Streetwise Professor

May 28, 2016

Obama’s Sly–and Cowardly–Slander in Hiroshima

Filed under: History,Military,Politics — The Professor @ 3:45 pm

Obama gave his long-awaited speech in Hiroshima yesterday. No, he did not apologize for Truman’s decision to drop the bomb. In many ways, what he says was actually worse.

Most of the speech was vapid banalities. War is bad. (Who knew?) War has been part of the human condition since the beginning of recorded history. (Really?)

Most of the rest was moral preening and the uttering of grandiose but completely empty and unrealistic solutions to the scourge of nuclear weapons. According to Obama, nothing short of a “moral revolution” is required.

What, pray tell, in the vast sweep of human history gives the faintest hope that such a “moral revolution” is remotely possible? Perhaps Obama has enlisted the help of invisible magic unicorns. Or angels.

Indeed, given Obama’s track record with gaseous speeches such as these, you might want to become a prepper, rent a backhoe, and start building your bomb shelter. For instance, Obama’s searching criticism of the history of the relationship between the West and the Muslim world, an his soaring call in his Cairo speech for a fundamental transformation–a revolution, if you will–in that relationship ushered in a period of even greater violence in the Muslim world, and a serious decline in the relationship between Islam and the West.

The Middle Eastern dystopia that slouched in the wake of Obama’s Cairo speech makes me shudder for what will follow in the aftermath of this one. Reading Obama’s Hiroshima speech in light of the dismal aftermath of his Cairo vaporings should lead the Bulletin of Atomic Scientists to move the Doomsday Clock to within a few seconds of midnight.

As for why Obama’s speech was in some ways worse than an outright apology, it was an exercise in moral equivalence that did not distinguish between the combatants in WWII, but lumped them into one mass engaged in a conflict that was undistinguishable from the conflicts that mankind has waged since pre-historical times:

The world war that reached its brutal end in Hiroshima and Nagasaki was fought among the wealthiest and most powerful of nations. Their civilizations had given the world great cities and magnificent art. Their thinkers had advanced ideas of justice and harmony and truth. And yet the war grew out of the same base instinct for domination or conquest that had caused conflicts among the simplest tribes, an old pattern amplified by new capabilities and without new constraints.

In the span of a few years, some 60 million people would die. Men, women, children, no different than us. Shot, beaten, marched, bombed, jailed, starved, gassed to death. There are many sites around the world that chronicle this war, memorials that tell stories of courage and heroism, graves and empty camps that echo of unspeakable depravity.

The difference between WWII, and the War of Austrian Succession, say, let alone some unrecorded tribal conflict, is blindingly obvious, and that difference matters. Why people were “shot, beaten, marched, bombed, jailed, starved, gassed to death” matters. And the responsibility matters, and it is indisputable that the responsibility for this ghastly record is by no means equally shared: it rests disproportionately on Germany and yes, Japan. To ignore these fundamental facts is unpardonable. To do so in the context of a speech at Hiroshima insinuates that the act that ended one part of the war was morally indistinguishable from the events that led up to it, and therefore obscures any moral line between those who initiated the conflict and carried it out with horrific brutality, and those who ended it.

Then there is this wretched paragraph:

The wars of the modern age teach us this truth. Hiroshima teaches this truth. Technological progress without an equivalent progress in human institutions can doom us. The scientific revolution that led to the splitting of an atom requires a moral revolution as well.

This suggests in a very Hegelian/progressive way that the dropping of the atomic bomb was the result of some some inexorable technological process that had slipped human control. It is a statement about a historical process that is utterly ahistorical–more of Obama’s trademark historicism, in other words. It does not put the decision in the very specific historical context of the time. It suggests that the decision to drop the bomb was worse than the alternatives, but does so in a cowardly way because it does not address those alternatives and argue that they were better than dropping the bomb.

It also suggests that the man who made the decision was morally defective, and in need of some moral reformation. This is utterly unfair. Truman had a wrenching choice to make.  A decent successor to his office would recognize that, and give it proper deference. But Obama did not do this, and instead continued his tiresome role as a moral titan instructing lesser beings. All in all, an utterly appalling performance, but a totally unsurprising one.

Obama’s amnesia is, unfortunately, widely shared. American attitudes about Hiroshima and Nagasaki have changed dramatically since the war, and no doubt Obama’s implicit condemnation will be viewed favorably by large numbers of Americans, perhaps a majority. In some respects, this reflects the fact that in the experience of most Americans, the Japanese are a peaceful, quiet, diligent and inoffensive people: few are familiar with the bestiality of Japanese conduct from 1931 through August, 1945. Therefore, it is hard for many to comprehend how something as horrific as Hiroshima and Nagasaki could possibly be justified.

