Britain"s Gravest Economic Challenge Isn"t Brexit

Authored by Paul Wallace, op-ed via Reuters.com,

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.

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

Productivity – output per hour worked – is the mainspring of economic growth.

In the decade before the financial crisis of 2007-08 productivity was increasing in Britain by just over 2 percent a year, outpacing the average for the other economies of the G7. But since the crisis British performance has been dismal. Although productivity jumped in the third quarter of 2017, prolonged weakness means that it is barely higher than its pre-crisis peak a decade ago. The recovery in GDP has been driven overwhelmingly by more labor input, a source of growth that is running dry – not least since the vote to leave the European Union delivered a message to curb immigration.

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.

Productivity is so central to prosperity and to macroeconomic management – by determining how fast the economy can sustainably grow – that a gaggle of economic researchers have been busy in their labs trying to diagnose the now decade-long disease. Early detective work highlighted the impact of the financial crisis itself, which was especially severe in Britain. This held back productivity by throttling bank credit to new potentially fast-growing ventures and by jamming up the usual way in which capital moves from declining to advancing sectors. 

But as the crisis has receded and British banks have become better capitalized this explanation is less convincing. Longer-term forces appear to be in play in Britain and elsewhere. Firms at the technological frontier continue to forge ahead in raising productivity. However, the diffusion of their best practices within economies has slowed. An aging workforce is now acting as a drag. And the contribution to productivity from improved educational attainment is falling.

One reason the productivity setback has been particularly severe in Britain is that its apparently robust performance before the crisis was overstated and unsustainable. Banking activities ballooned on the basis of what turned out to be economically and socially harmful practices such as risky securitizations. Despite making up less than a tenth of the economy, the financial sector has been responsible for nearly a third of the productivity slowdown. Longstanding weaknesses in qualifications and skills have also become more damaging as business becomes more knowledge-based. Over a quarter of British working-age adults perform poorly in numeracy or literacy or both.

Investment is inadequate, too. Although firms have stepped up their capital spending after it collapsed during the recession, they have done much less so than in previous recoveries. Business investment is only 5 percent above its pre-crisis high a decade ago. At a similar stage in the recoveries following recessions at the start of 1980s and of the 1990s it was 63 percent and 30 percent higher than the respective previous peaks.

The reluctance to invest in turn is rooted in a financial and business culture that is especially and perniciously short-termist in Britain. Firms under pressure from the markets are reluctant to make the strategic investments needed to keep productivity moving ahead. And too many British managers are simply not good enough.

Although a definitive diagnosis of the British productivity disease remains elusive there is a surprising degree of consensus about the treatment needed to resuscitate the patient. The chancellor’s to-do list should include steps to tackle congested roads and overcrowded trains, to support the sciences, to foster R&D in the private sector, and to upgrade Britain’s poor skills. Since competition spurs higher productivity as new and smarter firms drive out older and less productive businesses, Hammond needs Britain to be as open an economy as possible.

The remedies make good sense but they will not rescue the chancellor, who has in any case already announced more spending on infrastructure. First, they will take time to be effective. Second, finding more money for austerity-hit public services such as policing and health will add to the pressures on the public finances. And third, Brexit is now contributing to the productivity malaise as businesses respond to corrosive uncertainties by curbing their investment plans and as Britain becomes less open to trade by leaving the EU. Raising taxes is always an option for a cash-strapped chancellor, but it would be highly unpopular − not least in the bitterly divided Conservative party.

When he presents his budget, Hammond can be expected to put a brave face on things. He will point to the fall in the budget deficit from a peak of almost 10 percent of GDP after the financial crisis to 2.3 percent of GDP in the financial year ending in March 2017. But what matters now is the future path of the public finances. Britain’s poor productivity prospects will box the chancellor in because GDP is the tax base and future revenues will be smaller to the extent that output per hour worked continues to stall.   

The harsh reality is that Brexit will blight the public finances by hurting productivity. While Prime Minister May might see Britain’s overriding priority as ensuring that next month’s summit enables the Brexit talks to move on to trade, she’ll have to broaden her focus if she hopes to stay in office long enough to secure a deal that minimizes the damage Brexit is inflicting on the economy.

What Will Push Them Over The Edge?

Authored by Jeff Thomas via InternationalMan.com,

Recently, the people of two of Italy’s most prosperous regions voted in a referendum, on whether they wished to have greater autonomy from Rome.

The referendum is non-binding, but that’s not what’s most significant in the results.

What is significant is that over 95% of those who voted in Lombardy did so in favour of greater autonomy. In Veneto, the number in favour of greater autonomy was even higher, at 98%.

Roberto Maroni, president of Lombardy, said, “I now have a commitment… to go to Rome and give concrete actualization to the mandate that millions of Lombards have given me.”

It may appear on the surface that Mister Maroni intends to make an appeal for independence, but this is not what will occur. He’s a politician and won’t invite Rome to jail him for sedition. His goal will instead be to demand that a greater amount of the national income that’s generated by Lombardy and Veneto (about 20% of the total) remains within those regions.

This will not mean that he wants his people to be taxed less; his goal will be to retain a larger portion to be absorbed by the regional governments—to be in his own hands.

So much for the politicians’ agenda. But what does the referendum say about the people of the regions? Well, the extraordinarily high numbers in favour of greater self-determination demonstrate that virtually all the people in the regions have figured out that Rome is bilking them of their earnings and they’re getting pretty cheesed off.

In prosperous times, a population tends not to complain too much about being robbed through taxation. They grumble a bit, but tolerate it. However, in more stringent times, when people are finding it more difficult to make ends meet, they become more resentful of governments that are chronically both overreaching and wasteful.

Since 2008, we’ve been living in such a time, and the longer people go on without a true recovery, the more resentful they’re going to be.

Independence movements have been afoot in many countries in Europe, every state in the USA, and elsewhere on the globe, but, until recently, they’ve been minor issues, attracting primarily fringe support.

Brexit changed all that, as the people of one of the illustrious G7 countries voted to remove themselves from the parasitical EU.

This, of course, inspired the voters of “lesser” countries to consider the possibility of independence more seriously.

Some of these movements have been efforts by largely dependent entities such as Scotland to express the resentment of being the poor step-sister to a more prosperous central government, but others have been the result of the growing resentment that the province or region that’s producing the lion’s share of the national revenue is routinely having it siphoned off by the central government.

It’s predictable that any regional political leader will like the idea of independence, so that he can create his own country and become its president. However, in the present environment, we’re seeing the people of Lombardy, Veneto, Kurdish Iraq, and Catalonia voting overwhelmingly in favour of either full separation, or at least, greater autonomy.

Of course, this can’t be tolerated by the central governments, as it means that they’ll be losing all that revenue and, in many cases, this would collapse their economy.

But, at present, we’re looking at only the thin end of the wedge. There are countless other provinces and regions out there that have a similar desire to secede, and justifiably so.

After all, much of Europe, until the last century or so, was not made up of large countries. It was made up of lots of little tribal areas that sometimes worked collectively. Even the Roman Empire began as a collection of provinces.

Whilst we, today, are accustomed to a world map that’s remained largely the same throughout our lifetimes, there’s actually nothing sacred in the borders that were drawn on maps decades ago, often by people who had never been to those locales (in the case of former colonies and conquered areas). The smaller, tribal areas made more sense and actually worked more in favour of the inhabitants.

But, since World War II, the world has been headed in the direction of über states. The Unites States had already led the way in the late 18th century, but in recent times, the EU was formed and repeatedly expanded. In addition, many organisations have joined groups of countries together (ASEAN, Mercosur, Caricom, etc.).

In each case, the über states were created without the expressed majority interest of the voters. (In EU countries, referenda were sometimes held, but, in no case did a majority of voters vote in favour of joining the EU. The leaders did it in spite of the lack of support.)

Invariably, the über states were created by the political leaders and for the political leaders.

Not surprisingly, in each case in which the people of a province, state, or region have expressed a desire to secede, the central government has forcefully opposed secession. (The Americans fought their civil war, not over slavery, but over secession.)

Today, states such as Texas, which have repeatedly stated both their right and interest in possible secession, have been advised that, if they make such an attempt, they’ll be met with whatever force is required to stop it.

In Catalonia, we’re watching a standoff build between the leaders in Barcelona and Madrid, as each event unfolds.

And Catalonia is a good example of a further reason for a central government to resist the departure of a province: Should Catalonia succeed, there’s the likelihood that the adjoining regions of Valencia and the Balearic Islands might also be inspired to make an exit from Spain, and for the very same reason—because they’re the revenue producers and are having Madrid siphon off their earnings, to be spent on less-productive regions.

