French Elections: Populist Revolution Or Status Quo?

Authored by Soeren Kern via The Gatestone Institute,

• "If the Macron bubble doesn"t pop, this may portend the realignment, not just of French politics, but Western politics in general, away from the left-right division that has defined Western politics since the French Revolution, towards a division between the people and the elites." — Pascal-Emmanuel Gobry, French political analyst.


• "This divide is no longer between the left and the right, but between patriots and globalists." — Marine Le Pen, French presidential candidate.

The presidential election in France officially got underway on March 18, when the Constitutional Council announced that a total of eleven candidates will be facing off for the country"s top political job.

The election is being closely followed in France and elsewhere as an indicator of popular discontent with traditional parties and the European Union, as well as with multiculturalism and continued mass migration from the Muslim world.

The first round of voting will be held on April 23. If no single candidate wins an absolute majority, the top two winners in the first round will compete in a run-off on May 7.

If the election were held today, independent "progressive" candidate Emmanuel Macron, who has never held elected office, would become the next president of France, according to several opinion polls.

A BVA market research poll for Orange released on March 18 showed that Marine Le Pen, the leader of the anti-establishment National Front party, would win the first round with 26% of the votes, followed by Macron with 25%. Conservative François Fillon is third (19.5%), followed by radical Socialist Benoît Hamon (12.5%) and Leftist firebrand Jean-Luc Mélenchon (12%).

For the first time, the two established parties, the Socialist Party and the center-right Republicans, would be eliminated in the first round.

In the second round, Macron, a 39-year-old pro-EU, pro-Islam globalist (platform here), would defeat Le Pen, a 48-year-old anti-EU, anti-Islam French nationalist (platform here), by a wide margin (62% to 38%), according to the poll.

Macron, a former investment banker, was an adviser to incumbent Socialist President François Hollande, one of the most unpopular presidents in modern French history. A long-time member of the Socialist Party, Macron served in Hollande"s cabinet for two years as economy minister until August 2016, when he resigned to launch his rival presidential bid to "transform France."

Macron, whose core base of support consists of young, urban progressives, has tried to position himself in the political center, between the Socialists and the conservatives. His meteoric rise has been propelled by a scandal involving Fillon — who is the subject of a criminal investigation over allegations that he used government money to pay his wife and children more than €1 million ($1.1 million) for jobs they never did — and because the Socialists fielded Hamon, a nonviable candidate who has promised to pay every French citizen over 18, regardless of whether or not they are employed, a government-guaranteed monthly income of €750 ($800). The annual cost to taxpayers would be €400 billion ($430 billion). By comparison, France"s 2017 defense budget is €32.7 billion ($40 billion).

Macron"s ascendancy comes amid heightened worries over security. More than 230 people have been killed in attacks in France by Islamic radicals during the past two years. The latest attack, on March 18, involved a 39-year-old French-Tunisian jihadist who proclaimed that he wanted to "die for Allah," and was shot dead after he tried to seize a soldier"s weapon at Orly Airport in Paris.

Shortly after the attack, Le Pen accused Macron and the rest of France"s political establishment of "cowardice in the face of Islamic fundamentalism."

In an apparent effort to bolster his national security credentials, Macron on March 18 announced a surprise proposal to restore compulsory military service. He said he would require men and women between the ages of 18 and 21 to serve one month in the armed forces.

"I want each young French person to be able to experience military life, however brief," Macron said. "This is a major project of society, a real republican project, which should allow our democracy to be more united and the resilience of our society to be increased." Macron, if elected, would become the first president in modern French history not to have performed military service.

Observers say that Macron"s national service proposal — which copies Le Pen"s proposal to reintroduce compulsory military service for a period of at least three months — is an attempt to siphon votes away from Le Pen and Fillon, both of whose campaign platforms call for a strong national defense.

Macron"s proposal, which will require an estimated €15 billion ($16 billion) upfront, and another €3 billion ($3.2 billion) each year to maintain, has been met with derision because of its exorbitant cost and dubious contribution to national security. Le Monde reminded its readers that France spends a similar amount (€3 billion annually) on nuclear deterrence.

Fillon"s spokesman, Luc Chantel, said the proposal was "absurd and unrealistic" and added:

"Either it is a measure designed to discourage students from quitting school, and this is not the mission of the army, or it is training for the defense of France, and one month is a joke, it is a discovery camp."

Some of Macron"s other policy positions include:

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  European Federalism: Macron has repeatedly called for a stronger European Union. At a January 14 political rally in Lille, he said: "We are Europe, we are Brussels, we wanted it and we need it. We need Europe because Europe makes us bigger, because Europe makes us stronger."

  
  


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  Single European Currency: In a January 10 speech at the Humboldt University in Berlin, Macron, speaking impeccable English, said: "The truth is that we must collectively recognize that the euro is incomplete and cannot last without major reforms. It has not provided Europe with full international sovereignty against the dollar on its rules. It has not provided Europe with a natural convergence between the different member states. The euro is a weak Deutsche mark, the status quo is synonymous, in 10 years" time, with the dismantling of the euro."

  
  


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  Migration Crisis: Macron has repeatedly praised German Chancellor Angela Merkel"s open-door migration policy, which has allowed more than two million mostly Muslim migrants into Germany since January 2015.

  
  

  In a January 1, 2017 interview with Süddeutsche Zeitung, Macron accused critics of Merkel"s open-door migration policy of "disgraceful oversimplification." He said: "Merkel and German society as a whole exemplified our common European values. They saved our collective dignity by accepting, accommodating and educating distressed refugees."

  
  

  In a February 4 rally in Lyon, Macron mocked U.S. President Donald Trump"s pledge to build a wall with Mexico: "I do not want to build a wall. I can assure you there is no wall in my program. Can you remember the Maginot Line?" he said, referring to a failed row of fortifications that France built in the 1930s to deter an invasion by Germany.

  
  


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  Islamic Terrorism: Macron has said he believes the solution to jihadist terrorism is more European federalism: "Terrorism wants to destroy Europe. We must quickly create a sovereign Europe that is capable of protecting us against external dangers in order to better ensure internal security. We also need to overcome national unwillingness and create a common European intelligence system that will allow the effective hunting of criminals and terrorists."

  
  


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  Islam: Macron has said he believes that French security policy has unfairly targeted Muslims and that "secularism should not be brandished to as a weapon to fight Islam." At an October 2016 rally in Montpellier, he rejected President Hollande"s assertion that "France has a problem with Islam." Instead, Macron said: "No religion is a problem in France today. If the state should be neutral, which is at the heart of secularism, we have a duty to let everybody practice their religion with dignity." He also insisted that the Islamic State is not Islamic: "What poses a problem is not Islam, but certain behaviors that are said to be religious and then imposed on persons who practice that religion."

  
  


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  National Defense: Macron supports NATO, and has pledged to increase French defense spending to reach 2% of GDP by 2025 — a level to which all NATO members agreed in 2006. At the same time, Macron believes in the need to create an "autonomous" European defense capability, also known as a European Army, which would duplicate military capabilities which already exist within NATO.

