The ISIS March Continues: From Ramadi on to Baghdad?

Anyone telling you the Islamic State is in decline isn’t paying attention.

By Hassan Hassan

Hassan Hassan is a Middle East analyst and co-author of ISIS: Inside the Army of Terror.

May 19, 2015

The ISIS March Continues: From Ramadi on to Baghdad?

Once again, in less than a year, Iraqi soldiers abandoned their positions en masse and fled in the face of advancing Islamic State forces. The fall of the city of Ramadi, the provincial capital of Anbar province, leaves no doubt about the jihadi group’s capabilities: Despite U.S. attempts to paint it as a gravely weakened organization, the Islamic State remains a powerful force that is on the offensive in several key fronts across Syria and Iraq.

Ramadi is far from the only front on which the Islamic State is advancing. The group last week launched an offensive, supported by multiple suicide operations, in the eastern Syrian city of Deir Ezzor against President Bashar al-Assad regime’s holdouts in the military air base. In the central city of Palmyra, it attacked a regime base near the ancient Roman ruins. It also recently clashed with Syrian rebels and the regime in the eastern countryside of Aleppo, the provinces of Homs and Hama, and the southern city of Quneitra, near the border with Israel.

Nor are the Islamic State’s gains in Iraq confined to Ramadi.
The group has advanced deep into the Baiji oil refinery, the largest in the country. And it has since pushed on from Ramadi, attacking the nearby town of Khalidiya; if the group is successful, that might provide it with the territorial depth to advance on Baghdad.
The Islamic State’s recent advance did not take the world by surprise, as it did when the group captured Mosul and other areas across Iraq last year. This time, the United States said it conducted seven airstrikes in Ramadi, in an effort to prevent its fall, in the 24 hours before the city was lost.

Local officials in Ramadi, meanwhile, had repeatedly warned that the city would be overrun if they did not receive urgent reinforcements. But the international and Iraqi support that arrived was simply insufficient to hold the city.

Therefore, the prevalent narrative that the Islamic State is destined to decline appears to be false.

Rather than suffering from resource and manpower shortages, the group is only increasing its grip on the local populations in its strongholds of Mosul and Raqqa, Syria; it is also attracting a considerable number of recruits, especially among teenagers.

As with the occupation of Mosul, the fall of Ramadi will have a ripple effect across both the Syrian and Iraqi battlefields. In Syria, Iraqi Shiite militias fighting alongside the Assad regime will feel compelled to return to defend their home country, a move that would further undercut the regime’s ability to stop recent rebel advances. There are signs this is already happening: The leader of one Damascus-based militia announced that he was returning to “wounded Iraq.”

The failure to defend Ramadi also sets the stage for increased tensions between Washington and Baghdad over the use of Shiite militias to push back the Islamic State. This is the second time this issue has arisen: In the battle to retake the city of Tikrit, the Iraqi government deployed the Hashd al-Shaabi, an umbrella organization for Iranian-backed Shiite militias, which prompted the United States to refuse to launch airstrikes in support of the offensive until the irregular units withdrew.

The United States reportedly pressured the Iraqi government not to dispatch the Hashd al-Shaabi to Ramadi, insisting that local forces along with the Iraqi Army should fight in the Sunni city. As a result, some Iraqi officials blame the Americans for the fall of the city. With Shiite militias now heading to Anbar en masse to confront the resurgent threat by the Islamic State, the stage seems set for another confrontation with Washington, which fears that the fighters will only stoke sectarian tensions in the largely Sunni province.

Ramadi’s local leaders were instrumental in the U.S.-backed Awakening Councils, which were credited with the demise of al Qaeda in Iraq in 2006 and 2007 and which bravely held out against the Islamic State for the past year. The fall of the city, however, will significantly undercut the U.S. effort to recruit and train Sunni forces to fight the Islamic State.

“After Ramadi, [the Islamic State] will be able to present itself as the only Sunni force standing against the [Shiite] militias,” Wael Essam, a veteran journalist who embedded with the Iraqi insurgency after the war in 2003, told me. “Sunni forces allied with the government have failed to achieve the demands of the Sunni community for nearly a decade. ‘Suleimani Sunnis [a reference to Iranian spymaster Qassem Suleimani],’ as ordinary Sunnis now call them, have become tools to legitimize the government oppression against them.”

Unlike in 2006, when whole Sunni tribes rose up against al Qaeda in Iraq, there are now deep divisions over what to do about the Islamic State. With the fall of Ramadi, tribesmen loyal to the Islamic State will find themselves in a better position to pull their relatives toward their side, citing the failure of pro-government tribal leaders across Anbar.

But the fall of Ramadi will echo far further than just across Anbar.

