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Hysteria Over 3D-Printed Guns – Misconceptions Vs. Reality

Authored by Duane Norman via Free Market Shooter blog,

In the wake of Defense Distributed winning the right to freely publish its blueprint for its “Liberator” 3D-printed gun, the gun control outrage machine went into overdrive:

The most egregious bit of hyperbole was courtesy of Sen. Chuck Schumer, who displayed his ignorance on “ghost guns” in just two sentences:

“I am sounding an alarm that come Aug. 1, America is going to get a lot less safe when it comes to the gut-wrenching epidemic of gun violence,” Schumer said. “Ghost guns are not only scary, they’re outright dangerous in the way they can mimic the look and the capacity of a hardened, fully semiautomatic weapon.”

In spite of the fact that Liberator plans have been available for years (and are still available in many places on the internet), Schumer thinks an arbitrary legal date will all of a sudden mean Chicago gangs will take to the streets armed with “ghost gun” Liberators that are as fully functional as regular firearms.  The truth is, Schumer blatantly ignores the truth not only on the Liberator, but what a “ghost gun” actually is.  

While Wikipedia’s “A ghost gun is a gun with no serial number” definition is enough to make Schumer look stupid, for the sake of argument, we will go with a more robust definition from Quora…

It is a firearm manufactured for personal use in compliance with 18 USC 922(r), Federal, State and local laws.  Such firearms are made for personal use and are more-or-less untraceable as they are not required to be registered or serialized.

Hence the made-up term “Ghost Gun”, a gun that is ephemeral, that doesn’t exist in any form that can be traced or observed unless its owner chooses to reveal its existence.

…which is especially relevant when the legality of a “ghost gun” is considered:

The key to such guns is ALL laws must be followed.  They cannot be manufactured for commercial sale as this requires an FFL07.  They must not violate the National Firearms Act of 1934 in general.  If the firearm is assembled using foreign made parts, it must comply with 18 USC 922(r) in order to be considered a “US Made” firearm.

So a prohibited person cannot legally own any firearm, “ghost” or otherwise…

An AR-15 lower receiver being “finished” (Youtube – Paradox Technology)

…but more importantly, the term has traditionally been applied to “unfinished” lower receivers and firearms into fully functioning ones, as the LA Times described in its fearmongering on the dangers of “untraceable” ghost guns:

“Criminals are making their own weapons because they cannot buy them legally … or they are paying other people to make those guns for them to get around the gun laws,” said Bill McMullan, special agent in charge of ATF’s L.A. Field Division. “This is a trend among Southern California gangs.”

An unfinished lower receiver, sometimes referred to as an “80% receiver,” can legally be purchased without a serial number from a seller who is not a federally licensed firearms dealer as long as it is missing the key components that would make it a firearm.

The lower receiver then can be completed easily by drilling a few remaining holesinto the unfinished metal shell. It is then ready for a barrel, trigger mechanism, stock and upper receiver to be attached.

Aside from the LA Times (falsely) believing that milling a fire control cavity and the other gunsmithing work required to finish a lower receiver can be “easily” done, the newspaper made sure to omit the recent California law which makes such activity illegal unless the finished receiver is registered:

In July 2016, California passed AB 857 which requires all completed firearms to have a serial number applied by Jan 1, 2019. An 80% lower is not a firearm, so a serial number would only be required once the 80% lower is completed. Unfinished 80% lower receivers do not need a serial number.

If you build an 80% lower into a 100% lower after July 1, 2018, you must FIRST apply to the California DOJ for a serial number, pay a fee, and they will then assign a serial number that you must apply to your firearm. If you built your firearm prior to July 2018 and already engraved a serial number of your choosing that is compliant with ATF regulations, the text of the law seems to indicate that this should be in compliance. However, we have heard that CA DOJ has made statements suggesting that people must engrave a new DOJ issued serial number on their lower even though the lower receiver already has a ATF compliant serial number engraved on it.

To quickly summarize the above, every activity pertaining to building, completing, or possessing “ghost guns” by prohibited persons is already illegal under federal law, and heavily regulated under many state laws.  

So, why is all of the “ghost gun” talk pertinent to 3D-printed guns?  That question is even more relevant when you take a closer look at the Liberator itself:

The Defense Distributed gun can be best described as a .380 caliber, single-shot, plastic piece of shit.  And before you say “cheap”, take a close look at what The Atlantic, a super-liberal mainstream media outlet, stated about the Liberator:

But 3D printing, still being a young technology, is slow. The two firms I spoke with each suggested that printing the various small parts would take hours — eight hours in one’s estimation.

