Showing posts with label IRS. Show all posts
Showing posts with label IRS. Show all posts

Wednesday, November 18, 2015

The World's First Cashless Society Is Here - A Totalitarian's Dream Come True

By Nick Giambruno

Central planners around the world are waging a War on Cash. In just the last few years:
  • Italy made cash transactions over €1,000 illegal;
  • Switzerland proposed banning cash payments in excess of 100,000 francs;
  • Russia banned cash transactions over $10,000;
  • Spain banned cash transactions over €2,500;
  • Mexico made cash payments of more than 200,000 pesos illegal;
  • Uruguay banned cash transactions over $5,000; and
  • France made cash transactions over €1,000 illegal, down from the previous limit of €3,000.
The War on Cash is a favorite pet project of the economic central planners. They want to eliminate hand-to-hand currency so that governments can document, control, and tax everything. This is why they’re lowering the threshold for mandatory reporting of cash transactions and, in some instances, simply making it illegal to pay cash.

In the U.S., central planners ratchet up the War on Cash every time the government declares a made-up war on something else…a war on crime, a war on drugs, a war on poverty, a war on terror…..

They all end with more government intrusion into your financial affairs. Thanks to these made-up wars, the U.S. government is imposing an increasing number of regulations on cash transactions. Try withdrawing more than $10,000 in cash from your bank. They’ll treat you like a criminal or terrorist. The Federal Reserve is at the center of the War on Cash. Its weapons are inflation and control over the currency denominations.

Take the $100 note, for example. It’s the largest bill in circulation today. This was not always the case. At one point, the U.S. had $500, $1,000, $5,000, and even $10,000 notes. But the government eliminated these large notes in 1969 under the pretext of fighting the War on Some Drugs. Since then, the $100 note has been the largest. But it has far less purchasing power than it did in 1969. Decades of rampant money printing have inflated the dollar. Today, a $100 note buys less than a $20 note did in 1969.

Even though the Federal Reserve has devalued the dollar over 80% since 1969, it still refuses to issue notes larger than $100. This makes it inconvenient to use cash for large transactions, which forces people to use electronic payment methods. This, of course, is what the U.S. government wants. It’s exactly like Ron Paul said: “The cashless society is the IRS’s dream: total knowledge of, and control over, the finances of every single American.”

Policymakers or Central Planners?

On stories related to the War on Cash, you may have noticed that the mainstream media often uses the word “policymakers,” as in “policymakers have decided to keep interest rates at record low levels.” When the media uses “policymakers,” they are often referring to central bank officials. It’s a curious word choice. As far as I can tell, there is no difference between a policymaker and central planner. Most people who want to live in a free society agree that central planning is not a good idea. So the media uses a different word to put a more neutral spin on things.

To help you think more clearly, I suggest substituting “central planners” every time you see “policymakers.”

The World’s First Cashless Society

In 1661, Sweden became the first country in Europe to issue paper money. Now it’s probably going to be the first in the world to eliminate it. Sweden has already phased out most cash transactions. According to Credit Suisse, 80% of all purchases in Sweden are electronic and don’t involve cash. And that figure is rising. If the trend continues - and there is nothing to suggest it won’t - Sweden could soon be the world’s first cashless society.

Sweden’s supply of physical currency has dropped over 50% in the last six years. A couple of major Swedish banks no longer carry cash. Virtually all Swedes pay for candy bars and coffee electronically. Even homeless street vendors use mobile card readers. Plus, an increasing number of government restrictions are encouraging Swedes to dump cash. The pretexts are familiar…fighting terrorism, money laundering, etc. In effect, these restrictions make it inconvenient to use cash, so people don’t.

So far, Swedes have passively accepted the government and banks’ drive to eliminate cash. The push to destroy their financial privacy doesn’t seem to bother them. This is likely because the average Swede places an unreasonable amount of trust in government and financial institutions. Their trust is certainly misplaced. On top of the obvious privacy concerns, eliminating cash enables the central planners’ latest gimmick to goose the economy: Negative interest rates.

Making The Negative Interest Rate Scam Possible

Sweden, Denmark, and Switzerland all have negative interest rates. Negative interest rates mean the lender literally pays the borrower for the privilege of lending him money. It’s a bizarre, upside down concept. But negative rates are not some European anomaly. The Federal Reserve discussed the possibility of using negative interest rates in the U.S. at its last meeting. Negative rates could not exist in a free market. They destroy the impetus to save and build capital, which is the basis of prosperity.

When you deposit money in a bank, you are lending money to the bank. However, with negative rates you don’t earn interest. Instead, you pay the bank. If you don’t like that plan, you can certainly stash your cash under the mattress. As a practical matter, this limits how far governments and central banks can go with negative interest rates. The more it costs to store money at the bank, the less inclined people are to do it.