But to do this is to totally misunderstand the basic fact that modern Japan and modern Japanese are pacific, benign and enlightened precisely because of the bomb. Only the utter destruction of a militarist society that was enthusiastically supported by the vast bulk of the citizenry, and which spawned untold miseries across Asia, could have turned the Japanese into a pacific people. Nothing short of the bomb (or an invasion that would have led to more destruction and more death) would have scared the Japanese straight.

Although Obama did not apologize, many other commentators have used the occasion of Obama’s speech to regurgitate their condemnation of the dropping of the bomb and to suggest that an apology is the least that the US owes the Japanese, and the world. It would take me seventy years to go through the verbal sludge that has oozed forth in the last seven days, so I will limit myself to a brief discussion of the worst.

This piece was written by one Jeffrey Lewis, who styles himself in his Twitter bio as “one of the pointier heads in all of nuclear wonkdom.” It would be more accurate to say “one of the emptier heads in all of nuclear wonkdom.” Or at least I hope to God that’s the case, because we’re doomed if he isn’t. For Mr. Pointy Head wrote one of the most cosmically stupid lines I have read in my life:

The historical debate in the United States over Hiroshima, as best I can tell, began as a debate over responsibility for the Cold War.

It is the case that this has been a debate in the fever swamps of the left, who are sure that Truman dropped the bomb as the opening salvo of the Cold War, and that Stalin was the real target. But in the saner precincts of the United States (and even in those very rare academic precincts that can be considered sane) the historical debate began, and continues, as a debate over whether dropping the bomb was the best way to end WWII in the Pacific. The key issues in the debate were from the beginning and remain things like: Would moving away from unconditional surrender have led to an end of the war? How many casualties would the Allies have suffered if they had invaded? How many casualties would the Japanese have suffered if the Allies had invaded? How many Japanese would have died if the US had attempted to continue to firebomb and starve Japan into submission, instead of dropping the bomb? Would dropping the bomb on an uninhabited location, with Japanese witnesses, have convinced the Japanese to surrender?

But if you read Lewis’s piece, you’ll note that something is missing: World War Two! How anyone can discuss the dropping of the bomb and ignore altogether the Solomons, New Guinea, the Philippines (especially Manila), Iwo Jima, Okinawa, Kamikazes, Operations Downfall, Coronet and Olympic, western POWs, huge populations under brutal Japanese control in China and elsewhere in Asia, etc., etc., etc., boggles the mind. But no. In Lewis’s mind it’s all about the Cold War.

The closest that Lewis comes to recognizing the reality of the grim choice facing Truman is this smart-assed line: “And that’s why your granddad didn’t die on some god-forsaken beach code-named after a car.” Would that Paul Fussell or Eugene Sledge or other less literary veterans who were spared unspeakable horrors by the bomb were alive to put this little puke in his place.

Lewis is a product of the same leftist miasma that produced Barack Obama. I have little doubt that his views resonate with Obama, and that the President primarily chooses not to express such views as forthrightly as Lewis does out of political expediency, rather than out of conviction. But in truth, Obama said much the same in his remarks in Hiroshima. By orating about Hiroshima in soaring moral terms completely untethered to the horrific choices facing Harry Truman and the American military leadership, Obama slanders them and does a grave disservice to the truth.

 

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May 10, 2016

A Poster Child for the Devolution of American Conservatism Beats Trump With a Leftist Stick

Filed under: History,Politics — The Professor @ 6:22 pm

Trump’s triumph is sending establishment Republicans (on Capitol Hill, ex-Bushies, and writers at publications like the National Review and Weekly Standard) into paroxysms of apoplexy. A recent example is a WaPo piece by ex-Bush speechwriter (and relentless self-promoter) Michael Gerson. It makes for nauseating reading, even if you are not a Trump acolyte (and I am not).

The gravamen of Gerson’s gripe:

What common views or traits unite the most visible Trump partisans? A group including Limbaugh and Christie is not defined primarily by ideology. Rather, the Trumpians share a disdain for “country-club” Republicans (though former House speaker John Boehner apparently likes Trump because they were golfing buddies). They tend to be white and middle-aged. They are filled with resentment.

Above all, they detest weakness in themselves and others. The country, in their view, has grown soft and feeble. Their opponents are losers, lacking in energy. Rather than despising bullying — as Ryan, Romney and all the Bushes do — they elevate it. The strong must take power, defy political correctness, humiliate and defeat their opponents, and reverse the nation’s slide toward mediocrity.

The most annoying part about this is that Gerson–like other Republican Trump critics–uses a line of attack that the left has used against Republicans forever to attack Trump: “they tend to be white and middle-aged. They are filled with resentment.” Every time–every bleeping time–the Republicans have won big in an election (e.g., 1994, 2014) the left has attempted to de-legitimize the victory by claiming it is nothing but the tantrum of privileged, middle-aged whites. (Remember Peter Jennings’ verdict on the Gingrich-led Republican insurgency of 1994?)