Nor would it necessarily be cheap. The firm that ultimately offered to do the printing suggested that, given the number of objects and the fact that it was important to ensure that they were well-milled and that I wanted it quickly, the final price would be a bit above my budget: $1,500.

I wish the best of luck to anyone that attempts to build a Liberator for under $4,000 and safely fire it 10+ times.  But, even if it can be done for less than that, why would a criminal waste the money on the very limited Liberator, when the parts for a “ghost” AR-15 can be ordered online and “completed easily”, as the LA Times puts it?

The liberal hysteria surrounding “ghost guns” is nothing more than the latest round of liberal virtue signaling and inability to cope with the fact that President Trump is indeed… President.  In spite of the fact that all activity regarding home finishing of firearms is already widely-available yet illegal and off-limits to prohibited persons…

…this will not stop the big-money gun control machine from using the Liberator as its latest tool to make legal gun ownership as arduous, time consuming, and expensive as possible.  

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Maxine Waters Hit With FEC Complaint After Daughter Rakes In $750,000 From Campaign Funds

California Democratic Rep. Maxine Waters, 79, has been slapped with an FEC complaint after funneling $750,000 in campaign funds to her daughter since 2004 to manage a mailer program, as extensively detailed by the Free Beacon‘s Joe Schoffstall.  

The scheme managed by Karen Waters has raked in hundreds of thousands of dollars from California politicians who pay to be included in her “slate mailers” – sample ballots mailed out to around 200,000 Los Angeles voters which promote who Waters endorses. 

Since 2004, the campaign in turn reportedly has paid $750,000 to the congresswoman’s daughter, Karen Waters, or her public relations firm Progressive Connections for help producing them.

A government watchdog in July filed the first of two complaints with the Federal Election Commission asking for a full audit of the Citizens for Waters campaign. –Fox News

Waters, the California Democratic State Central Committee and Sen. Kamala Harris are all named in the first complaint. Of note, Harris is a likely 2020 Democratic presidential contender. 

Legally, the payments are considered “reimbursements” for the state mailer, rather than a campaign contribution – which is currently limited to $2,700 to a candidate’s committee and $5,000 to a PAC, so the mailer scheme is more or less a giant loophole. 

“This certainly violates the spirit of campaign finance laws, but the FEC doesn’t seem to think it violates the letter of the law,” said John Wonderlich, executive director of the Sunlight Foundation, a nonpartisan watchdog group that first reported on the practice by the Waters campaign in 2010 and the connection with her daughter.

“In this case, is it a question of enrichment for a family member?” Wonderlich added. “How much of the money passes through to cover postage and printing? It may be unsavory but not corrupt. Much of it hinges on the extent to which the money passes through.”  

–Fox News

A second, broader complaint is currently being drafted by the conservative National Legal and Policy Center, which will focus on Waters’ sources of funding as well as the mechanism by which her daughter has been so handsomely paid for running the mailer program. 

‘Maxine Waters found an old provision and turned it into a cottage industry.’

– Tom Anderson, National Legal and Policy Center

Waters is well versed in fundraising through mailers, while California’s top Democrats and local office-seekers have funneled far in excess of legal contribution limits to her campaign in exchange for her endorsement, Fox reports. Waters’ campaign pays Karen and other firms as part of the program, which the FEC approved in 2004. 

Everything was going smoothly until the California Democratic Party paid $35,000 to the Waters campaign in 2016 for her endorsement of Kamala Harris’ Senate candidacy on the mailer. Third parties are not legally allowed to pay for mailers endorsing a candidate without a reimbursement under the 2004 FEC approval, reads the complaint. 

Another report shows that the Harris campaign paid $30,000 to Waters’ campaign in early 2016 for a primary slate mailer, however no subsequent payments were made. 

“The Democratic State Central Committee of California’s $35,000 contribution to Citizens for Waters violated campaign finance limits” -FEC complaint

So far in the 2018 election cycle, Fox reports that as of July 28, Democrat Gavin Newsom’s gubernatorial campaign has paid $27,000 to Waters’ re-election campaign in exchange for inclusion in her mailers. 

The state Democratic Party snubbed Sen. Dianne Feinstein this year, but she paid $27,000 and has the Waters endorsement. Candidates for state assembly, sheriff and judges paid between $2,000 and $12,000 to Citizens for Waters to be included on the mailers.

