The gnomes of Zurich are silent no longer

Gideon Rachman

Past actions are catching up with some Swiss banking clients
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©Daniel Pudles
 
 
What is the link between the following political scandals? The Petrobras case in Brazil, the 1MDB affair in Malaysia, the unravelling of Fifa, the prosecution of a French minister and a party funding row in Spain. The answer is Swiss bank accounts.
 
Customers used to be able to rely on the legendary discretion of the “gnomes of Zurich” but Swiss bank accounts are no longer as secret as many clients once assumed. These days, if a prosecutor in another country asks the Swiss for co-operation in a corruption probe, they will get it. As a result, powerful people who might have hidden money in Switzerland are increasingly vulnerable to investigation.
 
The biggest changes in Switzerland’s banking culture followed the huge fines that the US levied on UBS, a Swiss bank, in 2009, for enabling Americans to evade tax. Further US prosecutions of Swiss banks followed, as well as a tightening of American tax law. The EU also began to increase pressure on the Swiss.
 
Partly as a result, Switzerland has made decisive moves away from its traditional culture of bank secrecy. The consequences are playing out worldwide.

The case of Jérôme Cahuzac, the former French budget minister who went to on trial for tax fraud in Paris last month, illustrates the pattern. Ironically, Mr Cahuzac had been asked to lead a campaign against tax evasion by President François Hollande. In late 2012, however, he was accused in the French media of having kept his own secret bank account in Switzerland. Mr Cahuzac vehemently denied the accusations for months, before suddenly resigning in April 2013. The trigger, it seems, was the news that the Swiss were co-operating with French prosecutors.
 
The Cahuzac case illustrates the way in which past actions can catch up with Swiss banking clients. Some years before his Swiss account came to light, Mr Cahuzac had closed it and transferred his funds to Singapore. But banks keep records, so closing an account does not always close a case.

Mr Cahuzac is just one individual but in Brazil large parts of the business and political elite are threatened by revelations emerging from Switzerland. A bribery scandal involving Petrobras, the national oil company, is revealing illicit payments and much of the information is coming from Swiss prosecutors.

Last month, the Swiss arrested Fernando Migliaccio da Silva, a Brazilian businessman and former executive of the Odebrecht construction company, as he attempted to close an account in Geneva. Mr da Silva was suspected of paying bribes to Petrobras directors, through accounts in Switzerland. Marcelo Odebrecht, the billionaire former CEO of the company, has just been jailed for 19 years for his role in the Petrobras scandal.

Other prominent Brazilians have also been caught out by their Swiss connections. João Santana, the former campaign manager for President Dilma Rousseff, has been arrested and accused of illegally depositing money in Swiss bank accounts. Eduardo Cunha, the speaker of Brazil’s lower house of parliament, faces charges of hiding millions in Petrobras-related bribes in Switzerland.

The Petrobras case shows that the Swiss authorities are prepared to take the initiative in revealing potential corruption. They have also played an important role in keeping alive a politically explosive corruption investigation in Malaysia. Najib Razak, the prime minister of Malaysia, has always denied allegations that a payment of $681m that made its way into his personal bank account, via a Swiss bank, had anything to do with an official Malaysian development fund, known as 1MDB. The Malaysian authorities have cleared Mr Najib and 1MDB has also denied wrongdoing. In late January, however, allegations about corruption in Malaysia were given fresh impetus when the Swiss announced that their own investigation into 1MDB had revealed “serious indications” that $4bn had originated from Malaysian state concerns.
 
Fifa, the governing body of world football, which is already threatened by US prosecutors, also has to worry about Swiss money-laundering investigations. The Swiss are looking into transactions that might be related to bidding processes for the 2018 and 2022 World Cups.

Investigations relating to Swiss banks have also had a major effect on Spanish and Greek politics.

One of the reasons that Mariano Rajoy, the Spanish prime minister, failed to secure a majority in elections in December was the backwash from a scandal: in 2013 it was revealed that Luis Bárcenas, the former treasurer of Mr Rajoy’s People’s Party, had accumulated millions of euros in Swiss bank accounts, which he had allegedly used to make illicit payments in Spain.

The financial crisis in Greece meanwhile has shone a spotlight on widespread tax evasion by that country’s elite. A list of more than 2,000 Greeks with accounts at the Geneva branch of HSBC became known as the “Lagarde list”, after Christine Lagarde, who, when finance minister of France, handed it to Greek authorities in 2010.

The Lagarde list had been stolen by a disgruntled employee. The more recent revelations to come out of Switzerland have emerged through official channels. In 2018, Switzerland will move to automatic exchange of information with other global tax authorities. There may well be further scandals to come.


New Rules for the Monetary Game

Raghuram Rajan

builder


NEW DELHI – Our world is facing an increasingly dangerous situation. Both advanced and emerging economies need to grow in order to ease domestic political tensions. And yet few are.
 
If governments respond by enacting policies that divert growth from other countries, this “beggar my neighbor” tactic will simply foster instability elsewhere. What we need, therefore, are new rules of the game.
 
Why is it proving to be so hard to restore pre-Great Recession growth rates? The immediate answer is that the boom preceding the global financial crisis of 2008 left advanced economies with an overhang of growth-inhibiting debt. While the remedy may be to write down debt to revive demand, it is uncertain whether write-downs are politically feasible or the resulting demand sustainable. Moreover, structural factors like population aging and low productivity growth – which were previously masked by debt-fueled demand – may be hampering the recovery.
 
Politicians know that structural reforms – to increase competition, foster innovation, and drive institutional change – are the way to tackle structural impediments to growth. But they know that, while the pain from reform is immediate, gains are typically delayed and their beneficiaries uncertain. As Jean-Claude Juncker, then Luxembourg’s prime minister, said at the height of the euro crisis, “We all know what to do; we just don't know how to get re-elected after we’ve done it!”
 
Central bankers face a different problem: inflation that is flirting with the lower bound of their mandate. With interest rates already very low, advanced economies’ central bankers know that they must go beyond ordinary monetary policy – or lose credibility on inflation. They feel that they cannot claim to be out of tools. If all else fails, there is always the “helicopter drop,” whereby the central bank prints money and sprays it on the streets to create inflation (more prosaically, it sends a check to every citizen, perhaps more to the poor, who are likelier to spend it). But they can also employ a range of other unconventional tools more aggressively, from asset purchases (so-called quantitative easing) to negative interest rates.
 
But do such policies achieve their goal of strengthening demand and growth? Monetary policy works by influencing public expectations. If an ever more aggressive policy convinces the public that calamity is around the corner, households may save rather than spend. That tendency will be even greater if the public senses that the consequences (distorted asset prices, high government debt, etc.) eventually must be reversed.
 
Conversely, if people were convinced that policies would never change, they might splurge again on assets and take on excessive debt, helping the central bank achieve its objectives in the short run. But policy inevitably changes, and the shifts in asset prices would create enormous dislocation when it does.
 
Beyond the domestic impacts, all monetary policies have external “spillover” effects. In normal circumstances, if a country reduces domestic interest rates to boost domestic consumption and investment, its exchange rate depreciates, too, helping exports.
 
Today’s circumstances, however, are not normal. Domestic demand may not respond to unconventional policy. Moreover, facing distorted domestic bond prices stemming from unconventional policy, pension funds and insurance companies may look to buy them in less distorted markets abroad. Such a search for yield will depreciate the exchange rate further – and increase the risk of competitive devaluations that leave no country better off.
 
