Iran: Diplomacy Could Succeed Only If Backed By The Threat Of An Attack

WASHINGTON – Optimistic commentators talking about the upcoming nuclear deal with Iran stress the importance of allowing “diplomacy” to deliver its promised outcome. They say that diplomacy is better than war. For this reason we should try to solve this Iran nuclear problem through negotiations.

Diplomacy has to be backed by force

This is unbelievably silly. In the real world diplomacy about major security issues is never separated from the threat of using military force. In other words, your bargaining power at the “diplomacy” negotiating table changes a great deal if the other side knows that you have the means to obtain what you want by military force, should negotiations fail.

Remember Teddy Roosevelt’s notion about talking softly while carrying a big stick? Well, if you talk softly but have a small stick, or no stick at all, and the other side knows this, they will not be inclined to oblige you in any way. This is not that complicated.

US will do nothing to coerce Iran

And here is the thing regarding Iran. The Iranian leadership is just about certain that the US is not prepared —I repeat, not prepared— to resort to force in order to destroy Iran’s nuclear facilities, should negotiations fail to reach a deal that will substantially curb the country’s advanced nuclear program.

And this is about all they need to know. What is the penalty for being uncooperative? May be some more sanctions, not universally enforced. But I doubt even that. If negotiations fail, the Iranians will go out in full force to tell their side of the story. “It is all about American arrogance. The Americans threaten the world with their own nuclear weapons. But they will not allow a peace-loving emerging country to develop its own peaceful nuclear program. How horrible!”

Negotiate now, or we shall destroy all your facilities

Imagine instead this scenario. America is completely and totally determined to destroy Iran’s nuclear facilities, because they have been created with the sole purpose of manufacturing nuclear weapons. The Iranians know that they are about to be attacked and that American overwhelming air power will destroy all their facilities.

But, before attacking, the US President says to Tehran that an attack could be avoided if within 24 hours Tehran will send negotiators to Geneva to set up an internationally monitored timetable unequivocally leading to the immediate dismantling of the entire program.

The Iranians agree. They send their negotiators to Geneva, and the framework for the dismantling process is agreed upon. Well, this is also a solution through “diplomacy”. But of a different kind. This is what used to be called “negotiating from strength”. “I force you to do something that you would rather not do. I can force you, because you know that refusing would bring about very bad consequences”.

No US bargaining power with Iran

Sadly, America has no such bargaining power with Iran today.

Issue one. Washington has proclaimed in every possible way that it would not use force to destroy Iran’s nuclear program.

Issue two. Most analysts argue that America today lacks the military capability to bring about such destruction. For sure, American air power can damage Iran’s nuclear facilities, and therefore delay the program. But it cannot destroy all of them, while an act of war would no doubt cause nasty international repercussions that this US President is unwilling to face.

No will, insufficient tools

So, there you have it. America has neither the will nor the tools to stop Iran’s nuclear programs through military means. Given all this, it takes a real fool to believe that something good and lasting will come out of these negotiations.

As a minimum, the outcome of this “diplomacy” will be to legitimize Iran’s uranium enrichment efforts, while guaranteeing that Tehran, even if in full compliance of a likely deal, will be just one step away from a nuclear weapon.

Use force if diplomacy fails

The problem, let me stress once more, is not that there is something inherently bad about “diplomacy”. The problem is that negotiations with a hostile counterpart can succeed only if our opponent knows that we have the will and the tools to coerce him, should “diplomacy” fail.

Diplomacy without the backing of real military strength and the clear determination to use it is a silly exercise in futility.

The Bergdahl Release Fiasco

WASHINGTON – It is now official that Sgt. Bowe Bergdhal, held prisoner by the Taliban for many years, has been charged with desertion. Here are the basic facts. One day Bergdahl abandoned his post in Afghanistan, after having expressed unhappiness with his role as a US soldier. He was almost immediately captured by the Taliban. After a few years in captivity, he was eventually released by the Taliban in exchange for 5 Guantanamo prisoners.

A truly bad story

Everything in this story looks horrible; and everybody closely associated with it looks either bad or pathetic, starting with President Obama.

