Inspector General Finds FBI, DOJ Broke Law In Clinton Email Probe, Refers To Criminal Prosecutor

Inspector General Finds FBI, DOJ Broke Law In Clinton Email Probe, Refers To Criminal Prosecutor

As we reported earlier Thursday, a long-awaited report by the Department of Justice’s internal watchdog into the Hillary Clinton email investigation has moved into its final phase, as the DOJ notified multiple subjects mentioned in the document that they can privately review it by week’s end, and will have a “few days” to craft any response to criticism contained within the report, according to the Wall Street Journal.

Those invited to review the report were told they would have to sign nondisclosure agreements in order to read it, people familiar with the matter said. They are expected to have a few days to craft a response to any criticism in the report, which will then be incorporated in the final version to be released in coming weeks. –WSJ

Now, journalist Paul Sperry reports that “IG Horowitz has found “reasonable grounds” for believing there has been a violation of federal criminal law in the FBI/DOJ’s handling of the Clinton investigation/s and has referred his findings of potential criminal misconduct to Huber for possible criminal prosecution.”

Sperry also noted on Twitter that the FBI and DOJ had been targeting former National Security Advisor Mike Flynn before his December 2016 phone call with Russian Ambassador Sergey Kislyak, stemming from photos of Flynn at a December 2015 Moscow event with Vladimir Putin (and Jill Stein).

Who is Huber?

As we reported in March, Attorney General Jeff Sessions appointed John Huber – Utah’s top federal prosecutor, to be paired with IG Horowitz to investigate the multitude of accusations of FBI misconduct surrounding the 2016 U.S. presidential election. The announcement came one day after Inspector General Michael Horowitz confirmed that he will also be investigating allegations of FBI FISA abuse.

While Huber’s appointment fell short of the second special counsel demanded by Congressional investigators and concerned citizens alike, his appointment and subsequent pairing with Horowitz is notable – as many have pointed out that the Inspector General is significantly limited in his abilities to investigate. Rep. Bob Goodlatte (R-VA) noted in March “the IG’s office does not have authority to compel witness interviews, including from past employees, so its investigation will be limited in scope in comparison to a Special Counsel investigation,”

Sessions’ pairing of Horowitz with Huber keeps the investigation under the DOJ’s roof and out of the hands of an independent investigator.

***

Who is Horowitz?

In January, we profiled Michael Horowitz based on thorough research assembled by independent investigators. For those who think the upcoming OIG report is just going to be “all part of the show” – take pause; there’s a good chance this is an actual happening, so you may want to read up on the man whose year-long investigation may lead to criminal charges against those involved.

In short – Horowitz went to war with the Obama Administration to restore the OIG’s powers – and didn’t get them back until Trump took office.

Horowitz was appointed head of the Office of the Inspector General (OIG) in April, 2012 – after the Obama administration hobbled the OIG’s investigative powers in 2011 during the “Fast and Furious” scandal. The changes forced the various Inspectors General for all government agencies to request information while conducting investigations, as opposed to the authority to demand it. This allowed Holder (and other agency heads) to bog down OIG requests in bureaucratic red tape, and in some cases, deny them outright.

What did Horowitz do? As one twitter commentators puts it, he went to war

In March of 2015, Horowitz’s office prepared a report for Congress  titled Open and Unimplemented IG Recommendations. It laid the Obama Admin bare before Congress – illustrating among other things how the administration was wasting tens-of-billions of dollars by ignoring the recommendations made by the OIG.

After several attempts by Congress to restore the OIG’s investigative powers, Rep. Jason Chaffetz successfully introduced H.R.6450 – the Inspector General Empowerment Act of 2016 – signed by a defeated lame duck President Obama into law on December 16th, 2016cementing an alliance between Horowitz and both houses of Congress. 

1) Due to the Inspector General Empowerment Act of 2016, the OIG has access to all of the information that the target agency possesses. This not only includes their internal documentation and data, but also that which the agency externally collected and documented.

TrumpSoldier (@DaveNYviii) January 3, 2018

See here for a complete overview of the OIG’s new and restored powers. And while the public won’t get to see classified details of the OIG report, Mr. Horowitz is also big on public disclosure:

Horowitz’s efforts to roll back Eric Holder’s restrictions on the OIG sealed the working relationship between Congress and the Inspector General’s ofice, and they most certainly appear to be on the same page. Moreover, FBI Director Christopher Wray seems to be on the same page as well. Click here and keep scrolling for that and more insight into what’s going on behind the scenes.

Here’s a preview:

 

Which brings us back to the OIG report expected by Congress a week from Monday.

On January 12 of last year, Inspector Horowitz announced an OIG investigation based on “requests from numerous Chairmen and Ranking Members of Congressional oversight committees, various organizations (such as Judicial Watch?), and members of the public.”

The initial focus ranged from the FBI’s handling of the Clinton email investigation, to whether or not Deputy FBI Director Andrew McCabe should have been recused from the investigation (ostensibly over $700,000 his wife’s campaign took from Clinton crony Terry McAuliffe around the time of the email investigation), to potential collusion with the Clinton campaign and the timing of various FOIA releases.

Courtesy @DaveNYviii

On July 27, 2017 the House Judiciary Committee called on the DOJ to appoint a Special Counsel, detailing their concerns in 14 questions pertaining to “actions taken by previously public figures like Attorney General Loretta Lynch, FBI Director James Comey, and former Secretary of State Hillary Clinton.” 

The questions range from Loretta Lynch directing Mr. Comey to mislead the American people on the nature of the Clinton investigation, Secretary Clinton’s mishandling of classified information and the (mis)handling of her email investigation by the FBI, the DOJ’s failure to empanel a grand jury to investigate Clinton, and questions about the Clinton Foundation, Uranium One, and whether the FBI relied on the “Trump-Russia” dossier created by Fusion GPS. 

On September 26, 2017, The House Judiciary Committee repeated their call to the DOJ for a special counsel, pointing out that former FBI Director James Comey lied to Congress when he said that he decided not to recommend criminal charges against Hillary Clintonuntil after she was interviewed, when in fact Comey had drafted her exoneration before said interview.

And now, the OIG report can tie all of this together – as it will solidify requests by Congressional committees, while also satisfying a legal requirement for the Department of Justice to impartially appoint a Special Counsel.

As illustrated below by TrumpSoldier, the report will go from the Office of the Inspector General to both investigative committees of Congress, along with Attorney General Jeff Sessions, and is expected within weeks.

DOJ Flowchart, Courtesy TrumpSoldier (@DaveNYviii)

Once Congress has reviewed the OIG report, the House and Senate Judiciary Committees will use it to supplement their investigations, which will result in hearings with the end goal of requesting or demanding a Special Counsel investigation. The DOJ can appoint a Special Counsel at any point, or wait for Congress to demand one. If a request for a Special Counsel is ignored, Congress can pass legislation to force an the appointment.

And while the DOJ could act on the OIG report and investigate / prosecute themselves without a Special Counsel, it is highly unlikely that Congress would stand for that given the subjects of the investigation.

