Jacare Souza is back and he still owns Derek Brunson.
A year after President Donald Trump’s inauguration, analysts and commentators are assessing both his performance in the first year of his presidency as well as the outlook for the remainder of his first term. Entering office as a surprise winner and a political neophyte, many people didn’t know just what to expect from Trump. Would he do what he pledged to do as a candidate, or was his campaign rhetoric just a lot of hot air to bamboozle enough people into voting for him?
One of Trump’s most popular promises was to “drain the swamp” and, while the President has tried to make some strides in that respect over the past year, there are concerning signs that any swamp draining may be coming to an end.
Personnel Is Policy
One of the primary rules in politics is “personnel is policy.” What a politician says he’ll do is less important than who he hires to implement his policies. In many cases, the people he hires may not agree with his policies and may work to surreptitiously (or not so surreptitiously) undermine and co-opt him. We certainly see this on Capitol Hill all the time, where class after class of freshman Congressmen enters Congress pledging to fix the way Congress works. Yet time after time they get corrupted by the system in Washington. Why is that? It’s because of the people they hire.
Coming into office often with no experience of how things operate in DC, they rely on their respective party apparatuses to staff their offices. They’ll hire Hill veterans as their chiefs of staff and legislative directors, staffers who are more concerned with the future of their careers and who consequently do everything they can not to upset party leadership so that they can maintain their ability to work on the Hill and work the government/lobbying revolving door. We’re seeing much the same thing happening in the White House today too, as Trump continues to hire establishment Republicans who wouldn’t be out of place in a Jeb Bush, Mitt Romney, or John McCain White House.
A prime example of that was Reince Priebus, President Trump’s first White House chief of staff. Trump’s initial appointment of Priebus as chief of staff was a confusing one, as Priebus’ establishment credentials all but guaranteed that he would try to bring as many establishment operatives to the White House as possible. By all accounts there was a civil war of sorts within the White House regarding appointments both within the White House and at cabinet agencies, as the pro-Trump insurgent wing fought things out with the establishment and its cadre of opportunistic former never-Trumpers.
While rumors of Priebus’ ouster were at first thought to be a promising sign that the insurgents were winning, Trump’s appointment of Secretary of Homeland Security and former Marine Corps general John Kelly as Priebus’ successor dashed any hopes of that occurring. Kelly immediately cracked down on access to the President, appointing himself as the gatekeeper through whom all information to and from the President was to flow. In less than a month Kelly had forced Steve Bannon out of the White House, and he slowly began to purge the White House of Trump loyalists. Anyone who wasn’t going to go along with Kelly’s organizational plans wasn’t going to last long.
One of the more recent loyalist departures was that of Omarosa Manigault, the former The Apprentice contestant who served as Director of Communications for the White House Office of Public Liaison and who reportedly enjoyed direct access to President Trump. By all accounts Omarosa bristled at Kelly’s attempts to control staffers’ access to the President, and attempted to continue contacting the President directly. Kelly obviously couldn’t handle what he viewed as insubordination and, after a series of scathingly negative articles in the media about Omarosa’s personality and job performance, she was forced out too.
Trump Supporters Replaced With Establishment Figures
It isn’t just the White House that has seen departures either. Cabinet agencies have witnessed similar incidents, such as Tom Price’s resignation as Secretary of Health and Human Services. In Price’s case, as with Omarosa and others, his departure fell into a familiar pattern. The official is targeted for removal, either by disgruntled insiders or outside political opponents, a series of negative articles in the vehemently anti-Trump media ensues, the media continue to fan the flames as long as they can, and eventually the target either resigns or is forced to quit.
In many cases the replacements after these resignations are retreads from previous administrations, or candidates favored by the establishment. For instance, the nominee to succeed Price at HHS, Alex Azar, served as General Counsel and Deputy Secretary at HHS during the George W. Bush Administration before becoming the top lobbyist for pharmaceutical firm Eli Lilly and later President of the company’s US operations. Kelly’s replacement as Secretary of Homeland Security was his chief of staff while at DHS, Kirstjen Nielsen, another veteran of the George W. Bush Administration.
Trump’s replacement for Michael Flynn as National Security Adviser was LTG H.R. McMaster, an Army general whose 1997 book, Dereliction of Duty, was critical of Vietnam-era military leaders for not questioning and criticizing the strategy they received from civilian leaders. McMaster’s deputy national security adviser was Dina Powell, a former managing director and partner at Goldman Sachs, and his pick to replace her is Nadia Schadlow, a member of the Council on Foreign Relations.
The policies these appointees pursue, too, are nothing more than a continuation of some of the worst violations of our freedoms, such as pushing for reauthorization of Section 702 of FISA and forcing states to comply with the REAL ID Act. These appointees and their policies wouldn’t be out of place under any other establishment administration, so how exactly does Trump expect to drain the swamp by appointing these people and why is he doing it?
Foreign Policy Is the Canary in the Coal Mine
President Trump is increasingly hemmed in by the people he has chosen to staff his administration. Kelly is doing his best to control the flow of information to the President so that he can control what ideas Trump can choose from. Kelly’s relationship with Secretary of Defense Jim Mattis, a former Marine Corps general, and National Security Adviser McMaster is said to be a close one, meaning that Trump’s foreign policy will essentially be controlled by generals who have fully embraced the mindset and world view of the military-industrial establishment. Given the trust Trump has placed in “his generals,” it is unlikely that we’ll see a sensible foreign policy coming from the White House any time soon.