  
  

An Ifop poll for the Journal du Dimanche published on March 18 found that French voters are divided into "two quasi-equal blocks" about Macron"s honesty and his ability to govern. According to the survey, only 46% of French people believe he will be "able to guarantee the safety of the French people." More than half (52%) of respondents said they were "worried" about Macron, while 52% said they doubted his honesty.

In an interview with BMFTV, Laurence Haïm, a Canal+ reporter who was accredited to the White House and who recently joined Macron"s team, described Macron as the "French Obama." She added: "I think that in today"s world we need renewal, from someone young, who is not a politician. He wants to make the democratic revolution."

So what is driving Macron"s political ascendancy? French analyst Pascal-Emmanuel Gobry explains:

"The best way to look at Macron is as a kind of anti-Le Pen, or, to stretch the bounds of logic even further, a "populist from the top." If Le Pen is anti-establishment, Macron is the incarnation of the French establishment, a graduate of ENA, the top civil service school that trains the country"s elites, and a member of the Inspection des Finances, the most elite civil service track. His only experience in the private sector is through the revolving door as an investment banker. And yet, Macron sounds off populist rhetoric: His candidacy, he says, is about sweeping out a corrupt system (even as he is supported by the vast majority of the French establishment).

"It would be only slightly churlish to say that the parts of the system Macron wants to do away with are the democratic ones; witness his full-throated support for the EU in a country that has rejected it at the polls. Macron supports various liberalizing reforms, and Angela Merkel"s welcoming policy towards migrants. He is, of course, a social liberal. In a country that takes culture very seriously, he has argued that there is "no such thing" as French culture; rather, there are many cultures with which the French perform a kind of synthesis. His biggest donors seem to be French tax exiles residing in London and Brussels.

"In other words, he is the mirror image of the political realignment that is transforming Western politics. If the familiar motley crew of populists — Trump, Le Pen — are the candidates for those who lost out from globalization, then Macron is the candidate of the winners. In both cases, they seem to make old left-right divisions obsolete. If the Macron bubble doesn"t pop, this may portend the realignment, not just of French politics, but Western politics in general, away from the left-right division that has defined Western politics since the French Revolution, towards a division between the people and the elites.

Le Pen agrees. At a rally in Lyon on February 5, she said:

"The old left-right debates have outlived their usefulness. Primaries have shown that debates about secularism or immigration, as well as globalization or generalized deregulation, constitute a fundamental and transversal divide. This divide is no longer between the left and the right, but between patriots and globalists.

"The collapse of traditional parties and the systematic disappearance of almost all of their leaders shows that a great political re-composition has begun."

At that same rally, Le Pen launched a two-pronged attack on globalization and radical Islam. She also promised French voters a referendum on remaining in the European Union in order "to allow us to recover our four sovereignties: monetary, economic, legislative and territorial."

She went on to articulate exactly what is at stake for France in this election:

In all respects, this presidential election is unlike previous ones. Its outcome will determine the future of France as a free nation and our existence as a people.

After decades of errors and cowardice, we are at a crossroads. I say it with gravity: the choice we will have to make in this election is a choice of civilization.

The question is simple and cruel: will our children live in a free, independent, democratic country? Will they still be able to refer to our system of values? Will they have the same way of life as we did and our parents before us?

Will our children, and the children of our children, still have a job, a decent wage, the possibility of building up a patrimony, becoming an owner, starting a family in a safe environment, being properly cared for, to grow old with dignity?

Will our children have the same rights as us?

Will they live according to our cultural references, our values ??of civilization, our style of living, and will they even speak our French language, which is disintegrating under the blows of political leaders who squander this national treasure — for example, by choosing a slogan in English to promote the candidacy of Paris to host the 2024 Olympic Games?

Will they have the right to claim French culture when certain candidates for the presidential election, puffed up by their own empty-headedness, explain that it does not exist?

I ask this important question because, unlike our adversaries, I am interested not only in the material heritage of the French, but I also want to defend our immaterial capital. This immaterial capital is priceless because this heritage is irreplaceable. In fact, I am defending the load-bearing walls of our society.

The choice for French voters is clear: Le Pen is the anti-establishment change candidate and Macron is the pro-establishment status quo candidate.

In the current French presidential election campaign, Marin Le Pen (right) is the anti-establishment change candidate and Emmanuel Macron (left) is the pro-establishment status quo candidate. (Image source: LCI video screenshot)

Le Pen is offering voters an historic opportunity to reassess relations with the European Union, reassert national sovereignty and stanch the flow of mass migration from the Muslim world. By contrast, Macron is offering voters increased European federalism, the transference of yet more national sovereignty to the European Union, and the further multiculturalization of French society.

If polls are any indication, French voters appear to be more comfortable with the status quo. The populist revolution that began in June 2016 when British voters decided to leave the European Union, and cross the Atlantic in November when Americans elected U.S. President Donald J. Trump, will not be spreading to France in 2017.

Trump Wins: G-20 Drops 'Anti-Protectionist, Free-Trade, & Climate-Change Funding' Commitment

After delays and hours of discussions amid tensions over "trade" comments between the United States and the rest of The G-20, it appears President Trump has "won". While China was "adamantly against" protectionism, the finance ministers end talks without renewing their long-standing commitment to free trade and rejection of protectionism after US opposition.

The world"s financial leaders are unlikely to endorse free trade and reject protectionism in their communique on Saturday because they have been unable to find a wording that would suit a more protectionist United States, G20 officials said.

This would break with a decade-old tradition among the finance ministers and central bankers of the world"s 20 top economies (G20), who over the years have repeatedly rejected protectionism and endorsed free trade.

But the new administration in the United States is considering trade measures to curb imports with a border tax and would not agree to repeat the formulations used by previous G20 communiques, clashing with China and Europe, the officials said.

"Unless there is a last minute miracle, there is no agreement on trade," one official, who declined to be named, told Reuters.  "This is not a good outcome of the meeting," a G20 delegate quoted Bundesbank President Jens Weidmann as saying.

In a partial face-saving move, as The FT details, G20 finance ministers meeting in the German resort town of Baden-Baden noted the importance of trade to the global economy, but dropped tougher language from last year that vowed to “resist all forms of protectionism”.

The new communique said: “We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.”

The watered-down commitments on free trade reflected the anti-globalisation mood that Donald Trump has brought to Washington and came in the first G20 meetings between Steven Mnuchin, the new US Treasury Secretary, and his foreign counterparts.

