What Happened Today: March 22, 2023
Nuclear bombers, uranium shells; State Department tsk-tsk to Israel; The facts you didn't know you wanted to know; How the Bank Collapse Goes Nuclear
The Big Story
Following the Russian Air Force’s interception of two American B-52 jets flying near the Russian enclave of Kaliningrad on Monday, NATO’s Allied Air Command released new footage on Tuesday showing an American B-52 jet flying over Europe with an escort of fighter jets from Spain, Italy, and Romania. The air-muscle flex, part of a NATO exercise that Air Command described as “strengthening our Euro-Atlantic partnership,” comes amid renewed support by NATO allies for Ukraine in its war with Russia.
The British Minister of State for Defense Annabel Goldie told Parliament on Monday that the United Kingdom would send Ukraine depleted uranium shells along with 14 military tanks. The shells are the subject of much debate, due to their potential downstream effects on civilians who are exposed to them. “Like in Iraq, the addition of depleted uranium ammunition into this conflict will only increase the long-term suffering of the civilians caught up in this conflict,” said Kate Hudson, general secretary of the Campaign for Nuclear Disarmament. “Depleted uranium shells have already been implicated in thousands of unnecessary deaths from cancer and other serious illnesses.”
Goldie’s announcement didn’t sit well with Russian President Vladimir Putin. At a press conference with Chinese premier Xi Jinping, Putin said on Tuesday that “if this happens, then Russia will be forced to act accordingly.” Russian Deputy Foreign Minister Sergei Ryabkov added fuel to the fire on Wednesday saying, “I wouldn’t want to dive into a discussion about whether the likelihood of a nuclear conflict is high today, but it is higher than anything we have had for the past few decades, let’s put it that way.”
Read More: https://www.dailymail.co.uk/news/article-11890303/NATOs-warning-Putin-B-52-bombers-flanked-NATO-allies-skies-Europe.html
In The Back Pages: How the Bank Collapse Goes Nuclear
→ Executives at three major vaccine manufacturers, GSK, Moderna, and CSL Seqirus, told Reuters on Wednesday that they are developing human vaccines for the strain of bird flu that has killed 59 million American birds in the past year. The H5N1 influenza virus has not yet been able to pass from one human to another, but on the rare occasion when humans have contracted it from an animal, the mortality rate was near 50%. Most of the doses are already allocated to the world’s wealthiest countries, the drug makers said, citing existing contracts, though no evidence has been presented that these drugs could thwart the spread of the virus. Speaking about the difficulty of making vaccines for poultry that may also apply to vaccines for humans, Jarra Jagne, an associate professor at Cornell University College of Veterinary Medicine, told Fast Company, “Vaccinating for avian influenza viruses is a complex undertaking that includes a myriad of issues. Avian influenza viruses change frequently, making vaccines obsolete in a very short time.”
→ For a minute last week, potential home buyers breathed a sigh of relief as mortgage rates dropped for the first time since November. The average rate dropped from 6.71% to 6.48% due to reduced yields on U.S. Treasury bonds, as investors flocked to them for safety during the banking crisis. According to the Mortgage Bankers Association, even the tiny drop in rates sent new applications and refinances to a six-week high. But it’s not all good news for those on the hunt for a new house. Goldman Sachs COO John Waldron told German paper Handelsblatt that small banks may be required to have more capital on hand going forward and may be regulated more strictly, potentially leading them to slow lending, which will slow the economy. From their childhood bedrooms, millennials are watching the dominoes fall as the one-two punch of inflation and high interest rates means they’ll be spending the rest of their thirties inviting dates back to their parents’ house.
→ The State Department summoned Israel’s ambassador to the United States, Mike Herzog, on Tuesday for a dressing-down, which hasn’t occurred between the two allies for more than 10 years.
The topic was the recent Israeli decision to rescind certain elements of the 2005 disengagement law that removed all Israelis from Gaza and parts of the northern West Bank, the area currently in question.
Vedant Patel, a spokesman for the State Department—the go-to agency for lecturing U.S. allies on how they ought to govern themselves—told reporters that the legislation “represents a clear contradiction of understandings the Israeli government made to the United States” referencing a letter from then Prime Minister Ariel Sharon to President Bush promising to evacuate several settlements in the West Bank to help with a potential future peace plan, which, they did.
Jerusalem Post Senior Contributing Editor Lahav Harkov told The Scroll the United States is trying to have it both ways, “President Biden has otherwise completely disregarded that [Sharon] letter, which also allows for Israel to retain major settlement blocs. The administration has admonished Israel over construction in those areas. If they’re going to cite the letter, they should be consistent.”
