Tag: news

Via SchiffGold.com,

Read Part 1 here…

3 Key Takeaways:

1. If the Fed tapers QE, it may reveal waning appetite for long-term treasuries
2. The Treasury may have used its cash balance reserve to anchor inflation expectations
3. If inflation persists, the Fed may have to increase rather than decrease QE

Note: By definition, inflation is an expansion of the money supply. In this article, inflation will be used interchangeably with rising prices (usually as a result of money supply expansion)

Introduction

When the economy was shut down in March 2020, the government responded with massive fiscal and monetary support. The fiscal stimulus totaled $4T+ in relief packages. All of this spending was paid for with debt issued by the Treasury. The Treasury mostly issued short-term debt. With rates being held at zero by the Fed, and strong demand for short-term debt, it made sense to quickly raise cash using Treasury Bills as interest-free loans.

The Fed monetary policy was two fold, slash short-term rates to zero and inject $1.5 trillion into the long-term debt treasury market. The effect was to bring down interest rates across the entire yield curve. After the initial debt binge, QE went on auto-pilot, with the central bank buying about $80B a month in long-term debt (plus another $40B in Mortgage debt). Over the last year, the Treasury has continued to issue long-term debt, averaging more than the $80B the Fed has been buying. This has caused long-term rates to rise.

All of this fiscal and monetary stimulus is not without cost. Historically this type of activity almost always leads to higher inflation. The Fed may have recently indicated it wants higher inflation, but this is not true. This stance simply provides cover for them to not act in the face of rising prices. To actually fight inflation, the Fed would have to increase short-term rates above the rate of inflation. Part 1 of this series went into detail about how US short-term debt has doubled from $2.5T to $4.5T. This makes even small changes in short-term rates an immediate risk to the federal government, not to mention the much higher rates needed in a true inflation fight.

In theory, the Fed could leave short-term rates at 0% while ending QE and even shrinking its balance sheet. This would push long-term rates up to combat inflation. In the short/medium term the Treasury can mathematically handle higher long-term rates because it takes time for the higher rates to work their way through long-term debt. See the chart below that shows how the last tightening cycle worked its way through the average interest rate across debt instrument. Specifically, look at Notes compared to Bills. The average weighted interest rate on Bills moved very quickly where the rate on Notes barely had time to increase before rates dropped again.

Source – Treasurydirect.gov

Although the Treasury could handle rising long-term rates (even if the economy and mortgage market cannot), the Fed has another problem. Rising long-term rates send an important message: rising inflation expectations. While inflation is first and foremost a result of monetary policy, higher inflation expectations quickly exacerbate the problem. This is why the Fed has been messaging they are OK with higher inflation and also why they have been pounding the table that inflation is transitory. They need to keep inflation expectations low! If inflation expectations were to rise, especially at this critical juncture, it would be game over for the Fed, as they would have to raise short-term rates (devastating the Treasury and economy) in order to save the dollar and squash inflation.

With the economy opening up in March of this year, things were getting very precarious as inflation was rapidly rising along with surging long-term rates. Remember that rising long-term rates indicate rising inflation expectations. This could cause transitory inflation to be much less transitory.

In summer 2020, the Treasury issued enough debt to build up a significant cash reserve. In response to rising long-term rates in Q1 2021, it appears the Treasury strategically used its cash reserves to slow down the issuance of long-term debt. With total short-term debt outstanding already so high, the cash balance gave the Treasury ammunition to decrease debt issuance just as a $1.9T stimulus bill was passed and inflation was set to explode higher. This would have been perfect timing to support the Feds narrative that inflation is transitory to keep expectations from snowballing out of control.

If inflation doesn’t slow in the coming months, the Fed may be forced to step in. With the Treasury poised to issue more debt, it can no longer rely on its one-time use of excess cash reserves. This will put more pressure on the Fed to clamp down long-term rates by increasing rather than decreasing QE. Yes, the Fed may decide to print more money (leading to higher prices) to fight rising inflation expectations (higher long-term interest rates).

Understanding recent fiscal and monetary maneuvers

Last year, when the pandemic hit, the US Government started spending trillions of dollars. Massive spending plans were approved in the name of stimulus and COVID relief. Because the government does not have much money on hand, and taxes cannot quickly be raised, the Treasury issued trillions in debt. The markets can easily absorb short-term US Treasury Bills, so when the Fed abruptly cut rates to 0%, the Treasury responded by issuing short-term debt to the tune of $2.4T from March to June 2020. See figure 1 below.

Source – Treasurydirect.gov

In tandem, the Fed bought up trillions of dollars in US Debt, but the Fed was buying on the long end of the curve while the Treasury was issuing debt on the short end. This caused long-term rates to collapse. The Fed purchased enough long-term debt to absorb more than a year’s worth of long-term debt issuance. The chart below shows how the month over month and cumulative change in the Feds balance sheet compared to the Treasury Debt Issuance of long-term notes and bonds.