Governments have had a long history of claiming, “If we don’t all stick together, we’ll be doomed.” However, historically, the aggressors, more often than not, have been the empires. The smaller a country, the more likely it is to mind its own business.

In addition, the smaller a country, the more closely its leaders are to their people and, correspondingly, the more responsive they are to the people’s needs and goals.

The great majority of the armed conflict that exists today exists either in the larger countries, or, more often, due to the aggression of larger countries.

Brexit has most certainly been the cause of a trend for smaller entities to get up the courage to back away from the parasitical central governments. The hope would be that this trend will expand dramatically.

There can be no doubt that there are those who believe in and are doing their utmost to create a New World Order (they’ve been stating their intent for over a hundred years). Yet, just as we seem to be moving headlong in this direction, a reversal has begun to take place at the same time.

There can be no doubt that the reversal will be resisted strenuously; however, as the voting described above attests, this is a ground-up trend, not a government-generated trend, and, historically, strong ground-up trends have had a healthy track record of success.

*  *  *

Even “successful” independence movements never go smoothly. Extreme economic turmoil is simply built into the game. However, some people always manage to come out the other side much wealthier. We’re sharing how in our Guide to Surviving and Thriving During an Economic Collapse. Click here to download your free PDF copy now.

3 Stories That Show Big Brother is Alive and Well

Via The Daily Bell

Getting Clever with Fear to Restrict the Internet.

Representatives from the seven countries (UK, USA, Germany, Italy, France, Canada, and Japan) known as the G7 which form the Council on Foreign Relations met to discuss what to do about extremist jihadi content on the internet. They want to work with tech giants to make sure anything that could recruit or train terrorists is taken down within two hours.

The United Kingdom actually proposed jailing anyone who even views extremist content online for up to 15 years! Of course, the governments will define “extremist content.” And as most things go, their definition will likely get looser over time.

For instance, when SWAT teams were introduced in America, the government claimed they would only be used in hostage situations. Today SWAT teams are used thousands of times a year, even for small-scale drug raids on non-violent suspects.

 

Prosecutors Pick a Target, THEN Find a Crime.

Practically anybody could be indicted for a crime if enough investigation went into their lives. There are so many laws, that we can’t go a day without breaking some statute.

Of course, most of us are not popular enough to draw the attention of U.S. prosecutors. But that is how they keep “the little guy” in line, by making examples out of the government’s enemies.

Reports indicate that Robert Mueller is on a fishing expedition to indict members of Trump’s team. If he can’t find any crimes, he will twist the law until something fits. Mueller and his team have done this in the past.

That’s the state of “justice” in America.

Fitbit and Pacemaker Info Used to Catch Criminals

Here’s the tough thing about Big Brother technology. In the beginning, it really is just used against actual criminals.

In one instance, a woman’s Fitbit, a watch monitoring her activity, cast doubt on her husband’s story. He said she was murdered by an intruder. He told the police a story about when she came home, what she did in the time before the supposed intruder showed up, and that she ran down into the basement. Based on information from the device, they could see the story was a fabrication.

In another case, prosecutors successfully subpoenaed information from a man’s heart rate monitor which proved he was awake when he claimed to be asleep before a fire started. He is going to trial for the arson, and a judge ruled that the evidence will be allowed to be presented.

The problem is the precedent it sets. Much like the SWAT raids in the example above, this information may at first be used to solve arsons and murders.

But what happens when it is used to fish for crimes instead? Or to frame someone in the wrong place at the wrong time?

Trump Confirms He Will Sign Russia Sanctions Bill

Following the approval from overwhelming majorities in both the House (419-3) and Senate (98-2), President Trump has just confirmed that he will sign the Russia sanctions bill into law.  The confirmation comes despite days of speculation after Anthony Scaramucci told CNN that Trump could sign the sanctions bill or "veto the sanctions and negotiate an even tougher deal against the Russians."

"President Donald J. Trump read early drafts of the bill and negotiated regarding critical elements of it.  He has now reviewed the final version and, based on its responsiveness to his negotiations, approves the bill and intends to sign it."

JUST IN: President Trump to sign Russia sanctions, White House says. POTUS "approves the bill and intends to sign it." pic.twitter.com/gMMlzPakdY

— ABC News (@ABC) July 29, 2017

Your move, Mr. Putin.

* * *

For those who missed it, here is some background on the bill from our prior posts:

Two days after the House passed bipartisan legislation in a 419-3 vote codifying and imposing further sanctions against Russia, Iran and North Korea and preventing the president from acting unilaterally to remove certain sanctions on Russia, moments ago the Senate also overwhelmingly approved the measure in a 98-2 vote.  Only Senators Rand Paul and Bernie Sanders voting no. The bill will now head to the White House where it will be either signed into law by the president or vetoed, setting up a potential showdown with the White House over Russia. The move marks congressional Republicans" first rebuke of Trump"s foreign policy, where the administration"s warmer stance toward Russia has drawn heavy skepticism from both parties.

The three countries named in the bill are accused of violating “the international order” by Senator Bob Menendez, the former chairman of the foreign relations committee.

Under the bill, existing sanctions on Russia for its aggression in Ukraine and interference in the 2016 election would be codified into law. New sanctions would go into effect against Iran for its ballistic missile development, while North Korea’s shipping industry and people who use slave labor would be targeted amid the isolated nation’s efforts to launch an intercontinental ballistic missile (ICBM).

While a full breakdown of the key details in the legislation is provided at the bottom of this post, in a nutshell the sanctions target Russian gas and pipeline developments by codifying six of Barack Obama’s executive orders implementing sanctions on Russia for its alleged interference in the US elections.

John McCain lauded the bipartisan process that supported the bill: “We will not tolerate attacks on our democracy!” the Senator, who chairs the armed services committee, said from the Senate floor. “That"s what this bill is all about.”

The Senate passage now sends the sanctions bill to Trump"s desk, although lawmakers expressed mixed expectations on whether the president would sign it into law. In recent days, White House press secretary Sarah Huckabee Sanders offered mixed messages in recent days.  On Sunday, Sanders told ABC’s “This Week” that the administration supports the bill. But on Monday, she told reporters on Air Force One that Trump is “going to study that legislation” before making a final decision.

* * *

Should Trump sign the bill into law, a prompt Russian response is imminent. On Thursday, Russia"s Kommersant newspaper reported that Russia is planning “symmetrical" response to earlier U.S. actions, including expelling diplomats and seizing U.S. Embassy properties, if and when Trump signs the new sanctions legislation.

It noted that Russia may take the Serebryany Bor vacation complex, and send home 35 diplomats, the same number as the Russian diplomats who were expelled by Barack Obama late in December. Komersant added that Russia may also limit maximum number of U.S. diplomatic personnel, which currently exceeds Russian staff in U.S.

Also on Thursday, Vladimir Putin said that Russia would be forced to retaliate if Washington pressed ahead with what he called illegal new sanctions against Moscow, describing U.S. conduct towards his country as boorish and unreasonable.

"As you know, we are exercising restraint and patience, but at some moment we"ll have to retaliate. It"s impossible to endlessly tolerate this boorishness towards our country," Putin told a joint news conference during a press conference in Findland.

"When will our response follow? What will it be? That will depend on the final version of the draft law which is now being debated in the U.S. Senate."

Putin also spoke about an ongoing diplomatic row between Moscow and Washington which erupted last December when then U.S. President Barack Obama ordered the seizure of Russian diplomatic property in the United States and the expulsion of 35 Russian diplomats.

"This goes beyond all reasonable bounds," said Putin. "And now these sanctions - they are also absolutely unlawful from the point of view of international law." Calling the proposed sanctions "extremely cynical," Putin said the demarche looked like an attempt by Washington to use its "geopolitical advantages ... to safeguard its economic interests at the expense of its allies".

* * *

But while Russia"s adverse reaction is to be expected, it is the EU"s response that will be closely watched.

According to an internal memo leaked to the FT earlier in the week, Brussles said it should act "within days" if new sanctions the US plans to impose on Russia prove to be damaging to Europe’s trade ties with Moscow. Retaliatory measures may include limiting US jurisdiction over EU companies. The memo, reported by the Financial Times and Politico, has emerged amid mounting European opposition to a US bill seeking to hit Russia with a new round of sanctions. 

Morning London, while you were sleeping this was our most read story https://t.co/eC4kSgYeHN

— Financial Times (@FT) July 24, 2017

The document said European Commission chief Jean-Claude Juncker was particularly concerned the sanctions would neglect the interests of European companies. Juncker said Brussels “should stand ready to act within days” if sanctions on Russia are “adopted without EU concerns being taken into account,” according to the Financial Times.

The EU memo also warns that “the measures could impact a potentially large number of European companies doing legitimate business under EU measures with Russian entities in the railways, financial, shipping or mining sectors, among others.”