As matters stand, central banks in developed countries find all sorts of ways to justify their policies, without acknowledging the unmentionable – that the exchange rate may be the primary channel of transmission. If so, what we need are monetary rules that prevent a central bank’s domestic mandate from trumping a country’s international responsibility.
 
To use a traffic analogy, policies with few adverse spillovers should be rated “green”; those that should be used temporarily could be rated “orange”; and policies that should be avoided at all times would be “red.”
 
If a policy has positive effects on both home and foreign countries, it would definitely be green.

A policy could also be green if it jump-starts the home economy with only temporary negative spillovers for the foreign economy (the policy will still be good for the foreign economy by eventually boosting the home economy’s demand for imports).
 
An example of a red policy would be when unconventional monetary policies do little to boost a country’s domestic demand – but lead to large capital outflows that provoke asset-price bubbles in emerging markets.
 
There will be plenty of gray areas (or orange, to stick to the analogy). A policy that has large positive effects for a big economy might have small negative effects for the rest of the world and yet still be positive overall for global welfare. Such a policy would be permissible for some time, but not on a sustained basis.
 
We are far from having clear agreement on the color of policies today, even with the best data, models, and empirical work. So we must begin a discussion. We could start with background papers from eminent academics and move on to multilateral institutions such as the International Monetary Fund and the G-20. There will be a lot of fuzziness initially, but discussion will lead in time to better models and data – and will push policymakers to stay out of the clearly red.
 
Arguably, what I have in mind will eventually require a new international agreement along the lines of Bretton Woods, and some reinterpretation of the mandates of internationally influential central banks. But we already have a basis for discussion. The IMF’s Article IV states: “In particular, each member shall … avoid manipulating exchange rates or the international monetary system in order to prevent effective balance-of-payments adjustment or to gain unfair competitive advantage over other members…”
 
Setting the rules will take time. But the international community has a choice. We can pretend all is well with the global monetary non-system and hope that nothing goes spectacularly wrong. Or we can start building a system fit for the integrated world of the twenty-first century.
 
 
This article is based on work with Dr. Prachi Mishra at the Reserve Bank of India.


Fury and the AfD

Inside the Revolt against Angela Merkel
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The success of the right-wing populist party AfD in recent state elections has shaken Germany. It is the expression of growing hatred of the elite among an expanding share of the population. Much of their anger is directed at Angela Merkel. By SPIEGEL Staff


Why do people vote for Alternative for Germany (AfD), the right-wing, anti-immigration party that has stormed onto the German political stage? It's an appropriate question for Harald Schäfer, the operator of a hotel in Mannheim who grew up in a Catholic family and studied economics. Schäfer is the kind of person one refers to as upright; he used to count among his city's dignitaries. From the moment he could vote, Schäfer always cast his ballot for the Christian Democratic Union (CDU), which in recent years meant that he was a supporter of Chancellor Angela Merkel.

But a week ago Sunday, in the state parliament election in his home state of Baden-Württemberg -- one of a trio of important state votes that took place last weekend -- Schäfer did not choose the CDU. Rather, he opted for the people who shout "Merkel must go!" and "our leaders are lying to us!" on the market squares. He chose the party whose leaders have spoken of the need to shoot at refugees to stop them from crossing the border into Germany. He opted for those who reflect on whether Africans have genetically pre-programmed reproductive behaviors that are different from ours; for those who have suggested that the chancellor flee to Chile before public anger drives her out of the Chancellery.

Schäfer doesn't want refugees to be shot at. Indeed, he disagrees with most of what the AfD espouses. Helping others is important to him, he says, and he goes to church every Sunday. He has even sent out a chain mail calling for solidarity with the people in Syria.

So what happened?

"It's not witchcraft," Schäfer says. "I realized that the CDU has increasingly moved toward the leftist mainstream." He then lists all of the things that the CDU has done wrong in recent years: abandoning nuclear power, introducing a minimum wage, same-sex marriage. With each reform, Schäfer drifted a little further from his chancellor -- until the already delicate thread broke completely when the refugee crisis began.

Schäfer and the 1.3 million voters who cast their ballots for AfD sent a shockwave through the country last Sunday. Starting almost from scratch, AfD landed multiple delegates in three state parliaments, including two western German states. The party won 13 percent in Rhineland-Palatinate, 15 percent in Baden-Württemberg and fully 24 percent in Saxony-Anhalt. Fifteen AfD candidates were elected directly in Saxony-Anhalt and two others in Baden-Württemberg.

No new party in Germany has ever been as successful so soon after its founding -- not even the Greens, which provided the first significant jolt to Germany's political party system in the 1980s. The Alternative for Germany is suddenly a force to be reckoned with. The party has thrown open the door to a new political era in the country.

A Revolt against Merkel

There are many explanations for AfD's success. But at its core, the rise of the AfD is the story of strife and of growing alienation between the chancellor and a portion of the German electorate. The triumph of the AfD is nothing less than a revolt against Angela Merkel.

It is a rebellion targeting a CDU leader who has continually led her party to the left, stripping many conservatives of a political home. It also targets a chancellor whose open borders policy in the refugee crisis may be attractive to left-leaning Germans, but is one which strikes more conservative voters as high-handed. Hotelier Schäfer, for his part, thinks it is naive to believe that so many Muslim refugees can be integrated into German society. "We are endangering our freedom when we take in too many people who don't want this freedom," he says.

Above all, however, the revolt is aimed at the chancellor as a symbol of the country's elite -- an elite which has supposedly lost sight of the people and their concerns. For many in Germany, Merkel has become the personification of a "ruling class" -- a class that not only includes the CDU, the center-left Social Democrats and the Greens, but also business leaders, union leaders and the media. The "powers-that-be" now includes anyone who has greater abilities, greater wealth or a louder voice than one's self.

The fight against the elites is the core of the AfD message, an approach that relies more on emotion than on a particular view of the world. In a poll conducted by TNS Forschung on behalf of SPIEGEL, 88 percent of AfD supporters agreed with the following statement: "The political powers-that-be do what they want, regardless. My opinion doesn't count." Among supporters of other parties, agreement with the statement was far lower.

As the head of a so-called "Grand Coalition," which pairs Merkel's conservatives with the center-left Social Democrats, and as a chancellor who has spent years attempting to fashion her party as a repository for virtually all political viewpoints, Merkel is the very epitome of the "powers-that-be."

At AfD events, posters are held up depicting the chancellor with vampire teeth growing out of her mouth. When talk turns to the cowardly figures with whom the people will soon settle scores, the reference is always to Merkel. Within the AfD, she is called a "traitor to the people."

Merkel is also sometimes referred to as "IM Erika," her alleged alias as a Stasi informant in former East Germany. The story is a fabrication, but the mood is such that the right-wing puts nothing past Merkel. She is blamed for everything: globalization, capitalism, Islamization, the European Union and the programs aired by the public broadcasters ARD and ZDF.

The Depth of Alienation

Vexing, however, is the fact that Merkel has not understood the depth of this alienation, as her closest confidants proved in the wake of the March 13 election. Defense Minister Ursula von der Leyen, who has, at times, been seen as a possible heir to Merkel's political throne atop the CDU, noted blithely that 80 percent of voters cast their ballots for parties that support the chancellor's refugee policies.

Of course there is still support for Merkel's approach in the refugee crisis. Green Party candidate Winfried Kretschmann, who has made no secret of his desire to help refugees, landed an unprecedented victory for his party in the Baden-Württemberg election. Malu Dreyer, the Social Democrat candidate in Rhineland-Palatinate and likewise a backer of Merkel's refugee policies, was re-elected as the state's governor. The vast majority of Germans continue to feel adequately represented in their country's democracy and hold no grudge against Merkel.