Source – Treasurydirect.gov

This action by the Fed had a massive impact on long-term rates. The chart below shows the difference between the two bars above, specifically the difference in Fed Buying and Treasury issuance of long-term debt for each individual month since Jan 2020. These values are not cumulative. The right Y-Axis shows the month-end interest rate of the 10-year bond. Looking at this chart shows something extremely clear: When the Fed buying exceeds debt issuance, rates are flat or falling; however when long-term debt issuance surpasses the Fed’s buying, rates rise.

Source – Treasurydirect.gov

The impact of the Fed can first be seen as interest rates fell from 1.5% to .6% during the initial buying spree. After the initial burst, the Fed put QE on auto-pilot, buying “only” $80B a month in long-term Treasuries. However, because the Treasury was issuing more than $80B a month as depicted by the positive bars starting in June 2020, interest rates started rising.

This trend started to accelerate in November of 2020, as long-term debt issuance was outpacing Fed Buying by around $200B. Things really started to escalate in the first quarter of 2021 as Treasury Debt issuance surpassed Fed buying by $286B in March right as interest rates were crossing above 1.7%.

Then, suddenly, long-term debt issuance started falling in April and was almost even with Fed buying in May. This consequently led to a fall in long-term rates, which are now hovering back around 1.5%. How did this happen just as Biden was pushing through a $1.9 stimulus package? Unlike 2020, when short-term debt issuance was used to plug the gap, Figure 1 above shows that short-term debt issuance was actually turning negative (blue bars).

What gives?

One look at the Treasury Cash Balance sheet in the chart below tells almost the entire story. This was first highlighted by a SchiffGold article published June 16. The chart below shows a massive surge in cash reserves by the treasury last year. Since March of this year, the cash balance has plummeted by over $1T.

Source – Treasurydirect.gov

Inflation Expectations

Why such a massive and sudden drawdown in the cash balance? In truth, there could be lots of reasons, but it does seem extremely sudden. One would think the Treasury, led by Yellen, would be very deliberate and thoughtful about how to use up $1T+ in dry powder. For the past 3 months, the Fed has been shouting from the rooftops that inflation is transitory. At the June FOMC press conference, Powell stood up and explained how long-term inflation expectations remain well-anchored. A proxy for inflation expectations is long-term interest rates.

Had interest rates continued to rise similar to the recent trajectory (climbing from .8% in Nov to 1.7% in March), this would have been a difficult narrative to push. The Fed needs inflation expectations to remain in check or else inflation will be anything but transitory. Thus, the perfect time for the Treasury to pause issuance of long-term debt would be April-June 2021 just as the economy is re-opening and the Fed is forecasting inflation to be at its worst before coming back down.

While this is speculation, it would be a very strategic move from both Powell and Yellen. Regardless of the intention though, the problem is that the Treasury has now spent its large cash balance. It could return to the short-term debt market, but the outstanding balance is still sitting above $4T (see part 1). It needs to be converting that short-term debt to long-term debt while long-term interest rates are still low and the Fed is still buying. But the Fed is simply not buying enough at $80B to convert all that debt!

If inflation persists beyond a few months, then interest rates are going to rise in a hurry as the market demands higher rates. Adding fuel to the fire will be the Treasury debt issuance overwhelming the $80B Fed buying as it did from November to March.

Then what?

Who is absorbing the long-term debt to keep interest rates from returning to the upward trajectory from Aug 2020 – Mar 2021?

International creditors have had little appetite for US Debt lately. The chart below shows the total outstanding debt held by foreign governments. In the past 15 months, while the Treasury has issued over $4T in new debt, the net amount bought by foreign governments is close to zero.

Source – https://ticdata.treasury.gov/Publish/mfh.txt

To zoom into the exact amount of change since the massive debt issuance, see the chart below. In total, foreign creditors have absorbed $120 billion of $6T+ or less than 2% of total issuance!

Source – https://ticdata.treasury.gov/Publish/mfh.txt

How are rates going to stay low if the Fed keeps the treasury buying cap at $80B? The Treasury will have to issue more than $80B in long-term debt to continue funding all the massive spending. If inflation expectations stay low, maybe the market will have enough firepower to ingest some of the new debt, but not all of it. With the Fed planning to begin tapering at the end of the year, someone will need to fill the $80 billion void. This does not even take into account the possibility of shrinking the Fed balance sheet, which should be considered impossible at this point.