Let’s stress some basic facts. Right after Bergdahl’s abandonment of his post, an internal Pentagon report found “incontrovertible” evidence that he was a deserter. Most of the other soldiers serving with him thought the same.

Get all our boys back

And yet the Obama administration engaged in long and complex negotiations to get this man suspected of desertion back. Eventually a deal was reached whereby we would get Bergdahl in exchange for the 5 people detained at Guantamo.

After the fact, President Obama defended it by saying that it is American policy to get all our people back, whoever they may be –heroes or deserters. The wisdom of this deal is questionable. But let’s agree that we accept this principle: “We Americans do not leave anyone behind”.

A PR opportunity?

However, given what the military thought about Bergdahl’s likely desertion, why on earth did President Obama arrange a White House event in which he announced Berghdal’s release with Berghdal’s parents on his side?

Obama gave the impression that, after much suffering, a US hero was coming home, when he must have known that this was not the case. Why make this release look like a great success, when everybody knew or should have known that Bergdahl was no hero? This looked bad then and positively stupid now, after the official desertion indictment.

“Honor and distinction”

But, wait, it gets worse. Yes, National Security Advisor Susan Rice, after Bergdahl’s release, declared on national TV that the likely deserter (he had not been charged with anything at the time; but a Pentagon report expressing this opinion existed) had served America with “honor and distinction”. Talk about unforced errors. To go on record saying this on national TV was silly. Even worse, she later on defended her assertion by saying that anybody who volunteers to serve in the US armed forces must have good qualities, or something like that.

Today all this looks pathetic.

The long investigation

And no, we are not finished. After Bergdahl’s release, it took the Pentagon months and months to come up with this desertion indictment. And why so long, since the relevant evidence had been collected years ago? Well, because there was a desperate attempt to create as much distance as possible from the exchange deal involving the Gitmo prisoners and Bergdahl and the desertion charges.

Somehow, it is assumed that we are so stupid that after a few months we must have forgotten that Bergdahl (probable deserter) was part of the exchange.


Well, what do we make of this? I am not sure. But it looks as if the Obama national security team played the junior partner role in a poorly crafted PR campaign run by third class amateurs. This was supposed to be a triumph of good diplomacy and compassion. Whereas they exchanged dangerous prisoners for a deserter.

They made the President look foolish by portraying a likely deserter as an honorable soldier caught by the bad guys in the battle field, when it was known by all that Bergdahl had abandoned his post.

Susan Rice, the President’s National Security Advisor, (a job previously held by the likes of Henry Kissinger, Zbignew Brzezinski, Brent Scowcroft, Frank Carlucci, and Colin Powell), played the part of loyal staff who would say just about anything in order to please her boss.

What can I say. Let’s hope that the next White House crew will do better than this lot.

Lee Kuan Yew Built Singapore – Great Deed?

WASHINGTON – Lee Kuan Yew, the architect of modern Singapore is dead. He ruled Singapore for 30 years as a semi-dictator. And he continued to influence policy for many years after he retired from active government.


Almost single-handedly Lee transformed a sleepy former British colony from inconsequential Asian port into a modern jewel. And this was done mostly by developing a first class, highly educated, super productive (mostly Chinese) work force, supported by a pro-business government.

Admired by all

Former US Secretary of State Henry Kissinger called Lee “one of the great men of our period. He established a competitive advantage based on the discipline and intelligence of his society.”

Asian values and capitalism

Lee’s mixture of Asian values, (strict discipline, reverence for education, filial piety, hard work), and free market capitalism produced an economic wonder. Singapore boomed. Its port blossomed. In time, the city-state added financial services to its manufacturing base. Given China’s pollution problems, many global multinational corporations are now moving their Asian headquarters to Singapore.

The regime built by Lee is a benevolent (or so we hope) fairly authoritarian state. Western style personal freedoms are not as important as in Europe or North America. In Singapore, the emphasis is on order and productivity, not on the protection of free expression.