US Treasury Secretary Mnuchin spoke to reporters after the meeting:

• *MNUCHIN: LOOKING FORWARD TO WORKING CLOSELY W/ G-20 COLLEAGUES


• *MNUCHIN: CONFIDENT U.S. CAN WORK CONSTRUCTIVELY WITH PARTNERS


• *MNUCHIN: U.S. BELIEVES IN FREE, BALANCED TRADE


• *MNUCHIN SAYS WILL LOOK AT TRADE SURPLUSES WITH VIEW TO CORRECT


• *MNUCHIN SAYS MULTILATERAL AGREEMENTS HAVE VERY IMPORTANT PLACE


• *MNUCHIN SAYS U.S. WANTS TO RE-EXAMINE TRADE DEALS INCL. NAFTA


• *MNUCHIN: U.S. BELIEVES IN APPROPRIATE REGULATION


• *MNUCHIN SAYS IMPORTANT BANKS CAN PROVIDE LIQUIDITY IN MARKETS

Reuters also points out another potential win for Trump as the communique will also drop a reference, used by the G20 last year, on the readiness to finance climate change as agreed in Paris in 2015 because of opposition from the United States and Saudi Arabia.

Trump has called global warming a "hoax" concocted by China to hurt U.S. industry and vowed to scrap the Paris climate accord aimed at curbing greenhouse gas emissions.

Trump"s administration on Thursday proposed a 31 percent cut to the Environmental Protection Agency"s budget as the White House seeks to eliminate climate change programs and trim initiatives to protect air and water quality.

Asked about climate change funding, Mick Mulvaney, Trump"s budget director, said on Thursday, "We consider that to be a waste of money."

The G20 do agree, however, to show continuity in their foreign exchange policies, using phrases from the past on foreign exchange markets.

As we noted earlier, needless to say, such an acrimonous end to the weekend"s summit would likely result in a surge in FX volatility when markets open for trading late on Sunday, reflecting the new state of global trade flux, in which the future of the US Dollar is completely unknown, and reflecting the emerging chaos over the future parameters of trade.
 

The Democrats' Trump-Russia Conspiracy Campaign Collapses

From MSNBC politics shows to town hall meetings across the country, the overarching issue for the Democratic Party’s base since Trump’s victory has been Russia, often suffocating attention for other issues. This fixation has persisted even though it has no chance to sink the Trump presidency unless it is proven that high levels of the Trump campaign actively colluded with the Kremlin to manipulate the outcome of the U.S. election — a claim for which absolutely no evidence has thus far been presented.

The principal problem for Democrats is that so many media figures and online charlatans are personally benefiting from feeding the base increasingly unhinged, fact-free conspiracies — just as right-wing media polemicists did after both Bill Clinton and Obama were elected — that there are now millions of partisan soldiers absolutely convinced of a Trump/Russia conspiracy for which, at least as of now, there is no evidence. And they are all waiting for the day, which they regard as inevitable and imminent, when this theory will be proven and Trump will be removed.

Key Democratic officials are clearly worried about the expectations that have been purposely stoked and are now trying to tamp them down. Many of them have tried to signal that the beliefs the base has been led to adopt have no basis in reason or evidence.

The latest official to throw cold water on the MSNBC-led circus is President Obama’s former acting CIA chief Michael Morell. What makes him particularly notable in this context is that Morell was one of Clinton’s most vocal CIA surrogates. In August, he not only endorsed Clinton in the pages of the New York Times but also became the first high official to explicitly accuse Trump of disloyalty, claiming, “In the intelligence business, we would say that Mr. Putin had recruited Mr. Trump as an unwitting agent of the Russian Federation.”

But on Wednesday night, Morell appeared at an intelligence community forum to “cast doubt” on “allegations that members of the Trump campaign colluded with Russia.” “On the question of the Trump campaign conspiring with the Russians here, there is smoke, but there is no fire at all,” he said, adding, “There’s no little campfire, there’s no little candle, there’s no spark. And there’s a lot of people looking for it.”

Obama’s former CIA chief also cast serious doubt on the credibility of the infamous, explosive “dossier” originally published by BuzzFeed, saying that its author, Christopher Steele, paid intermediaries to talk to the sources for it. The dossier, he said, “doesn’t take you anywhere, I don’t think.”

Morell’s comments echo the categorical remarks by Obama’s top national security official, James Clapper, who told Meet the Press last week that during the time he was Obama’s DNI, he saw no evidence to support claims of a Trump/Russia conspiracy. “We had no evidence of such collusion,” Clapper stated unequivocally. Unlike Morell, who left his official CIA position in 2013 but remains very integrated into the intelligence community, Clapper was Obama’s DNI until just seven weeks ago, leaving on January 20.

Perhaps most revealing of all are the Democrats on the Senate Intelligence Committee — charged with investigating these matters — who recently told BuzzFeed how petrified they are of what the Democratic base will do if they do not find evidence of collusion, as they now suspect will likely be the case. “There’s a tangible frustration over what one official called ‘wildly inflated’ expectations surrounding the panel’s fledgling investigation,” BuzzFeed’s Ali Watkins wrote.

Moreover, “several committee sources grudgingly say, it feels as though the investigation will be seen as a sham if the Senate doesn’t find a silver bullet connecting Trump and Russian intelligence operatives.” One member told Watkins: “I don’t think the conclusions are going to meet people’s expectations.”

What makes all of this most significant is that officials like Clapper and Morell are trained disinformation agents; Clapper in particular has proven he will lie to advance his interests. Yet even with all the incentive to do so, they are refusing to claim there is evidence of such collusion; in fact, they are expressly urging people to stop thinking it exists. As even the law recognizes, statements that otherwise lack credibility become more believable when they are ones made “against interest.”

Media figures have similarly begun trying to tamp down expectations. Ben Smith, the editor-in-chief of BuzzFeed, which published the Steele dossier, published an article yesterday warning that the Democratic base’s expectation of a smoking gun “is so strong that Twitter and cable news are full of the theories of what my colleague Charlie Warzel calls the Blue Detectives — the left’s new version of Glenn Beck, digital blackboards full of lines and arrows.” Smith added: “It is also a simple fact that while news of Russian actions on Trump’s behalf is clear, hard details of coordination between his aides and Putin’s haven’t emerged.” And Smith’s core warning is this:

Trump’s critics last year were horrified at the rise of “fake news” and the specter of a politics shaped by alternative facts, predominantly on the right. They need to be careful now not to succumb to the same delusional temptations as their political adversaries, and not to sink into a filter bubble which, after all, draws its strength not from conservative or progressive politics but from human nature.

And those of us covering the story and the stew of real information, fantasy, and — now — forgery around it need to continue to report and think clearly about what we know and what we don’t, and to resist the sugar high that comes with telling people exactly what they want to hear.

For so long, Democrats demonized and smeared anyone trying to inject basic reason, rationality, and skepticism into this Trump/Russia discourse by labeling them all Kremlin agents and Putin lovers. Just this week, the Center for American Progress released a report using the language of treason to announce the existence of a “Fifth Column” in the U.S. that serves Russia (similar to Andrew Sullivan’s notorious 2001 decree that anyone opposing the war on terror composed an anti-American “Fifth Column”), while John McCain listened to Rand Paul express doubts about the wisdom of NATO further expanding to include Montenegro and then promptly announced: “Paul is working for Vladimir Putin.”