The chart of the international holders above brings to mind the image of the Wiley Coyote running off a cliff. With 10-year interest rates hovering near 1.5%, one could argue there is strong demand for long-term Treasury debt. Unfortunately, foreign creditors have turned off their debt purchases. It took decades for them to accumulate ~$7T in Treasury debt. The Fed alone has accumulated more than half that (~$4.5T) over the last decade. The Fed is making the market seem strong, but as shown above, there might be nothing but air if they were to exit the market. With a thumb on the scale, no one is getting an accurate reading of true demand for US long-term debt.

Source – Warner Brothers

What about short-term debt markets?

As highlighted several times, the demand for short-term debt seems to remain very strong. This makes sense as T-Bills mature in less than a year, so these investments are perceived as nearly risk-free. In fact, it could be argued that the recent Treasury Bill issuance hiatus (Figure 1 – blue bars turning negative) could be causing stress in the Reverse Repo market. The chart below shows the current Reverse Repo market. Based on past quarter-end data, it’s very possible that Reverse Repos could exceed $1.5T by this coming Wednesday, June 30, before coming back down.

Source – https://fred.stlouisfed.org/series/RRPONTSYD

Many articles have been written to explain this phenomenon, without providing exact clarity on what’s actually going on. The current understanding seems to be that the banks are awash with cash – so much cash, they are hitting the limits in terms of how much cash they can hold on balance overnight. This is cash that should be invested on behalf of money market funds. But with so much cash in the system, if it were to all be invested in short-term debt instruments, it could drive rates negative. To avoid negative rates, the Fed is lending banks assets on its balance sheet overnight in exchange for cash. It is critical to avoid negative rates to insure money market funds never experience a loss and result in breaking the buck.

Maybe this is a leap too far, but it seems another solution to the Fed reverse repurchase activity could be for the Treasury to issue more short-term debt. So, why has the Treasury been drawing down its cash balance and letting short-term debt mature when there seems to be strong demand in the market? The Treasury must recognize the risk of having too much debt in short-term instruments and is trying to lengthen the duration of its debt outstanding. Unfortunately, this abundance of cash in the repo market is in search of low-risk short-term debt so will not provide demand for long-term debt.

If this is the case, it has created quite the pickle for the Treasury. By issuing too much short-term debt, the Treasury is by default putting pressure on the Fed to not raise short-term interest rates. However, by issuing too much long-term debt, the Treasury is by default putting pressure on the Fed to maintain or even increase quantitative easing. To reiterate, this is why it is imperative the market believes inflation is transitory. The Treasury cannot stop issuing debt, which leaves the Fed unable to raise rates or taper QE without wreaking havoc in the bond market. Additionally, if the Fed has to fight inflation, then it’s not just the Treasury facing its Wiley Coyote moment, but the entire US economy.

Wrapping up

With the economy reopening, the Treasury deployed its cash balance at the most opportune time, unless of course inflation numbers continue to increase (which based on all the data, anecdotal evidence, and liquidity in the repo market seems like a strong possibility). Unfortunately for the Fed, the Treasury will have to begin re-issuing debt again. Will it lean towards short-term debt hoping the Fed keeps interest rates low, or long-term debt hoping the Fed will expand QE?

But Fed may be constrained either way because it has its own problem. Powell must be praying that inflation readings come in low AND job numbers disappoint. If both don’t occur, then tough questions will be asked to justify more stimulus. Yellen and Powell may be best buds, but simple coordination will not be enough. They will need magic and luck to keep the course steady heading into 2H 2021 and 2022.

If the Fed is lucky enough to get low inflation readings out of its rigged CPI, it may provide cover to begin tapering. Rising long-term rates won’t have the same compounding effect on inflation expectations in a “low” inflation environment. Unfortunately, long-term rates will not be tenable over the medium term as the government has to finance more and more debt. As the market this year has indicated, when issuance surpasses Fed buying, rates have gone up. So what happens to rates when the Fed leaves the market entirely? Presumably, they go up a lot. How high will the Fed let rates go before re-entering?

Just because something is inevitable (US Debt spiral) does not make it imminent; however, the next six months of data may shine a bright light on all the irresponsibility over the last 12 years if inflation proves not so transitory. Chances are, the only thing transitory will be “talking about talking about” tapering.

For Instagram “influencer” Hushpuppi, also referred to as the “Billionaire Gucci Master” Ramon Olorunwa Abbas, living a life of private jet setting and luxury on Instagram in front of his 2 million followers turned out to not only be his claim to fame, but also the straw that broke the camel’s back for his empire. While many looked on at his life of luxury in awe, questions started to arise about how he obtained, and maintained his wealth. The answer lied in the evolution of the often mocked “Nigerian email scam” that we have all become used to. 

Hushpuppi always maintained the questions about his wealth were “the jealousy of so many haters”, a lengthy new Bloomberg profile notes. “As I turn a year older into my 30s today, I want to celebrate all of you out there,” the influencer said to his fans on his 37th birthday. “Those of you who mostly I have never met, spoken to or anything but have been a strong supporter of me through every situation until this point and still riding for me, I want you to know wherever you are that I celebrate and appreciate you today, today is OUR DAY!”