And yet the threat is nonetheless vast. The new AfD milieu, according to election analyses, isn't just larger; it is also more multi-faceted than had been assumed. The party is more than just a collection of Islamophobes. AfD managed to mobilize tens of thousands of first-time voters in addition to poaching voters from the CDU, SPD and the Left Party. Many of them didn't vote for AfD just because of the refugee crisis, but because of a general feeling of bitterness that has been growing for years.

Germany is experiencing what sociologist Theodor Geiger described in the 1930s as a "panic of the middle class." A close look at today's society reveals the "fear of imminent proletarianization" that Geiger described in his works. He writes of a diffuse feeling of having no future and no opportunities for improving one's lot: the feeling of not being able to realize one's own possibilities.

That doesn't mean that AfD supporters are financially insecure. In the SPIEGEL survey, most of them even described their economic situation as good. But they feel a disconnect between the modern world's promise of endless opportunity and their own feeling of constantly reaching the limits of what is available to them.

It is a feeling that has led to the creation of new, angry, anti-elitist movements across the Western world. It is these people who throw their support behind Donald Trump in the United States, Viktor Orbán in Hungary and Marine Le Pen in France. Many of those who support such populists can no longer be reached by rational arguments. They follow their gut rather than their intellect. And that's what makes them so dangerous.

Building Dissatisfaction

With such an emotional undercurrent, all that was needed to transform the silent and embittered into vocal demonstrators and AfD voters was a concrete provocation. In Germany, it came in the form of the refugee crisis, which served as a catalyst for all the dissatisfaction that had been building up in recent years.

It is true that many AfD voters seem uncomfortable with modern times and have a certain yearning for the past and that many of their utterances exude the kind of nostalgia that one encounters at high school reunions. "Remember how it used to be? Politicians used to have personalities, you could still get a decent loaf of bread and women didn't have to act chagrined for staying home to take care of the kids." But the yearning for yesteryear is not enough to explain the raw, often brutal emotion that characterizes this party. Nostalgia is not the kind of emotion that motivates thousands of people to take to the streets and make their way to the ballot box.

The ideological roots of the AfD reach much deeper, back to the decades of at-times violent resistance in the 1960s and '70s that ultimately gave rise to the Green Party. Being anti-establishment, opposed to the ruling class and "the system," is the kind of message that leads first to political action and then to outright revolt.

"As different as their voters are, they all agree that there is something fundamentally wrong with our political system," says sociologist Heinz Bude of the University of Kassel, who has studied the new party. "This hostility to the system, which used to be primarily a left-wing phenomenon, is now a key part of the AfD."

For AfD followers, who are characterized by their yearning for a simpler world, Angela Merkel is the embodiment of the system. She is the target of the rebellion.

On the Monday following the election, the chancellor made an appearance at CDU headquarters in Berlin -- and acted as though nothing had happened. There is "both light and shadows," she said. The rise of the AfD is certainly not nice, she said, "but it is not an existential problem." She was flanked by Julia Klöckner of Rhineland-Palatinate and Guido Wolf of Baden-Württemberg, both of whom had lost their respective elections -- and they looked as though they couldn't believe what they were hearing. They kept glancing at their boss with skeptical looks on their faces.

In the spring of 2005, then-Chancellor Gerhard Schröder called for early elections after his Social Democrats lost the governorship in North Rhine-Westphalia, traditionally a bastion of support for the SPD. Now, the CDU has plunged to just 27 percent in Baden-Württemberg, an appalling result for the party in the state -- yet Merkel is acting as though her party has suffered but a minor setback in a meaningless provincial vote.

Horror and Resignation

Shortly before her comments at CDU headquarters, Merkel had met with party leaders and made it clear that she sees no reason to rethink her course. According to people familiar with the meeting, her words were met with a combination of horror and resignation. When one member of the party leadership committee demanded that the party at least adopt a new communication strategy, Merkel didn't even find it necessary to respond. Most meeting participants, in fact, found her to be just as aloof as furious AfD supporters portray her to be.

It isn't without irony that the revolt against elites and the establishment is aimed at Merkel.

When she joined the CDU in 1990, she was anything but a member of the elite. Rather, she was a divorced physicist from East Germany who had spent several years living in a decrepit apartment in the Berlin neighborhood of Prenzlauer Berg together with a chemist to whom she was not married. In the early 1990s, her floor-length skirts made her look more like a Green Party intern who had gotten lost walking through the halls of parliament.

When Merkel first sought to become the chancellor candidate for the German center-right, conservative leaders from the West made it clear that she didn't belong to the establishment. Officials with the Christian Social Union (CSU) -- the Bavarian sister party to the CDU -- were open about the fact that they didn't trust Merkel to take on the country's most important political office.

Paradoxically, it is Merkel's distance to her party's past elites that helped plant the seed for the current hate directed at her. When Merkel took over the CDU, she took a dispassionate view of the doctrines and rites that defined her party. She cleaned out the CDU's political platform the way others dispose of worn socks from their sock drawer.

Old CDU traditions were of secondary concern for the new party chairwoman; she was more focused on expanding her party's electorate. Instead of seeing politics as the great battle over the shape of society and grand ideas, she reduced it to strategy and the consolidation of power. She moved her party so far to the middle that it soon became difficult to distinguish it from the Social Democrats.

She didn't wrestle with the SPD over political positions, she simply copied theirs -- and took over popular elements of the Green Party platform as well. Under her leadership, the CDU became a kind of Germany Party that leaned neither right nor left. Rather, it was "alternativlos," as Merkel liked to say -- there was no alternative.

There is no other word that better describes the early years of Merkel's stint in the Chancellery. Merkel seldom expended much effort in justifying or explaining her decisions. Rather, she presented them as the unavoidable result of forces beyond her control.

A Marionette

But by presenting her policies in such a way, she also fomented the emotions of those who saw Merkel as a marionette controlled by dark powers, whether it was the European Central Bank, Wall Street or Brussels bureaucracy.

Then, the refugee crisis arrived. No German chancellor prior to Merkel had held that it was not in the power of a nation-state to determine who could come into the country and who could not.

But even more than her decision to allow refugees into the country, it was her justification for doing so that enraged her opponents.

Merkel, who was known for her sober and matter-of-fact speaking style, suddenly began stressing morality. Merely helping people in need wasn't enough for her. She argued it was a "moral imperative" to open the borders. When resistance first began building to her approach, Merkel said she refused to apologize for Germany showing a friendly face. They were committed, courageous words and many media outlets, including SPIEGEL, expressed approval. But in the new AfD milieu, the sentence was seen as proof of her stubbornness and narrow-mindedness.

In the CDU, as well, the impression began spreading that Merkel was walling herself off and was no longer reachable. A chancellor who had long been an outsider herself surrounded herself with loyalists in a manner foreign to the old CDU. It is a group that includes her long-time office manager Beate Baumann, government spokesman Steffen Seibert, chief of staff Peter Altmaier and CDU General Secretary Peter Tauber.

The group is united by complete faith in the correctness of Merkel's refugee policies. The more intense the criticism has become in recent months, the more vehemently the chancellor's confidants have defended her. Criticism, from the likes of Finance Minister Wolfgang Schäuble and Interior Minister Thomas de Maizière, was largely drowned out.

