cognitive difficulty recognizing and understanding the impact of exponential growth.

Paralleling Moore’s Law, the current growth rate of new technologies roughly doubles every two years. In the transportation sector, the global penetration rate of electric vehicles, or EVs, was 1% at the end of 2016 and is now probably about 1.5%. However, a doubling every two years of this level of usage should lead to an automobile market that primarily consists of EVs in approximately 12 years, reducing gasoline demand and international oil revenue to a degree that today would seem unfathomable to the linear-thinking mind. Yes, the world is changing—rapidly.

Alternative energy sources (solar power, wind, and such) also are well into their exponential growth curves, and are even ahead of EVs in this regard. Based on growth curves of other recent technologies, and due to similar growth rates in battery technology and pricing, it is likely that solar power will supplant petroleum in a vast portion of nontransportation sectors in about a decade. Albert Einstein is rumored to have described compound interest (another form of exponential growth) as the most powerful force in the universe. This is real change.

The growth of U.S. oil production due to new technologies such as hydraulic fracturing and horizontal drilling has both reduced the U.S. need for foreign sources of oil and led to lower global oil prices. With the U.S. economy more self-reliant for its oil consumption, reduced purchases of foreign oil have led to a drop in the revenues of oil-producing nations and by extension, lower international demand for Treasuries and U.S. dollars.

ANOTHER MAJOR SECULAR CHANGE that is under way in the oil market comes from the geopolitical arena. China, now the world’s largest importer of oil, is no longer comfortable purchasing oil in a currency over which it has no control, and has taken the following steps that allow it to circumvent the use of the U.S. dollar:

• China has agreed with Russia to purchase Russian oil and natural gas in yuan.


• As an example of China’s newfound power to influence oil exporters, China has persuaded Angola (the world’s second-largest oil exporter to China) to accept the yuan as legal tender, evidence of efforts made by Beijing to speed up internationalization of the yuan. The incredible growth rates of the Chinese economy and its thirst for oil have endowed it with tremendous negotiating strength that has led, and will lead, other countries to cater to China’s needs at the expense of their historical client, the U.S.


• China is set to launch an oil exchange by the end of the year that is to be settled in yuan. Note that in conjunction with the existing Shanghai Gold Exchange, also denominated in yuan, any country will now be able to trade and hedge oil, circumventing U.S. dollar transactions, with the flexibility to take payment in yuan or gold, or exchange gold into any global currency.


• As China further forges relationships through its One Belt, One Road initiative, it will surely pull other exporters into its orbit to secure a reliable flow of supplies from multiple sources, while pressuring the terms of the trade to exclude the U.S. dollar.

The world’s second-largest oil exporter, Russia, is currently under sanctions imposed by the U.S. and European Union, and has made clear moves toward circumventing the dollar in oil and international trade. In addition to agreeing to sell oil and natural gas to China in exchange for yuan, Russia recently announced that all financial transactions conducted in Russian seaports will now be made in rubles, replacing dollars, according to Russian state news outlet RT. Clearly, there is a concerted effort from the East to reset the economic world order.

ALL OF THESE DEVELOPMENTS leave global financial markets vulnerable to a paradigm shift that has recently begun. In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

A current generational low in volatility across a wide spectrum of asset classes is another indicator that the market doesn’t see a paradigm shift coming. This suggests that current volatility is expressing a full discounting of stale fundamental inputs and not adequately pricing in the potential of likely disruptive events.

THE FEDERAL RESERVE is now in the beginning stages of a shift toward “normalization,” which will lead to diminished support for the U.S. Treasury market. The Fed’s total assets stand at approximately $4.5 trillion, or five times what they were prior to the financial crisis of 2008-09. The goal of the Fed is to “unwind” this enormous balance sheet with minimal market disruption. This is a high-wire act a thousand feet in the air without a safety net or prior practice. Additionally, at some not-so-distant future date, the U.S. will need to finance enormous and growing entitlement programs, and our historical international sources for that financing will no longer be willing to support us in that endeavor.

The market participants with whom I met theoretically could have the ability to accept cognitively the points made in this article. But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.

One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.