After the report’s completion, the DOJ will weigh in on it. Their comments are key. As TrumpSoldier points out in his analysis, the DOJ can take various actions regarding “Policy, personnel, procedures, and re-opening of investigations. In short, just about everything (Immunity agreements can also be rescinded).

Meanwhile, recent events appear to correspond with bullet points in both the original OIG investigation letter and the 7/27/2017 letter forwarded to the Inspector General: 

With the wheels set in motion last week seemingly align with Congressional requests and the OIG mandate, and the upcoming OIG report likely to serve as a foundational opinion, the DOJ will finally be empowered to move forward with an impartially appointed Special Counsel.

Here Is Trump’s Blueprint For Lowering Drug Prices

With Trump set to unveil his vision for lowering drug prices as part of his “American Patients First” initiative, moments ago the Department of Health and Human Services released a blueprint plan on drug prices.

Here is the summary of how Trump hopes to lower drug prices:

  • Increased Competition
  • Better Negotiation
  • Incentives for Lower List Prices
  • Lowering Out-of-Pocket Costs

A quick skim of the plan highlights the following section:

  • Considering fiduciary status for Pharmacy Benefit Managers (PBMs)

And some more details from the Plan:

Increased Competition: 

  • Immediate Actions
    • Steps to prevent manufacturer gaming of regulatory processes such as Risk Evaluation and Management Strategies (REMS)
    • Measures to promote innovation and competition for biologics
    • Developing proposals to stop Medicaid and Affordable Care Act programs from raising prices in the private market
  • Further Opportunities
    • Considering how to encourage sharing of samples needed for generic drug development
    • Additional efforts to promote the use of biosimilars

Better Negotiation

  • Immediate Actions
    • Experimenting with value-based purchasing in federal programs
    • Allowing more substitution in Medicare Part D to address price increases for single-source generics
    • Reforming Medicare Part D to give plan sponsors significantly more power when negotiating with manufacturers
    • Sending a report to the President on whether lower prices on some Medicare Part B drugs could be negotiated for by Part D plans
    • Leveraging the Competitive Acquisition Program in Part B.
    • Working across the Administration to assess the problem of foreign free-riding
  • Further Opportunities
    • Considering further use of value-based purchasing in federal programs, including indication-based pricing and long-term financing
    • Removing government impediments to value-based purchasing by private payers
    • Requiring site neutrality in payment
    • Evaluating the accuracy and usefulness of current national drug spending data
    • Investigating tools to address foreign government threats of compulsory licensing or IP theft that may be harming innovation and development, driving up U.S. drug prices

Incentives for Lower List Prices

  • Immediate Actions
    • FDA evaluation of requiring manufacturers to include list prices in advertising
    • Updating Medicare’s drug-pricing dashboard to make price increases and generic competition more transparent
  • Further Opportunities
    • Measures to restrict the use of rebates, including revisiting the safe harbor under the Anti-Kickback statute for drug rebates
    • Additional reforms to the rebating system
    • Using incentives to discourage manufacturer price increases for drugs used in Part B and Part D
    • Considering fiduciary status for Pharmacy Benefit Managers (PBMs)
    • Reforms to the Medicaid Drug Rebate Program
    • Reforms to the 340B Drug Discount Program
    • Considering changes to HHS regulations regarding drug copay discount cards

Lowering Out-of-Pocket Costs

  • Immediate Actions
    • Prohibiting Part D contracts from preventing pharmacists’ telling patients when they could pay less out-of-pocket
    • by not using insurance
    • Improving the usefulness of the Part D Explanation of Benefits statement by including information about drug price increases and lower cost alternatives
  • Further Opportunities
    • More measures to inform Medicare Part B and D beneficiaries about lower-cost alternatives
    • Providing better annual, or more frequent, information on costs to Part D beneficiaries

Of course, if Trump is indeed serious in his crackdown on pharma and drug companies, then the record IRR pharma companies reap through lobbying is about to crash.

Keep an eye on lobby spend to determine if Trump’s plan is just more fluff or has some hope of actually working.

Although judging by the market reaction, the plan does appear to have some bit:

  • BI NA HEALTHCARE SUPPLY CHAIN INDEX FALLS TO SESSION LOWS
  • CVS, EXPRESS SCRIPTS DIP TO SESSION LOWS ON PRICING BLUEPRINT
  • WALGREENS, CVS FALL TO SESSION LOWS AS TRUMP SPEAKS

CIA Whistleblower: Trump Is Doing What Kennedy Tried To

 

Former CIA Officer and whistleblower Kevin Shipp says what is going on with Donald J. Trump “is an ongoing coup to remove a duly elected President.” Shipp contends, “This is a huge constitutional crisis like the country has never seen before. This makes Watergate look like a Sunday school class.”

On Friday, Shipp and other retired top officials at the CIA, FBI, DOJ and NSA held a press conference and demanded Attorney General Jeff Sessions prosecute top Obama era officials for obvious crimes against the incoming Trump Administration. Shipp says,

We have a coup within our government right now at the senior levels at the CIA, DOJ and the FBI attempting to unseat a duly elected President who was elected by the American people and remove him from office…

This is, at worst, treason with senior officials in the shadow government or Deep State . . . to attack Donald Trump and remove him from office. . . . We have not seen anything like this since the Presidency of John F. Kennedy (JFK), when CIA Director Allen Dulles attacked him, and we saw what happened there…

There is crystal clear evidence that the CIA was, at least, involved with the cover-up of the JFK assassination.  Now, we have the same thing happening again…

Remember what Chuck Schumer said, and it was chilling.  He said, ‘If you cross the intelligence community, they can hit back at you six ways from Sunday.’  That’s what we are seeing now.  It’s collusion or a coup with senior officials at the FBI, DOJ and CIA along with Robert Mueller to unseat an elected president.”

Shipp goes on to explain, “There is essentially a civil war involving parts of senior management and upper parts of our government that is occurring in the United States. It’s between the ‘Dark’ side and the ‘Constitutional’ side.”

“There has never been anything like this in history.  It is extremely serious, and this is an extremely serious hour for our government and especially for our constitutional freedoms…

This essentially is a global criminal cabal that has penetrated into our government and now has senior level officials colluding and, I would argue, conspiring to unseat this president.

In closing, Shipp says, “People need to understand that the Democrat Party today is not the Democrat Party of John F. Kennedy.”

“The Democrat Party with Barack Obama and Hillary Clinton is more Marxist than anything else.  They think the Constitution should be a ‘progressive’ document.  In other words, the Constitution is outdated and should be redone.  They are both directly connected into George Soros, who wants to destroy the sovereignty of the U.S. government…

The Democrat Party is now made up of Marxists and leftists that have penetrated that entire organization. . . . Their entire goal is to change our form of government and destroy our sovereignty.

Join Greg Hunter as he goes One-on-One with CIA whistleblower Kevin Shipp, founder of the website ForTheLoveofFreedom.net.

Jeff Bezos Booed By Amazon Workers

Jeff Bezos, the world’s richest man, has made Amazon shareholders extremely wealthy and happy in recent years, but when it comes to Amazon’s 566,000 employees, it’s a vastly different matter. Last week, Amazon finally disclosed its workers’ median annual salary, which at a paltry $28,446 put Amazon on par with Hershey, slightly above retailer Home Depot, and almost ten times below the $240,430 median annual comp at Facebook, according to recent proxy filings.