Impressive results

That said, under Lee, tremendous progress took place. Singapore was ranked N. 9 in the world by the United Nations Human Development Index in 2014, and N. 1 in Asia. In comparison, Japan was only N. 17 in the world.

But no babies
So, here we have it. Shan-gri-la on the sea. Except for one thing. Soon enough this well crafted Paradise will be empty. Singapore has the lowest fertility rate per woman in the world —yes in the world. According to the CIA Fact Book, Singapore is number 224 out of 224 when it comes to women having babies. Dead last.
Now, this is odd. Here is a (mostly Chinese) harmonious and well run society. Almost everybody is doing well. The economy thrives. And yet people somehow decided that they do not want to bring children into this enviable environment.
Artificial Paradise?
And why not? I have no idea. But perhaps there is some missing ingredient in the sublime recipe concocted by Lee Kuan Yew.  Perhaps this Paradise, as well-engineered as it is, is so artificial that its people, while taking advantage of it, do not really love it.
Perhaps people in the end love what they have built based on their own ideas, and not what they have been forced to create, following someone else’s project.
Perhaps Lee Kuan Yew, this (almost) universally admired modern Philosopher King, did not really know what he was doing.

How Big A Threat From Jihadist Organizations?

WASHINGTON – The tricky part of any asymmetric warfare threat –now I am referring to the anti-Western Jihadist organizations spread around the Middle East and beyond– is that it is really difficult to assess its strength.

They are coming, by the thousands

For months Fox News, (a top rated US cable TV channel), has been telling  America that there are tens of thousands of would-be jihadists, (most of them “self-radicalized” young Muslims), who had gone to fight in Syria and Iraq. And now, after intense training received over there, they are coming back to unleash a wave of terror in America and in Europe.

A real threat, but not so huge

Look, no doubt there is some truth in this assessment. But only some. For sure, young people went to Syria to fight. For sure, some came back with bad intentions. And the recent killings in Paris, (Charlie Hebdo, and the Jewish super market), are evidence of what armed people with bad intentions can do. For all these reasons, counter terrorism agencies have to be extra vigilant. There is a real threat out there.

We are all targets

But the point is that we were told by dozens of security experts paraded on TV to expect waves of attacks perpetrated by thousands of determined warriors-terrorists.

We were told that any soft target in America (shopping malls, schools, train stations) has become a target. And we were also told that somehow this horrible development –the metastasis of the terror cancer– is Obama’s fault because our President has (stupidly?) under estimated the terror threat.

No wave of attacks

Well, while it is unwise to make blanket statements about a developing phenomenon, so far we have seen no waves of attacks. Yes, we have seen some. And this is bad enough. But the West is not about to be destabilized by thousands of suicide terrorists. Yes, there have been some instances of violent attacks. And no doubt other plots have been uncovered before the jihadists could make a move.

But overall, this is not a New Apocalypse. This jihadist phenomenon, with large cells in Syria, Iraq, Yemen, Somalia, Libya and also Nigeria, is a nasty brew animated by a millenarian ideology that surprisingly finds believers willing to fight for the violent recreation of a New Caliphate, or anything close to it. As absurd as all this sounds, it is nonetheless true.

No Clash of Civilizations

But this is not the prophesied “Clash of Civilizations”. The Islamic State, IS, in Syria and Iraq, as resilient as it is, is not going to transform all Muslim societies, from Morocco to Indonesia. IS will not turn their citizens into vast armies of pious fighters willing to die in order to destroy all the heretics and unbelievers.

Yes, we can count on more attacks, whether plotted in Yemen, or concocted by local “lone wolves”, in Paris, London or Minneapolis. This is most unpleasant. It means we are at risk. But let’s keep this in perspective. There are other risks, many of them bigger, if we measure them by the loss of life, that get almost no attention.

Only certain types of deaths matter

For instance, I just saw on TV that several hundreds Americans get killed by trains every year, because many pedestrians carelessly walk on and across railroad tracks, notwithstanding clear signs indicating that this is both very dangerous and strictly prohibited. And yet, this shocking statistic of hundreds (almost a thousand) of totally preventable deaths occurring every year gets barely a mention.

