CHINA MANEUVERS TO TAKE AWAY US’ DOMINANT RESERVE CURRENCY STATUS

CHINA MANEUVERS TO TAKE AWAY US’ DOMINANT RESERVE CURRENCY STATUS [12]

by RUSS WINTER [13]

“All warfare is based on deception.” – Sun Tzu, “The Art of War” (500 B.C.)
“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world.” – Thailand Deputy Prime Minister Olarn Chaipravat in an interview with Bloomberg
“An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis.” — People’s Bank of China (2009)
It should go without saying that China and Russia have designs to end the U.S. Dollar hegemony free ride. This is fundamental to understand and will be a game changer. The impacts on the standard of living of these players will be profound and especially negative for the U.S. How and in what manner this plays out is the question. I strongly believe that the answer lies in two parts: letting the U.S. put a noose around its own neck and then at the appropriate time, kicking the chair out from under it.
The first part of the operation is now advanced and is described below. The second part involves China and Russia preparing its relative currencies to be accepted in lieu of dollars. It means making the yuan and ruble at least equal to, if not superior to, American dollars in world trade. As you can imagine, the U.S. — a country with a debt-to-GDP ratio approaching 110% — can ill afford this sort of challenge to its status as a reserve currency.
China has already advanced the Yuan as a principal exchange currency by incorporating a series of deal with other countries. Such arrangements are hardly mentioned by U.S. financial media, but they are going on constantly. So far, the People’s Bank of China (PBOC) has signed nearly 2 trillion yuan worth of currency-swap deals with 20 countries and regions, including Hong Kong. Here’s a breakdown of happenings:

•  Earlier this month, the European Central Bank announced a large currency swap arrangement with China. [14]
• An Asian ”renminbi bloc” has been formed involving seven countries.
• Russia, Iran, Angola, Sudan and Venezuela have converted oil sales to China into the Chinese Yuan. Worldwide, we see more than 5 million barrels per day traded in Yuan rather than U.S. dollars.
• Thechinamoneyreport.com [15] on June 16 reported RMB-yen trade is growing strongly a year after launch.
• BBC News, April 9: “China and Australia in Currency Pact [16]“
• BBC News, Feb. 22: “UK and China Poised for Currency Swap Deal [17]“
• BBC News, March 26: “China and Brazil Sign $30bn Currency Swap Arrangement [18]“
• Thechinamoneyreport.com [19] on June 4 reports that Singapore has launched a Yuan clearing service.
• Although ignored in the U.S., there has been increased chatter among foreign media about the RMB (aka Yuan) reaching safe-haven, reserve currency status, as Asia Today [20] reported on July 22.

I suggest that the kicking the chair out from USD hegemony involves at least partially backing the Yuan, and Ruble for that matter, with gold. China’s reserve assets were 30.2% of the world total at the end of last year. How much of this is already in gold?
China is secretive about the number, I think it’s because it had some catching up to do and it’s incorporating Sun Tzu-style principles, namely deception. The last time China revealed its gold reserve levels was in 2009 at 1,054 tonnes, which caught the market by surprise.
Another reference point is that China’s foreign exchange reserve increased from $2.2 trillion in 2009 to $3.4 trillion today. During that period, U.S. dollar reserves held by China fell from 69% to 54%.  If only 10% of that $1.2 trillion increase went to gold, then let’s see … At an average price of $1,200, that would be nearly 3,000 tonnes, bringing China’s total gold holdings up to 4000 tonnes. Conventional wisdom would point to between 3,000 and 4,000 tonnes. The U.S. supposedly has 8,133 tonnes in its reserves. Russia has doubled its gold reserve in four years.

China’s mines produce an average of 350 tonnes per year. During the last four years, it has produced 1,400 tonnes. Certainly, its domestic production went toward its reserve. Production estimates for 2013 are 440 tonnes. It should be noted, however, that from 2002 to 2009 China had produced approximately 1800 metric tonnes of gold, which strongly suggests that its figure of 1,054 tonnes for 2009 is understated and deceptive, maybe by a factor of two to three times.
Between 2011 and 2012, imports into China via Hong Kong surged to a total of 950 tonnes. Some, but possibly the majority of this ended up in gold reserves. Furthermore, no one talks about “illegal” gold imports smuggled into China, which may add to the total.
?
This year, the gold grab has reached entirely new levels, no doubt just one of the “unintended consequences” of the gold short attack in the paper “market.” In the first five months of this year, China imported more than what it did for all of 2011, or 525 tonnes.

Another incredible number is the volume of ounces transferred out of the London bullion market (LBMA) in May. That month alone it increased to 28.2 million ounces. To put that in perspective: 28.2 million troy ounces translates into 877 metric tonnes of gold. The amount of physical gold delivered year to date on the Shanghai Gold Exchange is 1,198 tonnes. Again, it’s much more than one would expect of the appetite of institutions, banks and individuals. The “Chinese granny” investor story is overplayed and may be a bit of a decoy. Much of this are PBoC and their proxies.

