Geopolitical Risk Theater: Russian Jets Buzzed Over a US Destroyer!

Will a global arms race, inspired by a cauldron of ideology based on economic military keynesianism and the rise of nationalism, financed by inflationism, lead to a detente or a world at war? 

Perhaps a clue to the answer may be seen from the other day's close encounter between US and Russian forces at the Baltic Sea.

Apparently, Russians wanted to test the defenses of the US navy. So Russians jets buzzed over a US destroyer, not once but several times in a "simulated attack" formation.

From the Business Insider/Reuters

Two Russian warplanes with no visible weaponry flew simulated attack passes near a U.S. guided missile destroyer in the Baltic Sea on Tuesday, a U.S. official said, describing it as one of the most aggressive interactions in recent memory.

The repeated flights by the Sukhoi SU-24 warplanes, which also flew near the ship a day earlier, were so close they created wake in the water, with 11 passes, the official said.

A Russian KA-27 Helix helicopter also made seven passes around the USS Donald Cook, taking pictures. The nearest Russian territory was about 70 nautical miles away in its enclave of Kaliningrad, which sits between Lithuania and Poland. "They tried to raise them (the Russian aircraft) on the radio but they did not answer," the official said, speaking on condition of anonymity, adding the U.S. ship was in international waters.

The incident came as NATO plans its biggest build-up in eastern Europe since the Cold War to counter what the alliance, and in particular the Baltic states and Poland, consider to be a more aggressive Russia.

The three Baltic states, which joined both NATO and the European Union in 2004, have asked NATO for a permanent presence of battalion-sized deployments of allied troops in each of their territories. A NATO battalion typically consists of 300 to 800 troops.

Moscow denies any intention to attack the Baltic states.

Videos of the incident seen from the links here and here.

The Disadvantage of having an American Citizenship

The US government seems to be applying a pincer movement—or a military maneuver where the flanks of the opponent are attacked simultaneously in a pinching motion after the opponent has advanced towards the center of an army which is responding by moving its outside forces to the enemy's flanks, in order to surround it (Wikipedia.org)—to its own citizens, by imposing repressive tax laws that restricts capital movements outside the US.

Now even wealth management firms are advocating wealthy Americans to FLEE the US.

From Bloomberg,

Go away, American millionaires.

That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business.

“I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

“In the long run, if Americans have less and less opportunities to invest overseas, it would be a disadvantage,” Marc Faber, the fund manager and publisher of the Gloom, Boom and Doom report, said last month in Singapore.

The almost 400 pages of proposed rules issued by the U.S. Internal Revenue Service in February create “unnecessary burdens and costs,” the Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, one of more than 200 submitted to the agency. The IRS plans to hold a hearing May 15 and could amend how and when some aspects of the rules are implemented. It can’t rescind the law.

Obviously the Obama administration’s ploy has been to coercively capture resources of Americans through more policies of financial repression channeled through inflationism (negative real rates and QE), taxes, bank regulations, anti money laundering laws and capital controls

More from the same article…

“Bank accounts, investment accounts, mortgages and insurance policies are being refused to American clients, and those with accounts are seeing them closed or have been threatened with closure,” Marylouise Serrato, executive director of American Citizens Abroad, a Geneva-based organization, wrote in an e-mail.

U.S. citizens who live in countries that aren’t served by U.S. banks may find themselves unable to bank at all, and implementation of the law in its current form could cause collateral damage to American businesses abroad, she said.

“Americans either will not be allowed to enter into international partnerships or live and work overseas, and will be replaced by foreign nationals who do not have these limitations,” Serrato wrote. “The extensive reporting requirements of Fatca will be destructive to those who wish to do business internationally as well as to those Americans who are legitimately living and working overseas.”…

While that may be easy for Americans in Singapore, those who live elsewhere face obstacles. Before Fatca, U.S. citizens in Bangkok or Manila could find investment opportunities through non-U.S. banks such as HSBC. Now their only option is to fly to cities where U.S. firms operate.

