sábado, marzo 28, 2015

DISARM AND MODERNIZE / FOREIGN POLICY

|


Nukes

Disarm and Modernize

In terms of warhead numbers, the nuclear arms race may
 be over. But massive weapons upgrades now underway challenge the entire disarmament regime.
 
By John Mecklin

Illustrations by Carl de Torres
 
 
In the early decades of the Cold War, NATO made arrangements to bury what were known as atomic demolition munitions (in essence, nuclear mines) at key points in West Germany, to be detonated if Warsaw Pact forces ever invaded. Although this plan, if enacted, might have slowed the enemy advance, it also almost certainly would have turned vast West German territories into radioactive wastelands littered with corpses and smoldering buildings—the stuff of hellish alternative-
history scenarios. The West viewed such tactical nukes—NATO fielded 7,000 to 8,000 of these shorter-
range, smaller-yield weapons for most of the Cold War—as tripwires in anticipation of the Soviet Union’s own Strangelovian plans for its thousands of tactical weapons. That is to say, the forward positioning of these nukes was a signal: If the Soviet Union invaded Europe, confrontation would escalate quickly to the nuclear realm, and the United States would intervene.
 
With the end of the Cold War and the reduced risk of a Russian invasion, NATO eliminated almost all its tactical nuclear weapons in Europe. Today, five NATO countries—Belgium, the Netherlands, Germany, Italy, and Turkey—are widely believed to host roughly 200 U.S.-owned nuclear bombs at their air bases. These weapons, variants of the B61 warhead, a stalwart of the American thermonuclear arsenal since the late 1960s, are viewed by some security experts as provocative anachronisms. The critics argue that strategic missiles and bombers posted in the United States and the United Kingdom, along with missiles on nuclear submarines, provide more than enough deterrence against any Russian aggression.

But in the wake of Russia’s annexation of Crimea and the destabilization of Ukraine, the controversy about B61s is being heightened and compounded. In addition to retaining tactical nukes in Europe, the United States plans to modernize the weapons, as well as its arsenal back home, in a remarkably expensive way. This decision has inflamed debate about the depth of the U.S. commitment to the Nuclear Non-
Proliferation Treaty (NPT), which allows the United States, Russia, China, the United Kingdom, and France to have nuclear weapons if they promise to eventually disarm.

Today, weapons innovation threatens to become the new mode for arms competition. Washington’s upgrading of the B61-4 bomb, for example, would equip the device with a tail assembly, making it into a precision-guided standoff weapon. An irony is attached to this redesigned device, called the B61-12: It would be able to attack the same targets as previous gravity bombs in the U.S. arsenal, but would do so more accurately and efficiently, using smaller yields that would create less collateral damage and less radioactive fallout. This means the bombs might be seen as more conceivably usable in a limited or tactical conflict. And this is precisely why the U.S. Congress rejected the Air Force’s requests for low-yield, precision-guided nuclear weapons in the 1990s: Their very accuracy increases the temptation to use them.
These transformations and upgrades, designed to make weapons harder to shoot down and more precise and reliable, ensure that the world will be no less dangerous—and perhaps even more perilous—than it is now.
Nonetheless, under current plans, approximately 480 B61-12s are set to be produced by the mid-2020s, and they would serve all U.S. gravity-bomb missions contemplated for five different aircraft. In addition to deployment in Europe, the U.S. Air Force also intends to use the B61-12 to arm heavy B-2 and B-52 bombers based in America. Even by the standards of defense budgets, the B61 modernization program is exorbitant: Estimates place its ultimate cost north of $10 billion, or
more than if the bombs were constructed of solid gold.

But the high cost and questionable utility of the B61 program are not anomalies—nor is the fact that the plan has received little publicity. Countries with nuclear weapons have recently embarked on highly ambitious and costly programs, largely unexamined outside national security circles, to renew the strategic and tactical weapons in their arsenals. These projects include both technological upgrades and entirely new systems; as documented by Hans Kristensen and Robert Norris, nuclear-arsenal experts at the Federation of American Scientists, the modernizations run the gamut, from ballistic missiles to bombers, warheads to naval vessels, cruise missiles to even weapons factories. Russia is in the process of phasing out and replacing all its Soviet-era nuclear weapons systems. The proposed U.S. maintenance and modernization program has been projected to cost some $355 billion over the next decade and $1 trillion or more over 30 years. And every nuclear country is following suit.

While these efforts will not necessarily increase the number of deployed warheads in the world, the programs and the enhanced weapons they are projected to produce will last for decades. The race for ever-more nukes has become, instead, a race for ever-better, -sleeker, and -stealthier ones. And these transformations and upgrades, designed to make weapons harder to shoot down and more precise and reliable, ensure that the world will be no less dangerous—and perhaps even more perilous—than it is now.

In terms of sheer numbers, the nuclear arms race of the Cold War may be over. But the worldwide modernization craze scrambles the calculus of nuclear disarmament and nonproliferation efforts, challenging the aging underpinnings of the NPT itself. Approximately 16,000 nuclear weapons are still on the planet, and the massive, long-term plans that nuclear nations have in place strongly suggest that they have no intention of giving up their nukes anytime soon. All this makes it reasonable to ask: Is the international arms-control regime an outdated charade? That question will be on the minds of arms experts as the 190 signatories to the NPT convene in New York this spring for a review conference they hold every five years. The mood there, it’s fair to assume, is unlikely to be upbeat.

Opened for signature in 1968, the NPT not only allows five states to keep nuclear weapons, but it expressly prohibits the remaining 185 signatories from possessing them. So far, this arrangement has worked reasonably well. At the height of the Cold War in the mid-1980s, for example, six countries (the five nuclear weapons states, as well as Israel) had more than 70,000 nuclear weapons; today, nine countries (India, Pakistan, and North Korea have since joined the nuclear club) possess about 10,000 warheads, with another 6,000 or so “retired” but intact weapons in storage, awaiting dismantlement. The United States and Russia have more than 90 percent of those weapons.
 