FEC data also shows as of July 28, Citizens for Waters paid Karen Waters $54,000 so far for the 2018 election cycle, mostly for slate mailers but also for other campaign work. The congressional campaign paid her $72,000 in the 2016 cycle, according to the Center for Responsive Politics, which tracks money in politics.

In November, Waters is facing Republican Omar Navarro, 29, a small business owner. The 79-year-old incumbent beat Navarro in 2016 with 76 percent of the vote, and outpaced him again in the June “jungle primary” (in which both parties can run) with 72 percent of the vote.

“She is going to be re-elected no matter what,” Anderson said. “She comes knocking and other politicians in California to say, ‘do you want my endorsement,’ because she knows they don’t want her opposing them.”

“If you don’t pay to be on her slate, then maybe you’re one of Trump’s people,” Anderson said. “A local politician, like a judge, does not want to be on her bad side.”

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Police Chief May Have Fatally Overdosed on Drugs From Evidence Room

Investigators say an Ohio police chief may have fatally overdosed on drugs taken from his own department’s evidence room.

Kirkersville Police Chief James Hughes, 35, overdosed at his home in Reynoldsburg last May. He died of an “acute intoxication by fentanyl,” according to an autopsy by the Franklin County Coroner’s Office. Two syringes with fentanyl were found at the scene, in addition to a plastic bag with cocaine.

According to Reynoldsburg Police Department Lt. Ron Wright, some of those drugs appear to have come from the Kirkersville Police Department’s evidence room. “There was packaging that indicated that he was taking controlled substances from there,” Wright told the Newark Advocate.

Wright told The Columbus Dispatch he can’t be sure the drugs from the evidence room killed Hughes. But he said investigators “couldn’t find any indication that he went out and bought controlled substances…recently to do this.”

Reynoldsburg police plan to end their investigation soon, but Wright said he probably will refer the case to the Ohio Attorney General’s Office, which may want to examine Kirkersville’s evidence room procedures. “There appeared to be some practices happening out there that probably someone from the state AG’s office should probably look into,” Wright said.

Hughes had been serving as police chief for just a few months. “He was hired in March and wasn’t here that long, but he kept me informed [about] what was going on,” Kirkersville Mayor Terry Ashcraft said in May. “A lot of stuff goes on in this town, and he’d come and done his job and never had a complaint on him.”

Hughes might not have received any complaints as police chief, but an Advocate investigation conducted prior to his death revealed he might not have been the right person to lead a department. As a police officer at other departments, he was the subject of at least three internal investigations. A supervisor wrote in a 2012 performance evaluation that Hughes was “known to make bad decisions on and off duty.”

Hughes made one of those bad decisions in June 2013, when he admitted yelling a racial slur at a fast food worker. The Advocate reports that he eventually pleaded guilty to “a minor misdemeanor charge of disorderly conduct.”

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Matt Taibbi: Beware The Slippery Slope Of Facebook Censorship

The social network is too big and broken to properly function, and, as Matt Taibbi writes in the latest Rolling Stone, these “fixes” will only create more problems…

Excerpted from Rolling Stone…

You may have seen a story this week detailing how Facebook shut down a series of accounts. As noted by Politico, Facebook claimed these accounts “sought to inflame social and political tensions in the United States, and said their activity was similar — and in some cases connected — to that of Russian accounts during the 2016 election.”

…

Read this jarring quote from Sen. Mark Warner (D-VA) about the shutting down of the “inauthentic” accounts:

“Today’s disclosure is further evidence that the Kremlin continues to exploit platforms like Facebook to sow division and spread disinformation… I also expect Facebook, along with other platform companies, will continue to identify Russian troll activity and to work with Congress…”

This was in a story in which Facebook stated that it did not know the source of all the pages. They might be Russian, or they might just be Warner’s idea of “sowing division.” Are we comfortable with that range of possibilities?

…

Facebook was “helped” in its efforts to wipe out these dangerous memes by the Atlantic Council, on whose board you’ll find confidence-inspiring names like Henry Kissinger, former CIA chief Michael Hayden, former acting CIA head Michael Morell and former Bush-era Homeland Security chief Michael Chertoff.

(The latter is the guy who used to bring you the insane color-coded terror threat level system.)

These people now have their hands on what is essentially a direct lever over nationwide news distribution. It’s hard to understate the potential mischief that lurks behind this union of Internet platforms and would-be government censors.

…

When Facebook works with the government and wannabe star-chamber organizations like the Atlantic Council to delete sites on national security grounds, using secret methodology, it opens the door to nightmare possibilities that you’d find in dystopian novels.