But with serious doubts — and fears — now emerging about what the Democratic base has been led to believe by self-interested carnival barkers and partisan hacks, there is a sudden, concerted effort to rein in the excesses of this story. With so many people now doing this, it will be increasingly difficult to smear them all as traitors and Russian loyalists, but it may be far too little, too late, given the pitched hysteria that has been deliberately cultivated around these issues for months. Many Democrats have reached the classic stage of deranged conspiracists where evidence that disproves the theory is viewed as further proof of its existence, and those pointing to it are instantly deemed suspect.

A formal, credible investigation into all these questions, where the evidence is publicly disclosed, is still urgently needed. That’s true primarily so that conspiracies no longer linger and these questions are resolved by facts rather than agenda-driven anonymous leaks from the CIA and cable news hosts required to feed a partisan mob.

It’s certainly possible to envision an indictment of a low-level operative like Carter Page, or the prosecution of someone like Paul Manafort on matters unrelated to hacking, but the silver bullet that Democrats have been led to expect will sink Trump appears further away than ever.

But given the way these Russia conspiracies have drowned out other critical issues being virtually ignored under the Trump presidency, it’s vital that everything be done now to make clear what is based in evidence and what is based in partisan delusions. And most of what the Democratic base has been fed for the last six months by their unhinged stable of media, online, and party leaders has decisively fallen into the latter category, as even their own officials are now desperately trying to warn.

China's Banking System Hits $33 Trillion, Overtaking The Eurozone As World's Largest

Something historic, if largely unnoticed, took place at the end of 2016: China’s banking system surpassed that of the eurozone, becoming the world’s largest by assets, which according to the FT is a sign of both of the country’s increased influence in world finance and its reliance on debt to drive growth since the global financial crisis. It is also a confirmation that when it comes to interwoven, "Too Big To Fail" financial systems, nothing compares to China and that the onus is on Beijing to keep its banks viable and solvent at all costs.

Chinese bank assets, frequently discussed here and which are also the basis for Kyle Bass" bearish stance on China, hit $33 trillion at the end of 2016, versus $31 trillion for the eurozone, $16 trillion for the US and $7 trillion for Japan. The value of China’s banking system is now more than 310% the size of its GDP, compared to "only" 280% for the eurozone and its banks.

Putting China"s banking dominance in context, 4 of the 5 largest global banks are now Chinese:

“The massive size of China’s banking system is less a cause for celebration than a sign of an economy overly dependent on bank-financed investment, beset by inefficient resource allocation, and subject to enormous credit risks,” said Eswar Prasad, economist at Cornell University and former China head of the International Monetary Fund.

While China’s GDP - goalseeked as it may be - surpassed the EU’s in 2011, it was not until 5 years later that its banking system took over the top spot. The lag, as the FT notes, "reflects Beijing’s increased “financial deepening” — the term for the growth of a country’s financial system relative to gross domestic product. This has been fuelled by an extraordinary increase in bank lending since 2008, when the government unleashed aggressive monetary and fiscal stimulus to buffer the impact of the global crisis."

As discussed here extensively, while China became the world"s growth dynamo during and after the financial crisis, spewing out between $3 and $4 trillion in credit creation each year, and buffering the sharp global drop following the Lehman failure, its continued growth since then is now raising alarm flags:

World leaders and economists lauded China’s stimulus at the time for helping to stabilise global growth at a time when developed countries were deep in recession. Now, however, the stimulus is seen as leading to significant wasteful investment, industrial overcapacity and dangerous debt levels.

Analysts note that unlike in developed markets, Chinese local governments have relied heavily on bank loans to finance infrastructure. Unlisted, state-owned policy banks — notably China Development Bank, with assets of more than $2tn — play a central role, while commercial banks also participate.

“There’s a lot of hidden sovereign credit within the corporate loans on bank balance sheets, which can distort the picture when you do a cross-country comparison,” said Hou Wei, China banks analyst at Sanford C Bernstein in Hong Kong. “In most other markets, governments just borrow directly from capital markets. In China, it’s a unique situation.”

Making matters worse, the real number is likely even greater due to the substantial impact of China"s shadow banking sector which largely remains off the books: the FT confirms that the headline figures understate the true scale of Chinese banks.

Shadow banking has exploded since 2010. While ostensibly off-balance-sheet, most of this credit remains closely linked to commercial banks. The central bank warned last month that the distinction between on- and off-balance-sheet assets is often hazy due to the prevalence of implicit guarantees. Banks have frequently provided bailouts for off-balance-sheet products, even where no legal obligation exists.

While in recent weeks, China"s top leaders have signalled that they intend to shift policy focus away from stimulus towards risk control, the truth is they have done so on numerous occasions in the past only to fail, and as a result concrete action is lacking. As we reported at the time, the flow of broad credit hit a new record in January.

“The Chinese government’s ambivalent approach to financial markets — seeing them as a useful resource-allocation mechanism but unwilling to let them operate freely, with the ostensible aim of maintaining stability and control — has often added to market volatility and made them less efficient,” said Prasad.

Of course, as long as it is merely volatility instead of an all out collapse, few will mind.

But a greater risk is that should the build up in loans, i.e., assets, continue, it will become increasingly difficult to maintain control. And, as Bloomberg writes in a separate report, the Chinese credit engine will keep humming this year, adding the rough equivalent of Germany’s annual economic output to its already massive stock of total social financing, based on estimates derived from the nation’s 2017 targets.

Adding higher equity market financing and about 5 trillion yuan ($725 billion) worth of local government bond swaps to the official credit growth target of 12 percent, analysts at UBS Group AG see TSF expansion of 14.8 percent this year. They calculate that’s equal to a whopping 23 trillion yuan, or $3.3 trillion, addition to the amount of total credit already swishing around the world’s second-largest economy. In other words, by the end of 2017, China"s banking syste, will be roughly $37 trillion and rising precipitously.

A major problem with China’s great ball of money, as it is also known, is that it creates a constant headache for policy makers as money flows from asset class to asset class, creating constant bubbles along the way, whether in real estate, stocks or commodities. It’s a particular dilemma for the People’s Bank of China because it needs new credit to generate the kind of growth its leaders desire -- around 6.5 percent or higher if possible this year.

Back From Never Gone: CURRENCY WARS

In the previous episode of the currency wars, a few years ago, the Euro-Dollar exchange rate was in the spotlight. This has now completely disappeared to the background and whilst the countries of the Eurozone must be pretty happy with the weak currency (which boosts the export and increases the demand for domestically produced goods), the United States are less than happy as it weakens the position of the country on the export market.

Source: Tradingeconomics

You might have missed it when the mass media were falling over themselves to crucify president Trump, but we had the impression currency wars, and protecting the position of the United States on the world market were pretty high on his ‘to do list’ after decades of huge trade deficits. As you can see on the next image, there clearly is a huge discrepancy in the trade numbers between China and the United States. A substantial trade deficit, which has been nipped in the bud by China using their hard dollars to purchase US Treasuries.