Of course, central planners don’t want you to withdraw money from the bank. This is a big reason why they want to eliminate cash…so you can’t. As long as your money stays in the bank, it’s vulnerable to the sting of negative interest rates and also helps to prop up the unsound fractional reserve banking system. If you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates...or you can spend your money.

Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the War on Cash to force you to spend and “stimulate” the economy. If you ask me, these radical and insane measures are a sign of desperation. The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

Most people have no idea what really happens when a currency collapses, let alone how to prepare. How will you protect your savings in the event of a currency crisis? This just-released video will show you exactly how. Click here to watch it now.

The article was originally published at internationalman.com.


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Wednesday, November 26, 2014

Debunking the Claim That Puerto Rico’s Tax Benefits Are “Hype” or “Too Good to Be True”

By Nick Giambruno

It was only a matter of time before it happened.

After releasing our groundbreaking free documentary America’s Tax-Free Zone, new and old misconceptions about Puerto Rico’s tax benefits have surfaced. Many of them had previously been debunked.

The purpose of today’s article is to drive a stake through the heart of these misconceptions and forever put them to rest. And there is really no better person on the planet to do that than David Nissman, a true authority on this topic.

David Nissman was appointed by former U.S. President George W. Bush to be the United States Attorney for the U.S. Virgin Islands. He regulated the tax incentive programs there—which have many similarities to the Puerto Rico incentives—for the US federal government during his tenure. He also has written a number of the economic development statutes in place today.

David has since left the dark side and now represents U.S. taxpayers in IRS audits concerning tax incentive programs in the U.S. Territories—like the Virgin Islands and Puerto Rico. His current and former experiences gives him unparalleled insight into the U.S. government’s thinking behind Puerto Rico’s tax incentives.

After reading this article, you should have no doubt that Puerto Rico’s tax incentives are not “hype” and not “too good to be true.” The fact is, they are 100% real and legal. And for those who obtain them, they are here to stay.

Puerto Rico’s tax incentives may allow you to totally eliminate all forms of taxation on capital gains, interest, and dividends and reduce your corporate income tax rate to just 4%. Americans can find similar benefits nowhere else in the world short of renouncing their citizenship. Much ink has been spilled on this already, so if you are new to Puerto Rico’s tax incentives see here to get all caught up.

David will also show that:
  • Puerto Rico’s tax incentives are not some fly by night thing. They fit into the economic development policy that has been supported by the U.S. federal government and both political parties for many decades.
  • It’s nearly impossible for either the U.S. or Puerto Rican governments to end the tax incentives for those who already have obtained them.
Now, we aren’t saying it is impossible that these tax incentives could go away for new participants. That is a possibility, but also not a very likely one. It is also an incentive to obtain your tax benefits from the Puerto Rican government (which come in the form of a legally binding contract) as soon as possible—because once you’ve received your contract giving you your tax benefits, it will be almost impossible for anyone to take them away from you prospectively or retroactively, no matter how hard some politicians will stomp their feet.

Even if the benefits were to somehow magically disappear after a couple of years, you could still reap enormous benefits from participating in them. My colleague Louis James remarked that even if the tax incentives last only for five years, he’d be able to pay for his condo with his tax savings.

And now without further ado, I’ll turn things over to David Nissman, who will put these misconceptions to bed for good.
Until next time,

By David Nissman

When the United States began its relationship with Puerto Rico and the other Territories in the Caribbean in 1898, they were poor and had been economically oppressed. The US government sought to help create financial independence with economic development policies. This was not wholly altruistic. If the Territories were not financially independent, they would be a burden on the federal government.

From the start in the early 20th century, the Territories’ use of incentives to develop their economies was challenged as unconstitutional in violation of Article 1, Section 8, which required that “all duties, imposts, and excises shall be uniform throughout the United States.” The Supreme Court in a line of cases known as the Insular Cases used a line of deprecating and racially insensitive reasoning to accord all inhabitants of the Territories less than full constitutional rights. The less than satisfying trade-off in the outflow from the Insular Cases was that the Territories’ ability to use special tax laws to develop their economies was not restrained by Article 1, Section 8 of the U.S. Constitution.