And gee, last time I checked, George W. Bush (for whom Gerson wrote) didn’t exactly assemble a New Rainbow Coalition.

What makes things even more irritating is that after regurgitating the standard leftist/Democrat attack on Republicans, many of the anti-Trump crowd also scream “he’s not a real conservative!” No, he probably isn’t, but please tell me just how is using the leftist stick to beat Trump conservative?

Gerson has one thing sort of right: “The great Republican crackup has begun.”

There is a Republican crackup. One problem with Gerson’s sentence is the tense. The crackup began some time ago, and has been ongoing. Gerson also fails to identify who is responsible for the crackup. If he were honest, he would have to quote Pogo: “We have met the enemy, and he is us.”

For the rise of Trump is the direct result of the abject failure of the Republican Party generally, and the Bush Dynasty in particular. For decades they have failed to articulate a coherent, principled, intellectually compelling, or popular governing vision, or a practical program to implement it. For decades they have failed to produce any appealing leaders or candidates.

They are the ones who created the vacuum that Trump has filled with his bombast and outsized personality. And how did they respond to his insurgency? Not with a positive vision. Not with a coherent, reasoned, and appealing alternative to address the issues that Trump (perhaps opportunistically, but clearly astutely) has run on, which obviously strike a deep chord with many who voted reliably Republican in the past.

But never count on this crowd for honesty, or searching self-appraisal. Instead, they have responded with insults–all the while attacking Trump for his insult comic style. They have responded with ad hominem and invective, not with a positive program that could appeal to Trump’s supporters.

And rather than recognize that the failure of their attacks to resonate is a damning verdict on their shortcomings, they respond with attacks on the voters with whom they have failed to connect. Their reactions are all variations on “the people have spoken. The bastards.”

Paul Johnson–as solid as a conservative as there is–is much more astute about these things than Gerson, or the NRO gang, or the whiners on Capitol Hill:

For these reasons it’s good news that Donald Trump is doing so well in the American political primaries. He is vulgar, abusive, nasty, rude, boorish and outrageous. He is also saying what he thinks and, more important, teaching Americans how to think for themselves again.

. . . .

No one could be a bigger contrast to the spineless, pusillanimous and underdeserving Barack Obama, who has never done a thing for himself and is entirely the creation of reverse discrimination. The fact that he was elected President–not once, but twice–shows how deep-set the rot is and how far along the road to national impotence the country has traveled.

Under Obama the U.S.–by far the richest and most productive nation on earth–has been outsmarted, outmaneuvered and made to appear a second-class power by Vladimir Putin’s Russia. America has presented itself as a victim of political and economic Alzheimer’s disease, a case of national debility and geopolitical collapse.

I’m not saying Trump is the cure. In fact, I’m pretty sure he’s not. But I am sure that the #neverTrump crowd is a major part of the disease. The unprincipled and whiney way they have responded to his trouncing them is proof of that.

If Trump could actually send this lot into oblivion, he will have performed a valuable service. Perhaps then something better could take its place. I fear, however, that the establishment Republicans will survive a Trump defeat like cockroaches surviving a nuclear holocaust. Indeed, they are likely to mutate, and come back even more malign, saying “I told you so” over and over again, and seeing vindication in what in reality is a damning condemnation: Trump’s defeat would not be a victory for conservatism, or classical liberalism, but for the governing class and the dead hand of the state. I predict the establishment Republicans who survive in the dark, damp recesses of DC will be the New Bourbons, learning nothing, and forgetting nothing.

Because  if it happens, Trump’s defeat would not clear the way for a viable alternative to the perverse political correctness that Johnson attacks, or the prevalent liberalism that dominates current American politics. It would just represent a continuation of the American political devolution–especially on the right–of the last 30-odd years.  A devolution of which people like Michael Gerson are the poster children.

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May 5, 2016

If You Believe the Official Reason for Cutting Off Chinese Economic Statistics, I Have a Great Wall to Sell You

Filed under: China,Commodities,Economics,Energy,Politics — The Professor @ 9:33 pm

Since October of last year, China’s National Bureau of Statistics has not published detailed data on metals markets. And it’s not just metals:

Data on oil products such as liquefied petroleum gas, naphtha and fuel oil have been withdrawn. So too have regional figures for coal, steel and electricity output.

 

The ostensible reason is that statistics bureau personnel were selling data for personal gain.

If you believe that, I will sell you a large wall. It’s so big they say you can see it from space! Only one like it! I sell it to you for a song.

“Anti-corruption” is the cover/pretext that the Chinese government now uses to eliminate those who have fallen from political favor. The most likely explanation for the “anti-corruption” drive aimed at economic statistics agencies is not to eliminate politically inconvenient people: it is to eliminate politically inconvenient data.

The fraudulence of Chinese official economic statistics is well known. One of the challenges of creating false official statistics for aggregate numbers like GDP growth is making it consistent with data on specific industries or sectors. The divergence between GDP growth and electricity production, for instance, has often been remarked upon.