By the same token, sadly in the US there are frequent instances of deranged individuals shooting people in shopping malls, schools, or work places. But, somehow, since these are “regular killings”, we do not care that much.

However, if someone else does exactly the same thing –shooting innocent people without any rational motive– shouting “Allahu Akbar”, (“God is the Greatest”), then we are told by terror experts that the entire country is in mortal danger.

Not an existential threat

As a society, we should re-consider how we assess threats and how we talk about them. Don’t get me wrong. The jihadists are a real problem. Still, they are not an existential threat.

But somehow the media created the impression that they are a formidable force composed of determined fanatics about to destroy us. And this is simply not true.

Is Russia A Gangster State?


WASHINGTON – It is now accepted that Putin’s Russia is animated by a strong nationalist/revanchist spirit. After having lost the Cold War, the former Soviets decided that they really needed to regain at least some of what was historically “theirs”: the near abroad, pieces of Georgia, and now Crimea and Eastern Ukraine.

Russian appetites

We sort of know this, even though we do not know what to do about it. And responses to Putin’s moves in Eastern Ukraine are affected by how anybody evaluates the size of Russian appetites. Are we talking about a few border rearrangements here and there? Or is there a bigger plan for gobbling the Baltic States, and who knows what else?

The real story

Well, be that as it may, there is a bigger story underneath that is currently overshadowed by the conflict in Eastern Ukraine. And here it is. Russia is not an autocratic state with neo-imperial aspirations. No, Russia is a criminal state disguised as an autocracy.

Does this sound outlandish? Well, may be.

Bill Browder’s thesis

But this is the thesis formulated by Bill Browder in his book Red Notice. Browder used to be an investor in Russia during the turbulent post-communist years characterized by confusion and lawlessness. His point is that Russia, after having digested the epochal transformations caused by the end of Communism, had a decent chance to become a quasi-normal emerging market.

But that did not happen. The privatizations became high way robbery. 22 people (later on known as the oligarchs) “bought” 40% of all the assets.

Just like the Mafia?

And what followed is not pretty. According to Browder, Russia today is run like a Mafia Family. Putin sits at the top, while his underlings control critical segments of all national assets.

Please click on the link below and watch Browder interviewed by Reuters.

And then you can draw your own conclusions.


Fed Induced Wall Street Bubble Keeps Going – For Now

WASHINGTON – Right before the most recent Federal Open Market Committee, (FOMC), meeting, Wall Street was on edge. Would the Federal Reserve now run by Janet Yellen (finally) signal the end of the longest period of ZIRP (Zero Interest Rate Policy) in modern US history? In other words, after 6 years of extraordinary “accommodative” measures (Fed speak for easy money), are we going back to normal?

Fed induced Wall Street bubble

This is not a technical question just for people working in finance. This is not about making a few timely adjustments to investment portfolios in the light of different monetary policies that may or may not be announced.

No, there is a lot more going on here. What is at stake is the unsustainability of the current Wall Street boom without the support of zero interest rates mandated by the Fed that caused an absurd hypervaluation of stocks.

Put it differently, if and when the Fed will decide that interest rates have to be increased, Wall Street will take a hit, simply because current valuations are due mostly to the fact that investors have no where else to go, since any other form of investment yields zero interest, thanks to Fed policy. What we do not know is how big a hit.

When good news is bad news

And so, here is the perversion. Any time we get supposedly “good news” about lower unemployment, the stock market takes a hit. This sounds really odd. You would think that investors would gain confidence by looking at numbers indicating a more robust economy that creates more jobs. But no, what they think is that the Fed, by looking at the same jobs growth numbers, would have the evidence it needs to conclude that unemployment is back under control, and therefore it may be time to end ZIRP and jack up short-term interest rates, this way causing a market collapse.

The party is not over yet

Well, going back to the recent FOMC meeting, after the ritual announcement of what was decided, the market rallied. And the simple reason is that Fed announced nothing. Fed Chair Janet Yellen said that there may be indeed a time to consider raising interest rates, but that time is not as near as we thought it might be. And this is largely because the economy is not growing as much as the Fed had anticipated in 2014.