This policy began in 1900 with the advent of the Foraker Act, which set up the first municipal government in Puerto Rico and permitted Puerto Rico to utilize special taxing measures. During the 114 years since the Foraker Act, Congress and the local governments in the US Territories have enacted many different programs to help the Territories raise revenues. President Herbert Hoover, visiting the Virgin Islands in 1931, was stunned at the poverty and declared:

“[W]e acquired an effective poorhouse, comprising 90 percent of the population. The people cannot be self-supporting either in living or government without discovery of new methods and resources. The purpose of the transfer of administration from the naval to a civil department is to see if we can develop some form of industry or agriculture which will relieve us of the present costs and liabilities in support of the population or the local government from the Federal Treasury or from private charity.... [H]aving assumed the responsibility, we must do our best to assist the inhabitants.”
New York Times, March 27, 1931

Congress in 26 USC 933 (Puerto Rico) and in 934 (the Virgin Islands) has passed statutes that enable the local governments to grant benefits on territorial source income to territorial residents. These laws have been firmly in place since 1960.

Critics always opine that Congress and or the Territorial governments can take these laws away, but they neglect an important component of the legal relationship between the United States government and its Territories. The Territories have a very special status: according to US Supreme Court case law, the Territories have the status of federal agencies. If a federal agency grants a contract to a business or individual, the federal government is bound to honor it. It would be a violation of the Contracts Clause of the US Constitution to take it away. So if an individual or business holds a contract from the Puerto Rico government granting these tax benefits (Act 20, Act 22), the contract is enforceable against both the Puerto Rican and US governments. Not even Congress can affect existing contracts.

Puerto Rico’s tax incentives are carefully considered programs. The Puerto Rican government based them on the Virgin Islands Economic Development Commission (VI EDC) programs. The VI EDC program has been fully vetted and litigated in the federal courts. Everyone recognizes the legitimacy of these programs and how they are part of US developmental policy toward US Territories. The bottom line is, Puerto Rico’s tax incentives are very sustainable.

Because of the continuing discussions in Congress about reforming the tax code, there is quite a bit of fearmongering that Congress may somehow repeal these programs.

Two points must be considered when hearing this:

1) Do we actually believe that our gridlocked Congress is currently capable of reaching a bipartisan agreement to overhaul the US tax code? While the tax code is in serious need of overhaul, this is a project that is years away. When there finally is new tax legislation, the Territories will lobby hard—with the U.S. Department of the Interior (DoI) firmly on their side—to continue making these benefits available.

The United States DoI continues to recognize that the Territorial tax incentives are a necessary component of U.S. developmental policy toward its Territories. In July, 2005, the DoI filed a written statement concerning its own concerns with new tax regulations for the Territories. The paper noted that (emphasis mine):

[t]he Secretary of the Interior has stated that her top priority for the Insular Areas is to promote private sector economic development there. Under the Secretary’s leadership, the Department of the Interior has been implementing a comprehensive program to advance this priority …. Because of the special fiscal and economic challenges faced by the Insular Areas, it has been the policy of successive administrations from both parties to support tax and trade provisions to help the Insular Areas generate sufficient tax revenue and economic activity to meet the most basic needs of their people. Notwithstanding these incentives, each of the Insular Areas continues to experience severe economic and fiscal difficulties. 

Special tax provisions for the Insular Areas, in particular, manifest an important underlying principle of US territorial policy: The Federal government does not treat the Insular Areas as sources of revenue. The US has a strong interest in maintaining and enhancing the economic and fiscal well-being of the Insular Areas.
—Statement of the US Department of the Interior, Office of Insular Affairs on Temporary and Proposed Regulations to Implement the American Jobs Creation Act of 2004 (July, 2005)

2) Whether these programs change one day or whether Puerto Rican statehood requires different tax rules, the individuals and businesses that have decrees with the Puerto Rican government will have to be grandfathered in based on the Contracts Clause in the US Constitution. Those individuals and businesses interested in moving to Puerto Rico would be wise to get moving to the extent there is any fear of legislative change.

Finally, it is also not very likely that the Puerto Rican government itself will end these programs. Attracting wealthy people and profitable businesses to relocate to Puerto Rico through these programs is attractive to both of the major political parties in Puerto Rico. Given the financial crisis in Puerto Rico, it is unlikely that the local government—which has committed large resources to marketing these programs—will suddenly embark on a different direction.

In conclusion, those who lawfully fulfill the purpose and requirements of the Territorial tax incentive programs—like Puerto Rico’s Acts 20 and 22—should feel confident that their contracts will be honored by both governments.

Editor’s Note: If you’re considering taking advantage of Puerto Rico’s tax incentives—benefits Americans can find nowhere else—then you should check out our comprehensive video course on the topic. It’s the authoritative guide on Puerto Rico’s tax incentives with information you won’t find anywhere else; and it will save you a lot of time and money. More on that here.
The article was originally published at internationalman.com.