In 2009, a Chinese state council adviser known simply as “Ji” said that a team of experts from Shanghai and Beijing had set up a task force to consider expanding China’s gold reserves. Ji was quoted as saying, “We suggested that China’s gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years.”
The numbers I’ve cited are consistent with China easily reaching the Ji gold holding of 6,000 tonnes this year. The kind of withdrawal numbers being reported out of the LBMA, Comex and GLD (418 tonnes YTD) suggest that the PBOC through it’s proxy, the State Administration of Foreign Exchange (SAFE), is involved in a physical gold raid of such magnitude that the 6,000-tonne target has been left in the dust. The great gold sale has facilitated a push heading closer to 10,000 tonnes.
More importantly, as long as gold prices remain suppressed, China will continue to be a large-scale buyer. Perversely, if gold prices remain low, it will serve to accelerate the timeline for China to take down USD reserve currency hegemony. The U.S. can ill afford a China gold reserve buildup of 1,000 tonnes or more a year, let alone raid 2,000 tonnes and at cheap prices.
Meanwhile, China reportedly is progressing well on its ambitious plan to recast large gold bars into smaller, 1-kilogram bars on a massive scale. The big gold recast project points to the Chinese preparing for a new system of trade settlement. In the process, they are constructing a foundation for a new gold-supported monetary system that will give them advantages to their trade payments.
Finally, higher gold prices are necessary if the U.S. wants to curb China demand and prevent an emperor-wears-no-clothes scenario on the home front. You see, once yuan becomes a currency fully backed by gold, the next logical step will be not just domestic but international pressure on the U.S. and others, like Germany, to lift the iron curtain and reveal whether the gold they claim backs their currency really exists. Then get ready for all hell to break loose.
http://www.zerohedge.com/print/476704

Barclays Warns End-Of-QE.. Would Make 2000 Bubble Look Like A Day At The Beach

"It's hard to make the case that [US stocks are up 17% on a 2.5% earnings rise] based on fundamentals alone - it's money in motion," is how BofA's CIO Hans Olsen describes the unreality occurring in US asset markets currently. He noted in last week's interview with CNBC that Bernanke's experimentation has created asset-inflation "that would make the stock market bubble of 2000 look like a day at the beach. It's really quite remarkable." Critically, as many have noted, he notes "let the market start to price things based on fundamentals again rather than money printing. The sooner we get back to a market pricing, the more sustainable it becomes." What is ironic is that Olsen is overweight stocks in spite of all this - but like everyone else in the status quo - is hoping Bernanke keeps the house of cards from collapsing. Olsen appears to be among the very few career bankers willing to tell the truth - the fear being, of course (aswe showed here [4]) that it would mean their "skills" are completely meaningless.

(h/t Christopher)

Barclays Warns "End-Of-QE.. Would Make 2000 Bubble Look Like A Day At The Beach"

CFTC Fines Algorithmic Trader $2.8 Million For Spoofing In The First Market Abuse Case Brought By Dodd-Frank Act, And Imposes Ban

There has been some degree of concern among regulators during the course of this year with regard tohigh speed algorithmic trading and what certain authorities consider to be the disruptive behavior in which certain traders engage by using algorithms to outpace other market participants.

Today, the US Commodity Futures Trading Commission (CFTC) has brought a successful case against two parties, citing them for engaging in what the CFTC considers to be the disruptive process of spoofing. This is a milestone case, as it represents the first time that a trading firm has been prosecuted under the Dodd-Frank Act’s prohibition of spoofing, which is defined under the act as the illegal practice of bidding or offering with intent to cancel before execution.

Britain’s Financial Conduct Authority (FCA) collaborated with the CFTC on this matter, and has also issued a penalty to the same parties.

One of the reasons that algorithmic trading is on the agenda of regulators is that it facilitates positions to be opened and closed at extremely high speeds, using extremely high technology, therefore giving certain traders a distinct advantage over others.

In this particular case, Panther Energy Trading LLC and its Principal Michael J. Coscia utilized a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts.

The resultant toxic order flow of firms that use algorithms without contravening any laws has resulted in German regulator BaFIN proposing a mandatory delay in trade execution times to prevent disruptions, and go against latency arbitrage by those with quicker systems and complex automated algorithms.

Certain firms, without any encouragement from regulators, are also considering imposing a latency floor in order to absolve them of any such business. EBS recently embarked on such a consideration.

The CFTC’s order against Mr. Coscia and his firm finds that this unlawful activity took place across a broad spectrum of commodities from August 8, 2011 through October 18, 2011 on CME Group’s Globex trading platform.

The CFTC Order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.

According to the Order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts.

For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel.

By placing the large buy orders, Mr. Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell.

http://forexmagnates.com/cftc-fines-algorithmic-trader-2-8-million-for-spoofing-in-the-first-market-abuse-case-brought-by-dodd-frank-act/

G20 backs plan to stop global tax avoidance and evasion

Finance ministers from the G20 group of leading nations have formally backed plans to tackle international tax avoidance and evasion.

A statement issued earlier supports the automatic exchange of tax information between countries.

It also backs plans by the Organisation for Economic Cooperation and Development to stop firms moving their profits across borders to avoid taxes.

The OECD said some firms "abuse" current rules to avoid tax.

UK Chancellor George Osborne said the announcement, which came after a two-day G20 meeting in Moscow, was an "important step towards a global tax system that is fair and fit for purpose for the modern economy".

'Aggressive tax avoidance'

Last month, the G8 group of leading economies agreed a deal to "fight the scourge of tax evasion", and nations including the UK, France, Germany, the USA and Australia are taking part in a pilot information exchange scheme.

British Prime Minister David Cameron made the issue a priority for the UK's presidency of the G8 this year, and Australia has agreed to do the same during its G20 presidency next year.

The OECD said current tax rules, some dating to the 1920s, were created to avoid "double taxation" of companies working in more than one country - but it said they were being abused to allow "double non-taxation".

BBC business correspondent Joe Lynam said the "bandwagon of clamping down on aggressive tax avoidance" was moving on from developed economies to emerging ones like Brazil and India.

The rules should mean bigger bills for companies which could previously "pit one country off against another in terms of tax", our correspondent added.

The G20 asked the OECD to come up with a plan to improve tax cooperation, and the finance ministers said they "fully endorse the OECD proposal for a truly global model" of information sharing.

Their statement called on all countries to make automatic information sharing a reality "without further delay", adding that "capacity-building support" would be provided for poorer nations.

