Saturday, June 30, 2012

Sunday, June 24, 2012

If you want to see how nations attempt to create outrage when they are looking for a fight, the recent incident where a Turkish surveillance craft was shot down by the Syrians over the Mediterranean. On its face it looks like a major incident, one that will escalate tensions in the area, and perhaps draw a response. Turkey has called for Article IV consultations under NATO's Washington Treaty, but it is Article V which triggers coordinated response. The reality however, does not support the easy spastic response that those trying to push escalation want.

No one likes to have their nose bloodied, and it is certainly true that had the situation in Syria been less ugly, that what would normally have happened would be that the plane would have been warned, probably repeatedly, and been allowed to leave Syrian airspace, perhaps under escort from Syria's own jets. Even as things stand, the regime in Damascus should probably have let matters slide. However, the Turkish side is not that of a blameless victim attacked by a brutal paranoid regime, but that of a manipulative state making a provocative action, attacked by a brutal, paranoid regime. The flight path, ducking low under radar, is colloquially known as "buzzing" the target. It is possible that the pilot decided to see if he could firewall it and make it. It is also possible that the Turkish military ordered a route that was deliberately provocative. The more noise that is made, the more likely the second is to be true.

This means that while Turkey will invoke consultations, and there will be strongly worded statements from various allies, no one not already willing to intervene in Syria will have their minds changed about matters from what happened here, and what ill instead happen is that various pro-war, and I mean pro-war in the abstract, not pro-war in a specific sense, factions will try and make more of this than it is to attempt to build up support in among the public for use of force. Specifically what the outside wants is to be able to declare a no-fly zone, hit Syrian air defense, and then start shooting down Syrian rotary and fixed wing craft. This is why the helicopter story got play from Hillary Clinton earlier, because use of air power against civilians is a strong argument for such a no-fly zone.

One line that the interventionists will push is how important the plane was, the reality is exactly the reverse. The original F-4 Phantom was designed in the late 1950's, saw test flights in 1959 which proved that it was the fastest military airframe then flying, and then was introduced into service. In the late 1960's problems with agility and the engines caused it to have upgraded engines installed. It went on to become an iconic plane, being used extensively in Vietnam, and showing up in popular culture. But by now, this once workhorse plane is used by the US for target practice. The cost for a conversion is $800,000 or less, and there are "hundreds" of surplus F-4 planes at the boneyard.

The particular plane was one that had been upgraded, and some pro-war figures will attempt to blow this out of proportion, the reality again is very different. The upgrades to the F4E that were made by Israel incorporated some improvements to agility, some structural reinforcement, and improved avionics, intended to make the plane better at striking targets on the surface – naval or ground.

To the outside observer, this starts too look out of place. The Turkish forces just dumped billions into a modernization. They have much better planes available. Why would they bother with a craft that is obsolete in air combat roles? The official story from Turkey is that this was "a training mission" to test their radar also makes no sense, precisely because this plane could not out run hostile fire. This is a lie on its face, everyone knows that the situation with Syria is tense, and while one should never discount the possibility of a military screw up, it strains credulity to believe that the Turks ordered someone into harm's way on a training mission. Syria is a dictatorship facing the most serious challenge to party rule since the uprisings in the late 1970's and early 1980's that culminated with a series of massacres in 1982 that left Bashar's father in firm control of power. No one with a scrap of military integrity would order such a mission as a "training" mission. Previously the Turks tried to deny that the plane had violated Syrian airspace, and then said such violations were "routine." That is true in routine circumstances, but these are not routine circumstances.

Why does Turkey have such planes in service, when they have much better ones in their arsenal? Because the better planes come with strings attached, not to be used for purposes that the nation supplying the technology does not like. Turkey has used modified F4's to bomb Kurdish rebels, and there are allegations of hitting civilians with them. That qualifies. An F4 may be an obsolete airframe, but it is cheap, expendable, and comes with no diplomatic strings.

Again, not to discount the possibility of a military screw up, but the Turkish story strongly implies that the plane's air controller knew the flight plan took it close to Syrian airspace, namely the Turks say that the plane was ordered out when it was known to have crossed in.

The other part of the Turkish story that does not add up is the excuse that the plane was hit in international waters. Given the dynamics of where it went down, the Syrian's clearly shot at the plane while it was in Syrian air space. Everyone agrees they did so without warning, which is a violation of international protocol. But again, not something that has any traction on getting intervention from anyone not already inclined to intervene.

What we have then is the Turks sent an over age jet jalopy into harms way, a plane that is an expendable, and it gets shot down by Syria. Syria, while technically within its rights, was certainly acting outside of convention. However, shoot downs have occurred before without generating military response. Since the guardians of international response are Russia and China, and Russia is in bed with Assad, it seems unlikely that fake outrage will change their positions. And the outrage is fake: there is no way that the Turkish military could not know that flying a plane which is either meant for spying or hitting targets on the ground could not be seen as provocative by Syria, and it again strains credulity not to have taken into account that Syria would shoot.