Source: Danske Bank

Whereas the president was definitely pointing fingers at China during his election campaign, he seems to have been softer after a recent call with the Chinese president.

Does this mean the USA and China are now best buddies again? Probably not. It’s far more likely the president has realized he won’t be able to get much done when he gets in a direct confrontation with China. His staff has now launched a ‘test balloon’ and widened the scope of the currency manipulation investigation. Instead of singling out China, the White House will now be using a more general approach, and has even singled out Germany.

Source: Danske Bank

In order to be able to ‘sell’ this idea to concerned countries and entities, the Trump administration might present its own ‘alternative facts’, according to the Wall Street Journal. Even though the trade deficit between the United States and China is very clear in the previous image, it’s entirely possible the White House will introduce a new standard to calculate the trade deficit, to increase the deficit numbers.

According to a paper published by the Trump camp during the election campaign, China was really the main focus of the Economic plan. According to the paper; ‘In a world of freely floating currencies, the US dollar would weaken and the Chinese yuan would strengthen because the US runs a large trade deficit with China and the rest of the world. American exports to China would then rise, Chinese imports to America would fall, and trade should come back towards balance’.

Source: The Trump Economic Plan

That’s an absolutely accurate description, and even in the white paper, the Trump camp looked to things on a larger scale instead of focusing on China. Even the European Monetary Union and specifically Germany were singled out as examples of ‘currency manipulators’.

So don’t be surprised if the White House suddenly announces a plan to use a new method to calculate the trade deficits, in order to make the deficits appear to be larger than they really are. And this could absolutely re-shape the world and increase the impact from currency exchange rates. This doesn’t mean things will definitely change for the worse, but it’s always a very thin line when you’re dealing with powerful trading partners.

It will be difficult to create a win-win situation, but let’s hope it doesn’t turn into a lose-lose situation, as that could cripple the worldwide economy again.

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How Corporate Media Continues To Use The 'Russia Scapegoat' To Distract from Status Quo Failure

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

Countless observers have noted the obvious fact that the corporate media’s all-encompassing obsession with anti-Russia hysteria is partly just a shameless campaign to prevent change within the Democratic Party by blaming its loss on an outside enemy as opposed to the oligarch-coddling, corrupt disaster it nominated. While true, the strategy is far bigger than that. So called Western elites have failed miserably across the globe, and the only way to retain their undeserved positions of power (many should be in jail), is to create and promote a mindless, highly emotional, non-domenstic distraction. Enter Russia.

Ken Wilber perfectly articulated the failure of our discredited status quo in his recent ebook, which I quoted extensively from in my recent post, How a Breakdown in Liberal Ideology Created Trump – Part 1. He noted:

The problem very quickly became what Integral Metatheory calls a “legitimation crisis,” which it defines as a mismatch between Lower-Left (or cultural) beliefs and the Lower-Right systems (or actual background realities, such as the techno-economic base). The cultural belief was that everybody is created equal, that all people have a perfect and equal right to full personal empowerment, that nobody is intrinsically superior to others (beliefs that flourished with green). Yet the overwhelming reality was increasingly one of a stark and rapidly growing unequality—in terms of income and overall worth, property ownership, employment opportunity, healthcare access, life satisfaction issues. The culture was constantly telling us one thing, and the realities of society were consistently failing to deliver it—the culture was lying. This was a deep and serious legitimation crisis— a culture that is lying to its members simply cannot move forward for long. And if a culture has “no truth,” it has no idea when it’s lying—and thus it naturally lies as many times as it accidentally tells the truth, and hence faster than you can say “deconstruction,” it’s in the midst of a legitimation crisis.

Naturally, those in power can never admit their historically epic failure on all fronts, so they’re increasingly rallying around the Russia meme in order to distract the public and hopefully hang on to their plum positions within society.

In that regard, Robert Parry has written an excellent article published in Consortium News titled, NYT’s Fake News about Fake News. Here are some key excerpts:

A front-page Times article on Tuesday, citing “fake news” as a threat to Europe, contains what arguably is “fake news” itself by claiming that many of the purported 2,500 stories “discredited” by the European Union’s East Stratcom operation have “links to Russia” although the Times doesn’t identify those links.

The article by Mark Scott and Melissa Eddy then goes on to blur these two separate concepts: “In a year when the French, Germans and Dutch will elect leaders, the European authorities are scrambling to counter a rising tide of fake news and anti-European Union propaganda aimed at destabilizing people’s trust in institutions.”

But it is this mushing together of “fake news” and what the Times describes as “anti-European Union propaganda” that is so insidious. The first relates to consciously fabricated stories; the second involves criticism of a political institution, the E.U,, which is viewed by many Europeans as elitist, remote and disdainful of the needs, interests and attitudes of average citizens.

Whether you call such criticism “propaganda” or “dissent,” it is absurd to blame it all on Russia. When it comes to “destabilizing people’s trust in institutions,” the E.U. — especially with its inept handling of the Great Recession and its clumsy response to the Syrian refugee crisis — is doing a bang-up job on its own without Russian help.

Perfectly said.

Yet, rather than face up to legitimate concerns of citizens, the E.U. and U.S. governments have found a convenient scapegoat, Russia. To hammer home this point — to make it the new “groupthink” — E.U. and U.S. leaders have financed propaganda specialists to disparage political criticism by linking it to Russia.

Even worse, in the United States, the Times and other mainstream publications – reflecting the views of the political establishment – have editorialized to get giant technology companies, like Facebook and Google, to marginalize independent news sites that don’t accept the prevailing conventional wisdom.

There is an Orwellian quality to these schemes — a plan for a kind of Ministry of Truth enforced by algorithms to weed out deviant ideas — but almost no one whose voice is allowed in the mass media gets to make that observation. Even now, there is a chilling uniformity in the endless denunciations of Russia as the root of all evil.

Though the Times’ article treats the E.U.’s East Stratcom operatives as 11 beleaguered public servants sticking their fingers in the dike to protect the citizenry from a flood of Russian disinformation, “stratcom” actually is a euphemism for psychological operations, i.e., the strategic use of communications to influence the thinking of a target population.

In this case, the target populations are the European public and – to an ancillary degree – the American people who get to absorb the same propaganda from The New York Times. The real goal of stratcom is not to combat a few sleazy entrepreneurs generating consciously false stories for profit but to silence or “discredit” sources of information that question the E.U. and U.S. propaganda.

NATO has its own Stratcom command based in Latvia that also is assigned to swat down information that doesn’t conform to Western propaganda narratives. The U.S. Agency for International Development and the U.S.-funded National Endowment for Democracy also pour tens of millions of dollars into media operations with similar goals as do major Western foundations, such as currency speculator George Soros’s Open Society. Last December, the U.S. Congress approved and President Obama signed legislation to create an additional $160 million bureaucracy to combat “Russian propaganda.”