The standard narrative of disarmament asserts that, despite the fits and starts inevitable in international politics, continued arms-control efforts will lead to ever-shrinking arsenals, thereby saving governments enormous amounts of money and improving global security.

Among these efforts to date, in addition to the NPT, is the 1996 Comprehensive Nuclear-Test-Ban Treaty (CTBT), which would prohibit all nuclear testing, above and below ground. The treaty has yet to come into force for various reasons. Some states question whether it would be verifiable (even though a body of research strongly suggests it would be), while some officials in nuclear states insist that the option to test should be kept open, to ensure that stockpiles do not become unreliable. Twenty out of 183 CTBT signatory states have not ratified the treaty, including the United States (largely as a result of opposition from Republicans in Congress).

The New Strategic Arms Reduction Treaty between the United States and Russia, which took effect in early 2011, does not require the destruction of a single warhead, but both countries agreed to limit the number they deploy on land- and sea-based ballistic missiles to 1,550 each by 2018. In a 2013 speech at Berlin’s Brandenburg Gate, U.S. President Barack Obama proposed that each country cut its deployed warheads by about one-third, to roughly 1,000.

Obama also vowed to seek “bold reductions” of nonstrategic nuclear weapons in Europe and to push for Senate ratification of the CTBT.
The modernization programs in the United States, Russia, and elsewhere threaten to open the door to a new arms competition—and an ever-increasing number of nuclear weapons states.
But disarmament efforts have languished during much of Obama’s second term. Almost immediately after the president’s Berlin speech, for instance, U.S. congressional opponents and Russian leaders raised objections. Republicans asked whether such cuts would threaten national security, and Moscow decried U.S. missile-defense efforts, saying they threatened Russia’s strategic missile force and made new arms cuts impossible. With Republicans taking control of both houses of Congress this year, ratification of the CTBT now seems extremely unlikely.

Numbers show the slowdown in arms-control progress: The U.S. nuclear stockpile was reduced by only about 300 warheads from 2009 to 2013, and Russia retired about 1,000 weapons, Kristensen and Norris have written. These reductions were at a much slower pace than those in the previous five-year period, when Washington nixed more than 3,000 weapons and Moscow roughly 2,500 in a spring-cleaning of outdated and unreliable arsenals. Now, the Ukraine crisis seems likely to further slow the arms-control process. And, in general, the relatively sluggish reduction rate suggests that U.S. and Russian arsenals are not so much headed toward zero as plateauing for the foreseeable future.

In the face of this deceleration, the world’s patience is wearing thin. Many of the 185 countries that agreed not to build nukes have become increasingly unhappy. Three conferences held in the past few years on the humanitarian effects of nuclear weapons were seen widely as attempts to force the nuclear powers to move faster on disarmament. The nuclear club largely ignored the first two conferences, sponsored by the governments of Norway and Mexico. But the events had grown to include most of the world’s non-nuclear-weapons countries by the time of the third gathering, held in Vienna in December 2014 and sponsored by the Austrian government; more than 150 countries signed up to attend. In the end, the United States sent a representative, though with the disclaimer that “this conference is not the appropriate venue for disarmament negotiations or pre-negotiation discussions.”
 
 Current Stockpiles : The United States and Russia have more than 90 percent of the 16,000-plus nuclear weapons on the planet today. North Korea also holds nuclear weapons, though the extent of its program remains unknown. (Source: Federation of American Scientists.)
 
In Vienna, Ambassador Adam Scheinman, the U.S. president’s special representative for nuclear nonproliferation, recounted a rosy history of America’s support for a world without the bomb. “It is precisely our understanding of the consequences of nuclear weapons use that drives our efforts to reduce—and eventually eliminate—nuclear weapons,” he said, “and to extend forever the nearly 70-year record of non-use of nuclear weapons.” Scheinman acknowledged that Washington’s approach to disarmament remains an incremental one. But that step-by-step orientation, he said, has led to an 85 percent reduction in Washington’s stockpile since the late 1960s, when it peaked at more than 30,000 weapons.

The next day, Richard Lennane, the officially titled “chief inflammatory officer” of the anti-nuclear NGO Wildfire, offered the conference a more acerbic assessment. He likened the nuclear states to alcoholics, addicted to bombs instead of liquor, and urged the international community to stop enabling them. “How long will you listen to the nuclear-armed states expressing their ‘unequivocal commitment’ to nuclear disarmament and then saying that they need their nuclear weapons for ‘stability’? How long will you wait for the mythical ‘right conditions’ for nuclear disarmament?” he asked. “You can remove the ambiguity that supports their habit.… You can negotiate and adopt and bring into force a treaty banning nuclear weapons.”

The disarmament debate is likely to make this spring’s NPT conference a contentious one and just might be loud enough to make the public aware that a new type of nuclear arms race is unfolding around the world.

Under the Obama administration, the U.S. national security establishment has proposed upgrades to all three legs of the nuclear triad of land-based missiles, submarine-launched missiles, and long-range bombers, something not done since the mainstay planes and missiles of the current nuclear force were built in the Cold War’s early years. The Navy, for example, wants a new class of 12 ballistic missile submarines. The Air Force is reviewing options for a new land-based intercontinental ballistic missile (a mobile missile less vulnerable to detection is one possibility), and it is developing a stealthy long-range bomber to be rolled out in the mid-2020s. The plan is to buy 80 to 100 of these bombers, some of which will be nuclear-capable, at a cost of more than $55 billion. Washington also intends to deploy a new, stealthy, nuclear-
capable fighter-bomber—the F-35A Lightning II Joint Strike Fighter—to its allies in Europe, including Italy, the Netherlands, and Turkey.
 