Closing loopholes

The G20 said the changes should be in place within two years, but our correspondent called that "very ambitious" because hundreds of tax treaties exist between countries and "thousands of amendments" might be needed.

Many multinational firms currently avoid tax - legally - by means including loopholes and tax havens, but the new rules could require them to pay more in the countries where they do business.

Firms including Google, Starbucks, Amazon and Apple have been criticised for the amount of tax they pay.

Earlier this year, MPs attacked Google for routing £3.2bn of UK sales through Dublin and paying little tax as a result.

Starbucks has been questioned for transferring money to a Dutch sister company in royalty payments, though the firm agreed to pay more tax after strong public criticism.

The companies point out that these schemes are legal and they have a duty to shareholders to minimise their tax bills.

http://www.bbc.co.uk/news/uk-23389695?print=true

Did A Raging Fire Burn Down JPMorgan's Gold Vault?

Overnight there has been a flood of viral reports that 'there was a fire at JPM's gold vault' based on a self-made video showing a barrage of fire trucks located on Broad Street between Wall Street and Exchange Place, further substantiated additionally by a @FDNY tweet around 6:30 pm on Saturday which indeed confirmed there had been a "commercial fire in a vault."

As a reminder, it was Zero Hedge who broke the news in March about the location of JPM's vault, namely that it can be found 90 feet below street level at 1 Chase Manhattan Plaza (located over half a mile away on Liberty and William Streets). Which is relevant, because as the FDNY reports, and as the video clip below vividly confirms (with the Federal Hall National Memorialdistinctly visible in the background), the fire response was focused on the area on Broad street between the New York Stock Exchange and what is now the 15 Broad Street block.

So did a sweeping fire "take place" (in broad daylight and in front of video camera armed streetwalkers) providing the fire brigade a pretext to abscond with JPM's gold on orders from above, or merely give JPM an alibi to say it's gold is "gone... all gone" or rather "burned... all burned" (leaving aside the propensity of a fire to propagate in the confined oxygen constraints to be found on top of the Manhattan bedrock and far below street level)? No. For the simple reason that 1 Chase Manhattan Plaza is over two blocks away from where the fire did take place as can be seen on the map below:

In other words, if there was a "fire" in JPM's vault, the response would have been not at 15 Broad Street, but over half a mile away at the perfectly fire-accessible Liberty Street (between the NY Fed and 1 CMP), across from the real JPM vault fire doors which can be seen in the following interactive image:

#0000ff; text-align: left;">View Larger Map

And yes: those who may suggest that any amount of gold tonnage may have been quietly moved over two blocks by the Fire Brigade have never actually carried the not-so-light-bars of gold themselves, especially not in broad daylight.

So why the confusion?

It appears the confusion stems from the Fire Brigade's designation of the fire as taking place at "JP Morgan's building" which indeed is where the Fire Brigade was located. However, it is the 23 Wall Street building, also known as the "JPMorgan building" formerly owned by JPM, and subsequently owned by Morgan Guaranty Trust Company, best known for being the site of the September 16, 1920 Wall Street bombing, when 38 people were killed and 400 injured. Ironically, as was then reported, "because the Morgan building was so well known, many assumed that the target of the assumed anarchist bombing was actually the bank itself."

For modern generations, 23 Wall Street may be better known as the (incorrect) facade of the NYSE as represented in The Dark Knight Rises.

Of course, JPM has long since moved on from its landmark location just across from the NYSE, and now can be located at its Park Avenue headquarters (with its Bear Stearns annex), and of course, at 1 Chase Manhattan Plaza.

So what is now housed in the 15 Broad/23 Wall Street block to where the FDNY was responding, if not any JPM? 23 Wall and 15 Broad Street were sold in 2003 for $100 million to Africa Israel & Boymelgreen (there is likely a far more interesting story surrounding Africa Israel and Boymelgreen here than there is about the "fire in JPM's vault"). The two buildings have become a condominium development, Downtown by Philippe Starck, named for French designer Philippe Starck, one of a growing number of residential buildings in the Financial District. Starck made the roof of 23 Wall into a garden and pool, accessible to the residents of the development.

Could there be a vault in the Downtown residential building, and could the FDNY have been responding to a fire in such a "commercial vault"? Of course: as anyone who has ventured into the skyscraper forest of New York's Financial District knows, there is an underground vault in virtually every building.

However, was this the JPMorgan gold vault? Certainly not.

http://www.zerohedge.com/news/2013-07-21/did-raging-fire-burn-down-jpmorgans-gold-vault

Savers And The 'Real' $10.8 Trillion Cost Of ZIRP

Via Chris Turner,

As a reprisal, let’s revisit the financial impact from Zero Interest Rate Policy (ZIRP) as it applies to responsible savers.  From the previous post, we just need to make a couple adjustments [5].   To assist in charting and calculations, the following data sets provided ample information:

1. Total Savings – FRED
2. Average interest rates on savings deposits – FRED (M2OWN)
3. Interest Income – IRS tax stats, NIPA tables
4. Effective Federal Funds Rate (FRED)

The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.  Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.

 [6]

Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally.  However, after 2001, the interest earned stopped increasing.  The green line shows the effective interest paid on interest bearing accounts.

Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.

 [7]

As savings increased when Fed Funds rate remained around 5%, interest income continued to rise.  However, post 2001, the interest income received stopped growing at the same rate.  With the exception of 2005 to 2008 when rates went back to “normal” in the 5% range – the interest income earned has remained stable at just under 1 trillion (Ben Bernanke is so smart).

Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?”  Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%.  With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income.  Voila, a calculation is borne:

 [8]

By calculating the estimated interest income from historical ratios (orange shaded area), we can see that as of July 2013, approximate interest income would be just over 3 trillion (1/5^th of GDP) on savings of 6.8 trillion (using the left scale).  Whereas the actual interest income reported by NIPA remained at 1.1 Trillion, the difference in interest received and lost interest equals roughly 2 Trillion.  Remember, this is interest income to SAVERS forever lost since 2001.  By aggregating the entire shaded orange area, SAVERS have missed out on a whopping 10.8 Trillion in earned interest usage.  The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.

http://www.zerohedge.com/print/476537

Wells Fargo ad: Dollar will lose its real value

http://dollarvigilante.com/blog/2013/7/10/a-major-bank-makes-a-freudian-slip-about-the-dollar.html#4912

Stratfor: The Problems with Background Investigations

The Problems with Background Investigations 

By Scott Stewart

In the wake of the case of National Security Agency leaker Edward Snowden, the company that conducted the background investigation for his security clearance is under heavy scrutiny. USIS has received significant media attention and is under investigation by the inspector general of the U.S. government's Office of Personnel Management. While such investigations of government contractors happen frequently, this particular case is interesting in that it concerns background investigations, which are considered by many to be a critical component of protecting national security.

However, background investigations as currently designed and conducted are fundamentally flawed. They are more effective at providing bureaucratic cover than they are at catching spies or preventing moles from penetrating the system.

Background Investigations

As a bit of disclosure, I have had several U.S. government background investigations conducted on me. I was first subject to full-field background investigations as an Army Intelligence Officer and then later as a Diplomatic Security Service special agent. I have also conducted background investigations, first as a Diplomatic Security Service special agent domestically and while assigned to a U.S. embassy overseas, and then later as a contract investigator for the State Department. I have also been interviewed by scores of investigators conducting background investigations on my friends, colleagues and former interns and employees. All this to say that my experience as a subject and source in various investigations, and as an investigator who has conducted hundreds of background investigations myself, has given me some insight into the problems of the current process.

National security background investigations in the United States date back to efforts to prevent potential Nazi and communist spies from infiltrating the government. Today, every federal government employee is subjected to a basic criminal and credit history check as part of the hiring process. Those employees who require access to classified information as part of their duties will also be subjected to a national security background check. These can vary from a perfunctory national agency records check for confidential or secret clearances to full-field background checks for access to top-secret material and sensitive compartmented information. Some agencies, such as the CIA and FBI, also mandate full lifestyle polygraph examinations as part of the clearance process. People holding a security clearance are also subjected to a periodic reinvestigations.

One of the biggest problems with personnel security investigations is the sheer number of them that are conducted. The State Department, which has fewer than 19,000 U.S. employees, conducts some 20,000 of them each year. When one considers the 240,000 employees at the Department of Homeland Security and the 3.23 million employed by the Department of Defense, as well as myriad other agencies and contractors with government security clearances, the number of personal security investigations conducted each year is staggering.

Going back to the State Department example, with only about 2,000 Diplomatic Security Service special agents worldwide, and the vast majority of them assigned to duties other than background investigations, the bulk of the investigations are conducted by contractors. But beyond sheer manpower considerations, most special agents simply do not view background investigations as important. Speaking from personal experience, I was far more motivated to investigate a bombing attack against an embassy or arresting a drug smuggler, terrorist or pedophile for passport fraud than I was to interview a potential employee's neighbors or former bosses. Because background investigations are not exciting and sexy, conducting them is also not considered particularly career enhancing compared to other assignments. I know from talking with friends from other agencies that agents there had similar views. Even many investigators working for investigation companies view their jobs more as stepping stones to other occupations, such as being a federal agent.

This disdain for background investigations by the people conducting them is compounded by the people who manage personnel security investigations. Because of the massive volume of cases involved, program managers tend to be focused on speed, efficiency and cost far more than on thoroughness. They encourage investigators to do the absolute minimum to meet the requirements as outlined in Executive Order 12968, which sets the standards for access to classified information, rather than to focus on really investigating and understanding the background of the subject of the investigation. In the case of a for-profit company like USIS, the bottom line is also a factor. Streamlining the efficiency of the process means doing the very least amount of work required to complete the specific task, thus maximizing profit and satisfying the board of directors.

Agents and investigators who sense something is not right and want to dig deeper and interview additional developed sources are frequently criticized for missing deadlines or conducting unnecessary interviews. Contract investigators who do this are also often accused of milking the system. Many investigators therefore find it easier to just do the minimum required rather than have to go back to their supervisors to get permission to conduct additional interviews beyond what was initially assigned to them.

There is a very real tension between managers who want streamlined investigations done within deadlines and good investigators who want to conduct a thorough investigation. A good investigator is methodical and persistent in his craft, but methodical and persistent investigations often take longer and cost more than investigation program managers will allow. Good investigators also frequently want to follow hunches and instincts, and it is very hard to convince managers to permit that type of latitude, and so the investigations rarely go very deep.

Interviews

Even the interviews tend to be shallow. Most investigators merely read Privacy Act and Freedom of Information Act warning statements followed by a list of obligatory, scripted questions rather than really probe during an interview.

While most agencies and companies do not permit investigators to conduct phone interviews except in exigent circumstances, some investigators have become masters of eliciting people to request telephonic interviews. By conducting interviews by phone, a contract investigator can cut down on travel time and complete more interviews more quickly -- thus making more money per hour. I live in a very remote area, and most investigators do not want to make the effort to drive out to interview me in person, so I often get this approach by investigators who are conducting investigation on friends and former employees. Since I know the game, when I am solicited for a telephonic interview, I refuse and make the investigator drive out to talk to me in person.