If you aren’t up to speed on the machinations of the U.S. Agency for International Development (USAID), make sure to read the following:

U.S. Government Caught Using Humanitarian HIV Program as a Front to Foster Cuban Dissent

Conspiracy Fact – How the U.S. Government Covertly Invented a “Cuban Twitter” to Create Revolution

In other words, the West’s stratcom and “psychological operations” are swimming in dough despite the Times’ representation that these “anti-disinformation” projects are unfairly outgunned by sinister forces daring to challenge what everyone-in-the-know knows to be true.

If these “stratcom” operations were around in 2002-2003, they would have been accusing the few people questioning the Iraq-has-WMD certainty of putting out “fake news” to benefit Saddam Hussein. Now, journalists and citizens who don’t buy the full-Monte demonization of Russia and its President Vladimir Putin are put into a similar category.

Disturbingly, the leading forces in this suppression of skepticism are the most prestigious newspapers in the United States and Europe. Even after the disastrous experience with the Iraq War and the bogus WMD groupthink, Western news outlets that were party to that fiasco have virtually excluded well-reported articles and documentaries that question the U.S. and E.U. narratives of the New Cold War.

For instance, there has been almost no presentation in the mainstream Western media of an alternative – and I would argue more complete and accurate – narrative of the Ukraine conflict, taking into account the country’s complex history and deep ethnic divisions.

It is essentially forbidden to refer to the violent overthrow of elected President Viktor Yanukovych three years ago  as a “coup” or a “putsch” or to cite evidence of a U.S.-backed “regime change,” such as an intercepted phone call between U.S. Assistant Secretary of State Victoria Nuland and U.S. Ambassador to Ukraine Geoffrey Pyatt in which they discussed how “to glue” and how “to midwife” the installation of a new leadership in Kiev.

In the supposedly “free” West, you can only refer to the post-coup events in Crimea, in which the people of the largely ethnic Russia area voted overwhelmingly to secede from Ukraine and rejoin Russia, as a “Russian invasion.” No skepticism is allowed even though there were no images of Russian troops wading ashore on Crimea’s beaches or Russian tanks crashing across borders. The “invasion” supposedly happened even though no invasion was necessary because Russian troops were already in Crimea under the naval basing agreement at Sevastopol.

Amid the West’s current hysteria about “Russian propaganda,” U.S. and E.U. citizens are not even given the opportunity to watch well-reported documentaries about key moments in the New Cold War, including an eye-opening investigative report debunking the Western propaganda myth constructed around the death of Russian accountant Sergei Magnitsky or a well-produced historical account of the Ukraine crisis.

Western news outlets and governments even take pride in blocking such dissenting views and contrary information from reaching the American and European publics. Like East Stratcom — the E.U.’s Brussels-based 11-member team of diplomats, bureaucrats and former journalists — establishment institutions see themselves bravely battling “Russian disinformation.” They see it as their duty not to let their people hear this other side of the story.

One of the really important, but potentially overlooked, observations made by Robert relates to the potential use of algorithms to censor non-official perspectives. He noted:

There is an Orwellian quality to these schemes — a plan for a kind of Ministry of Truth enforced by algorithms to weed out deviant ideas — but almost no one whose voice is allowed in the mass media gets to make that observation.

With that in mind, I want to highlight a really important report published by the Pew Research Center on the topic titled, Code-Dependent: Pros and Cons of the Algorithm Age. Here are a few excerpts:

Algorithms are aimed at optimizing everything. They can save lives, make things easier and conquer chaos. Still, experts worry they can also put too much control in the hands of corporations and governments, perpetuate bias, create filter bubbles, cut choices, creativity and serendipity, and could result in greater unemployment.

 

Algorithms are instructions for solving a problem or completing a task. Recipes are algorithms, as are math equations. Computer code is algorithmic. The internet runs on algorithms and all online searching is accomplished through them. Email knows where to go thanks to algorithms. Smartphone apps are nothing but algorithms. Computer and video games are algorithmic storytelling. Online dating and book-recommendation and travel websites would not function without algorithms. GPS mapping systems get people from point A to point B via algorithms. Artificial intelligence (AI) is naught but algorithms. The material people see on social media is brought to them by algorithms. In fact, everything people see and do on the web is a product of algorithms. Every time someone sorts a column in a spreadsheet, algorithms are at play, and most financial transactions today are accomplished by algorithms. Algorithms help gadgets respond to voice commands, recognize faces, sort photos and build and drive cars. Hacking, cyberattacks and cryptographic code-breaking exploit algorithms. Self-learning and self-programming algorithms are now emerging, so it is possible that in the future algorithms will write many if not most algorithms.

 

Algorithms are often elegant and incredibly useful tools used to accomplish tasks. They are mostly invisible aids, augmenting human lives in increasingly incredible ways. However, sometimes the application of algorithms created with good intentions leads to unintended consequences.

 

The use of algorithms is spreading as massive amounts of data are being created, captured and analyzed by businesses and governments. Some are calling this the Age of Algorithms and predicting that the future of algorithms is tied to machine learning and deep learningthat will get better and better at an ever-faster pace.

 

While many of the 2016 U.S. presidential election post-mortems noted the revolutionary impact of web-based tools in influencing its outcome, XPrize Foundation CEO Peter Diamandis predicted that “five big tech trends will make this election look tame.” He said advances in quantum computing and the rapid evolution of AI and AI agents embedded in systems and devices in the Internet of Things will lead to hyper-stalking, influencing and shaping of voters, and hyper-personalized ads, and will create new ways to misrepresent reality and perpetuate falsehoods.

 

Analysts like Aneesh Aneesh of Stanford University foresee algorithms taking over public and private activities in a new era of “algocratic governance” that supplants “bureaucratic hierarchies.” Others, like Harvard’s Shoshana Zuboff, describe the emergence of “surveillance capitalism” that organizes economic behavior in an “information civilization.”

Now here’s a chart presenting the “major themes about the algorithm era”:

Finally, here’s an important quote highlighting some of what needs to be done in order to ensure algorithms work for us, as opposed to against us.

To create oversight that would assess the impact of algorithms, first we need to see and understand them in the context for which they were developed. That, by itself, is a tall order that requires impartial experts backtracking through the technology development process to find the models and formulae that originated the algorithms. Then, keeping all that learning at hand, the experts need to soberly assess the benefits and deficits or risks the algorithms create. Who is prepared to do this? Who has the time, the budget and resources to investigate and recommend useful courses of action? This is a 21st-century job description – and market niche – in search of real people and companies. In order to make algorithms more transparent, products and product information circulars might include an outline of algorithmic assumptions, akin to the nutritional sidebar now found on many packaged food products, that would inform users of how algorithms drive intelligence in a given product and a reasonable outline of the implications inherent in those assumptions.