This will hardly come as a surprise: after all, most of the roughly half-million blue-collar, part-time employees at Amazon don’t make six figures while spending their workdays writing code, and instead unload trucks, drive forklifts and walk miles collecting products to fill orders—all for around the same pay as workers in other companies’ warehouses. Due to their menial, repetitive task, they are also rapidly being replaced by robots.

Which explains why Amazon CEO Jeff Bezos was booed and received a hostile reception from his own workers, when he arrived in Berlin on April 24 to pick up an innovation award (mercifully, it wasn’t for making human workers obsolete.)

According to Bloomberg, around 350 Amazon workers, members of Germany’s powerful Ver.di trade union, gathered outside the office of tabloid publisher Axel Springer where the awards ceremony was taking place, carrying posters demanding to “Make Amazon Pay.”  The union has been pushing for higher pay for Amazon’s thousands of workers in the country for several years, claiming they receive lower wages than workers in other retail jobs. Amazon workers from other countries, including Poland and Italy, also traveled to Berlin to join the protest.

In a dramatic description of Amazon working conditions, Verdi boss Frank Bsirske said that “we have a boss who wants to impose American working conditions on the world and take us back to the 19th century.” Ver.di has for years been a constant thorn in Amazon’s side in Germany, organizing workers strikes to demand improved pay and working conditions according to Bloomberg.

One of the protesters at the event was Thomas Rigol, 37, who joined Amazon as a logistics worker in Leipzig in 2008. Rigol says he would like Bezos to give unions a say in the company, and increase profit sharing opportunities for workers.

“But mostly it’s about respect, which the simple workers aren’t getting from the upper management,” Rigol said. “Mr. Bezos is the richest man in the world and we are being patronized.”

The protest took a political turn, when Andrea Nahles, the new leader of Germany’s Social Democrats which is in coalition with the ruling CDU, turned up at the protest, and also had harsh words for Bezos, telling reporters that he didn’t deserve his prize since he treats his employees badly. Amazon employs some 16,000 people in Germany, its biggest market outside the US.

And confirming that Germany will do everything in its power to maximize Amazon’s tax receipts – if only in Germany – Nahles labeled Amazon, along with other big tech companies “world champions in tax avoidance” and told reporters that “this does not deserve a prize.”

Later, during a fireside chat with Axel Springer CEO Mathias Döpfner on Tuesday evening, Bezos defended Amazon saying he was “very proud of our working conditions, and I’m very proud of the wages we pay,” including in Germany. It was not immediately clear if he discussed his unstated desire to replace all low-paid warehouse workers with zero-paid robots over the next several years.

Separately, when asked a question about whether he was concerned Trump would try to break up Amazon Bezos said he expects to be scrutinized. “The big tech companies have become large enough that they’re going to be inspected,” Bezos said. “It’s fine.” In other words, the world’s richest man is not all worried about the actions of the world’s most powerful man.

Socialism, Privacy, & Charity For The Powerful. Capitalism, Surveillance, & Rugged Individualism For The Powerless.

TDB’s blog

Authored by Caitlin Johnstone via Steemit.com,

The crowning achievement in hypocrisy must go to those staunch Republicans and Democrats of the Midwest and West who were given land by our government when they came here as immigrants from Europe. They were given education through the land grant colleges. They were provided with agricultural agents to keep them abreast of forming trends. They were granted low interest loans to aid in the mechanization of their farms, and now that they have succeeded in becoming successful, they are paid not to farm. And these are the same people that now say to black people, whose ancestors were brought to this country in chains and who were emancipated in 1863 without being given land to cultivate or bread to eat, that they must pull themselves up by their own bootstraps. What they truly advocate is socialism for the rich and capitalism for the poor.”

~ Martin Luther King, Jr

“I gotta get rid of this stuff. Man, I don’t know what I’m gonna do with it. The more money you make, the more free shit they give you. It makes no sense.”

~ Adam Sandler, Funny People (2009)

A GoFundMe for former FBI Deputy Director Andrew McCabe, who was fired two weeks ago by Attorney General Jeff Sessions, has raised over $400,000 in less than a day.

Another way to say that would be that a former officer from the US intelligence community, who is married to a successful physician and will surely receive a book deal worth millions of dollars, just had a charity drive which in less than a day raised an amount of money it would take the average American years to earn.

Meanwhile, an impoverished American recently died because his GoFundMe failed to raise enough money for his insulin and an FBI whistleblower was just arrested for trying to bring transparency to the Bureau’s secret domestic surveillance practices while banks receive massive bailouts, global fossil fuel subsidies total trillions of dollars, and Amazon paid zero federal taxes last year despite earning billions.

Even leaving aside the reasons for McCabe’s firing and the shady dealings he was accused of, this is a very solid illustration of everything that is sick about the United States of America.

In America you have socialism for the rich and capitalism for the poor.

You have government secrecy for the powerful and surveillance for the powerless.

You have charity for wealthy establishment lackeys and rugged individualism for ordinary human beings.

Those at the top are uplifted even further, while those on the bottom are stomped through the floor.

Julian Assange is currently under siege in the Ecuadorian embassy, deprived of mobility, sunlight and healthcare, and now internet, phone calls and visitorsall because he dared to bring some transparency to the powerful. Meanwhile the intelligence and defense agencies who serve as the armed goon squad of the wealthy and the powerful are able to kill, destroy and pillage from behind the opaque walls of near-total government secrecy in the name of “national security”. And instead of defending the single defenseless man who speaks truth to power, mainstream media reporters around the world are spitting on him in near-unanimity because he hurts power’s feelings.

This is how we end up with John Bolton, people. This is the “kiss-up, kick-down” pathway to success that elevates bloodthirsty psychopaths like John Bolton, the worst of the worst, the ones willing to do the most killing on behalf of the powerful and the most stomping on the powerless to get to the top. This has become the unquestioned pathway in every sphere of public life. We have a situation now where the highest echelons of power are not the wisest among us, but the wiliest.

The fourth estate is full of everyday people who at one point presumably believed they were there to bring truth to power, stomping on the silvery head of one who does, while sucking up to the very power that he regularly embarrasses with his leak drops.

Speaking as an Australian, it sickens me to see my fellow Australians slip down this slope. Like many Australians, I was brought up to champion the underdog, cheer on the little Aussie battler, go into bat for the vulnerable and chop down tall poppies. My Australia wasn’t one that delighted in leaving one of our own to wither and die under siege in a “small camp” while making a parade of brown-nosing the establishment. It wasn’t a place where you used your gifts to help the powerful and hurt the vulnerable. It was the kind of place that created a man like Julian Assange, one that believed in constantly choosing the highest interest over self-interest. It wasn’t one where you used your gifts with the pen to turn a hero into someone everyone could feel okay about abandoning.

To all who work in the media:

…your selfish obsession with choosing your career over telling the truth when it counts, with choosing not to know rather than to dig and find out something you’d rather not know, with choosing getting along with your mates rather than standing up for what you know is right, that tiny little seemingly innocuous preference you have is what is driving our whole species towards extinction. That’s your copy of the mind virus that is killing us all. You are in a position of power and you are using it to kill us.