The F-35A is expected to carry the upgraded B61-12 bomb, which, as part of the future U.S. arsenal, would potentially join a program aimed at creating a smaller array of interoperable warheads for submarine and land-based missiles. The planned upgrades to warheads could require that they be tested to ensure they would work, threatening the moratorium on testing that has held since the 1990s. Any tests would undermine hope that the CTBT would come into force. This, in turn, would likely create major repercussions for the international arms-control regime.

To produce the new warheads, the Obama administration has proposed an array of expensive enhancements to what is often called the nuclear weapons complex: eight facilities—three national laboratories, four production plants, and the Nevada National Security Site, where nuclear tests were conducted until the 1990s—that are government owned but run by contractors and overseen by the semiautonomous National Nuclear Security Administration (NNSA), a part of the U.S. Energy Department. Budget constraints, however, make it unclear whether many of these upgrades will ever be undertaken.

The complex has long had severe management and cost-control problems, as evidenced by multibillion-dollar cost overruns that led the Energy Department last year to suspend work and explore “alternative approaches” to a facility at the Savannah River Site, a weapons plant that would have turned plutonium from retired nukes into fuel for civilian power plants. The management snafus were even more glaringly illuminated in 2012, when three activists—one an 82-year-old nun—penetrated multiple levels of security to protest in front of the United States’ largest storage facility for bomb-grade uranium. This embarrassing security breach and many other management failures led Congress to create an advisory panel that in November 2014 recommended a major overhaul, including elimination of the NNSA and placement of the nuclear weapons complex under the direct control of an Energy Department rebranded as the Department of Energy and Nuclear Security.

It is unclear whether Congress will pay heed to the recommendations of this panel—one in a long line of commissions to study hapless administration of the nuclear weapons complex—or provide the many billions of dollars that would be needed over time to complete all the proposed upgrades to an infrastructure so old that the ceilings of some facilities are actually falling in.

Although Russia is less transparent about weapons than the United States is, reports by Kristensen and Norris suggest that Moscow intends to phase out and replace all its Soviet-era nuclear systems in the next decade. They note Russia is developing three new land-based missiles, including an SS-27 intercontinental ballistic missile modified so it can carry multiple warheads that can be aimed at different targets, thereby expanding the lethality of each missile.

Its ballistic submarines are also set to be modernized, with eight new subs that reportedly will be able to launch 16 missiles, each capable of carrying up to six independently targetable warheads—again increasing the number of targets that can be attacked.

And it doesn’t stop there. The Russian bomber force is also being upgraded, with plans for a relatively slow but super-stealthy flying wing, known as the PAK-DA, apparently going forward. A new nuclear-
capable cruise missile, long in development, appears to be nearing operational status; the new Iskander-M SS-26 short-range tactical nuclear missile—a mobile system with two missiles per carrier—is being rolled out, and the Su-34 Fullback fighter-bomber is replacing 1970s-era planes as a platform for tactical nuclear strikes. Meanwhile, a nuclear-powered guided-missile attack submarine is about to enter service, along with a long-range cruise missile that may have a nuclear capability. Production of nuclear warheads for these systems continues.

As is the case in the United States, some of Moscow’s efforts could significantly alter warhead designs, which would raise questions about whether Russia might seek to test the upgrades, in breach of the moratorium on testing. This freeze is central to the international arms-control regime.
Currently four countries that are not parties to the NPT—India, Israel, North Korea, and Pakistan—have nuclear weapons. A resumption of testing could result in more countries trying out and then deploying nuclear weapons. In short, the modernization programs in the United States, Russia, and elsewhere threaten to open the door to a new arms competition—and an ever-
increasing number of nuclear weapons states.

In a multipolar world, tomorrow’s nuclear arsenals could be managed in unpredictable ways by countries whose governments range from fragile to stable and whose approaches to international affairs range from passive to assertive to even aggressive. The United States’ and Russia’s race to modernize their nuclear arsenals is paralleled in China, Europe, and South Asia, with countries all seeking to keep up with former Cold War rivals or compete with the military efforts of neighbors.
 
China, for one, has long professed a goal of minimum nuclear deterrence—that is, an arsenal that is just large enough to inflict unacceptable damage on any country that attacked China first—and is estimated to have about 250 warheads for delivery by land-based missiles, bombers, and an emerging submarine fleet. But China is also engaged in continuing, low-level disputes with its neighbors—the Philippines, Vietnam, and other countries—over control of the Spratly and Paracel island groups in the South China Sea, where Beijing reportedly has been building man-made islands from reefs and shoals to host military facilities. In the latter stages of an aggressive, two-decade program of upgrading its land-, sea-, and air-based nuclear delivery systems, China is the only member of the five NPT-declared nuclear weapons states increasing its arsenal, albeit slowly.
 
Global Nuclear Weapons Stockpiles, 1945–2014The number of warheads worldwide has steadily decreased since the mid-1980s. Here, the U.S. and Russian figures reflect warheads in military stockpiles, excluding retired, but still intact, weapons. (Source: Bulletin of the Atomic Scientists.)
 
On land, Beijing is significantly upgrading its older liquid-fuel missiles and replacing them with longer-range, road-mobile solid-fuel missiles based at new or upgraded garrisons. This will give a greater portion of China’s future land-based missiles longer ranges and more survivability.

At sea, the country is in the process of deploying a new design for a ballistic missile submarine.

Three of these so-called Jin-class subs have recently been put into service, each apparently capable of carrying 12 single-warhead missiles. This gives the sub fleet the potential to carry 36 missiles, up from the previous total of 12, which were carried on one submarine that entered service in 1986 and is no longer considered operational. The missiles for these new subs, however, are still in development, and it remains unclear how the submarines may eventually be deployed. U.S. intelligence and military sources have suggested that China is adding a nuclear capability to some of its ground- and air-launched cruise missiles, which could greatly increase the number of nuclear-weapons delivery systems in the country. There has been no official confirmation of such a move or how many cruise missiles it might involve. But any production of nuclear-armed cruise missiles would mark a significant change in China’s deterrence posture and concern neighboring countries, from Japan to South Korea and beyond, that worry about Beijing’s increasingly confrontational ways.