The freshly leaked memo suggests that the EU is seeking “a public declaration” from the Trump administration that it will not apply the new sanctions in a way that targets European interests.  Other options on the table include triggering the ‘Blocking Statute,’ an EU regulation that limits the enforcement of extraterritorial US laws in Europe. A number of “WTO-compliant retaliatory measures” are also being considered, according to the memo.

Over the weekend, we reported that Brussles expressed its concerns over the sanctions bill, when the European Commission said in a statement that “the Russia/Iran sanctions bill is driven primarily by domestic considerations,” adding that it “could have unintended consequences, not only when it comes to Transatlantic/G7 unity, but also on EU economic and energy security interests.” 

And so, trapped between looking like a Russian crony on one hand if he refuses to sign the bill, and inflaming relations with not only Moscow but also Europe if he does sign, it will be up to Trump to determine if the feud with Russia escalates even more and involves European nations who are far closer to Russia in socio-economic terms than they would like to admit.

* * *

Finally, courtesy of Goldman, here are the main details of the legislation:

Here are the main details of the draft legislation:

• Codifies existing US sanctions on Russia and requires Congressional review before they are lifted.


• Reduces from 30 days to 14 days the maximum allowed maturity for new debt and new extensions of credit to the state controlled financial institutions targeted under the sectoral sanctions.


• Reduces from 90 days to 60 days the maximum allowed maturity for new debt and new extensions of credit to sectoral sanctions targets in the energy sector, although this largely only brings US sanctions in line with existing EU sanctions, which already impose a 30-day maximum for most energy companies.


• Expands the existing Executive Order authorising sectoral sanctions to include additional sectors of the Russian economy: railways and metals and mining.


• Requires sanctions on any person found to have invested $10 million or more, or facilitated such an investment, in the privatisation of Russian state-owned assets if they have “actual knowledge” that the privatisation “unjustly benefits” Russian government officials or their close associates or family members.


• Authorises (but does not require) sanctions “in coordination with allies” on any person found to have knowingly made an investment of $1 million or more (or $5 million or more in any 12-month period), or knowingly provided goods or services of the same value, for construction, modernisation, or repair of Russia’s energy export pipelines.


• Orders the treasury, in consultation with the Director of National Intelligence and the Secretary of State, to prepare detailed reports within the next 180 days:
  
  • on Russia’s oligarchs and parastatal companies including individual oligarchs" closeness to the Russian state, their involvement in corrupt activities and the potential impact of expanding sanctions with respect to Russian oligarchs, Russian state-owned enterprises, and Russian parastatal entities, including impacts on the entities themselves and on the economy of the Russian Federation, as well as the exposure of key US economic sectors to these entities.
  
  
  • on the impact of debt- and equity-related sanctions being extended to include sovereign debt and the full range of derivative products.
  
  

Can Britain Afford To Be A Hard Power?

Authored by Matthew Jamison via The Strategic Culture Foundation,

Recently the UK Royal Navy and Ministry of Defence unveiled their brand new aircraft carrier HMS Queen Elizabeth at a cost of 3 Billion Pounds. This at a time when UK national finances are under heavy pressure and the country has been experiencing seven years of severe austerity.

It has recently come to light that in true Ministry of Defence fashion (poor project management & wasteful spending, duplication, poor planning, lack of oversight and accountability) the true costs are set to rocket even further for more aircraft needed to be able to land properly on HMS QE. How very British. The decision to go ahead with a brand new and very expensive aircraft carrier for the UK at a time of acute social and economic headwinds has been hailed by some as an exciting new weapon in Britain"s hard power arsenal that will allow Britain to «punch above her weight» in world affairs and global power projection rankings in Jane"s Weekly.

Some however question if Britain can really afford such an expensive project such as a new aircraft carrier when the Prime Minister Theresa May repeatedly said during the recent General Election that there was no magic money tree for nurses, police, firefighters, doctors, in essence all public sector workers – yet there is 1 Billion Pounds for the DUP and 3 Billion Pounds for a new aircraft carrier that perhaps given the cost and the reality of Britain"s position in the world could have been done without. The cost goes to the heart of the politics of reality and a realism that is sorely lacking in British foreign & defence policy. Can the country really afford such an object when 3 Billion Pounds could have been a major boost to a National Health Service under severe strain? Or imagine what 3 Billion Pounds could do to improve social housing? Or 3 Billion Pounds invested in a National Bank dedicated to helping the carers of those suffering from Alzheimer"s and/or Dementia?

The decision to go ahead with the HMS Queen Elizabeth exemplifies everything that is currently wrong and indeed utterly divorced from reality with the current Government. It goes to the heart over the debates surrounding what kind of country Britain really is, wants to be and should be. Is Britain in reality a strong, successful, competent hard military power with an indispensable, irreplaceable military role to play in world affairs as former Prime Minister Tony Blair would have the country believe with his vision of British foreign policy? Or is it a country with some sections of its public and establishment divorced from reality, still living in a bygone imperial era clinging tenaciously to a shameful period of time in British history and politico-cultural-militarist narratives that are just simply false?

Is it in reality a country with tremendous assets mainly within the soft power field of the arts and humanities such as language, culture, entertainment, acting, drama, academia, museums, libraries, sport, music as well as cutting edges in science, technology and engineering. However beyond that sphere of soft power the British have quite a mixed and mediocre record. The British economy is the most unproductive in the G7, one of the most unproductive economies in the OECD. British efficiency and rigour are substandard as is the work ethic to a great degree. Very little proper thought, planning and analysis goes into project management in Britain. The quality of good management and leadership in Britain is sorely lacking whether it be in the political, governmental, economic, or indeed military sphere. Nothing ever really works properly or functions correctly in Britain from its transport infrastructure, customer services, public services etc.

Which brings us back to the decision to build this aircraft carrier at such a huge cost in the first place. What is Britain trying to prove? Why must its Ministry of Defence spend billions upon billions of taxpayers money creating weapons of mass destruction, «boys toys», when there are so many internal problems in the country crying out for social and economic redress. Further more Britain has become a disruptive force in world affairs. It has steadily taken on the role of disruptor in what was seen as the traditional Western Alliance of North America and Europe. At this time of acute international challenges and turbulence in world affairs it is Britain which has become a major contributor to such turbulence and has added to the complexity of the problems facing the international community, not lessened those problems. With this new found role Britain must be treated accordingly. The British have sadly played up to all the worst stereotypes regarding Britain during this period and have demonstrated on a massive scale how unreliable, undependable and two faced they can be. All the brand new, multi-billion pound shiny aircraft carriers (that don"t even properly work once set out to sea) in the world will not be able to gloss over that fundamental truth of regarding the collective, national character.

Perhaps it is time for future British Governments to disabuse themselves of the vanity and pretentiousness that previous British Governments both Labour and Tory have exhibited regarding Britain"s military power. Perhaps it is time to face facts and come to terms with reality. Britain can have a significant role to play within the soft power sphere. But as a hard power, taking part in massive American led military interventions whether it be in Iraq, Afghanistan, Libya and allowing an incompetent and poorly governed Ministry of Defence to continually waste so much taxpayers money as if they had a guaranteed government/taxpayer «Magic Money Tree» must be brought to an end. Furthermore at this time of extreme economic and social challenges that Britain is facing it would be a very wise course of action indeed if Britain were to focus a lot more of its time, resources and energy on putting its own house in order rather than spending vast amounts of money on maintaining a non-essential, non-vital role as a very junior, supporting member of the American Western Alliance.

EU "Sounds Alarm" Over New US Sanctions On Russia; Germany Threatens Retaliation

Late on Friday, Congressional negotiators reached a deal to advance a bill that would punish Russia for its interference in the 2016 election and restrict the president’s power to remove sanctions on Moscow, according to the WSJ. The measure, if signed into law, will also give Congress veto powers to block any easing of Russian sanctions by the president. And while it remained unclear if President Donald Trump would sign the bill if it reaches his desk, which is now likely, the loudest complaint about the bill to date has emerged noe from the Oval Office, but from Brussels, after the EU once again urged (and warned, and threatened) US lawmakers to coordinate their anti-Russia actions with European partners, or else.

As Reuters reports, the European Union "sounded an alarm on Saturday" about moves in the U.S. Congress to step up U.S. sanctions on Russia, urging Washington to keep coordinating with its G7 partners.  In a statement by a spokeswoman after Republicans and Democrats in the U.S. Congress reached a deal that could see new legislation pass, the European Commission warned of possibly "wide and indiscriminate" "unintended consequences", especially on the EU"s efforts to diversify energy sources away from Russia, adding that "unilateral measures" by the US could undermine transatlantic unity.