I have been fortunate to ride substantial bets on big trends, earning high risk-adjusted returns using time-tested techniques for exploiting these trends. Additionally, I have had the luxury of not participating actively full-time in macro investing during this difficult period. Both factors might give me perspective. I regard this as an extraordinarily opportune moment for those able to shed timeworn, archaic assumptions of market behavior and boldly return to the roots of macro investing.

The opportunity is reminiscent of the story told by Stanley Druckenmiller, who was promoted early in his investment career to head equity research at a time when his co-workers had vastly more experience than he did. His director of investments informed him that his promotion owed to the same reason they send 18-year-olds to war; they are too dumb to know not to charge. The “winners” under the paradigm now unfolding will be market participants able to disregard stale, anomalous concepts, and charge.

RELATEDLY, THERE IS a running debate as to whether trend-following is a dying strategy. There is plenty of anecdotal evidence that short-term and mean-reversion trading is more in vogue in today’s markets (think quant funds and “prop” shops). Additionally, the popularity of passive investing signals an unwillingness to invest in “idea generation,” or alpha. These developments represent a full capitulation of trend following and macro trading.

Ironically, many market players who wrongly anticipated a turn in recent years to a more positive environment for macro and trend-following are throwing in the towel. The key difference is that now there is a clear catalyst to trigger the start of the pendulum swinging back to a fertile macro/trend-following trading environment.

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision. The thesis proposed here is one such vision.

Forget Catalonia, Flanders Is The Real Test Case Of EU Separatism!

Authored by Andrew Korybko via Oriental Review,

Catalonia’s separatist campaign has dominated European headlines for the past couple of weeks, but it’s really the northern Belgian region of Flanders which will serve as a barometer over whether large chunks of the EU will fall apart into a collection of identity-centric statelets prior to the bloc’s reconstitution into a “federation of regions”.

What’s going on in Catalonia is of paramount importance to the geopolitical future of Europe, since it could very well serve as the catalyst for fracturing the EU if copycat movements elsewhere are emboldened by the Spanish region’s possible separatist success. This was explained in detail in the author’s recent analysis about “The Catalan Chain Reaction”, which readers should familiarize themselves with if they’re not already acquainted with the thesis put forth in that work. To concisely summarize, there’s a very distinct possibility that the EU’s liberal-globalist elite have been planning to divide and rule the continent along identity-based lines in order to further their ultimate goal of creating a “federation of regions”.

Catalonia is the spark that could set off this entire process, but it could also just be a flash in the pan that might end up being contained no matter what its final result may be. Flanders, however, is much different because of the heightened symbolism that Belgium holds in terms of EU identity, and the dissolution of this somewhat artificially created state would be the clearest sign yet that the EU’s ruling elite intend to take the bloc down the direction of manufactured fragmentation. Bearing this in mind, the spread of the “Catalan Chain Reaction” to Belgium and the inspiration that this could give to Flanders to break off from the rest of the country should be seen as the true barometer over whether or not the EU’s “nation-states” will disintegrate into a constellation of “Balkanized” ones.

“The First Bosnia”

In order to properly understand the state of affairs at play, it’s necessary to briefly review the history of what could in some sense be described as “The First Bosnia”, or in other words, Europe’s “first artificially created state”. Most of the territory of what is nowadays referred to as Belgium was unified with the modern-day Netherlands from 1482-1581 when the political entity was referred to as the Habsburg Netherlands. The southern part (Belgium) came under Spanish control from 1581-1714 when it was called the Spanish Netherlands. Afterwards, it passed under Austrian administration from 1714-1797 when it became the Austrian Netherlands prior to its brief incorporation into the First French Republic and later Empire from 1797-1815. It was during the Spanish and Austrian eras that Belgium began to consider Catholicism as an inseparable part of its national identity in opposition to the Netherland’s Protestantism. Finally, Belgium was part of the United Kingdom of the Netherlands from 1815-1839 until the Belgian Revolution made it an independent state for the first time in its history.

In essence, what ended up happening is that a majority-Catholic but ethno-linguistically divided population got caught up in the 19^th century’s wave of nationalism and created a hybrid Franco-Dutch state that would eventually federalize in the late-20^th century, in a structural sense serving as a precursor to the dysfunctional Balkan creation of Bosnia almost a century and a half later.

