Month: September 2020

Just weeks after we reported that many EV manufacturers in the super-saturated Chinese market were going public to avoid bankruptcy, we are learning that China’s local governments are also doing everything they possibly can to keep the country’s EV projects afloat.

For example, when NIO was under tremendous financial pressure just months ago, it was the municipal government of Hefei that stepped in to bail the company out by investing $1 billion in cash for a 24.1% stake in the company’s China’s entity – and getting the company to relocate its headquarters to its province. Hefei has “hopes of creating a powerful rival to Tesla,” according to Nikkei.

Similarly, other local governments have stepped into help China’s young EV names. Not unlike Elon Musk’s Tesla, China’s Nio, Xpeng Motors, Li Auto and WM Motor have also all relied on taxpayer/state money to push their visions forward. In China, the state backing could work to divide the country’s push to take on Tesla, instead of unify it, according to Nikkei. 

But states are still broadly supporting an agenda that was set in Beijing that makes it clear that EVs are going to be a huge part of the country’s “Made in China 2025” initiative going forward. China has a goal of pushing NEV vehicles to 25% of all overall car sales by 2025.

China is already the largest EV market in the world, making up 57% of the global market as of April 2020. In addition to Tesla, the market is dominated by well established names like BYD and GAC Group. Tesla has already carved out a 20% market share for themselves in China, demonstrating the appetite for smart vehicles in the country. If startups want to compete, they need the government help.

Cui Dongshu, secretary general of the China Passenger Car Association said: “The regional governments are very strong investors. They will be the lifesaver for China’s EV startups.”

The modus operandi of state government investments are that EV startups move their headquarters to the province and build factories in the region. “Hundreds of city-level governments are competing for big projects. There are not many good ones at the moments,” Cui continued.

And regional investors have been access to capital than private investors. They can raise trillions in yuan from bonds while focusing more on the “benefits to the overall economy over financial return”.

But the state backing could also cause additional scrutiny from the U.S. government, as tensions between the two countries continue to rise. In a day and age where the U.S. has grown increasingly skeptical of Chinese technology, there could also be growing skepticism about state backed Chinese EV makers looking to break into the U.S. market. That is, if the Chinese state already hasn’t done so with Tesla…

Sujoy Sarkar, head of corporate development at Byton, said: “China is now a world power, and the U.S. government wants to protect its own interests, especially [concerning ] such technologies at a scale that affects everyone.”

Sarkar continued: “Based on my own experience, I’d say most [Western] investors are capitalists, and most prefer limited to no government involvement.”

Wayne Shiong, partner at venture capital China Growth Fund, said: “The involvement of state capital is necessary because the automobile industry concerns the national interest and people’s livelihood. An industry consolidation will come much later.” 

Recall, we wrote about the successful IPO of Li Auto on the U.S. markets. It has “received investments from several entities backed by municipal governments of Changzhou and Xiamen as well as state-run investment bank China International Capital Corporation.”

Additionally, we reported weeks ago that competition in China’s EV market is starting to become super-saturated. But rather than actually allow the market to consolidate and eliminate some of the smaller players, Chinese EV companies were taking another route to stave off going under: going public.

After all, what better way to put a company that’s not meant to survive on life support than to sell shares of it to a public that doesn’t know how to read financial statements? 

Hozon New Energy Automobile was the latest name to launch an IPO, Bloomberg pointed out in a recent article, saying it wants to list in Shanghai next year. Hozon is trying to capitalize on lower priced vehicles, offering an electric SUV for less than $10,000. The company has already shipped more than 16,000 vehicles. WM Motor is seeking a valuation of about $4.3 billion and is backed by names like Baidu and Tencent. 

Robert Cowell, an analyst at Shanghai-based private-equity firm 86Research Ltd. told Bloomberg: “The strength in Tesla and NIO shares is creating a window for new EV startups to list. The current conditions provide an attractive opportunity to raise funds, which can help some of these smaller startups sustain the investments necessary to compete effectively.”

This has given hope to the dozen or so EV names that have been able to raise money in China. They have emerged from a group of nearly 100 EV startups, all helped along by the government’s promise of subsidies for the industry. But its likely that out of the dozen that will make it to the public markets, not even all of those candidates will be successful.

For the rest, maybe they can fall back on the Chinese government…

The FBI has warned Chicago-area law enforcement that nearly three-dozen street gangs “have formed a pact to ‘shoot on-site any cop that has a weapon drawn on any subject in public’,” according to ABC7.

According to an August 26 ‘situation information report’ from Chicago-based FBI officials, “members of these gang factions have been actively searching for, and filming, police officers in performance of their official duties. The purpose of which is to catch on film an officer drawing his/her weapon on any subject and the subsequent ‘shoot on-site’ of said officer, in order to garner national media attention.”

Alerts based on police intelligence, no matter how unspecific, are frequently distributed to law enforcement agencies according to investigators, especially when they involve threats to officers. The FBI’s “Potential Activity Alert” is from “a contact whose reporting is limited and whose reliability cannot be determined.” That could mean the information came from a police street source, a cooperating witness in an ongoing case, or from discussions overheard on a wiretap or other surveillance recording. –ABC7

According to CPD Superintendent David Brown, there is an overall “sense of lawlessness” felt by local police, and the ‘danger to police officers is real and increasing.’