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Thursday, June 26, 2014

The Four Horsemen of the Geopolitical Apocalypse

By John Mauldin


Ian Bremmer, NYU professor and head of the geopolitical consulting powerhouse Eurasia Group, consults at the highest levels with both governments and companies because he brings to the table robust geopolitical analysis and a compelling thesis: that we are witnessing “the creative destruction of the old geopolitical order.” We live, as his last book told us, in a “G-0” world. In today’s Outside the Box, Ian spells out what that creative destruction means in terms of events on the ground today. As Ian notes, the most prominent feature of the international landscape this year has been the expansion of geopolitical conflict. That expansion is gaining momentum, he says, creating larger-scale crises and sharpening market volatility. Hold on to the reins now as Ian take us for a ride with the “Four Horsemen of the Geopolitical Apocalypse.”

We’ll follow up Ian’s piece with an excellent short analysis of the Iraq situation from a Middle East expert at a large hedge fund I correspond with. Pretty straightforward take on the situation with regard to ISIS. This quagmire has real implications for the world oil supply. (It appears that the Sunni rebel forces are now in complete control of the key Baiji Refinery, which produces a third of Iraq’s output.)

Back in Dallas, it’s a little hard to focus on geopolitical events when seemingly all the news is about ongoing domestic crises. But the outrageous IRS loss of emails doesn’t really affect our portfolios all that much. What happens in Iraq or with China does. There’s just not the emotional impact.

One domestic humanitarian crisis that is brewing just south of me is the massive influx of very young children across the U.S.-Mexican border. When this was first brought to my attention a few weeks ago, I must admit that I questioned the credibility of the source. We have had young children walking across the Texas border for decades but always in rather small numbers. The first source I read said that 40,000 had already come over this year. I just found that to be non credible, but then with a little reasonable research it not only became believable but could be a bit low – it looks as many as 90,000 children will cross the border this year.

What in the name of the Wide Wide World of Sports is going on? First of all, how do you cover up something of this magnitude until it is a true crisis? When the administration and other authorities clearly knew about it last year? (The evidence is irrefutable. They knew.)

I am the father of five adopted children. In an earlier phase of my life, I was somewhat involved with Child Protective Services here in Texas. It was an emotionally difficult and heartrending experience. (One of my children came out of that system and three from outside of the United States). I have no idea how you care for 90,000 children who don’t speak the language and have no connection to their new locale. Forget the dollar cost, which could run into the tens of billions over time. These are children, and they are on our doorstep and our watch. You simply can’t ignore them and say, “They are not supposed to be here, so it’s not our responsibility.” They are children. Someone, and that means here in the U.S., is going to have to figure out how to take care of them, even if it is only to learn why they try to come and figure out where to send them back to. And frankly, trying to to send them back is going to be a logistical and legal nightmare, not to mention psychologically traumatic to the children.

Maybe someone thought that waiting until there was a crisis to let this information slip out (and we found out about it because of photos posted anonymously of children packed together in holding cells) would create momentum for immigration reform. And they may be right. But I’m not certain it’s going to result in the type of immigration reform they were hoping to get.

I have to admit that I’ve been rather tolerant of illegal immigrants over the course of my life. There are a dozen or so key issues that I think this country should focus on, but I’ve just never gotten that worked up about illegal immigration. The simple fact is that everyone here in the US is either an immigrant or descended from immigrants. It may be, too, that I’ve hired a few undocumented workers here and there in my life. As an economist, I know that we should be trying to figure out how to get more capable immigrants here, not less. What you want are educated young people who are motivated to create and work, not children as young as four or five years old who are going to need housing, education, adult supervision, health care, and most of all a loving environment where they can grow up.

It is one thing for undocumented workers to come across the border looking for jobs or for families to come across together. It is a completely different matter when tens of thousands of preteen children come across the border without parents or supervision. They didn’t get across 1500 miles of desert without significant support and a great deal of planning. This couldn’t be happening without the awareness of authorities in Mexico and the Central American countries from which these children come, and if this is truly a surprise to Homeland Security, then there is a significant failure somewhere in the system.

And if it was not a surprise? That begs a whole different series of questions.

This is a major humanitarian crisis, and it is not in the Middle East or Africa. It is on our border, and we need to figure out what to do about it NOW!

I don’t care whether you think we need to build a 20 foot high wall across the southern border of the United States or give amnesty to anyone who wants to come in (or both), something has to be done with these children. It is a staggering problem of enormous logistical proportions, and we have a simple human responsibility to take care of those who cannot take care of themselves.