How to solve this problem? Stop producing the underlying sector/industry/product specific data. How to do that without giving away the real reason? Use the all-purpose excuse: fighting corruption.

This has an air of plausibility: after all, corruption is rife in China. But this really doesn’t pass the smell test, especially given the timing: note that the data embargo started when concerns about the Chinese economy became acute at the end of last year.

The Chinese are desperate to maintain the illusion of 6.7 percent growth, quarter in, quarter out. Maintaining that illusion has become harder and harder as questioning of the consistency of various data sources has become more insistent. Shutting off the flow of sector/industry/product data is a brute force way of dealing with that problem.

This is another signal of the real state of the Chinese economy. The government wouldn’t have jacked up the stimulus unless the true state of affairs was far more dire than official statistics suggest. The government wouldn’t be suppressing data from the primary goods sectors unless it was also giving the lie to the official line.

Bottom line: question everything relating to the economy in China right now. Be especially skeptical about anything done under the banner of fighting corruption. That banner should be a red flag warning that the Chinese Communist Party is trying to suppress inconvenient people, or inconvenient truths. If they say it’s about corruption, it’s really about something else.

 

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May 4, 2016

Schrödinger’s Combat

Filed under: History,Military,Politics — The Professor @ 7:14 pm

A Navy SEAL was killed in Iraq a couple of days ago. And the administration has handled this with all of the mendacity we have come to expect.

First, there was just a vague announcement that an American serviceman had been killed. Then they acknowledged it was a SEAL, and that he died as a result of “direct fire” (meaning, he was shot, rather than being hit by a mortar, for instance). Then they tried to suggest that he was part of an advise and assist mission.

Now, finally, we get the real story. (I say that with the usual caveats necessary when dealing with this lot.) The SEAL, Charles Keating IV, grandson of the Charles Keating of Keating Five infamy, was part of a quick reaction force that flew in to rescue some Americans who were meeting with Peshmerga forces behind the lines when ISIS mounted a surprise attack. There was an intense hours-long firefight, during which PO1/SO1 Keating was killed.

Sounds like combat to me. But no. You don’t have the intellect to understand the nuance that this administration is capable of. Sayeth Obama spokesman Josh Earnest:

“This is an individual who is not in a combat mission, but he was in a dangerous place,” Earnest told a daily briefing. “And his position came under – under attack. He was armed, trained and prepared to defend himself.”

“Unfortunately, he was killed. And he was killed in combat, but that was not a part of his mission,” he continued. “His mission was specifically to offer advice and assistance to those Iraqi forces that were fighting for their own country.”

Oh! It’s all clear to me now!

That is beyond disgusting. The other day I wrote about Schrödinger’s Clearinghouse. Here we have, courtesy of the Obama administration, Schrödinger’s combat, which is infinitely worse. It both is and isn’t combat, simultaneously.

Unfortunately, in this case the box was opened, and SO1 Keating was dead.

And let’s cut the crap.  The job of SEALs generally, and quick reaction forces in particular, is to engage in combat. Army Special Forces do advising. SEALs do killing. Period. To say that “combat . . . was not a part of his mission” is a mendacious falsehood. Every word. Including  the “a.”

Belay that. Especially the “a.” It was the only part of his mission.

Seriously. Everything Earnest said is a lie. Every fucking thing.

Keating’s “position did not come under attack.” Keating was involved in a counterattack to retake a position ISIS had seized from the Peshmerga. Combat was part of his mission. He was not defending himself. He was involved in a counterattack. He quite definitely was not there to advise and assist. He was there as part of a QRF to save those offering “advice and assistance” to those Iraqi forces. And they aren’t even Iraqi forces, as the term should be understood. They are Kurdish Peshmerga, not Iraqi army troops.

How many lies can one man tell in five sentences? I count five. I’m sure he’ll do better next time. Maybe he’ll make to six or seven.

Obama prefers Schrödinger’s combat so that he can have it both ways. He can appear all butch and claim that he is taking the fight to ISIS, while at the same time claim that he is honoring his pledge not to commit ground forces to Iraq or Syria.

Let’s have some honesty. We can handle the truth. The administration owes the American people an honest  accounting of what is going on. No, not operational details. No, not an order of battle. But an indication of the scope and nature of the commitment, the size of the force, and its missions.

Let’s face facts here. The administration tried to hide the circumstances of SO1 Keating’s death for as long as possible. They went with the modified limited hangout until the Guardian got ahold of video of the battle, taken by a Peshmerga fighter.

This is not acceptable.