It’s important to mention that the territory of what would eventually become Belgium had regularly been a battleground between the competing European powers of the Netherlands, the pre-unification German states, France, the UK, and even Spain and Austria during their control of this region, and this new country’s creation was widely considered by some to be nothing more than a buffer state. The 1830 London Conference between the UK, France, Prussia, Austria, and Russia saw the Great Power of the time recognize the fledgling entity as an independent actor, with Paris even militarily intervening to protecting it during Amsterdam’s failed “Ten Day’s Campaign” to reclaim its lost southern province in summer 1831. For as artificial of a political construction as Belgium was, it fared comparatively well during the 19^th century as it leveraged its copious coal supplies and geostrategic position to rapidly industrialize and eventually become a genocidal African colonizer in the Congo. Although it was devastated in both World Wars, Belgium was able to bounce back in a relatively short period of time, partly because it could rely on its Congolese prison state.

In The Belly Of The Beast

Flash forward to the present, and the only thing that modern-day Belgium has in common with its past self is its internal divisions. The post-colonial aftermath of “losing the Congo” and shortly beforehand agreeing to host the capital of the European Union opened up previously nationalistic Belgium to liberal-globalist influence, which contributed to what would eventually become its utter domestic dysfunction in recent years. It wasn’t by chance that Brussels was chosen as the EU’s headquarters either, since its inherent weakness was thought to make it an ideal “compromise country” for establishing the bloc’s headquarters, as it would never become as powerful as France, for example, in potentially monopolizing the international organization’s agenda. Again, Belgium’s history as a buffer state/region came into relevant play in positioning it “in the belly of the beast” that’s nowadays reviled by all sorts of individuals across the continent.

The administrative disconnect between its northern region of Flanders and the southern one of Wallonia, as well as what would eventually become its multi-tiered federal, regional, and community structure, was exploited by the EU’s ideologically extreme elite to make the country the centerpiece of their “multicultural experiment”. After decades of facilitating mass migration from civilizationally dissimilar societies of the “Global South”, 5.9% of the country is Muslim while at least an astonishing 20% of Brussels follows Islam. Almost all of the capital’s Muslims are immigrants, mostly from Morocco and Turkey, which isn’t surprising considering that 70% of Brussels’ inhabitants are foreign-born. Unfortunately for the native locals, the “multicultural experiment” has failed miserably, and Belgium is now Europe’s jihadist leader in terms of the per capita number of fighters who have travelled abroad to join Daesh.  All things considered, the “utopia” that the Belgians were promised by joining the EU and hosting its headquarters has turned into a dystopia, and the country now finds itself in the belly of the liberal-globalist beast.

It’s little wonder than that some of Belgium’s population wants to escape from the organization which is responsible for their socio-cultural and security challenges, ergo the Flemish independence movement which aims to see the country’s northern region become an independent state because of the lopsided demographic-economic advantage that it has over Wallonia. Flanders contributes four times as much to Belgium’s national economy as Catalonia does to Spain’s, being responsible for a whopping 80% of the country’s GDP as estimated by the European Commission, and it also accounts for roughly two-thirds of Belgium’s total population unlike Catalonia’s one-sixth or so. This means that Flemish independence would be absolutely disastrous for the people living in the remaining 55% of the “Belgian” rump state, which would for all intents and purposes constitute a de-facto, though unwillingly, independent Wallonia. Therefore, it’s important to forecast what could happen if Belgium ultimately implodes with Flanders’ possible secession.

Breaking The Buffer State

This section should appropriately be prefaced by emphasizing that there’s no guarantee that Flanders will actually secede from Belgium, or that it would be successful in holding an unconstitutional referendum such as the one that Catalonia did in attempting to “legitimize” its anti-state ambitions. Furthermore, the Belgian state or its EU superstate overseer might resort to force just as Madrid did in trying to prevent this region’s secession, so the reader shouldn’t take it for granted that Flanders will inevitably become an independent state. Having gotten the “disclaimer” out of the way, however, there’s a very real chance that the “Catalan Chain Reaction” will spread to the “belly of the beast” in catalyzing a similar separatist process in Flanders, hence why the author argued in the introduction that the outcome of such a reenergized post-Catalan movement in this region will be the best barometer in gauging whether the EU’s liberal-globalist elite do indeed plan to “Balkanize” the bloc into an array of regionally “federalized” identity-centric statelets.