The sheer market power of these companies over information flow has always been the real threat. This is why breaking them up should have long ago become an urgent national priority.

The endgame here couldn’t be clearer. This is how authoritarian marriages begin, and people should be very worried.

Read more here…

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The Important but Arcane Procedural Issue That Might Upend the Restraining Order Against Defense Distributed

As of Tuesday, Defense Distributed, a company dedicated to distributing software and hardware to help people make guns at home, has been under a temporary restraining order (TRO) issued by Judge Robert Lasnik of the U.S. District Court for the Western District of Washington. The TRO requires the company to behave as if a settlement agreement it reached after many years of legal wrangling with the federal government never happened, meaning it has to stop distributing software that can help people make guns at home using 3D printers or CNC mills.

Defense Distributed believed its long court fight for legal permission to distribute those files, which company founder Cody Wilson and his legal team view as constitutionally protected speech no different from a printed book or manual containing gun-making directions, was over when the federal government settled. While the government never conceded any constitutional problems with its ban on Defense Distributed’s files, the settlement explicitly allowed the company (and all Americans) to “access, discuss, use, reproduce or otherwise benefit from the technical data.”

Judge Lasnik suspended that agreement in response to a lawsuit by eight states and the District of Columbia. Defense Distributed promptly obeyed the TRO, although the files are already all over the internet for anyone who wants them.

According to the TRO, the states were “seeking a declaration that the ‘temporary modification’ of the USML is invalid and an injunction requiring the federal defendants to rescind the procedurally defective modification and refrain from acting on it.” The USML is the United States Munitions List, which defines which items are affected by the Arms Export Control Act (AECA), the law that was used to stop Defense Distributed from uploading its software.

The settlement’s impact on the USML is one of the key issues that led Lasnik to issue the TRO:

Plaintiffs have shown a likelihood of success on the merits of their Administrative Procedure Act claim insofar as the “temporary modification” has resulted in the removal of one or more items from the USML. The federal government represents that its settlement was the result of a multi-year review process which was completed in May 2018 and resulted in a determination that the type of firearms and related technical data at issue here would not provide a military advantage to adversaries and therefore no longer warrant export control under the AECA and should be removed from the USML.

In such circumstances, the governing statute, 22 U.S.C. §2778(f)(1), requires that the results of such reviews be reported to Congress and precludes the removal of any item from the USML until thirty days after such notice is given.

In a brief opposing the request on the states’ part for the TRO, Josh Blackman, one of Defense Distributed’s lawyers, argues that Lasnik’s description of the settlement is wrong:

The Settlement Agreement does not require the removal of anything from the USML…Section 1(a) of the agreement only requires that the State Department commit to draft and fully pursue removal of the technical data at issue in this action from the USML, “to the extent authorized by law (including the Administrative Procedure Act).” The proposed rule explained that the government was expressly complying with the requirements of the notice-and-comment rulemaking process, even though it determined that it was not required to do so….

The government engaged in a sterling rulemaking process, and more than adequately justified its agency action—the action is certainly not “arbitrary and capricious.” In any event, even if the State Department removed the subject technical data from the USML—it didn’t—the AECA expressly, clearly, and unequivocally precludes judicial review of such decisions:

“(h) Judicial review of designation of items as defense articles or services
The designation by the President (or by an official to whom the President’s functions under subsection (a) have been duly delegated), in regulations issued under this section, of items as defense articles or defense services for purposes of
this section shall not be subject to judicial review. 22 U.S.C. § 2778(h).”

The Plaintiffs contend that this provision is irrelevant because “the States are not challenging the federal defendants’ designation of the computer code at issue as defense articles, but instead their decision to remove the code from the USML.” We cannot repeat this point enough: Nothing has been removed from the USML! The rule is only in its proposed form.

In short, while the plaintiffs and the judge are acting as if the settlement removed the gun-making files from the USML, Blackman says the government only temporarily stopped treating them as if they were on the USML. It’s a subtle point that Lasnik may well reject at the next hearing in the case on August 10. The judge might reason that treating the files as if they are not on the USML is tantamount to removing them from the list.

But as Blackman sees things, the plaintiffs have no reason to believe the State Department will not go through all the legal requirements before officially amending the USML. Only if they fail to do so down the line would they have a legitimate procedural complaint.

That said, that arcane dispute about the niggling specifics of administrative law is far removed from the very important constitutional issues raised by the TRO. As Blackman notes, the TRO imposes “a prior restraint of constitutionally protected speech that is already in the public domain” yet Lasnik’s order does not so much as mention the First Amendment.