And on that note I will go ahead and hit the send button, and let’s focus on the critical geopolitical events happening around the globe. Iraq is a disaster. Ukraine is a crisis. What’s happening in the China Sea is troubling. It just seems to come at you from everywhere. Even on a beautiful summer day.

Your stunned by the magnitude of it all at analyst,
John Mauldin, Editor
Outside the Box


(From Ian Bremmer)

Dear John,
We're halfway through 2014, and the single most notable feature of the international landscape has been the expansion of geopolitical conflict. why should we care? what's the impact; what does it mean for the global economy? how should we think about geopolitics? My thoughts on the topic, looking at the four key geopolitical pieces "in play"–in Eurasia, the middle east, Asia, and the transatlantic.

Geopolitics

 

I've written for several years about the root causes of the geopolitical instability the world is presently experiencing. a new, g-zero world where the united states is less interested in providing global leadership and nobody else is willing or able to step into that role. that primary leadership vacuum is set against a context of competing foreign policy priorities from increasingly powerful emerging markets (with very different political and economic systems) and a Germany-led Europe; challenges to the international system from a revisionist Russia in decline; and difficulties in coordination from a proliferation of relevant state and non state actors even when interests are aligned. all of this has stirred tensions in the aftermath of the financial crisis: instability across the middle east after a stillborn Arab spring; a three-year Syrian civil war; a failed Russia "reset"; rising conflict between china and japan; fraying American alliances with countries like Brazil, Germany, and Saudi Arabia.

And yet geopolitical concerns haven't particularly changed our views on global markets. each conflict has been small and self contained (or the spillover wasn't perceived to matter much). Geopolitics has been troubling on the margins but not worth more than a fret.

That's about to change. though perceived as discrete events, the rise of these geopolitical tensions are all directly linked to the creative destruction of the old geopolitical order. it's a process that's gaining momentum, creating in turn larger-scale crises and broader market volatility. we've now reached the point where near to mid-term outcomes of several geopolitical conflicts could become major drivers of the global economy. that's true of Russia/Ukraine, Iraq, the east and south china seas and U.S./Europe. in each, the status quo is unsustainable (though for very different reasons). and so, as it were, the four horsemen of the geopolitical apocalypse.

Russia/Ukraine

 

The prospect of losing Ukraine was the last straw for a Russian government that has been steadily losing geopolitical influence since the collapse of the soviet union over two decades ago. Moscow sees NATO enlargement, expanded European economic integration, energy diversification and the energy revolution as direct security threats that need to be countered. Ukraine is also an opportunity for the Kremlin...for president Putin to invigorate a flagging support base at home.

Putin intends to raise the economic and military pressure on Kiev until, at a minimum, southeast Ukraine is effectively under Russian control. the Ukrainian government's latest effort in response, a unilateral week long cease fire in the southeast, was greeted with lukewarm rhetoric by Putin and rejected by Russian separatists in the region, who escalated their attacks against the Ukrainian military. meanwhile, thousands of Russian troops recently pulled back from the Ukrainian border have now been redeployed there, bolstered by Putin ordering 65,000 Russian troops on combat alert in the region.

The choices for Kiev are thankless. if they press further, violence intensifies and Russian support expands, either routing the Ukrainian military, or taking serious losses and requiring direct "formal" intervention of Russian troops. if they back off, they lose the southeast, which is critical for their internal legitimacy from the Ukrainian population at large. all the while the Ukrainian economy teeters with much of their industrial base off line, compounded by Russian disruptions on customs, trade, and gas supply.

The growing conflict will lead to further deterioration of Russia's relationship with the united states and Europe: gas flow disruptions, expansion of defense spending and NATO coordination with Poland and the Baltic states, turbulence around Moldova and Georgia given their European association agreements this week...and "level 3" sectoral sanctions against Russia. that in turn means a serious economic downturn in Russia itself...and knock-on economic implications for Europe, which has far greater exposure to Russia than the united states does.

For the last several years, the major market concern for Europe was economic: the potential for collapse of the euro zone. that's no longer a worry. the primary risk to Europe is now clearly geopolitical, that expanded Russia/Ukraine conflict hurts Europe, in worst case pushing the continent back into recession.

Iraq

 

Like so much of the world's colonial legacy, many of the middle east's borders only "worked" because of the combination of secular authoritarian rule and international military and economic support. that was certainly true of Iraq–most recently under decades of control by the Baath party, beginning in 1963. Saddam Hussein's ouster forty years later by the united states and Great Britain, combined with the dismantling of nearly all of the military and political architecture that supported him (in dramatic contrast to, say, the ouster of Egypt's hosni Mubarak) undermined Iraq's territorial integrity. since then, Iraqi governance could still nominally function given significant American military presence and military and economic aid. once that was removed, there was little left to keep iraq functioning as a country.