Translation: “Contrary to what we feared, the party is still on, and the Fed just told us that it will go on for quite a while. Therefore, fear not. Keep throwing money into stocks. At some point this thing will end. But not now.”

The Fed created a monster

This may look like lunacy. But it is pretty much what is going on. The truth is that after 6 years of ZIRP, the Fed has created a monster. It has monetized trillions of dollars of US debt. It has quadrupled its portfolio, and ZIRP has induced investors to put their money into Wall Street, unless they really prefer zero interest alternatives (the functional equivalent of the old mattress).

Mad rush for the door

And yet, the very thought of putting an end to this unprecedented financial distortion creates market gyrations. Imagine what will happen when ZIRP will be truly over. It is wishful thinking to assume that there will be an orderly exit from the most overvalued stocks. Most likely there will be a mad rush for the door. It will be a huge mess.

But there is no way to avoid this. This ZIRP absurdity has to end. Unless we really want to believe that ZIRP is normal, that the Fed can keep printing money for ever, and all will be well, because our Keynesian mandarins running the show from the Eccles Building really know what they are doing.

China Is Slowing Down – Old Model Not Working Anymore

WASHINGTON – We all know that the Chinese economy is slowing down. But we do not know all the facts. The picture may be much darker than what we can get from official statistics. It would seem that recent growth has been financed by large debts. Much of this debt will not be paid back because the money went to pay for ill-conceived projects. Local governments created large liabilities in order to finance development projects for which there is no market.

The Chinese economy is losing altitude

In order to shed some more light on these issues I reproduce here excerpts from a longer article that appeared in the English language version of Caixin, a Chinese publication, (Will Slow and Steady Win China’s Economy Race? By Yu Hairong, Xing Yun, Wu Hongyuran, Zhang Yuzhe and Wang Liwei, March 18, 2015).

 “The government said the gross domestic product growth rate sank to a six-year low 6.8 percent in January and February. Figures for those months came in far short of the average 7.7 percent forecast by economists from 14 financial institutions previously surveyed by Caixin. Fixed-asset investment growth and lending growth slowed as well during the period.”

“Early-year GDP growth also came in below the 7 percent target for 2015 set by the government, as spelled out in an annual report on the government’s work delivered by Premier Li Keqiang on March 5 to the opening session of the National People’s Congress.”

“Officials have acknowledged this year’s slow start in the context of what Li and others have called the “new normal” for China’s economy. GDP growth for “the first quarter will be below 7 percent,” said Zhu Baoliang, director of the economic forecast department of the State Information Center (SIC), a government research agency. The government is pressing forward with transformational economic reforms, but pressure to modify the official approach to these long-term changes has been building as slowing growth affects banks, the overall business climate and local government finances.”

“Pressure is building as the real economy turns downward,” said Xu Gao, chief economist at Everbright Securities. Zhu said how quickly the government is able to strike a balance between the slowdown and economic stability will largely depend on the ability of policymakers to maneuver and adjust fiscal policies.”

“Only in recent months has the Chinese business sector started to feel the full impact of a reform-related campaign to reduce the economy’s heavy reliance on what used to be ever-higher levels of fresh investment.”

“One sign of this impact is reflected in industrial value-added output, a measure of industrial production, which increased 6.8 percent during the January-February period compared to 8.6 percent for the same period last year. Nationwide, fixed-asset investment growth also slowed, increasing just 13.9 percent, down 1.8 percentage points compared to the first two months of 2014. A macro-economic analyst at Haitong Securities, Jiang Chao, predicted industrial value-added growth would fall to 6.5 percent in March. Other recent indicators of a changing business climate since the beginning of the year include reports of declining consumption of coal by power plants and slipping prices for manufactured steel.”

 “A Shandong Province city official overseeing local business investment who asked not to be named said that many small and medium-sized companies decided to suspend or delay investment projects earlier this year. These companies, which contribute significantly to local economies, have had tight capital chains.”