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Tim Cook Rescues US Stocks As Trump Crushes China, Turkey

Forget the “three comma club”…

Tim Cook’s Apple just  joined the four-comma-club…

 

 

AAPL rescued the entire market – “Thank you Tim Cook!!”

 

Apple has never been this big relative to the S&P 500…

 

While we are on the subject of AAPL – the spread between AAPL Bond yields and dividend yields has never been wider…

 

And AAPL’s panic-buyback-bid prompted an epic liftathon in the Nasdaq (blue) at the cash open (and everything else)… Dow futs (red) manage to hold onto unchanged…Can you spot the moment the cash market opened for buyback business?

 

In cash markets even The Dow managed to benefit from AAPL’s surge, ramping from -240 points at the open to unch… Nasdaq Composite led the charge though…

 

FANG stocks managed gains today…

But remain major laggards relative to “safe haven” AAPL…

 

And despite its biggest quarterly loss ever, Tesla bonds and stocks soared today… (we’ve seen this pattern before)


 

While all eyes were on Apple’s gains, the big moves were in FX markets…

As the Turkish Lira tumbled to a new record low as threats and sanctions were exchanged…

 

And Trump’s tariff threats prompted another plunge in the offshore Yuan…

 

….And China stocks tumbled.

And European stock were ugly too…

 

The Dollar Index rallied, extending gains off the Fed dip…

 

Cryptos continued their freefall…

 

Treasury yields drifted lower today after two ugly days…

The yield curve steepened very modestly on the day. 10Y yields closed below 3.00%…

 

Global bond prices popped today – JGBs (blue), Bunds (red), USTs (gold)…

 

While Copper and PMs continued to drift lower (as the dollar gained), WTI popped after a Genscape report suggested Cushing inventories tumbling….

 

Finally, while Tim Cook won, Jeff Bezos is close behind…

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CDC Urges America To Stop Re-Using Condoms

If the American economy is doing so well… and we are at full-employment… why do so many feel the need to “reuse” condoms?

In a somewhat shocking tweet, The Centers for Disease Control and Prevention issued a rather amusing reminder urging Americans to stop re-using condoms: “We say it because people do it: Don’t wash or reuse #condoms! Use a fresh one for each #sex act.”

Research has found that as many as three percent of people have tried to reuse condoms, and half us have put a condom on too late or removed it too soon, the Daily Mail said. 

“Correctly using male condoms and other barriers like female condoms and dental dams, every time, can reduce (though not eliminate) the risk of sexually transmitted diseases (STDs), including human immunodeficiency virus (HIV) and viral hepatitis,” the CDC said. 

Early condoms like this Durex actually came with instructions to wash them. They also had a seam the side and were made of actual rubber.

We know better now…

 

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Russell Napier: “Let’s Ask Dr Copper If China Can Reflate The World”

Submitted by Russel Napier of ERIC

The Solid Ground has long speculated that, one day, the great reflation of the world will be driven by China and not the USA. Many will argue that the great reflation began in June 2009, when US GDP bottomed, but your analyst prefers to measure any successful reflation with reference to the global debt to GDP ratio. Only by reducing that ratio from record highs can any reflation be said to be undoing the structural risks of depression and deflation inherent in any highly geared economy. Globally credit to the non-financial sector as a percentage of GDP reached 218% in 4Q 2017 from 180% in 4Q 2007, at the peak of the last business cycle.

This is not a successful reflation. Nominal GDP growth remains far too low, relative to the growth in debt, despite the now prolonged economic recovery. The structural risks from too high a debt and too low a cash flow are greater than ever. Now that the world’s second largest economy is attempting to reflate, can this finally bring the inevitable inflationary solution to the high debt problem?

There were many causes of the GFC but primus inter pares was the then record high level of debt to GDP. The chances of a recession becoming a depression are much higher when an inability to service high debt burdens threatens to depress the value of bank assets below the value of their liabilities. When that happens a bank’s capital is expunged and, at least in theory, a major contraction in its balance sheet and a destruction of money should occur. That destruction of money causes the debt deflation and depression that will always be a clear and present danger when debt levels are too high and declining cash flows in any recession threaten default.