Given the domestic and historical particularities of the Belgian case study, it appears likely that Flanders’ successful secession (however it ends up coming about) would lead to a narrow range of geopolitical outcomes for the Western European country.

The first one is that Wallonia would be unable to function as a stand-alone “rump”/”independent” state given its measly 20% of unified Belgium’s GDP, its one-third of the previous population, and presumed dependency on Flanders’ port of Antwerp for most economic contact with the “outside world’ aside from France and Germany. For these reasons, it’s conceivable that the French-speaking region could be taken over by France just like how the famous French diplomat Charles Maurice de Talleyrand-Périgord originally envisioned in his unfulfilled eponymous “Talleyrand partition plan” that was first unveiled during the 1830 London Conference. As for Flanders itself, it could either attempt to remain an “independent” state or possibly confederate with the Netherlands, if there was any desire from both parties for this latter option.

Where things get tricky, however, is when it comes to the German-speaking community in eastern Wallonia, which might not want to become part of France. Also, for reasons of sensitive political-historical optics, they probably wouldn’t be able to join Germany because it would carry uncomfortably strong shadows of Hitler’s annexation of the Sudetenland during the pre-World World II dissolution of Czechoslovakia. Therefore, it’s likely that this sub-region would remain within Wallonia, which itself would probably become part of France, albeit with possible autonomy guaranteed to the German speakers that Paris would be “inheriting”. That said, this isn’t the trickiest part of any Belgian breakup, as the status of Brussels would definitely occupy center stage in this scenario. The EU would be inclined to see to it that its capital becomes an “independent” city-state on par with similarly sized Liechtenstein, though with a much higher and more dangerous Salafist demographic to contend with, one which could make it the “rightful” capital of “Eurabia” if civilizational-geopolitical trends continue in that direction.

Concluding Thoughts

The future of Flanders will be more of a harbinger of the EU’s administrative-political future than Catalonia’s will be, though the latter is indeed the trigger for sparking what might become the former’s emboldened separatist push. If the host country of the EU’s headquarters falls victim to the secessionist trend that might be poised to sweep across the bloc due to the “Catalan Chain Reaction”, then it would confidently indicate that the EU’s ruling liberal-globalist elite are determined to initiate the “controlled Balkanization” of the continent into a constellation of identity-centric statelets so as to ultimately satisfy their long-held goal of implementing a “federation of regions.

There is no place in Europe more symbolically significant than Belgium, and especially its jihadist dystopian capital of Brussels, so if the European power structures “allow” Flanders to separate from “the First Bosnia”, then it’s all but certain that the rest of the bloc will feel the geopolitical reverberations within their own borders sooner than later.

The Catalan Chain Reaction

Authored by Andrew Korybko via Oriental Review,

Catalonia’s drive for “independence” has unleashed a chain reaction of viral social media support that’s frighteningly resurrected civil war-era rhetoric, but the most dangerous consequences of this domino effect are yet to come if the separatists are ultimately successful in their quest.

The Nostalgia Narrative

The Catalan “independence” cause has taken the world by storm, thrown into the global spotlight by the heavily publicized referendum earlier this week and Madrid’s forceful response to this unconstitutional measure. Supporters all across the world have been energized by the recent events and have taken to describing them in civil war-era terms as a battle between “democracy” and “fascism”. Furthermore, they also accuse the Rajoy government of being “Francoists”, as they do the country’s post-Franco 1978 Constitution which returned Catalonia’s autonomy in an even more robust way than before and even bestowed this privilege to the rest of the country as well.

Although it can be safely presumed that Spain naturally retained some of the “Francoist” members of its permanent military, intelligence, and diplomatic bureaucracies (“deep state”) after the death of their movement’s eponymous leader, it’s an exaggeration to refer to the constitution and the present government as “Francoists” in the sense of what the term stereotypically implies. Rather, the improper use of such polarizing civil war-era terms demonstrates that the separatists are trying to capitalize on the revolutionary nostalgia that their domestic and foreign supporters have for reliving the 1936-1939 anarcho-communist experiment via a simulacrum, one which plays out differently depending on their audience.