"We highly value the unity that is prevailing among international partners in our approach towards Russia"s action in Ukraine and the subsequent sanctions. This unity is the guarantee of the efficiency and credibility of our measures," the Commission said in its statement.

"We understand that the Russia/Iran sanctions bill is driven primarily by domestic considerations," it went on, referring to a bill passed in the U.S. Senate last month and to which lawmakers said on Saturday they had unblocked further obstacles.

"As we have said repeatedly, it is important that any possible new measures are coordinated between international partners to maintain unity among partners on the sanctions that has been underpinning the efforts for full implementation of the Minsk Agreements," the Commission said, referring to an accord struck with Moscow to try to end the conflicts in Ukraine.

"We are concerned the measures discussed in the U.S. Congress could have unintended consequences, not only when it comes to Transatlantic/G7 unity, but also on EU economic and energy security interests. This impact could be potentially wide and indiscriminate, including when it comes to energy sources diversification efforts.

"Sanctions are at their most effective when they are coordinated. Currently our sanctions regimes are coordinated. As a result their impact on the ground is increased and through coordination we are able to avoid surprises, manage potential impact on our own economic operators and address collectively efforts to circumvent such measures. Unilateral measures would undermine this," the Commission said.

"We therefore call on the U.S. Congress/authorities to engage with the partners, including the EU, to ensure coordination and to avoid any unintended consequences of the measures discussed."

Furthermore, Germany has already warned of "possible retaliation" if the United States moves to sanction German firms involved with building a new Baltic pipeline for Russian gas. EU diplomats are concerned that a German-U.S. row over the Nord Stream 2 pipeline being built by Russia"s state-owned Gazprom could complicate efforts in Brussels to forge an EU consensus on negotiating with Russia over the project.

The proposed restrictions against Moscow are part of the Countering Iran’s Destabilizing Activities Act, aimed not only at Tehran, but also North Korea. Passed by the Senate last month, the measures seek to impose new economic measures on sectors of Russia’s economy. Among the new anti-Russia proposals, the legislation aims to introduce individual sanctions for investing in Russian pipeline project. It also outlines steps to hamper construction of Russia’s Gazprom’s Nord Stream 2 gas pipeline project, and is the reason why America"s European allies are on edge, worried they may be penalized for continuing a project in which they have already invested hundreds of millions.

The House is set to vote on the proposed legislation Tuesday, Brussels has already registered its unease even before the bill hits Donald Trump’s desk, urging Washington to consider European interests, especially in the energy sector. Noting that “the Russia/Iran sanctions bill is driven primarily by domestic considerations,” the European Commission has asked its American partners to coordinate measures against Russia with Europe and the rest of the G7.  

One month ago, we reported that Austria and Germany accused the U.S. of having ulterior motives in seeking to enforce the energy blockade, which they said is trying to help American natural gas suppliers at the expense of their Russian rivals. They also warned the threat of fining European companies participating in the Nord Stream 2 project "introduces a completely new, very negative dimension into European-American relations."  At the time, the foreign minister of Austria and Germany, Kern and Gabriel, urged the United States to back off from linking the situation in Ukraine to the question of who can sell gas to Europe. "Europe"s energy supply is a matter for Europe, and not for the United States of America," Kern and Gabriel said. The reason why Europe is angry Some Eastern European countries, including Poland and Ukraine, fear the loss of transit revenue if Russian gas supplies don"t pass through their territory anymore once the new pipeline is built.

Fast forward to today, when Reuters quoted the European Commission saying that “as we have said repeatedly, it is important that any possible new measures are coordinated between international partners to maintain unity among partners on the sanctions." It added that “we are concerned the measures discussed in the US Congress could have unintended consequences, not only when it comes to Transatlantic/G7 unity, but also on EU economic and energy security interests."

“This impact could be potentially wide and indiscriminate,” the Commission warned. “We therefore call on the US Congress/authorities to engage with the partners, including the EU, to ensure coordination and to avoid any unintended consequences of the measures discussed.”

Addressing the proposed bill, Kremlin spokesman Dmitry Peskov said that Moscow takes an “extremely negative” view of the new developments. President Vladimir Putin earlier cautioned that any new sanctions against Russia will only make US-Russian relations worse.

But it wasn"t just Russia and Europe eager to warn the US that any ongoing attempts to trap Trump into perpetuating the Deep State"s Russian policies would backfire: ahead of Congress clearing all potential hurdles for the bill, a number of American multinationals – including ExxonMobil, General Electric and Boeing, as well as MasterCard and Visa – raised concerns that the punitive measures will ultimately harm their interests, rather than that of the Kremlin.

Trump-O-Rama - Exposing The Difference Between Power & Authority

Authored by Paul Brodsky via Macro-Allocation.com,

Writing and distributing weekly observations is a fascinating study in sociology. Our audience is highly educated and accomplished, mostly from the US, Canada and Western Europe. Though each recipient shares the same personal anxieties as everyone else in society, the professional hardship most of us have each day is how best to allocate accumulated wealth. It is, as they say, a high-end problem.

Nevertheless, our readers seem to be as politically diverse and opinionated as any sample pool of voters. Each mention of Donald Trump – framed positively or negatively (we have done both) – elicits a torrent of emotional comments. This got us thinking: how should investors think about the cult of personality surrounding Mr. Trump and what does it mean for commerce? Let the comments flow…

Donald Trump is an interesting character. We are unaware of any past US leader who was more interested in the appearance of greatness at the expense of executing policy.

Some would welcome his platform of lower marginal income tax rates, fiscal stimulus, and diminished regulatory oversight. His impolitic personality, however, threatens to single-handedly sink his own economic agenda. Others would welcome degrading America’s obligation to maintain the US dollar’s hegemonic status because it requires ever higher budget and trade deficits. Mr. Trump’s budget-busting economic goals, however, could ironically render the issue moot by destroying the dollar’s exchange rate. Still others have expected the Trump administration to maintain and build America’s global trade and military influence around the world. Once again, his hard line re-negotiating tactics threaten to fracture the sound loyalty of allies. And finally, a large chunk of society would like the federal government to be a more active re-distributor of wealth. Mr. Trump’s interest in re-distribution so far seems limited to redirecting admiration for others back towards himself.

To leave no room for doubt, we are not a fan of the man himself and we think his broad portfolio of social, economic and foreign policies is not thoughtful, comprehensive or practical enough to elicit confidence. Mr. Trump appears to lack any capacity for nuance and his lack of self-awareness seems epic. His skin seems a bit thin to be the leader of the free world and his diplomatic skills are clearly not up to baseline his job has traditionally required. As an impulsive, bitter and overcompensating tweeter, he has become a lightning rod for argument – not only in political circles but among the population at large. He likes to publicly challenge those who would criticize him (often, and in a petty way), which, either by design or consequence, serves to challenge all concerned to be either with him or against him. Mr. Trump does not seem to recognize or care that polarizing Americans and insulting foreign leaders does not ultimately serve his interests, which, as far as we can tell, begin and end with him. If we are wrong about this it would be even more disturbing – being aware of his own foibles but too sociopathic to care. His decades-long pattern of public misogyny is disturbing on many levels, but sadly seems consistent with his larger personality. Perhaps most curious is how a seventy one year-old billionaire can still have such a gargantuan chip on his shoulder. It hints of recklessness and self-destructiveness. Our amateur psychoanalysis is that Mr. Trump is mentally unwell.

Our personal distaste for the man does not blind us to the legitimacy of his election or the legitimate rationales of those who voted for him. (We voted for president, but wrote-in a non-candidate.) Wealth and income gaps have been widening meaningfully. We suspect Mr. Trump’s election success was made possible due to the loss of dignity among enough voters ready to blame government for their social and economic displacement. Populist anger has always been a vote getter, but Mr. Trump’s own anger must have seemed most genuine and, of all the candidates, his public persona was definitely most amusing.

To be sure, his political instincts are absolutely sensational, fabulous (as he might say), carefully honed no doubt by appealing to a reality TV audience fascinated by watching a rich bully beat up on subordinates. These people demanded a voice in politics, and Donald Trump was the perfect person to provide it.  As a candidate he was a walking counterfactual, standing for everything untried. He seemed to imply: “what if the staid institutions we have been relying on to better our lives – but haven’t – lost their power!”

Now that he is president, Mr. Trump is successfully shining a harsh light on the inadequacies of the political system, continuing to make the point, as he did during the campaign, that government does not serve the people. Of course, he is now the captain of the ship of state and the irony seems lost on him. We are witnessing a political coup d’état, though not a revolution in the governing process. This is precisely what his peeps asked him to do, but it is counterproductive in terms of legislating a solution for them.