“I think it’s bigger than a suggestion,” said Brown. “I think 51 officers being shot at or shot in one year, I think that quadruples any previous year in Chicago’s history. So I think it’s more than a suggestion that people are seeking to do harm to cops.“

The alleged pact comes amid national protests over several high-profile incidents between black suspects and police officers which has resulted in arson, looting, murder and other violent acts in cities across the country sparked by the death of George Floyd – a black suspect who died in police custody after an officer knelt on his neck for over eight minutes.

As ABC7 notes, the warning comes after 54 people were shot in the windy city – including two Chicago PD officers who are expected to live, while 10 victims died according to the report. That said, there is no indication that the officers were targeted as part of the alleged gang assassination pact described in the FBI alert.

The FBI alert, headlined “Pact Made by People Nation Gang Factions to ‘Shoot On-Site’ Any Police Officer with a Weapon Drawn” lists street gangs that have become well-known in Chicago the past five decades, from the Latin Kings and Vice Lords to the El Rukns and Black P Stones.

Supt. Brown said on Monday the spike in attacks on police makes it clear to him that “people are seeking to do harm to cops.”

“We need police officers and as community members we need to push back fervently against lawlessness,” Brown said. –ABC7

Chicago PD told the outlet that they are aware of the gang threat, and take all threats to officers’ safety seriously. Federal authorities have not provided additional information. 

Authored by Rick Moran via PJMedia.com,

The California Assembly will vote before Monday on a state Senate bill that creates a task force to look at the question of slavery reparations. The measure passed the state Senate in a bipartisan vote.

The radical left is getting ready for a Biden presidency and a Democratic Party takeover of the U.S. House and Senate by laying the groundwork for their agenda at the state level. Slavery reparations will be close to the top of the radical’s wish list if Biden wins.

Associated Press:

“Let’s be clear: Chattel slavery, both in California and across our nation, birthed a legacy of racial harm and inequity that continues to impact the conditions of Black life in California,” said Democratic Sen. Holly Mitchell of Los Angeles.

She cited disproportionate homelessness, unemployment, involvement in the criminal justice system, lower academic performance and higher health risks during the coronavirus pandemic.

This is a surprise. California was a free state when it entered the Union in 1850 as a result of the Compromise of 1850. But now we’re told there was “chattel slavery” in California.

Well… sorta.

Although California before the Civil War was officially a free state, Mitchell listed legal and judicial steps state officials took at the time to support slavery in Southern states while repressing Blacks.

But what about the fact that white people alive today had nothing to do with slavery?

Sen. Steven Bradford, a Democrat from Gardena who supported the bill, said he only wished it was more than a study.

He noted that Friday marked the 57th anniversary of the March on Washington and The Rev. Dr. Martin Luther King, Jr.’s “I Have a Dream” speech.

“If the 40 acres and a mule that was promised to free slaves were delivered to the descendants of those slaves today, we would all be billionaires,” Bradford said.

“I hear far too many people say, ‘Well, I didn’t own slaves, that was so long ago.’ Well, you inherit wealth – you can inherit the debt that you owe to African-Americans.”

Reparations are inherently unfair and no proposal is workable. They are unfair because they assign guilt to an entire race of people. That’s absurd on its face and turns our concept of individual responsibility on its head.

It will be impossible to fairly, not to mention intelligently, divvy up reparations in any rational manner. The questions don’t end with who gets what. How much do the descendants of former slaves get compared to families that arrived from Africa in the last 10 years? More prosaically, how “black” do you have to be to get your money? Will we go full Nazi and start looking at “pure blood” and “half breeds”? Should someone who is only one-quarter black get the same amount as someone who has a higher percentage of “black blood”?

These aren’t idle questions. We’re talking about trillions of dollars in the most massive transfer of wealth in world history. It would be nice if we knew what we were doing before expropriating that kind of cash.

We may get lucky and see the radicals – as radicals are wont to do – blow up their own proposal by squabbling over the details. But this is an issue that won’t go away. Logic doesn’t matter to these people. In fact, it makes them angry when you try to apply logic to the problem. And manipulating street violence to get their way will always be an option for them.

Colleges and universities which are opening for in-person, on campus classes this week and the next are apparently stopping at nothing to ensure they can detect COVID-19 cases early, especially as they struggle to prevent total campus shutdowns as happened last March when the pandemic hit the US, also as in many cases the very financial survival of a number of institutions of higher learning is at stake.

Already stringent virus testing measures are in effect for new and returning students, but some schools are going to more extreme lengths. Testing students’ shit – literally – is now a thing, apparently.

“The University of Arizona found early signs of COVID-19 in a student dorm this week by testing wastewater and were able to head off an outbreak there, school leaders announced Thursday,” the daily newspaper Arizona Republic reports.

“Researchers at the school have looked for traces of the virus in wastewater samples taken from the greater Tucson area since March and have gathered samples from 20 buildings on the UA campus since school started,” the report states.