It was one of many posts he made flaunting his wealth and engaging with his followers who supported him while he jet-setted, beefed with celebrities online, and did his best to side-step questions about where, exactly, his success came from. 

His captions to his photos would make his life of luxury look like the honest success of the son of a taxi driver and bread salesman from Nigeria. But of those who he likely didn’t celebrate or appreciate was the FBI, who is the driving force behind United States of America v. Ramon Olorunwa Abbas, which alleged in a California federal court that Abbas engaged in “conspiracy to launder money obtained from business email compromise frauds and other scams”. 

For example, a small sliver of the cash he received as part of these schemes was $922,857.76 sent by a New York law firm that was supposed to be sending it to one of its clients. A paralegal at the firm received a fax from “someone in Abbas’ orbit” directing her to send the payment to a Chase bank account and initiated the transfer without even thinking twice. The firm didn’t even notice the cash had been misallocated until later in the month.

The transfer was part of a relatively sophisticated “business email compromise” scheme that Abbas and his co-conspirators implemented around the world, the FBI alleged. 

Bloomberg, in their profile, described how the BEC scam works:

BEC attacks started appearing roughly a half-dozen years ago, escalating each year until they surpassed all other forms of internet fraud. The FBI reports there were almost 20,000 such scams against American businesses in 2020 alone, accounting for $1.8 billion in losses, though the variety of BEC crimes can make totals hard to pin down. Crane Hassold, the senior director of threat research at the cyberdefense company Agari Data Inc. and a former FBI analyst, likes to define a BEC as “a response-based impersonation attack that’s requesting something of value”—basically, posing as a legitimate business to trick people into giving away their money.

No matter the flavor, a BEC scam generally begins with someone hacking into a corporate email account often using social engineering tactics like phishing. Once inside, the perpetrators don’t steal anything, not at first. Instead they quietly begin forwarding copies of incoming and outgoing email to themselves. Then they wait. “They watch it for a number of weeks or months, looking for details of certain payments that are going out, understanding who their customers are, looking at communication patterns,” Hassold says. When they spot an invoice coming in or out, they “use that intelligence to insert themselves into an actual payment that is supposed to be due.”

Those who participate in the scheme are loosely networked and work together. There’s different roles for the scheme too: your hackers, your money mules, and even people tasked with controlling international bank accounts that can accept millions of dollars in transfers.

Crane Hassold, the senior director of threat research at the cyberdefense company Agari Data Inc. and a former FBI analyst, told Bloomberg: “These attacks are so realistic-looking, most people don’t give it a second thought. Because when you’re involved in payments like these, you see a lot of these emails every single day. And when it doesn’t raise any red flags, you are not going to go up the chain and do any confirmation. One would expect that when you get into larger and larger and larger amounts of money that are exchanging hands, that there would be some process that requires secondary authorization or something like that. But in many cases, that’s not what actually happens.”

He continued:  “I think that most people think of BEC attacks as just basic, boring attacks, and most people don’t think it’s as big a problem as it actually is. When you look at the amount of money that is actually lost to ransomware, it’s a drop in the bucket compared to what’s lost in BEC attacks.”

“A lot of the same concepts that go into these BEC attacks, criminals and scammers in West Africa have been doing for decades at this point. Those were all individually targeted social engineering attacks. And essentially what happened was, around 2015, cybercriminals started seeing that they could make more money targeting businesses than they could targeting individuals,” he continued. 

People from the neighborhood where Abbas grew up in Nigeria “began to drift into online scamming in the early 2000s”, the report notes. But since no one would associate with them once they revealed themselves as Nigerian, the schemes evolved. “Scams evolved over a decade from money-order fraud to check-cashing scams to romance scams to BECs,” the report notes. 

In terms of motivation, aside from the obvious, Abbas appeared to take exception with the system where he grew up, saying in one Snapchat video: “My mother is from the Niger Delta part of Nigeria, where Nigeria’s oil comes from. She has never benefited one dollar. One dollar! And she is over 60 years old.”

Olayinka Akanle, a sociology professor at the University of Ibadan who’s studied youth and cybercrime said: “Cybercrime is a metaphor for a more deep-seated and deep-rooted problem in Nigeria. When people face survival challenges, they innovate. And when they innovate, if there is no system to address their innovation in a very decisive way, it becomes the norm.”

He started to show off the money he was making on Instagram as far back as 2012. Several years later, one of his close associates, Samson Oyekunle, after moving to Houston in 2017, was arrested and charged with “participating in multiple BEC frauds” and was sentenced to 5 years in jail. Abbas had moved to Dubai by then and the walls were closing in him, too. With evidence mounting about how he was making his income, his time ran out in 2020. 