'Stake Its Claim to the Center'

Just how much things have changed under Merkel's leadership can be seen by visiting the office of CDU General Secretary Tauber. Tauber is a wiry man of 41 who wears a fitness tracker on his wrist and has a Lego R2-D2 on his windowsill. He has 74,000 Twitter followers. When an Internet troll recently abused the chancellor on Facebook, Tauber called him an "asshole."

Tauber says it makes no sense to move the CDU to the right in an effort to combat the AfD. "The CDU should not adjust based on others, but should actively advocate its own values and stake its claim to the center," he says.

For decades, the CDU saw its mission as that of preventing the establishment of any party to its right on the political spectrum. For Tauber, that is no longer the case. "The C (for 'Christian') in our party's name establishes a natural limit on the right." Of course, Tauber says, the CDU should not simply give up on AfD voters from the get-go. But among AfD supporters, he argues, there are many who fundamentally reject the system as such. "We stand for the political system of the Federal Republic of Germany, we have played a decisive role in shaping it and we believe it is good," he says. It cannot be expected that such sentences will do much to soften the revolt against Merkel. The bitterness and fear among AfD supporters is simply too deeply rooted, no matter how overwrought it may be.

"Is there a future?" That's the question which torments Joachim Kuhs and which drove him to become a member of AfD. When Kuhs says that he's afraid of the future, he is thinking of his children -- all 10 of them. Kuhs, who is from Baden-Baden, sees nothing but threats ahead for his family. He believes that German society is in peril, including freedom of opinion, freedom of religion and the traditional family. The greatest threat to Germany used to be the atomic catastrophe. Kuhs believes it has now been replaced by the asylum catastrophe.

Kuhs describes himself as a conservative Christian who is faithful to the Bible. He is a member of the Anglican parish and goes to church every Sunday. He rejects the ideas propagated by the modern church and he finds the German Bishops' Conference of the Catholic Church to be too liberal. The 59-year-old had voted CDU his entire life -- until the arrival of Angela Merkel. In the 2009 elections, when Merkel was re-elected for the first time, he cast a protest vote for the business-friendly Free Democrats (FDP). Then, in March 2013, he joined AfD. Last Sunday, he was the party's candidate in Baden-Baden and received 9,000 votes, or 15 percent -- more than the SPD and Left Party put together. "Yes to children! Yes to family!" reads a banner on the website of AfD's Baden-Baden chapter, next to a picture of Kuhs, in a dark jacket and blue shirt, looking thoughtful behind his smile.

'Contempt for the Morons'

Kuhs belongs to that category of AfD supporters who, in the view of sociologist Bude, believe the government is rapidly losing control. They believe that the established parties no longer have a grip on things and are trying to cover up their failures -- or, even worse, are presenting that failure as the desired outcome.

A second group of AfD voters, Bude believes, is made up of those who believe they have been stepped on by the state and prevented from reaching their potential due to laws and bureaucracy.

"Such people are convinced that, in contrast to the politicians, they have an accurate view of things and can fix everything," says Bude. "They would be happy under a great leader, such is their self-image, but they have nothing but contempt for the morons currently in power."

Finally, the third group is made of people who have not achieved the standing in society that they once strived for. They are well-educated men and women from the middle class who "feel as though their careers have been blocked due to globalization and societal change," Bude says.

The result is that AfD supporters include stalwart nationalist conservatives who are afraid of Germany's downfall alongside economic liberals who want to see the state's social welfare system privatized. The party includes haters of America who believe Russia's Vladimir Putin is a great leader. And in the middle of it all are the remnants of various racist-nationalist movements who dream of the resettlement of German lands with Nordic purebreds.

In Germersheim, on the Rhine River, every fourth voter cast their ballot for AfD in the state election, more than twice the average in Rhineland-Palatinate. The party ended up as the second strongest in the town, population 22,000, even ahead of the CDU.

Yet AfD doesn't even have a regional office in Germersheim. Hardly anyone in the city knows even a single AfD candidate on the party's state list, says Mayor Marcus Schaile, who is a member of the CDU. During the campaign, he says, AfD only hung up a couple of posters and not much else: No events, no rallies.

'Gender Insanity and Other Meaningless Issues'

Two days after the election, the mayor sat in his office studying the results, electoral district by electoral district, wondering how AfD could have ended up with 25 percent in Germersheim. There are a couple of districts where the result was even higher, such as a 35 percent return in one populated by many Germans from Russia and Eastern Europe -- groups that tend to be more conservative than the mainstream and who came to Germany en masse in the early 1990s.

But beyond that? "It goes through all the neighborhoods," Schaile says. City center, residential high-rises, newly developed areas with single-family homes. The mayor said he would love to talk to these people, but that's not so easy. Thus far, "not a single resident" has admitted to him to being an AfD voter, Schaile says.

So where should one look in the search for AfD voters in Germersheim? Even the new party's own officials present a rather diverse image. The party's leading candidate in the district, Matthias Joa, used to be a member of the CDU. Heiko Wildberg, AfD floor leader in the county council, was a Green Party member for many years before he found the AfD platform to his liking -- due to his "liberal-conservative attitudes," as he says.

We meet Patrick Hoffmann in the town of Kusel in Rhineland-Palatinate, where he had been active in the Left Party until 2014, even rising to become a member of the state party executive until he left the party, frustrated by its "gender insanity and other meaningless issues." He bolted to AFD.

In each of the three state elections on March 13, the party tailored its main candidates and its message to its desired target groups. In the southwest, it was upstanding economics professor Jörg Meuthen who helped lead the protest party into state parliament. The bourgeoisie family man's polished appeals for meritocracy would likely be supported by just about any small- and medium-sized business owners -- the so-called Mittelstand -- in Baden-Württemberg. Such businesses are often called the backbone of the German economy, but they are particularly prevalent in the southwestern German state.

In Saxony-Anhalt, AfD presented itself as the "party of the little people," a place that welcomes the disappointed. Here, André Poggenburg, the owner of a small business that sells car radiators -- and a man who has trouble transforming even the simplest of ideas into a complete sentence -- ran as the leading candidate.

How is it that the party is able to withstand such sharp contrasts? Why hasn't the party long since divided into a movement of commoners and a movement of professors? The thing that attracts and connects these seemingly disparate groups, as is the case with all collective movements, is an approach to life that de-emphasizes social and ideological origin. "It's the AfD feeling," party boss Frauke Petry said during her thank-you speech at the election party in Berlin on the night of March 13. "It's the feeling of belonging together and not standing alone."

Persecution Complex

People believe they are part of a resistance movement, even if for most the only act of resistance here is casting their ballot. This spirit of resistance has grown out of the feeling that there's a media conspiracy and that the traditional parties have become helpless. They're convinced that this "cartel of power," under whose rule TV stations can only praise the government's policies, is driving Germany toward the abyss. Many AfD voters have the impression that nothing in Germany works any longer, that rules aren't being obeyed and that nobody is allowed to say anything about all this -- be at the bakery or a family gathering.

These people are convinced that those who decry undesirable developments will ultimately be pilloried and become social pariahs themselves. They don't seem to see any contradiction in the fact that they themselves, along with AfD leadership, post their own views day and night on Facebook or on talk shows unimpeded. After all, they believe the majority of people are still against them, and the majority has the power.

Frauke Petry herself fueled this view with her party base on election night, lamenting that her party is the victim of "a defamation campaign of the likes never seen before." If the media had reported half-way fairly, she said, the party would be able to grab 30 percent of the total vote nationwide in Germany.