The campus has some 5,000 students currently moving into their on-campus dorms and housing. At least one of the dorms’ sewage water came back positive for traces of COVID-19.

“Earlier this week, data collected from the dorms found higher viral loads in wastewater samples taken from Likins Hall,” AZ Republic writes further. This led the school to test all newly arrived 311 students in that dorm, resulting in discovery of two COVID-19 positive cases.

The positive students were said to be asymptomatic, which suggests they could have spread the disease far and wide before any detection, if not for the new sewage monitoring.

Meanwhile a report in The Washington Post notes that other schools like University of California are doing the same.

This also as there are nationwide efforts underway to put some kind of wastewater COVID-19 detection tracking system in place, as the virus is believed to appear in feces often prior to the onset of symptoms like fever, coughs, and headaches.

Authored by Alasdair Macleod via GoldMoney.com,

Socialism has moved on from the Marxist version of the state owning the means of production to one whereby production remains in the hands of individuals but are heavily regulated – echoing Mussolini’s fascist-socialist model.

But after nearly nine decades this model faces collapse, much like the Soviet collapse after sixty-seven years. This article explores the modern socialist model, updates the economic calculation problem identified by von Mises in 1920 and explains why it still fails in today’s socialism. And finally we predict the consequences for governments and their state-issued currencies.

Introduction

It is presidential election year in the United States. The choice is between the Republican’s or the Democrat’s socialism, the former being a milder version of the latter. A further difference is President Trump’s administration increasingly pays the government’s bills by socialising money, while great-uncle Joe wants to tax the rich even more (which in practice means not the rich but the middle and lower classes) as well as defoliating  the magic money tree.

In Britain, those of us who rejoiced at a free marketeer becoming Prime Minister with a strong electoral mandate have experienced a greater clampdown on personal freedom than imposed by any British government since post-war rationing. Admittedly, Covid-19 and its lockdowns were not foreseen, but will the British ever regain any of their hitherto restricted freedoms? And those of us with long memories are reflecting that the imposition of taxes — the socialising of our earnings — under the Conservatives is almost always more onerous than under Labour. It was not meant to be like that.

One way or the other, the establishment’s socialisation of our wealth, money and freedom “creeps in this petty pace day to day until the last syllable of recorded time”. Whether we like it or not, we are all socialists now. It is a fact of our lives, if not our inclinations. The destruction of our money and what wealth we have left is claimed to be for the common good, as opposed to capitalism, which the socialists tell us enriches the few and is deeply immoral. They, the socialists, have captured the moral high ground, leading us to their higher plain. They allege it is progress towards a better humanity. Their utopian view sees the end of social inequality as its final goal, and as Man progresses towards it the human race will discard capitalism and the class wars that go with it.

No longer should we define socialism by its post-Marxian objective, the acquisition by the state of the means of production and the ending of property ownership. The failure of the organising state to produce goods demanded by the consumer was fully exposed by the collapse of the USSR and the ending of the Chinese state’s monopoly on production. But that has not stopped socialism, which has simply evolved into a new form dominated by the social democratic model. The title is itself a contradiction. Social is laudable and democratic is inclusive but put them together and the state has been handed power over its electors by its electors.

The social democratic philosophy begs some fundamental questions. If it is a better system than the alleged evils of capitalism, why does social cooperation not evolve towards it at the behest of ordinary people without the need for an organising government? Why are leaders required to coerce, organise and force people to part with their income and wealth for their own common good? Who benefits?

Those who are said to benefit are the sick and the poor through the redistribution of wealth. But the evidence is overwhelming that a state bureaucracy is not better at this humane function than independent charities. The socialist’s rebuttal is that no one should have to rely on charity, to which those who value their freedom are normally too dull-witted to respond by asking, why not, when the alternative is state coercion backed by imprisonment?

Claims of morality are a thin cover, a disguise for wealth transfer from ordinary people to the state. The state is now an organisation that leeches on its electors in order to pursue its own separate agenda. We must therefore put claims of morality to one side if we are to understand the damage socialism has done to ordinary people and their economic progress. No longer ambitious for the acquisition of the means of production, modern socialism has evolved into a fascist form, a fact which when pointed out to social democrats leads to instant denial and horror, because in their language it is right wing and extreme, wrongly associated with free market capitalism.

Being fascists without knowing it

The accusation that social democratic planning is fascism is easily proved. Some claim fascism’s origins were in the nineteenth century, when European philosophers expressed ideas which were only later described as fascist. But the fascist movement proper started in Italy, when Benito Mussolini, then an avowed Marxist, was the most forceful Italian proponent of the Marxian paradise to come.

In 1914 on the declaration of the Great War Italian communists declared it to be a fight between imperialists and exploiters of the proletariat. In their view, the proletariat should stand aside and not be exploited by either side, waiting for the inevitable civil war which would pave the way to the destruction of capitalism, giving power to the workers.