When Dubai police raided his hotel room and arrested him in 2020, they were so proud of the takedown, they took a page out of Abbas’ book: they posted the raid on social media. 

.@DubaiPoliceHQ takedown “Hushpuppi”, “Woodberry”, ten international cybercriminals in a special operation dubbed “Fox Hunt 2”. pic.twitter.com/E8oOFHZftG

— Dubai Media Office (@DXBMediaOffice) June 25, 2020

You can read the entire Bloomberg feature on Hushpuppi here. 

Authored by Ann Wright via Consortium News,

Each week the Pacific is getting even more crowded with military ships, submarines and aircraft from countries in the region and from outside.  NATO countries — United Kingdom, France, Germany and the Netherlands — are sending military vessels and aircraft. The Russian navy conducted military maneuvers off Hawaii. The US is on the verge of creating a permanent Pacific naval task force as a part of its aggressive response to China’s naval presence in the Pacific. The largest land exercise in Asia and the Pacific is taking place in Australia with 17,000 U.S. and Australian military.

In March, President Joe Biden directed the Pentagon to establish a China Task Force to examine China-related policies and processes and give its recommendations to Defense Secretary Lloyd Austin. The creation of a Pacific Naval Task Force would allow the secretary of defense to provide more of the Pentagon’s budget for challenging China’s presence in the Pacific. The Pacific task force would also include NATO allies such as Britain and France, that have already sent their warships into the Pacific, as well as Japan and Australia.

At the recent NATO meeting in Brussels, most leaders agreed with Biden’s confrontational stance with China, declaring that Beijing is undermining global order and is  a security challenge.  A similar NATO naval task force, the Standing Naval Forces Atlantic, composed of six-to-10 ships, destroyers, frigates and support vessels from multiple NATO nations, has operated for decades in Atlantic waters.

Russian War Practice Near Hawaii

It’s not only China that is causing the US concerns in the Pacific. A US missile defense test was delayed at the missile test facility on the Hawaiian island of Kauai in May due to the presence of a Russian surveillance ship 13 miles off the island, at the edge of US territorial waters.

The Kareliya, a Russian Navy Vishnya-class auxiliary general intelligence, or AGI, ship is based in the Russian Pacific port of Vladivostok and is one of seven AGIs specializing in signals intelligence. For several weeks it sailed off the coast of Kauai, 100 miles from the massive US naval facility at Pearl Harbor on the island of Oahu.

The Missile Defense Agency (MDA), in cooperation with the US Navy, conducted on Kauai what it called Flight Test Aegis Weapon System 31 to demonstrate the capability of a ballistic missile defense (BMD)-configured Aegis ship to detect, track, engage and intercept a medium-range ballistic missile target with a salvo of two Standard Missile-6 Dual II (BMD-initialized) missiles.

To the chagrin of the MDA, with the Russian signals ship as a witness, the May 29 missile test eventually was carried out with ship-fired missiles but they failed to intercept a medium-range ballistic missile target.

The U.S. Pacific Fleet at Pearl Harbor made this statement at the time, saying it was-

“aware of the Russian vessel operating in international waters in the vicinity of Hawai’i, and will continue to track it through the duration of its time here. Through maritime patrol aircraft, surface ships and joint capabilities, we can closely monitor all vessels in the Indo-Pacific area of operations.”

A few days later, US Air Force F-22 jets made two sudden flights out of Hawaii with the Indo-Pacific Command eventually acknowledging that “several Russian ships and aircraft” were 200 miles to the west of the Hawaiian Islands and the F-22s had been sent out to keep watch on them.

The “several ships and aircraft” turned out to be the largest Russian naval maneuvers in the Pacific since the end of the Cold War. As reported by the Honolulu Star Advertiser on June 23, prior to the meeting of the Russian President Vladimir Putin and President Joe Biden in Geneva on June 16, the Russian Ministry of Defense publicized the Russian naval maneuvers off Hawai’i as a naval and air exercise that practiced “destroying the aircraft carrier strike group of the mock enemy” and delivering a simulated strike with cruise missiles against “critically important” military infrastructure. The Russian press release described the military exercise as two detachments of ships, operating about 2,500 miles southeast of the Kuril Islands, that detected, countered and delivered missile strikes against an aircraft carrier strike group.

The missile strike practice was conducted by the flagship of the Pacific Fleet, the missile cruiser Varyag, the frigate Marshal Shaposhnikov and multiple corvettes.  Twenty surface warships, including a submarine and support vessels, were involved in the exercise with 20 aircraft, including long-range antisubmarine aircraft Tu-142M3, anti-submarine aircraft Il-38, high-altitude fighter-interceptors MiG31BM, deck anti-submarine and search-and-rescue helicopters Ka-27.