With all that said, it is important to recognize that his scorched earth rhetoric is a mile wide and an inch deep. Mr. Trump’s policies, if enacted, might have some economic and financial impact, but only superficially and temporarily given the diminishing scale of US and global output vis-à-vis the greatly expanding scale of public and private sector balance sheets. While respected policy think tanks, such as the Heritage Foundation, may have influence over Trump’s White House policy, the best-case fiscal, tax and regulatory outcomes derived from that influence are limited.

Mr. Trump offered soaring conservative rhetoric in Poland last week. “The fundamental question of our time is whether the West has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilization in the face of those who would subvert and destroy it?” He also took a stand against “the steady creep of government bureaucracy that drains the vitality and wealth of the people,” and closed by citing the value of individual freedom and sovereignty. What does any of this really mean in practical terms? Very little. Such language makes his base feel warm and cared for, but it is as legislatively shallow as the progressive presidential rhetoric from the last administration.

A big difference between Donald Trump and past presidents is that his predecessors seemed to know (or care) about the difference between speeches and statecraft. Barack Obama, for example, did not alienate his opposition to the point of personal abhorrence. This allowed for personal discussions that led to the Affordable Care Act, which Mr. Obama wanted as his signature legacy. Mr. Trump’s setback in revoking the ACA a couple weeks ago, despite Republicans holding both houses of congress, suggests he resides on a political desert island, which in turn threatens his entire economic agenda. 

The Fed and the Bank for International Settlements (BIS) are together the global financial policy setter. They accommodate the best interests of G7 money center banks because the global financial architecture and its dollar-dominated flexible exchange rate monetary system are very supportive of the political dimension, which makes laws, invests in public works, regulates commerce and trade, protects the banking system, and ensures compliance under tacit threat of military intervention. This is not a secret conspiracy. The quid pro quo linking governments to lenders is legal, carefully crafted and transparent.

Still, the White House is not without influence over global markets. Mr. Trump seems to have signaled that Janet Yellen will not be re-appointed Fed Chairman, judging by recent Fed chatter to keep hiking rates despite stubbornly low inflation and to begin shrinking the Fed’s balance sheet sooner than previously expected. Clearly, the Fed wants to set a proper table before the White House appoints a Chairman who would be friendlier to it. Meanwhile, it was announced last week that the ECB has begun discussions to step away from its pledge to step up the pace of asset purchases if necessary. Accordingly, global sovereign interest rates have been rising, but not enough to signal robust global output growth.

The political zeitgeist today is a case study in the difference between power and authority. Mr. Trump continues to rhetorically challenge authority, but as a politician without a crisis on the table he does not have the power to have a transformational impact on domestic or global spending and wealth. For all his bluster, economic incrementalism remains the order of the day (and his behavior is a barrier to even that).

To be sure, we share America’s fascination with Donald Trump. We watch him the same way we watch a good horror movie: suspending our disbelief, knowing it will end badly but not the how and the when of it, peering through our fingers, unable to look away. There are no two ways about it – this particular US president is an amusing character and people cannot look away. (Is it us or has President Trump begun imitating Alec Baldwin imitating President Trump? The two have become indistinguishable to us.)

In our last Real Vision Interview (February 29, 2016), we suggested that Donald Trump was not making a mockery of the political system, but rather exposing the political system for the mockery it had become.

We think his lasting legacy will not be his queer behavior, but that his presidency exposed ongoing White House economic influence as very narrow. The importance of a good politician to investors is limited to the broad confidence he or she can elicit following a crisis. At this, Mr. Trump may do fine...or not. 

Multipolar World Order: The Big Picture In The Qatar-Saudi Fracture

Authored by Federico Pieraccini via The Strategic Culture Foundation,

In a climate of outright confrontation, even the Gulf monarchies have been overtaken by a series of unprecedented events. The differences between Qatar on one side, and Saudi Arabia, the United Arab Emirates and Bahrain on the other, have escalated into a full-blown diplomatic crisis with outcomes difficult to foresee.

Officially, everything started with statements made by Qatari emir Tamim bin Hamad Al Thani that appeared on the Qatar News Agency (QNA) on May 23, 2017. A few hours before the conference between the 50 Arab countries and the US President, Al Thani was reported to have said the same words that appeared on QNA. The speech was very indulgent towards Iran and described the idea of an «Arab NATO» as unnecessary. The exact words are not known because the event in which Al Thani had made such incendiary remarks concerned military matters and was thus not accessible to the general public. Especially to be noted is that QNA denies having published words in question and attributed them to a cyber-attack.

The public dissemination of the Emir"s words on QNA promptly provoked an unprecedented diplomatic crisis in the Gulf. Immediately, Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt and the Maldives took advantage of the confusion created by Al Thani’s alleged words by enacting a series of extreme measures while accusing Doha of supporting international terrorism (through Hamas, al Qaeda, Iran and Daesh). Qatar’s ambassadors in the countries mentioned were requested to return home within 48 hours, and Qatari citizens were given 14 days to leave Bahrain, Saudi Arabia and the UAE. At the same time, Riyadh proceeded to close its airspace as well as land and sea borders to Qatar, effectively isolating the peninsula from the rest of the world.

Realistically, what interest would Qatar have had in promulgating the words of Al Thani in order to antagonize Riyadh and Abu Dhabi? Even if the Emir had made such remarks, Doha would certainly not have given them to QNA to publish on its website. If it was not a cyber-attack, it was certainly a miscalculation on Doha"s part or, worse, possibly internal sabotage to damage the Al Thani family.

To explain the dynamics that have officially created this unprecedented situation, it is necessary to sift through the facts in order to discern reality from fiction.

There is no difference between Saudi Arabia and Qatar

The Saudi charge that Qatar supports terrorism is well supported by the facts, Doha having long supported terrorist groups in North Africa and the Middle East, from Libya to Syria through to Egypt and Iraq. The problem is that the one throwing the charge, Saudi Arabia, is as guilty of it as is the accused. Both countries have provided the financial backing for much of the extremism that has been infesting the globe for decades. The Saudi royal family is the ultimate expression of the Wahhabi heresy that historically corresponds to the ideology of al Qaeda. Riyadh"s support for terrorist organizations was complemented by the US neoconservative strategy designed to destabilize Afghanistan in the context of anti-USSR geopolitics, as admitted by the recently deceased Zbigniew Brzezinski.

The rivalry between Saudi Arabia and Qatar has deep roots and affects not only the ideological difference between Wahhabis and the Muslim Brotherhood, but also the increased religious tolerance of Doha as opposed to the ideological intransigence of Riyadh.

Qatar, through the Muslim Brotherhood, has supported the Arab Spring that deposed Mubarak and placed Morsi in charge of Egypt, creating in the process strong tensions with the Saudis. Riyadh supported al Sisi to remedy the situation in Egypt, financing the coup that sent Morsi to jail. In 2014 this prompted a crisis between Gulf Cooperation Council (GCC) countries, with Qatar’s ambassadors being expelled from the UAE and Saudi Arabia. Differences were soon patched up by the convergence of interests in destabilizing Syria and Iraq with extremist terrorism funded by both nations together with Turkey"s important contribution.

The Neocon Zionist and Wahhabi plans

What is interesting to note in connection with the Gulf crisis is the change in strategy in recent months by the US, Israel and Saudi Arabia. Washington"s plan, shared by Tel Aviv and supported by Riyadh, is to pin the blame for sponsoring international terrorism on Tehran and Doha, fingering Qatar as the key financer of Hamas, al Qaeda and Daesh. The reason and purpose behind this are manifold.

The problem of Islamic terrorism has become a subject of focussed attention for European and American citizens because of frequent attacks. Security agencies are incapable of preventing terrorist attacks from the same elements they have for years funded and supported as part of their anti-Iranian and anti-Syrian strategy. The difficulties faced by secret services in halting such attacks (as opposed to rogue secret services who aid terrorist networks a la Operation Gladio) have made people question.

Citizens, increasingly frightened and angry with their governments for the lack of security, are beginning to realize that the extremists receive their financial support from the Gulf countries, who are known to be in business with many European capitals. The last thing that the governments of France, Italy, Germany, the UK and the US want is the revelation that they are in league with Islamic terrorism for geopolitical purposes. The consequences would be disastrous for the already fragile credibility of the West.

Further confirmation of this strategy to gang up on Qatar can be seen in the economic field. S&P downgraded the credit rating of Qatar a short time ago to AA-, setting the stage for a further downgrade that could have important implications for the future economic stability of the emirate.