“Banks, which finance four-fifths of the country’s economic growth, are lending more cautiously. Credit is still available, but more thought is going into credit-issuing decisions. “The most important questions revolve around finding assets with good prices and controllable risks,” said the president of a commercial bank who asked not to be named. Risk control has become increasingly important in light of increasing numbers of bad loans. The China Banking Regulatory Commission (CBRC) said that as of December 31, the nation’s commercial banks were saddled with 842.6 billion yuan worth of non-performing loans. That amount was up 42 percent from the beginning of 2014.”

“Bad loan ratios are higher in some regions than in others. Government data show that for banks in the coastal provinces of Zhejiang and Shandong and in the interior provinces of Sichuan and Henan the average bad loan ratios are around 2 percent. The figures for banks in Shanxi Province and the Inner Mongolia region, both in the north, are about 5 percent. A manager at China Merchant’s Bank said that its Sichuan branches are seeing an increasing number of bad loans. He blames the rise on the area’s private lending network, heavy investment climate and the government’s anti-corruption campaign. Yu Xuejun, chairman of the Supervisory Board for Key State-Owned Financial Institutions at the CBRC, said that bad loan rates are rising at a faster pace than in the past, “regardless of the region and bank.”

“Moreover, loans to businesses in the commodities sector have been drying up due to risks tied to slumping prices for a variety of basic commodities, said a source at a joint-stock bank.”

“Local governments are also facing credit pressure. Since last year, several governments, including those in Shanxi, Heilongjiang and Liaoning provinces, have reported declining revenues due to sluggish business for coal and steel companies crucial to their economies. Liaoning’s government reported a 4.6 percent decline in 2014 revenue from the previous year. A bond market source said that the Inner Mongolia government’s financial position is quickly deteriorating due to declining coal prices. In February, the local government in Yijinhuoluo Qi, near the city of Ordos, had to borrow 20 million yuan from the central government to pay employees working on government-backed projects.”

“A nationwide review of government debt ordered by the Ministry of Finance found that as of January 5 local governments had a combined 40 trillion yuan in liabilities. But that figure may be low because in late January the ministry found some data was falsified by local governments. [Bold added] A revised report was expected to be released in March. Local government platforms that borrowed money for infrastructure and other projects are a particular concern. In the eyes of a Shanghai bank executive who asked not to be named, the “local financing platforms’ default risks are much greater than imagined.” One reason, he said, is that “many governments repackaged old projects into new ones in order to obtain bank loans.”

“The Ministry of Finance also set a quota of 1 trillion yuan in debt that local governments are allowed to convert from expensive loans into low-interest rate municipal bonds. The move was designed to help the governments finance new projects.”

The glitter is gone

So, here is the picture. China’s GDP is growing less than official forecasts had predicted. Industrial production is down. In all this, many local governments need to be bailed out because of bad economic development decisions that led to “malinvestment” and high debt. That financial hole may be a lot bigger than early figures had indicated.

What do we make of all this?

A safe conclusion is that China’s golden moment is over, because much of it was fake. GDP growth was spurred by a construction boom that turned out to be a bubble, because there is no real demand for all this debt-financed development. In the meantime, the country created an absurd level of over capacity in all the industrial sectors that support construction and infrastructure development. Many local governments got into big debt to finance big projects that have no economic rationale.

Beijing will pay all the bad debts

As bad as this looks, China is not Greece. We can rest assured that Beijing can manage all this. The Chinese state has gigantic cash reserves that can and will cover all the existing bad debt. But this is a small consolation.

The bad news is that the current scenario indicates the end of an era. The old economic development strategy does not work anymore. A new model that will see a shift from capital investments to more consumer spending has been talked about, but is not operational.

The best I can think of is that, absent huge economic gains stemming from truly innovative sectors, China will go down to average emerging market growth rates of 4 to 5% a year. This is China’s “new normal”. And it does not look that great.



80% Of All US Children Follow A Bad Diet

WASHINGTON – The alarming news is that millions of American children now exhibit signs of heart disease normally found only in adults. Yes, believe it or not, US children have high cholesterol and hypertension, and so they have to be put on medications. This sounds crazy. But it is true.