Nor is it acceptable that the supine press corps in DC, which is obsessed with Trump, and to a lesser degree Hillary and Bernie, lets the administration–and Obama personally–get away with this deliberate deception and evasion day after day after day. Obama has made one statement recently about commitment of US forces in the fight against ISIS. He usually lets SecDef Carter carry his water. If the White House gets questioned, Earnest handles the questions, lies through his grotesque pie hole, and the press is content to let the story die before the news cycle is over. There is more talk about Obama’s performance at the Throne Sniffers’ Dinner–excuse me, the White House Correspondents’ Dinner–than about his being MIA on the issue of the war against ISIS.

This is particularly disgusting given that the administration is taking its fifth anniversary victory lap over the killing of Osama. That’s history. Read a book about it. It doesn’t matter. What matters is happening on the ground–yes, the ground, where boots tread–in Iraq and Syria. The Most Transparent Administration in History (Most Ironic is more like it) owes us answers. Instead, we get the war reporting version of Schrödinger’s Cat.

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May 2, 2016

Zero Hedge: Zero Class

Filed under: Economics,Politics — The Professor @ 8:13 pm

Bloomberg’s Tracy Alloway and Jake Kawa wrote an expose on Zero Hedge last week. There was not a tremendous amount of new material here. I was disappointed that they didn’t have anything about Daniel Ivandjiiski’s father: I am convinced there is a Warsaw Pact intelligence connection there. The story focused on the revelations of an ex-Tyler Durden, Colin Lokey. Looked provided information that supports what I’d written almost five years ago, namely, that ZH is a Russian information operation:

Lokey, who said he wrote much of the site’s political content, claimed there was pressure to frame issues in a way he felt was disingenuous. “I tried to inject as much truth as I could into my posts, but there’s no room for it. “Russia=good. Obama=idiot. Bashar al-Assad=benevolent leader. John Kerry= dunce. Vladimir Putin=greatest leader in the history of statecraft,” Lokey wrote, describing his take on the website’s politics. Ivandjiiski countered that Lokey could write “anything and everything he wanted directly without anyone writing over it.”

The remaining Tyler Turkeys responded in their typically classy way. I am very proud to be featured in their lead:

Others, such as “academics who defend Wall Street to reap rewards” had taken on a different approach, accusing the website of being a “Russian information operation”, supporting pro-Russian interests, which allegedly involved KGB and even Putin ties, simply because we refused to follow the pro-US script. We are certainly ok with being the object of other’s conspiracy theories, in this case completely false ones since we have never been in contact with anyone in Russia, or the US, or any government for that matter. We have also never accepted a dollar of outside funding from either public or private organization – we have prided ourselves in our financial independence because we have been profitable since inception.

Hilarious. Hey guys: next time use my name!

And seriously. There’s a lot more behind what I wrote than “simply because we refused to follow the pro-US script.” Such a disingenuous non-responsive response is as much as a confirmation as I could imagine.

The Tylers continue to strike their pose as courageous battlers against the corrupt capitalism. Ironically, given that they recycle the laughable NYT bullshit story labeling me a tool of Wall Street, I have inflicted far more real pain on those that ZH claims to fight than they have. Whereas they are all talk, by my rough estimate I have contributed materially to cases in which banks, traders and others have paid in the mid-to-high nine figures to settle. The figure could realistically exceed ten figures in the near future.

After taking a swipe at me, the remaining Tylers turn their attention to Lokey. They quote extensively from his text messages (more class!) and label him as a drug addict and drug dealer, and claim that this discredits him as a source.

Um, he wrote for them for a year while he knowing about his past and his alleged instabilities. Doesn’t that kind of discredit what they published for a year?

Based on Lokey’s account, the Bloomberg piece describes ZH as the web equivalent of a sweat shop. This makes it highly unlikely that the remaining two named Durdens, Ivaandjiiski and Tim Backshall, carried the load prior to Lokey’s arrival. Thus, there are probably other ex-Durdens out there with tales to tell.

ZH is a dodgy operation. Bloomberg has turned over the rock a little. But there is much more to learn. Let’s hope Bloomberg, or someone else, turn over a few more.

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April 29, 2016

Rounding Up the Usual Suspects, With Chinese Characteristics

Filed under: China,Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 8:32 pm

Commodity prices on Chinese exchanges, especially for ferrous metals, have been skyrocketing in recent weeks. Rebar, iron ore and coking coal have been particularly active, but thermal coal and cotton have been jacked too.

In response, the Chinese authorities are cracking down on speculation.  Exchanges have raised margins in order to attempt to rein in trading. The government is making ominous statements about speculation and manipulation. And we know what can happen to speculators who fall afoul of the government.

Ironically, prices never appear to be just right, by the lights of the Chinese authorities. Last summer, and earlier this year, speculators were allegedly causing stock prices and commodity prices to be too low. Now they are causing commodity prices to be too high.

This is a case of the Chinese authorities playing Claude Rains in Casablanca, and ordering a roundup of the usual suspects. Speculators make convenient targets, and they appear to be the proximate cause: after all, their trades produce the rapidly rising prices.