When you choose to masturbate some old mens’ desire for a final war with Russia rather than present the case for peace, you are killing us all. When you choose to roundly condemn a man for bringing truth to power rather than helping him do so, you are killing us all. When you choose to help Andrew bloody McCabe instead of the poor and the powerless, you are killing us all. Every time you suck up to power to get ahead a little, you are killing us all.

Do better, humans. Do the opposite of John Bolton, who kisses up to power and kicks down at the powerless.

Punch up at the most powerful, and to the powerless, extend a helping hand. Lift up the Julian Assanges and pull down the John Boltons. Give privacy to the people, not to power. Give bailouts to human beings, not banks. Give subsidies to the poor, not to the plutocrats. Give money to people who need it, not to Andrew McCabe.

*  *  *

Thanks for reading, clear-eyed rebel. My daily articles are entirely reader-funded, so if you enjoyed this piece please consider sharing it around, liking me on Facebook, following my antics on Twitter, bookmarking and getting on the mailing list for my website, checking out my podcast, throwing some money into my hat on Patreon or Paypalor buying my new book Woke: A Field Guide for Utopia Preppers.

The Grand Illusion 2.0

TAB

Introductory notethis is a very long epistle. But I think my point needs to be made fully and at length. Before you go further, in fairness here is the TL:DR version:

  • Advocates of free trade and globalization were taken aback a week ago by the assumption by China’s President Xi Jinping of rule for life.
  • This was because it runs completely contrary to their theory that free trade leads to economic liberalization, which in turn leads to political liberalization.
  • This theory has been repeatedly and thoroughly repudiated throughout history, most catastrophically be World War I.
  • That’s because autocrats will use the gains of economic trade for their own ends, typically the pursuit of further political and military power.
  • Historically middle classes do not revolt against autocracy when they are prospering, but rather only after a period of rising expectations has been dashed by an economic downturn in which the autocratic elite unfairly forces all of the burden onto them.
  • But since these historical facts are nowhere to be found in the economic models, they are ignored as if they do not exist. We can only hope they do not once again lead to catastrophe.

First, let me pose a thought experiment.  Country A and Country B propose to enter into Agreement X. We have no idea at all what Agreement X is, but we know that the result will be that both Country A and Country B will each be richer by $1 Trillion each and every year thereafter.

Country A, being an egalitarian paradise, is going to share out the proceeds equally among its population of 250 million, with each person getting $4,000 per year.

The dictator of Country B is going to do the same with 1/2 of its $1 Trillion gain, making his population very happy, but — because this is his personal aim — he is going to spend the other $500 Billion each and every year in building up its military so that it can challenge and eventually vanquish Country A, and then keep all of the gains of Agreement X to itself.

Should Country A enter into Agreement X?

*  *  *

A week ago The Economist opined that “The West’s Bet on China has Failed,” stating that:

Last week China stepped from autonomy into dictatorship. That was when Xi Jinping … let it be known that he will change China’s constitution so that he can rule as president for as long as he chooses …. This is not just a big change for China but also strong evidence that the West’s 25 year long bet on China has failed.

After the collapse of the Soviet Union, the West welcomed [China] into the global economic order. Western leaders believed that by giving China a stake in institutions such as the World Trade Organization would bind it into the rules based system … They hoped that economic integration would encourage China to evolve into a market economy and that, as its people grew wealthier, its people would come to yearn for democratic reforms ….

CNN’s Fareed Zakaria recoiled in horror, writing in the Washington Post that

[W]hat’s happening in China … is huge and consequential. China is making the most significant change to its political system in 35 years.

For decades, China seemed to be getting more institutionalized…. But that trend has now been turned on its head. If term limits are abolished, which is now almost certain, Xi Jinping could stay China’s president, general secretary of the Communist Party and chairman of the Central Military Commission for the rest of his life. And he is just 64.

… The real danger is that China is eliminating perhaps the central restraint in a system that provides staggering amounts of power to the country’s leaders. What will that do, over time, to the ambitions and appetites of leaders? “Power tends to corrupt,” Lord Acton famously wrote in 1887, “and absolute power corrupts absolutely.” Perhaps China will avoid this tendency, but it has been widespread throughout history.

If Zakaria felt blindsided, he should not have been. Because ten years ago, after he published “The Post-American World,” arguing that because the US had successfully spread the ideals of liberal democracy across the world, other countries were competing for economic, industrial, and  cultural – but not military – power, I confronted him at the former TPM Cafe.

For the truth is, the West’s bet on China, so ruefully mourned by The Economist and Zakaria, was always likely to fail. That free trade leads to economic and political liberalism and to peace – championed by neoliberal economists and their political retinue – has been a fantasy for over 100 years, and for 100 years it has been a lie. They would have known if their theories and equations could account for the likes of Kaiser Wilhelm II. But since their equations and theories are blind to the pursuit of power, they dismiss it — at horrible cost to the world.

In an interview with David Frum, Minxin Pei, who a decade ago dissented, predicting that China would not transition towards true economic and political freedom, said it well:

[M]any people were too dazzled by the superficial changes, especially economic changes, to realize that the Communist Party’s objective is to stay in power, not to reform itself out of existence. Economic reform or, to be more exact, adopting some capitalist practices and embracing market in some areas, is only a means to a political end…

W]hen China was forced to keep the door [to liberalization] more open, it was in a weaker position relative to the forces outside—the West in general and the U.S. in particular. But when the conservative forces inside China gain strength while the West appears to be in decline, those forces are far more likely and able to close the door again, as is happening right now. So, while the logic of irresistible liberalization appears to be reasonable on the surface, it overlooks the underlying reality of power.

I set set forth the fuller historical context a decade ago in my response to Zakaria,which I am taking the liberty of reposting in full immediately below.

*  *  *

Over at TPM Cafe, this week Fareed Zakaria’s new book, “The Post American World” is being discussed. In it, Zakaria repeats the theory of globalization’s most toxic and unproven claim: that countries which participate in trade together do not make war upon one another. So if you want to prevent war, just participate in deep and interwoven trade with the other country and everything will be hunky-dory.

It’s a lie.

Zakaria claims that We’re Living in Scarily Peaceful Times”:

The new and most dangerous twist to all this is that our great looming danger is Russia, China, and the rising oil dictatorships…. This is a worldview bereft of any historical perspective. Compared with any previous era, there is more economic integration and even comity among the world’s major powers. The imbalance between the West and the rest is large, not complete but large and in most areas increasing. The newly emerging states want to grow within the existing world order, which John Ikenberry has nicely described as “easy to join and hard to overturn.” The world is going our way, slowly and fitfully, with some detours. No great power has an alternative model of modern life that has any real attraction?

This is essentially the same argument that Thomas Friedman made in The Lexus and the Olive Tree’ and reiterated even a short time ago in this liveblog:

You know in Lexus I wrote that no two countries would fight a war so long as they both had McDonald’s. And I was really trying to give an example of how when a country gets a middle class big enough to sustain a McDonald’s network, they generally want to focus on economic development. That is a sort of tipping point, rather than fighting wars.