Limited Choices

If Americans choose to bank with a non-U.S. firm such as HSBC, their investment choices are limited. At the HSBC branch in the bank’s Asia regional headquarters in Hong Kong, Americans can hold only savings deposits. They’re prohibited from opening accounts to trade local stocks or buy products available to non- U.S. customers, including 45 equity funds investing in China or other geographies and industries. There’s only one comparable emerging-markets equity option available on HSBC’s U.S.-based investors’ website.

Financial institutions that choose not to accept American customers still must determine whether new or existing clients are so-called U.S. persons in order to comply with Fatca, according to Michael Brevetta, director of U.S. tax consulting at PricewaterhouseCoopers LLP in Singapore.

The definition includes citizens, green-card holders and non-Americans deemed U.S. residents by being present in the country for at least 183 days over a three-year period, which makes them subject to U.S. tax on their worldwide income, according to the IRS.

Compliance Costs

The compliance costs for banks, asset managers and insurance companies “could stretch into the billions of dollars,” Brevetta said. Private-banking firms in Hong Kong and Singapore already have operating costs between 88 percent and 90 percent of their revenue, compared with 70 percent at Swiss banks, PricewaterhouseCoopers estimated in a September report.

Penalties for not complying will be stiff. Non-U.S. firms that don’t make required disclosures will be subject to 30 percent withholding of certain dividends, interest or proceeds from the sale of assets they or their customers receive from U.S. sources, according to Baker & McKenzie’s Weisman, who has conducted workshops and seminars on the proposed rules for current and potential clients in Hong Kong and Singapore.

Wow. The above essentially signifies as the proverbial “writing on the wall” of the growing desperation by the US government over her unwieldy state of finances due to a bloated and unsustainable welfare-warfare economy.

Not only will US citizens be restricted access to foreign financial institutions, such tax laws are subtle manifestation of protectionism as overseas investments from US investors will be severely limited. [As one would note, foreign banks have been in retaliation to the encroaching protectionist US tax laws by denying Americans access]

President Obama’s nationalist-protectionist rhetoric over BPOs is apparently being realized via arbitrary tax laws. Yet protectionism will only compound to the nation's fragile economic conditions.

F. A. Hayek once warned that Americans are headed towards the road to serfdom. His admonitions appear as becoming a reality with the deepening of America’s police state aside from snowballing political and economic fascism, signs of which the US could be in a slippery slope towards dictatorship.

Yet such laws will have adverse consequences. This should incentivize, not only more tax avoidance measures, but also prompt wealthy Americans to consider giving up on their citizenship.

True, US government has made the exit option a burden. There have been reported incidences where the US government has denied applications by Americans wishing to renounce their citizenship (Sovereign Man).

Limiting people's actions increases political destabilization. Again all these seem to square with record gun sales, polls where gold seen as the best investment option, ballooning sales of home safe and even a report where the US government has been preparing for a “civil war”.

Political risks has certainly been mounting in the US as political and economic repression suggest that the US has been increasingly at war with their citizens.

I recall that after college graduation, a relative who is a resident of the US encouraged me to emigrate to the US and apply for American citizenship. Now I realize that this decision of mine to say NO may have seemed worthwhile or the right decision.

The Philippine Financial Markets Shrugs off the Scarborough Shoal Standoff

The financial markets and politicians backed by mainstream media apparently lives in two distinct worlds.

If one goes through the daily barrage of sensationalist headlines, one would have the impression that the Philippines must be in a state of panic. That’s because media has been projecting what seems as intensifying risk of a full blown shooting war over the contested islands, the Scarborough Shoal with China. And all these should have been sending investors scrambling for the exit doors, if not the hills.

But has such alarmism represented reality?

Of course by reality we rely on expressed and demonstrated preferences and not just sentiment. Over the marketplace, people voting with their money have fundamentally treated the recent geopolitical impasse as pragmatically nonevents.

The Phisix has been little change for the week but importantly trades at FRESH record high levels.

Meanwhile the local currency the Philippine Peso posted its SIXTH CONSECUTIVE weekly gains and has been approaching February’s high, whereas local bonds ADVANCED for the week, amidst the geopolitical bedlam[1]

Contrived Risks and Real Risks

There’s a world of difference between real risk and that of a pseudo, or may I suggest concocted, geopolitical risk.