Trump’s ambassador to the UN, Nikki Haley, has taken a far more hawkish line than candidate Trump ever did, and has been doing that since day one with no repercussions. Trump’s Secretary of State, Rex Tillerson, recently announced a “new” US policy towards Syria that is committed to the overthrow of Syrian President Assad, a policy whose outcome would have a severe destabilizing effect on the Middle East and whose execution would continue the risk of provoking a war with Russia. The US Senate has increasingly become emboldened in standing up to President Trump too, questioning some of his anti-establishment appointments or, in the case of former Congressman Scott Garrett, Trump’s nominee to head up and reform the Export-Import Bank, rejecting them outright. Establishment figures finally sense that the populist wave that swept Trump into office is subsiding, and they are beginning to feel their oats.
Many in Trump’s electoral base are unaware of the political machinations that are going on to isolate and co-opt the President. They see passage of a tax reform bill, withdrawal from TPP, and continued movement towards building a border wall as signs that Trump is still “winning.” But recent comments from Kelly, who called Trump’s previous stances on immigration and the border wall “not fully informed” make it clear that the cabal encircling the President has its own ideas and will continue working to bring them to fruition. They’ll chip away at Trump and his policy ideas piece by piece until they are able to substitute their own ideas for his.
The establishment’s ideal is to surround the President with policy experts who present him with a limited range of policy options which have the establishment’s stamp of approval, excluding any non-interventionist or outside-the-box thinking. They hope to then get the President to claim their ideas for his own when doing his victory laps, making him think that he was responsible for what are actually the same doomed-to-fail policies that have circulated throughout DC for decades. When things inevitably go belly up, it will be Trump taking the blame in the media while the establishment figures advising him slink back to their think tanks, law firms, or lobbying firms to await the next President they can hijack.
The establishment isn’t averse to using the media to nudge Trump towards their side either, as Kelly’s latest interview indicates. Although there have been some reports that Trump is getting fed up with Kelly, he recently took to Twitter to support his chief, capitulating to the establishment to ensure the appearance of a unified front within the White House. One thing is for sure, there won’t be any changes in the direction of White House policy until Kelly leaves or is fired. But even then, Trump may be so hopelessly encircled by now that he’ll end up picking another establishment chief of staff, perhaps even at the recommendation of those closest to him.
Parallels Between Trump and Reagan
Trump’s current situation brings back memories of President Reagan’s first term, when chief of staff James Baker, a former Democrat and Bush family friend, was able to put his allies in key positions, ensuring that he was largely successful in keeping President Reagan from enacting any real conservative policies or appointing conservatives to key positions such as the Supreme Court. Another poor personnel pick, Treasury Secretary (and later White House chief of staff) Don Regan, chaired the US Gold Commission and was instrumental in neutering the nascent movement to return the US dollar to a commodity standard, thus completely sidelining a policy that was important to Reagan.
What the Reagan Revolution could have accomplished was nipped in the bud, replaced by what we have now come to know as neoconservatism – a focus on hawkish and interventionist foreign policy, making peace with the welfare state, and economic views that pay lip service to free markets while continuing a policy of big government and crony capitalism. Large budget deficits and a series of proxy wars all over the world were the Reagan legacy, and set the pattern for the actions of future Presidents.
Had it not been for the Soviet Union’s collapse and the post hoc ergo propter hoc assignation of the collapse to the Reagan Administration’s military spending, Reagan’s stature would not be nearly what it is today. Unfortunately the timing of that collapse, even though it was economically inevitable, provided neoconservative foreign policy with a shot in the arm that it has continued to ride for the past quarter of a century in an attempt to maintain its veneer of legitimacy.
We’re facing a similar, Reagan-like situation with President Trump now, as the voters who put him into office intending to give Washington the middle finger have found their man stymied at every turn. If Trump supporters fail to understand what is going on and reflexively support everything coming out of the White House because they view it as originating from President Trump, then their ability to actually effect a change in Washington’s policies will be virtually nil.
The policy establishment surrounding the President knows what it wants and has a strategy to achieve it. They believe that dangling red meat issues like the border wall in front of Trump supporters, or occasionally rattling sabers against North Korea or Iran, giving those in the base just a taste of what they want, is enough to keep them placated while the establishment pursues its own ambitions. Trump supporters are still in the honeymoon phase right now, so that strategy may work, at least for the present.
If Trump supporters don’t wake up and recognize what is transpiring very soon, by the time they realize that they’ve been hoodwinked and that Trump has become the establishment’s Manchurian President it will be too late. Any possibility for good that could have come out of the Trump White House will have been squandered and it may take another generation or more before a similar opportunity presents itself.
On Friday a Middle East regional CNN network reported that American Sniper Chris Kyle had been killed while embedded with US-backed Kurdish forces in Syria by invading Turkish troops, and the story went viral. Or maybe they meant to say actor Bradley Cooper?
Though priding itself for its brand recognition in setting the agenda for accurate mainstream news and top notch investigative journalism around the globe, CNN has once again embarrassed itself as its sister network, CNN Turk, fell for what should have been an easy to recognize prank. At the end of this week false reports that two US Special Forces members had been killed in Syria while embedded with American-backed Kurdish units fighting in the northwest Aleppo district of Afrin in Syria spread wildly through major Turkish media after CNN Turk reported it.
Bradley Cooper as SEAL Sniper Chris Kyle in “American Sniper” via NPR
The only problem is that the identified US soldier purported to be featured in a photo circulating on social media which is the basis of CNN Turk’s story was actually none other than “American Sniper” actor Bradley Cooper. That’s right, as one classic and sadly all too literally serious headline from Newsweek reads – CNN Turkey Reports ‘American Sniper’ Bradley Cooper Killed In Syria, U.S. Military Denies.
And yes, the Pentagon was forced to issue a quick and urgent denial of the story through US Coalition spokesman Colonel Ryan Dillon, who said Friday: “Reports of two US-Coalition members killed in Afrin are FALSE. Completely UNTRUE.”