This argument, repeated over and over on both necoconservative and neoliberal sites, and all over the corporate media, that free trade leads to middle classes leads to democracy leads to kumbayah, is pretty simple, and it is dangerously wrong. Or as Zakaria reviewer David Rieff summarizes:

he reads too much into into two indisputable facts of the current moment — that there are fewer major wars taking place than in living memory and that there is a greater level of global economic integration than at any time in history.

The truth is, the free trade zealots also have spent too much of their careers seduced by neoclassical economics’ favorite mythical beast, Homo economicus, the Rational Man; and not enough time reading history.

For a start, contrary to the free trade zealots, this is not the first period in world history in which there has been relatively “free” trade, nor is it the first time in which there has been “globalization.” For example, as is pointed out in an article entitled European Social Security and Global Politics By Danny Pieters, European Institute for Social Security Conference

Globalisation is not a new phenomena. During the second part of the nineteenth century there was a strong move toward the liberalisation of international transactioins, and international trade expanded rapidly until the beginning of World War I

And just which country in Europe was undergoing the most rapid growth and industrialization during the perioed from 1870-1914? As this essay states, Germany

embarked upon an extensive education program; it specialised in technical ares and so there was a greater push in that direction. It produced more and better scientists, and so Germany began her industrial advance. Also, the French threat, even if it was superficial, spurred the Germans in authority into action, and made them make Germany stronger and superior.

German expansion was also helped by the expansion of the railway network, so that goods and mail could get from one place to another, and to more places, faster and more efficiently.

Needless to say,much like the mercantilist expanding autocracies now fawned over by so many of the free trade zealots, during this time Germany was a monarchy, ruled by the Kaiser.

Even worse, this isn’t just the first time that economies have experience “globalization”, it also isn’t the first time that this exact same argument has been made. In his 1910 best-seller, “The Great Illusion” Norman Angell wrote that:

the universal assumption that a nation, in order to find outlets for expanding population and increasing industry, or simply to ensure the best conditions possible for its people, is necessarily pushed to territorial expansion and the exercise of political force against others…. It is assumed that a nation’s relative prosperity is broadly determined by its political power; that nations being competing units, advantage in the last resort goes to the possessor of preponderant military force, the weaker goes to the wall, as in the other forms of the struggle for life.

The author challenges this whole doctrine. He attempts to show that it belongs to a stage of development out of which we have passed that the commerce and industry of a people no longer depend upon the expansion of its political frontiers; that a nation’s political and economic frontiers do not now necessarily coincide; that military power is socially and economically futile, and can have no relation to the prosperity of the people exercising it; that it is impossible for one nation to seize by force the wealth or trade of another — to enrich itself by subjugating, or imposing its will by force on another; that in short, war, even when victorious, can no longer achieve those aims for which people strive….

There is quite simply no difference at all between the theses of Angell a century ago, and Friedman and Zakaria now.

And what happened only 4 years after “The Great Illusion” was published? Well, another book that Zakaria and Friedman ought to read is Vera Brittain’s autobiography, “Testament of Youth”. Vera Brittain was a comfortable affuent middle class girl who was accepted to Oxford University shortly before World War I broke out. By the time it was over, her brother, Edward; her fiance Roland Leighton; and every other young man she had been close to, had been killed. Brittain’s book is a searing documentary about the utter destruction of an entire generation of British young men caused by the war.

Just how many people were killed by World War I?  One source puts just the number of military deaths at 10 million. Including the wounded, in some European countries over half of the entire generation of young men were casualties.  Another sourcesays:

the percentage of a country’s population directly afflicted. During the course of World War One, eleven percent (11%) of France’s entire population were killed or wounded! Eight percent (8%) of Great Britain’s population were killed or wounded, and nine percent (9%) of Germany’s pre-war population were killed or wounded! The United States, which did not enter the land war in strength until 1918, suffered one-third of one percent (0.37%) of its population killed or wounded.

Simply put, World War I is a thorough and devastating refutation of the argument that free trade leads to peace and democracy. Quite the contrary, had Zakaria and Friedman bothered to actually study history, they might have found out that revolutions typically do not occur in eras of increasing plenty. Rather, they occur in times where rising expectations have been dashed:

the “J-curve” theory says that when conditions improve for a relatively long period of time, — and this is followed by a short economic reversal — an intolerable gap occurs between the changes that the people expect (dashed line) and what they actually get (solid line). Davies predicts that this is when revolution will occur (arrow).

Support for this theory was found in a 1972 study of 84 nations. Researchers found a clear relationship between indications of political instability and economic frustration. “Frustrated countries” are those that had poor economic conditions — low economic growth, insufficient food, few telephones and physicians — while being acquainted with the higher living standards of industrialized, urbanized countries.

These studies show that frustration is more likely to develop from relative frustration — the gap between their expectations and the reality that does not live up to these expectations. People in poor countries isolated from the outside world do not realize how poor or frustrated they are. Their frustrations are accepted merely as part of living. In contrast, the people in poorer countries exposed to modern standards feel more “frustrated.” To top this off, deprived people who have experienced some recent progress are more frustrated than those who experienced poverty and oppression.

In short, just as Germans were hardly big agitators for democracy during the time the German state was expanding, and autocracy was resulting in greater prosperity, so we should not expect that any autocratic states today that are profiting mightily from economic growth are suddenly going to turn democratic. To the contrary, just like the Kaiser’s Germany, it is much easier to direct aggression elsewhere.

Democratic revolutions occur when previously rising expectations have been dashed, and the populace has no outlet for their anger and frustration. In democracies, governments can be changed (as in 1932); but in autocracies, the ruler’s cronies are protected from the privations, and with no alternative avenue of recourse, and seeing the manifest injustice of the benefits of the system, the populace revolts.

For example, Taiwan’s democratic reforms were sparked by the violence of the “Kaohsiung Incident” of 1979. Similarly, democracy finally came to South Korea in 1987 when workers finally rebelled against artificially low wages:

South Korea is hardly a model of a free economy. The hand of government planners in setting priorities and steering companies has been heavy. The low wages that helped fuel growth did not result from market forces. For 25 years, successive governments deliberately held down pay rates. They virtually barred strikes, jailed militant labor leaders, and decreed tough guidelines for wage increases. To block development of independent unions, companies created their own and installed leaders acceptable to the government. Says a Western diplomat in Seoul: ”Union leaders were practically appointed by the national security police.” With democratic winds sweeping South Korea this summer, workers were emboldened to push for higher pay, independent unions, and the right to strike,

[2018 update: Even the American Revolution had elements of this paradigm, as England reined in the colonist’s rising fortunes following the French and Indian War by taxing them for the costs, expanding the territory of Quebec to include all of what is now the American northern Midwest, and prohibiting expansion beyond the Appalachians.]

It is a disgrace that we see these same discredited theses, this same Great Illusion, embraced by corporate media pundits so often. That free trade inevitably leads to peace and democracy is a Big and Dangerous Lie, to which World War 1 is the most spectacular and unequivocal counter-evidence.