Having initially taken the Italian communist position of abstaining from war, Mussolini then aligned himself with the nationalists against the imperialist Austrians. It was an opportunist move and a grab for support from the communist rank and file. Following the First World War, the Italian communist party movement faltered, and Mussolini with his new fascist party stepped into the void. Members left the communists and joined Mussolini’s fascists in droves, because there was little discernible difference between Mussolini’s socialism and that of the Italian Marxists. His 1919 manifesto was anti-capitalist and posed as socialism with renewed vigour. From there, it evolved into advocating aggressive interventionism, and then towards Nazism which was developing in parallel. The Nazi economic creed was simple: capitalists can own the means of production so long as they obey the commands of the state. In other words, business was directed and regulated instead of owned by the state.

It neatly describes the socialism of today. Socialists no longer deem it necessary for the state to own the means of production, it merely controls it by regulation, directing it by selective subsidies and taxes. It also exposes the intellectual ignorance of the useful idiots who blindly follow slogans.

The loss of the means of economic calculation

We have established that the objectives of today’s social democrats are little different in principal from those of the fascists in the interwar years. But this modifies our analysis from that of Ludwig von Mises in 1920, who wrote an important essay titled “Economic Calculation in the Socialist Commonwealth”, which sparked what became known as the socialist calculation debate. Mises demonstrated why public ownership of the means of production was bound to fail. Central to his argument was the state’s inability to make the calculations necessary to allocate the means of production, a function which can only be attempted successfully by independent entrepreneurs putting their own resources on the line.

Today’s institutional socialism is now fascist instead of being on the Marxist lines which were debated between Mises and socialist economists a century ago. The failure of Marxist socialism was for the reasons Mises predicted. It must still apply today to that portion of a socialist economy that relates to government spending which is not redistributed in the form of welfare payments or put out to private sector contracts by means of competitive tender. What then remains of government expenditure will lack the basis of economic calculation, which cannot be performed. But welfare distributions and government contracts raise a separate issue, the distortion of an economy by state-directed spending into spending that would not otherwise occur, and the wasteful use of all forms of capital which would otherwise be deployed more efficiently by private enterprise.

Economic activities that remain under free market principles, whereby entrepreneurs seek to profit by anticipating the needs and wants of consumers successfully, are now heavily regulated and restricted. State bureaucrats effectively control the forms and characteristics of goods and services offered by producers. They claim to protect the consumer from unscrupulous capitalist profiteers. Sometimes, regulations imposed by the state succeed in this objective, but it is wrong to argue that free markets would not have matched or even provided higher standards of product than those framed by the state’s regulatory regime, because it is manifestly in every producers’ interest to produce the best product for the market, unless, that is, the state regulator protects the producer from competition. This is too often the case.

Why bureaucracy fails and free markets succeed

The bureaucrats and their supporters — the socialists and trade unions — do not understand prices. They firmly believe in the cost theory of prices, whereby the price of a final product is set by the cost of production. It is also central to Marxist economics, which evolved before marginal price theory, and declared prices to be determined by the cost of labour and therefore exploitative. The Austrian economist, Carl Menger, was one of three independent discoverers of marginal price theory in the 1870s. Menger showed that in free markets prices are purely subjective: in other words, prices are set by consumer preferences and it is up to the producer to anticipate and then respond to them.

It is this division between the bureaucratic-socialist belief and free market evidence that separates two entirely different propositions: the state’s bureaucratic management and free markets.

It is only by understanding how the different systems operate that we can explain the flaws of bureaucracy in an economic context. Free markets work on the basis of the ownership of property and its unfettered deployment for the production of goods and services. Property used in production takes it value from it, which is why by giving property no value by monopolising it economic calculation cannot take place.

It is a socialist myth that private ownership gives capitalists power over people. It is true that capitalists are in command of resources, but their masters are the consumer, who they must satisfy by organising their property and other resources effectively. In economic terms, it is the purest form of democracy.

The regulatory burden on established sectors producing goods and services has become increasingly onerous. Being forced to satisfy the regulators instead of customers, businesses are decreasingly focused on customers. The regulator replaces the customer completely in the scale of importance when the provider of goods or services is guaranteed a margin over costs and given a monopoly by the state. These businesses extend the state’s control over the consumer, and while nominally in the private sector, should be regarded as part of the state for the purpose of economic analysis, because they operate on a statist cost plus regulated margin basis.

Allowing for influences such as these, unfettered private sectors in modern economies are less important than commonly thought, most businesses being more burdened by bureaucratic management and control than is generally realised. Supposedly free markets are being directed by bureaucrats and administrators who have opted for an easy life of secure income and pensions, where they do not have to make judgements, but only to administer regulations without any further thought or responsibility for their actions.

Who pays for it all?

An economy run by the state owning the means of production cannot succeed because it cannot calculate. It can only resort to force, evidenced by the masses killed by the Soviets and Chinese communists in their attempts to get Marxist socialism to stick. Now that that form of socialism has been exposed by its failures, modern socialism is in a halfway house of some remnants of state ownership coupled with fascist control and regulation over private production.

It is not difficult to see why contemporary economies are struggling under these burdens, and we do not need to resort to empirical evidence to assist with an explanation. But with modern economies overburdened by economic inefficiencies arising from state-directed malinvestment of scarce capital, they are heading for the same general failure experienced by the Soviets. A similar collapse of our socialistic governments has only been deferred so far by the partial existence of markets. But as an economic policy, increasing rates of wealth transfer from producers and consumers through taxation to sustain the socialistic state has finally run out of road.