Trump and other leaders of the G7 seem to have made up their minds, agreeing with Saudi wishes, heaping on Qatar all the blame for Islamic terrorism. The US administration, more eagerly than its European vassals, also insists on including Tehran in the charge of state sponsors of terrorism. For Washington, the aim is to curtail covert Western support for terrorism, all the more urgent given the worsening state of affairs in Europe. Politicians from the Old Continent understand that it is fundamental for a culprit to be found before being accused of being unable to stop Islamist terrorism. It is a desperate exit strategy that aims to attribute primary blame to Qatar and secondary blame to Iran.

Europeans are more reluctant to endorse this vision, given the possible trade opportunities for the European private sector in Iran following the removal of sanctions. It is even possible that some European leaders are opposed to Trump"s idea, probably discussed during the G7 in Italy, given Qatar"s billions of investment poured into the dying European economy.

Israel has officially maintained a neutral position concerning the Arab Spring, benefiting from the chaos in the region and the weakening of geopolitical opponents like Syria and Egypt. Qatar"s support for Hamas, Israel"s historic enemy, is a factor that has contributed to Tel Aviv"s support for Riyadh"s manoeuvres against Doha.

The Saudis, on the other hand, have multiple reasons for attacking Qatar. Firstly, it brings Doha"s foreign policy back into line after showing leanings towards Tehran. Secondly, it aims to incorporate Qatar in order to absorb its enormous financial resources, as an extreme measure to help solve Saudi Arabia’s disastrous economic situation.

Chaos as a means of preserving global hegemony

Behind a convergence of convenience involving the triumvirate of Israel, Saudi Arabia and Qatar lies a well-outlined project of preventing Tehran from becoming a regional hegemon. The Saudis regard Iran as a heretical nation with regard to Islam and have always promoted policies against Tehran. Israel considers Iran the only real danger in the region as it is also a military powerhouse like Israel. As for the United States, the main objective is to mediate a diplomatic rapprochement between Israel and Saudi Arabia, which is needed for the two nations to officially develop a military alliance against Tehran. The final goal is the creation of an Arab NATO to contain Iran, mirroring NATO"s stance towards the Russian Federation.

The fault lies in Qatar.

Washington sees only one possible way to at once allay the concerns of her European allies suffering an onslaught of Islamist attacks while simultaneously giving the impression to a domestic audience of fighting extremists. It plans to do this by entering into a major agreement with the two nations closest to Islamist terrorism - Israel and Saudi Arabia - while blaming a third terrorist-supporting nation for all the terrorism -Qatar. Of course the weakest and strategically least relevant of these three countries is Qatar.

The real challenge: Unipolarity vs. Multipolarity.

The most salient point in this story is the contrast between the new multipolar order and the American unipolar world order. Qatar, thanks to its enormous financial resources, has maintained high-level contacts with a wide variety of countries that are not necessarily allied to Riyadh.

From the point of view of energy, Qatar is the region"s second power after Riyadh, getting 90% of its revenue from exports of liquefied natural gas from the world"s largest deposit that is shared with Iran. In the case of relations with Moscow, the problem is not significant given the relations between Saudi Arabia and the Russian Federation. For example, Qatar has recently injected capital into Rosneft by acquiring a large share of stocks. Qatar foreign minister meet with Lavrov in Moscow a couple of days ago discussing how to deescalate tensions but also reaffirming the importance of relations between Doha and Moscow. Qatar, on the back of its economic wealth, has expanded its political horizons by moving away from Riyadh, infuriating Washington and Tel Aviv.

The strengthening of the Iranian position in the region was achieved thanks to two main factors, namely the victories in the Syrian war and the agreement with the Obama administration over Iranian nuclear power. This rehabilitation of Iran on the international scene following the signing of the agreement slowly led Doha to advance back-channel dialogue with Tehran to reach a compromise, especially in relation to the exploitation of the South Pars / North Dome gas field. About three months ago, Qatar removed the moratorium on exploiting the field and carried out dialogue with Iran over its development. It seems that an agreement has been reached between Qatar and Iran for the future construction of a gas pipeline from Iran to the Mediterranean or Turkey that will also carry Qatari gas to Europe. In exchange, Doha’s ending of support for terrorism has been demanded, openly contravening Saudi and American directives to destroy Syria.

The Saudis have bet all their chips on the continuation of American hegemony. They prefer to please the United States by avoiding the sale of oil to China in yuan, and are consequently paying the price, with China buying more and more oil from Angola and Russia instead. Moscow Central Bank has even opened a bank branch in Shanghai to convert yuan into gold, creating something that resembles the US dollar gold standard of yesteryear.

In Yemen, Riyadh has compromised its future by squandering huge amounts of wealth, with the only thing to show for it being a pending military defeat at the hands of the poorest Arab country on the planet. The collapse of the price of oil has only exacerbated these difficulties. Qatar has avoided these problems by virtue of having huge gas reserves as well as a somewhat more diversified foreign policy than Riyadh. For the Saudis, placing under their control the world"s largest gas reserve, as well as an obscene amount of cash, would offer the opportunity of at least recovering in part the huge losses experienced recently.

In this bloody game, Qatar is in the wrong place at the wrong time, and the mainstream media"s coverage of the events leaves us with little doubts as to what the future for Doha will be. CNN"s interview with the Qatari ambassador to the United States represented a rare example of journalistic integrity when the ambassador was embarrassed by the CNN host’s airing accusations of Qatar’s support for terrorists.

Neocon Deep State Vs Neoliberal Deep State

The fratricidal war within the US deep state also affects the Middle East, especially in the clash between Qatar and Saudi Arabia. It has long been known that Huma Abedin has deep ties to the Muslim Brotherhood, as did the previous American administration as well as Hillary Clinton. This proximity has had repercussions on the relationship between Obama and the Sunni countries, especially Saudi Arabia.

Until a few months ago, Washington was full of rumours about alleged lobbying efforts by former Trump adviser Michael Flynn on behalf of Erdogan. Considering that the former general was fired, this could be an important indicator of Trump’s position on Qatar, as the Turkish President is very close to the Muslim Brotherhood, a Doha-backed ideological movement. Flynn could have been fired by Trump for his close indirect relationship with the Muslim Brotherhood.

The mainstream media close to the Clinton/Obama clan may have used the alleged links between Flynn and Russia to obscure the hidden links between Washington and the Muslim Brotherhood. On the other hand, the evidence of collusion between the Muslim Brotherhood and Washington dates even before 2010, with Obama"s speech in Cairo in 2009 and the resulting Arab springs, all funded by Qatar via the Muslim Brotherhood, with Washington’s blessing. The consequences of those actions are well known, having increased the chaos in the region, forced a greater US presence in the Middle East, and contributed to increasing synergies between the Shiite axis in response to terrorist aggression.

In this context, Turkey backed the same terrorist groups as Qatar and Saudi Arabia, and the abortive July 2016 coup only served to strengthen the takeover of power by Erdogan and the Muslim Brotherhood faction supporting him. Even today the consequences of the coup reverberate in the region, with the alliance between Ankara and Doha recently strengthened with the presence of Turkish troops in Qatar. Another element not to underestimate was Iran"s attitude towards Ankara following the failed coup d"état, with Tehran declaring its solidarity with Ankara.

The strategic choices of previous administrations in the Middle East were disastrous in every respect. They strengthened enemies and weakened historic allies. No wonder Trump has decided to hit the rewind button, placing strong confidence in the two main allies in the Middle East, Israel and Saudi Arabia.

Trump and the deep-state faction loyal to him aims to create an Arab NATO able to confront Iran in its own right, freeing Washington from a constant presence in the Middle East. The United States is focussed on two key factors in this strategy, namely the sale of Saudi oil in US dollars, and the sale of weapons to US allies to keep its military-industrial complex happy. These goals coincide with what happened recently in the emirates with Trump"s visit. The United States and Saudi Arabia have signed agreements worth over 350 billion dollars. Saudi Arabia strongly supports the creation of an Arab NATO. The organization would make official Tehran"s role as the greatest danger for the entire region. Moreover, the project of an Arab NATO would suit Israel fine, as it hates Tehran.

For the US deep state, or at least part of it, the most urgent strategy concerns the transfer of American forces in terms of presence and focus, from the Middle East and Europe to Asia in order to face the main challenge of the future, namely China’s intention to dominate the Asian region. What is happening in the Philippines with Daesh, which the author wrote about last week, is simply the continuation of a wider strategy that also affects the Saudi-Qatar conflict.

With Obama and the ruling Democrats, much attention had been paid to the issue of human rights. In particular, the component of the deep state close to the Clinton/Obama clan embraced the Muslim Brotherhood"s attempt to subvert power in the Middle Eastern region through the Arab Spring. The approach of neoconservatives and neoliberals towards hegemony is very different and shows conflicting strategies, highlighting the diversity between the two souls of the US deep state that has long been battling each other.