In Washington, it should be clear that the current U.S. strategy to fight the Islamic State has failed. The White House’s focus on airstrikes in Iraq — while making little progress in training anti-Islamic State Sunni forces in either Syria or Iraq — is allowing the group immense space for planning, maneuvering, and redeployment.

Despite attempts by U.S. officials to downplay the significance of Ramadi’s fall, the development marks a dangerous new phase of the war. The Islamic State seems poised to take new areas despite American firepower and despite Iranian backing of tens of thousands of Shiite and Kurdish forces. The idea that the Islamic State is losing or declining now seems absurd.

Editorial Commentary

No Help Needed

Free trade is automatically fair; governments managing trade infringe on our liberties.

By Thomas G. Donlan           

May 15, 2015 10:30 p.m. ET

Trade is a voluntary act of exchange between independent actors seeking mutual profit. But governments negotiate trade deals for reasons that go beyond the needs of business. Each country’s government has vested interests supporting it. Many vested interests have commercial weaknesses, exposing them to competition from businesses in foreign countries.  The vested interests push their governments to protect them from strong foreign competitors, in exchange for domestic political support.
Witness the turmoil and strife in Washington last week, when Senate Democrats tried to tie irrelevant provisions about labor unions, environmental rules, and currency values to a “fast track” bill (not that there’s anything fast in Congress).
The bill would give President Barack Obama authority to complete the Trans-Pacific Partnership, a trade-liberalization agreement, and submit it to Congress for a single up-or-down vote.
This fast-track negotiating authority arose in the Kennedy administration as a way to limit parochial lawmakers’ ability to attach killer amendments to trade deals. Eventually, the most ambitious meddlers caught on: If they couldn’t amend trade deals, they could kill them by refusing fast-track authority.
Last week, the Senate voted twice on whether to start debating a bill providing fast-track authority to complete negotiations on the Trans-Pacific Partnership.
Supporters needed 60 votes in the Senate, but 51 Republicans and one Democrat voted in favor in the first vote. Casting votes in opposition were 44 Democrats and one Republican. This vote was an amazing defeat for the Democratic president and for economic liberty. It was also a temporary defeat.
Fortunately, the president decided to get into the game and play rough—at least by the standards that prevail in Washington, where hot air is a deadly weapon. He targeted 10 Democrats, led by Sen. Ron Wyden of Oregon, who were heralding their devotion to free trade, while making the bill impossible to pass. He put public pressure on them in a White House meeting and demanded that they stand up for free trade.
The gang of 10 had folded under pressure from Minority Leader Harry Reid of Nevada, a strong protectionist. They folded again when the president pushed back.
After Reid lost control of the trade issue, the Senate voted again. This time, 14 Democrats accepted the face-saving promise of votes on their amendments as separate bills instead of a guarantee that the amendments would be incorporated in the main bill. This drastically reduced the chance that any of them will be enacted.
The U.S. has been leading the world toward international business liberty since World War II, tiny step by tiny step. Although the practical effects of the Trans-Pacific Partnership are often overrated, derailing it would be a step in the wrong direction, with powerful symbolic effect. It would give satisfaction and inspiration to Americans who would rather live in the mythical economic security of Fortress America.
Organized labor has been trying to wreck trade liberalization since the early 1970s, when U.S. manufacturing first began to rust away. It was no coincidence that the most heavily unionized industries faded first.
It’s futile to expect a union boss to acknowledge that productivity and profit—not unions—create jobs and raise wages. But citizen-consumers shouldn’t buy into a narrow self-interest that can only claim to represent a small percentage of the workforce. They should be free to buy what they want, wherever it comes from.
Some people in the U.S. environmental movement are playing the same kind of con game. They want trading partners to adopt U.S. levels of conservation, pollution control, green subsidies, and regulatory power. They may be somewhat more idealistic than the union cynics, but achieving their good intentions also requires our trading partners to earn new wealth first.
Free trade for all Americans, to have liberty to do business and buy products as they can around the world, is so important that it should not have the help of the government.
The best trade policy is no trade policy: no tariffs, no quotas, no trade barriers at all.
We don’t need lawmakers, bureaucrats, or trade lobbyists to assure commercial freedom for U.S. businesses. Let’s just do it.


Don’t write off write-offs

Bad news often reflects past overoptimism

May 16th 2015

WHEN big companies announce write-offs, they tend not to do things by halves. Back in 2008 AIG, an insurance group rescued by the American government, reported an annual loss of $99 billion, with almost $62 billion of that occurring in a single quarter. In 2001 JDS Uniphase, an optical-equipment maker, chalked up a deficit of $56 billion.

Such losses are so big they can seem almost unreal. That can serve a dual purpose. First, the deficit can be dismissed as the product of “mere accounting”, the result of pedantic number-crunching. Assets have been written down in value, but that is not the same as a cash loss.