In previous quarterly reports The Solid Ground has looked at the limited, objective measurements for key countries that tell us when too much debt is genuinely too much debt. With very few exceptions, notably Germany, there are few countries undergoing the reflation that brings debt to GDP ratios to levels well below their levels of 2008 – when a global recession came close to becoming a global depression. In particular, China has seen a failed reflation with its non-financial debt to GDP ratio rising from 145% in 4Q 2007 to 256% in 4Q 2017. The Solid Ground contends that this failure has been enforced by an exchange rate policy that must now be abandoned to begin a successful reflation and degearing of China. This major switch in policy, now recently launched, will have profound impacts on global financial markets.

Long-term readers of The Solid Ground will know the importance in the difference between bank debt and non-bank debt. The expansion of bank debt creates debt and money while the expansion of non-bank debt is simply the creation of debt. Across the world the disintermediation of the banking system has allowed the creation of ever more debt, outside the banking system, without the creation of money. This has some benefits as it has allowed debt to grow without the boom in money supply that would almost inevitably lead to high inflation. However, it also has many downsides because low money supply growth keeps nominal GDP growth low as non-bank debt burdens grow ever higher. The result is higher debt levels relative to cash flows and a more fragile financial system. These higher debt burdens do support higher levels of economic activity, but they primarily support ever higher asset prices. Over the past few decades the owners of assets, in China and elsewhere, have been the key beneficiaries of this new form of debt laden growth.

The surge in non-bank lending in China has clearly played a key role in the rise of the country’s debt to GDP ratio and also its asset prices. It has also played a role in keeping GDP growth higher than it would otherwise be but, according to this analyst, not as high as it would have been had all the growth in debt been accounted for by the growth in bank debt. What China needs is higher money supply growth and higher nominal GDP growth, and this cannot be provided by a surging non-bank debt growth. At the heart of this surge in debt, and decline in broad money growth that pushes the debt to GDP ratio ever higher, is the wrong monetary policy. Exchange rate targeting has taken China to a dangerous place and must now be abandoned.

In the last Solid Ground Fortnightly the need was outlined for China to move to a more flexible exchange rate. The exchange rate management policy forces the level of broad money growth in China to relate to the condition of its external accounts. With the deterioration in those accounts in recent years, it has been necessary to keep bank credit growth, and thus money supply growth, lower than before to prevent a rapid deterioration in the external accounts through a boom in imports. Into the vacuum of relatively more controlled growth in bank credit stepped the so-called ‘shadow banking system’ – that system which creates debt without creating money. While the debt so created does have a positive impact on economic activity and particularly asset prices, it does not have the same powerful impact on nominal GDP growth as the expansion of bank credit and thus money.

It’s a form of growth that fits with China’s exchange rate policy as the deterioration in the external accounts is more muted, given the low level of broad money growth. So the exchange rate policy has resulted in a constraint on the growth of money, but not in the growth of non-bank debt. As long as monetary policy remains constrained by an exchange rate target, there are only two options for China:

  • a major improvement in the country’s external accounts that permits higher levels of broad money growth and inflation.
  • a painful deleveraging in which debt contracts faster than GDP

Of course, the more bullish outcome is possible. It is, however, unlikely to occur through a current account improvement, unless driven by a collapse in Chinese GDP growth and import growth and this would clearly be to the detriment of Chinese and global growth. However such an improvement in the external accounts can occur by a major improvement in the capital account. Forecasting capital account conditions is notoriously difficult and, as we all know, China has been managing its capital account aggressively in recent years in an attempt to reduce capital outflow. It is thus tempting to think that the capital account is at best stable and could probably deteriorate further if the population’s desire to reduce their RMB exposure reached even higher levels. However, it could go the other way, particularly if China was to liberalise its financial system and permit massive restructuring of SOEs. Such a move could both retain and attract capital to China. Similarly a major liberalisation of the Chinese bond market, allowing material foreign ownership, could also act to create a major capital account surplus. We will have to wait to see whether such liberalisation actually occurs with positive impacts for the condition of the external accounts, broad money growth and nominal GDP growth. In this scenario China can combine a stable exchange rate with the much higher levels of nominal GDP growth necessary to reduce its debt to GDP ratio.

Your analyst remains sceptical regarding the prospects for liberalisation as it would involve the Chinese Communist Party giving up control of key levers for the control of interest rates and credit. It could happen, but it is not probable. And the more China is threatened by outside forces, the more likely it is that the Communist Party of China responds by guarding more closely its levers of power. Short of such an improvement in the capital account, China risks a painful forced deleveraging as broad money growth and nominal GDP growth continue to decline. That option is one few politicians would countenance, whether elected or un-elected, and thus it is much more likely that the exchange rate targeting regime is abandoned. All this points to a change in monetary policy that would allow China to inflate away its debts. No such policy can be pursued, in the absence of a major capital account improvement, without a lower exchange rate.