Two Simulacra

As it relates to the Catalans themselves, this is meant to force them into the false binary choice between “standing with their ancestors against fascism” or “betraying their motherland for the Francoists”. Concerning the foreign supporters of the Catalan separatists, they’re supposed to get riled up and vent their hatred against Madrid and impassioned support for Barcelona all throughout social media, picking up on the cue that they should inaccurately compare modern-day Madrid to post-Maidan Kiev in making the Alt-Media argument that Catalonia has as much of a right to “independence” as Crimea does to its reunification with Russia.

This is a false equivocation, the full debunking of which isn’t the focus of this article however, as it’s important enough in this context to draw attention to the polemical chain reaction that’s being spun by the separatists and their supporters in crafting a self-interested narrative for serving their cause. There are many well-intentioned individuals who are standing behind Barcelona, so it’s not at all to infer that most of them don’t sincerely believe in this interpretation of events, but the point here is just to highlight how Catalonia’s “independence” crusade is exploiting historical memory and revolutionary nostalgia in order to advance its organizers’ argument that the region needs to split from Spain.

Spanish Scenarios

Centralized Crackdown:

While most people might be led to think that the Catalan Crisis is solely between Barcelona and Madrid, the fact is that it actually involves all of Spain and is poised to have geopolitical reverberations throughout the entirety of Europe. Concerning the politically unstable Iberian country, Catalonia’s separatist campaign already crossed the Rubicon of no return after the referendum and Madrid’s reaction to it, so there’s no going back to the previous status quo. This means that only three scenarios are probable: a centralized crackdown, Identity Federalism, and separatism. The first one could see the state implement Article 155 of the constitution in temporarily imposing direct rule over the region, though with the expected consequence being that it might catalyze a low-scale civil war if the Catalans resort to terrorist-insurgent tactics to resist.

Identity Federalism:

The next scenario is Identity Federalism, which would require the revocation or reform of Article 145 in devolving the centralized state into a federation or confederation of regions, each of which could theoretically function as quasi-independent statelets with their own economic, military, and foreign policies. Essentially, this would be the transplantation of the Bosnian model onto Spain, albeit with added privileges given to each constituent member. As with the centralized crackdown scenario, this is likely to lead to violence, and would probably only occur as a “compromise solution” to any prolonged conflict. Madrid does not want to lose control of the country and see the Iberian Peninsula in southwestern Europe “Balkanized” like its namesake counterpart in Southeastern Europe, which is why this outcome probably wouldn’t ever happen in peacetime.

Secessionism:

Finally, the last possibility for how the Catalan Crisis could play out is that the restive region becomes “independent” from Spain and is recognized by at least one country or more, which in all likelihood might end up being some of the Baltic and/or Balkan states before anyone else. Spain wouldn’t be able to survive in its present administrative-political format with the loss of roughly 20% of its GDP, so the rump state would either have to be radically reformed, undergo a “stabilizing” military coup, or fully collapse in a collection of “countries” just like the former Yugoslavia did a generation ago. As for Catalonia, it could become a base for foreign (NATO/Western/American) intervention into what might then descend into a multisided civil war. A weakened Spain or its remnants also wouldn’t be able to defend from an African-originating “Weapons of Mass Migration” tidal wave into Europe, either.

Geopolitical Chain Reactions

Forecasting is never an exact science, but it is indeed an art, and with that being said, there’s no guarantee that any of the aforementioned scenarios will play out, though if they do, they’ll inevitably have very serious geopolitical ramifications which could end up sparking a chain reaction throughout the region and beyond. The centralized crackdown might lead to a civil war that could either be contained to Catalonia or come to engulf other traditionally sovereign-minded areas such as Basque Country or Galicia too, to say nothing of the rest of the country in general. That said, and accepting that the consequences would inevitably spread to at least Portugal and France as well with time, this sequence of events isn’t what’s the most continentally explosive, as it’s the scenarios of Identity Federalism and “independence” that are the most dangerous.