Bad diet

And how did this happen? Very simple. It is mostly about an extremely bad diet adopted on a massive scale by millions of families. As a result, American children eat too much of the wrong stuff: processed food, junk food, high sugar carbonated sodas, cookies and potato chips. And they do not eat almost any of the good stuff: fresh fruits, vegetables, fish, and whole grains.

The American food industry did this

We can thank the American food industry for this. It has managed to create very cheap processed products available now in every supermarket and convenience store that are really bad for you. This food, if consumed in large quantities, amounts to poison. But the marketing message is the opposite. The companies’ relentless advertising has convinced millions of Americans that snack bars and chips are nutritious and healthy.

Only 1% follow a good diet

Well, the compounded effects of this bad diet embraced now by almost every family and child in America are truly frightening. A recent study of 9,000 American children has concluded that only 1% –yes this is 1%– follow the optimal dietary guidelines recommended by pediatricians and nutritionists. Another 20% follow the guidelines at least to some extent. And this means that 80% do not. Think of this. 80% of all American children have bad to horrible dietary habits.

Teach about healthy food  

No wonder that we see children with previously unheard of manifestations of heart disease. This is incredibly bad. The good news however is that all this can be changed. Of course, modifying entrenched eating habits will require a lot of education. Parents need to be taught about healthy food, so that they can properly feed their children. But education is possible. And, given the health catastrophe in the making, it has to be considered an essential and urgent effort.

Cheap Fossil Fuels Killed Renewable Energy

WASHINGTON – Renewable energy had its great moment when we had the convergence between Global Warming predictions (or prophesies?) and Peak Oil pseudo-science. It went like this. Burning carbon is insane, because carbon emissions will destroy our habitat. Besides, carbon will get scarce and much more expensive, as we squeeze every drop that is left, after decades of insane drilling.

Renewable energy is the only solution

Our only hope for salvation was renewable energy. Just the expression “renewable energy” sounds sweet and benign. Think of it. A source of energy that replenishes itself, and that does not leave behind any nasty byproducts. No emissions. It is what we need to save the planet.

And so the production of renewable energy did not become an industry, a money-making enterprise. No, it became a mission, pursued by an exalted priesthood of benign scientists –or so we were told.

All gone

But now, puff, it is all gone. The prophesies about Global Warming did not go away. But the predictions of oil and gas scarcity have disappeared. And that has killed or will kill non competitive renewable energy.

The fact is that we have an enormous amount of carbon based energy. What happened here in the US, thanks to the shale revolution, is just the tip of the iceberg.

The shale revolution

America was the first country to discover and adopt hydraulic fracturing to exploit shale deposits. But there is plenty of shale in China, Argentina, Russia, Australia and elsewhere. Because of our ability to exploit large shale deposits, US natural gas is ultra cheap. How can renewables compete without subsidies against very inexpensive natural gas? They cannot. And tax payers will soon wise up and realize that the “renewable energy missionaries” are in fact part of a scam aimed at making money by forcing utilities to buy expensive wind and solar energy in the name of lower emissions and sustainability.

So, here is the new picture. The world is awash in oil, (conventional, plus “tight” extracted from shale), and soon enough many other countries will start developing shale gas. And if you say that this is just a phase, because these resources are after all finite, think that our carbon reserves will last at least another 100 years. This is not for ever; but it is a long time.

Methane hydrates

Besides, we are just beginning to understand the energy potential of methane hydrates, methane crystals found in enormous quantities at the bottom of the Oceans. There are huge deposits that contain colossal amounts of energy.

At the moment, the exploitation of methane hydrates is in its early, experimental stages. It will take time to develop this exploration into commercial activities. But, when that happens, this will be the equivalent of drilling the first commercial oil well (known as Drake Well) in Titusville, North-Western Pennsylvania in 1859.

It will be another energy revolution.