Second, when new managers are appointed, a huge loss can be blamed on the previous regime.

All the bad news can be revealed at once, a phenomenon known as “kitchen-sinking”. From that point on, the only direction for profits must be up.

Analysts tend to be very supportive of such arguments. They typically dismiss big write-offs, even when they failed to forecast them. They argue that it makes more sense to focus on operating profits, which reflect the health of the underlying business. These, it is said, are a better guide to the future direction of the firm.

The same arguments crop up at the aggregate level. Robert Shiller of Yale averages profits over ten years to get his cyclically-adjusted price-earnings ratio. So this measure includes numbers from 2008, when firms in the S&P 500 index reported a plunge in profits thanks to huge write-downs at banks (see chart). This, argue critics such as Jeremy Siegel of the Wharton School, makes the stockmarket look more expensive than it truly is.

This optimistic view, dubbed “earnings without the bad stuff”, has deep roots. Investors place a high value on predictability. They like companies at which profits grow, quarter after quarter, year after year. They want the corporate sector as a whole to produce steadily higher profits—and that is just what analysts tend to forecast. Predictions of recession are rare.

Indeed, back in February 2008, Mr Siegel said there would be no recession that year and that profits, the stockmarket and the financial industry would all do well.

Companies are well aware of investors’ biases and strive to gratify them. But this creates behavioural problems. A short-term focus on the next quarter’s earnings means that companies may reject long-term projects that could boost the value of the company but would hurt profits in the coming year or two. Managers will also resist changing a failing strategy (and thus admitting assets are worth less than before) until the last minute.

Take the recent catalogue of disasters at Tesco, a British supermarket chain. The company unveiled one set of write-downs in 2013, reflecting poor results in its foreign operations. But that was merely the prelude to the even bigger £6.4 billion ($10.4 billion) loss announced last month, which reflected a write-down of the value of its British property. Tesco had been slow to realise that its customers were losing enthusiasm for huge out-of-town stores and were switching to online shopping and to discount stores such as Aldi and Lidl.

Seen through this prism, a write-off of assets is not merely an accounting nicety. Ultimately, equity holders have a stake in the assets as well as the profits of a company; if those assets are worth less, shareholders are poorer. To the extent that the business paid too much to acquire those assets, that is a loss as real as selling baked beans below cost. Indeed, investors’ calculations of future profits were probably based on the company’s ability to earn a decent return on such assets. Furthermore, such write-downs tell investors something about the management’s ability to understand its own industry.

In the case of the financial industry, the massive write-downs during the crisis were a necessary correction of the overstatement of profits in previous years. Banks had generated profits by issuing, underwriting or lending against mortgage securities. Those profits turned out to be illusory. If you were to ignore the ensuing write-downs, you should also adjust down profits for previous years.

The simplest answer, which lies at the heart of Mr Shiller’s analysis (and was proposed by Ben Graham, the doyen of security analysts, before him), is to average profits over several years.

The mistake is to believe rosy forecasts for future profits, and to dismiss spikes in losses as exceptional. Write-offs are usually right.

The Federal Reserve

Railing against bailing

Congress launches new attacks on America’s central bank

May 16th 2015 

DURING a financial panic, said Walter Bagehot, a former editor of The Economist, a central bank should help the deserving and let the reckless go under. Bagehot reckoned that the monetary guardians should follow four rules: lend freely, but only to solvent firms, against good collateral and at high rates. Many American politicians complain that the Federal Reserve is all too happy to lend, but that it ignores Bagehot’s other dictums. On May 13th two senators of very different hues—Elizabeth Warren, a darling of the left, and David Vitter, a southern conservative—joined forces to introduce a bill that would restrict the Fed’s ability to lend during the next financial panic. Does that make sense?

Emergency lending under Section 13(3) of the Federal Reserve Act was one of the most controversial policy responses to the financial crisis. In a letter to Janet Yellen, the chair of the Fed, Ms Warren and Mr Vitter say that from 2007 to 2009 the Fed provided over $13 trillion to support financial institutions. The loans were cheap. A study from 2013 by the Levy Institute, a nonpartisan think-tank, found that many of them were “below or at the market rates” (sometimes less than 1%). Many of the banks that benefited were insolvent at the time. And much of the $13 trillion went to just three banks (Citigroup, Merrill Lynch and Morgan Stanley), leading many to suspect that the Fed was indulging favoured firms.

Critics focus on details but miss the big picture, counters the Fed. Elizabeth Duke, a former governor, says that the Fed targeted its lending programmes at the right markets, such that it helped to stop the crisis from getting even worse. Jerome Powell, a current governor, points out that “every single loan we made was repaid in full, on time, with interest.”