Media has slyly been luring the gullible public into oversimplified “emotionally framed” explanations based on flimsy correlations which blatantly overlooks the behind-the-scenes causal factors[2]. Emotionalism thus opens the door for politicians to prey on the public by manipulating them through the foisting of repressive policies that benefits them at the expense of the taxpayers and importantly of our liberties. The recent call for nationalism via “unanimity” by a national political figure is just an example[3].

Politicians use fear or what the great libertarian H. L. Mencken calls as endless series of imaginary hobgoblins as standard instruments of social controls meant to advance their agenda or self-interests through the political machinery.

Aside from possible factors for the standoff, such as the smoke and mirrors tactic probably employed by China to divert the world from witnessing the brewing internal political schism[4] and or the promotion of sales for the benefit of the military industrial complex, it could also be that the call for “unanimity” may be associated with the domestic impeachment trial of a key figure of the judiciary where “rallying around the president” would extrapolate to the immediate closure of the case in the favor of the administration.

In doing so, the incumbent administration will be able control three branches of government and impose at will any measures that suits their political goals with hardly any opposition, all done under the sloganeering or propaganda of anti-corruption.

Yet the brinkmanship geopolitics in Asia, has not been limited to the controversial territorial claims in Scarborough and Spratlys, as well as Japan claimed Senkaku Islands[5]. Recent events includes the recent widely condemned missile test by North Korea, as well as, missile tests of former archrivals India and Pakistan[6]

Yet market’s responses to these events have disparate.

Pakistan’s Karachi index (KSE:100 orange) trades at the highest levels since 2009 and seems on the way to knock on the doors of the 2007 highs, whereas India’s BSE (SENSEX green) has struggled since peaking late February.

In short, the recent missile tests by both countries hardly influenced financial markets for the two South Asian giants.

The reason for this has been due to substantially improving trade relations[7] that has dramatically eased political tensions between them.

This validates the great free trader Claude Frédéric Bastiat[8] prediction centuries ago.

if goods don t cross borders, armies will

North Korea as the Real Geopolitical Risk

The North Korea-South Korea tiff cannot be seen in the same light.

Since the North Korea’s announcement of a missile test last March 16^th, South Korea’s KOSPI has been struggling. (chart from stockcharts.com)

The South Korean currency, the won, has also wobbled in the face of Nokor’s actions. (chart from yahoo.com)

Nokor’s largely embarrassing failed missile launch[9] last April 13^th has not deterred the new regime under Kim Jong Un from threatening to do another nuclear blasting test[10]

The fundamental difference from the abovementioned instances, including the unfortunate Scarborough-Spratlys affair, has been the near absence or the lack of trade linkages of Nokor which has not fostered social cooperation or goodwill with other nations.

Instead, Nokor’s despotic communist government’s survival has long been dependent on the ‘blackmail diplomacy’ in securing foreign aid. Yet uncertainty shrouds on the direction of Nokor’s foreign policy under the new leadership which appears as being manifested on the markets.

The good news is that so far there has been no sign of panic. This means South Korea’s consolidating markets could be digesting or has been in the process of assessing the political and security risks from Nokor’s new regime.

Otherwise if the worst option does occur, where posturing turns into armed confrontation the ensuing violence will spillover the world markets. But again Nokor has been more of a paper tiger than a real military power considering their dire economic status. A war is likely to cause the Kim regime to disintegrate under its own weight as famished and ill equipped soldiers are likely to defect to the South or a coup will force down the leadership.

The Free Trade Factor and Geopolitical Linkages

The same premise tells us why domestic politicians and media live in a different world from the citizenry. And this is why I hardly touch on mainstream news, except when scouring for the facts. I avoid from reading “opinions”, especially from so-called experts. That’s because mainstream’s opinions blindly represents the interests of the establishment[11].

China ballooning trade with ASEAN, which includes the Philippines[12], represents a very important deterrent from aggression.