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US Aircraft Carrier Group Begins "Routine" Patrols In Disputed South China Sea

Threatening to destabilize the tentative improvement in Sino-US relations achieved in recent days following Trump"s recent concession over the "One China" policy, was the US deployment of the aircraft carrier USS Carl Vinson (CVN-70) to the disputed waters of the South China Sea on Saturday as part of maritime "routine operations", according to an announcement posted on the Vinson"s Facebook page.

Sailing with the 97,000-ton Vinson is the guided-missile destroyer USS Wayne E. Meyer, the Navy said in a statement. The Vinson carries a flight group of more than 60 aircraft, including F/A-18 jet fighters.

The deployment comes just one day after China wrapped up its own naval exercises in the South China Sea on Friday, CNN reported. War games involving its own aircraft carrier have unnerved neighbors with which it has long-running territorial disputes.

US aircraft carrier operations in the South China Sea are not unusual. Almost a year ago, the USS John C. Stennis led a similar cruise through the area. And the Vinson was in the South China Sea in 2015, just one of its 16 operations in the South China Sea in its 35-year history. The cruise of the Vinson in the South China Sea is the second of a high-profile US Navy vessel this month.

It also follows training operations in the South China Sea conducted by the littoral combat ship USS Coronado, which is temporarily based in Singapore, according to a Navy statement. "While underway, we are conducting training across multiple mission areas including weapons training, manned and unmanned flight operations, ship handling, and damage control drills," said Cmdr. Scott Larson, the Coronado"s commanding officer. "Training at sea in these warfare areas maintains crew proficiency and ensures we are ready to operate successfully in a variety of missions."

Quoted by the Navy News Service, Rear Adm. James Kilby, commander of the Vinson strike group, had a similar message: "The training completed over the past few weeks has really brought the team together and improved our effectiveness and readiness as a strike group," Kilby said in a statement. "We are looking forward to demonstrating those capabilities while building upon existing strong relationships with our allies, partners and friends in the Indo-Asia-Pacific region."

The operation, which is the latest test of Chinese response to US naval presence in the contested region comes amid growing tensions between the United States and China over territory and trade, and as the Trump administration looks set to take a more confrontational stance toward China than its predecessor. During his confirmation hearing, new Secretary of State Rex Tillerson said China should be blocked from accessing the artificial islands it"s built, setting the stage for a potential showdown.

As CNN reports, in a news conference Wednesday, China"s Foreign Ministry said it heard about the planned deployment of the Vinson days before it happened, and warned Washington against challenging its sovereignty.  "China respects and upholds the freedom of navigation and overflight in the South China Sea, which countries enjoy under international law, but firmly opposes any country"s attempt to undermine China"s sovereignty and security in the name of the freedom of navigation and overflight," China"s Foreign Ministry spokesman Geng Shuang said.

In an overnight op-ed in the nationalistic Global Times tabloid, China wrote that it "should strongly object to the US in this case. Having freedom of navigation is reasonable in certain areas in the open sea. But, in an exclusive economic zone over which a country has exclusive rights to explore and use the marine resources, the US" freedom of navigation does not apply and it may harm the economic interests of other countries."

In the past few years, the US administration under then president Barack Obama limited the US Navy operations in disputed areas such as the Nansha Islands and did not perform freedom of navigation operations in the South China Sea from 2012 to 2015 so as to avoid unnecessary clashes. 

After all, frequent US activities in the waters can easily lead to clashes with China. Obama"s restriction has to some extent prevented such scenario from happening. Recently, a Chinese early warning aircraft nearly collided with a US Navy patrol plane. In matters like this, Trump needs to learn from his predecessor.

The contested waters are a key shipping route at the heart of a territorial dispute that pits multiple countries against one another. China has a long history of maritime disputes with its South China Sea neighbors. China claims almost all of the South China Sea, including islands more than 800 miles from the Chinese mainland, despite objections from neighbors such as the Philippines, Malaysia, Brunei and Vietnam.

Beijing has also created artificial islands in the area, outfitting some of them with military features. According to the US, China has reclaimed more than 3,000 acres in the Spratly Islands since 2014. In December, satellite imagery released by Asia Maritime Transparency Initiative showed China has installed weapon systems on all seven artificial islands.

Though the US takes no position on the territorial dispute in the South China Sea, its warships have conducted routine "freedom of navigation" operations near the reclaimed islands, eliciting warnings from Beijing. The most recent of those was in October by the guided-missile destroyer USS Decatur. China at the time called it a serious breach of law and an intentional provocation. There is no word whether the Vinson or the Meyer would be getting near the Chinese-claimed islands.

In a preemptive move to limit foreign naval presence in proximity to China and the disputed South and East China Sea islands, last Thursday China"s People"s Daily reported the Beijing is set to revise its 1984 Maritime Traffic Safety Law, which would allow the relevant authorities to "bar some foreign" (read U.S.) ships from passing through Chinese territorial waters. The Legislative Affairs Office of the State Council announced Tuesday it is soliciting public opinions on the revisions. Think of it as an Air Defense Identification Zone, only in the water. China has yet to make a formal decision.

The latest distribution of US naval forces around the globe is shown in the map below.

The VIX Will Be Over 100 due to Central Bank Created Tail Risk

By EconMatters

We discuss the manner in which Central Banks have destroyed financial markets, and have the stage for what I label as the Red Swan Event in this video. When the Swiss National Bank holds risky Tech stocks in its portfolio, we are in unchartered territory!

We had the Financial Crisis of 2008, and instead of learning from the mistakes of incentivizing excessive risk taking, the Central Banks were allowed to buy outright assets without any formal authority, no checks and balances whatsoever, and have since destroyed the entire financial market system globally.

In short, Financial Markets are broken, any sense of properly pricing risk has been completely removed from the market, as such, risk has been distorted to such a degree, the future ramifications for financial markets, and financial market participants is profound.

Expect the VIX, to blow past the elevated levels that occurred during the financial crisis of 2008 in the 60 range, to well over 100, and even 200 is possible, maybe even 1,000. The Central Banks have no clue to what degree they have distorted financial asset prices, I can tell you my model stops at a 20 Sigma Event over the next decade. I put the 20 sigma event as high as a 35% probability over the next 10 years, 35 percent, that is just how much asset price distortion has occurred in financial markets by more than 10 major Central Banks around the Financial System since the 2008 Financial Crisis, which was a bubble then.

If we think of China`s massive credit bubble and real estate crash implications for the Asia Pacific Rim Region alone, or the complete dissolution of the European Union (remember the debt crisis of 2012) debt has gotten worse in the European Union since then, to the massive stock market and bond market bubbles in the United States one will start to realize that I am not being alarmist, but that this is a real possibility, and poses a substantial threat to the entire global financial system.

In essence to modern civilization as we know it. Central Banks are so worried about this potential Bubble popping, that they just are afraid to take any responsible action to try and reduce the impact of the ultimate asset unwind.