But whether the Fed should be able to offer this kind of financial support at all is a different question.

Choosing certain firms or markets to receive credit over others is inherently problematic, says a recent paper from the Federal Reserve Bank of Richmond. The prospect of easy money encourages firms to take excessive risks. And according to a paper by Alexander Mehra, then of Harvard Law School, the Fed “exceeded the bounds of its statutory authority” when it bought privately issued securities as well as making loans.

The Dodd-Frank Act, passed in 2010, was supposed to ensure that the Fed never again made such large, open-ended commitments. Congress told the Fed’s board to ensure that emergency lending propped up the financial system as a whole, not individual firms. However, say Ms Warren and Mr Vitter, the Fed has not implemented the new rules in the spirit of the law. The new bill proposes a number of Bagehot-like changes: to toughen up the definition of insolvency, such that the Fed lends only to viable firms; to offer any lending programme to many different institutions; and to ensure that when the Fed does lend, it charges punitive rates.

This battle is not the only one the Fed faces. On May 12th Richard Shelby, a Republican senator and chair of the Senate Banking Committee, introduced his own bill, which he hopes will rein in the Fed’s powers in different ways. It would increase the threshold at which a financial institution became “systemically important” (and thus subject to tougher regulatory scrutiny) from assets of $50 billion to $500 billion. Mr Shelby also wants to shake up the structure of the Federal Reserve System, including changing how the president of the New York Fed, which oversees big banks, is appointed.

They may have different complaints, but lots of America’s lawmakers agree that the Fed must change.

Can China Save Europe - and Vice Versa?

By: Erik Swarts
Tuesday, May 12, 2015
Over the past decade, while US pundits and politicians soapbox their Kabuki laments over Chinese trade policy and misgiven currency regimes, Europe has quietly emerged as China's largest trading partner and strategic counterbalance to perceived US economic hegemony.
Perceived, because just last fall the IMF recalculated its projection of China's 2014 GDP, returning the torch of "Worlds Largest Economy" - a handle China carried over 19 of the past 20 centuries.
Factoring in the GDP of the runner-up (EU), the composite scale between China and the EU accounts for roughly a third of the world's economic output.
As we look for China to continue to take the next steps in transitioning its maturing economy away from being driven by unsustainable construction and infrastructure growth to greater breadth of domestic consumption, Europe is well positioned to capture the lion share of trade spoils, with China also greatly benefiting from their deep financing relationship with its largest foreign investor base - Europe.
With trade flows between Europe and China reaching over $1 trillion in recent years, the immense commonality of their vested interests in one another has only grown, primarily at the expense of more traditional trade partners - namely, the US.
Below are a few highlights from a dated - but highly recommended, research note from Deutsche Bank (see Here), describing the burgeoning strategic economic relationship that exists between the EU and China - and which likely will strengthen over the coming years.
  • Trade in goods between China and Europe has almost doubled over the past decade, with Germany strongly positioned as China's largest EU trading partner; accounting for roughly half of EU exports and a third of EU imports.

  • Foreign direct investment (FDI) between the two economies has been disproportionate, with the EU emerging as the largest investor in China, while Chinese direct investment currently accounts for less than 1 percent of the EU's total inbound FDI. This investment asymmetry presents a large opportunity in Europe for Chinese capital, should further progress be made with a free trade agreement. Since 2011, Chinese investors have increased their FDI stock by more than four times within two years.

  • Symbiotic process manufacturing relationships between the EU and China has continued to evolve to benefit both economies. Intermediate goods that need to be processed further for final consumption composed approximately 60 percent of EU exports to China. Moreover, Europe is China's single biggest provider of foreign inputs for its export industry, as China sources roughly a third of the value-added used in its exports from abroad.

  • Europe is well positioned to benefit from the transition in the Chinese economy to greater domestic consumption, as consumption goods nearly doubled as a share of EU exports to China between 2007 and 2012. EU consumer goods have been supported by the demand of an increasingly affluent middle class in China, as many European car manufacturers realize China as their largest market.

  • Europe presents a significant opportunity for China with further adoption of the renminbi (RNB). Infrastructure built through major financial institutions, will make it possible to foresee RMB settlement increase to as much as 40% of EU-China bilateral trade by 2024 from less than 10% currently.
With concerns of the slowdown in China continuing to build with each passing week's diminishing data dumps, we remain focused on the bigger picture narrative unfolding - that of remaking China's system of governance to potentially afford more sustainable economic growth in the future, while titrating the colossal hybrid economy further from communism to capitalism.