Reports of two US-Coalition members killed in Afrin are FALSE. Completely UNTRUE. @CJTFOIR efforts focused on supporting our SDF partners aggressively hunt remaining ISIS pockets east of Euphrates near Abu Kamal. #defeatDaesh
— OIR Spokesman (@OIRSpox) January 26, 2018
CNN Turkey, which is owned by the Turner Broadcasting System Europe and Doğan Media Group, was fooled into believing the satirical report which appears to have started among pro-Kurdish social media.
However, the prank should have been easy to recognize considering all early social media reports were based on a photograph said to be a US Special Forces member named Eddie Bragdon who went by the Kurdish nom de guerre “Zana Rizgar”. But the photograph was so obviously a shot from the 2014 film, American Sniper, based on the life of the late Navy SEAL veteran Chris Kyle.
According to Newsweek, the fake story began circulating when a pro-YPG account called “Bird Person” tweeted the following on Thursday:
Eski Amerikan özel kuvvetleri askeri YPG’li Zana Rizgar kod adlı Eddie Bragdon Efrîn Buseya dağında yaşanan çatışma esnasında yaşamını yitirdi yolun yolumuza ışık tutacak Şehid Namirin#TwitterKurds #YPG pic.twitter.com/YIFGei8gnQ
— Bird Person (@horointuccari) January 25, 2018
Newsweek: “In what’s believed to be the original claim, an account supportive of the Kurdish YPG reported the death of U.S. Special Forces member Eddie Bragdon, a.k.a. Zana Rizgar, instead of the actual individual pictured: U.S. actor Bradley Cooper in the film ‘American Sniper.’ The user later claimed that the post was intended to be satirical and criticized Turkish media for picking it up literally.”
Amidst the propaganda war now raging between Turkish and pro-Kurdish media as Turkey continues its ‘Operation Olive Branch’ inside northwest Syria, both Turkish nationalists – who celebrated the supposed “deaths” of US troops embedded with Syrian Kurds – and Kurdish sources, promoted the story on social media.
Yet from the moment the story spread social media users were quick to point out the obvious origins of the photo. But not before CNN Turk featured the story.
The story of “Eddie Bragdon’s” death was featured briefly on CNNTurk.com but was quickly taken down:
And here’s the story tweeted out by CNN Turk’s verified account: The headline reads “Former US Special Forces military was killed in the ranks of the YPG”
It appears a number of Turkish military analysts also promoted the story, which also gave it momentum before it landed on CNN Turk’s homepage.
Listen, this is hilarious.
A Kurdish tweep intentionality makes up a story of “ex-American SOF, YPG fighter killed in Afrin” to troll Turkish nationalists. It makes it all the way to Turkish CNN! Top notch investigative journalism! pic.twitter.com/9qhcf2mraY
— Gilgo (@PapaGilgo) January 26, 2018
Many of the dozens of articles which were subsequently written by Turkish and regional outlets based on the CNN reporting have now since taken offline.
The initial pro-Kurdish social media account from which the fake news originated is now celebrating the fact that it successfully trolled CNN and other mainstream outlets, again tweeting the original Bradley Cooper photo but now with the caption (in Turkish), “Smile for the camera!”
We give it a 10 for some top notch trolling. For CNN it’s about par for the course.
Over the span of 2000-2016, the amount of money spent on food by the average American household increased from $5,158 to $7,203, which is a 39.6% increase in spending.
Despite this, as Visual Capitalist’s Jeff Desjardins notes, for most of the U.S. population, food actually makes up a decreasing portion of their household spending mix because of rising incomes over time. Just 13.1% of income was spent on food by the average household in 2016, making it a less important cost than both housing and transportation.
That said, fluctuations in food prices can still make a major impact on the population. For lower income households, food makes up a much higher percentage of incomes at 32.6% – and how individual foods change in price can make a big difference at the dinner table.
FLUCTUATING GROCERY PRICES
Today’s infographic comes from TitleMax, and it uses data from the Bureau of Labor Statistics to show the prices for 30 common grocery staples over the last decade.
Courtesy of: Visual Capitalist
We’ve summarized the statistics in the following table to show the grocery prices in 2007 and 2017, as well as the total percentage change.
Only prices of three items fell: chicken breasts (-6.4%), whole milk (-7.4%), and eggs (-14.9%).
However, the average price increase for all items was 22%, buoyed especially by meats like bacon (58.2%), ground beef (44.6%), top round steak (40.6%), frozen turkey (38.3%) and sirloin steak (35.2%).
THE FUTURE OF FOOD
As we’ve previously noted, technology is being applied to agriculture and food in really interesting ways – and the future of food could be very different than what we see today.
How will the grocery prices of everyday staples be affected by growth in automated vertical farms, aquaponics, in vitro meats, and artificial animal products?
With shifting consumer preferences towards more local and sustainable products, it will be interesting to revisit this data in the coming years.
We have frequently written about the unsustainable trends in new car sales in the United States created by the combination of lower rates, easing underwriting standards and voracious demand for new securitizations by wall street and pension funds that will do just about anything for an extra 20bps of yield.
This week we find that according to the latest Edmunds’ data, many of the same problems also afflict the used auto market. The most startling takeaway from the report is that the percentage of used cars being traded in with negative equity values – which means that dealers lenders are willing to accept an immediate loss for new transactions – continues to rise and currently stands at an all-time high 32.4%, up from under 20% in 2009. Moreover, the average balance of the negative equity also continues to rise and stood at a record $5,130 last year, up over a quarter from $4,075 a decade earlier.
This confirms that banks and finance companies are making riskier loans to keep up revenue as vehicle sales slow. and here’s why.
The record percentage of underwater loans on trade-ins suggests that car owners are trading in their vehicles sooner than they had previously. According to Bloomberg, “a consumer is often the most underwater on his or her auto loan in the first few years of ownership, because the value of the vehicle drops fastest over that time. By the fourth year, for example, the borrower has paid down a big chunk of the loan, catching up to the depreciation they took in the first few years.”