In South Asia, meanwhile, what may be the world’s most threatening nuclear face-off—exacerbated by long-simmering distrust and military competition between Pakistan and India, a continuing border dispute over the Kashmir region, and allegations of Pakistani support for terrorist attacks in India—seems to be spawning a modernization race. Both India and Pakistan are upgrading their weapons complexes to produce increased amounts of bomb-grade uranium and plutonium, which would provide the countries with the ability to build more warheads.

Pakistan’s expansion is notably rapid. Today, the country has an estimated 120 weapons, an increase from around 90 in 2007. At its current pace, Pakistan could have 200 nukes in its arsenal within a decade. Beefing up its tactical weapons, the country is developing a new medium-
range ballistic missile, new air- and ground-launched cruise missiles, and a short-range nuclear missile, the Nasr (officially known as Hatf IX, meaning “vengeance”—a theatrical choice that reflects the nuclear politics of the region). The Pakistani military claims that the Nasr, a mobile system with a range of 60 kilometers (37 miles), is highly accurate and able to carry nuclear warheads. It is designed for “shoot-and-scoot” warfare—that is, firing at a target and then immediately moving to avoid enemy counterfire—and apparently is meant for use in the event of an invasion by India’s conventional forces, widely seen as superior to Pakistan’s.

An analysis of the potential use of tactical nukes in South Asia—relying on the outlines of the 1965 India-Pakistan war as a guide to invasion routes—suggests that Pakistan’s detonation of just one
30-kiloton battlefield weapon would not only affect invading Indian forces, but also cause the loss of at least tens of thousands and probably hundreds of thousands of Pakistani civilian lives, according to Jaganath Sankaran, an associate at the Managing the Atom project at Harvard University’s Belfer Center for Science and International Affairs. In turn, India is developing longer-range ballistic missiles, including the Agni-V—agni is the Sanskrit word for “fire”—with a range of 5,000 kilometers (3,107 miles), making it capable of reaching any target in China, its primary regional rival.

In addition, India has launched its first ballistic missile submarine, the Arihant, meaning “slayer of enemies” in Sanskrit, which is expected to be followed by several others that will eventually have the capability to launch ballistic missiles. This is significant: Pakistan has long warned that it would consider an Indian submarine armed with nuclear missiles to be destabilizing.

The modernization fervor has also gripped Europe to a degree that could seem unusual for those who view nuclear competition primarily in the historical U.S.-Russia frame. But the nuclear weapons and platforms of European countries are also aging, and these countries continue to have joint defense obligations with one another and the United States. France has undertaken a comprehensive upgrade of its arsenal, deploying an improved submarine-launched missile, the M-51—a multiple-warhead missile with increased accuracy, intercontinental range, and payloads—that will also be outfitted with a new nuclear warhead later this year. An air-launched cruise missile, the Air-Sol Moyenne Portée Amélioré, which has a range of 500 kilometers (311 miles) and an improved warhead, has been integrated into two fighter-bomber squadrons, one at Istres on the Mediterranean coast and the other at Saint-Dizier, in northeastern France.

In 2010, Britain announced its plans to reduce its stockpile to 180 warheads by the mid-2020s, but it is currently bringing out a new class of ballistic missile submarines to replace older submarines scheduled for retirement, starting in 2024. It seems likely that the B61-12 bomb and the deployment of the U.S. stealthy F-35A fighter-bomber in Europe will enhance NATO’s overall nuclear capability across the region while simultaneously raising concerns about a lowering threshold for nuclear weapons use during a time of East-West tension.

Israel, meanwhile, maintains a stance of nuclear ambiguity—neither confirming nor denying that it has weapons—though it has been widely accepted for decades that the country has an arsenal. In the absence of official information, the news media, think tanks, authors, and analysts have given widely varying appraisals of the size of the Israeli nuclear stockpile, from 75 up to more than 400 warheads. (Kristensen and Norris estimate that Israel has about 80 warheads.) The country is also likely modernizing its land-based ballistic missile and a cruise missile for its submarines.

Although North Korea’s nuclear program and bellicose rhetoric have drawn regular media coverage, it is unclear to what extent the country has militarized its nuclear capability. What is clear is that the rhetoric has not diminished. And satellite monitoring and expert consensus suggest that, though the country is not there yet, North Korea is certainly trying to achieve the ability to field deliverable nuclear weapons. It is an understatement to say success could significantly increase tension in the region around the Hermit Kingdom.
It is a well-worn trope in news articles about disarmament to quote from Obama’s stirring April 2009 speech in Prague. “Some argue that the spread of these weapons cannot be stopped,” he intoned to a rapt crowd. “Such fatalism is a deadly adversary.” The speech provides a dramatic contrast to the general disappointment in his administration’s disarmament efforts in the time since it was delivered.
 
But often, a key portion of the speech is conveniently overlooked: Immediately after asserting America’s commitment to a nuclear-weapons-free world, Obama warned that such a goal would be difficult and might not be reached in his lifetime. Prague was never a promise of instant disarmament.

Today, however, even the Obama administration’s complicated, gradual efforts toward controlling nuclear weapons are being undercut, perhaps even being rendered moot. The nuclear nonproliferation and disarmament regime is centered on the NPT, which entered into force in March 1970, the month when the Beatles released the song “Let It Be” and the Concorde airliner made its first supersonic flight. The decades have certainly added up since then; the Beatles and the Concorde are no more.