In our opinion, the popular view by the policy wonks - that of a painful economic rebalancing at the foot of decades worth of breakneck growth and over-investment, largely ignores the capacity of the People's Bank of China (PBOC) to actively stimulate growth and mitigate liquidity concerns - through this inevitable slowdown, while continuing to develop greater interdependent economies of scale with their largest trading partner. The net effect - we believe, should go a long way towards smoothing this transition and shifting the world's balance of power further east.

Chinese President Xi Jinping has made the strategic partnership with Europe an early focus of his term, with Europe committing last year to bilateral talks on a free trade agreement with China. As trade disputes are often contentious and present real risks to further developing a common economic interest, the long-term benefits to both economies far outweigh whatever short-term political hurdles may emerge or are postured at the podium from tangential concerns. I.e. Germany may push Greece to the limits over a new debt deal, but ultimately will not risk a fracture in the fragile EU - as they clearly have the most to loose.

As both central banks move to aggressively loosen monetary policy, two overarching questions remain in the financial markets:
1. Will a successful transition in China continue to build out the foundation for a lasting bull market in equities, and; 
2. Will it also provide Europe with another lifeline away from the deflationary conditions still swirling around the old world?

Although we agree that in times of conspicuous central bank influence and intervention, the correlation between the relative health of a country's economy and their respective markets is increasingly difficult to discern, for both Europe and China today - their equity markets should play a leading role in foreshadowing the character of the next chapter of this massively influential bilateral relationship.

Despite growing skepticism by equity analysts and pundits of the recent surge in Chinese stocks over the past year, we continue to like their prospects and view its equity markets as a leveraged position on China successfully engendering greater consumer consumption, as stocks provide a broad wealth transmission mechanism to a growing percentage of the population.

Along these lines, we've approached the August 1982 consolidation breakout in the S&P 500 as a prospective roadmap for a sustained move higher in the Shanghai Composite index. To a large extent, the structure and momentum congruences have played out in the SSEC, with the index even exceeding our own expectations and doubling over the past year as a violent breakout rally confounds both the policy and equity bears. From our perspective, the transition in China is well on its way to maintaining their exceptional legacy of surpassing presumptions over the past four decades. Of course, not withstanding the considerable set-backs ushered in through Marxism in the mid-20th century, this is par for the course in China over the last few millenniums.

1980-1983 SPX versus 2008-2015 Shanghai Composite
Larger Image

Turning to Europe, while the German's clearly have the most significant inroads through trade in China, we suspect the more fragile economies - such as Spain, would also greatly benefit from a rising tide, if China successfully avoids a hard landing and stimulates greater domestic consumption.

Over the next year, Europe's plight is tightly tied to whether recent deflationary conditions are in fact transitory or more pernicious in nature. While it's too early to declare a new trend, after falling for four consecutive months, euro-zone consumer prices remained flat in April - easing deflationary concerns.

As described in previous notes, the higher beta equity indexes in southern Europe - such as Spain's IBEX, continue to walk the equity high wire act of where the previous two major perennial asset declines over the past century have cyclically turned down. What the ECB is attempting to break with its recent adoption of QE, is the policy missteps that were compounded by each central bank in their respective cycles; both by the Fed in late 1936 into early 1937 and the BOJ in 1997. With hindsight 20/20, the powers that be worsened economic conditions by tightening monetary and fiscal policy, where they very likely should have eased.

The Long Tails of Deflation
Larger Image

With China and Europe both aggressively moving to provide more accommodative monetary policies - while further developing crucial and strategic economic synergies, the Ancient and Old Worlds look to pen a new and more prosperous chapter.

Although the economic data in China continues to sour, we expect the recent surge in Chinese consumer confidence on the back of a significant equity market rally, will soon translate into improving domestic consumption - buttressing a positive feedback loop to its largest trade partner.

Assuming Germany ends their own Kabuki theater soon, it would appear that Europe's more fragile economies may now have a fighting chance of breaking the glide path of the major asset deflations of the past century.

miércoles, mayo 20, 2015




The futility of coca eradication

While cocaine remains illegal, Latin America has to find better ways to fight the mafias it sustains

May 16th 2015

SELDOM can such a laborious public policy have been devoted to such a futile end. For the past 15 years or so Colombia has used crop-dusting planes operated by American contractors to spray around 130,000 hectares (321,000 acres) a year of its land with glyphosate, a powerful weedkiller, in an attempt to wipe out the coca crop that provides the raw material for cocaine.

Put all that land together, and it amounts to an area almost as big as the state of New Jersey.

The defenders of spraying, who include the drug warriors in Washington, DC, claim that it has played a vital role in cutting coca cultivation in Colombia to a third of its peak of the late 1990s, and with it the output of cocaine (though by less). But studies have linked the spraying to increased rates of skin and respiratory diseases, and of miscarriages among farmers’ families.