But the speculators are merely the messengers. If the Chinese authorities want to find the real culprits, they need to look in the mirror, for the speculators are responding to the most recent lurch in Chinese economic policy.

Put simply, after the economic slowdown of the second half of 2015 (a slowdown masked by fraudulent official statistics, but evident nonetheless), the government pushed the panic button and fell back on its standard remedy: injecting a burst of credit.  Some estimates put the Chinese debt to GDP at 237 percent. Since GDP is likely also an overstated measure of national income, due to fraudulent statistics and the fact that the losses on past investments have not been recognized (in part because much of the credit is pumped  into zombie companies that should be bankrupt) this ratio understates the true burden of the debt.

The surge in credit is being extended in large part through extremely fragile and opaque shadow banking channels, but the risk is ending up on bank balance sheets. To engage in regulatory arbitrage of capital rules, banks are disguising loans as “investments” in trust companies and other non-bank intermediaries, who then turn around and lend to corporate borrowers.  Just call a loan a “receivable” and voila, no nasty non performing loan problems.

There is one very reasonable inference to draw from this palpably panicked resort to stimulus, and the fact that many companies in commodity intensive industries are in desperate financial straits and the government is loath to let them go under: today’s stimulus and the implied promise of more in the future whenever the economy stutters will increase the demand for primary commodities. The speculators are drawing this inference, and responding accordingly by bidding up the prices of steel, iron ore, and coal.

Some commentors, including some whom I respect, point out that the increase does not appear to be supported by fundamentals, because steel and coal output, and capacity utilization, appear to be flat. But the markets are forward looking, and the price rises are driven by expectations of a turnaround in these struggling sectors, rather than their current performance. Indeed, the flat performance is one of the factors that has spurred the government to action.

When the Chinese responded to the 2008-2009 crisis by engaging in a massive stimulus program, I said that they were creating a Michael Jackson economy, one that was kept going by artificial means, to the detriment of its long term health. The most recent economic slowdown has engendered a similar response. Its scale is not quite as massive as 2008-2009, but it’s just begun. Furthermore, the earlier stimulus utilized a good portion of the nation’s debt capacity, and even though smaller, the current stimulus risks exhausting that capacity and raising the risk of a banking or financial crisis. It is clear, moreover, each yuan of stimulus today generates a smaller increase in (officially measured) output. Thus, in my view, the current stimulus will only provide a temporary boost to the economy, and indeed, will only aggravate the deep underlying distortions that resulted from past attempts to control the economy. This will make the ultimate reckoning even more painful.

But the speculators realize that the stimulus will raise commodity demand for some time. They further recognize that the stimulus signals that the authorities are backsliding on their pledges to reorient the economy away from heavy industry and investment-driven growth, and this is bullish for primary materials demand going forward: the resort to credit stimulus today makes it more likely that the authorities will continue to resort to it in the future. So they are bidding up prices today based on those predictions.

In other words, as long as the Michael Jackson economy lives and stays hooked, its suppliers will profit.

So yet again, commodity markets and the speculators who trade on them are merely a lurid facade distracting attention from the underlying reality. And the reality in China is that the government cannot kick the stimulus habit. The government may scream about (and worse) the usual suspects, but it is the real cause of the dizzying rise in Chinese commodity prices, and the burst of speculation.

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April 18, 2016

Corn is Chicken Feed, But the Losses from Chinese Malinvestment Aren’t

Filed under: China,Commodities,Economics,Politics — The Professor @ 6:34 pm

The WSJ reports that China could face a $10 billion write-down on the huge corn stocks that it accumulated as part of its efforts over the past years to prop up prices for farmers. Corn is chicken feed, but $10 billion ain’t.

But I think that the moral of this story goes far beyond corn. Chinese agricultural price supports are just one example of the myriad policies that the country has adopted over recent years that distort prices and lead to misallocations of resources. Indeed, the deadweight losses from ag price supports are probably chicken feed in comparison with the waste resulting from distortions in the capital and credit markets that have led to massive malinvestment in industrial capacity (note the huge overcapacity in industries like steel), infrastructure, and housing.

Perhaps the main difference is that the corn inventories are being written down. The corn counted towards national income when it was produced, and writing down the inventories will reduce national income. Alas, the vast bulk of the malinvestments elsewhere will not be marked to market, and reported Chinese national income will be too high as a result.

What’s particularly important is that although the Chinese are apparently recognizing that their agricultural policies were inefficient, they cannot wean themselves from the credit stimulus habit. About 2 years ago I gave talks where I said China faced three alternatives, two of which were bearish for commodities: hard landing, transition to a more market-based, consumer-oriented system, or continued reliance on credit stimulus to keep measured growth high. I further opined that the latter alternative would just defer the choice between the first two for some time.

I did not venture a strong opinion on which alternative would happen, because I believed (and believe) that the choice is ultimately political, and I am in no position to predict with confidence Chinese politics. My sense was (and is), however, that sustaining the status quo was (and is) the most likely outcome. This would involve cranking up the stimulus in the face of any slowdown.