Cries to soak the rich by even higher taxes are failing to convince the wider public that that is a course to be followed. Now that we are in the grip of the Covid-19 crisis, ordinary people know that the ending of government support schemes cannot be replaced with higher taxes to recoup lost government revenue, without crashing the economy. It is only the bureaucrats in government offices, secure in their jobs and pensions acting as unthinking functionaries, who miss this vital point. There can only be one desperate solution, the one understood by central bankers who reaffirm they will print whatever it takes to fund government deficits.

When socialists run out of people to rob of their wealth by overt taxation, they inflate. In modern times it has been a process that dates back to the depression in the 1930s. This fascist social construct has now been evolving for eighty-seven years in America, if we take Franklin Roosevelt’s socialising policies and his ban on owning gold as a starting point — even longer than the Soviet experiment which started with the foundation of the Soviet Union in 1922 and ended with the collapse of the Berlin Wall in 1989.

Over the last forty years, the US economy has been financialised; that is to say economic resources have shifted from the non-financial economy to the financial. It is the consequence of the financial reforms in the 1980s, when London underwent its big-bang and America abandoned the Glass Steagall Act, which had banned retail banks from investment banking activities. Through the combination of these events banks took over all financial activities, including market making in securities, commodities and derivatives, using bank credit expansion to apply virtually unlimited capital resources to these functions. Being licensed by governments, it has become an extension of statist control over prices, with the benefit that through their banking agents governments could use the expansion of broad money supply to finance government spending and spread the wealth effect through rising stock markets, while suppressing commodity prices by increasing their synthetic supply.

The cost of this financialisation has been economic stagnation in non-financial activities, with the production of goods exported to the savings-driven economies of Eastern Asia, while the banks have become dependent on financial speculation for their profits. They are now failing in their original mandate to sustain non-financial businesses.

As well as its normal cyclical failures, the banking system now faces the consequences of the failure of socialism itself, from which they have benefited in the past through the socialisation of money through the inflation of bank credit.

Covid-19 and its lockdowns have exposed the fragility of the whole system, bankrupting businesses and making the banks reluctant to lend, preferring to call in their loans. Any independent observer of economic developments can only come to one logical conclusion: financing economic expansion by bank credit has finally come to an end, and widespread bank failures are becoming impossible to avoid. The inflation of money as a means of financing the state now falls increasingly on central banks, even without a banking crisis. And here it is worth noting that US dollar bank credit is a current multiple of M1 money supply of 3.4 times[iii].

Figure 1 shows how US dollar M1, principally currency and demand deposits, has increased at three progressively greater rates of growth since the 1980s: a steady rate until the Lehman crisis, a significantly faster pace since then, and finally a nearly vertical rate since last March, all indicated by the arrowed lines.

We now must consider how inflationary financing will progress in the absence of bank credit being made available to the non-financial private sector. Bank lending to the private non-financial sector is currently $11 trillion[iv], twice the M1 figure, giving us an indication of how narrow money must increase from its current accelerated rate if the Fed is to prevent an imminent economic slump in the non-financial economy. And that is before we consider another important factor which requires inflationary financing, the maintenance of the financial asset bubble which is central to the illusion that all is well.

The magnitude of central bank monetary inflation yet to come is far greater than hitherto and therefore bound to radically undermine the dollar’s purchasing power. In turn the US Government’s finances will be undermined by the quantity of dollars required and the effect on dollar interest rates. Other nations are in a far worse position, and like the USSR in the late 1980s are rapidly running out of options.

Epilogue

This analysis has exposed the failings of government intervention in free markets. Predictably, the increasing burden of government intervention on any economy will cause it to underperform, detracting from the primary function of free markets, which is to satisfy the needs and wants of consumers.

Consumers consume because they are employed, specialising in their labour to maximise their output and therefore their ability to buy the things they need and want. But over the decades, consumers have become increasingly dependent on governments, either to employ them as bureaucrats, officials in nationalised education and health systems, or to guarantee their employment through regulations. They benefit most from free markets but lack an understanding and sympathy for them. The loss of free markets and their vilification by socialists is likely to ensure that when the current international socialist regime fails, free markets will be blamed.

We appear to be rapidly approaching that point of failure. We can see from the chart in Figure 1 how narrow money supply has already accelerated in three phases, and how the failure of bank credit expansion will lead to an even greater debasement of the currency. And that is likely to be the most optimistic outcome, assuming bank failures will be strictly limited instead of systemically widespread. The statists’ dependency on inflationary financing is set to increase to the point where all confidence in fiat currencies will be lost.

We have made comparisons with the failure of the USSR after sixty-seven years, noting that the current fascistic socialising model has already run for eighty-seven. When the USSR failed, there was a better economic model for which the Soviets could refer. The standard of living and plentiful supplies of food and consumer goods in Western shops were a ready comparison with Soviet misery and it was relative economic freedom that had delivered. Our failure will not have that comparison. Instead, it is likely that statists will point towards another economic model in the hope of continuing with state control.