The problem with telephonic interviews is that the people being interviewed via telephone are far less likely to provide derogatory information than people interviewed in person. I experienced this several times while conducting split investigations, in which another investigator and I both identified and interviewed the same developed source. In one case, I interviewed a woman who provided some incredibly significant derogatory information about a subject indicating he had lied about his background. During our interview, she also told me that another investigator had interviewed her. When I asked her if she had also related this critical information to the other investigator, she said no, because he had only conducted a telephonic interview and had not asked her any specific questions that would have led to the information.

Dishonest investigators are also known to fabricate interviews they never conducted. While some investigators do this out of greed, others do it out of frustration when they have attempted to reach a source several times and a manager is pressuring them to close out a case. A good investigator will resist this pressure, because he or she has the mindset that the source may be able to provide a critical piece of information needed to break open the case. The poor investigator just sees the interview as a yet another meaningless task to complete, and therefore feels less guilt about the fabrication. Such conduct is criminal, and several investigators have been prosecuted in recent years for such activity. Agencies and companies are supposed to audit the work of investigators to protect against such things, but this auditing also takes time and money -- according to the Washington Post, one of the things USIS is being investigated for is failure to conduct sufficient audits.

I have found that the prevailing attitude among managers and investigators is that background investigations are perfunctory tasks that only require the minimum work necessary to check off the prerequisite boxes and get the investigation over as quickly -- and as superficially -- as possible. This means that the subject of the investigation can greatly influence its scope just by the information he or she provides -- or withholds -- in questionnaires and interviews.

Outdated practices

Moreover, the background investigations currently being conducted were developed decades ago when the world was a far different place. They are not really designed to deal with the complexity of the modern world. In the Internet age, people no longer must to go to Klan meetings, neo-Nazi rallies, anarchist bookstores or jihadist mosques to be exposed to such ideas or radicalized by them. In much the same way that people can become grassroots terrorists through such a self-radicalization process, they can also become a grassroots intelligence threat. The low-key methods of recruitment and radicalization mean that this potential threat may not be visible to others. This very real limitation is then compounded by the fact that personal security investigations have become meaningless bureaucratic processes that lack the ability to uncover the type of information required to catch an infiltrator who does not want to be caught.

The investigations are also only looking for very specific behaviors in the subject's past, such as criminal behavior, debt, mental health issues or drug use. These things are merely outward indicators, not real insights into the subject. Besides, a lack of these indicators does not necessarily mean that the subject will not compromise national security in the future, especially if the person is motivated toward espionage or a massive public disclosure of classified information by ideology or ego. Even many of the people motivated by money have done so more out of greed than by any demonstrable history of financial problems.

Furthermore, with the transient nature of today's society, where people frequently change jobs and addresses, neighbors and co-workers simply do not know people as well as they did in the 1950s. I have interviewed countless neighbors and co-workers who had absolutely no relevant knowledge of the subject I was investigating. Yet these interviews were deemed sufficient to check off a required box. The problem is that a person who does not know their neighbor is simply in no position to provide a reason that neighbor should not be considered suitable for a position of trust and confidence with the U.S. government.

Polygraphs are not much more effective. As we've discussed in relation to previous cases, polygraph examinations work well when administered to honest people, but they are not very helpful in cases where an individual has no compunction against lying or where the subject has received training in deceiving the polygraph. Even in cases where the polygraph is effective on a subject, it will only catch past nefarious behavior -- it cannot detect or prevent future espionage.

The U.S. government is spending billions of dollars on a national security background investigation system that is archaic and largely ineffective. The system works on honest people or stupid spies, but is quite simply not very effective in uncovering the lies of clever, duplicitous people. It is also clearly not designed to anticipate future behavior. The Office of Personnel Management's inspector general is attempting to hold USIS accountable for some allegations of sub-standard performance, but who is holding the entire system accountable? The only thing the current system does well is provide cover for bureaucrats who can point to a completed investigation as proof they are not culpable for a security breach.

Read more: The Problems with Background Investigations | Stratfor
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Americans' Confidence in Congress Falls to Lowest on Record

Congress ranks last on list of 16 institutions; military earns top spot again

by Elizabeth Mendes and Joy Wilke

WASHINGTON, D.C. -- Americans' confidence in Congress as an institution is down to 10%, ranking the legislative body last on a list of 16 societal institutions for the fourth straight year. This is the lowest level of confidence Gallup has found, not only for Congress, but for any institution on record. Americans remain most confident in the military, at 76%.

Small business and the police also continue to rank highly, with 65% and 57% of Americans, respectively, expressing "a great deal" or "quite a lot" of confidence in these institutions. Joining Congress at the bottom of the list are Health Maintenance Organizations (HMOs) and organized labor. Congress' low position is further underscored when one looks at the percentage of Americans who have little or no confidence in each institution. The slight majority of Americans, 52%, have this level of confidence in Congress, compared with 31% for HMOs.

Americans' confidence in several institutions measured in the June 1-4 Gallup poll has shifted since last year. Americans have become more confident in banks, organized religion, and public schools, and less confident in the U.S. medical system, the Supreme Court, and Congress.

Confidence in Congress Falls to Record Low

The percentage of Americans expressing a great deal or quite a lot of confidence in Congress is the lowest for a trend that dates back to 1973. The high point for Congress, 42%, came in that year.

Confidence in Congress has been at its lowest points for several years, while it was higher in the mid-1980s and in the early 2000s.

In Contrast to Past, Republicans, Democrats Hold Congress in Equally Low Regard

Democrats, independents, and Republicans are about equally likely to express low confidence in Congress. This is a change from the past and likely reflects the split control of Congress.

Historically, members of each major party expressed greater confidence in Congress when their party held control of both houses. During most years of the Republican-controlled House and Senate in the early to mid-2000s, Republicans were at least slightly more likely than Democrats to express confidence in Congress. After the Democratic Party took over both houses in 2007, however, Democrats began reporting more confidence than Republicans in the institution.