As the great Professor Ludwig von Mises wrote in his magnum opus[13],

Man curbs his innate instinct of aggression in order to cooperate with other human beings. The more he wants to improve his material well-being, the more he must expand the system of the division of labor. Concomitantly he must more and more restrict the sphere in which he resorts to military action. The emergence of the international division of labor requires the total abolition of war.

So aside from her thrust to use the yuan as region’s foreign currency reserve as evidenced by the push for wider Free trade zone (including the ASEAN China Free Trade Agreement which began operations in 2010[14]) hardly squares with the bellicosity that has been publicly portrayed.

Free Trade agreements in Asia has exploded since China’s Deng Xiaoping opened China to the world bannered by the famous catchphrase “To get rich is glorious” (which according to some has been misattributed to him)[15]

Claude Barfield of the American Enterprise Institute points out that[16]

In 1975 there was one free trade agreement in the region but in 2011, there are now currently 245 free trade agreements that have been proposed, under negotiation or concluded.

Besides it is naïve to see events in the lens of a single prism.

An outbreak of military conflagration will likely draw in various major players that could lead to a world war, an event which hardly any party would like to indulge in (despite the politicians arrogant rhetoric), considering the today’s age of NUCLEAR and DRONE warfare, standing armies have been rendered obsolete, and mutually assured destruction[17] will likely be the outcome.

So aside from some missile tests by Asian countries, recently Vietnam hosted a joint naval exercise with US[18] while on the other hand China and Russia also recently completed naval war games[19]. While these may look like a show of force for both parties, they could also just be pantomimes.

Yet for me all these seem like watching a movie that gives you the vicarious effect, especially from the 3D vantage point. However when the closing or end credit appears or when the curtains fall, we come to realize that this has been just a movie.

So far the financial markets seem to be exposing on the exaggerations of the so called gunboat diplomacy, or perhaps too much of yield chasing activities may have clouded people’s incentives that has led them to underestimate such a risk.

While I believe the yield chasing factor has functioned as a substantial contributor to the current state of markets domestically and internationally, I also think that the local market has rightly been discounting the territorial claims issue for reasons cited above.

So unless politicians here or abroad totally losses their sanity, the issue over territorial claims will eventually fade from the limelight.

So be leery of politicians calling for patriotism or nationalism, that’s because as English author Samuel Johnson famously warned on the evening of April 7, 1775[20]

Patriotism is the last refuge of a scoundrel.

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[1] Bloomberg.com Philippine Peso Completes Sixth Weekly Gain on Growth Outlook, April 27, 2012

[2] See The Scarborough Shoal Standoff Has Not Been About Oil April 16, 2012

[3] See Scarborough Shoal Dispute: The Politics of Nationalism April 28, 2012

[4] See China’s Political System Reeks of Legal Plunder, April 20 2012

[5] See From Scarborough Shoal to Senkaku Islands April 19, 2012

[6] Globalspin.blogs.time.com Will Pakistan and India’s Back-to-Back Missile Tests Spoil the Mood?, April 25, 2012

[7] Thehindubusinessline.com Pak may be allowed to invest in India February 16, 2012

[8] The Freeman.org Claude Frédéric Bastiat

[9] See See North Korea’s Failed Missile Launch Reflects on Dire Economic Status, April 14, 2012

[10] Bloomberg.com North Korea Poised to Rattle Region With Nuclear Blast April 27, 2012

[11] See The Toxicity of Mainstream News March 13, 2012

[12] networkideas.org China, India and Asia: The Anatomy of an Economic Relationship (Draft Copy) 2009

[13] von Mises Ludwig 4. The Futility of War XXXIV. THE ECONOMICS OF WAR Human Action

[14] Wikipedia.org ASEAN–China Free Trade Area

[15] Wikipedia.org Deng Xiaoping

[16] Barfield Claude TAIWAN AND EAST ASIAN REGIONALISM American Enterprise Institute, November 10, 2011

[17] Wikipedia.org Mutual assured destruction

[18] Telegraph.co.uk Vietnam begins naval exercises with the US, April 23, 2012

[19] Abs-cbennews.com China, Russia end naval exercises, April 27, 2012

[20] Wikipedia.org The Patriot Samuel Johnson's political views

Classical Liberalism: Towards A Less Violent World

Steve Pinker at the Wall Street Journal brings us a good news: there has been a declining trend of violence worldwide.