It will be a muddle that lasts for as long as governments in their bankruptcy try to maintain control over economic events. We will need as many people as possible to explain to the politicians that the way to national wealth is not through socialism but by free markets and small government.

First it was US banks. Now it’s China’s turn.

Not long after the Big Four banks, and the US financial sector in general, reported the biggest jump in loan loss provisions following the covid crisis as millions of unemployed workers simply stopped paying down their debt, rent, car, phone and utility payments, which sent loss reserve among the megabanks to a near record $33 billion…

… which in turn led to the biggest tightening in loan standards since the financial crisis just as US consumers and small businesses desperately need cheap capital as the record fiscal stimulus has gradually unwound since July 31…

… it is now China’s turn to go through the same pain, with Reuters and Bloomberg reporting that China’s largest state-owned banks are bracing for a surge in bad debt and increased margin pressure in the months ahead as forbearance policies designed to give borrowers breathing space during the coronavirus crisis expire (similar to the US). And as Chinese banks set aside record amounts to counter an eruption of bad debt, they posted their worst profit declines in more than a decade as the government called on these state-owned enterprises to help backstop the slumping economy, while putting pressure on plans to pay dividends next year. Profit at Industrial & Commercial Bank of China, the world’s largest lender by assets, China Construction Bank Corp., the second-largest, Agricultural Bank of China and Bank of China dropped by at least 10% in the first half as loan loss provisions jumped between 27% and 97% at the four banks.

In total, China’s more than 1,000 commercial banks posted a 24% decline in second quarter profits, with non-performing loans hitting a record 2.7 trillion yuan, resulting in an official average non-performing loan ratio for commercial banks of 1.94%, the highest since 2009. While it was unclear what the real NPL ratio is, some estimates have pegged it at 5-10x more than the official numbers.

Non-performing loan (NPL) ratios rose at the big five banks during the reporting period, with ICBC’s increasing to 1.5% by the end of June from 1.43% three months earlier, and that of CCB rising by 0.07 percentage points in second quarter to 1.49%.

This lead to a spike in Q2 loan-loss provisions which jumped 61% to 436% compared to the same period last year at ICBC, CCB, AgBank and BoC, data from China International Capital Corp showed. Meanwhile, as in the US, the crater in first-half profit was mostly due to provisioning ordered by regulators, CICC said, noting that second-quarter profit growth would otherwise have been 1.5% to 5.1% for those four lenders.

“The external challenges in the second half are unprecedented,” Bank of China President Wang Jiang told Reuters on Monday.

The bank’s gloomy forecasts highlight the devastating impact of the pandemic and the economic slowdown on China’s banks, despite Beijing’s best attempts to pretend it was “but a scratch” and brush the slowdown under the rug. If the plunge in profit wasn’t enough, the same banks have been asked by Beijing to step up and lend to flagging sectors, while sacrificing even more profits in a bid to revive the country’s fortunes.

Contrary to Beijing’s official narrative that the covid shock is in the rearview mirror, millions of bank clients have struggled to repay debt after months of lockdown and some sectors, such as those in the travel industry, and are battling to survive under the shadow of coronavirus. “As forbearance policies that help companies to recover expire in the first half of next year, the impact of non-performing loans will increase,” Chief Risk Officer Jin Yanmin of China Construction Bank Corp said during a news briefing. Meanwhile, Ji Zhihong, CCB vice president, predicted that net interest margins, a key profitability indicator, will narrow further leading to further profit erosion.

Agricultural Bank of China reported net income 108.8b yuan vs 121.4b yuan; its President Zhang Qingsong said bad loan pressure was rising, as short-term policies aimed at keeping firms afloat expired, adding its profit growth faces pressure from a “declining loan prime rate, fee cuts and an increase in loan loss provisions.”

Industrial and Commercial Bank of China, the world’s largest commercial lender by assets, reported net income 148.8b yuan vs 167.9b yuan year earlier; the bank said it will face higher pressure on loan risk controls in the second half and will increase efforts on provisions to guard against “significant turbulence,” its vice president Liao Lin said.

Meanwhile, as Bloomberg notes, China’s $45 trillion banking system has been put on the front-line of helping alleviate the worst economic slump in 40 years, triggered by a large scale shutdown due to the virus outbreak. Authorities have required lenders to forgo 1.5 trillion yuan ($218 billion) in profit by providing cheap funding, deferring payments and increasing lending to small businesses struggling with the pandemic.

Unfortunately for China, as well as the US, the pain is hardly over and banks are expected to keep boosting provisions in the third quarter, Everbright Securities analyst Wang Yifeng said. The banks themselves also warned that the second half would continue to be challenging: “The global economy faces unfavorable conditions including significant contractions in global trade and investments, volatile financial markets, limitations on interactions between countries, disruption of globalization and heightened geopolitical tensions,” ICBC said in its report.

“Consumer behavior changes and reshuffle of industries accelerated by the pandemic will have an uncertain impact on the economy,” Moody’s Investor Service analyst Nicholas Zhu said.

Citigroup last month slashed 2020 to 2022 earnings forecasts for major Chinese banks by more than 10 percentage points and expects them to suffer a 13% drop in profit this year.