The “Catalan Countries”:

Before going any further, both of these would guarantee that the Catalan Crisis becomes an existential one for Spain. The nominal Kingdom can’t devolve into a federation without changing the constitution, and even if this unlikely event were to happen, then Catalonia might seek to rearrange the country’s internal boundaries in a nationalist bid to gobble up the territory that its most jingoistic supporters claim as constituting the “Catalan countries”. This ultra-extreme concept holds that the modern-day borders of Catalonia don’t represent the historic geo-cultural space of the Catalan people, so they therefore need to be expanded to include all or some of the Spanish regions of Aragon, the Balearic Islands, and Valencia, as well as the country of Andorra and the French department of Pyrénées-Orientales (also known as “Roussillon” or “Northern/French Catalonia”).

Most of the people in these areas don’t want to be part of a “Greater Catalonia”, but the hyper-nationalists in charge of the Identity Federalized or “independent” state might resort to subterfuge or force in pressing their claims, even if they don’t do so right away. The concept of the “Catalan countries” is therefore a very dangerous one because it means that the Catalonia issue will inevitably have pronounced internal geopolitical consequences for Spain and also possibly even France as well if the separatists in control of Barcelona right now eventually get their way. Again, the Identity Federalism scenario would likely only result from a war brought about by a centralized crackdown, and would represent a (temporary) “compromise solution” to outright separatism, though with the latent dangers that would come from the latter with time.

Regional Copycats:

European regions allegedly seeking independence from the host states.

Whether it’s Identity Federalism or separatism, either of these outcomes could encourage regional copycats all throughout the EU. The UK “Independent” published a very misleading map just the other day claiming to have pinpointed all of the other Catalan-like political movements in Europe, obviously inferring that they could be next if the Barcelonan separatists are successful. The salient point being made here isn’t that each and every one of them will rise up in Color Revolution-esque fervor just like the Catalans did, but that some of them will undoubtedly be inspired to push forth with their agenda in fracturing their home countries and contributing to the “regionalization of Europe”. Other than the Spanish examples mentioned in the map, this could also see a chain reaction occurring in Scotland, Northern Italy, Germany’s Bavaria, and maybe even parts of France too.

The Hungarian minority that’s been living outside of their nation-state ever since the 1920 Treaty of Trianon might agitate for reunification with their homeland, which could destabilize the politically tenuous situation in Central Europe and the Balkans. It could also make Prime Minister Orban, if he’s still serving by that time, an easy target for liberal-leftist Mainstream Media attacks that he’s the “New Hitler” for wanting to reunify with his compatriots abroad. All that these regional copycats would have to do, regardless of the validity behind their claims and socio-political movements, is to organize highly publicized unconstitutional referenda in order to provoke the state into a forceful response that could in turn “legitimize” a Color Revolution in the said peripheral region. The result doesn’t necessarily have to be separatism, but Identity Federalism, as this end is essentially the same in the structural sense.

“Euro-Federalism”:

The devolution of once-unified states into identity-“federalized” ones de-facto internally partitioned along ethno-regional lines would interestingly promote the cause of “Euro-Federalism” that Gearóid Ó Colmáin described in his latest article titled “Catalan ‘independence’: a tool of capital against labour”. His work builds upon the 1992 proposal by billionaire Europhile Freddy Heineken to “federalize” Europe along regional lines, which was likely the unstated inspiration behind Belgian bureaucrat-academic Luk Van Langenhove’s 2008 policy suggestion urging “Power To The Regions, But Not Yet Farewell To The Nation State”. The bigger picture here is quintessentially one of divide and rule, albeit modified for the EU’s post-Brexit conditions.

The author himself spoke about this in a different context in his summer 2016 article for The Duran about the “Post-Brexit EU: Between Regional Breakdown and Full-Blown Dictatorship”, in which it was postulated that the bloc might devolve into regionally focused state-driven organizations in the future. What’s happening instead is that Brussels might be preparing for a further devolution beyond the member states themselves and to the individual regions within (and sometimes, even between) them. This represents a modification of what the author wrote in his earlier work titled “Identity Federalism: From “E Pluribus Unum” To “E Unum Pluribus”, which appears at this moment to have incorrectly concluded that the EU wouldn’t go forward with this scenario out of fear that it could invite more “Weapons of Mass Migration” from the Global South (in the Spanish case, from Northern and Western Africa), as well as create geostrategic opportunities for Russia and China.