But the NPT still staggers on, now up against a modernization tide that sees the major nuclear countries continuing to spend enormous fortunes improving their arsenals. Unless the United States, Russia, and other powers find a way to agree on reining in their modernization programs, the world’s non-nuclear countries will have increasingly legitimate reasons to ask how they benefit from being part of the NPT—and why they shouldn’t go their own way.


John Mecklin (@meckdevil) is the editor of the Bulletin of the Atomic Scientists.

China's Fragile Evolution

By Rodger Baker and John Minnich

March 24, 2015 | 08:00 GMT


Last week, China's anti-corruption campaign took a significant turn, though a largely overlooked one. The Supreme People's Court released a statement accusing former Politburo Standing Committee member Zhou Yongkang, the highest-ranked official thus far implicated in China's ongoing anti-corruption campaign, of having "trampled the law, damaged unity within the Communist Party, and conducted non-organizational political activities." In Chinese bureaucratic speak, this was only a few steps shy of confirming earlier rumors that Zhou and his former political ally and one-time rising political star from Chongqing, Bo Xilai, had plotted a coup to pre-empt or repeal the political ascension of Chinese President and Party General Secretary Xi Jinping. Thus, the court's statement marks a radical departure from the hitherto depoliticized official language of the anti-corruption campaign.

Of course, it has long been clear that the Xi administration's anti-corruption campaign is far more than just a fight against graft — it is also a political purge designed to tighten the new leadership's control over Party, government and military apparatuses. But up to now, official language on the anti-corruption campaign has been couched in terms of fighting graft and abuse of power "for personal gain." So far as we are aware, very few if any official statements have alluded to "political activities" by suspects — and certainly none concerning high-profile figures like Zhou, whose position at the top of the country's energy industry and domestic security apparatus made him one of the most powerful Chinese politicians of the 2000s. Whatever the court's precise intent, that it chose language even hinting at a coup by Bo and Zhou is extraordinary.

If we accept that the use of a phrase like "non-organizational political activities" is significant, then we have to ask what the decision to use that phrase at this time may signify. To our minds, two possible interpretations stand out. First, it could mark a nascent shift in the way Chinese authorities frame the anti-corruption campaign and imply that going forward the campaign will become more overtly political. Second, it could signal that Xi and his allies, confident of having fully eliminated any threat posed by Zhou and his associates, are acknowledging an end to one phase of the anti-corruption campaign — the elimination of competing factions — and are now embarking on the further consolidation of authority and control over the far reaches of the bureaucracy.

If the former interpretation is correct, the anti-corruption campaign is about to get more brutal and potentially more destabilizing, as it moves from a relatively focused purge and general cleansing of the Party to a full-on assault against those who have the strength to challenge Xi's nascent authoritarianism. According to the latter hypothesis, with the would-be challengers routed and acknowledged as anti-Party plotters, and with political power firmly centralized under Xi and his allies, China's leaders can now put politics aside and move on to the more difficult and important task of building a government ready to manage the profound social and political disruptions that will almost certainly accompany China's economic slowdown.

Xi's Strategy

In either case, the anti-corruption campaign and political centralization are not occurring in a vacuum. The campaign may be the highest profile of Xi's initiatives thus far, but it alone is clearly not sufficient to deal with China's myriad problems. The question, then, is what to expect next.

Two recent developments in particular frame our understanding of the trajectory of China under Xi and his strategy for ushering China and the Communist Party safely through the difficult years ahead.

First is the Party's renewed emphasis following the Fourth Plenary Session in October on establishing effective rule of law. Second is the announcement in February that going forward, the anti-corruption campaign would center on 26 of the country's largest state-owned enterprises, with a focus on resource, construction, heavy industrial and telecommunications businesses. This announcement came one month prior to renewed government pledges to merge and consolidate the state sector. It also stands out as the first time the government has pre-emptively and publicly named potential future targets – thus, in theory, giving them fair warning. As one official put it, the government plans to "hang the sword of Damocles" over the state-owned sector's head.

The thread that binds these two seemingly disparate elements together is the problem of political development in the context of rapid social and economic change — that is, how to build flexible and adaptive governing institutions capable of adjusting to meet the emerging needs of an urbanizing and industrializing (in some regions, post-industrializing) society like China's.

Although Chinese society and its economy have undergone profound changes over the course of the past 30 years — China's economy has grown nine-fold since 2000 alone — the country's political structure has changed only incrementally. To be sure, China's government is in many ways stronger and more effective today than it was when Deng Xiaoping took power in 1978.

But it retains the same basic form he put in place more than two decades ago. As long as China's economy was growing of its own accord, this model sufficed. Its task was simply to prevent politics — a second Mao — from derailing the economy. But as the anti-corruption campaign and Xi's power consolidation drive signify, the model of consensus-based political decision-making put in place by Deng is breaking down.

The leadership transition from former President and Party General Secretary Hu Jintao to Xi was the first since the late 1970s that was not pre-ordained by Deng. Following the ravages of the Great Proletarian Cultural Revolution and the brief reign of the so-called Gang of Four, Deng assumed the mantle of Chinese leadership, reversing many of Mao Zedong's economic policies, but also fundamentally altering the political organization of China. Rather than Mao's revolutionary model, which required perpetual upheaval, Deng proffered an evolutionary model — one that would use consensus politics to both break down the extreme factionalism of the Mao era and undermine the ability of any single individual to rebuild a clear faction in the face of multiple competing and cooperating interest groups.

To further reinforce stability, Deng selected both Hu and his predecessor, Jiang Zemin, ensuring more than two decades of clearly defined succession plans. During the economic growth of China's nearly three-decade “miracle,” the system of political consensus proved largely effective. The main purpose of government was to provide stability in the Party and the overall economic system, primarily serving a managerial role rather than a truly innovative leadership role. Certainly there were crises during these years, but these were frequently short-lived, and the government response was often one of delay followed by mitigation, rather than the implementation of any significant change in the underlying political, economic or social systems.