In March a research arm of the World Health Organisation reclassified glyphosate as “probably carcinogenic”. The finding is rejected by Monsanto, its manufacturer, and some independent scientists. But it prompted Juan Manuel Santos, Colombia’s president, to ask his officials this week to halt aerial spraying by October and find an alternative.

That will not be easy. In Peru the government conducts manual eradication, sending workers to yank out coca plants one by one. But Colombia’s countryside is littered with landmines planted by guerrillas who rely on drug revenue, making manual eradication dangerous. To try to preserve the spraying programme American officials leaked a report that coca planting rose by 40% in Colombia last year. That happened in part because FARC guerrillas are seeking to raise cash ahead of a possible peace agreement.

Yet Mr Santos is right not to be swayed by such scaremongering. Few public policies in Latin America are as ineffective as coca eradication. Daniel Mejía of Bogotá’s University of the Andes has found that to be sure of wiping out just one hectare of coca 30 must be sprayed. Manual eradication does not work much better. Nowadays coca farmers replant straight away. Latin Americans may be generally poor at business innovation but coca is an exception: in Peru farmers have adopted high-density planting and drip irrigation to raise productivity. Some have doubled their harvests, to four a year. Rather than destroy the crop, eradication just pushes it into new areas. Total cocaine output in the Andes has remained abundant enough to supply the world without anything more than occasional price spikes.

So what is to be done? Many, including this newspaper, believe that legalising cocaine is the least bad option. Such is the fatigue with the drug war in the Americas that some presidents, including Mr Santos, have begun to muse about that. But legalisation remains decades away.

Meanwhile, Latin American democracies suffer the lethal, corrosive power of the drug gangs. That was on display on May 1st in Jalisco, in Mexico, where a newish mob answered a government crackdown by shooting down a helicopter with a rocket-launcher, killing six soldiers, and setting up roadblocks across the state. Peruvians are becoming used to gangland killings in Lima; in a recent poll 72% said Peru is “on the way” to becoming a “narco-state”. That is an exaggeration, but the drug trade has penetrated politics and the courts as well as the police.

No state can ignore the kind of challenge posed in Jalisco. Mexican officials stress that dismantling drug mobs is only part of a broader strategy that includes strengthening the police and crime prevention in vulnerable communities. But they are struggling to turn those intentions into reality.

The same applies farther south. Peruvian officials talk up their coca eradication. But the state barely disturbs organised crime. Peru is now the world’s biggest source of cocaine and supplier of counterfeit money, and a rising money-laundering centre. Yet the government seizes less than 10% of estimated cocaine output and few of the chemicals used in its manufacture, and almost nobody has been charged with money laundering.

Colombia does much better at interdicting the cocaine trade, frequently seizing up to half of estimated production. Bello’s suggestion to Mr Santos would be to forget about eradication altogether. After all, harvested coca accounts for less than 10% of the value of cocaine exports (and much less of retail value in foreign markets). Forget, too, about consumers and small-scale dealers.

Instead, redouble efforts to go after the cocaine laboratories, the chemical suppliers, the traffickers and the money launderers, with better intelligence and better policing. And continue to argue for legalisation.


Past Time to Reform Bretton Woods


MAY 16, 2015

The reluctance of American and European officials to give developing nations a greater role in the International Monetary Fund and the World Bank risks making those institutions less relevant and effective than they could be.
The two trace their founding to 1944, when officials from the United States, Britain and other countries met in Bretton Woods, N.H., to restructure the global economic system. At the time, America held most of the economic cards. World War II was devastating Europe and Japan, a brutal civil war in China would soon resume, and India was still a British colony.
The global economy has changed greatly since then, but who calls the shots at the two institutions has not. Both are based in Washington.
The United States and European countries collectively are the largest shareholders, and they appoint the top executives. Despite their rapid growth, China, India and other developing countries have much smaller votes than their relative size in the global economy.
For many years, officials in developing countries quietly grumbled about Western control of these two organizations, and for good reason. The I.M.F. lends to financially troubled nations, and the World Bank finances development projects in poor countries. Why shouldn’t developing countries have a bigger say? Nevertheless, they did not dare to openly challenge the status quo.
Credit Associated Press       
That may be changing. China has decided that it will wait no longer for a bigger role on the global economic stage. Recently, it said it would create the Asian Infrastructure Investment Bank, a rival to the World Bank that has already attracted many European and Asian countries as members. And last year, it enlisted Brazil, India, Russia and South Africa to create the New Development Bank.
Together, the two China-led banks will have about $150 billion in capital, an amount that is roughly 70 percent of the World Bank’s $223 billion. China has also lent tens of billions of dollars to countries in Africa, Latin America and Asia through bilateral loans.
Some Western leaders, including many Europeans and the president of the World Bank, have said the West should welcome these new Chinese banks and invest alongside them. One reason is to make sure they operate at the same high standards as the I.M.F. and the World Bank, though Western leaders should have no illusions about their influence, since China intends to dominate both organizations.
The new banks pose a challenge to the West to modernize the old institutions. Even though the I.M.F. has too often pushed countries to adopt destructive austerity policies, and the World Bank has been slow to adapt to the needs of fast-growing developing countries, they remain the best tools the world has to address economic crises and finance development.
To its credit, the Obama administration tried in 2010 to increase the representation of developing countries in both institutions. For example, China’s voting share on the fund’s board would have increased to 6 percent, which is about half as big as China’s share of the global economy, though still considerably higher than the country’s current 3.8 percent share.
But Republicans in Congress have refused to ratify changes to the I.M.F., which would have also increased its capital. They signaled that they would only vote for I.M.F. reforms if they got something in return from the administration, like changes in the 2010 health care reform law.
But there is more that the administration and European officials can do on their own without waiting for Congress. For example, they can declare that they will end the anachronistic tradition of appointing a European to head the fund and an American to head the bank. They should simply pick the best candidates for those jobs regardless of nationality.
If the West does not make more space for developing countries in existing financial institutions, the result will probably be a more fragmented global economy.