Plenty of cheap carbon energy

Bottom line, contrary to decades of dire predictions, we have plenty of carbon energy, and it is cheap. This does not mean that renewable energy has no future. It only means that renewable energy will be adopted when it will make economic sense.

Its days as a political mandate are over.

China Dumping Excess Steel

WASHINGTON – In a “normal” capitalistic country, when supply expansion strategies in any given industry exceed market demand, the companies operating in that sector pay the price. In order to realign demand and supply, they have to cut production, fire workers, sometimes close down entire production facilities. And, of course, the weakest players go bankrupt. Invested capital goes up in smoke, share holders are wiped out. This is painful. But it has to be done, simply because nobody can afford the luxury to keep making stuff that cannot be sold at a profit. And you cannot have any functioning capitalism without profits.

In China market rules do not apply

Well, move over to China and you see that these elementary rules do not apply –at least not now. Here is the story. In the go-go reckless years in which all local Chinese governments went into heavy debt in order to finance more and more construction projects, (construction was the easiest way to jack up GDP numbers), China built up gigantic steel, copper, cement, and glass capacity. All this was necessary, or so it seemed at the time, in order to supply the extraordinary construction boom.

Yes, except that the boom is over. China now is fantastically overbuilt. Brand new developments sit empty. There is too much of everything: luxury condos, shopping malls, office buildings.

Factories will not be closed

Needless to say, this is having and will have an impact on the supercharged sectors that were beefed up in order to support construction, steel first and foremost.

Well, according to the old-fashioned “demand and supply” capitalistic logic, China would have to cut down steel production. And we are not talking about trimming. We are talking about shutting down dozens of steel mills, since shrinking demand generated by a cooling economy will not even remotely match the existing, gigantic over-supply in the years to come. This would be most unpleasant. At a time of diminishing economic expectations, when projected growth rates are constantly adjusted down by the Beijing authorities, closing state-owned steel plants, while creating unemployment by firing thousands of workers would be politically complicated.

Political jobs

But, no worries. China operates in its own world –a world in which normal laws of the business cycle do not apply, for now. You see, in China most large steel mills are state-owned corporations. They will not go bankrupt on account of this over capacity and over production crisis because the state will give them easy credit, no matter what. It is politically important (forget about economics) that the mills stay open, and that they keep all their workers employed.

Dumping is the answer

And what about the excess steel they keep making for which there is no domestic market? Very simple! They will dump it abroad. In fact, they are already doing this.(Dumping means selling a product below cost, an illicit trade practice). As the WSJ reports, Chinese steel exports to the US have already jumped 40% in January 2015 from a year before, while US domestic prices have collapsed, creating a huge problem for US steel producers already hit by lower demand from the energy sector.

It is illegal

But wait. Isn’t dumping against the WTO rules? Isn’t Chinese behavior prohibited? Of course it is. But you have to make a case: provide the evidence, bring the whole thing to the WTO in Geneva, wait for a ruling, plan countermeasures, etc. All this takes time. Meanwhile, the Chinese keep dumping gigantic amounts of excess steel all over the world: Europe, the USA, India, and South Korea, bringing about economic ruin to hundreds of companies and thousands of workers.

How much excess capacity?

And how big is this excess capacity? Extremely big. As David Stockman put it in his Contra Corner: “China’s steel exports are now running at a 110 million ton annual rate compared to just 50 million in 2013. What’s worse, China has in excess of 1.1 billion tons of capacity and after nearly tripling production to satisfy its construction binge, its current 750 million tons of domestic demand has nowhere to go except down.” Got that? That’s 350 million tons of steel produced annually beyond what the Chinese market can absorb. All this will be dumped all over the world.

If private sector capitalism is bad, state-run corporations are worse

Capitalism is a crisis prone, wasteful and lousy system. We know that. But if you think that a country running huge state monopolies that are (at least for a while) immune from market forces is any better, just look at China.

I am confident that the oversold Chinese economic miracle will be soon deflated, along with its bubble economy. But, in the meantime, this anomaly that passes for “superior economic system” will be a source of disruption for the rest of a world economy that is trying to create and live by some rules of good conduct.