But as China neared its 2012-2013 leadership transition, it was clearly entering uncharted waters. Not only did this transition move beyond anything Deng had prepared for, it also occurred at a point where China's Deng-era economic model had clearly run its course. As with many of the Asian economic tigers before it, China's export-oriented and government investment-heavy model had reached a point where growth alone was no longer sufficient to sustain economic activity, and society had evolved faster than the political model. The global economic crisis, along with Europe's sustained sluggishness, only served to reinforce the end of China's easy times, and made it clear to China's leaders that they could no longer postpone what they had been delaying for more than a decade: a restructuring of the economy to one that would better harness internal consumption.

Xi Jinping's actions are symptoms, not causes, of the breakdown of the Deng political and economic model. As we wrote previously, the anti-corruption campaign is one element in a broader evolutionary process driven by the realization that the transition between China's former economic model (based on low-cost exports and investment-led construction) and new economic model (based on domestic consumption, services and high value-added manufacturing) will entail five to 10 years of immense social, economic and political strain.

Simply put, the old model, whose legitimacy rested on the promise of ever-rising material prosperity and stability, is no longer viable.

Toward a New Political Order

What China is building in the old model's place appears to be a more centralized and more personalized political order: in essence, a dictatorship under Xi. At the same time, given the trajectory of Chinese social and economic development — the need to stimulate domestic consumption and innovative, high value-added industry — it is also clear that to succeed, this new order will have to differ fundamentally from the kind of dictatorship established under Mao.

The campaign against Zhou and Bo was more than a personality clash, and much more than an issue of basic corruption. It was a battle between competing models for the Party to maintain authority and control during the economic transition — and it was a battle over how the economy would make that transition. On the one hand, Bo — and by implication Zhou, as Bo's patron and ally — seemingly espoused what amounted to a return to the revolutionary politics of the Mao era, in which political legitimacy would rest not with the administrative apparatus, and certainly not within the rule of law, but in the hands of a charismatic leader, presumably Bo himself. On the other hand, if recent pledges to strengthen the rule of law and streamline and improve the functioning of powerful state-owned enterprises are to be taken seriously, then Xi and his allies would appear to be driving toward something else. The Xi camp's vision seems to be a political framework that could draw on elements of Mao's legacy — centralization of political power and nationalism, most saliently — while ultimately preserving the Deng model's promise of evolutionary, rather than revolutionary, change.

Let us assume that the politicization of the charges against Zhou is a sign of the Xi camp's victory over the Zhou and Bo camp regarding the political, social and economic model for Chinese reform. If that is the case, the Chinese leadership is, at least publicly, seeking a model that, though under tight central leadership, will try to rest on an autonomous, efficient and high-performing bureaucracy. This model also will almost certainly entail some level of legal protection for private and intellectual property rights — at least those of Chinese citizens — as a means to stimulate domestic consumption and innovation.

Recent Communist Party pronouncements on the importance of strengthening the rule of law, far from empty doublespeak, represent embryonic moves toward this end. The same goes for the anti-corruption campaign, especially in its application to the process of consolidating and streamlining the state sector. Authoritarianism and effective rule of law are not fundamentally incompatible. Neither are dictatorship and efficient administration. History offers several examples of countries that combined strong government and legal protection for things like private property and contracts without also adopting democracy: 19th century Prussia, for example, or 20th and 21st century Singapore. As China's leaders attempt to bolster their own rule of law and bureaucratic reforms, these examples are likely not far from their minds.

But the problem with this comparison is that Prussia, at its peak in 1871, had fewer than 25 million people. At the end of the Napoleonic Wars, its population measured only 10 million. Singapore is a city of 5.4 million. The leaders of each country worked for decades, over successive generations, to build high-performing bureaucracies that combined the kind of effective protection of property rights historically necessary to support the transition to advanced industrial economies. The differences between Prussia and Singapore and China are so many and so great as to make comparison virtually impossible. But two key differences — two fundamental constraints on China — stand out: size and time.

Evolutionary Versus Revolutionary Change

Throughout history, China has struggled with a common cyclical problem: To manage a nation as vast as China, the central government that first pulled together the far reaches of the empire needs to build and expand a bureaucracy to manage the complexities and scale of China. Over time, that very bureaucracy steadily usurps power from the center, and parochial interests reign supreme. At times of national crisis, the center tries to reclaim authority and control, only to realize that power has fragmented. The bureaucracy is resistant to change, and the system often breaks down after struggling to reform. Then, a new centralizing power rises from the ashes of the old, and the cycle begins again.

The Communist Party is no stranger to this cycle. Mao followed a revolutionary path, allowing frequent disruptions to keep the bureaucracy from ever fully usurping power from the center. Deng encouraged the bureaucracy, hoping that the economic prosperity it could bring would ultimately allow the center to balance the competing centrifugal forces with a fairly light touch.

While Deng's model was a revolutionary shift from the Maoist model, it was predicated on a slow, steady evolutionary change in China and assumed it could somehow avoid the challenges of China's centuries of cycles. The transition from Hu Jintao to Xi Jinping, and the attendant challenge from Bo Xilai, questioned whether the Deng model was still applicable.

The difference between the Xi model of reform and the vision espoused by Bo was in part in how they would harness support from the population. Both Xi and Bo would need to reallocate capital from the more economically advanced coast and Yangtze River basin. Bo, who had built a cult of personality in Chongqing and blended Chinese nationalism with Party veneration, was apparently going to justify that through revolutionary propaganda, following the Maoist pattern of harnessing the vast masses of economically disenfranchised to force the redistribution of wealth.

Xi, on the other hand, though certainly consolidating power and taking on a more controlling tone, appears to be pursuing a more evolutionary path to reshape China's economic landscape.