There is no guarantee, alas, that we are not now on that same catastrophic path.

*  *  *

In 2015, I reiterated this point more succinctly:

A more fundamental point is about human nature.  In any economic downturn, the powerful elites are going to try to deflect all of the suffering on the powerless masses.  In a representative democracy, eventually the majority will rebel at the ballot box and elect a party which promises to end their suffering.  [Update: It might be a left-wing party, like Syriza in Greece or FDR’s New Deal democrats in the US, or it might be from the right-wing like AfD in Germany or Donald Trump.  ]

In an authoritarian state, however, no such safety valve exists.  That’s why revolutions don’t happen in an era of rising expectations.  They happen when rising expectations are dashed.  So long as China’s economy continues to expand stoutly, expect no meaningful turbulence.  But someday China will have a recession, and then, dear reader, is when world history will get interesting.

So here we are a decade later, and the free-trade economists and their acolytes are gobsmacked by something that was not just predictable, but actually predicted,  because there is no place in their theories for actual human behavior as revealed in history. We can only hope that when the inevitable happens, China will not lash out as Kaiser Wilhelm did a century ago.

Was The SEC Sending Tesla A Message?

Authored by  ‘The Credit Strategist’ Michael Lewitt via HVST.com,

On March 14, the SEC prosecuted the massive fraud at Theranos committed by founder Elizabeth Holmes, a media darling who defrauded investors of more than $700 million while the financial press sang her praises.  The company, as well as its former president Sunny Balwani, were also charged.  It turns out that Ms. Holmes pretty much lied about everything she told investors in the company, and naturally she lied to the press and the public repeatedly.  Ms. Holmes was fined $500,000 and stripped of her control of the company as well as her 18.9 million shares in the company and barred from serving as an officer or director of a public company for 10 years.Criminal charges are still likely.

In  the  press  release  accompanying  the  fraud  charges,  Steven  Peiken,  Co-Director  of  the  SEC’s Enforcement Division, said the following:

“Investors are entitled to nothing less than complete truth and candor from companies and their executives.  The charges against Theranos, Holmes, and Balwani make clear that there is no exemption fromthe anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.”  (italics added)

And Jina Choi, Director of the SEC’s San Francisco Regional Office, added the following:

“The Theranos story is an important lesson for Silicon Valley.  Innovators who seek to revolutionize and disrupt an industry must tell investors the truth about what their technology can do today, not just what they hope it might do someday.”

If those words bring to mind Tesla, Inc. (TSLA), it may not be an accident.

TSLA has repeatedly lied about its prospects to investors, the financial press, and the public. 

Shareholders in this money-losing, cash-burning house of cards may excuse Tesla’s grotesquely inaccurate financial  and  production  projections  as  good  faith  estimates  gone  bad, but the  company’s  estimates  are consistently  so  far  off  the  mark  that they  cannot  be based  on the  kind  of  grounded  analysis  required  of public companies (this may be why so many senior accounting executives keep quitting the company).

And the boilerplate disclaimers that Tesla employs to protect itself from liability do not cover situations where companies are merely speculating on their future results rather than providing serious projections grounded in solid financial analysis and facts. Tesla’s financial and production projections, as well as the tweeting activity of Elon Musk, make a mockery of the securities laws.

Even if they are not deliberately misleading shareholders, they constitute legally-reckless behavior. If the disclosure laws are to mean anything, Tesla and Musk should be held accountable for their actions.

The words of the SEC apply as much to Tesla as they do to Theranos – the only difference is that Tesla’s shareholders and bondholders haven’t lost their shirts yet because they continue to ignore the facts and suspend disbelief. 

But time is running out as news slips out that Tesla is still struggling to solve its Model 3 production problems, larger and richer competitors are catching up in the electric car race, Tesla keeps burning cash, and Tesla ’s promises run thin.

Reporter “Harassed” By Police After Exposing China’s “Dirty” Steel Secret

While the whole world is up in arms over Trump’s trade tariffs, virtually nobody wants or dares to, point out that Trump is actually spot on when slamming China’s trade practices. And for confirmation, look no further than China’s own behavior when caught in the act.

As a reminder, it all started in December 23, 2015 – which we said at the time was “the date the global trade wars officially began” because that’s when President Obama imposed a 266% tariff on Chinese cold-rolled steel imports which Beijing had been quietly dumping around the world, a consequence of China’s attempt to overstimulate its economy (capex, capex, capex) starting in 2014.

To be sure, with Chinese mills, smelters and refiners all producing far more than can be purchased domestically amid slowing domestic demand, as well as the government’s anti-pollution crackdown, China’s decision to ship the excess overseas, and the dump it at far below prevailing prices, was understandable.

As was the collective global response: it wasn’t just the US that slapped China with tariffs: so did the EU, which as we reported two days ago, just extended its Chinese steel pipe tariffs of 72% for another 5 years.

What China did in response was, well, lie.

Beijing government swore that it would cut production and slash capacity in response to the global trade war-esque retaliation. It did not, as we first reported one year ago in “Iron Ore Tumbles As China Steel-Producing Hub Found Lying About Production Cuts.” Some more details:

In 2016, China’s state council set out plans to eliminate 100 -150 million tonnes of steel capacity in a bid to restructure the economy from one driven by government-led infrastructure investment and exports to a more consumption and services-oriented model. Last January, the hub of China’s steel production –  the northern province of Hebei – announced it would cut output to ease pollution and help curb oversupply. Hebei said it planned to reduce steel output by 8 million metric tons in 2016, its Governor Zhang told local lawmakers, while Iron ore production would be cut by 10 million tons.

More than one year later, it appears that Governor Zhang lied about Hebei’s intentions, and according to a provincial notice by the Chinese province, it has emerged that China’s compliance with its own mandatory production cuts has been “problematic.”

Subsequent reporting by Reuters  found that the same Hebei province, China’s biggest steel-producing area, launched a probe into steel overproduction in the city of Tangshan “amid concerns that firms have continued to raise output despite mandatory capacity cuts.”

Tangshan is the heartland of Chinese steel production. The city is home to the headquarters of the state-owned Tangsteel Group, which in 2006 merged with other companies to form Hebei Steel Group, the second-largest steel producer in the world. Located around 100 miles east of the capital Beijing, Tangshan is on the frontline of the country’s “war on pollution”, and was seventh on the list of China’s ten smoggiest cities in the first two months of this year.

Having been exposed to the entire world for lying about its production cuts, China’s central government then “ordered” the investigation of firms in Tangshan that have “restricted but not cut production, restricted production but not actually cut emissions, and cut capacity but actually increased output.  Investigate and punish, that is.

Or at least that was the not so sophisticated charade staged by Beijing, because despite having been caught lying once already, China continued the theater. It had no choice: for one thing it had to allocate its trillion dollar stimulus somewhere, even if it meant keeping its zombie steel mills alive, and more importantly, China had to avoid the middle-class revolt that would follow if millions of steelworkers were suddenly laid off.

What’s far worse: all of China’s trading partners knew all about it.

* * *

Fast forward to today when CNBC’s China reporter Eunice Yoon decided to check if Beijing had kept its promises that it was slashing steel production and excess capacity, by visiting a town that was reportedly “steel free.”