As Bloomberg explains, for borrowers who do trade in their underwater cars, lenders are essentially giving them the money to pay down their loan. The dealer sells the used car, and whatever balance remains on the old loan is folded into the new loan. The borrower might get a longer-term loan than he or she had before to help keep monthly payments manageable. That means that loan balances are getting bigger relative to the value of the new car, and the debt will be paid off slower.
Confirming this, Moody’s analyst Jason Grohotolski notes that the growing proportion of underwater trade-ins means that at least some borrowers are getting deeper and deeper in debt with every car they buy. This will – eventually – translate to bigger and bigger losses on loans for finance companies whenever the economy heads south, the same way lower down payments slammed mortgage lenders after the credit and housing bubbles burst.
“It’s this cycle that just continually gets worse and worse,” Grohotolski said. “It has to stop, and it doesn’t have a favorable outcome.”
Meanwhile, the average used car price continues to rise and stood at $19,400 as of Q3 2017. This suggests that, since most people simply roll their negative equity into their new loans, many used car buyers are likely sitting on loans where ~15-20% of their outstanding balance simply reflects their negative equity from their previous car.
But wait, there’s more.
Despite rising average used car prices and rising negative equity, average monthly payments for used cars have managed to stay pretty much flat since Q3 2011. Obviously, monthly payments are determined by 3 variables: beginning loan balance, interest rate and term. While interest rates have (at least until recently) come down since 2011, they haven’t declined nearly enough to offset a $2,800 increase in starting principal balance which indicates that, like new car loans, used car loan terms are getting stretched out further and further to manage monthly payments.
* * *
Record “underwater” trade-ins are just one of the many facets of the deteriorating US auto market, which has been slowing down in the past year, and in 2017 new vehicle sales fell 1.8% to 17.2 million in 2017, the first decline since 2009…
… even as loan volumes for new and used car purchases was on track to be higher than ever. Suggesting more trouble lies ahead, Moody’s said that the growth in the average amount financed for a new car outpaced median income growth between 2013 and 2016, suggesting borrowers are getting more strained.
This can be quantified directly by observing surging delinquency and default rates for subprime auto loans. With few ways to keep the business flowing as demand slows, one staple remains which, of course, is to reach out to less creditworthy borrowers. As a result, delinquencies are soaring for subprime auto loans and in the third quarter reached the highest rate in more than seven years, according to New York Fed data from November.
While few deny that the US auto segment, and especially its financing subset is in a bubble, there is broad consensus that unlike subprime mortgages, the bursting of the auto loan bubble will not have dire consequences. In fact, according to a surprisingly rosy take by Bloomberg, “any pain from car-loan trouble will likely be just a shadow of the housing bubble collapse, because the auto debt market is much smaller.” There were around $9 trillion of mortgages outstanding at the end of the third quarter, compared with $1.2 trillion of auto debt, the New York Fed said.
And so far, many of the bonds backed by subprime auto loans are performing well thanks to built-in protections for investors. Wells Fargo analysts said in a note Wednesday that bonds issued by two of the biggest subprime auto lenders — Santander Consumer USA Holdings Inc. and General Motors Co.’s finance arm — have room to reach prices not seen since before the financial crisis.
Of course, where this analysis falls short is assuming a linear deterioration once the bubble pops; as the last financial crisis demonstrated, once the waterfall effect of bursting asset bubbles is in play, the fallout quickly turns exponential, and no rational assessment will do the ensuing collapse justice. As such, the real question is whether auto loans will be the trigger for the bursting of the next consumer debt bubble, or just one of the many dominoes to fall.
Meanwhile, Wall Street is back to its usual antics. Since auto loans performed relatively well during the financial crisis, it encouraged new lenders to step into the space, according to Dan Zwirn, chief investment officer of Arena Investors. Rrisky car loans can be bundled into bonds and sold to yield-starved investors, who are eager to buy them, and as the chart below shows, that’s precisely what is going on.
And, according to Zwirn, that also gives cheap funding to finance companies to reach out to riskier borrowers.
“The same sorts of excesses are happening in car loans that happened in residential mortgages,” Zwirn said. “Ultimately, when the overall fixed-income market has an issue, even if this is not the cause, car loan debt will likely suffer greatly.”
And since Zwirn’s hedge fund had to shutter a decade ago precisely because it did not envision this particular scenario, Zwirn’s caution deserves particular attention..
For now, the stable economy and low interest rates are helping keep borrowers afloat for now said Moody’s Grohotolski. But once there is a slowdown, and rates start rising aggressively, lenders will face a reckoning.
“We could be in a continued state of risk-building on lenders’ balance sheets,” Grohotolski said. “You may not necessarily recognize all of that risk until an unexpected downturn. There could be a meaningful increase in losses.”
* * *
For now, besides the modest decline in total sales and surging delinquencies among subprime borrowers, there are few signs of an imminent storm in the new or used auto markets. However, chaos in the used-car market – once it accelerates – will hurt OEMs.
As we pointed out in June, Morgan Stanley recently predicted that the surge in used-car inventory – driven by a flood of off-lease vehicles – would saturate the market, resulting in as much as a 50% crash in used car prices over the next couple of years which would, in turn, put further pressure on the new car market, which has already resorted to record incentive spending to maintain volumes.
What can borrowers do when prices inevitably crash? Last year, the New York Times reported that lenders are increasingly taking delinquent borrowers to court, and winning – garnishing their wages for years for cars that were, in many cases, worth far less than the amount they’re paying.
For working-class borrowers who are struggling in an economy with stagnant wages, this burden could create serious problems for the household budget, and beyond. It also means that once the current low-rate, credit funded sugar high ends, it will be the middle class that pays for it, as usual.