Inside Träne, a dilapidated bar in downtown Germersheim, the innkeeper serves schnitzel Milanese for €5.50 and complains about "the politicians." She says that people all over town are talking about the rise in crime and the increase in theft at the supermarkets since the refugees' arrival. "I think the election result is good," the innkeeper says.

Did she vote for AfD? "No, no," she says defensively. Instead she destroyed her ballot card.

 "I'm not giving any party my vote any longer."

Worries over Outward Appearances

On a round table just across from the counter, four older men are sitting, listening to the innkeeper.

They also praise AfD, but only one admits in the end to having voted for them. "I wanted to take a stand," says the 66-year-old retiree. He used to vote for the Social Democrats, he explains, "but all they're doing now is things together with Merkel and the CDU." The man declines to provide his name. After all, he says, you never know what to expect from the "lying press."

In speaking to AfD supporters, it quickly becomes apparent how easy it is for them to feel slighted. Behind the decisiveness with which they state their gripes, there's always a lurking fear that they aren't being taken seriously, or even that they are despised. The feeling that everyone outside the AfD world is conspiring against them defines this party's world view. At the same time, their obsession with the "lying press" that allegedly distorts and twists everything also betrays a need for recognition and affirmation.

But many AfD voters do care how they are perceived by others, because it is important to them that they not be lumped together with far-right radicals. True right-wing extremists at most vent pro-forma fury out of concern they may be put at some kind of disadvantage if they allow an accusation to go unchallenged. But many AfD supporters get truly outraged when people associate them with a group they want nothing to do with.

As is the case with all parties that are held together more by a feeling than any true ideology, the party's actual message is mutable. When right-wing agitator Björn Höcke speaks to his followers, for example, much of his message sounds as though it could have been coopted from the Left Party.

Höcke, too, deplores the "disgraceful" fact that 2.8 million children in Germany are threatened by poverty. He speaks of the fate of pensioners who can no longer afford their rents and he thunders against the growing societal gap between the rich and poor. At the same time, though, he invokes the spirit of the Thousand Year Germany in his speeches.

When the AfD group in Saxony's state parliament recently introduced a motion for "the protection of victims of domestic and sexual violence," it emerged that the text was an almost verbatim copy of a similar one introduced by the Left Party. It's not surprising that a lot of the voters AfD is attracting in the east are coming from the Left Party.

Leveling the Playing Field

To properly understand the AfD's impressive election results, one must also take into account the mobilizing power of the Internet. Germany's Pirate Party, which has since declined into obscurity, was the first in the country to demonstrate the kind of power that intelligent use of social media could have. Their deft strategies enabled a splinter party to become a political sensation within a matter of weeks.

The Internet plays a major factor in leveling the playing field, even in politics. Before people were able to use Facebook and Twitter to organize themselves, the barriers to entry into the political world were much higher. Getting your voice heard required having backers with deep pockets and a strong member base. Today, however, a decent website can be all it takes to keep people informed and foster a community feeling. AfD has only 240 official members in Saxony-Anhalt, but even that proved sufficient for the party to land 24 seats in the state parliament there. This means that one in 10 of the state's AfD members now hold seats in parliament.

Angelina Toller followed AfD's election campaign on the Internet. That's also where she read about refugees who had touched children inappropriately in public swimming pools or had set fire to the accommodations they were living in. In her mind, none of this is propaganda -- it's reality. "I can very much imagine that it happened. Back at home they lived in a wooden hut for €100 a month, but here they are demanding €2,000 and a single family home."

Toller, a 24-year-old first-time voter who has counted herself as a proud AfD supporter since the election, lives together with her husband Maurice and a friend in a shared apartment north of Mannheim. Photos of their two daughters adorn the walls and there's a mountain of plush toys beneath the window. The home cinema projector beams weak light onto the wall. Toller sits Indian style on the couch. Her appearance is resolute, with dyed blonde hair, a lip piercing and arms full of tattoos, including one bearing the name of her daughter. The two men remain silent for most of the time that she speaks.

Earlier, Toller said she had little interest in politics, but things were different this time. She says she enthusiastically read the AfD mailing that landed in her mailbox before the election. At times she says she even set her alarm clock in order to wake up to watch political talk shows.

'Germany Has Gotten Out of Control'

For Toller, the decision to support the new party was not a protest vote; she says she voted for AfD out of conviction. At the polling booth, she even took a photo of her ballot in order to preserve the moment. When asked to explain her reasons, she mentions the sexual assaults on New Year's Eve in Cologne, street crime and the many refugees. Germany has "gotten out of control," says Toller. Sure, Toller says, she also finds some of AfD's demands to be extreme, like the recent call by party chief Frauke Petry for refugees to be shot at the border if they try to cross into Germany. "But at some point, you have to get things under control."

Toller says she's worried about the refugee problem and that no one is tackling it. "I have the feeling that AfD are the only ones doing anything." She says she's not a racist. She does, however, think there are a number of reasons the refugees shouldn't be coming to Germany.

But the fact that Toller's worries aren't finding ready ears in Angela Merkel's Chancellery or, in any case, that they aren't leading to a change in policy, also doesn't mean that the rest of the Christian Democrats are reacting nonchalantly to AfD's gains. Calls are growing ever-louder for action to counter the new movement. When the national parliamentary group of the CDU and CSU met last Tuesday to discuss the election results, the mood wasn't as sanguine as it had been the day before at a meeting of the CDU's national executive committee. Members of parliament spent three hours discussing the results. Domestic affairs policy spokesman Hans-Peter Uhl called for Germany to finally impose a tighter border-control regiment the way other European countries had. He said he could no longer bear listening to the constant admonitions for closing party ranks. "It's also a closing of ranks when the lemmings run to the cliff," he quipped.

Gerda Hasselfeldt, the head of the CSU parliament group in Berlin, pleaded with Merkel to send out the message that Germany could no longer take in any more refugees. Heike Brehmer, a federal parliamentarian from Saxony-Anhalt, spoke of the anger felt by people in her state -- people who believe there is no money available for them but there is plenty for the refugees. She says that's why they voted for AfD.

None of this has made Merkel budge. Instead she points out that the number of refugees has fallen. But all it took was the next sentence for her to trigger new anger. When asked if this was the result of the closure of the Balkan Route or the patrols of the Aegean Sea ordered by NATO, she said, "that remains to be seen." Mumbling quickly erupted in the room. Many members of parliament consider the closure of the borders that Merkel has criticized so heavily to be the only effective measure taken so far in the refugee crisis.

There is currently nobody in the CDU who is actively organizing opposition to Merkel, so all eyes at the moment are on Horst Seehofer. The CSU party boss is continually escalating the dispute with Merkel. Last Monday, he spoke of the "massive failure" of her refugee policies. In an interview given shortly after, he opened up the possibility that his party, currently only in Bavaria, might spread to the national level. He also reiterated his long-running threat to sue the federal government at the Constitutional Court over its refugee policies.

Can the Center Hold?

As is true for many AfD supporters, for Seehofer the bigger picture has only marginally to do with the refugees. The actual conflict is more fundamental. Merkel has steered her CDU so far towards the center that she has opened up the space needed for a new right-wing to take root. Members of Seehofer's CSU have been observing that trend for years with concern, but now it is emerging as a real existential threat. The CSU's lifeblood is its aura of uniqueness. If AfD robs the party of its current absolute majority in Bavaria, complains former German interior minister Hans-Peter Friedrich, then all that will be left of his party is a "CDU in lederhosen."