Sectarianism is the primary form of allegiance in iraq today, both limiting the reach of prime minister nouri al maliki's majority shia government and creating closer ties between iraq's sunni, shia and kurdish populations and their brethren outside Iraq's borders. extremism within iraq has also grown dramatically as a consequence, particularly among the now disenfranchised sunni population--made worse by their heavy losses in the war against bashar assad across the largely undefended border with syria. the tipping point came with the broad attacks by the islamic state of iraq and syria (isis) over the past fortnight, speeding up a decade-long expansion of sectarian violence and ethnic cleansing between iraq's Sunni and shia. the comparatively wealthy and politically stable Kurds have done their best to steer clear of the troubles, seizing a long sought opportunity for de facto independence.

The American response has been cautious. domestic support for military engagement in Iraq diminished greatly as the war in Iraq continued and the economic and human costs mounted. obama repeatedly promised an end to the occupation and considered full withdrawal a major achievement of his administration. there's little domestic upside for taking responsibility in the crisis. obama's position has accordingly been that any direct military involvement requires a change in governance from the Iraqis--initially sounding like a unity government and increasingly evolving into the replacement of prime minister maliki. the pressure on maliki has gained momentum with shia grand ayatollah ali al-sistani calling on the iraqi prime minister to broaden the government to include more kurds and sunnis.

But Maliki, having successfully fought constitutional crises and assassination attempts, to say nothing of decisively winning a democratic election, is unlikely to go. isis poses a threat to the unity of the iraqi state, but not to maliki's rule of iraq's majority shia population, which if anything now stands stronger than it did before the fighting. and maliki's key international sponsor, iran, has little interest in forcing maliki into compromise as long as there's no threat to baghdad: they see themselves in far better strategic standing with a maliki-led iraqi government where they exert overwhelming influence, than over a broader government where they're one of many competing international forces. further, even if maliki were prepared to truly share power with iraq's kurds and sunni (something made more likely by the informal "influence" of 300 us military advisors now arriving in baghdad), he's unlikely to see much enthusiasm responding to that offer. the kurds are better off sticking to nominal (and a clearer road to eventual formal) independence; and sunni leaders that publicly find common cause with maliki would better hope all their family members aren't anywhere isis can find them.
absent american (or anyone else's) significant military engagement, the iraqi government is unlikely to be able to remove isis from leadership and, accordingly, reassert control over the sunni and kurdish areas of the country. that will lead to a significant increase in extremist violence emanating from the islamic world, a trend that's already deteriorated significantly in recent years (and since obama administration officials announced that cyberattacks were the biggest national security threat to the united states--a claim president obama overturned during his west point speech last month). since 2010, the number of known jihadist fighters has more than doubled; attacks by Al Qaeda affiliates have tripled.

The combination of challenging economic conditions, sectarian leadership, and the communications revolution empowering individuals through narrowing political and ideological demographic lenses all make this much more likely to expand. that's a greater threat to stability in the poorer middle eastern markets, but also will morph back into a growing terrorist threat against western assets in the region and more broadly. that creates, in turn, demand for increased security spending and bigger concerns about fat tail terrorism in the developed world, particularly in southern and western europe (where large numbers of unintegrated and unemployed islamic populations will pose more of a direct threat).

The broader risk is that sunni/shia conflict metastasizes into a single broader war. isis declares an islamic state across sunni iraq and syria, becoming ground zero for terrorist funding and recruitment from across the region. the saudi government condemns the absence of international engagement in either conflict and directly opposes an increasingly heavy and public iranian hand in iraqi and syrian rule. the united states completes a comprehensive nuclear deal with iran and declares victory (but doesn't work meaningfully with teheran on iraq), steering clear of the growing divide between the middle east's two major powers. the gulf cooperation council starts to fragment as members see opportunity in economic engagements with Iran. Iranian "advisers" in Iraq morph into armed forces; Saudi Arabia publicly opposes isis, but Saudi money and weapons get into their hands and an abundance of informal links pop up. militarization grows between an emboldened Iran and a more isolated, defensive Saudi Arabia. that's when the geopolitical premium around energy prices becomes serious.

East/South China Sea

 

Ukraine and Iraq are the two major active geopolitical conflicts. but there are two more geopolitical points of tension involving major economies that are becoming significant.

