Economic Warfare

[Dayuhan]

But short selling is not the only financial practice or instrument available. If I were going to construct a strategy of financial attack, my main weapon would probably be the CDS. Used correctly (or badly), a set of credit default swaps can act as a land mine, draining liquidity from a company very quickly.

Possible, but again, targeting one company is unlikely to do damage much beyond that except in very precarious circumstance. If you're dancing on the edge of a cliff any number of things can push you over the edge... but your problem in that case is not all those things that could push you over the edge, but your position on the edge of the cliff.

Certainly it's possible that if the US backed itself into a position where it could be so easily disrupted, and if that were sufficiently clear to outside parties, someone might come along and exploit that for political advantage. I don't think that's what happened, but it's possible. I also don't see any realistic way of protecting ourselves from that, other than not getting into that position in the first place. Again, the conspiracy talk seems to me a distraction from the real systemic problems that need to be addressed... and all too often a way to blame some nefarious external party for problems that with political will could be brought under control.

I'm speculating that what he refers to is a coming war in Asia over Energy(IF credit bubble debt is NOT written down and energy efficiency does NOT become a massive focal point) , I believe he is referring to a conflict between the US and China directly or via proxy thru Pakistan/India/Kablamistans with Russia playing a significant role as well.

I'm not seeing how addressing debt is going to produce a war in Central Asia. I also don't think energy will: Central Asian oil is not important enough to the US to justify war, by proxy or otherwise. China could absorb the entire output of Kazakhstan, Turkmenistan, and Azerbaijan without any significant adverse consequence for the US. It would be an issue for Russia, not because Russia needs the energy but because Russia's dominance of the export conduits for these countries gives Moscow huge influence at both ends of the pipe. I can see Central Asia as a Russia/China flashpoint more than as a China/US flashpoint.

I would also agree that China would try to play to it's strengths....dollars...but wouldn't the US also be tempted to leverage it's own strength via it's incredible conventional/unconventional force projection overmatch?

Temptation to use(literally and/or figuratively) it before you lose it due to increasing difficulty in sustaining the capability long-term?

Use it how? Where, and to what end? Is there any specific scenario in play here?

My personal feeling is that there seems to be a disconnect between strong conflict & security analysis and strong finance/economic/energy analysis...I guess that's why I'm an open advocate for trying to cross pollinate the two wherever possible to see what comes out of it, if anything, and try to better understand where we are likely headed.

Since that's my line of work, I'll agree, vigorously

[flagg]

Possible, but again, targeting one company is unlikely to do damage much beyond that except in very precarious circumstance. If you're dancing on the edge of a cliff any number of things can push you over the edge... but your problem in that case is not all those things that could push you over the edge, but your position on the edge of the cliff.

Certainly it's possible that if the US backed itself into a position where it could be so easily disrupted, and if that were sufficiently clear to outside parties, someone might come along and exploit that for political advantage. I don't think that's what happened, but it's possible. I also don't see any realistic way of protecting ourselves from that, other than not getting into that position in the first place. Again, the conspiracy talk seems to me a distraction from the real systemic problems that need to be addressed... and all too often a way to blame some nefarious external party for problems that with political will could be brought under control.



I'm not seeing how addressing debt is going to produce a war in Central Asia. I also don't think energy will: Central Asian oil is not important enough to the US to justify war, by proxy or otherwise. China could absorb the entire output of Kazakhstan, Turkmenistan, and Azerbaijan without any significant adverse consequence for the US. It would be an issue for Russia, not because Russia needs the energy but because Russia's dominance of the export conduits for these countries gives Moscow huge influence at both ends of the pipe. I can see Central Asia as a Russia/China flashpoint more than as a China/US flashpoint.

I have asked for clarification behind the paywall...will have to wait and see.

I also see possible friction between Russia and China in the region......and I'm wondering if it would result in aligned interests between the US and Russia to check China.....to me it seems quite complex.....given the following:

The Reagan Administration effectively kaboshed Soviet/Russian efforts pipe gas into Western Europe at the time.....stunting critically needed Soviet cashflow and stunting geopolitical leverage over Western Europe if it went forward at the time.

What role would Soviet leadership THEN and Russian leadership NOW give to US involvement in the oil glut that further choked Soviet cashflow...was it a happy coincidence or planned undermining of a nation?