Between 2009 and 2012, a period that saw Congress come under split control, these partisan differences gradually diminished, and this year, Democrats are a mere two percentage points more likely than Republicans to report having a great deal or quite a lot of confidence in Congress.

Bottom Line

Americans' confidence in Congress is not only at its lowest point on record, but also is the worst Gallup has ever found for any institution it has measured since 1973. This low level of confidence is in line with Americans'low job approval of Congress, which has also been stuck below 30% for years.

The divided Congress, with Democrats controlling the Senate and Republicans the House, is likely part of the reason for the low levels of confidence rank-and-file Democrats and Republicans express, and is tied to Americans' frustrations with Congress' inability to get much done.

Gallup will explore the long-term trends in Americans' confidence in other key institutions in future stories.

Survey Methods

Results for this Gallup poll are based on telephone interviews conducted June 1-4, 2013, with a random sample of 1,529 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia.

For results based on the total sample of national adults, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points.

Interviews are conducted with respondents on landline telephones and cellular phones, with interviews conducted in Spanish for respondents who are primarily Spanish-speaking. Each sample of national adults includes a minimum quota of 50% cellphone respondents and 50% landline respondents, with additional minimum quotas by region. Landline telephone numbers are chosen at random among listed telephone numbers. Cellphone numbers are selected using random digit dial methods. Landline respondents are chosen at random within each household on the basis of which member had the most recent birthday.

Samples are weighted to correct for unequal selection probability, nonresponse, and double coverage of landline and cell users in the two sampling frames. They are also weighted to match the national demographics of gender, age, race, Hispanic ethnicity, education, region, population density, and phone status (cellphone only/landline only/both, cellphone mostly, and having an unlisted landline number). Demographic weighting targets are based on the March 2012 Current Population Survey figures for the aged 18 and older U.S. population. Phone status targets are based on the July-December 2011 National Health Interview Survey. Population density targets are based on the 2010 census. All reported margins of sampling error include the computed design effects for weighting.

In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.

View methodology, full question results, and trend data.

For more details on Gallup's polling methodology, visit www.gallup.com.

http://www.gallup.com/poll/163052/americans-confidence-congress-falls-lowest-record.aspx

China's Great Humiliation

MODERN MYTH'S OF NATIONAL TRIUMPH
Writing in 'Wall Street Journal' and saying China needs “a new national story”, Orville Schlee and John Delury basically claim China has for too long been hobbled and fettered, ideologically, by its modern history of humiliation. This was due to the so-called unequal treaties it was forced to sign with what for Chinese, were the Western Barbarians. These unequal treaties started with the British in 1842.

The cult of national humiliation was used by Mao Zedong, founding the Peoples Republic in 1949 when he said “Ours will no longer be a nation subject to insult and humiliation."

Schlee and Delury contrast that with the US and France:
“Every July, amid festivities and fireworks, the U.S. and France mark their birth as nations”. They claim that in both cases this started with triumph:  “Accustomed as we are in the West to histories that begin with triumph—the signing of the Declaration of Independence, the storming of the Bastille—it may seem strange that China, the fast-rising dynamo of the East, marks the beginning of its journey to modern nationhood in a very different way: with the shock of unexpected defeat and the loss of national greatness”.

Chinese state mythology, to be sure, makes it obligatory for every schoolchild to know China's official Before and After – Before and After the First Opium War of 1839-42. Schlee and Delury say this is comparable with Americans teaching children the preamble of the Declaration of Independence, and French forcing all schoolchildren to learn La Marseillaise, but in China's case it is a cult of national humiliation and the natural desire for revenge.

In fact all three events were revolutionary, included 'revanchist' motives, involved mass killing and were overturned and superceded by the real world. Teaching everybody, not only schoolchildren the differences between Before 2008, and After the crisis, are a lot more relevant to the modern world.

CHINA'S REBALANCING IS ALSO CULTURAL
When or if China experiences a massive financial and economic crisis comparable to that of 2008 in the US, France, other European countries, Japan, and other developed countries this may be as humilating for China as its 1842 defeat by the British in the First Opium War. It will be humiliating in the same way, but possibly not as intensely, as the deep humiliation suffered by the populations of the PIIGS countries, doomed to years (even a decade) of austerity, their youth forced to emigrate.

China's slowing economy is taken as “a danger signal”, by many in the West, only for what Chinese slowing will or can do to global economic growth.

It is usually ignored for what it is: a danger signal generated by and inside the Chinese economy and society. It warns that China can suffer a finance-triggered crash exactly like the Western economies. Very little prevents this – and the reason is because China has caught up. China is so far from a humiliated nation that, although Scheel and Delury don't exactly say this, its “170-year-old cult of national humilation” is a lot more than simply dangerous, if it affected Chinese political decisions.

This is not the case, but the reasons should alarm us even more. China has learned from the Western crisis of 2008 and its sequels. China is alarmed and perplexed, confused in the same way as Western deciders, or non-deciders. China knows this is a terminal crisis, but does not know what comes next.

The almost natural reflex action is to slow down, like driving in fog, hail or heavy rain.

National symbols, historical myths are in any case unrelated to the modern global economy. It is also arguable China has re-interpreted its 170 years of humiliation much more constructively than Americans, today, treat and mistreat the Declaration of Independence, and French fumble with the “real meanings” of the Storming of the Bastille.