Recent experience suggests that’s the case:

China’s economy slowed further in the beginning of the year, though Beijing’s policies to revive growth with old-style tools such as lending and construction appeared to gain traction in March.

China’s gross domestic product expanded by 6.7% year-over-year in the first quarter, down from a 6.8% gain in the previous quarter, the National Bureau of Statistics said Friday. The figure, the slowest quarterly growth for China since the height of the financial crisis in 2009, was in line with forecasts.

In the past month, some confidence has returned to the world’s second-largest economy, fueled in part by sharp property-price rises in China’s major cities as well as some lessening of currency volatility and capital outflows that spilled over onto global markets last year and early in 2016. In March, China’s foreign-exchange reserves grew for the first time in five months.

Friday’s data release provided signs that a host of stimulus measures put in place over the past 15 months are having some impact—or are at least delivering some short-term gains. Industrial output, retail sales and property investment rose more than expected in March after a weak performance in January and February. Fixed-asset investment also improved.

And lending soared. Chinese financial institutions issued 1.37 trillion yuan ($211.3 billion) in new yuan loans in March, rocketing well past economists’ expectations of around 1.1 trillion yuan, and almost twice February’s volume.

This means more new malinvestment, and more papering over (with credit) the write down (and hence recognition) of past malinvestments.

This credit splurge helps explain the commodities rebound in recent months. But it also shows how tenuous the foundations of that rebound are. It is an artifact of artificially stimulated investment. Eventually, inevitably, the accumulated waste and distortions will bring the entire Chinese economy to a shuddering halt, and perhaps a crash. Eventually the accumulation of distortions becomes so great that a shakeout and rationalization is necessary, and inevitable. China is at best delaying the reckoning.

Corn is a small part of a much bigger picture. But it is a revealing part. It shows how perverse pricing policies lead to inefficient accumulations of capital that eventually become worth far less than the amount invested. Corn is relatively easy to value, and the cost of the malinvestment in corn stocks looks to be about $10 billion. When one considers how many other wasteful investments have been made in China as a result  of its interventionist policies, and the imagination staggers at what the losses would be.

Put differently, China’s performance would look far less stellar if national income accounting was accurate, and realistically marked its past investments to market. Of course, it is this very fact that induces the Chinese authorities to use every trick in the book to prevent that from happening. But there will come a day, because losses this large cannot be concealed forever.

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April 13, 2016

You Can’t Handle the Truth! Censoring Politically Inconvenient Research at the CFTC

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 2:29 pm

I had missed that the CFTC’s Office of the Inspector General had found that the Office of the Chief Economist had “prohibited relevant but potentially controversial research” on position limits. According to the OIG, during a routine interview with a CFTC staff economist, without being asked, the economist told the OIG that s/he had been prevented from doing research on position limits. According to the OIG, “several OCE economists identified position limits as an example of a topic on which economic research is no longer permitted.” One said: ”you can’t write a report on something that destroys three years of (CFTC) work.”

The basic conclusion is damning:

Several other economists confirmed their impression that OCE is now censoring research topics that might conflict with the official positions ofthe CFTC. Some ofthis censorship occurs on the part ofindividual staffeconomists themselves-when selecting potential topics, they now choose non-controversial ones. However, multiple OCE economists also reported that the Chief Economist has declined to permit research on certain topics relevant to the CFTC mission, including position limits.

Some OCE economists expressed uncertainty as to the purpose of OCE’s research program if the Office is prevented from studying topics relevant to current CFTC rulemaking. Yet OCE economists reported that the Chief Economist has rejected or delayed research paper topic ideas if tey were related to pending rulemaking or could challenge the validity of agency regulations. One OCE economist described the policymaking process as one in which a decision is made and then analysis is done in a fashion designed to support the decision. There is a perception within OCE that the ChiefEconomist is “more Commission-friendly,” and that he discourages research that might offend Commissioners.

During “multiple” discussions with the OIG, the Chief Economist at first admitted that this was so, then backtracked:

He agreed that he had initially rejected a research proposal on position limits on the basis that it was politically controversial. The Chief Economist later stated his belief that the CFTC did not have the data or the in-house expertise to do this project in any event. The Chief Economist explained that this was a matter of discretion, and that he did in fact permit research into politically controversial topics. He provided an example ofresearch into high-frequency trading and instances ofself-trading. When asked, the Chief Economist agreed that the Chairman actively supported this line ofresearch. The Chief Economist also stated that he wanted to be able to take to the Chairman and Commissioners anything he or OCE did.

Appalling.