Likud MK Dan Illouz summed up the situation in blunt terms: “We have no problem clarifying to the United States in every conversation in which we are invited that the Land of Israel belongs to the Jewish people.”
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→ Quote of the Day:
Soon there were hundreds of people sleeping within a few blocks of Old Station, most of them suffering from mental illness or substance abuse as they lived out their private lives within public view of the restaurant. They slept on Joe and Debbie’s outdoor tables, defecated behind their back porch, smoked methamphetamine in their parking lot, washed clothes in their bathroom sink, pilfered bread and gallon jars of pickles from their delivery trucks, had sex on their patio, masturbated within view of their employees, and lit fires for warmth that burned down palm trees and scared away customers.
A new New York Times feature details the ongoing chaos in certain areas of downtown Phoenix through the eyes of Joe and Debbie Faillace, longtime owners of Old Station Subs, a neighborhood sandwich institution. While Joe and Debbie have tried to roll with the punches and even provide aid and comfort to the growing homeless population camped outside their cherished business, they’ve reached their wits’ end. The heartbreaking, well-written exposé presents a vision of our times: Everyone is suffering.
Read More: https://www.nytimes.com/2023/03/19/us/phoenix-businesses-homelessness.html
→ Amid continued sniping from Republican lawmakers who argue our military is in a death spiral due to woke-ification, General David H. Berger, the commandant of the U.S. Marine Corps, says he’s seen “zero evidence” to support the critique. Berger told Defense One in an interview last Thursday that the Corps’ No. 1 goal is ensuring that its forces are combat-ready and that having “cohesive teams” is key. He said that if the focus had shifted as much as critics have suggested, he’d be seeing significant drop-outs, but Marine Corps retention and recruiting remain stable. Recruitment appears more difficult, however, for the Army, who missed its recruitment target by 25% last fiscal year.
→ Four Oath Keepers were found guilty on all charges Monday, nearly two years after they entered the Capitol on Jan. 6, 2021. Sandra Parker, 60, Laura Steele, 52, Connie Meggs, 59, and William Isaacs, 21, were convicted of conspiracy to obstruct an official proceeding, conspiracy to prevent a member of Congress from doing their duty, destruction of government property, and civil disorder. Though they were not indicted for any specific acts of violence in the Capitol, the jury sided with prosecutors because the four joined various mobs that had pushed through doors or past police barricades. Each Oath Keeper faces a maximum sentence of 20 years in prison.
→ Video of the Day:
The World Baseball Classic ended in classic fashion on Tuesday night, as the Japanese superstar Shohei Ohtani faced his Los Angeles Angels teammate Mike Trout in the last at bat of the global tournament, in front of 36,000 fans in Miami. By the 9th inning, Japan was up 3-2, after a fantastic game that saw home runs from the United States’ Trea Turner and Kyle Schwarber and Japan’s Kazuma Okamoto and Munetaka Murakami. With the Americans coming up to bat for one last time to try and catch up, superstar Ohtani stalked out to the mound after playing most of the game as a designated hitter. He walked the first batter and got the second to hit into a double play, bringing up his teammate and fellow baseball great Trout for the final out of the game. Ohtani pitched fire, throwing some fastballs over 100 mph, and a few balls to get the count to 3-2, and on the next delivery he got Trout swinging with an off-speed slider for the strikeout heard round the world. The showdown between the two titans, at the penultimate moment of the ultimate game of the tournament, made Japanese player Kazuma Okamoto think of comic books. “It was like a manga,” he said.
1. In Philadelphia’s Center City, the real estate boom over the past 20 years has converted 8.2 million square feet of office space into homes or hotel rooms.
2. As of March 17, 2023, Tetris’ birth is closer to World War II than to the present day.
3. A majority of all Americans now believe that the novel coronavirus likely originated from a lab leak, including 86% of Republicans and 54% of Democrats.
4. New York is the most expensive state for retirement, where $1 million saved will only cover approximately 14 years’ worth of expenses.
5. Social Security added an 8.7% cost-of-living adjustment for 2023, averaging an additional $140 per check for recipients.
6. The average rent in Phoenix rose 80% during the COVID-19 pandemic.
7. More than 45 million Adderall prescriptions were written in 2022.
8. If you are a male who is seven feet tall, you have a 1 in 6 chance of making the NBA.
9. Since 1972, there has been an average 10% happiness gap between conservatives and liberals…
10. According to Pew data…Liberals are roughly twice as likely as their conservative counterparts to suffer from mental illness.