Fast forward to now...and the next generation of Russian leadership seem to have won the long-game in Western Europe energy politics.

How well could US/Russian leadership work together to stunt China if their interests are only roughly aligned?



Use it how? Where, and to what end? Is there any specific scenario in play here?

Call me a crackpot...but from a Machiavellian perspective....could a FAILURE TO ACT or failure to act fast enough...in a crisis environment where the US would be expected to break up a fight before it spirals out of control, but fails to do so result in an opportunity for the US to capitalize?

Example:

Pakistani based and backed terrorists/insurgents attack India(yet again) compelling India to respond with force against Pakistan.

While the crisis escalates, the US, through an act of omission rather than commission, is intentionally too slow/weak/ineffective to de-escalate the crisis in a distinct change of behavior from previous historical diplomatic efforts to de-escalate the two nuclear armed rivals.

Crisis escalates into conflict that threatens to suck China and the US into the vortex.

But with the US possessing vastly superior strategic conventional and nuclear force projection overmatch against all combined combatants and physical distance, the US decides to sit on the sidelines and quarantines the conflict area of Pakistan/India/China to let the conflict burn itself out, to potentially take a considerable amount of excess production capacity off of the table, to provide the US an opportunity/excuse to default on it's debt to China, to reduce fast growing energy demand from about a 1/3 of the planet's population and force down energy prices via a forced increase in surplus/swing energy production capacity and another generation to sort out Cheap Peak Oil, to ensure the US is sitting at the head of the table for Bretton Woods 3.0, and to provide a sufficiently large crisis to more easily push fundamental/structural reforms in the US like re-industrialization further kicking Chindia in the teeth.

Cr@ppy and dark techno-thriller pulp fiction....but I would agree with Eric Janszen that without significant and fundamental reform in the US the remaining options are quite possibly darker gambles.

If it's a choice(although I know it's not) between an easy gamble and a hard uphill climb....what would most folks choose?


Since that's my line of work, I'll agree, vigorously

If you're aware of any sources that effectively mesh the finance/economics analysis with the defense/security analysis I'm all ears.....and would be most appreciative.......seems kinda hard to find in open source.

Same goes for widely distributed research on finance/economic/energy root causes of WWII....it's out there....but largely ignored, understated, or overlooked.

For the record, I don't think we are destined for a major conflict.....but I do think that the longer it takes for the US to make the necessary fundamental and structural changes it demands to regain it's overall health...the dangerously easy gambles will become more attractive if an opportunity presents for their consideration.

One thing EJ has called is a pending economic crash in China within less than 24 months....likely within 12...I would agree based on my amateur understanding of the situation.

EJ's "kremlinology" seems to work pretty well in the west, particularly on the US with his quite accurate calls on the US....but the translation to a command driven economy able to instantly respond with mass liquidity to put out the fires probably makes for a less accurate prediction due to that fact and less transparency in the Chinese banking system.

Eric Janszen refers to China's future crisis as "The Greenspan Credit Bubble with Chinese characteristics."

Maybe we could add "A return to the 1930's with 21st Century characteristics."

Certainly going to be interesting times ahead.

[motorfirebox]

Possible, but again, targeting one company is unlikely to do damage much beyond that except in very precarious circumstance. If you're dancing on the edge of a cliff any number of things can push you over the edge... but your problem in that case is not all those things that could push you over the edge, but your position on the edge of the cliff.

Why in the world would someone only target one company? As for cliff edges, I'll point out again that dancing on them is not some rare act. If it were, the recent crash wouldn't have been possible.

Certainly it's possible that if the US backed itself into a position where it could be so easily disrupted, and if that were sufficiently clear to outside parties, someone might come along and exploit that for political advantage. I don't think that's what happened, but it's possible. I also don't see any realistic way of protecting ourselves from that, other than not getting into that position in the first place. Again, the conspiracy talk seems to me a distraction from the real systemic problems that need to be addressed... and all too often a way to blame some nefarious external party for problems that with political will could be brought under control.

I agree that not dancing on cliff edges is the only realistic cure. I think that if cliff edges continue to be danced upon, someone's going to try to shove us off. I view that possibility as an addition to the threat presented by wholly accidental disaster. Given the way that it seems a lot of leading economists think, especially on the right (that is, that there's nothing wrong with the system that can't be fixed by even more relaxed oversight), I'm not sure the threat of accidental disaster carries enough weight.