Mr. Pinker writes,

Believe it or not, the world of the past was much worse. Violence has been in decline for thousands of years, and today we may be living in the most peaceable era in the existence of our species.

The decline, to be sure, has not been smooth. It has not brought violence down to zero, and it is not guaranteed to continue. But it is a persistent historical development, visible on scales from millennia to years, from the waging of wars to the spanking of children.

Mr. Pinker attributes the “six major declines of violence” as the process of pacification, civilizing process, the Humanitarian Revolution, the Long Peace, the New Peace and the cascade of "rights revolutions.

He further notes that 3 peacemakers are responsible for the deepening trend towards greater peace.

1. the pacificist state

2. commerce

3. cosmopolitanism or the expansion of people's parochial little worlds through literacy, mobility, education, science, history, journalism and mass media.

In my earlier posts, I showed Hans Rosling in two videos explaining how people have become remarkably wealthier over the past 200 years, through the division of labor (how washing machine enhanced out lives).

Today, I quoted Matt Ridley saying that the successful evolution of the homo sapiens came from trade.

In short, liberalism has been the primary force responsible for bringing about civilization, wider access to information and knowledge, increasing wealth, vastly improved quality of life and charity, all of which has led to lesser appetite for violence.

In the words of the great Ludwig von Mises, (emphasis added)

Liberalism aims at a political constitution which safeguards the smooth working of social cooperation and the progressive intensification of mutual social relations. Its main objective is the avoidance of violent conflicts, of wars and revolutions that must disintegrate the social collaboration of men and throw people back into the primitive conditions of barbarism where all tribes and political bodies endlessly fought one another. Because the division of labor requires undisturbed peace, liberalism aims at the establishment of a system of government that is likely to preserve peace, viz., democracy.

The Twilight Age of the Aircraft Carriers

Even the course of conventional-traditional warfare will be adapting to the ever changing realities. Vastly technology-enhanced anti-ship ballistic missile will render aircraft carriers obsolete

Writes Eric Margolis,

Batteries of DF-21D’s based safely inland may keep the US Navy far off China’s coasts, isolate Taiwan, and threaten US bases in Japan, Okinawa and Guam. In fact, the mere existence of the DF-21D’s and their deployment in sizeable numbers may be enough to keep US carriers at least 2,000 km from China’s coasts, thus beyond the useful range of the carrier’s strike aircraft…

But anti-ship missiles are lethal to carriers. Layered anti-ship missile defense can stop small number of attacking missiles. But if enough high-speed missiles are fired, and from different directions, at least one or two will permeate carrier and escort defenses.

Just one missile, filled with explosives and fuel, hitting a carrier will cause massive damage and fires that will put the great capitol ship out of action. I have joined numerous naval warfare simulations: in almost every case, some anti-ship missiles fired by enemy aircraft and subs inevitably leaked through layered defenses and hit the carriers. Each carrier and its escorts costs over $25 billion (not including its aircraft). They simply cannot be risked against relatively inexpensive Chinese missiles.

Officially, the US Navy denies claims its beloved carriers are increasingly vulnerable. The Navy’s brass is dominated by former naval aviators, just as the pre-war US Navy was run by battleship admirals. There is huge institutional bias against abandoning big attack carriers, just as there is bitter Navy and Air Force opposition to abandoning manned fighter aircraft and relying on drones.

Which makes all the more amazing an article in the May 2011 issue of the US Naval Institute Proceedings (for which I’ve written) by two Pentagon strategists urging an immediate end to building aircraft carriers, “Proceedings” is the voice of the US naval establishment.

For this heresy to be printed is a bombshell. But a needed one. It’s time the US Navy face facts and plan for the obsolescence of its attack carriers. There will still be a role for smaller carriers carrying drones and helicopters, but in wartime, the days of the mighty flattop that won the epic WWII victories at Midway and the Marianas are over.

Aircraft carriers signify as artifacts of the industrial age warfare. The information age (Third Wave) will radically change even the methods of engagement of military conflicts.