That's what makes this fight so inexorable for Seehofer's people; it's a question of them or us, Merkel or the CSU. The Bavarians have had to watch in horror as their CDU colleagues in neighboring Baden-Württemberg seek to become the junior partner to the Greens in a government there. One top CSU official in Berlin says this will only serve to reinforce the view among AfD voters that everything is blurring into one big homogenous political mass. Within AfD circles, the other parties are already disparaged as the "bloc parties."

The big question now is whether AfD's victory march will continue and whether it can establish itself within Germany's political structures. Or if it will remain a temporary political phenomenon that will disappear again as soon as the refugee crisis ends.

Merkel is hoping for the latter. From her perspective, the cleaning out of the CDU sock drawer has been a success. She has fragmented the left side of Germany's political spectrum so successfully that she was able to push the CDU even further into the center, at least temporarily. In doing so, she gained more voters. But what is good for Merkel is not necessarily good for the CDU.

A vital part of any healthy democracy is having alternatives and parties that are distinguishable from each other. At the moment, it's no longer possible to tell what it is that separates the CDU from the SPD or the Greens. The party is whatever Merkel says it is. There are close to no correctives left in Germany and there is no longer a balance of power. The more Merkel tries to peddle her policies as being without alternative, the greater the anger within the populace will grow.

In any case, no one should assume following their success in the state elections that AfD and its supporters will drop their fight against "the-powers-that-be" any time soon. As absurd and presumptuous as it may seem, AfD supporters in recent days have been posting images on Facebook and Twitter of Sophie Scholl's White Rose student resistance movement along with the caption, "Today they would have been with AfD."

Scholl risked her life in February 1943 distributing flyers, and was executed a short time later.

She had been fighting against the Nazi regime.


By Melanie Amann, Matthias Bartsch, Sven Becker, Markus Feldenkirchen, Jan Fleischhauer, Ralf Neukirch, René Pfister, Josef Saller and Katja Thimm


The 'Crisis' Has Just Begun; Is The American Dream Over?

By: Chris Vermeulen


Global Central Banks have run out of 'ammunition'. Since March 2008, Central Banks have cut interest rates 637 times and have purchased a staggering $12.3 trillion dollars' worth of assets. There is not much more that they can do, and currently, the next 'great crisis' is upon us.

The global economy and the global financial system will continue to weaken before our very own eyes.

If we do experience a major "black swan event" that takes place, it will cause the bottom of the stock markets around the world to fall out, and this could happen at any given moment.

Chinese exports have seen their sharpest drop in almost seven years, adding to concerns over the health of the worlds' second largest economy. Exports have dropped sharply by 25.4% from the previous year, while imports fell 13.8%. This weak data comes on the heels of Beijing registering their 'slowest economic growth in 25 years'.

The February 2016 trade figures reflected, are likely to raise new fears over China's struggles to maintain economic growth, while implementing reforms and trying to shift towards more services and domestic spending. China was considered 'the engine of global growth'.

The FED has been looking at the 'illusion of recovery', but not the real deal. If this were real, we would not have 100 million adult Americans without jobs. There are currently 46 million citizens on foods stamps as compared to 18 million that were in 2000. Thirty-five percent of the population is receiving some form of public assistance. For so many years, Global Central Banks have been manipulating the financial marketplace with their 'monetary voodoo'. They have convinced investors, around the world, to invest trillions of dollars into equities; artificially inflating the 'equity asset class'. By creating money out of 'thin air' and pumping it into the financial system it devalues currencies and creates an artificial sense of a true economic recovery which so far has not been realized.

A shock to the financial system and 'contracting economic growth' from abroad will force the FED to delay further short interest rate increases and furthermore, reverse their course. These 'academic pinheads' are so blinded by their tinker toy "Keynesians Macro-Model" that they cannot see the flashing red light warnings that are in front of them. Keynesian fiscal policies, which postulate that spending more of taxpayer money, that it would "stimulate" an 'economic rebound'. IT FAILED!

NY Times March 4, 1933

Last week, Chairwoman Dr. Yellen, was forced to wave 'a white flag'. The FED overestimated the strength of the global markets and consequently, will not be able to go ahead with its planned four short term interest rate hikes, in 2016.

The diminishing holdings of U.S. Debt by foreign governments is now a major issue that the FED must confront IMMEDIATELY!

This growing situation is going to result in the FED resuming 'monetarizing public debt'. Dr. Yellen is now beginning to listen to the advice of, her predecessor, Dr. Bernanke, and is now potentially embracing negative interest rates.

Central Bankers Do Not Understand 'Booms and Busts':

Central Banks still do not understand the 'boom and bust cycles'. Falling stock prices will shortly be in the news. Central Bankers still do not understand 'deflation', whether they are 'Keynesians' or some other variant, thereof.

The next 'bubble' that is yet to burst

Student financial debt is out of control. Over $1.3 trillion in student debt is floating around in the current economic system. The majority of this debt is a burden to younger Americans, who are entering into a job market with incredibly low wages. Student financial loan delinquencies are rising dramatically. Student debt is now the worst performing sector of loans in our economy. This is yet another 'bubble' that is yet to burst. Momentum will catch up and the delinquencies will be the first cracks in the dam.


Student Loans


We now must embrace our own prosperity, our financial freedom and peace of mind in our daily lives. I accurately warned my past clients of the housing bust, the credit crisis and the 'Great Recession' more than one and a half years in advance.

It is now time to prepare for the inevitable. Gold has been used as money for more than 3,500 years while it doubles as a currency and a store of value. It has also proven to be a good hedge since the experiments with unbacked fiat money which began in Europe and the USA, in the 18th century have failed to store one's value or wealth.

Gold is the purest form of 'money' and the oldest and most durable. The Gold Aurum Coin was already legal tender and the first coin to be ever used. The oldest gold coins are derived from the seventh century BC.

Investors use gold as a 'store of value' in their IRA or simply by holding physical bullion, which is explained in this gold investing guide. Gold metal offers the appearance of capital appreciation compared to devaluing currencies. Gold has always had favorable liquidity throughout history and will become more liquid in the coming years are more of the world turn to gold as a store of value, hedge on inflation, and insurance policy incase the financial systems does actually implode one day.


The Dark Night: North Korean Strategy

George Friedman
Editor, This Week in Geopolitics

 
To understand North Korean strategy today, we must first understand the implications of its geography. Korea is a peninsula jutting southward from Manchuria. The waves of the Yellow Sea break on its western shores, and the waves of the Sea of Japan roll in on its eastern flank. It shares a 30-mile-wide border with Russia, its northeastern border about 70 miles from Vladivostok, Russia’s major eastern port. The southeast corner of Korea juts to within 100 miles of Japan to its south, and the peninsula’s southwest corner angles westward only about 300 miles from Shanghai. In hostile hands, Korea can threaten Japan’s access to the East China Sea and the Pacific from the Sea of Japan. Korea can also potentially interfere with China’s access to the Yellow Sea and potentially to Shanghai.

Japan and China have invaded the Korean Peninsula on several occasions. Its geographical position and size relative to Japan and China made these incursions inevitable. From the Chinese point of view, Korea served as Japan’s axis of advance in China. From Japan’s point of view, if a hostile power were to hold Korea and thereby gain access to the Sea of Japan, it could threaten maritime trade and open the door to invasions of the home islands from the west and the east. When the peninsula was in Japanese hands, Manchuria and the Russian maritime regions, including Vladivostok, were threatened.