The deployment of Russian “Bear” bombers as part of the exercise twice resulted in missile-armed Hawaii Air National Guard F-22 fighters scrambling to possibly intercept the turboprop planes — which headed in the direction of Hawaii but never came close, according to US officials. No US intercepts of the Russian aircraft were made.

The two long-range Tu-142MZ anti-submarine aircraft that provided support to the exercise had flown from Kamchatka Peninsula, spending more than 14 hours in the air and covering about 10,000 kilometers during the exercise, according to the news report.

Rounding out the air component of the Russian exercise were six Il-38 and Il-38N anti-submarine aircraft that searched for and tracked submarines of the “mock enemy.” The anti-submarine aircraft were escorted by MiG-31BM high-altitude interceptor fighters of the Pacific Fleet with refueling capability provided by II-78 aircraft of the Russian Aerospace Forces. An open-source satellite view of the Russian flotilla was taken on June 19 when it was 35 nautical miles (40 statute miles) south of Honolulu and was being escorted by three U.S. Navy destroyers and a Coast Guard cutter.

A spokesman for U.S. Indo-Pacific Command at Camp H.M. Smith in Honolulu said on June 21 that the Russian vessels operated in international waters throughout the exercise and at the closest point, some Russian ships operated approximately 20 to 30 nautical miles (23 to 34 statute miles) off the coast of Hawaii and that they were tracked very closely by U.S. forces.

US & Russian Vessels Around Hawaii

Making for a crowded area around Hawai’i, the USS Carl Vinson aircraft carrier strike group based in San Diego was operating off the east side of the Hawaiian Islands at the same time the Russian fleet was off the west side of the islands.  The Carl Vinson, the flagship of the carrier strike group, conducted exercises with Carrier Air Wing 2, Destroyer Squadron 1, the guided-missile destroyers USS O’Kane, USS Howard, USS Chafee, USS Dewey and USS Michael Murphy. The Chafee and Michael Murphy are based at Pearl Harbor.

French Air Force Arrives

On Sunday, June 27, in their first visit to Hawai’i, the French government sent 170 Air and Space Force personnel, three Rafale fighter aircraft, two A330 Phenix refueling tankers and two A400M Atlas transports to Joint Base Pearl Harbor-Hickam in Honolulu for training with Hawai’i-based U.S. F-22 fighters, C-17 cargo aircraft and KC-135 refuelers. The French squadron will depart Hawai’i on July 5 for Nellis Air Force Base in Nevada for more training with U.S. military units.  U.S. Pacific Air Force command emailed that “It is imperative that the U.S. accelerates change in synchronization with allies like France to ensure we are ready for the next fight.”

The British Are Coming Too

Besides the French military aircraft arriving in the Pacific, the new British  65,000-ton aircraft carrier HMS Queen Elizabeth and its carrier group is heading for the Pacific in what is called the “most important peacetime deployment in a generation” for the United Kingdom.

British Defense Secretary Ben Wallace said on April 26 that “even as the Pacific’s importance to our future economy continues to rise — so the challenges to the freedom of navigation in that region continue to grow. Our trade with Asia depends on the shipping that sails through a range of Indo-Pacific choke points, yet they are increasingly at risk.”

HMS Queen Elizabeth, the centerpiece of Britain’s Royal Navy, departed the U.K. in May for a world voyage including stops in 40 nations and steaming through the South China Sea.  Defense Minister Wallace said that while China is “increasingly assertive, we are not going to the other side of the world to be provocative. We will sail through the South China Sea. We will be confident, but not confrontational.”

Adding to the numbers of naval vessels in the crowded South China Sea will be the nine escort vessels of  HMS Queen Elizabeth: destroyers HMS Defender and HMS Diamond, anti-submarine frigates HMS Kent and HMS Richmond, the Royal Fleet Auxiliary’s RFA Fort Victoria and RFA Tidespring, Dutch frigate HNLMS Evertsen and U.S. Navy destroyer USS The Sullivans.

US & the ‘International Rules-Based Order’

The State Department said the United States, which has maintained what it calls the “international rules-based order” in the Pacific since the end of World War II, is “committed to upholding a free and open Indo-Pacific in which all nations, large and small, are secure in their sovereignty and able to pursue economic growth consistent with international law and principles of fair competition.” In 2019, the U.S. Department of Defense wrote in its strategy document that the Indo- Pacific region is the single most consequential region for America’s future.

Admiral Phil Davidson said on April 30 when he relinquished leadership of the massive U.S. Indo-Pacific Command, “Make no mistake, the Communist Party of China seeks to supplant the idea of a free and open international order with a new order — one with Chinese characteristics — where Chinese national power is more important than international law.”