The last piece of the puzzle is that Russia recently completed an upgrade of Syria's air defense systems, these upgraded systems are clearly capable of taking down the F4. The obvious folly of flying a plane into air defense occurred even to untrained observers immediately

This leaves the possibility that the Turks intended to draw fire as part of the mission as being a strong one. If this had been merely a screw up in a training mission, the Turks would be trying to turn down the temperature, while still asserting that the Syrians had created a diplomatic incident by shooting at all. Turkey, however, wants to intervene in Syria, and has seriously considered military intervention in the past. If Turkey had been holding out olive branches in the past, their outrage now might count for something. But the West has already effectively cut ties with Syria, and declared that it wants the fall of the regime. While not holding any brief for Bashir's rein of terror, it is entirely reasonable of Syria to send the message that it does not want outside interference. Realizing of course this is a regime that shells its own civilians.

For those against intervention, this will not be a shocking revelation. Syria is an armed camp, we knew this. They are inclined to shoot first and ask questions later, we knew this. They have a shiny new air defense that can take out over age economy of force units. We knew this too. The Turkish government did as well, though now they have a clearer picture of the level of hostility. But it might make those against intervention realize that matters are deteriorating rapidly, that actors, other than the US, want to escalate, and may find an excuse to do so better than this incident. It isn't as if Turkey has not made its desire to intervene clear enough.

For those in favor of intervention, this dramatically increases the cost side of the cost benefit analysis: to make Syria a permissive environment for drone, cruise missile, and air attacks, it will be necessary to make a broad series of strikes aimed at disabling command and control. With planes better than a somewhat polished 1960's vintage plane with 1970's vintage engines. Note that Israel has, but has not admitted to exporting a variant of this plane with newer PW1120 engines, which pushes the plane back up to merely obsolescent from obsolete.

Any lessons here? For one it shows that the UN is now in the rear view mirror, and that the various nations in the area have taken it into their own hands to intervene. The Russians are sending marines, the Turks trying to gin up an incident, the Americans, while clearly stating that they want Assad gone, have not yet signed on for intervention. For two it shows that there are increasingly direct attempts by various players to create public outrage: massacres, incidents, slanted stories. Since Assad's regime is unlikely to become any nicer in the near future, this pressure will continue, particularly because the macro-forces that created the popular part of the uprising are ebbing. Austerity is nasty, but it does have the effect of lowering input prices, and lower food inflation means less pressure on people to revolt now. The rebellion in Syria has become harder now that its members are clearer that they will need a military, rather than popular, victory. While the F4 incident holds public attention, dozens more civilians were killed in ground actions, and there is still no investigation as too who has been responsible for kidnappings and murders. While the two lost pilots are military dead, they at least knew they were signing up for a dangerous job.

The ur problem with intervention, however, consists of the following:

  • There are no good military options here without a potential government to be the boots on the ground.
  • The rebellion is to fractured and unable to control its own forces to be that potential government.

Thus, even if one believes that Assad should be removed, the question is who is going to replace him. It does little to overthrow one brutal dictator in favor of a failed state, for example Iraq, or replaced with another brutal dictator. The point of intervention is that it must be possible, and it must be effectual. Right now we have neither.

Monday, June 18, 2012

Krugman's errors of Fact

Once again, Krugman makes errors of fact in his analysis about the crisis in Greece.

First error of fact is that the Eurozone wanted a single currency without a government, and modeled his argument after states within the United States. In fact, the eurocrats did want a closer government integration: it was proposed twice, once as a constitution and once as a treaty, with Ireland, of all places, voting it down.

The second error of fact is the nature of single currency zones. Single currency zones have existed, with stability, for long periods of time, without transfers. The mechanism is personal, rather than financial, mobility. The US deliberately, as in it is part of the design of the modern state, pays people to stay relatively put, rather than pour into cities.

This is not to say that Europe's wealthy nations should have let Greece into the Euro, or that once it was in, they should have allowed it to borrow as much as it did – which was against the fiscal terms of the treaty, and well within the ECBs ability to restrain.

The reality is that Greece, like other dollar board countries, had an inflow of capital. Argentina imploded, but then left. This was a heterodox solution that rested on keeping as much of the money in the country as possible a.k.a. currency controls.

Another did quite well: China. China only went off a dollar peg recently. Hong Kong is on a dollar peg, and does well without transfers of wealth.

The problem is that Greece did not discipline its own economy under hot money, and then once that fell apart, Europe prevented the Greeks from doing what was obviously correct: slamming the door shut on capital flight, and negotiating an orderly exit from the Euro to the Drachma. That is to say, what Iceland did.

The Euro was not fatally flawed, instead, it is the people who have run it that were fatally flawed. The 2000's had a profligate US funding two wars. Europe took advantage by exporting consumer goods, particularly to the US, which was also spending far too much on health care and housing. Europe was artificially more competitive, because the US was engaging in protectionism by funding internal economic activity, rather than export activity.