The Korean Peninsula poses a potential threat to three major powers, not because of what any government on the Korean Peninsula might do, but simply because of its geographical position. [https://geopoliticalfutures.com/forecasts/the-world-in-2016-2/] For that reason, it has been invaded by both China and Japan at various points throughout history and by the Soviet Union and the United States in the 20th century. The motivation behind the invasions has not been so much to capture the wealth of Korea, which was minimal, as it has been the fact that the country can provide strategic springboards or blocks to major powers. Korea was a critical piece in any Chinese or Japanese strategy.

The end of World War II did not reduce Korea’s importance. It simply eliminated one player, Japan, and introduced a new one, the United States. The American presence in Korea was not actually new. In 1871, the Americans sent a delegation to open trade relations with Korea. While the talks were going on, Korean shore batteries opened fire on American warships that had accompanied the delegation. This conflict culminated in a battle between US sailors and Marines and Korean troops that killed about 200 Koreans and three Americans.

This incident would have created long-lasting enmity, except that the Japanese began in 1876 a process of annexing Korea that culminated in the formal Japanese occupation of the country in 1910. That occupation wiped away any residual resentment of the United States, as the Japanese occupation was, by contrast, brutal and demeaning. Seventy years after the occupation ended, it remains a bitter historical memory for the Koreans.

The defeat of Japan in World War II ended Japanese hegemony over Korea. The Yalta Conference created a four-power joint government in Korea, but that coalition failed, as did a similar joint government in Berlin. As in Berlin, Korea was divided, with Soviet troops and their Korean supporters occupying the land north of the 38th parallel and the Americans and their Korean supporters occupying the south.

The United States did not see South Korea as a critical strategic asset, but the Soviets and the Chinese saw an opportunity. The Soviets had suffered a defeat in Berlin when their blockade failed because of the American airlift. They also saw Korea as a threat to Vladivostok should the US regain interest. The Chinese were similarly concerned about a later shift in American interest and wanted to expel the Americans from the peninsula.

The fact that doing so would also increase pressure on the United States in Japan was another consideration. Japan was critical to America’s successful containment of Russia, as Japan effectively blocked Soviet access to the Pacific from Vladivostok. A Soviet naval base at Busan, Korea, might pose as both an offensive threat and a defensive solution. Again, it was Korean geography that mattered.

The North Korean invasion of South Korea in June 1950 took the United States completely by surprise: US intelligence had failed to detect North Korea’s act of aggression on the ground. President Harry Truman faced a critical decision. Technically, Korea was not critical to US national security. But Truman calculated that Korea’s strategic position would protect Japan, and defending South Korea would make clear that the United States would resist open aggression. Truman’s decision, made in a weekend, created modern northeast Asia by making the United States the guarantor of South Korean national security. [https://geopoliticalfutures.com/the-meaninglessness-of-missile-defense-in-south-korea/] Two imperatives drove Truman—one geopolitical and the other psychological. His decision also demonstrated the importance of studies and position papers. In the end, a US president is sometimes compelled to act because he feels the overwhelming force of reality.

The war began with the North Koreans nearly taking South Korea. A defensive perimeter was forged around Busan, and reinforcements rushed in to hold it. The North Koreans were driven back, and then General Douglas MacArthur executed an amphibious landing at Incheon, cutting off the North Korean military and shattering it. He crossed the 38th parallel and moved north.

The Korean Peninsula is designed for defense. It is narrow—about 200 miles wide at its narrowest—and about 500 miles long. It is also covered with very rugged hills. A relatively small force, using the rugged terrain cleverly, can hold off a larger force, retreating slowly and inflicting casualties on the attacker, who has to come out from under cover. The first attack from the north had come as a surprise, driving an inferior and poorly prepared South Korean force back. In their counterattack, MacArthur’s forces did not slog through those treacherous hills but flanked the defending North Koreans by sea.


As the Americans moved rapidly forward, they approached the Yalu River in the northeast. Their advance threatened both the Chinese and the Russians, who could not accept a large American force along their borders. Therefore, the Chinese—again to the surprise of US intelligence—drove a large force southward, pushing the Americans back.

The initial Chinese attack resulted in a rout, but in the end, the Americans were able to stabilize their position and impose heavy casualties on the Chinese, ending the war in an armistice that looked much like the status quo prior to the war.

War is extremely difficult to wage on the Korean Peninsula. During temporary positions of surprise or imbalance, it is possible to drive the defender back. But the Korean War showed that, while it is possible to drive the enemy back, it is not possible to simply wipe it out. One reason is the terrain; another is the strategic reality that no major regional power can afford to allow the peninsula to fall completely into the hands of a hostile power.

This set of dynamics created the current situation in Korea. The peninsula is divided into two states—one with the full support of the United States, the other at the moment in a much more complex relationship with China, its traditional patron. South Korea has emerged as one of the major industrial powers in the world. One reason for its economic success is the American grand strategy of maintaining a long-term commitment to defend South Korea. However, a strategic relationship with the United States carries with it both benefits and risks. The major risk is war. The major benefit is that the US tilts the table in favor of the client state.

North Korea’s relationship with China and Russia has not resulted in similar benefits.



The map above displays light visible from space at night. South Korea is ablaze, China less so but with intense areas. North Korea, on the other hand, is virtually without light, or to be more precise, without enough clustered lighting to be seen from space. Thus, while both South Korea and North Korea were devastated by the Korean War, South Korea has transformed into a modern industrial power, while North Korea appears to be preindustrial—or so it appears, based on nighttime lighting.

How did this disjuncture occur? The Chinese and Russians had fewer resources to invest in North Korea than the US had to invest in the south. But the complete answer must be somewhat more complex. Even on their own, the North Koreans should have been able to generate greater economic growth than they have. And certainly, after the fall of the Soviet Union, the Chinese could have aided North Korea more fully had they wished to do so.

The rest of the answer has to do with the nature of the North Korean regime. The first strategy of any state is its preservation. North Korea was faced with a major US force and an increasingly powerful South Korean force. The logical thing would have been for the Chinese and Soviets to create an equivalent force. They chose not to.

The Chinese and Russians did not want a powerful North Korea; they wanted a buffer state between themselves and American forces in the south. They wanted a North Korea strong enough to deter an American attack, and they wanted the regime to survive. But as always, a strong North Korea could face two ways. In its current configuration it faced south. With regime change it could face north. Therefore, the Russians and the Chinese, split though they were during the latter part of the Cold War, together created a paradox in North Korea. They sought to retain a regime that blocked any American adventures northward and put the South Koreans and the Americans on the defensive. They did not want the regime to fall and thus create a vacuum that could create an opening for the Americans, but they also didn’t want North Korea strong enough to threaten them.

Both the Soviets and Chinese understood that simply being communist was no longer sufficient grounds for an alliance. The Soviets and Chinese had become enemies in spite of a shared ideology. Neither wanted the other to use North Korea as a tool against it. We should add that South Korea and the United States themselves were not eager to see the North Korean regime fall. South Korea did not want to bear the expense and risks involved in reintegration. The United States was content with the status quo in the Korean Peninsula, as its primary interest there was minimal conflict. And out of this paradoxical strategy emerged the contemporary North Korean state.

As the Soviet Union fell China moved toward a more liberal economy, and North Korea was placed in a difficult position. Its primary strategies of regime survival and blocking both the Americans and the South Koreans remained intact. But reliance on its communist partners became more difficult and complex. One partner was no longer communist, and the other was increasingly unpredictable. North Korea could not emulate China and still guarantee regime survival, and the forces that had transformed its partners might be lurking in North Korea as well.