Davidson added that strategic competition in the Indo-Pacific “is not between two nations, it is a contest between liberty — the fundamental idea behind a free and open Indo-Pacific — and authoritarianism, the absence of liberty.”

China Responds

On May 27, at a China Ministry of National Defense press conference, Senior Colonel Tan Kefei said America keeps “stepping up military deployments in the Asian Pacific region, frequently conducts close-in reconnaissance against China, and even deliberately initiates dangerous circumstances between Chinese and U.S. military aircraft and vessels.”

He added that a strategy emphasizing military presence and military competition “will only heighten regional tensions and undermine world peace and stability.  No strategy should instigate countries to establish selective and exclusive military alliances, or to create a ‘New Cold War’ of confrontational blocs.” In relation to Taiwan, Tan said, “there is only one China in the world, and Taiwan is an integral part of China,” and that currently China-Australia relations “face serious difficulties.”

G7 & Quad Support Status Quo on Taiwan 

The Group of Seven, or G7 —made up of leaders from Canada, France, Germany, Italy, Japan, the United Kingdom and United States —said on June 13 that, “We underscore the importance of peace and stability across the Taiwan Strait,” adding that “we remain seriously concerned about the situation in the East and South China Seas and strongly oppose any unilateral attempts to change the status quo and increase tensions.”

Three months earlier, on March 12, the first leaders’ meeting of the Quadrilateral Security Dialogue, or “Quad” — the United States, Japan, Australia and India — issued a statement saying they are:

“united in a shared vision for the free and open Indo-Pacific…We support the rule of law, freedom of navigation and overflight, peaceful resolution of disputes, democratic values and territorial integrity.”

Largest Land-War Maneuvers in Region

The largest land war practice in the region, the U.S.-Australian war maneuvers Talisman Sabre 2021 began in June in Australia.  Scaled down from 30,000 due to Covid, over 17,000 military personnel from the U.S., Canada, Japan, Republic of Korea, New Zealand and the U.K. will conduct war maneuvers including combined Special Forces operations, parachute drops, amphibious (marine) landings, land-force maneuvers, urban and air operations and the coordinated firing of live ammunition from late June until mid-August. France, India and Indonesia will participate as observer nations. The U.S.-Australian hypersonic  weapon, capable of flying at speeds greater than five times the speed of sound (Mach 5), may be tested during Talisman Sabre 2021 at the Australian rocket range near the town of Woomer, South Australia.

In one month alone, this June, the US IndoPacific Command military forces participated in over 35 war maneuvers with other countries. Read more about the war preparations with these countries here.

In what’s being heralded as a major diplomatic victory for the UK, British diplomats have reportedly succeeded in securing an exemption for the financial services industry from the global corporate tax framework that’s being hammered out by the OECD. With talks set to end Thursday, the OECD is expected to soon publicize “Pillar 1” of what would be the most comprehensive overhaul of international corporate tax rules in a century.

But while Washington likes to talk about the new framework as a foregone conclusion, there’s plenty of reason to doubt that it will ever be implemented.

One reason is that countries like Ireland, Singapore, Indonesia and island island tax havens like Bermuda all oppose the new scheme. Why would these countries want to surrender a policy that has in almost every case been a tremendous boon for economic growth, just to accept whatever tax crumbs the Americans toss their way? Adding salt to their wounds, while these countries haven’t played much of a role in the talks so far, the UK has already succeeded a critical carveout, something that even Amazon hasn’t managed to accomplish.

Their biggest fear, of course, is that everybody gets an exemption but them.

Britain’s financial services industry has been left in shambles since Brexit. This exemption is an example of the UK scrambling to protect what’s left of its imploding banking sector. And as the FT reported, UK Chancellor Rishi Sunak only managed to secure the exemption by making a critical tax concession to the US.

The talks at the Paris-based OECD, which are due to conclude on Thursday, have accepted Britain’s case that the financial services industry be carved out of the proposed new global tax system, according to two people briefed on the negotiations.

But UK chancellor Rishi Sunak’s victory in haggling over the details of new corporate levies came at a cost, said these people. He had to make concessions to the US on dismantling Britain’s digital services tax that is focused on American technology companies.

Meanwhile, the FT also shared some new details from the negotiations. In the first part of the talks, the UK and France have pushed to ensure that American tech giants will pay more in taxes wherever they operate, in exchange for countries raising their minimum corporate tax to 15%. While Washington initially pushed back against the exemption for financial services, Britain manage to persuade the US with a commitment to “early removal” of the digital tax mentioned above. The timing of the removal would be “carefully choreographed.”

The US agreed to the focus on taxing multinationals more based on where they operate so long as other countries committed to removing their digital taxes, but shocked the UK by saying that the pillar one tax rules had to apply to all sectors including financial services.

“This was a pure game between the US and the UK and France,” said one person close to the negotiations.