Short of such liberalisation, bringing a major improvement in its external accounts, China’s exchange rate policy constrains it to continue to create low money supply growth and low nominal GDP growth and thus an inability to reduce its debt to GDP ratio. Even during the recent so-called period of deleveraging, China’s non-financial debt to GDP ratio has only stabilised at 256% of GDP through the course of 2017. To bring down the debt to GDP ratio China needs to create more broad money growth and more inflation, but the exchange rate policy is delivering a record low growth in broad money – just 8% year on year in June 2018. China needs to boost the supply of broad money if it is to relate away its debts and to do this it needs more bank lending and less lending from the non-bank system. As higher broad money growth and higher nominal GDP very probably lead to a deterioration in the current account, then the current exchange rate policy hinders such a reflation. The declines in the RMB exchange rate in recent weeks signal that China’ s policy makers recognize the constraint and are moving to a new policy setting with a more flexible exchange rate.

The weakness of the RMB in the past few months tells us many things, but most importantly it tells us that China has conceded that a genuine reflation, one that reduces an escalating debt to GDP ratio, is now more important than exchange rate stability. By moving away from exchange rate targeting, the regime is free to boost bank credit growth and money growth with a view to generating the high nominal GDP growth that can bring debt to GDP levels lower. In this process strict controls have to be kept upon non-bank credit to ensure that the lower real interest rates, necessary to inflate away debt, do not encourage further borrowing from non-banks. As The Solid Ground has noted many times before, any policy that inflates away debts has to have an element of financial repression involved in it. There are numerous long-term implications from financial repression for investors, but most obviously it produces poor nominal but particularly poor real returns for bond investors. Enticing foreign algorithms to buy Chinese bonds may be still possible in a period of greater repression, but encouraging a human being to so commit capital is surely a challenge.

This is a very different policy mix for China with a more flexible exchange rate, and a credit policy likely to produce higher nominal GDP growth while constraining the flow of non-bank credit to assets. Can this new policy mix be good for the world and produce a global reflation?

In the 3Q report The Solid Ground will look in detail at whether China’s changing policy mix can be a net positive for the world. In the short term we have already seen the initial reaction to the move to a reflation is a lower exchange rate. That lower exchange rate creates many challenges to those who compete with the world’s largest exporter of goods. China might use the weakness to cut the USD selling price of globally traded goods, producing not only deflation but solvency issues for those it competes with.

However, as discussed in the last Fortnightly, a move to reflate by China would almost certainly take the country to a current account deficit at a time when key developed world countries seem determined to run current account surpluses – a major positive for global growth. There are many other pluses and minuses from this new policy mix. So how do we weigh them up to assess whether the net impact is reflationary or deflationary? Your analyst suggests that in the short term the best indicator to watch to establish the net impact is the copper price.

Much has been written about the ability of Dr Copper to reflect the outlook for world growth. Indeed in Anatomy of The Bear this analyst found it to be one of the few reliable indicators, at major market bottoms, that deflation was ending and a reflation was beginning. Of course, no indicator is perfect but in general the copper price provides a good lead indicator to the market’s assumptions in relation to global growth. So how is it responding to the change in the policy mix in China? When it weighs the negative impact from an RMB devaluation and the positive impact from a Chinese reflation, does it respond positively or negatively? While there have been no conclusive moves in the copper price, the current indications are more negative for global growth than positive.

Investors should continue to watch Dr Copper to assess whether these key changes in the world’s second largest economy are the beginning of that new world of a true reflation. It is a world where a major Chinese reflation can lead to a level of higher world nominal GDP growth and finally a decline in the world’s record high non-financial debt to GDP ratio. This is a world of much higher inflation with very profound implications for asset price returns.

Your analyst still remains more in the deflation camp than the inflation camp. There are any number of key problems facing global growth, enumerated at length in various quarterly reports, that suggest our record high debt to GDP ratio can once again risk turning a recession into a depression. However, China’s move to reflate, albeit with a more flexible exchange rate, and the recent pick up in bank lending in the US (previously covered in the late June Fortnightly) are important changes that investors need to watch closely. How Dr Copper trades in the next few weeks and months will provide a critical insight into the net impact of these key changes. Your analysts expects a lower RMB combined with a lower copper price. Time will tell.