TODAY IN TABLET:
Failed Unions by Justine El-Khazen
Arab Americans were the test cases for mass surveillance and we let it happen
Escape From Mariupol by Edward Serotta
A Holocaust survivor and her family in hiding and on the run
SCROLL TIP LINE: Have a lead on a story or something going on in your workplace, school, congregation, or social scene that you want to tell us about? Send your tips, comments, questions, and suggestions to email@example.com.
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How the Bank Collapse Goes Nuclear
This isn’t a Silicon Valley problem, it’s a global debt crisis
It should go without saying that we are now in a financial crisis. We have just witnessed the collapse or near-collapse of five banks, including Credit Suisse, an institution of systemic importance. And yet it still needs to be said in light of the glib reaction following the collapse of Silicon Valley Bank (SVB) earlier this month, which many pundits claimed was only a problem for rich “tech bros.” But SVB was the 16th largest bank in the United States and its speed-of-social-media implosion left observers and regulators grasping for answers, which made it easy to blame the bank’s failure on corrupt venture capitalists trying to cheat the system. After SVB, the San Francisco-based First Republic bank also started to meltdown, while the crypto-focused Signature and Silvergate banks went into closure, a pattern that reinforced the notion that this was a Silicon Valley phenomenon being hyped up by wealthy venture capitalists looking for a government bailout.
As New York University Professor Scott Galloway wrote on March 19 in a sneering tweet (since deleted but still cached), “Hunger games on the way up, Denmark on the way down,” a reference to scathing commentary he’d made on Face the Nation. There he argued that venture capitalists seem to want less government when times are good but government intervention when things go south. This was a tidy, retweet-friendly way of packaging the disaster in an easy to digest narrative primed for social media’s us-versus-them binaries.
Then Credit Suisse happened. After rapid outflows of deposits and a nose dive in its stock, Credit Suisse was acquired at the polite but firm suggestion of Swiss regulators by rival UBS, a development that put to rest the narrative that this was a Silicon Valley phenomenon and exposed the global nature of the banking failure, while pointing to its underlying causes.
While the current crisis has echoes of the 2008 global financial crash, the reality is that it’s more a toxic byproduct of the government’s response to the ‘08 crash. It also has the potential to be considerably worse. When the U.S. government bailed out banks that had taken outrageous risks in the housing market, it ignited an era of loose monetary policy. To fund the $800 million dollar Emergency Economic Stabilization Act and similarly sized American Recovery and Reinvestment Act, as well as to stimulate the economy (though these two efforts were essentially one and the same) the Fed cut interest rates to 0% for the first time in history. While there was an expectation that interest rates would stay ultra-low for some time, the Fed kept them under 1% for almost ten years. By 2019, the Fed’s balance sheet had swollen to $4 trillion. But the public, which enjoyed soaring stock markets, low mortgages and car loans, and the lush fruits of easy money, was placated.
Of course, it didn’t hurt that the Obama Administration, with the enthusiastic backing of the media, successfully messaged the idea that the government had recovered the funds used for the 2008 bailouts. “We got back every dime used to rescue the banks,” Obama said in a campaign speech in 2012. This was later shown to be false, since the actual taxpayer cost of the bailouts was around half a trillion dollars.
Then Covid hit, and the Fed began printing money like it was going out of style—and now it might be. In 2020 alone, the Fed created $3 trillion in virgin money compared to 2019 when it injected $115 billion into the economy—a nearly 30-fold increase. It would print another $2 trillion in the two years after that. As a result, the money supply has increased more in the past three years than in the preceding decade. Put another way, more dollars were put into circulation between 2014 and 2022 than in the entire recorded history of the dollar.
And where did the Covid trillions go? Into the banks, primarily, which invested some of that money in long duration treasury bonds, since that is the sensible thing to do when you come into trillions of dollars. The catch, however, is that when banks began investing the money in those bonds, the Fed was forecasting the interest rate would remain unchanged into 2023, which meant the value of bank-held long term bonds would hold steady. (When interest rates go up, bond prices go down and vice versa.) But interest rates didn’t stay low. They went up. And it wasn’t just that they “went” up, as if by some natural force of economic antigravity. They were driven up by the same institution that created the tidal wave of new money while forecasting low rates into 2023: the Fed. For its part, the Fed was doubly betrayed by reality when inflation, which it (along with many media and political figures) had dutifully labeled “transitory,” started to look a bit more permanent.