[flagg]

I'm not seeing how addressing debt is going to produce a war in Central Asia.

I think I forgot to effectively address your question:

If I understand it correctly, iTulip/EJ posits the FAILURE to address the massive credit bubble debt effectively combined with a failure to achieve considerable improvement in average energy efficiency will lead to a far higher risk of broad conflict outside the US as a solution to the problem from a US perspective.

If the US continues down the track of foreign creditor insolvency to the point of a complete collapse in new credit....what's going to happen with that multi-trillion dollar military capability? Will it just sit there to slowly attrit..or will it be leveraged?

[Dayuhan]

Why in the world would someone only target one company? As for cliff edges, I'll point out again that dancing on them is not some rare act. If it were, the recent crash wouldn't have been possible.

It happens at regular intervals, and has for a long time. In any event, I think we have more to fear from our own blunders than from "economic warfare"

Trying to bring down the US economy by trying to drive a company or a group of companies out of business, or to depress their stock prices, seems to me too indirect to be worth trying, and I remain convinced that these "attacks" are conducted in pursuit of immediate profit, not political goals. I very much doubt that the people who short-sold Bear Stearns or Lehman had any clue what the consequences would be. They wanted the money.

I agree that not dancing on cliff edges is the only realistic cure. I think that if cliff edges continue to be danced upon, someone's going to try to shove us off. I view that possibility as an addition to the threat presented by wholly accidental disaster. Given the way that it seems a lot of leading economists think, especially on the right (that is, that there's nothing wrong with the system that can't be fixed by even more relaxed oversight), I'm not sure the threat of accidental disaster carries enough weight.

The only people with the capacity to shove us off a cliff are likely to go over it with us, given the interconnectedness of global economies. We're more likely to fumble over edges ourselves than to be pushed off.

As always, we pay too much attention to "oversight" and too little to effective management of incentives and good long-term policy.

[Dayuhan]

I think I forgot to effectively address your question:

If I understand it correctly, iTulip/EJ posits the FAILURE to address the massive credit bubble debt effectively combined with a failure to achieve considerable improvement in average energy efficiency will lead to a far higher risk of broad conflict outside the US as a solution to the problem from a US perspective.

If the US continues down the track of foreign creditor insolvency to the point of a complete collapse in new credit....what's going to happen with that multi-trillion dollar military capability? Will it just sit there to slowly attrit..or will it be leveraged?

Still not seeing a credible causative chain here. Of course one can always speculate, but that's rarely a sound basis for decisions. How are these factors supposed to drive war?

How well could US/Russian leadership work together to stunt China if their interests are only roughly aligned?

Why would the US want to "stunt China", especially in concert with the Russians?

One thing EJ has called is a pending economic crash in China within less than 24 months....likely within 12...I would agree based on my amateur understanding of the situation.

Hardly rocket science, lots of people are saying similar things. I would not personally want to call it a "crash", or to put a time bracket on it, or to predict how it will play out or what the consequences will be. Too many unknowns in the picture to call any of that accurately.

Certainly going to be interesting times ahead.

There always are... and dramatizing and sensationalizing them will always draw in readers.

[slapout9]

Interview of Max Keiser who is actually in Greece. Listen close to understand how debt is used as weapon of mass financial destruction and listen to who benefits.

http://www.youtube.com/watch?v=kssMN...mbedded#at=572

[Fuchs]

The word "debt" is conspicuously in fashion since it's the Republican strategy to defund the democratic government's policies.

For comparison, "Schulden" ("debt") appears in German media almost only in the context of Greece, followed by the "PIGS" context as a distant second.


Being a fashionable topic, it's a common mechanism to overspread its use. Such as Newtonian physics were applied to the military when they were in fashion, or evolution theory was applied to way too many topics.

[slapout9]

The word "debt" is conspicuously in fashion since it's the Republican strategy to defund the democratic government's policies.

For comparison, "Schulden" ("debt") appears in German media almost only in the context of Greece, followed by the "PIGS" context as a distant second.


Being a fashionable topic, it's a common mechanism to overspread its use. Such as Newtonian physics were applied to the military when they were in fashion, or evolution theory was applied to way too many topics.

Fuchs, what was the German press saying about the recent visit of Angela Merkel. Very little was said over here (USA).