 Standing corrected with the wisdom of hindsight and in light of recent events, especially the insight that the author acquired through his research on Civilizational Aggression, it now seems as though the very same scenario of the EU collapsing into a constellation of regional entities is being partially experimented with by none other than  Brussels itself as the ultimate divide-and-rule stratagem for controlling the bloc in the post-Brexit era. This doesn’t mean that the process will be taken to its extreme –so long as it’s still “controllable” – but just that the EU does indeed seem to be tinkering with this as part of its phased adaptive approach to the emerging Multipolar World Order.

Concluding Thoughts

Catalonia is globally significant because of the chain reaction that its separatists have started in furthering the scenario of a “controlled” devolution-collapse of the EU’s existing member-state order into a more “flexible” hybrid one of politically equal national and regional entities. If Catalonia serves as a successful example, whether in the Identity Federalized or separatist instances, then it could have a powerful demonstration effect elsewhere in the EU by encouraging other copycat movements, thereby redirecting what might have otherwise been semi-multipolar forces into the false allure of “independence” within a de-facto strengthened EU and even NATO.

This is very possible because the Catalan precedent would clearly indicate that no EU member state’s territorial integrity and constitution are safe from the globalist desires of a separatist Color Revolutionary and possibly even Hybrid War vanguard, thereby dealing a heavy blow to the right-wing “sovereignists” (publicly smeared as “nationalists” in the Mainstream Media) who are coming to the fore of European politics nowadays. After all, the so-called “Catalan Question” was supposed to have been settled by the 1978 Constitution that gave the region an even more robust autonomy than it had ever enjoyed before in history, so if this can be reversed, then Pandora’s Box has truly been reopened all across the EU.

Another point to dwell upon is the viralness with which the Catalan separatist cause spread through global Mainstream and Alternative Medias, as this provides crucial insight into how other movements might attain such tremendous soft power in such a short time in the future. It helps if they’re tourist destinations where lots of foreigners have visited and acquired an affinity for the local culture and environs, as well as if there’s a civil war- or other conflict-era history (no matter how distant, decontextualized, and/or irrelevant to the present) that could be spun to “legitimize” the said “federalist”-separatist cause.

Altogether, the Catalan case study in all of its dimensions is very instructive in demonstrating how the declining Unipolar World Order is seeking to adapt to multipolarity, and its state of affairs at any given time provides a decent barometer for gauging the dynamics of this process.

It's Time To Take Out "Freedom Insurance"

Authored by Nick Giambruno via InternationalMan.com,

Only a fool tries to survive by acting like a vegetable, staying rooted in one place, when the political and economic climate changes for the worse.

—Doug Casey

Unless you’ve been living under a rock, you know that America is in turmoil. That was on full display recently in Charlottesville, Virginia.

But it’s not just Charlottesville. There have been deadly clashes in Ferguson, Charleston, Dallas, St. Paul, Baltimore, Baton Rouge, and Alexandria.

America is headed for a new kind of civil war.

And when it erupts, you and your family will want “freedom insurance” - the ability to get out fast and set up comfortably in a more stable country.

I recently spoke with my friend and colleague Chris Lowe about this, and I knew I had to pass along our discussion to International Man readers. Chris is the editor of Bonner & Partners’ Inner Circle. His publication shares insights from Bill Bonner’s personal global network of analysts and investment experts.

*  *  *

Chris Lowe: You’ve been urging folks to diversify internationally. Why is that message so important now?

Nick Giambruno: The US is becoming more and more fragmented, as I’m sure our readers have noticed. I’ve never seen it more polarized.

In fact, I’ve only seen this degree of polarization in countries that have gone through civil wars. It all feels eerily familiar.

I was born in the US, and grew up there. But I used to live in Lebanon, which went through a nasty 15-year civil war. More than 120,000 died. Thousands more lost their homes.

And I currently live in Colombia part of the year. The country has a 50-year history of civil conflict.

Chris Lowe: What’s to blame for this situation?