All three were war-related events. All three events presaged future wars – civil wars. None of then had anything to do with the global economy's fantastic morph into uncharted waters since 2008. Inside the US and France, today, their historical relics are criticised by some as a “distraction”, even an irritation. 
For Chinese, national mythology makes The Temple of the Tranquil Seas, in Nanjing, the place where Chinese forces signed a humiliating surrender deal with British forces, a “curious porthole into the bitter past of foreign incursion and exploitation”. Today, countries like Cyprus must sign with the Troika, for last-minute bailouts under humiliating conditions. Across the OECD countries and with very few exceptions, the tens of millions of additional unemployeds since 2008 must accept the humiliation of long-term joblessness.

FORGET THE FIREWORKS
As it is, this July 14, many French towns and smaller cities have quietly shelved their traditional fireworks shows. Even when produced and sold by China, as most are, they are too expensive.

As we know, both Republicans and Democrats trace their ideologies to July 4. Both Napoleon and French Republicans claimed legitimity from July 14. In China, both the Nationalists and Communists constructed their ideologies with claimed inspiration from the August 1842 Nanjing Treaty. In no case did this prevent intense conflict, even civil war. Arguments can be made that all three “founding national events” sowed the seeds of civil war.

Facing economic crisis and being unable to trace it to unequal trade treaties, dumping, currency devaluation, commodity or stock price manipulation – or any other hostile action called Economic War – the fireworks of Great Power conflict, spurred by economic war, are at present very unlikely. This is because the crisis is too grave, not the opposite.

The fact that the Asian Locomotives, following the Asian Tigers, have slowed and then slowed again, while the other BRICs and G20 former high-growth Emerging economies, such as Brazil, are almost in recession should alert us to the real situation. For China, simply because of its massive size and long history, its deep experience of the recent high-growth phase of economic globalization, the roles of rebalancing – firstly to slow the economy – are clearly understood.

The motives for this are however more complex in the Chinese case, than in the Western economies which were subjected to chaotic and unexpected slowing, turning it into an inevitable crash. China in now way wants to repeat that humiliation, dealt to and inflicted on the West by itself. China therefore plans for controlled slowing – with all the dangers that implies.

As the Western economies have slowly understood, since 2008, there is little or no symmetry between the growth economy and decline economy. They are not simple red lines and blue lines on a chart, the one canceling the other. They are different processes – understood, now, by the admission of some Western economists, if not politicians, that “restoring growth” may not be conventionally possible or may have to be “heterogeneous”, spread over a long time period, staggered, or suchlike.  This recognition is often given coded language for example “double dip and triple dip”, “negative growth”.

China rides the Dragon. The capture by British forces of a Chinese Imperial Rising Dragon flag at the Battle of Chusan, during the First Opium War, was a key event in this key war. The Dragon, in Chinese mythology, can disappear in a flash and as a mythological animal is both revered and feared. Growth of the economy, in China, may be so extremely compressible that for all intents and purposes it disappears from view.

This would be more than simply a national humiliation – it would be a global catastrophe.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

http://www.marketoracle.co.uk/Article41385.html

A 21st Century Glass-Steagall Act

We are confident the following amusing bill titled grandiosely enough "A 21st Century Glass-Steagall Act" (the Bill text here) by Elizabeth Warren, John McCain et al, to pretend Congress is not a bought and paid for by Wall Street marionette, will have a last minute rider that says "Compliance with any or all of the above provisions is purely voluntary."

From Elizabeth Warren

Senators Warren, McCain, Cantwell, and King Introduce 21st Century Glass-Steagall Act

Senators Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA), and Angus King (I-ME) today will introduce the 21st Century Glass-Steagall Act, a modern version of the Banking Act of 1933 (Glass-Steagall) that reduces risk for the American taxpayer in the financial system and decreases the likelihood of future financial crises.

The legislation introduced today would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. This bill would clarify regulatory interpretations of banking law provisions that undermined the protections under the original Glass-Steagall and would make "Too Big to Fail" institutions smaller and safer, minimizing the likelihood of a government bailout.

"Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," said Senator John McCain. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail.  But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer."

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," said Senator Elizabeth Warren.  "The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk.  The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking, make our financial system more stable and secure, and protect American families."

"Too many Main Streets across America have paid the price for risky gambling on Wall Street," Senator Maria Cantwell said. "This bill would restore clear bright lines that separate risky activities from the traditional banking system. It's time to restore faith in our financial institutions by rebuilding the firewall that protected our economy for decades in the wake of the Great Depression. Restoring Glass-Steagall would focus our financial system where it belongs: getting capital into the hands of job creators and businesses on Main Streets across America."

"As Maine families continue to feel the sting of the 2008 economic downturn, America's largest financial institutions continue to engage in risky banking and investment activities that threaten the health of our financial sector and our economy as a whole. While recent efforts at financial sector regulatory reform attempt to address the ‘too big to fail' phenomenon, Congress must take additional steps to see that American taxpayers aren't again faced with having to bail out big Wall Street institutions while Main Street suffers," Senator Angus King said. "While the 21st Century Glass-Steagall Act is not the silver bullet to end ‘too big to fail,' the legislation's re-establishment of clear separations between retail and investment banking, as well as its restrictions on banking activities, will limit government guarantees to insured depository institutions and provide strong protections against the spillover effects should a financial institution fail."

The original Glass-Steagall legislation was introduced in response to the financial crash of 1929 and separated depository banks from investment banks. The idea was to divide the risky activities of investment banks from the core depository functions that consumers rely upon every day.  Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the wall between investment and depository banking and weakened Glass-Steagall. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Steagall.

http://www.zerohedge.com/news/2013-07-11/21st-century-glass-steagall-act 

WASHINGTON -- Sens. Elizabeth Warren and John McCain, along with two other colleagues, introduced legislation Thursday to reinstate the Glass-Steagall prohibition on federally insured banks from also operating as investment banks.

The legislation would minimize the risk of future goverment bailouts by forcing banks some still consider "too big to fail" to become smaller.