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‘It Became Normal, It Became Hot, to Be Alternative’ — Reason 50th Anniversary: Podcast

Reason magazine was founded 50 years ago, in 1968, by Lanny Friedlander (1947-2011), who was then a student at Boston University. As part of Reason‘s ongoing 50th anniversary celebration, I’ve been interviewing past editors of the print magazine for the Reason Podcast. Previous episodes include conversations with Robert W. Poole, Marty Zupan, Virginia Postrel, Matt Welch, and Katherine Mangu-Ward.

A few weeks ago, it was my turn to be interviewed about my time at the top of the mast. I joined the staff in 1993 as an assistant editor and served as editor in chief of the magazine and website from 2000 to 2008. Then I became editor in chief of Reason.com and Reason TV, a dual position I held until earlier this year, when I became an editor at large.

Katherine Mangu-Ward conducted the wide-ranging interview at the center of today’s episode. She zeroed in on a 1999 cover story of mine, “All Culture, All the Time,” as illuminating many of the themes that Reason would explore under my stewardship. The story celebrated what I called “cultural proliferation” and the breakdown of single standards of greatness, quality, seriousness, legitimacy, you name it. Just as the economic sector had been deregulated and liberalized in key ways during the 1970s, ’80s, and ’90s, the cultural sphere of our lives was finally deregulated. Let a 1,000 websites bloom! I likened what was happening at the turn of the century to the breakdown of state religion in 17th-century England.

From today’s podcast:

Religious freedom didn’t mean that people gave up on standards or religion didn’t matter anymore or anything like that. It meant that people could finally express themselves and create the worlds that they wanted to live in. They could debate and argue and mongrelize and hybridize things. I think that’s a really powerful way to look at the world that we’re in now. The other [main point in the story comes from] James Buchanan, the recently vilified libertarian economist who helped to create “public choice” economics and won a Nobel Prize for doing so. He talked about Albert Hirschman’s ideas of “exit, voice, and loyalty.” He used to stress in a lot of his work that when people can exit systems, it’s a good thing. That’s basically what I think cultural proliferation [does]. It allows people cultural exit. It didn’t mean they didn’t want culture. It just meant they got to embrace their own culture and their own morality and things like that. It’s an incredibly liberating and better world because of that.

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Audio production by Ian Keyser.

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White House Wants to Cut Capital Gains Tax

Fresh off the accolades for last year’s tax cuts, the Trump administration is mulling another one. This time the target is the capital gains tax, which the administration may try to reduce without approval from Congress by changing the definition of investment profits to take inflation into account.

The capital gains tax applies to profits from long-term investments. If you buy a stock for $10 and sell it for $110, for instance, you would owe capital gains tax on the $100 in profit. The rate depends on how much non-investment income you earn that year. Individuals at the lower end of the income scale do not have to pay any capital gains tax, while those in the middle pay 15 percent and high earners pay 20 percent.

Under the policy the Trump administration is considering, the gain would be adjusted for inflation, so investors would pay taxes only on the real profit they earn. Treasury Secretary Steven Mnuchin told an interviewer at the Group of 20 summit last month in Argentina that his department might be able to make this change through regulation.

“If it can’t get done through a legislation process,” Mnuchin told The New York Times, “we will look at what tools at Treasury we have to do it on our own, and we’ll consider that.” Lawrence Kudlow, director of the National Economic Council, also supports the idea.

The idea is controversial because it disproportionately benefits the wealthy, who pay the vast majority of capital gains taxes. Wharton economic analyst John Ricco calculates that “the top one percent of tax units would receive more than 86 percent of the tax cuts,” although he adds that the administration’s proposal would do little to “meaningfully change the distribution of tax burden.”

While indexing capital gains to inflation could promote economic growth, it’s not such a good idea for the president to impose the policy unilaterally. When conservatives tried that under President George H.W. Bush in 1992, National Review‘s Ramesh Ponnuru notes in a Bloomberg Opinion column, they met with strong resistance from the Treasury and Justice departments. Even if President Donald Trump has the Treasury Department on his side this time around, enacting a major tax change without congressional approval would invite legal challenges.

Another issue is the tax cut’s fiscal impact. Last year’s tax cuts are projected to add $1.5 trillion to the deficit during the next 10 years, and that’s assuming Congress lets the cuts expire in 2025, which it is unlikely to do. Ricco estimates that indexing the capital gains tax to inflation would cost the government an additional $102 billion in revenue during the same period. That’s a small hit compared to last year’s tax cuts, but every reduction in revenue that’s not offset with cuts in spending will make the current fiscal hole that much deeper. Instead of shrinking government, Republicans are passing the burden on to future taxpayers, a dangerous and reckless policy.

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