On one hand, the neoliberal/human-rights clan is very close to Obama and Clinton as well as supportive of the Muslim Brotherhood and Qatar indirectly. Neoconservatives, however, are historically more aligned with Saudi Arabia and Israel, both of whom seem to support Trump in order to make the US role in the Middle East less central, thanks to an Arabian NATO that would free the US up to shift its attention to Asia by delegating regional control to Riyadh and Tel Aviv.

In this regard, the nuclear agreement between the Obama administration and Tehran is explained. The neoliberals hoped to see Iranian revolts in the wake of the Arab Spring, leading to the overthrowing of the regime and the ushering in of democracy. Neoliberal human-rights interventionists abuse the word democracy, wielding it as a baton. The results of these efforts can be seen in the disasters in Libya and Syria. Paradoxically, Obama and Clinton"s strategy has backfired on Washington, since Iran, thanks to the nuclear agreement, has increased its weight in the region, forcing the Neocon-Saudi-Zionist faction to try to sabotage it in any way.

Conclusion

Qatar is at a crossroads. Acquiescing to Saudi pressure means falling into line and abandoning its dalliance with the multipolar world order. The fate of Doha is probably already determined, with Iran and Russia hardly desirous of becoming too much involved in the sanguinary game. A likely outcome is that the Al Thani family will in the end acquiesce to Saudi demands after resisting thanks to foreign partners help. What is interesting to note is that the situation in Washington has deteriorated to such an extent that even Washington"s historic allies are fighting each other.

Iran, Russia and China, assisting Iraq, Syria, Yemen and Libya, have created the necessary conditions to end Middle-Eastern destabilization, even prompting an internal crisis in the Gulf Cooperation Council. The bet that Riyadh, Tel Aviv and Washington embarked on with the aggression against Doha could prove to be an unforgivable strategic error, even leading to the end of the Gulf Cooperation Council and the weakening of the anti-Iran coalition in the region.

If Qatar should decide to resist Saudi pressure, which is only possible with the covert support of Russia, China and Iran, it is likely that the Syrian war has its days numbered. This is not to mention the fact that such an outcome would provide Turkey with an even easier path to transition into the Eurasian alliance.

Should Doha decide to oppose the demands of Riyadh (their economic capacity is certainly not lacking), it will be up to Russia, Iran and China to decide whether to risk supporting Qatar against Saudi Arabia in order to stabilize the region. The hostility of the United States, Saudi Arabia and Israel hold towards Qatar are warning signs for the Eurasian bloc, already facing many obstacles in the world as it is.

Despite this, Tehran and Moscow are providing and offering Qatar"s first needed goods in terms of food and medicine. Iran is also opening its own airspace to Doha-based companies. Iran, in addition to being a nation usually ready to help when demanded, sees the opportunity to continue the destruction of the axis opposed to it. An overall assessment (In Astana at the SCO meeting?) will be needed to determine which strategy is best to follow. Above all it will be necessary to understand how Qatar will want to proceed in this unprecedented crisis in the Gulf region.

Even in Syria, the terrorist groups funded by the monarchies and Turkey are fighting each other, reflecting the divisions and tensions within the Gulf. It is only a matter of time before the conflicts between various organizations extends to other places in Syria, leading to the collapse of the opposition groups. In light of these developments, it appears that Iran and Syria have proposed to Qatar that they switch from supporting terrorism and instead cooperate in the reconstruction of Syria with Chinese and Iranian partners. Receiving credible responses to such a proposition is impossible, but following dialogue between Doha and Tehran on the development of the North Pars Gas Field, one cannot rule out that an agreement could be reached in Syria in the medium term, which would also bring enormous benefits to Doha as well as to Damascus and Tehran.

The American century is rapidly coming to an end. Terrorists are biting their masters’ hands and the vassals are rebelling. The unipolar world order that defers to the United States is rapidly disappearing, and the consequences are being felt in many areas of the world.

Putin, Trump, And "My Guy" Macron

Authored by Pepe Escobar via The Asia Times,

France"s president is lauded in the media for talking tough with his Russian counterpart, but behind the hype may be signs of a new alignment...

The three-hour face-off between Vladimir Putin and Emmanuel Macron in Versailles offered some fascinating geopolitical shadow play.

Macron went so far as to say that, “No major problem in the world can be solved without Russia.” On Syria’s war, which topped their agenda, he said it needs “an inclusive political solution.” While on terrorism, his guest offered: “It is impossible to fight a terrorist threat by dismantling the statehood of those countries that already suffer from some internal problems and conflicts.”

That’s hardly straight from the standard establishment playbook. More like a slight variation on 300 years of Franco-Russian diplomacy.

Putin and Macron got together to inaugurate an exhibition at the Grand Trianon in Versailles, in partnership with the Hermitage in St Petersburg, celebrating the 300th anniversary of Peter the Great’s visit to France – which proved one of the founding stones of a complex cultural-political cross-fertilization.

Peter not only drew on the royal palace of Versailles as part of the inspiration for his new capital, St Petersburg, he also modernized the entire empire using many of the Enlightenment ideals that first took root in France. It was under Peter’s rule that Russians were indelibly imprinted with a European identity.

Connections with current geopolitical juncture enhance the Versailles face-off’s appeal.

The St Petersburg Economic Forum – where quite a few CEOs from large European companies will be discussing business in Russia – starts later this week.

Late last week, a Nato summit in Brussels and a G7 summit in Taormina busted open deep divisions in the Western front, essentially pitting the EU against Donald Trump.

To say that the vast EU bureaucracy has been horrified is an understatement. In places like the Egmont – the Royal Institute for International Relations in Brussels – the consensus might best be summarized as: Europeans would only matter if they put in a US$100 billion order for US defense equipment (each, of course), and stopped whining about the climate.

As this is not happening, the letter of the law is that every Nato member must spend 2% of GDP on defense, and “bad, bad” Germany should stop selling cars to the US.

No wonder then that a common European viewpoint is begging to emerge after some serious discussions inside the EU, which is that the only way out is for Europe to get its act together – politically, economically and militarily.

And it’s up to the Franco-German power couple to show the path to the region’s real strategic autonomy.

That’s the gist of the extraordinary statement by Chancellor Angela Merkel: “The times in which we can entirely depend on others are gone. This, I have experienced in the last few days. We Europeans must take our destiny in our own hands.”

This would suggest that not only are there a few icebergs blocking the Atlanticist channels, there must also be a serious reappraisal under way of Europe’s relationship with Russia. (There are no significant German or French business interests that want sanctions against Russia to persist.)

Merkel could not have gone out on this limb unless she was fully supported domestically, and prepared to position the economic might of Berlin at the vanguard of this “Reformation.”

And that’s really the big story following the show of irrelevance at the G7 in Taormina.

Which is where Emmanuel Macron comes in.

All hail the Philosopher King

The supine French media – largely controlled by a handful of banking, financial and telecom interests – has gone ga ga over Macron’s handling of what is a de facto “presidential monarchy.”

Only the terminally naïve would deny that Macron was the candidate of globalized Atlanticist elites in thrall to the diktats of the financial system. As a bonus, he also dutifully follows the standard Russophobia – as in his charges against Moscow of pursuing a “hybrid strategy, combining military intimidation and an information war.”

Macron was skillfully sold as an “outsider” – yet he is backed by the ultimate French insider A-list. Its members include the Rothschilds; the Montaigne Institute; the Saint-Simon Foundation; the Terra Nova think tank; insurance giant AXA; Jacques Attali; Alain Minc; LVMH boss Bernard Arnault (also a media tycoon); and telecom and media billionaire Patrick Drahi.

He is, according to an elite insider cited by Le Monde, a fantasy come true for members of Le Siècle – the premier elite club in Paris: “A left-winger implementing a pro-business policy.”

Nuances make “project Macron” even more attractive. Because he studied philosophy and was an assistant to the revered Paul Ricoeur, Macron has been extolled as a Philosopher King in the Platonic tradition. And that was even before his show-stopping initial performance on the global stage – yes, the Alpha Male Handshake Battle with Trump.

It gets quirkier. Ecstatic intellectual Macronites even attest he combines the burning ambition of Alcibiades – a precociously talented Athenian general with a penchant for political maneuvering – with the wisdom of Socrates. Well, at least Macron seems to prefer reading to tweeting and being fed one-line bullet points by his minions.

It’s always enlightening to remember that the Philosopher King, as Plato conceived it, was not exactly a democrat. After all, Plato considered “the people” as something like a “huge beast,” filled with irrational passions, and unworthy of comparison with the demonstrative knowledge espoused by a lover of ideas.