The problem with this strategy is that the bubble gets substantially bigger every additional month they wait to either raise interest rates, sell assets on their massive balance sheets, or withdraw additional liquidity from the market through other available monetary tools. Moreover, the subsequent risks become exponentially greater as well the more asset prices get distorted from previous historical norm valuation levels through never before attempted artificial Central Bank Balance Sheet Purchases.

We have now blown past Too Big To Fail Territory, risk is not able to be modeled correctly, there isn`t enough money in the system to cover the losses. Whether we are talking taxpayer bailout, gold reserves, currency devaluation, partial haircuts; there are no measures available to cover the losses on a 20 sigma risk event, let alone if the VIX goes to 1,000!

We are facing the massive unilateral complete global financial default that only the tin foil hat crowd has envisioned. How can a responsible Central Bank even let it get to this point where the Extremist Market Crash Scenario is a legitimate possibility, and something that now has to be modeled by financial market participants?

This is the reason we are starting to experience tail risk buying out there in various asset curves. I cannot believe Economists can be this stupid, irresponsible and absolutely ignorant of the risks now brewing to financial markets, and not be scurrying like hell to remedy these alarming financial system risks. Everywhere I look in Financial Markets there are giant massive asset bubbles, and just look below at the Central Bank policies as a group as to the reason why, and the real culprit for the next financial Armageddon. In short, Central Banks have set the entire financial system on a collision course with a Risk level that cannot be properly assessed, and through no formal powers authorizing them this Power.

Just look at all those charts below by Central Banks, and tell me I am wrong to the risks facing the entire global financial system!

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"We're Way Past Humpty Dumpty"

Submitted by Jeffrey Snider via Alhambra Investment Partners,

The most basic link in finance is that between risk and reward. Just like alchemists who once sought a path to gold from lead, a great deal of modern finance was built around finding a shortcut between them. Discovering the great asymmetry where risks would be low but rewards sky high was the Holy Grail of later 20th century mathematics. If you studied advanced math or economics (same thing, unfortunately) at an Ivy League school at that time chances were that at the end of your college career was one on Wall Street.

It was almost like a series of Nigerian princes had descended upon the financial districts of each of the world’s great money centers, promising each and every bank (really “banks”) as much wealth as they could possibly want should they only take a small risk. The most famous of them was Robert Merton and Myron Scholes, who got involved with LTCM, and though they nearly brought down the financial world in 1997 and 1998, that was merely the re-imposition of risk/reward that had never really been altered.

That was one of the great ironies about LTCM. It introduced math in a way that actually preyed upon biases. The allure of math is its scientific senses, the way in which it is pitched under objectivity, as if great formulas and complex equations can see the future because there they have no emotion or individuality. In truth, this financial math is sleight of hand, a magic trick performed by the best of illusionists.

Despite that spectacular failure, everyone on Wall Street and Lombard Street set out to be them anyway, until 2007. When risk/reward was finally appreciated as something as close to an immutable law as there is in finance and economy, it all practically ceased for a time. The death of the eurodollar system is about that more than anything else. Banks pre-August 7, 2007, grew as much and as fast as they could because they believed the scales had been tipped in their favor by the asymmetry of math, the modern alchemy of complexity that in the end fooled more so those on the inside employing it than the vast majority on the outside wondering what the hell had happened.

A great deal has been made about regulation in the years since the crisis, particularly that it has been effective in reducing or eliminating the same behaviors that caused it. This is post hoc ergo propter hoc fallacy, for regulations never, ever stand in the way of Wall Street (or Lombard Street) on a mission. If there was a realistic path back to the mythical asymmetries of post-1995 balance sheet expansion, does anyone really believe that it has been Dodd-Frank holding them all back all this time? In addition to the mass of Ivy League mathematicians they hoarded, the big banks also amassed an army of Ivy League lawyers by which to plow through any obstacles to reaching the Holy Grail. Money is no object when the object is “money.”

On the same day that President Trump signs Executive Orders to begin the process of the repeal or replacement of Dodd-Frank, Deutsche Bank announced that it was cutting 17% of its equity unit and a further 6% in fixed income though that piece of the business has already been pared back enormously already. As always, litigation costs are the media-driven culprit when in reality if DB thought there was an avenue for growth via renewed balance sheet vigor these would be mere hurdles to cross as they chased ever-forward expansion in FICC and employed maximum leverage throughout.

In other words, what is missing is reward, especially under conditions where there are no longer illusions about risk. The last time DB moved all in that direction was 2014, and it does so in isolation nearly ruining them all over again. This is what is so significant about the events in 2011 and why it should be studied equally if not more than 2008.

MR. SACK. I would actually like to argue that the declines on Monday were not entirely driven by the downgrade. I think they were a continuation of the decline in sentiment and the concerns about economic growth that we had already seen develop very intensely over the previous week… My point would be that the downgrade just added to that, but I think the primary driver of all this is really the revision to the economic outlook…

And I think it’s worth pointing out that this is all happening with $1.6 trillion of reserves in the system.

You just don’t commit to massive amounts of internal (thus hidden in math) leverage in an environment where even two QE’s have no effect on either the economy or funding! It wasn’t Dodd-Frank or Basel III that put turmoil upon the repo and FX markets then, it was instead the combined Oh Sh## moment where banks realized they were still holding massive prior risks without the expected recovery by which to deal with them. What happens if you expect to repair your balance sheet with retained future earnings only to find that isn’t so easy and guaranteed as you thought given that money printing turns out to have been “money printing?” You shrink. Period. The faster the better. The more that condition extends, the more you shrink. If you don’t, you become all risk with no possible reward (DB).

The fatal flaw that was considered in 2007 (rather than LTCM 1997) but proven beyond doubt in 2011 was that so long as whatever bank liability any eurodollar bank might create was considered currency, further balance sheet expansion would thus create all the “dollars” necessary to fund it. Thus, that fatal flaw was its circular reasoning, that balance sheet expansion created “dollars” which funded balance sheet expansion, creating more “dollars” and so on. Remove the expansion and the inconsistencies, risk primarily, implode the whole intent. Like a spinning top, it can only ever be stable at high rates of growth, because when it slows everyone starts to question whether that math-as-money is actually real or merely, like alchemy or the Nigerian scam, an impossible dream.

The difference between 2011 and 2007 was as I wrote earlier this week, that in 2009 even the eurodollar futures market believed (perhaps more like hoped) the Fed could possibly be a substitute with its balance sheet expansion, but by 2011 these banks knew for a fact that it could never.

Without recovery, there would be no “dollars”, indeed could be no “dollars.” Regulations were just kicking them when they were already down, an assignment of causation that just doesn’t meet the facts. Removing Dodd-Frank won’t solve the eurodollar, because the eurodollar’s problems are far, far bigger than Dodd-Frank. We are way, way past Humpty Dumpty time. You can bring back prop trading, but you still have to have asymmetry for banks to trade in it. That ship sailed for good in late July 2011.