Led Zeppelin is joining a lucrative multi-million bandwagon of other acts variously marking their golden anniversaries with box sets, rarities, exhibitions and other events.
In addition to warning that U.S. President Donald Trump represents an immense “danger” to civilization, billionaire George Soros used the spotlight of the World Economic Forum in Davos, Switzerland on Thursday to urge the international community to take seriously the threats posed by Facebook and Google, which he said could ultimately spawn “a web of totalitarian control” if they are not reined in.
Particularly alarming, Soros said, is the prospect of Facebook and Google – which he scathingly deemed a “menace” to society – teaming up with “authoritarian states” to “bring together nascent systems of corporate surveillance with an already developed system of state-sponsored surveillance.”
Such “unholy marriages” could result in a strain of authoritarianism “the likes of which not even Aldous Huxley or George Orwell could have imagined,” the billionaire investor cautioned.
Soros went on to compare the tech giants’ impact on the internet – and social media in particular – to the effects of fossil fuel giants on the environment.
“Mining and oil companies exploit the physical environment; social media companies exploit the social environment,” Soros said, warning that the days of internet monopolies like Facebook and Google “are numbered.”
“But the fact that they are near-monopoly distributors makes them public utilities and should subject them to more stringent regulations, aimed at preserving competition, innovation, and fair and open universal access.”
If tech companies are permitted to retain overwhelming control over information, “far-reaching adverse consequences on the functioning of democracy” could result, Soros concluded.
“The power to shape people’s attention is increasingly concentrated in the hands of a few companies,” Soros said.
“It takes a real effort to assert and defend what John Stuart Mill called ‘the freedom of mind.’ There is a possibility that once lost, people who grow up in the digital age will have difficulty in regaining it.”
Below is a short clip of Soros’s speech.
The current moment in history
Good evening. It has become something of an annual Davos tradition for me to give an overview of the current state of the world. I was planning half an hour for my remarks and half an hour for questions, but my speech has turned out to be closer to an hour. I attribute this to the severity of the problems confronting us. After I’ve finished, I’ll open it up for your comments and questions. So prepare yourselves.
I find the current moment in history rather painful. Open societies are in crisis, and various forms of dictatorships and mafia states, exemplified by Putin’s Russia, are on the rise. In the United States, President Trump would like to establish a mafia state but he can’t, because the Constitution, other institutions, and a vibrant civil society won’t allow it.
Whether we like it or not, my foundations, most of our grantees and myself personally are fighting an uphill battle, protecting the democratic achievements of the past. My foundations used to focus on the so-called developing world, but now that the open society is also endangered in the United States and Europe, we are spending more than half our budget closer to home because what is happening here is having a negative impact on the whole world.
But protecting the democratic achievements of the past is not enough; we must also safeguard the values of open society so that they will better withstand future onslaughts. Open society will always have its enemies, and each generation has to reaffirm its commitment to open society for it to survive.
The best defense is a principled counterattack. The enemies of open society feel victorious and this induces them to push their repressive efforts too far, this generates resentment and offers opportunities to push back. That is what is happening in places like Hungary today.
I used to define the goals of my foundations as “defending open societies from their enemies, making governments accountable and fostering a critical mode of thinking”. But the situation has deteriorated. Not only the survival of open society, but the survival of our entire civilization is at stake. The rise of leaders such as Kim Jong-Un in North Korea and Donald Trump in the US have much to do with this. Both seem willing to risk a nuclear war in order to keep themselves in power. But the root cause goes even deeper.
Mankind’s ability to harness the forces of nature, both for constructive and destructive purposes, continues to grow while our ability to govern ourselves properly fluctuates, and it is now at a low ebb.
The threat of nuclear war is so horrendous that we are inclined to ignore it. But it is real. Indeed, the United States is set on a course toward nuclear war by refusing to accept that North Korea has become a nuclear power. This creates a strong incentive for North Korea to develop its nuclear capacity with all possible speed, which in turn may induce the United States to use its nuclear superiority preemptively; in effect to start a nuclear war in order to prevent nuclear war – an obviously self-contradictory strategy.
The fact is, North Korea has become a nuclear power and there is no military action that can prevent what has already happened. The only sensible strategy is to accept reality, however unpleasant it is, and to come to terms with North Korea as a nuclear power. This requires the United States to cooperate with all the interested parties, China foremost among them. Beijing holds most of the levers of power against North Korea, but is reluctant to use them. If it came down on Pyongyang too hard, the regime could collapse and China would be flooded by North Korean refugees. What is more, Beijing is reluctant to do any favors for the United States, South Korea or Japan– against each of which it harbors a variety of grudges. Achieving cooperation will require extensive negotiations, but once it is attained, the alliance would be able to confront North Korea with both carrots and sticks. The sticks could be used to force it to enter into good faith negotiations and the carrots to reward it for verifiably suspending further development of nuclear weapons. The sooner a so-called freeze-for-freeze agreement can be reached, the more successful the policy will be. Success can be measured by the amount of time it would take for North Korea to make its nuclear arsenal fully operational. I’d like to draw your attention to two seminal reports just published by Crisis Group on the prospects of nuclear war in North Korea.
The other major threat to the survival of our civilization is climate change, which is also a growing cause of forced migration. I have dealt with the problems of migration at great length elsewhere, but I must emphasize how severe and intractable those problems are. I don’t want to go into details on climate change either because it is well known what needs to be done. We have the scientific knowledge; it is the political will that is missing, particularly in the Trump administration.
Clearly, I consider the Trump administration a danger to the world. But I regard it as a purely temporary phenomenon that will disappear in 2020, or even sooner. I give President Trump credit for motivating his core supporters brilliantly, but for every core supporter, he has created a greater number of core opponents who are equally strongly motivated. That is why I expect a Democratic landslide in 2018.