In Asia, it's the consequences of (and reactions to) an increasingly powerful and assertive china. the growth of china's influence remains the world's most important geopolitical story by a long margin. but, at least to date, china's growth is mostly an opportunity for the rest of the world. for the middle east, it's the principal new source of energy demand as the united states becomes more energy independent. for Africa, it's the best opportunity to build out long-needed infrastructure across the continent. for Europe and even the united states, it's a critical source of credit propping up currency, and a core producer of inexpensive goods. that's not to argue that there aren't significant caveats in each of these stories (or that those caveats aren't growing--they are), but rather that overall, china has been primarily perceived as an opportunity rather than a threat for all of these actors, and so it remains today.

for asia, a rising china has been seen more clearly as a double-edged sword. the greater comparative importance of the chinese economy has translated into more political influence (formal and informal) for beijing, at the expense of other governments in the region. meanwhile, china's dramatic military buildup has fundamentally changed the balance of power in asia; it's had negligible interest elsewhere.
china's military assertiveness has also grown in its backyard. in other regions, china continues to promote itself as a poor country that needs to focus on its own development and stability. in east and southeast asia china has core interests that it defends, and it is increasingly willing to challenge the status quo as its influence becomes asymmetrically greater.

that's been most clear with vietnam, where china first sent one oil rig to drill in contested waters directly off vietnam's shore--accompanied by several hundred chinese fishing vessels. they announced last week that they are repositioning four more. unsurprisingly, the vietnamese response has been sharp--anti-chinese demonstrations, violence, increased naval presence in the region, and coordination with the philippines.
none of that creates significant political risk on its own: vietnam isn't an ally of the united states and so engenders less support and response from washington than the philippines or japan...which is precisely why beijing has decided that's the best place to start changing the regional security balance.

but tokyo feels differently. the japanese government understands that a rising china is longer term a much more existential threat to its own security position in asia, and it isn't prepared to wait to raise concern until its position weakens further. so prime minister shinzo abe has declared his security support for vietnam. for america's part, obama has jettisoned the official "pivot" to asia. but the administration continues to believe that america's core national security interests, now and in the future, are in asia; and if china significantly escalates tensions in the east and south china seas, the united states is not likely to sit as idly by as they have on syria or ukraine.

the good news here is that--unlike with the countries driving the tensions in eurasia and the middle east--china has solid political stability and isn't looking for international trouble. but the realities of chinese growth, coupled with strong leadership from japan and (over time) india, along with the persistence of a strong american footprint are contributing to a much more troublesome geopolitical environment in the region.
the principle danger to the markets is what happens if the chinese government no longer holds that perspective. president xi jinping's commitment to transformational economic reform has been strong over the first year of his rule, and he has gotten surprisingly little pushback from the country's entrenched elites. but the uncertainty around china's near- to medium-term trajectory is radically greater than that of any of the world's other major economies. should significant instability emerge in china, very plausible indeed, china's willingness to take on a far more assertive (and risk-acceptant) security strategy in the region, promoting nationalism in the way putin has built his support base of late, would become far more likely. and then, the east and south china seas move to the top of our list.

U.S.-Europe

 

finally, the transatlantic relationship. advanced industrial economies with consolidated institutions and political stability, there's none of the geopolitical conflict presently visible in the middle east, eurasia, or asia.

geopolitical tensions have long been absent from the transatlantic relationship, the great success of the nato alliance. for all the occasional disagreement in europe on us military and security policy both during the cold war and since (the war in iraq, israel/palestine, counterterrorism and the like), european states never considered the need for broader security ties as a counterbalance for nato membership.

but the changing nature of geopolitics is creating a rift between the united states and europe.
american global hegemony had security and economic components, and it was collective security that had been the core element holding together the transatlantic alliance. that's no longer the case--a consequence of changing priorities for the americans and europeans, and an evolving world order (russia/ukraine a major blip, but notwithstanding). the transatlantic relationship is much less closely aligned on economics.

it's not the conventional wisdom. most observers say that, after bush, american policy looks more european these days--less militarist, more multilateralist. but actually, us foreign policy isn't becoming more like europe, it's becoming more like china. it's less focused on the military, except on issues of core security concern (in which case the united states acts with little need to consult allies), while american economic policy tends to be unilateralist in supporting preferred american geopolitical outcomes--which is seen most directly in us sanctions behavior (over $15bn in fines now levied against more than 20 international banks--mostly european) and nsa surveillance policy (with no willingness of the us to cooperate in a germany requested "no spying" mutual agreement)

transatlantic economic dissonance is also in evidence in a number of more fundamental ways: america's "growth uber alles" approach to a downturn in the economy, compared to germany's fixation on fiscal accountability. europe's greater alignment between governments and corporations on industrial policy, as opposed to a more decentralized, private-sector led (and occasionally captured) american policy environment. a more economy-driven opportunistic european approach to china, russia and other developing markets; the us government looking focused more on us-led/"universalist" principles on industrial espionage, intellectual property, etc.

as the g-zero persists, we will see the united states looking to enforce more unilateral economic standards that the europeans resent and resist; while the europeans look to other countries more strategically as counterbalances to american economic hegemony (the german-china relationship is critical in this regard, but that's also true of europe's willingness to support american economic policies in russia and the middle east). all of this means a much less cooperative trans-atlantic relationship--less "universalism" (from the american perspective) and less "multilateralism" (from the european perspective). more zero-sumness in the transatlantic relationship is a big change in the geopolitical environment; a precursor to true multipolarity, but in the interim a more fragmented and much less efficient global marketplace.