Rather than Maoist revolutionary ideology, Xi's propaganda machine nearly paints him as an equivalent of a U.S. or European president, a leader best qualified to be trusted to guide the Chinese forward through difficult times. While he is harnessing a type of Chinese nationalism or extreme patriotism, it is intended to keep all of the Chinese agreeing on policies, rather than turning against one another.

The fundamental question, however, is whether China has time for an evolutionary change. Other Asian nations that underwent significant economic and political transformation, from Meiji-era Japan to Park Chung-hee's South Korea, each made more radical and rapid changes — something that may be forced upon China's leaders. But each did so with the attending major social disruption and a heavy hand in domestic security. Major economic overhauls are messy affairs, and China has decades of dead wood to trim from its economy due to the lingering effects of Mao's intentional drive to ensure massive industrial redundancy, as well as to mismanagement and frequent unprofitability among state companies.

Although Singapore and even Prussia may be idealized models for China as countries that were able to transform and retain tight central authority, Lee Kuan Yew and the kaiser never had to manage a population of nearly 1.4 billion people, more than two-thirds of whom have effectively been left behind over three decades of promises that everyone would get rich in the end. As China tries to transition away from low-end manufacturing and economic stimulus driven by government-financed construction, it is the low end of the economic spectrum that will be disproportionally affected. A gradual shift in its economic model would allow China to slowly metabolize these displaced workers, but it is far from certain that China has the time to allow for this slow change, as the rest of the global economy is shifting with or without Chinese consensus. 


The Follies of Central Bank Watchers ...

by Larry Edelson

Wednesday, March 25, 2015


I am continually amazed at how many investors and analysts hang their investments and/or trade decisions on what the Fed does or doesn't do, says or doesn't say.

As if the Fed controls the markets! Or any central bank, or combination of central banks for that matter!

Simply put, central banks have no impact on an economy or on market trends.
 
None at all. Period.

At best, all they do is ...

A. React to the economy and markets. And/or sometimes ...

B. Get lucky and make a policy change or a verbal statement that tends to coincide timing-wise with what an economy or a market(s) is already set to do.


Let me dissect each of the above for you, by way of examples.
 
Reacting to the economy and markets

 
 

Do you think interest rates go up because the Fed raises its official rate? Or that they fall because the Fed lowers its official rate?

If you do, then it's time for you to learn a very important lesson: The Fed, or any other central bank for that matter, merely reacts to what's already happening in the free markets.

If people, investors, and businesses are borrowing money, and that demand exceeds the immediately available supply for money or credit, then interest rates — the cost of borrowing — go up. Whether or not a central bank likes it.

Conversely, if money and credit are contracting because demand is weakening, then interest rates fall — again, regardless of what a central bank may want to see or happen.

Just consider the stock market collapses of 2000-01, 2003, or 2007-09.
What happened? Interest rates collapsed because credit was contracting and new demand for credit was also slumping. The Fed had nothing to do with it at all. All it did was follow rates lower by notching down its official discount interest rate.

Or consider the last several years of record low interest rates. Do you think they are low and heading lower in many parts of the world because central banks say so?

No, rates are at historical record lows because there is virtually no demand for money and credit.
 
Or consider the late 1970s, when interest rates were soaring. Stocks and commodities were booming. Credit demand was off the charts. Investors were willing to pay any rate of interest to invest in anything that had a shot at matching or bettering high inflation rates.

So interest rates went up together with most assets and the Fed could do nothing more than raise its official rate in tandem.


Markets and interest rates only peaked, not because Fed Chairman Paul Volcker raised rates to 20 percent in June 1981, but simply because that particular inflation cycle was due to end anyway.

Anyone who thinks or tells you otherwise is merely a rookie in the markets, or if they have any experience at all, is simply ignorant of how markets work.

Or consider last week's Fed meeting and press conference, which in my opinion is the epitome of Fed follies and an amazing show of how there are so many investors and analysts who get caught up in watching the Fed.

At last week's meeting and press conference, Chairwoman Janet Yellen removed one single word from the Fed's official press release — the word "patient" — giving the impression the Fed was more ready to raise rates.

But then, in other wording in the press release, the Fed noted it "would not be impatient" raising rates either — giving the opposite message, that it would take its time raising rates.

And what did the bond
markets do? Rates actually declined. Traders who bet that rates would rise due to the removal of the word "patient" got their heads handed to them ...

While traders who bet on declining rates — which is the free market trend still in force now — made a couple of bucks.
 

I could go on and on with one historical example after another from the beginning of time, but the fact is this: Central banks have zero control over interest rates.

Anyone who thinks otherwise, I repeat, is simply a rookie, or completely ignorant of how markets work.

Now, let's consider my point B, where a central bank may get lucky ...

And make a policy change or a verbal statement that tends to coincide timing-wise with what an economy or a market(s) is already set to do.

This doesn't happen all that often, but it happens enough that it leads many investors and traders astray.

Consider what I just told you about Paul Volcker in 1981. Many credit him with killing inflation back then by dramatically raising rates.

Not true. That inflation cycle was due to die off in June 1981 anyway.
 
Volcker was merely lucky. He was in the right place at the right time.

Or consider again, last week's Fed meeting. As I have been telling you, the euro was overdue for a bounce, the dollar for a correction, and gold and silver for a short-term pop higher — and that's exactly what happened last week.

Did the Fed cause it? No way. The Fed merely reacted to the markets.
 
The dollar would have sold off, the euro would have bounced along with gold and silver no matter what the Fed said or did.

It's crucial that you understand this. The majority of investors and traders make their decisions on erroneous information and central bank watching and guessing. Do that and you are destined to never become a successful investor or trader.

Instead, focus on what the free markets are doing, what the major, big picture trends are, and on the charts. They tell you everything you need to know. And the facts right now are ...