My personal goal in the United States is to help reestablish a functioning two-party system. This will require not only a landslide in 2018 but also a Democratic Party that will aim at non-partisan redistricting, the appointment of well-qualified judges, a properly conducted census and other measures that a functioning two-party system requires.
The IT monopolies
I want to spend the bulk of my remaining time on another global problem: the rise and monopolistic behavior of the giant IT platform companies. These companies have often played an innovative and liberating role. But as Facebook and Google have grown into ever more powerful monopolies, they have become obstacles to innovation, and they have caused a variety of problems of which we are only now beginning to become aware.
Companies earn their profits by exploiting their environment. Mining and oil companies exploit the physical environment; social media companies exploit the social environment. This is particularly nefarious because social media companies influence how people think and behave without them even being aware of it. This has far-reaching adverse consequences on the functioning of democracy, particularly on the integrity of elections.
The distinguishing feature of internet platform companies is that they are networks and they enjoy rising marginal returns; that accounts for their phenomenal growth. The network effect is truly unprecedented and transformative, but it is also unsustainable. It took Facebook eight and a half years to reach a billion users and half that time to reach the second billion. At this rate, Facebook will run out of people to convert in less than 3 years.
Facebook and Google effectively control over half of all internet advertising revenue. To maintain their dominance, they need to expand their networks and increase their share of users’ attention. Currently they do this by providing users with a convenient platform. The more time users spend on the platform, the more valuable they become to the companies.
Content providers also contribute to the profitability of social media companies because they cannot avoid using the platforms and they have to accept whatever terms they are offered.
The exceptional profitability of these companies is largely a function of their avoiding responsibility for– and avoiding paying for– the content on their platforms.
They claim they are merely distributing information. But the fact that they are near- monopoly distributors makes them public utilities and should subject them to more stringent regulations, aimed at preserving competition, innovation, and fair and open universal access.
The business model of social media companies is based on advertising. Their true customers are the advertisers. But gradually a new business model is emerging, based not only on advertising but on selling products and services directly to users. They exploit the data they control, bundle the services they offer and use discriminatory pricing to keep for themselves more of the benefits that otherwise they would have to share with consumers. This enhances their profitability even further – but the bundling of services and discriminatory pricing undermine the efficiency of the market economy.
Social media companies deceive their users by manipulating their attention and directing it towards their own commercial purposes. They deliberately engineer addiction to the services they provide. This can be very harmful, particularly for adolescents. There is a similarity between internet platforms and gambling companies. Casinos have developed techniques to hook gamblers to the point where they gamble away all their money, even money they don’t have.
Something very harmful and maybe irreversible is happening to human attention in our digital age. Not just distraction or addiction; social media companies are inducing people to give up their autonomy. The power to shape people’s attention is increasingly concentrated in the hands of a few companies. It takes a real effort to assert and defend what John Stuart Mill called “the freedom of mind.” There is a possibility that once lost, people who grow up in the digital age will have difficulty in regaining it. This may have far-reaching political consequences. People without the freedom of mind can be easily manipulated. This danger does not loom only in the future; it already played an important role in the 2016 US presidential elections.
But there is an even more alarming prospect on the horizon. There could be an alliance between authoritarian states and these large, data-rich IT monopolies that would bring together nascent systems of corporate surveillance with an already developed system of state-sponsored surveillance. This may well result in a web of totalitarian control the likes of which not even Aldous Huxley or George Orwell could have imagined.
The countries in which such unholy marriages are likely to occur first are Russia and China. The Chinese IT companies in particular are fully equal to the American ones. They also enjoy the full support and protection of the Xi Jingping regime. The government of China is strong enough to protect its national champions, at least within its borders.
US-based IT monopolies are already tempted to compromise themselves in order to gain entrance to these vast and fast growing markets. The dictatorial leaders in these countries may be only too happy to collaborate with them since they want to improve their methods of control over their own populations and expand their power and influence in the United States and the rest of the world.
The owners of the platform giants consider themselves the masters of the universe, but in fact they are slaves to preserving their dominant position. It is only a matter of time before the global dominance of the US IT monopolies is broken. Davos is a good place to announce that their days are numbered. Regulation and taxation will be their undoing and EU Competition Commissioner Vestager will be their nemesis.
There is also a growing recognition of a connection between the dominance of the platform monopolies and the rising level of inequality. The concentration of share ownership in the hands of a few private individuals plays some role but the peculiar position occupied by the IT giants is even more important. They have achieved monopoly power but at the same time they are also competing against each other. They are big enough to swallow start-ups that could develop into competitors, but only the giants have the resources to invade each other’s territory. They are poised to dominate the new growth areas that artificial intelligence is opening up, like driverless cars.
The impact of innovations on unemployment depends on government policies. The European Union and particularly the Nordic countries are much more farsighted in their social policies than the United States. They protect the workers, not the jobs. They are willing to pay for re-training or retiring displaced workers. This gives workers in Nordic countries a greater sense of security and makes them more supportive of technological innovations than workers in the US.
The internet monopolies have neither the will nor the inclination to protect society against the consequences of their actions. That turns them into a menace and it falls to the regulatory authorities to protect society against them. In the US, the regulators are not strong enough to stand up against their political influence. The European Union is better situated because it doesn’t have any platform giants of its own.
The European Union uses a different definition of monopoly power from the United States. US law enforcement focuses primarily on monopolies created by acquisitions, whereas EU law prohibits the abuse of monopoly power irrespective of how it is achieved. Europe has much stronger privacy and data protection laws than America. Moreover, US law has adopted a strange doctrine: it measures harm as an increase in the price paid by customers for services received – and that is almost impossible to prove when most services are provided for free. This leaves out of consideration the valuable data platform companies collect from their users.
Commissioner Vestager is the champion of the European approach. It took the EU seven years to build a case against Google, but as a result of her success the process has been greatly accelerated. Due to her proselytizing, the European approach has begun to affect attitudes in the United States as well.