[Fuchs]

The comments and reporting weren't exactly excited, it was mostly presented as politicians simply at work.

[slapout9]

Iceland and maybe Ireland stand up to the Tali-Banksters


http://www.youtube.com/watch?v=SixS1...&feature=feedu


Go Ireland!

[bourbon]

The war on terabytes - Policymakers worry about attacks on America’s financial system. The Economist, Dec 31st 2011.

Sponsored access is not the only way that a determined assailant could create havoc. The “flash crash” of May 6th 2010, in which American equities spectacularly nosedived, showed the damage that can be done by high-speed algorithmic trading. It is much easier to drag markets down when they are already reeling, by the use of such things as short-selling, options and swaps, points out James Rickards of Tangent Capital, an expert on financial threats. This is what the military would call a “force multiplier”.

Evidence of market manipulation in the financial crisis, by Vedant Misra, Marco Lagi, and Yaneer Bar-Yam. New England Complex Systems Institute, December 13, 2011. (PDF)

We provide direct evidence of market manipulation at the beginning of the financial crisis in November 2007. The type of market manipulation, a “bear raid,” would have been prevented by a regulation that was repealed by the Securities and Exchange Commission in July 2007. The regulation, the uptick rule, was designed to prevent market manipulation and promote stability and was in force from 1938 as a key part of the government response to the 1928 market crash and its aftermath. On November 1, 2007, Citigroup experienced an unusual increase in trading volume and decrease in price. Our analysis of financial industry data shows that this decline coincided with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the total trading volume. The selling of borrowed shares cannot be explained by news events as there is no corresponding increase in selling by share owners. A similar number of shares were returned on a single day six days later. The magnitude and coincidence of borrowing and returning of shares is evidence of a concerted effort to drive down Citigroup’s stock price and achieve a profit, i.e., a bear raid. Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior. Markets are not sufficiently transparent to reveal or prevent even major market manipulation events.

Our results point to the need for regulations that prevent intentional actions that cause markets to deviate from equilibrium value and contribute to market crashes. Enforcement actions, even if they take place, cannot reverse severe damage to the economic system. The current “alternative” uptick rule which is only in effect for stocks dropping by over 10% in a single day is insufficient. Prevention may be achieved through a combination of improved transparency through availability of market data and the original uptick rule or other transaction process limitations.

[Dayuhan]

Interpretations and analyses of financial markets should consider the possibility that the intentional actions of individual actors or coordinated groups can impact market behavior.

Of course "intentional actions of individual actors or coordinated groups can impact market behavior". This is not exactly news. Nor is a bear raid exactly news; and it's not like they started in 2007.

Bear raids and the like are symptoms, not causes; they don't sink healthy companies or crash healthy markets. If a company is sick enough for a bear raid to be anything more than a passing inconvenience, questions need to be asked... not about why a bear raid was allowed, but about why the company was in that condition to begin with.

[bourbon]

Bear raids and the like are symptoms, not causes; they don't sink healthy companies or crash healthy markets. If a company is sick enough for a bear raid to be anything more than a passing inconvenience, questions need to be asked... not about why a bear raid was allowed, but about why the company was in that condition to begin with.

By that logic I could shoot you in the head the next time you kayak into a rip current; and questions would be need to be asked... not about why you were shot in the head, but about why you were in rip current to begin with.

Of course "intentional actions of individual actors or coordinated groups can impact market behavior". This is not exactly news. Nor is a bear raid exactly news; and it's not like they started in 2007.

Your behavior in this thread is peculiar. All you have done in this thread is selectively taken quotes and arguments out of context, comment on articles you clearly haven’t even read, and regurgitate efficient market hypothesis dogma like a zealot; it is in stark contrast to your otherwise thoughtful posts in other threads.

[Dayuhan]

By that logic I could shoot you in the head the next time you kayak into a rip current; and questions would be need to be asked... not about why you were shot in the head, but about why you were in rip current to begin with.

Not the best analogy, as a bear raid is not at all like a shot in the head. Might be closer to compare to somebody giving me a hard slap in the side and capsizing my boat. If I have my $#!t together I'll just roll my boat back up again, no harm done. If I can't do that, you might well wonder why I was out there to begin with.