The UK believed financial services would be carved out from the new global tax rules because regulation forces banks to be separately capitalised in every jurisdiction they operate in, so that they declare profits and pay tax in the countries in which they do business.

Without the exemption, the UK Treasury risked seeing City banks paying less tax to it and more to other countries.

Washington initially insisted that Italy, France, the UK and any other country with a digital tax targeting American tech firms abolish those levies as soon as a deal on a new global framework was struck. Ultimately, it appears even the UK refused immediate elimination. As Sunak said: “I think it’s a fairly obvious point the Americans want domestic digital services taxes removed. They will be, but the whole thing has to be looked at in the round.”

Authored by Simon Veazey via The Epoch Times,

Brits squirrelled away their wages, profits, and pandemic handouts during this year’s spring lockdown, taking household savings to near-record levels, according to official figures.

The data from the Office for National Statistics also show that GDP contracted during that first quarter of the year by more than expected, dropping by 1.6 percent compared with the previous 1.5 percent estimate.

The drag of the 2021 lockdown kept GDP below pre-pandemic levels by 8.8 percent, but it was less marked than during the 2020 spring lockdown when it dropped by 20 percent.

But the finer-grained monthly data give a more positive picture, showing that growth jumped from 0.8 percent in February to 2.4 percent in March. In April the jump was 2.3 percent and the Bank of England’s outgoing Chief Economist Andy Haldane recently said the economy was going “gangbusters.”

The latest data come amid growing pressure on the government to stick to its pledge on removing all pandemic restrictions on July 19, and as the government prepares to wind down the furlough scheme from tomorrow.

Martin Beck, senior economic adviser to the EY ITEM Club, said GDP will recover strongly in the second quarter as households spend some of the savings built up in lockdowns.

He said, “The delay to removing remaining restrictions and any effect to confidence from the recent rise in COVID-19 infections present potential risks to this forecast though.”

Julian Jessop, economics fellow at free market think tank the Institute of Economic Affairs, said the figures showed that “pent-up demand may prove to be even stronger.”

“More timely business surveys already suggest that overall economic activity (as measured by GDP) will be back to pre-COVID levels as soon as the third quarter, with employment picking up well,” he said in a statement.

Jessop said that means the government should press ahead with winding down the furlough scheme as planned from July 1.

“It is increasingly clear that the furlough scheme is now contributing to staff shortages and actually holding back the recovery, including in hospitality. With most of the economy open again, people should be encouraged to find new jobs, instead of being locked into their old ones.”

Jonathan Athow, deputy national statistician at the ONS, said: “Today’s updated GDP figures show the same picture as our earlier estimate, with schools, hospitality, and retail all hit by the reimposition of the lockdown in January and February, with some recovery in March.

“With many services unavailable, households again saved at record levels with only last spring seeing more saved.”

Today in “Skynet rewrites history” news, a Google algorithm has been responsible for mixing up an engineer based in Switzerland with a notorious serial killer online. 

The mix up happened when algorithms mistakenly took a photograph of engineer Hristo Georgiev and placed it into a Wikipedia entry for Hristo Georgiev, who is described by the same entry as “a Bulgarian rapist and serial killer who murdered five people, mainly women, between 1974 and 1980”. 

The software engineer seemed to take the news in stride.

Seems like Google falsely associated a photo of mine with a Wikipedia article of a serial killer. I don’t know if this is hilarious or terrifying. pic.twitter.com/rmAL7uQYy4

— Hristo Georgiev (@hggeorgievcom) June 24, 2021

He even wrote a blog post called “Google turned me into a serial killer”. 

“As I was scrolling through my inbox today, I stumbled upon an e-mail from a former colleague of mine who wanted to inform me that a Google search of my name yields a picture of me linked to a Wikipedia article about a serial killer who happens to have the same name as mine,” he wrote. 

“I quickly popped out my browser, opened Google and typed in my name. And indeed, my photo appeared over a description of a Bulgarian serial killer,” his blog says. “My first reaction was that somebody was trying to pull off some sort of an elaborate prank on me, but after opening the Wikipedia article itself, it turned out that there’s no photo of me there whatsoever.”

Georgiev concluded:

“It turns out that Google’s knowledge graph algorithm somehow falsely associated my photo with the Wikipedia article about the serial killer. Which is also surprisingly strange because my name isn’t special or unique at all; there are literally hundreds of other people with my name, and despite of all that, my personal photo ended up being associated with a serial killer. I can’t really explain to myself how this happened, but it’s weird.”

Several days later, the engineer reported the that problem had been fixed.

Google fixed the problem. No harm done (or none that I‘m aware of). Blog post updated – https://t.co/rOeQoQnZK7

— Hristo Georgiev (@hggeorgievcom) June 26, 2021