The rise of nationalism and how to reverse it
I have mentioned some of the most pressing and important problems confronting us today. In conclusion, let me point out that we are living in a revolutionary period. All our established institutions are in a state of flux and in these circumstances both fallibility and reflexivity are operating at full force.
I lived through similar conditions in my life, most recently some thirty years ago. That is when I set up my network of foundations in the former Soviet empire. The main difference between the two periods is that thirty years ago the dominant creed was international governance and cooperation. The European Union was the rising power and the Soviet Union the declining one. Today, however, the motivating force is nationalism. Russia is resurgent and the European Union is in danger of abandoning its values.
As you will recall, the previous experience didn’t turn out well for the Soviet Union. The Soviet empire collapsed and Russia has become a mafia state that has adopted a nationalist ideology. My foundations did quite well: the more advanced members of the Soviet empire joined the European Union.
Now our aim is to help save the European Union in order to radically reinvent it. The EU used to enjoy the enthusiastic support of the people of my generation, but that changed after the financial crisis of 2008. The EU lost its way because it was governed by outdated treaties and a mistaken belief in austerity policies. What had been a voluntary association of equal states was converted into a relationship between creditors and debtors where the debtors couldn’t meet their obligations and the creditors set the conditions that the debtors had to meet. That association was neither voluntary nor equal.
As a consequence, a large proportion of the current generation has come to regard the European Union as its enemy. One important country, Britain, is in the process of leaving the EU and at least two countries, Poland and Hungary, are ruled by governments that are adamantly opposed to the values on which the European Union is based. They are in acute conflict with various European institutions and those institutions are trying to discipline them. In several other countries anti-European parties are on the rise. In Austria, they are in the governing coalition and the fate of Italy will be decided by the elections in March.
How can we prevent the European Union from abandoning its values? We need to reform it at every level: at the level of the Union itself, at the level of the member states and the level of the electorate. We are in a revolutionary period; everything is subject to change. The decisions taken now will determine the shape of the future.
At the Union level, the main question is what to do about the euro. Should every member state be required to eventually adopt the euro or should the current situation be allowed to continue indefinitely? The Maastricht Treaty prescribed the first alternative but the euro has developed some defects that the Maastricht Treaty didn’t foresee and still await resolution.
Should the problems of the euro be allowed to endanger the future of the European Union? I would strongly argue against it. The fact is that the countries that don’t qualify, are eager to join, but those that do qualify have decided against it, with the exception of Bulgaria. In addition, I would like to see Britain remain a member of the EU or eventually rejoin it and that couldn’t happen if it meant adopting the euro.
The choice confronting the EU could be better formulated as one between a multi-speed and a multi-track approach. In a multi-speed approach, member states have to agree in advance on the ultimate outcome; in a multi-track approach, member states are free to form coalitions of the willing to pursue particular goals on which they agree. The multi-track approach is obviously more flexible but the European bureaucracy favored the multi-speed approach. That was an important contributor to the rigidity of the EU’s structure.
At the level of the member states, their political parties are largely outdated. The old distinction between left and right is overshadowed by being either pro or anti-European. This manifests itself differently in different countries.
In Germany, the Siamese twin arrangement between the CDU and the CSU has been rendered unsustainable by the results of the recent elections. There is another party, the AfD further to the right than the CSU in Bavaria. This has forced the CSU to move further to the right in anticipation of next year’s local elections in Bavaria so that the gap between the CSU and the CDU has become too great. This has rendered the German party system largely dysfunctional until the CDU and CSU break up.
In Britain, the Conservatives are clearly the party of the right and Labor the party of the left, but each party is internally divided in its attitude toward Brexit. This complicates the Brexit negotiations immensely, and makes it extremely difficult for Britain as a country to decide and modify its position towards Europe.
Other European countries can be expected to undergo similar realignments with the exception of France, which has already undergone its internal revolution.
At the level of the electorate the top-down initiative started by a small group of visionaries led by Jean Monnet carried the process of integration a long way but it has lost its momentum. Now we need a combination of the top-down approach of the European authorities with the bottom-up initiatives started by an engaged electorate. Fortunately, there are many such bottom-up initiatives; it remains to be seen how the authorities will respond to them. So far President Macron has shown himself most responsive. He campaigned for the French presidency on a pro-European platform and his current strategy focuses on the elections for the European Parliament in 2019 – and that requires engaging the electorate.
While I have analyzed Europe in greater detail, from a historical perspective what happens in Asia is ultimately much more important. China is the rising power. There were many fervent believers in the open society in China who were sent to be re-educated in rural areas during Mao’s Revolution. Those who survived returned to occupy positions of power in the government. So the future direction of China used to be open-ended; but no more.
The promoters of open society have reached retirement age and Xi Jinping, who has more in common with Putin than with the so-called West, has begun to establish a new system of party patronage. I’m afraid that the outlook for the next twenty years is rather bleak. Nevertheless, it is important to embed China in institutions of global governance. This may help to avoid a world war that would destroy our entire civilization.
That leaves the local battlegrounds in Africa, the Middle East and Central Asia. My foundations are actively engaged in all of them. We are particularly focused on Africa, where would-be dictators in Kenya, Zimbabwe and the Democratic Republic of Congo have perpetrated electoral fraud on an unprecedented scale and citizens are literally risking their lives to resist the slide into dictatorship. Our goal is to empower local people to deal with their own problems, assist the disadvantaged and reduce human suffering to the greatest extent possible. This will leave us plenty to do well beyond my lifetime.
Superheroes and Oscar nominees lead the way
If there is such a thing as financial hell, it is probably Greece… with Illinois coming in close second.