One of the great flaws of this contention is that it consistently and drastically overstates the damage that short selling or a bear raid can actually do to a healthy company. These things can only depress share price, they have no impact at all on the fundamentals of the company. If those fundamentals are solid the depression of the share price will be transient and will have little or no impact beyond the short term.

Your behavior in this thread is peculiar. All you have done in this thread is selectively taken quotes and arguments out of context, comment on articles you clearly haven’t even read, and regurgitate efficient market hypothesis dogma like a zealot; it is in stark contrast to your otherwise thoughtful posts in other threads.

I think my behavior is consistent. I've little patience for conspiracy theories in any field. In this particular area the theories seem both inaccurate and dangerous: pretending that the financial crisis is something that "they" did to "us" only distracts us from serious systemic issues that badly need to be addressed. Even the constant stress on regulation as "the answer" seems to me inappropriate and inutile. Government already has all the tools it needs to manage these situations, it just doesn't want to use them. More regulations aren't going to solve that problem. It's easy to look back and claim that regulation X would have prevented action Y, but the chances are hat all you would have done was to roll over into action Z, with the same outcome. Speculators are always more nimble than regulators, and trying to regulate against incentives is futile. Much better to manage the incentives.

Much of the talk we see about the financial crisis seems to echo what we heard after the stock crash in 2001, only back then it was all the fault of the market makers and the nekkid shorts. We don't seem much for learning from experience...

[bourbon]

Not the best analogy, as a bear raid is not at all like a shot in the head. Might be closer to compare to somebody giving me a hard slap in the side and capsizing my boat. If I have my $#!t together I'll just roll my boat back up again, no harm done. If I can't do that, you might well wonder why I was out there to begin with.

One of the great flaws of this contention is that it consistently and drastically overstates the damage that short selling or a bear raid can actually do to a healthy company. These things can only depress share price, they have no impact at all on the fundamentals of the company. If those fundamentals are solid the depression of the share price will be transient and will have little or no impact beyond the short term.

You just did it again. By completely ignoring the use of CDS, leveraged ETFs, and rumor/disinformation in modern bear raids, you are attacking a straw man. Weak.

[Dayuhan]

You just did it again. By completely ignoring the use of CDS, leveraged ETFs, and rumor/disinformation in modern bear raids, you are attacking a straw man. Weak.

Doesn't matter. It's still just share price manipulation. The underlying business of the company is not affected, and if that underlying business is strong there's not much lasting impact to share price manipulation. Symptoms should not be confused with causes.

[bourbon]

Doesn't matter. It's still just share price manipulation. The underlying business of the company is not affected, and if that underlying business is strong there's not much lasting impact to share price manipulation. Symptoms should not be confused with causes.

You are ignoring the fact that CDS manipulation can cut-off access to credit.

Since financial firms depend on access to short-term financing, it can affect the underlying business of the company. The other thing financial firms are dependent upon for the underlying business of the company, is investor confidence; and investor confidence can be eroded through disinformation and share price manipulation.

This has been explained to you before.

[Dayuhan]

Explanations are unnecessary, I'm sufficiently familiar with the workings of the industry to know that the impact of a bear raid on a healthy companiy's ability to finance operations is minimal.

Of course when companies are badly managed, overleveraged, and otherwise on thin ice, bear raids and short sellers will emerge from the woodwork. This is an opportunistic response to conditions, not a cause of conditions.

Certainly a wave of bear raids can perforate a bubble. That doesn't make them the cause of any subsequent crisis. Bubbles burst: that is their nature. If one thing doesn't burst them something else will. Getting all upset about whatever specific event burst the bubble does absolutely nothing to advance understanding of the roots of any subsequent crisis, and can easily distract from that understanding. What burst the bubble is meaningless, the question that needs to be examined is why the bubble emerged in the first place.

Of course the bursting of the bubble will always be heralded as "the cause" of the crisis by conspiracy theorists and those who failed to recognize the bubble and got caught with their necks out. That's always the case, and it's always irrelevant.

[bourbon]

Explanations are unnecessary, I'm sufficiently familiar with the workings of the industry to know that the impact of a bear raid on a healthy companiy's ability to finance operations is minimal.

I didn’t know the Peace Corps had an investment banking division, but that’s good to know…

So you are saying that CDS manipulation has a minimal effect on a company’s ability to access credit; and that disinformation and share price manipulation has a minimal effect on investor confidence?