As a result, North Korea was forced to lock in its policy of intense hostility to the south and to ramp up already extreme measures to preserve the regime, defending it from both external and internal forces—even forces within the ruling family. Its strategy became one of bluffing. A game of bluff requires utter discipline and no dissension. The North Koreans sought to frighten the Americans and South Koreans by pretending to be irrational and on a hair trigger. [https://geopoliticalfutures.com/the-use-of-irrationality-in-foreign-affairs/] The leadership sought to convince the North Korean public that there was no external threat it could not crush, because of its enormous strength. What appeared to the world as entirely irrational behavior was, given North Korea’s strategic needs, quite rational.

North Korea had a massive army but not a good one. Its weapons and tactics were generations out of date. It had one advantage—geography. Seoul, the South Korean capital, now a modern metropolis, lay within artillery range of North Korea. The north massed its forces on the border and threatened that in the event of a conflict (which it insisted it would trigger if provoked), it would shell the massive metropolitan area and move its tanks south to occupy the city. By the numbers this was possible, but the North Korean military on the move would be extremely vulnerable to air power. Still, sheer proximity meant that an irrational move could do significant damage.

North Korea also needed a more credible threat than its massed force begging for a carpet bombing. This need engendered its nuclear program. [https://geopoliticalfutures.com/the-significance-and-insignificance-of-a-north-korean-hydrogen-bomb/] The program enhanced the consequences of irrational action. It was an obvious bluff, since resorting to a nuclear attack would guarantee the annihilation of the regime—and possibly the nation. Rationally speaking, North Korea couldn’t possibly launch a nuclear strike. Therefore, it was critical for North Korea to appear irrational. Only apparent irrationality, meticulously managed, could convince the Americans, South Koreans, Japanese, Russians, and Chinese that North Korea was utterly dangerous. But the regime’s apparent irrationality had to be calibrated in such a way th at North Korea’s dangerousness was never so credible or imminent that someone would preemptively attack it. It had to preserve the regime and paralyze its opponents without forcing military action by its adversaries.

North Korea had two enormous advantages in this strategy. First, no one really cared enough to act. The South Koreans didn’t want to incur the cost that Germany bore when it integrated the post-communist east. The US was not eager for the instability that would be created by a North Korean collapse, nor were the Japanese or Russians. And the Chinese were using their apparent ability to soothe the irrational North Koreans to extract concessions on other issues from the Americans. Everyone was content with the North Koreans as they were. Second, the North Korean regime worked. Instead of fragmenting and morphing as other communist regimes had done, the North Korean regime became locked into a model that was extremely effective in its unique strategic situation.

There is a permanence to the current North Korean situation that many underestimate. [https://geopoliticalfutures.com/forecasts/envisioning-2040-2/] South Korea has far more important matters, such as its own massive economy, to worry about. [https://geopoliticalfutures.com/signs-of-political-instability-in-south-korea/] North Korea must avoid a preemptive strike on its nuclear facilities, since its conventional military options would be unsustainable. The major partners understand North Korea well enough to endure its assertions of power and aggression without panicking. The regime appears resilient and in control. The result is a formula for stalemate… a stalemate of the indifferent.

But the cost of this stalemate is the blackness of the North Korean night. The cost of maintaining the regime is a dramatic lack of economic development. What wealth that exists is diverted to maintaining the bluff, which in turn requires a delicate internal balance that demands not only massive repression but also, above all, isolation. Contact with the rest of the world would be destabilizing, and so North Korea must limit that contact, resulting in cultural as well as physical darkness. And the night will not pass quickly. The dark night is what makes North Korea possible. It allows the bluff to go on and with it the regime.

As ever, for the rest of the world Korea—now North Korea—is a place used strategically to block the ambitions of others. Few want anything from it other than for it to continue to buffer greater powers. And even if fulfilling this purpose requires North Korean leadership to occasionally seem frightening by appearing irrational, those who watch North Korea know that its frightening aspect is tightly controlled by a calculating regime.


The Clown Show Has Come and Gone

By: Gary Tanashian


Our main theme has been that the ironclad post-2011 confidence in the Federal Reserve among conventional market participants would slowly but surely start to fade because macro parlor tricks, so vigorously employed by the Bernanke Fed, were only tricks or in some cases (Operation Twist) borderline magic, after all.


Clown Car


At biiwii.com (still unsure if or in what capacity the site may reappear) we used to have fun with clown car videos, as the various Fed members piled out honking horns, doing somersaults and shouting incomprehensible phrases and announcements.

Like Rosco's clown car above, that is all fading away now. The pretense that the Fed is the steward of a sound financial system and currency has been stripped away. We are no longer anticipating a waning of confidence. In rolling over last week and playing dead, the Fed announced for all the world to see that it is no more secure or respectable than the clown known as 'the Draghi', Kuroda the Klown or the troupes in Canada, Australia, England and China's Central Planning.

The US Fed, through no good work of its own was the beneficiary of a Goldilocks environment in which global economic pressures resulted in capital flight into the US.


US Dollar Index Monthly Chart


That was all well and good while the Goldilocks benefit lasted. The Fed, or more accurately Benny the Clown was made out to be a genius, somehow managing to promote inflation and asset market appreciation while suffering none of the traditional drawbacks, like outwardly visible inflation problems.


US Dollar Index Weekly Chart

An upward surge in the US dollar (reserve currency) due to global deflationary pressures only cemented Benny's already bestowed reputation as "the Hero".

Bernanke on cover of Atlantic Magazine

But then the stock market started to roll over under the pains of US dollar strength. This was due to weakening exports and manufacturing in general. Here in Q1 2016 we find a deceleration in corporate profits, hot off the press from FactSet.com:

S&P500 Net Profit Margin


Now we again consider the chart of the S&P 500 and US dollar above. Taking it a step further, consider the real reason that the stock market has risen post-2008, unbridled inflation. From
Slopeofhope.com:


S&P500 versus Monetary Base

The entire span of the black line - during its upward surge phases - was Bernanke. The roll over?

That is happening on Janet Yellen's watch. She is not to blame.

For some time after Bernanke had taken center ring I continued to focus on Alan Greenspan.

That is because the 'nank was sent into the Big Top to clean up the fallout from Greenspan's inflationary mess.

Today we look back to Benny the Clown and the tricks he played on us, with poor Janet Yellen the fall guy in waiting. It's a sort of tradition, a right of passage for those who would assume the lead roll in this show. One employs a bag of tricks and the other... holds the bag.

Yet multitudes of conventional market participants have proceeded on as if any of this were normal. They are like the poor elephants in the circus, trained to just go along with the show, the planners of which are well above their pay grade. But the biggest takeaway from last week, from NFTRH's perspective, is that our theme of waning confidence got rammed to the forefront of the average investor's consciousness.

The Fed appears ready to continue the inflation, this time without pretense or the aid of a global deflationary 'Goldilocks' benefit. Aside from the stock market and economic motives, might the Fed also be considering the post-2007 buildup in Debt-to-GDP? A little inflation can go a long way in inflating away a government's debt problems.

US Government Debt to GDP

We will continue to watch for market-based inflation signals in items like the Silver-Gold ratio (to be covered later in the report) and Treasury bonds vs. inflation indexed T bonds. While inflation expectations have bounced to date, a breakout in inflation expectations would only be signaled by a rise above the 1.6% area.


10-Year Breakeven Inflation Rate

Regardless, the Fed is dropping its pretense and starting to gets serious in the game of global inflationary Whack-a-Mole.

Whack a Mole