US Farmers In "Dire Straits": JPM Warns Of Imminent Liquidity Crunch

Tyler Durden

05/15/2015 14:35 -0400

Despite the government's 'advice' to young debt-laden students, the tragedy of the American farmer continues with worryingly pessimistic views on the future of the industry. With farmland prices falling for the first time in almost 30 years, credit conditions are weakening dramatically and the Kansas City Fed warns that persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity, and JPMorgan concludes, the industry is currently in dire straits with the potential for a liquidity crunch for farmers into 2016.

Not so long ago, US farmland - whose prices were until recently rising exponentially - was considered by many to be the next asset bubble. Then, almost overnight, the fairytale ended, and as reported in February, US farmland saw its first price drop since 1986.

Looking ahead, very few bankers expect price appreciation and more than a quarter of survey respondents expect cropland values to decline further in the next three months.
And now, The Kansas City Fed warns that Agricultural credit conditions are worsening rapidly...

Credit conditions in the Federal Reserve’s Tenth District weakened as farm income declined further in the first quarter of 2015. Persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity. Funds were available to meet historically high loan demand, but loan repayment rates dropped considerably. Although profit margins in the livestock industry have remained stable, most bankers do not expect farm income or credit conditions to improve in the next three months.

On a more regional level, farm income declined in all District states except Oklahoma. In Oklahoma, farm income has steadily improved over the last three years due to revenue from mineral rights and cattle production but remained unchanged in the first quarter of 2015

Strains on the farm economy have begun to affect the overall economic outlook in some states. Through 2014, growth in per capita personal income was notably smaller in states most heavily concentrated in crop production.
Ninety-four percent of survey respondents expect farm income to remain the same or decline further in the next three months. Additional declines in farm income could continue to create economic challenges in states heavily dependent on crops.
Loan Demand is surging... (to replace income's collapse or roll old debt)

The continued decline in farm income boosted demand for new loans as well as renewals and extensions on existing loans. During years of historically high farm income, some farmers were able to self-finance. However, as working capital has declined due to high production costs and lower crop revenues, more producers have needed external financing to pay for operating expenses and capital purchases.  
Loan demand was also supported by livestock loans on feeder cattle, which still command historically high prices. In fact, demand for non-real estate farm loans increased across all District states in the first quarter and is expected to remain elevated over the next three months.
If expectations are met, the survey measure of loan demand would be the highest since the survey began in 1980.
And paying back loans is slumping...

Alongside reduced farm income and higher loan demand, loan repayment rates have declined significantly.
Bankers also expressed concerns over increased debt-to-asset ratios, especially for younger farmers with high borrowing needs.
As The Kansas City Fed concludes...
Low crop prices placed added stress on net farm incomes and contributed to weaker credit conditions in the first quarter. As farm incomes fell, cropland values moderated and more producers depended on financing to cover operating expenses.
Sufficient funds were available to meet increases in loan demand, but declines in repayment rates as well as slight increases in carry-over debt, collateral requirements and loan renewals and extensions suggest that credit quality may become more of a concern moving forward.

*  *  *

All of which is summed up ominously by JPMorgan, writing in a downgrade not for Deere, that...

We recently spent some time in the Midwest meeting various agriculture industry participants including dealers, farmers and industry experts. We believe it was clear from what we heard that the industry is currently in dire straits with the potential for a liquidity crunch for farmers into 2016.
So that is why the government is pushing the young debt-laden student serfs into farming... to 'create' some demand...