“Under mounting political pressure, China banks not only have had to further cut loan yields to subsidize the real economy, but also need to accelerate counter-cyclical provisioning and adopt more conservative NPL assumptions in setting provisions,” Citigroup analysts led by Judy Zhang wrote. “The potential negative earnings growth will overhang the China banks’ near-term share performance.”

Speculation is also growing on whether Chinese banks will be able to maintain paying out about 30% of their profit in dividends. Another lender, Bank of Communications, on Friday reported a 15% decline in profit and said it was looking at its dividend policy ahead. “The dividend policy needs to be aligned with the external environment and conditions,” Bocom Vice President Guo Mang said on Friday. “It’s necessary for every bank to study their current policy — while trying to retain more capital we should also handle the relationship between bank growth and shareholder dividends.”

As a result, investors have fled from Chinese lenders and shares of the biggest banks are trading at a mere 0.45 times their forecast book value, a record low valuation, after underperforming the benchmark indexes in Hong Kong and on the mainland for most of the past five years.

* * *

The hope, according to CICC analysts, is that the first-half is likely to mark the start of the sector’s bottoming-out and they expect the industry to post profit growth again in 2021 as economic activity gradually recovers. In the second half and early 2021, big banks are expected to step up the sale of capital bonds to help counter deteriorating asset quality.

That won’t be enough, and Moody’s estimates that China’s biggest banks still have a estimated shortfall of $500 billion by 2025 to meet global capital requirements.

Authored by Daisy Luther via The Organic Prepper blog,

“I’ll just pull out my Glock/HK/Ruger and deal with those punks. Once they see their buddies drop, they’ll back off soon enough.”

“We could end this by just killing anyone who sets foot on our block.”

“All good Americans need to do is start mowing down protesters with their cars if the roads get blocked.”

Chances are, if you ever read the comments or visit any type of social media outlet online, you’ve read some comments pretty similar to the ones above. After all, this is America, land of the free, home of the brave. It’s up to all good patriots to defend our property and our country from scumbags with deadly force.

But not so fast…

Things are never as cut and dried as people with 3-second solutions like to make it seem in the comments.

You can’t escalate directly to lethal force in every situation.

Let’s take a look at the situation Terry Trahan wrote about the other day, where the lady was sitting in a restaurant having dinner when she got surrounded by an unruly mob who insisted she raise her fist in the air in support of a group of activists. The comments section is filled with people who are apparently ready to open fire on a city street into a crowd of people.

Is that really the appropriate response? While I absolutely agree that the behavior of that mob is horrible and that these things shouldn’t happen, is this a moment that requires the use of uncensored deadly force?

Have any of these folks stopped to think about what happens after they open fire?

Because I can tell you what is very likely to occur if you unload a magazine in a public space in the middle of downtown Washington DC. At best, you will be arrested and charged with brandishing a weapon or illegal discharge of a weapon. At worst, one of your bullets will go through its intended target and hit an innocent bystander – maybe a child – maybe even your own child who is making his way back from the bathroom.  Or you’ll kill a member of the angry mob and someone will take the gun away and turn it on you and you’ll be dead. Or you’ll valiantly take down three attackers and find yourself awaiting trial for homicide, among other charges.

And you know what else? Every idiotic off-hand comment you ever made online about blowing people away will come back to haunt you in court. If you think you’re anonymous online, I assure you that you are not. Even when you use a VPN, your actual IP can be traced given enough resources and time.

Choosing how you escalate your response

We’ve all heard the saying, “When your only tool is a hammer, you treat everything like it’s a nail.”  The same is true when your only tool is deadly force.

Obviously there are life and death situations in which deadly force is the only possible response if you want to live. When someone bursts into your home waving a gun screaming that they’re going to kill you, when someone in a mask is trying to drag you into a van with dark-tinted windows, when someone is clearly intent on beating the crap out of you until you’re dead – all of these things are situations in which your use of a lethal response is entirely justified.

But… a lot of situations require more finesse unless you want to risk a) spending the rest of your life in prison and praying you don’t drop the soap or b) vengeance from your adversary’s friends or family or c) criminal prosecution and civil lawsuits forever and ever until you die.

You need to have an understanding of the appropriate escalation of force.

A book I read last year has a place on everyone’s shelf during these times in which a conflict can arise for just about anyone, just about anywhere. That book is Scaling Force: Dynamic Decision Making Under Threat of Violence and it’s by Rory Miller. If you’ve been around here for a while, you may have seen my review of another of Miller’s books, and you may have seen Toby Cowern and Terry Trahan reference him as well. That’s because, in my opinion, nobody knows more about the science of violence than Miller. As well, he spent years working in law enforcement settings, so he knows a lot about what happens after the violence takes place.

Identify what the threat actually is.

If you are in a situation in which you may have to defend yourself, it’s important that you understand what the threat really is.

• Are you just being yelled at or mocked?

• Are people just trying to intimidate or embarrass you?

• Are they trying to have an actual discussion or just shout over you?

• Are you outnumbered?

• Are they threatening to physically attack you?

• Are they capable of physically attacking you?