The reality is that Greece is only partially to blame, in that while it is a drug addict, the banks of Europe were more than happy to pump up their bonds portfolios with sovereign loans that acted to a great extent the way mortgages here did: with the back door promise that they would not default. Thus it was not a few mortgages in Maine that unraveled the world banking system, nor is it Spain, or Greece, or Italy, that threatens to unravel the Eurozone. What is happening is a series of speculative attacks on Germany by way of peripheral countries, each attack designed to get the Germans to pour money into a bail in, one that profits bond holders of weak bonds. It has not been a risk free proposition: many of these attacks have left the bond holders sharply short. But over all, it has been a profitable exercise.

The lesson here is for both large and small nations. For small nations, do not allow hot money, and when it starts to flee, slam the door shut. Greece did not do this, and is now caught. Had the billions that fled Greece been nailed down, Greece could make payments and hold out for a better deal, or default and continue to import necessary resources. For large countries the lesson is also simple: do not use small peripheral nations as saps. Hong Kong does not allow it, and Argentina and Iceland have learned, painfully, not to do it.

The US once made the mistake, before a currency union, of allowing one part to wallow in hot money, this was a proximate cause of the Civil War, a recession in no small part caused by Southern excess fell hardest on the North, driving a wedge of hot economic pain to add to the calculus of interest.

Is there a solution for Greece? Now, no. The Greeks have voted for their youth to flee the country, leaving a husk of a nation of pensioners who will vote to pile on debt to keep their checks flowing, for as long as it lasts. Before? Yes.

But that was then, now, Greece will have to perpetually threaten to blow up the Euro to get crumbs enough to survive. The instability of the government is the only card they have: fall, and the Euro falls with them.

Irony is dead

From a right leaning British Paper Ambrose Evans-Pritchard writes: (and later quotes naked capitalism

Europe’s establishment is delighted by the victory of New Democracy and pro-asphyxiation bloc. This relief is unlikely to last much beyond today, if that.

Greece’s new leaders have a mandate from Hell. Almost 52pc of the popular vote went to parties that opposed the bail-out Memorandum in one way or another. There is no national acceptance of the Troika’s austerity policies whatsoever.

While the most left leaning major daily in the UK writes:

12.05pm: Time for a lunchtime round-up. A relief rally in the first hour of trading - after Greece avoided "Drachmageddon" - soon showed signs of fading, with the stock markets turning negative. European shares have recovered somewhat since then, with the FTSE now up 18 points at 5497, a 0.4% gain. Germany's Dax has climbed 42 points, or 0.7%, to 6272, while France's CAC has edged up nearly 6 points, or 0.2%, to 3093.

Spanish and Italian bond yields are surging again: the Spanish ten-year has jumped 22 basis points to a new euro era high of 7.149% while the Italian equivalent is a shade over 6%, up 13 bps.

That's correct, a left leaning paper is concerned about inflation, while the right leaning paper is against circular loan arrangements. Irony is dead. That's dead. dead. dead.

Some day people will be able to understand strategic money, but right now, they are too busy collecting pay checks for not understanding it...

Friday, June 1, 2012

Krugman: 2 million people don't matter

Krugman: 2 million people don't matter. This does not count all of the multuplier effect jobs that service construction.

Krugman has decried that we live in a dark ages of macro-economics. He's right: basic counter-cyclical policy has been forgotten, and he is correct in attacking the hausterity community. Sadly, he's also part of the dark ages of macro-economics, when he refuses to put the other half of the equation in place. The government, in a down turn, borrows money to restructure the economy. This was the other part of the New Deal: to spread demand vertically and horizontally, and create an economy that could unlock economic energy. For those misty eyed about the new deal, don't worry, this generation will give you a chance to do it again.

The Skipping Stone

Some time ago when certain individuals were trumpeting the coming expansion, sans real data, this blog was putting forward the skipping stone thesis: namely policy makers were afraid of another significant downturn, but because of the red queen's race, did not want to have a robust expansion, therefore, as soon as enough expansion took hold to ease the fears of a wipe out of the present political order, they would turn to austerity again, and economies would slow. This is a consequence of the end of cheap oil, and the accumulation of assets in the hands of those oilarchies with small stakeholder bases versus the accumulation of assets in the hands of those who control the capital system. That's the real argument of political economy in a nutshell: how to keep the holders of capital rents ahead of the holders of sovereign resource rents. Everything should be looked at through this lens.

According to the skipping stone, the US economy would be allowed to slow to near standstills, and then there would be a pump of money, largely by revenue reductions and other capital inflation measures, id est QEFoo. This is why mid-cycle governments such as the UK are taking their recession now, with two years to recover, Sarkozy's fall in France being an object lesson.

The skipping stone thesis is, of course, supported by employment data. But why listen to people who have actually come up with ideas based on employment data, when you can hire hacks whose job it is to give people in denial self-spin? It's not like there are really barbarians inside the gates who will make trouble. Demographics isn't destiny, but it is a measure.

So while the boomers fiddle around with how to distribute the wealth they are robbing from the millenials - decisions, decisions, spend it on prop up home values or to pay for expensive medical treatments? So many thieves, so few victims.

One more time: it is blazingly obvious that America trading oil rent for land rent and driving the sprawlconomy is a broken mechanism of spreading the benefits of internal capital demand, and until we realize this, we are going to keep putting our hand in the fire, and getting it burned.