For those unfamiliar, here’s a quick recap: Illinois (rate just one notch above junk) is drowning under a mountain of debt, unpaid bills and underfunded pension liabilities and it’s largest city, Chicago, is suffering from a staggering outbreak of violent crime not seen since gang wars engulfed major cities from LA to New York in the mid-90’s, while rising taxes have prompted a mass exodus with the state lost 1 resident every 4.3 minutes in 2017.
Here is just a small taste of some of our recent posts on Illinois’ challenges:
- Illinois Pension Funding Ratio Sinks To 37.6% As Unfunded Liabilities Surge To $130 Billion
- Illinois Unpaid Vendor Backlog Hits A New Record At Over $16 Billion
- Illinois Lost 1 Resident Every 4.3 Minutes In 2017, Dropped To 6th Most Populous State
- The State Of Illinois Is “Past The Point Of No Return”
- “What The Hell Is Going On In Chicago” And Other Highlights From Trump’s Speech To FBI Grads
Seen in this light, any irrational actions undertaken by the near-insolvent state would almost make sense, if not be expected. Actually make that irrational and utterly bizarre, such as a proposed offering of a mind-blowing $107 billion in debt – a never before attempted amount in the world of munis – to “fund” the state’s insolvent pension system, which would also assure that Illinois would default (even faster) in the very near future.
According to Bloomberg, Illinois lawmakers are so desperate to shore up the state’s massively underfunded retirement system that “they’re willing to entertain an eye-popping wager: Borrowing $107 billion and letting it ride in the financial markets.“
If that number sounds oddly large, is because it is: an offering of this size would be by far the biggest debt sale in the history of the municipal market, and amount to roughly 50% more debt than bankrupt Puerto Rico accumulated in the run up to its record-setting insolvency.
Putting the proposed deal in context, Illinois had $26.3 billion of general-obligation bonds as of July and the state sold $750 million of bonds in November to pay down unpaid bills that had accumulated during its two-year budget impasse. The state still has $8 billion of unpaid bills even after that issuance, according to the comptroller’s office.
An Illinois Democrat came up with the perfect soundbite framing this head-scratching proposal:
“We’re in a situation in Illinois where our pension debt is just crushing,” Martwick, a Democrat who chairs the committee, said in a telephone interview. “When you have the largest pension debt in the world, you probably ought to be thinking big.”
In other words, with left nothing to lose, Illinois may as well go big. So big, in fact, it’s never been seen before.
What is just as shocking is that not even $107 billion would be enough to fully fund the Illinois pension system, which owes $129 billion after years of failing to make adequate annual contributions.
And since the state’s constitution bans any reduction in worker retirement benefits, the government’s pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that pushed Illinois’s bond rating to the precipice of junk over the summer when the state avoided a historic downgrade below investment grade with a last minute budget deal.
To be sure, Illinois wouldn’t be the first state to issue debt to shore up its pension system: the state did so again back in 2003, when it issued a record $10 billion of them. New Jersey also tried it with catastrophic consequences, seeing its pension shortfall soar again after the state failed to make adequate payments into the system for years. And then there is Detroit’s now infamous pension-fund borrowing in 2005 and 2006 helped push it into bankruptcy.
Will Illinois gamble with a bond offering that – in one deal – could reprice the entire muni bond market? According to Bloomberg, the state legislature’s personnel and pensions committee plans to meet on January 30 to hear more about a proposal advanced by the State Universities Annuitants Association.
The group wants Illinois to issue the bonds this year to get its retirement system nearly fully funded, on one condition: Illinois will pursue the deal assuming that the state can make more on its investments than it will pay in interest.
Ah yes, ye olde IRR: will it be positive or negative?
Naturally, the association which is advocating the plan says it will save the state $103 billion by 2045. That’s because Illinois’s current debt to its pensions grows at the rate that the retirement system expects to earn on its investments, which may be – shall we say – aggressive, and is much higher than the interest rates governments pay to issue municipal bonds.
There is just one problem: whereas Illinois universities expect total returns to keep rising well in the double-digit category, others, such as GMO, forecast real stock returns of -4.7% annually for the next 7 years, while bonds lose 1% in real terms as Mish notes. Offsetting this is the cost of debt, which for the near-junk bonds will likely come out around 6-7% – unless of course the ECB decides to backstop these too – and Illinois Pensions are looking at annual losses of 8%+ every year for the next 7 years.
On the surface, the plan appears to be sheer mathematical idiocy, guaranteeing that Illinois pensions are depleted even faster, but that never stopped Illinois before.
According to the abovementioned democrat Robert Martwick, “if it makes sense, we’ll do it, and if it doesn’t we won’t.” Of course, he also said that Illinois has to be “thinking big” and there literally hasn’t been a bigger municipal bond sale ever.
As for the rating agencies, they will be thinking just how deep into junk territory to downgrade Illinois. Indeed, as Bloomberg notes, municipal-bond investors would likely frown upon such a massive sale, to say the least.
“Those types of deals are not typically positively received by the rating agencies or investors,” said Eric Friedland, director of municipal research in Jersey City, New Jersey, for Lord Abbett, which holds about $20 billion of municipal debt, including Illinois’s. “That type of issuance could definitely be a credit negative.”
Needless to say, this kind of issuance contemplated by the association would significantly increase the state’s debt burden, and “will not go over well in the bond market,’” said Richard Ciccarone, Chicago-based president of Merritt Research Services LLC, which analysts municipal finance.
“It absolutely increases default risk. There’s no cushion” Ciccarone said.
But that’s not Illinois problem: at this point the state’s default is only a matter of time, and as such it may as well accelerate it if it means a faster transfer of cash from willing
idiots debt investors to the state’s retirees. And considering that Illinois’ general obligations were trading back at par just a few months ago after tumbling in late 2016…
… the presence of numerous
idiots debt investors who are willing to gamble with other people’s money just to beat treasuries is guaranteed.