What happened next, as Yoon reports, is that just as soon as she discovered a steel plant in a town that was supposed to be “steel-free”, and that, drumroll, Beijing had lied once again, she was promptly escorted away by Chinese police as the local government had no interest in divulging to the world that as China was closing steel mills in one part of the country, it was quietly opening new plants in other parts of the country, or as she said: “Beijing may be reducing capacity here, but it’s moving it elsewhere.”

Yoon then adds: “the issue of closing steel mills is highly sensitive in China, and as evidence of this we were taken away by the police, we were harassed when we were reporting, and a lot of that is despite the fact that the authorities there were very proud of the fact that this was a “steel-free” town, they still took us to the police station, acknowledged that we were allowed to be there, and then escorted us all the way out of town.”

Meanwhile, by literally shifting around production, China was keeping the same total excess steel production, which in turn leads to more dumping, and more foreign steelworkers losing their jobs, just so China can pad its goalseeked GDP and keep its own steelworkers happy, preventing a worker uprising.

Trump’s Volley – Hoover’s Folly?

By: Michael Lebowitz

“You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store” 
– Sixteen Tons by Tennessee Ernie Ford

Shortly following Donald Trump’s election victory we penned a piece entitled Hoover’s Folly. In light of Trump’s introduction of tariffs on steel and other selected imports, we thought it wise to recap some of the key points made in that article and provide additional guidance.

While the media seems to treat Trump’s recent demands for tariffs as a hollow negotiating stance, investors are best advised to pay attention. At stake are not just more favorable trade terms on a few select products and possibly manufacturing jobs but the platform on which the global economic regime has operated for the last 50 years. So far it is unclear whether Trump’s rising intensity is political rhetoric or seriously foretelling actions that will bring meaningful change to the way the global economy works. Either as a direct result of policy and/or uncharacteristic retaliation to strong words, abrupt changes to trade, and therefore the role of the U.S. Dollar as the world’s reserve currency, has the potential to generate major shocks in the financial markets.

Hoover’s Folly

The following paragraphs are selected from Hoover’s Folly to provide a background.

In 1930, Herbert Hoover signed the Smoot-Hawley Tariff Act into law. As the world entered the early phases of the Great Depression, the measure was intended to protect American jobs and farmers. Ignoring warnings from global trade partners, the new law placed tariffs on goods imported into the U.S. which resulted in retaliatory tariffs on U.S. goods exported to other countries. By 1934, U.S. imports and exports were reduced by more than 50% and many Great Depression scholars have blamed the tariffs for playing a substantial role in amplifying the scope and duration of the Great Depression. The United States paid a steep price for trying to protect its workforce through short-sighted political expedience.

Although it remains unclear which approach the Trump trade team will take, much less what they will accomplish, we are quite certain they will make waves. The U.S. equity markets have been bullish on the outlook for the new administration given its business-friendly posture toward tax and regulatory reform, but they have turned a blind eye toward possible negative side effects of any of his plans. Global trade and supply chain interdependencies have been a tailwind for corporate earnings for decades. Abrupt changes in those dynamics represent a meaningful shift in the trajectory of global growth, and the equity markets will eventually be required to deal with the uncertainties that will accompany those changes.  

From an investment standpoint, this would have many effects. First, commodities priced in dollars would likely benefit, especially precious metals. Secondly, without the need to hold as many U.S. dollars in reserve, foreign nations might sell their Treasury securities holdings. Further adding pressure to U.S. Treasury securities and all fixed income securities, a weakening dollar is inflationary on the margin, which brings consideration of the Federal Reserve and monetary policy into play.

The Other Side of the Story

The Best Reasons to Try a Prepaid Cell Phone.

The President recently tweeted the following:

Regardless of political affiliation, most Americans agree with President Trump that international trade should be conducted on fair terms. The problem with assessing whether or not “trade wars are good” is that one must understand the other side of the story.

Persistent trade imbalances are the manifestation of explicit global trade agreements that have been around for decades and have historically received broad bi-partisan support. Those policies were sponsored by U.S. leaders under the guise of “free trade” from the North American Free Trade Agreement (NAFTA) to ushering China in to the World Trade Organization (WTO). During that time, American politicians and corporations did not just rollover and accept unfair trade terms; there was clearly something in it for them. They knew that in exchange for unequal trade terms and mounting trade deficits came an implicit arrangement that the countries which export goods to the U.S. would also fund that consumption. Said differently, foreign countries sold America their goods on credit. That construct enabled U.S. corporations, the chief lobbyists in favor of such agreements, to establish foreign production facilities in cheap labor markets for the sale of goods back into the United States.

The following bullet points show how making imports into the U.S. easier, via tariffs and trade pacts, has played out.

  • Bi-partisan support for easing multi-lateral trade agreements, especially with China
  • One-way tariffs or producer subsidies that favor foreign producers were generally not challenged
  • Those agreements, tariffs, and subsidies enable foreign competitors to employ cheap labor to make goods at prices that undercut U.S. producers
  • U.S. corporations moved production overseas to take advantage of cheap labor
  • Cheaper goods are then sold back to U.S. consumers creating a trade deficit
  • U.S. dollars received by foreign producers are used to buy U.S. Treasuries and other dollar-based corporate and securitized individuals liabilities
  • Foreign demand for U.S. Treasuries and other bonds lower U.S. interest rates
  • Lower U.S. interest rates encourage consumption and debt accumulation
  • U.S. economic growth increasingly centered on ever-increasing debt loads and declining interest rates to facilitate servicing the debt

Trade Deficits and Debt

These trade agreements subordinated traditional forms of production and manufacturing to the exporting of U.S. dollars. America relinquished its role as the world’s leading manufacturer in exchange for cheaper imported goods and services from other countries. The profits of U.S.-based manufacturing companies were enhanced with cheaper foreign labor, but the wages of U.S. employees were impaired, and jobs in the manufacturing sector were exported to foreign lands. This had the effect of hollowing out America’s industrial base while at the same time stoking foreign appetite for U.S. debt as they received U.S. dollars and sought to invest them. In return, debt-driven consumption soared in the U.S.

The trade deficit, also known as the current account balance, measures the net flow of goods and services in and out of a country. The graph below shows the correlation between the cumulative deterioration of the U.S. current account balance and manufacturing jobs.

Data Courtesy: St. Louis Federal Reserve (NIPA)

Since 1983, there have only been two quarters in which the current account balance was positive. During the most recent economic expansion, the current account balance has averaged -$443 billion per year.

To further appreciate the ramifications of the reigning economic regime, consider that China gained full acceptance into the World Trade Organization (WTO) in 2001. The trade agreements that accompanied WTO status and allowed China easier access to U.S. markets have resulted in an approximate quintupling of the amount of exports from China to the U.S.  Similarly, there has been a concurrent increase in the amount of credit that China has extended the U.S. government through their purchase of U.S. Treasury securities as shown below.