The Federal Open Market Committee is the key Federal Reserve committee responsible for setting the federal funds rate, which is the rate that banks can loan each other money. In other words, it sets the benchmark interest rate for the economy, which also determines how much money flows through the system. Far from the 0.1% rate that was predicted by the Fed in 2020, rates have risen to 4.7%, which means the Fed missed its own estimate by 47 times. What this means is that banks behaving with the Fed’s projections in mind now have a Titanic-sized hole in their books. The value of those long duration bonds banks snapped up in 2020 (when it was the safe thing to do) has plummeted, worth up to 10-50% less than they were supposed to be worth. Meanwhile, banks have incurred liabilities in the form of loans and investments predicated on 2020 bond prices. The banks are, in simple terms, underwater—and not just in Silicon Valley due to greedy tech bros but, as The Economist recently reported, across the country.
The Fed’s rate hike on Wednesday delivered a hybrid message, increasing the federal fund rate by .25% but also signaling this will be the last, or second to last, increase. “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks,” the Fed Open Market Committee wrote. But with the banking sector in crisis mode, even this modest rate increase—coming in place of a pause in raising or a drop in rates—could inflame the debt crisis, putting more banks at risk.
Despite the expressions of public shock in the days after Silicon Valley Bank’s collapse, the writing was on the wall. The investor Ray Dalio argued that SVB’s collapse, far from being an unforeseeable “black swan,” represented “a very classic event in the very classic bubble-bursting part of the short-term debt cycle.” Describing the mechanics behind the breathtaking risk the economy is now facing, Dalio wrote: “Tight money [employed] to curtail credit growth and inflation leads to a self-reinforcing debt-credit contraction that takes place via a domino-falling-like contagion process.”
What Dalio means is that the Fed can no longer raise interest rates without causing the value of long-duration bonds held by hundreds (if not thousands) of banks to drop again. But if the Fed lowers rates and loosens the money supply it risks creating more demand, increasing wage growth, and sending inflation even higher, which, after 15 months of rising prices, could morph into the kind of runaway inflation that might trigger an even more severe economic crisis. The Fed has placed itself in a damned if you do, damned if you don’t scenario.
Dalio is not alone in his doomsaying. Nouriel Roubini, the economist who predicted the 2008 crash, told Bloomberg, “It’s an extremely dangerous moment, because there’s now significant stress in some parts of the U.S. banking system at a time when inflation is still too high.” In an interview earlier this month, Roubini—who called the current scenario a “debt trap” weeks before Silicon Valley Bank went under—described how the situation could realistically unfold:
The Fed will have to keep raising rates in spite of what happened with SVB. Then we will have a recession. That recession is going to cause more defaults, because as income falls, people who have too much debt are going to default. And then the increase in bond yields and market spreads is going to cause a recession [that’s] even more severe. So it will be a negative feedback between the real economy and the financial markets with an economic crash leading to a greater financial crash making an economic downturn more severe.
Roubini noted that the total equivalent of fixed income long duration assets (basically, long-term debt instruments, of which bonds and certificates of deposit are examples) in dollars is a staggering $20 trillion, of which, he says, $10 trillion could be wiped away by raising the interest rate by enough to bring inflation down. Moody’s has downgraded the entire US banking system from stable to negative, citing a “rapidly deteriorating operating environment.”
It’s this that led famed “Black Swan” investor, Mark Spitznagel, to say last year that we might witness “the greatest tinderbox-timebomb in financial history,” with repercussions not unlike what was experienced during the Great Depression. The reason for the extreme language is that in the globalized economy, the debt crisis is global. Foreigners hold $1 trillion in U.S. currency and around $12 trillion in long term debt. With bond prices plummeting, this places foreign banks and other debtholders in the same situation as American debt-holders. More importantly for the future of the U.S., it incentivizes foreigners to dump the dollar. With China, Russia, Iran and other countries who have suffered the wrath of the U.S. Treasury acting as the pointy end of America’s geopolitical stick—banding together to create new methods of trading outside the dollar, this exigency is now turning into a reality.
This is where disaster could cascade into catastrophe. A flight from the dollar would soak the economy in even more currency as foreign investors sell their dollars in exchange for more stable options. In such a scenario, no amount of interest rate raising could contain the damage without creating even more destruction--higher unemployment and more bursting bubbles. After twenty years of comforting ideas about infinite, easy money, the U.S. is now hoping that someone will be left to bailout the bailers.