The Worst Sovereign Debt Crisis, Ever …

by Larry Edelson

Wednesday, May 13, 2015

The largest and worst sovereign debt crisis, ever, is rapidly approaching.

Greece is now at its tipping point. As I pen this issue, the government of Greece is desperately trying to stave off default on a 750 million euro repayment ($835.7 million) to the International Monetary Fund (IMF).

Whether Greece gets concessions or not, won't matter. Because come June, Greece faces another 2.6 billion euro repayment (US $2.9 billion).

And come July and August, it will face a whopping 8.7 billion euro ($9.69 billion) repayment — 7 billion ($7.8 billion) of which is owed to the European Central Bank (ECB).


This summer, Greece needs to come up with 8.7 billion euros for the ECB.
There is simply no way Greece can pay off that debt. It doesn't have the money. Just to make a minor 200 million euro payment last week, the Greek government had to call in all excess cash from regional banks, leaving government employees and pensioners waiting for their checks.

Nor can Greece rollover the debt without paying excessive interest rates — near 12 percent for 10-year money — bankrupting the country even further.

Meanwhile, the IMF and the ECB are ramming more and more austerity measures down the throats of the Greek people — all in the name of making sure bondholders and authorities get repaid.

I ask you, is this what the world has come to? Sacrificing the lives of ordinary people to make sure creditors get repaid?

Already in Greece, a recent study shows that the suicide rate has soared 36 percent during the crisis. Not surprising considering the stress the Greek people are under which, in turn, has forced unemployment to 25.4 percent and youth unemployment stands at a whopping 50.1 percent.

If you think Greece is to blame, think again. Sure, like any country, Greece has its tax cheats and black market economy.

But in 2001, Greece was essentially held at gunpoint to join the euro, through forced financings at attractive low interest rates.

And now that it has having trouble repaying that debt, Greece is being held at gunpoint again.

Thing is, it's not just Greece that is about to reach the tipping point. all of Europe is about to go under. You can see the most indebted of them — compared to their GDP — in this chart here.
While Greece is certainly the worst, Italy isn't far behind, or is Portugal.

And of those European countries that have debt levels just above or below the 100 percent of GDP level, don't let anyone kid you. Not one of these countries is capable of servicing its debt, not even France.

Lest you think a sovereign debt crisis is confined to Europe, think again. Europe's sovereign debt crisis is merely the starting point.

Japan's debt stands at more than 24 percent of GDP, nearly $12 trillion.

And worst of all is, yes, none other than the United States, where Washington is in hock — not for just its $18 trillion national debt — but for more than $215 trillion — the worst and biggest debt in the history of civilization at nearly 12 times our GDP.

Put another way, if you took every penny of what our country produces in a single year, it would take 12 years to pay off that debt.

Put yet another way, it would require each and every American to give up their earnings and production, essentially go bankrupt, for 12 straight years.

And that's not even counting the interest expense on the debt, which is sure to rise in the months and years ahead.

A sovereign debt crisis of unprecedented proportions? You bet it is. We all knew it was lurking out there, and now, it's here. Greece is merely the starting, tipping point.

One of the most important aspects of this sovereign debt crisis as it unfolds over the next several years will be how they impact the financial markets.
Understand that, and you will survive.

Thing is, very few indeed will understand what will really happen. So let me summarize it now.

First, and most obvious, government bond markets are headed into the abyss. Don't touch sovereign debt with a 100-foot pole. Do so and you might as well commit financial suicide.

Second, and far less obvious, gold and commodities generally: At the beginning stage of the crisis, now, commodities, including precious metals, will remain caught in deflation.

Why? It's actually rather simple. In the beginning phase of a sovereign debt crisis, investors of all sorts seek the safe haven of hoarding cash. And since the U.S. dollar is still the world's reserve currency, that's bullish for the dollar, and bearish for commodities.

But later in the crisis, that thinking will invert, and ...

Third, once commodities reach their lows in a panic sell off, they will take flight to the upside, in a massive new bull market, one which will ultimately see gold hit better than $5,000 an ounce.

Why? Because later in the crisis it will become apparent that it is not just the government of Europe that is going under, but also the governments of Japan and the United States.

And when that recognition comes, it will reignite a bull market in commodities and all sorts of tangible assets. In addition ...

Fourth, most will expect U.S. equity markets to crash. But that's dead wrong. The history of sovereign debt crises is that stock markets perform exceptionally well — when government, the public sector, not the private sector, is going bust.

Why? Because no one would dare lend money to government. Because the U.S. stock markets represent the safest, deepest, most liquid bastion of capitalism on the planet. And because our biggest companies, very simply put, will outlast our government.

So get ready. The worst sovereign debt crisis, ever, is right around the corner.