Data Courtesy: St. Louis Federal Reserve and U.S. Treasury Department

The Company Store

To further understand why the current economic regime is tricky to change, one must consider that the debts of years past have not been paid off. As such the U.S. Treasury regularly issues new debt that is used to pay for older debt that is maturing while at the same time issuing even more debt to fund current period deficits. Therefore, the important topic not being discussed is the United States’ (in)ability to reduce reliance on foreign funding that has proven essential in supporting the accumulated debt of consumption from years past.

Trump’s ideas are far more complicated than simply leveling the trade playing field and reviving our industrial base. If the United States decides to equalize terms of trade, then we are redefining long-held agreements introduced and reinforced by previous administrations.  In breaking with that tradition of “we give you dollars, you give us cheap goods (cars, toys, lawnmowers, steel, etc.), we will most certainly also need to source alternative demand for our debt. In reality, new buyers will emerge but that likely implies an unfavorable adjustment to interest rates. The graph below compares the amount of U.S. Treasury debt that is funded abroad and the total amount of publicly traded U.S. debt. Consider further, foreigners have large holdings of U.S. corporate and securitized individual debt as well. (Importantly, also note that in recent years the Fed has bought over $2 trillion of Treasury securities through quantitative easing (QE), more than making up for the recent slowdown in foreign buying.)

Data Courtesy: St. Louis Federal Reserve

The bottom line is that, if Trump decides to put new tariffs on foreign goods, we must presume that foreign creditors will not be as generous lending money to the U.S. Accordingly, higher interest rates will be needed to attract new sources of capital. The problem, as we have discussed in numerous articles, is that higher interest rates put a severe burden on economic growth in a highly leveraged economy. In Hoover’s Folly we stated: Further adding pressure to U.S. Treasury securities and all fixed income securities, a weakening dollar is inflationary on the margin, which brings consideration of the Federal Reserve and monetary policy into play.

It seems plausible that a trade war would result in potentially controversial intervention from the Federal Reserve. The economic cost of higher interest rates would likely be too high a price for the Fed to sit idly by and watch. Such policy would be controversial because it would further blur the lines between monetary and fiscal policy and potentially jeopardize the already tenuous independent status of the Fed.

Importantly, this is not purely a problem for the U.S. Still the world’s reserve currency, the global economy is dependent upon U.S. dollars and needs them to transact. Any disruption in economic activity as a result of rising U.S. interest rates, the risk-free benchmark for the entire world, would most certainly go viral. That said, for the godless Communist regimes of China and Russia, a moral barometer is not just absent, it is illegal. Game theory, considering those circumstances and actors, becomes infinitely more complex.

Summary

Investors concerned about the ramifications of a potential trade war should consider how higher interest rates would affect their portfolios. Further, given that the Fed would likely step in at some point if higher interest rates were meaningfully affecting the economy, they should also consider how QE or some other form of intervention might affect asset prices. While QE has a recent history of being supportive of asset prices, can we assume that to be true going forward?  The efficacy of Fed actions will be more closely scrutinized if, for example, the dollar is substantially weaker and/or inflation higher.

There will be serious ramifications to changing a global trade regime that has been in place for several decades. It seems unlikely that Trump’s global trade proposals, if pursued and enacted, will result in more balanced trade without further aggravating problems for the U.S. fiscal circumstance.  So far, the market response has been fidgety at worst and investors seem to be looking past these risks. The optimism is admirable but optimism is a poor substitute for prudence.

In closing, the summary from Hoover’s Folly a year ago remains valid:

It is premature to make investment decisions based on rhetoric and threats. It is also possible that much of this bluster could simply be the opening bid in what is a peaceful renegotiation of global trade agreements. To the extent that global growth and trade has been the beneficiary of years of asymmetries at the expense of the United States, then change is overdue. Our hope is that the Trump administration can impose the discipline of smart business with the tact of shrewd diplomacy to affect these changes in an orderly manner. Regardless, we must pay close attention to trade conflicts and their consequences can escalate quickly. 

Everything You Should Know About The 1994 Assault-Weapons Ban

 

Here we go again. Another assault weapons ban rears its knee-jerk head. The Assault Weapons Ban of 2018 is the feel-good, we-have-to-do-something move. I’m all for it if it will make a positive difference. But it won’t. We already know that it won’t because of the 1994 assault weapons ban.

Remember how excited your mother was in 1994? “Honey,” she said, “finally we’re doing something about crime.” She did have a point since crime had been rising steadily through the eighties and early nineties. The ban seemed like a good idea at the time, and darn it if FBI crime statistics didn’t prove her right. (You hate it when that happens.) From 1994 to 2004, the violent crime rate dropped 35 percent.

When the Department of Justice released statistics about firearms homicides specifically, your mother was even more sure of herself. In 1993, the year before the ban took effect, there were 18,253 firearm homicides. The ban took effect, and the number of firearm homicides dropped every year for the next seven years. They began to rise again in 2001, but in 2004, there were 11,624 firearm homicides, an overall reduction of 36 percent.

“See?” your mother crowed, “Told ya!” (*sigh*)

Then you got to thinking. There was that statistics course you took in college, and something is niggling in the back of your mind. Hey, you realized, those numbers don’t mean much unless you know how many guns were on the street while all of this was happening. A crude measure of gun sales is criminal background checks, and the FBI began collecting data in 1998, four years into the 1994 Assault Weapons Ban. You can’t study the entire ban period, but you can study the last six years. And then you can study the first six years after the ban.

For the six years from 1999 to 2004 when the ban was lifted, 52,214,932 background checks were conducted. For the first six years after the ban was lifted (2005 to 2010), 71,319,676 background checks were conducted. If each background check represents one gun, 19 million more guns were purchased in the six years after the ban than during the last six years of the ban. This makes intuitive sense: when guns are banned, fewer guns are sold; when the ban is lifted more guns are sold. But is it the number of guns we care about or what people are doing with those guns?

You compare the data on background checks – your reference point for gun sales – to the FBI’s data on what people were doing with those guns for 1997 to 20012002 to 2006, and 2007 to 2011. While you’re at it, you look at what the FBI says people were doing with rifles specifically since there was a principal target of the ban.

The FBI says that during the last six years of the ban, firearms were used to kill 54,468 people, 2,483 of whom were killed with a rifle.

During the first six years after the ban – with 19 million more guns on the street – the FBI says firearms were used to kill 58,065 people, 2,432 of whom were killed with a rifle.

What? More people were killed with a rifle during the ban than after the ban? Could it be the assault ban made no difference to homicide by rifle? Why, yes, yes it could. And with 19 million more guns on the street after the ban, there were only 3,597 additional firearms homicides? Could it be that limiting guns had very little impact on limiting total firearms homicides? Why, yes, yes it could.

You realize that during the last six years of the ban, there was one gun murder for every 959 guns whereas, during the first six years after the ban, there was one gun murder for every 1,228 guns.Well, you’re right to wonder, if there were more guns but fewer firearms homicides per gun, what was everybody doing with all those extra guns? They certainly weren’t using them to murder more people. Could this help to explain the steady drop in violent crime rates that has continued since 2004? Could it be that people are using those extra guns to defend themselves and to deter and prevent all kinds of violent crime? Why, yes, yes it could.

You need to tell your mother.

Especially if she looks like Dianne Feinstein