Nick Giambruno: Identity politics are a big factor.

That’s when your religion, race, ethnic background, and so forth are the most important thing in politics. You’re no longer an individual American. You’re part of some group, undoubtedly being victimized by another group.

This naturally leads to collectivism, tensions… and eventually violence between the groups.

Identity politics were a big factor in Lebanon’s civil war. And they’re a big factor in the US right now. This poisonous trend is growing, and it’s probably unstoppable.

The media is another big factor. Most Americans live in a partisan information bubble with these 24-hour news networks and partisan websites. That accelerates the divide.

I lived in Beirut, Lebanon’s capital city, for about three years. It reminds me of the media there. About 6 million people live in Lebanon, but it has about a dozen 24-hour news channels. Each one caters to a different political/sectarian/ethnic group. This allows each group to live in its own media bubble.

Lebanon’s bloody civil war happened in the 1970s and 1980s. But it’s still an extremely divided country. It wouldn’t take much for its civil war to start up again.

The media in Lebanon helps incubate tensions there. Today, the same thing is happening in the US.

I don’t mean to sound dramatic, but Americans hate each other right now. And it’s getting worse. We’re just a market crash… a recession… or some other extreme event away from more widespread violence. A new form of civil war is even possible.

Chris Lowe: We’re not talking a return to 1861—to pitched battles between armies and hundreds of thousands dead. But if you define “civil war” as a situation where you have widespread violence, a rejection of political authority, and the National Guard on the street, it’s easy to see how America gets there.

Nick Giambruno: I agree. I can’t say exactly what it is. But something does seem to be brewing. And it’s not good. That’s why Doug Casey and I urge our readers to internationalize their lifestyles.

Call it what you want, but American society is cracking. Like you say, it’s not necessarily just the political system, but society itself. And that’s probably more worrisome.

Doug and I have talked about this a lot lately. Doug is older than I am. He’s in his 70s. And he says he hasn’t seen anything like this in his lifetime.

This is why I urge readers to diversify outside of the US. The fracturing of society will create a lot of political risk. And that’s on top of the risks from money printing, higher taxes, and increasing regulations.

Chris Lowe: What do you say to folks who see the idea of an America at war with itself as farfetched?

Nick Giambruno: We’ve seen this movie before. As Doug has been warning his readers for years, it happened in Bosnia in the 1990s. It happened in Afghanistan in the 1980s. It happened in Rhodesia—now Zimbabwe—in the 1970s. It happened in the Belgian Congo in the 1960s… in Cuba in the 1950s… in China in the 1940s… in Germany in the 1930s… and in Russia in the 1920s.

It also happened recently in Ukraine, where Doug and I visited last year. There, it started with the downfall of a Russian-backed thug who was replaced by a US-backed thug. The country lost itself in identity politics—people who identified with Russia versus those who didn’t.

From there, it descended into armed conflict. So far, more than 10,000 are dead and many thousands more are wounded.

As Doug puts it, if you stay put in one place… and you don’t have options when one of these extreme events happens… you’re going to wind up a victim.

No matter where you live, international diversification can greatly reduce the threat your home government poses to your personal and financial wellbeing.

Chris Lowe: How does it work?

Nick Giambruno: You know the benefits of diversifying your investment portfolio. If you put all of your asset “eggs” in one basket, you could lose your entire portfolio if that basket breaks.

The same idea applies to political risk. If your home country fractures—and suffers the kind of civil unrest and violence we’ve been talking about—you could lose everything.

Most people have medical, life, fire, and car insurance policies. You hope you never have to use these policies. But you have them anyway. They give you peace of mind and protection if the worst comes to pass.

International diversification is the ultimate insurance policy. Think of it as “freedom insurance.” It frees you from dependence on any one country. Achieve that freedom, and it becomes extremely difficult for any one group of bureaucrats to control you. The results can be life changing.

Everyone in the world should aim for political diversification. But it’s especially critical for those who live under a government that’s sinking hopelessly deeper into financial trouble. That means most Western governments… and the US in particular, given what’s going on right now.

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We recently released a memo that reveals the underlying source of all this political polarization and social unrest in America… and a troubling truth about America that no one else will tell you. Click here to read it now.