Warren (D-Mass.), an outspoken liberal, and McCain (R-Ariz.), a conservative who was his party's 2008 presidential nominee, are an unlikely pair.

But they are united in the belief that separating traditional deposit-taking from investment activities would reduce risk in the banking system and lessen the chance of future bailouts.

The two were joined by Sens. Maria Cantwell (D-Wash.) andAngus King (I-Maine) in introducing the 21st Century Glass-Steagall Act. Sen. Tom Harkin (D-Iowa) proposed similar legislation in May.

http://www.latimes.com/business/money/la-fi-mo-elizabeth-warren-john-mccain-glass-steagall-bank-regulation-20130711,0,165263.story

9 Plagues That Are Collapsing Capitalism

Via Jim Quinn's Burning Platform blog (authored by Paul Rosenberg of FreemansPerspective blog),

Let me be blunt: Our capitalist system is approaching failure.

Or, perhaps better said: Our marginally capitalist, partly-free market systems are approaching a massive collapse.

Not because of what capitalism is, mind you, but because the powers that be have bastardized it.

Capitalism can bear many distortions and abuses, but it is not indestructible.

And, make no mistake, the ‘capitalist’ system we have today has been massively corrupted, so much so that it’s sagging under the load... and will continue to do so until the proverbial straw breaks its back.

The 9 Plagues

1. The average producer is being stripped bare. In the US, for example, the total take of taxes has not risen dramatically, but fewer and fewer people actually pay them. There was a big uproar during the last election cycle over the fact that 47% of working-aged Americans paid no income tax. That means that the half who do work (read suckers) are paying the whole. And more than that, they are also paying for the many millions who are on food stamps and disability. Producers are being punished and abused, made into chumps.

2. Thrift is essentially impossible. I’ve explained this in detail previously, but a hundred years ago, it was possible for an average person to accumulate money. Mechanics, carpenters, and shop owners slowly filled their bank accounts with gold and silver. It was common for them to make business loans and to retire comfortably. But now, all of our surplus is drained away to capital cities, where it is poured down the drains of welfare, warfare, and political lunacy. Money has been removed from the hands that made it, and moved into the hands of non-producers, liars, and destroyers.

3. In 2008, US federal government regulations cost an estimated $1.75 trillion, an amount equal to 14 percent of US national income. Let me restate: Simply complying with regulations costs American businesses more than $1,750,000,000,000 (that’s $1.75 Trillion) every year. This, again, is money taken out of production and wasted on political lunacy.

4. Small businesses are being squeezed out. Take a look at the two graphs below, and understand that as small businesses are squeezed out, only the large corporations remain. These days, only the largest and best-connected entities are able to get their concerns dealt with (by the politicians they fund). Small operations are cut off from the redress of their grievances and are crushed by taxes and regulation. And don’t forget the comments of Mussolini:

Fascism should more properly be called corporatism, since it is the merger of state and corporate power.

While there may be no dictator, state/corporate partnerships are taking over commerce in the West.

5. The military industrial complex is out of control. Their lobbying, fear-mongering, and spending can only be characterized as obscene. Dwight Eisenhower was right when he warned us about this in 1960. It is sad beyond measure that so few Americans took him seriously. Trillions of dollars and millions of productive lives are being spent on the war machines of the West. Never forget that wars destroy massively and produce nothing.

6. All the Western nations now feature large enforcer classes, composed of bureaucrats, law enforcement units, inspectors, and so on. In the US alone this amounts to several million people – none of whom produce anything, and all of whom restrain producers from producing. Millions of people are paid to restrain commerce.

7. We now have a very large financial class in which blindly aggressive people make millions of dollars. The problem is that finance is not productive. It may allocate money in beneficial ways (though it often allocates mainly to itself), but it doesn’t actually produce anything. At present, the allocators get the big bucks, and the producers get scraps.

8. The modern business ethic has become about acquisition only. In more enlightened times, it was also about creating benefit in the world, or at least creating newer and better things. Mere grasping is an insufficient philosophy for capitalism; it leads to dark places.

9. Every nation on the planet is using play money and forcing their inhabitants to use their play money. Moreover, they have super-empowered a small class of Central Banking Elites, who make fortunes on their currency monopolies, and who are entirely unknown to the producers who unwillingly (and unknowingly) purchase jets and yachts for them. Our money systems have brought back aristocracies; a class that is both hidden and immensely powerful.

So What’s Next?

That’s up to the producers. Everything hinges upon them. The game, as it is, depends entirely on them being willing to accept abuse.

All that is necessary to fix this is for the producers to stop being willing victims. Simple, I know, but there is a problem with such a sensible idea:

The producers are convinced that their role in life is only to struggle and obey.

Modern producers believe that the ruling classes have a legitimate right to tell them how much of their money they are entitled to keep, which charity causes they’ll be forced to contribute to, which features their car is required to have, and much, much more. Why? Simply because those other people are in “high positions,” and they (the producers) are in “low positions.” An evil assumption has been planted in their minds:

It is right for important people to order me around.

The productive class holds all the real power, but they are nearly devoid of moral confidence. So, they are abused without end.

Right now, a parasitic ethic rules the West and will continue to rule so long as producers play the part of the suckers. If this continues, what remains of capitalism will grind to a halt and will be overrun by a Neo-Fascist arrangement – not the dictator and swastika variety – but one where the state and powerful business interests merge into one unstoppable and insatiable force.

On the other hand, if ever the producers wake up from their moral coma and reject the role of doormat, they will build a society embodying the ethics of production. It almost sounds impossible, I know. But it is has happened before and could happen again.

It’s up to us.

http://www.zerohedge.com/news/2013-07-10/guest-post-9-plagues-are-collapsing-capitalism