Macron’s unbridled – Platonic? – ambition should not be underestimated. Putin, a master of cunning, did detect it in Versailles. Trump tried to charm him, calling Macron “my guy” in the presidential race. Macron, described by his circle as supremely confident, is sure he may be able to charm/bend Merkel – arguably a decaying quantity – into a “Leader of the West” Philosopher King role.

No wonder Macron is an EU superstar. He is seen as a savior because he embodies their ultimate wishful thinking that one day, inside the EU, inside the UN, in the G7, and even in Nato, globalized Europeans will be undivided on defense, trade, foreign policy – and their own interests.

Deutsche Bank Calculates The "Fair Value Of Gold" And The Answer Is...

Over the past three years, gold has found itself in an odd place: while it still remains the ultimate "safety" trade and store of value should everything go to hell following social and monetary collapse, when it comes to "coolness" it has been displaced by various cryptocurrencies, all of which have vastly outperformed the yellow metal in recent months. Meanwhile, central banks continue to pressure the price of gold to avoid a repeat of 2011 when gold nearly broke out above $2,000, putting the fate world"s "reserve currency" increasingly under question. As a result, gold has traded in a rather somnolent fashion, range bound between $1,100 and $1,300 over the last few years, failing to break out on either side.

But is that a fair price for gold?

That is the question Deutsche Bank"s Grant Sporre set out to answer in a special report released overnight, which among other things finds that gold is a "metal" full of paradoxes.

Here is what Deutsche Bank found: as Sporre contends, in order to determine whether gold is cheap or expensive, one must first define what gold actually is.

At its simplest form and yes we are stating the obvious, gold is a shiny yellow metal, relatively scarce and mined from the earth’s crust. Valuing the metal should then be just as easy? Gold is a simple commodity, governed by supply and demand, and valuing it should bear some relationship to the cost of digging it out of the earth? But it turns out; gold’s nature is far more mercurial. Gold can be many things to many different people – a store of value, a financial asset, a medium of exchange, a currency, an insurance policy against disruptive events or global uncertainty and even a “barbarous relic*” according to John Maynard Keynes. (*As with any famous quote, there are suggestions that the term was not originally coined by Keynes himself, nor that he was actually referring to gold, but rather to the constraints of the gold standard at the time).

All of this means that finding an absolute valuation method which will be accepted by all is rather optimistic; and that the value of gold is more likely to be determined on a relative basis depending on the individual’s perception of gold.

Whilst we contend that there is something of an art to valuing gold, we have used a more scientific framework to come up with that true fair value. There are flaws in any one of the individual approaches, and even averaging out the different approaches still seems like a bit of a cop out. However, in our table below the average of all the selected metrics would suggest that gold should trade around USD1,015/oz, with relative G7 per capita income valuing gold at USD735/oz, whilst the bloated size of the big four central bank balance sheets suggesting that gold should travel at USD1,648/oz.

Here is a summary of DB"s findings:

And DB"s take: the reason why gold is trading with a roughly 20% premium to "fair value" is because "there is a heightened perception of risk or uncertainty in the broader markets."

Although gold screens as expensive, there is a short term scenario (3 month) which would justify gold trading higher, in our view. In the near term, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD 2% weaker from current levels (not our FX strategist view) and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.

Our own simple four factor model points to a value of USD1,185/oz. Our conclusion is that gold is still trading at a premium versus a wide variety of metrics; 20% versus the average or 6% versus our fair value model. This suggests to us that the certainly through the lens of gold, there is a heightened perception of risk or uncertainty in the broader markets.

And some additional thoughts from DB on how it scores gold"s value across its various roles in society:

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Gold as a commodity – scarce but always in surplus?

Many investors are uncomfortable with treating gold as a commodity in that gold is not “consumed” like other commodities – it is not eaten, or burned or forged as food, energy or industrial metals would be. At first glance the price of gold relative to the marginal producer on the cost curve would provide a perfect yardstick to determining the fair value of gold. There are however two fundamental problems with this method. The first is that the conventional supply demand analysis does not work very well for gold. Partly due to its value and enduring nature (and high incentive to recycle), very little gold is actually consumed or lost every year. Thus every year, we add to the stocks of gold, with the industrial surplus being “consumed” by financial investors. We would argue that even the jewellery market is not “pure” consumption and the motivation is linked to a store of wealth.

Gold’s price trajectory relative to the marginal producer on the cost curve should be reasonable determinant of value. However, the mined supply of gold is relatively stable and only responds to pricing signals with a four to five year lag. Gold has been falling since 2012, the bump in 2016 notwithstanding and we only forecast mined supply to finally decline in 2017. It turns out, the gold miners are very good at adjusting their cost bases to the prevailing gold price, not least by targeting the richer parts of their ore bodies. The practice of “high grading” is much frowned upon in the industry, as certain less economic  parts of the ore body may be sterilized thereby reducing the NPV of the mine. However, when faced with significant cash burn, many miners have little choice.

If indeed gold is a commodity, gold’s perceived value relative to copper and oil should revert to a long run equilibrium level, based on the relative abundance of various commodities in the earth’s crust. There is no doubt that gold is scarce relative to copper for instance (10,000x less abundant). However the perception of utility will vary according to global growth. In a high global growth environment, copper should be seen as more valuable relative to gold.

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Gold as Money – a medium of exchange with little intrinsic value?

Gold is often seen as a medium of exchange and one that is officially recognized (if not publically used as such) in our view. Simply, gold is widely held by most of the world’s larger central banks as a  component of reserves. The ideal medium of exchange must balance the paradox of representing value while having little intrinsic value itself. Fiat currencies physically have no use other than that which is ascribed to them by government and accepted by the public. Arguably, gold is a purer form of money because it actually costs something to produce, compared to fiat currencies which cost very little. However, the concept of relative scarcity or abundance comes into play. If the rate at which fiat currencies have been printed exceeds that rate at which gold has been mined, then ceteris paribus, gold should become scarcer and rerate versus fiat currencies. Since 2005, central bank balance sheets have expanded nearly fourfold. In contrast the global above ground stocks of gold have expanded a mere 20%. The gold price has rerated accordingly, but not enough to keep the value of gold at parity with the global (big four central banks to be precise) money stock. The average ratio since 2005 between global money stocks and the value of global gold stocks is c.1.8x. In order for gold to get back to this level, the price should appreciate to USD1,648/oz, nearly USD300/oz above the current spot price.

If we assume that gold reverts to the long run ratio of these two commodities, then at an oil price of USD50/bbl, gold should be trading at USD840/oz, and at a copper price of USD5,600/t, gold should be trading at USD960/oz. Gold remains expensive versus other commodities

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Gold as a store of value – capital appreciation but no yield

We all need ways to store the fruits of our physical or intellectual labour for use at a later stage. We all have our preferences, be it bricks and mortar, the equity markets or gold. It depends on your confidence in how well you believe your asset of choice will preserve and in many instances grow your wealth or capital. We have examined the level of the gold price in real terms i.e. versus US CPI, relative to the per capita income and versus an alternative financial asset, the US equity market.

In terms of the relationship between gold and the S&P500, we have adjusted both for inflation and applied a further equity time value adjustment. Both should rise with inflation, but the S&P 500 should rise more and its retained and reinvested earnings should generate real EPS growth. We find that the adjusted gold to S&P500 ratio at 0.65x is still above its historical average of 0.54x. To bring this ratio back to its long run average would require the gold price to fall to USD990/oz. The average G7 per capita income since 1971 could buy just over 62 ounces of gold. Currently the average per capita income can purchase 47 ounces which implies that gold should trade at USD740/oz.

The real gold price average since 1971 when the gold standard was relinquished in the US is USD735/oz in PPI adjusted terms and USD810/oz in CPI adjusted terms.

Gold as a measure of market uncertainty

In order to adjust for the current gap between the actual gold price and our model forecast, we have adjusted our model (yes all models have dummy variables to account for the periods when they don’t quite work) for global risk perceptions. The adjustment we apply is simply a risk perceptions adjustment factor derived by plotting the model residual against the VIX index. We note that any significant period above 20 on the VIX index causes gold to trade above its “fair value”. The scale we apply ranges from -20 to 20, with each point accounting for USD10/oz. This is the minimum and maximum range of the deviation. The current gap of USD80/oz or 8 on our scale would suggest an above average sense of risk or uncertainty in the market. If we apply the DB house view forecasts at year end for the US 10 year bond yield of 2.75%, a US 10 year break even of 2.15%, an S&P year-end target of 2600, IMF gold purchases of 5 tonnes and a USD up 7.6% versus the broad trade weighted basket, then gold should trade all the way down to USD1,031/oz. Even if we increase our risk perception index from 8 to 12, this brings us back to USD1,150/oz by year end. In the near term however, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD down 2% from current levels and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.