• Are they armed with firearms, items that could be used as bludgeons, or knives?

While all of these things may make you angry, if you are not in physical danger, you have to temper your response accordingly.

Part of the book is a detailed description of pre-assault indicators that can help you identify a potentially violent encounter before it happens. This goes a long way toward reducing the likelihood of you being injured, killed, or imprisoned due to your response.

Here are some key steps to take during a potentially violent encounter.

In Miller’s book – which I strongly recommend – he suggests a pattern that begins with simply leaving the situation, to verbal de-escalation when you are not in imminent danger, with other steps all the way up to and including lethal force. He discusses in detail how to rapidly assess your situation to see where you should start. You can find these steps on the internet but they’re not detailed. You should truly read the book to get a deep understanding of them – and you need that now more than ever.

This is my personal take on what he wrote. Any mistakes or misinterpretations are mine alone.

Presence: The encounter requires your presence and there are two components to this. First, is, don’t be there. Any time you ask Selco and Toby what you should do in a dangerous situation, their immediate response is “don’t be there.” And that is true of many of the things happening right now. Going to a protest, for example, is automatically putting you at high risk of being involved in a violent encounter.

Your second option is to leave the situation. If you find yourself in a scenario in which you could be embroiled in a violent encounter, leave. This is like “don’t be there” but in action form. If you see a crowd gathering up ahead chanting and raising their fists in the air, turn around and go a different way. If you are in a setting in which someone makes you feel uncomfortable, trust your instincts and leave. Don’t talk yourself out of listening to your gut. You’re not being silly. (This is especially true for women.)

Use your voice. First, you can try to de-escalate the situation. If you can’t avoid it and you can’t leave, verbal de-escalation is your next best bet. This depends heavily upon your understanding of psychology. You want to calm the situation down and one of the best ways to do that is setting up what Miller refers to as a “face-saving exit.” If you are dealing with one member of a crowd, that person will have a lot of personal investment in not being embarrassed in front of his or her friends. You’ll want to think of a way to defuse things while sparing the person from that humiliation. This, of course, sucks, because we all want to kick the butts of someone who is treating us unreasonably. However, your goal is to get away from this encounter without being hurt or killed. If you are alive and uninjured, you’ve won.

Your other voice option is a sharp command if you seem like the kind of person who can back this up. Take me, for example, a middle-aged mama. A command from me is unlikely to have a huge effect on an angry group. However, a command from me backed up by a gun in my hand would be a lot more convincing. (This is something that has actually happened to me – you can read about it here.)

Touch. In some situations, touch can be used to de-escalate a conflict. Touch can be soothing, it can help to distract someone fixated on potentially hurting you, and it can help to defuse situations that haven’t gone too far. If you are not stronger than your potential opponent, this should be used very cautiously, as touching them puts you within their reach as well. For many women, this is not going to be a viable option.

Physical control. This is another thing that won’t work for everyone. But if it is within your wheelhouse, you might be able to prevent the violence from escalating by physically controlling the attacker. This prevents them from harming you or anyone else around you.  At this point, you’re beginning to get into territory that could have legal consequences.  This is also another thing that may not be particularly viable for women against a male assailant.

Use less than lethal force. The next step up the ladder is less than lethal force. This might mean pepper spray, a taser, or a physical blow, to name a few options. This can be a defensive preventative that will work in some cases. If you are able to stun your attacker, it can be the thing that allows you to move back down the ladder to step one – not being there. Physically overpowering an assailant and injuring them to the extent they can no longer hurt you is an option but, again, you’ll very likely face legal consequences unless it is well-witnessed or provable that you had no less violent options.

Use lethal force. The final solution in this hierarchy is lethal force. This should not be your first choice unless your life is in imminent danger. You can’t just shoot someone because you decide they “deserve” it or because you feel they’re inflicting an injustice upon you. Well, you can, but you can also expect a trial that will empty out your bank accounts and cause your family to potentially lose their home and any other assets while you finance your defense. Then, if you win, you get to start all over again economically. If you lose, you spend five years to the rest of your life in prison. Lethal force must be legally justified and even then, you can end up suffering immensely for having used it.

Again – I strongly recommend you read Rory Miller’s book on this topic, as it is far more detailed than I can be in a quick article and filled with personal anecdotes that make it a very interesting read. You really do have far more options than just killing someone and most of the time, the other options will be better for your future as well as the future of your family.

How do you plan to respond to the threat of violence?

We’re living in a world where unruly groups of people are spending their evenings out trying to intimidate people who they feel “deserve” it, without actually knowing anything about their targets. Any of us could become a target.

Understand that I sincerely believe in the right to armed self-defense. It is our basic human right to protect ourselves, our families, and our property. But I urge you to use temperance when making rapid decisions that could have long-term consequences. These aren’t problems with three-second solutions, and to look at them that way is both ignorant and short-sighted.

Have you considered how you would respond to the threat of violence? To intimidation by an angry mob? To the looting of your property?

It’s good to think these things through ahead of time and consider what your own options are. You’ll need to weigh your personal abilities and limitations against these steps. Remember that your response to potential violence can affect the rest of your life and make your decisions with this in mind.