* * *

so that's where i see geopolitics emerging as a key factor for the global markets--much more than at any time since the end of the cold war. there's some good news and bad news here.

the good news is none of these geopolitical risks are likely to have the sort of market implications that the macro economic risks did after the financial crisis. there are lots of reasons for that. a low interest rate environment and solid growth from the us and china--plus the eurozone out of recession--along with pent up demand for investment is leading to significant optimism that won't be easily cowed by geopolitics. the supply/demand energy story is largely bearish, so near-term geopolitical risks from the middle east won't create sustained high prices. and markets don't know how to price geopolitical risk well; they're not covered as clearly analytically, so investors don't pay as much attention (until/unless they have to).

the bad news...that very lack of pressure from the markets means political leaders won't feel as much need to address these crises even as they expand, particularly in the united states. this is another reason the world's geopolitical crises will persist beyond a level that a similar economic crisis would hit before serious measures start to be taken to mitigate them. these geopolitical factors are going to grow. now's the time to start paying attention to them.

* * *
every once in a while, it's good to take a step back and look at the big picture. hope you found that worthwhile. i'll surely get back in the weeds next monday.

meanwhile, it's looking like a decidedly lovely week in new york.
very best,
Ian

From intel sources:

Dislodging ISIS Will Be a Difficult Task

 

The ISIS advance toward Baghdad may be temporarily held off as the government rallies its remaining security forces and Shia militias organize for the upcoming Battle for Baghdad. There is a rather clear reason why the ISIS leader has renamed himself Abu Bakr al-Baghdadi, meaning the Caliph of Baghdad . ISIS will at a minimum be able to take control of some Sunni neighborhoods in Baghdad shortly and wreak havoc on the city with IEDs, ambushes, single suicide attacks, and suicide assaults that target civilians, the government, security forces, senior members of government, and foreign installations and embassies. Additionally, the brutal sectarian slaughter of Sunni and Shia alike that punctuated the violence in Baghdad from 2005 to 2007 is likely to return as Shia militias and ISIS fighters begin to assert control of neighborhoods and roam the streets.

Even if Iraqi forces are able to keep ISIS from fully taking Baghdad and areas south, it is unlikely the beleaguered military and police forces will be able to retake the areas under ISIS control in the north and west without significant external support, as well as the support of the Kurds.

ISIS and its allies are in a position today that closely resembles the position prior to the US surge back in early 2007. More than 130,000 US troops, partnered with the Sunni Awakening formations and Iraqi security forces numbering in the hundreds of thousands, were required to clear Anbar, Salahaddin, Diyala, Ninewa, Baghdad, and the "triangle of death." The concurrent operations took more than a year, and were supported by the US Air Force, US Army aviation brigades, and US special operations raids that targeted the jihadists’ command and control, training camps, and bases, as well as its IED and suicide bomb factories.

Today, the Iraqis have no US forces on the ground to support them, US air power is absent, the Awakening is scattered and disjointed, and the Iraqi military has been humiliated badly while surrendering or retreating in disarray during the lightning fast jihadists' campaign from Mosul to the outskirts of Baghdad. This campaign, by the way, has been remarkably and significantly faster than the U.S. armored campaign advance to Baghdad in 2003 . The US government has indicated that it will not deploy US soldiers in Iraq, either on the ground or at airbases to conduct air operations.  Meanwhile, significant amounts of US made advanced armaments, vehicles, ammunition, and diverse military equipment have fallen into ISIS jihadists’ hands .

ISIS is advancing boldly in the looming security vacuum left by the collapse of the Iraqi security forces and the West's refusal to recommit forces to stabilize Iraq. This has rendered the country vulnerable to further incursions by al Qaeda-linked jihadists as well as intervention by interested neighbors such as Iran. Overt Iranian intervention in Iraq would likely lead any Sunnis still loyal to the government to side with ISIS and its allies, and would ensure that Iraq would slide even closer to a full-blown civil war and de facto partition, and risk a wider war throughout the Middle East.

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