1. Interest rates are not headed higher for some time.

2. Deflation still rules.

3. The dollar remains in a long-term uptrend, the euro in a massive long-term bear market.

4. Commodities, nearly all of them, remain in bear markets.

Best wishes, as always ...

Markets

For Money Managers, a Daily Search for Trouble

With the collapses of 2000 and 2008 fresh in their minds, stock pickers scour markets for signs of problems

By E.S. Browning

March 23, 2015 5:15 p.m. ET
 

David Kotok reads research reports early in the morning on his stationary bike at his Florida home. He calls the hour on his bike ‘some of the best time of my day.’ Photo: Edward Linsmier for The Wall Street Journal  
 
SARASOTA, Fla.—Most mornings at 5:45, David Kotok hops on his exercise bike, straps a small miner’s lamp to his forehead to read in the twilight and begins scouring research reports for signs the stock market could crumble.

The Florida money manager, who is 72 years old, is bullish, but things can change suddenly. This month, he moved heavily to cash amid signs of trouble, but soon returned to stocks. So he pedals onward, reading reports and shifting two smartphones and a sheaf of papers to avoid drops of sweat.

In Minneapolis, Doug Ramsey’s daily ritual involves tracking 130 indicators on subjects from corporate performance to investor mood. He isn’t as bullish and has reduced his stockholdings.

“I think about it hourly. It really keeps me up,” said Mr. Ramsey, chief investment officer at Leuthold Group, which oversees $1.6 billion.

Across the country, other money managers go through their own rituals, trying to anticipate trouble.

The S&P 500 has more than tripled and the Dow Jones Industrial Average is up 177% since their 2009 financial-crisis lows, and stocks are expensive. Stock collapses in 2000 and 2008 are fresh in investors’ minds.

The stock market stumbled in early March after big February gains, and money managers still are divided on how serious the trouble could be. Mr. Ramsey’s indicators fell back to almost neutral recently and he cut his holdings in stocks to 55% from 58%. “What we have today is a broadly overvalued market,” he said. The more expensive stocks are, the harder it is for them to rise.

Mr. Kotok said the strong dollar will pull investment into the U.S., helping the economy and stock market, but Mr. Ramsey said “the evidence is still pretty clear we could be in the last few innings of this thing.”

The S&P 500 trades at more than 20 times its companies’ net profits for the past 12 months, well above its historical average of 15.5 and the highest since 2004, before the financial crisis, according to research and money-management firm Birinyi Associates.

Sooner or later, stocks will suffer a bear market, meaning a decline of 20% or more. World economic growth has slowed, pulling oil down 56% since June 20. Continental Europe is struggling to avoid recession.

“You are always concerned there could be some kind of setback because the world is a volatile place,” said former New Jersey Gov. Thomas Kean, a client of Mr. Kotok’s. Like Mr. Kotok, however, Gov. Kean still is bullish.

Money managers come in types. Fundamentalists base decisions on the economy, interest rates and earnings expectations. Stock pickers select preferred stocks or sectors. Momentum investors ride fast-growing stocks. Technical analysts track charts and trends.

Mr. Kotok, chairman of Cumberland Advisors, which oversees $2.3 billion, looks at all these factors but, as an economist by training, he emphasizes economic fundamentals.

One morning recently, as the sun prepared to rise, he pedaled while reading a Federal Reserve paper, an interest-rate study and a report on the European Central Bank. He gets analyses from a long list of research services and receives email alerts from his staff of 38.

“When I get up in the morning there is a series of things that have been emailed to me,” he said. “I use as many measures around the world as I can.”

He calls the hour on his bike “some of the best time of my day,” although he has plenty of reading left when it ends.

Mr. Kotok boosted cash holdings early this month as the European Central Bank prepared a program to stimulate the region’s stagnant economy. The ECB hadn’t released details of its plans, which would affect the dollar. Momentum indicators showed U.S. stock gains slowing.

Mr. Kotok sold shares in multinational companies, whose international sales would be hurt by a strong dollar, and boosted cash. Then, after research persuaded him Europe’s moves would hurt multinationals but push investment into the U.S., and after the market pulled back a bit, he put the money into the stocks of smaller companies not dependent on foreign business.

“This market in our view is headed higher, maybe much higher,” Mr. Kotok said. “Money flows into the dollar are extraordinary and in my view they will become even more extraordinary.” He did a similar analysis when oil prices collapsed last year, and again when it seemed Greece might exit the countries that use the euro, concluding both times that stocks would weather the storm.

Mr. Ramsey focuses heavily on market trends, as well as economics. Every Monday by noon he updates his firm’s “major trend index,” tracking U.S. and foreign stock indicators. He often works weekends on it.

Leuthold Group’s indicators fall into five categories: economics, valuation, investor sentiment, momentum and supply and demand. The economics look strong and stock demand has been all right.

But high stock prices have stretched valuations, and investor sentiment lacks skepticism. Momentum has weakened as groups including transportation and financial companies haven’t kept up with indexes. When sectors fall by the wayside, it can be a sign of trouble. Mr. Ramsey isn’t persuaded that the overall market has peaked, however. “Some of the divergences I have described can go on a long time,” he said.

Richard Dickson, senior market strategist at Lowry Research Corp. in North Palm Beach, Fla., uses his own large databases, focusing particularly on the supply and demand forces Lowry believes lie at the heart of market action. As indexes rise, Mr. Dickson sees an increasing number of individual small-company stocks down by 20% or more, a red flag.

He has advised clients to be careful about buying small stocks and focus mainly on midsize and larger companies. But he said it can be months before the broader market is affected.

“We aren’t seeing the signals you would see prior to a major top,” when many larger stocks would be falling, he said. “We are saying there are a lot of land mines in the small-stock area so you want to be very careful about any buying you do there.”