Chairman Massad has recently rejected the OIG’s conclusion, the statements of multiple staff economists, and the initial gaffe (i.e., truth telling) by the Chief Economist. It wasn’t politics, you see. It was priorities:

“Our Office of the Chief Economist has many excellent economists, the morale there is very good and the work they produce is very good. They often produce things that might conflict with the views I have and the views other commissioners have, but we don’t have any kind of political screen on what we do,” said Massad, testifying before the Senate Committee on Appropriations on April 12.

“We do have, however, priority setting. It’s a small division and we must set priorities. We can’t always have a staff person just do the research they would like to do, as opposed to research we really need to focus on. That’s the only way in which we focus their work,” he added.

To state the obvious: priorities are inherently political. The statement about priorities therefore does not refute the belief of the staff economists that the decision to forbid research on position limits was ultimately political.

Chairman Massad’s assertion also is flatly inconsistent with the opinions expressed by multiple individuals, including his own Chief Economist (before he got his mind right, anyways). Thus, there is certainly a widespread perception in the OCE that permissible research means politically correct research. Either this perception is correct, or Chairman Massad has done a poor job of communicating to the economists the criteria by which research resources are allocated.

In a Washington where everything is politicized, and in particular where Senator Elizabeth Warren clearly attempts to censor those expressing dissenting opinions, and attempts to intimidate and slander those who dare to express such opinions, it is utterly plausible that the economists’ perceptions are very well grounded in reality. I view the economists’ complaint as facially valid, but potentially rebuttable. Mr. Massad’s testimony does not even come close to rebutting their assertions. Indeed, knowing how to decode words like “priorities” from GovSpeak, if anything his testimony buttresses the complaint, rather than rebuts it.

But let me suspend disbelief for a moment, and take Chairman Massad at his word. Just what does that imply?

First, it implies that a position limits initiative that would impose substantial burdens on the industry is of insufficient importance to justify a researcher or two to spend a portion of their time to study. Not to denigrate the value of the economists’ time, but in the scheme of things this does not represent a huge expenditure of resources. If position limits are of that little importance, what is the potential benefit of the regulation? Why does the Commission persist in pushing it if it is not even worth the time of a few staff economists?

Second, what does this say about the Commission’s commitment to carrying out its statutory obligation to conduct a cost-benefit analysis of the regulation?

Third, and relatedly, if the Chief Economist is correct and his staff does not possess “the data or the in-house expertise to do this project” how would it even be possible for the OCE, and the Commission, to perform a valid cost-benefit analysis? In particular, since the proposed research appears to speak to the issue of the benefits and necessity of limits, how can the Commission generally, and Chairman Massad in particular, credibly claim that they have determined that limits offer sufficient benefit to make them necessary, or to exceed their cost, if its own Chief Economist claims that his office has neither the data nor the expertise to perform valid research on the effects of limits?

Position limits have been a political project from Day 1. They remain a political project, as Senator Warren’s recent jeremiad (directed substantially at yours truly) demonstrates. The economic case for them remains dubious at best. Given this history and this context, the assertion that prohibiting CFTC staff economists from researching the issue was politically motivated is all too plausible.

The Risk article that I linked to quotes Gerry Gay, who was Chief Economist under Wendy Gramm in the Bush I administration. Gerry notes that prior to 1993, economics and economists had pride of place within the CFTC. It was viewed as “an economist’s shop.”

That is a fair statement. What happened in 1993? The Clinton administration took over, and (as Gerry notes) de-emphasized economics. I remember distinctly an article in Futures Magazine that solicited the opinion of many industry figures as to the changes the new administration would bring. Ex-CFTC Commissioner Philip McBride Johnson’s statement sticks in my mind. This is almost an exact quote, though it is from memory: “We can now get rid of the economists and put the lawyers back in charge.”

That’s exactly what happened then, and with a few exceptions during the Bush II years, has remained true ever since. Just as Clemenceau said that war is too important to be left to the generals, the DC set established that regulating the markets is too important to be left to the economists. What’s more, particularly in the Obama administration, starting with Gensler’s tenure as head of the Commission, it was determined that certain kinds of lawyers had to be in charge, and they had to follow marching orders from politicians. Do not forget that Gensler was only able to overcome skepticism about his Goldman background by pledging fealty to the Democratic senators on the relevant committees, and to their agenda. Truly independent regulators get crushed. (Remember the fate of FCC head Tom Wheeler when he strayed just a little bit off the party line on net neutrality?)

Keep that in mind when attempting to determine the true story of the disapproved research on position limits. It has been determined that you can’t handle the truth.

Update: Note well that the CFTC economists’ concerns about acceptable research extend beyond position limits. It is clear that several believe that policy-relevant research is discouraged, at least if it could contradict existing or pending regulations. If that’s in fact true, it would be fair to ask why the hell the CFTC has economists anyways. Economics has a vital role in informing policy on markets. The economists could pay their lifetime salaries many times over by stopping or correcting one misguided regulation, or even one misguided piece of a broader regulation. (I recall a quote from Coase that an economist could pay for his lifetime salary by just delaying a bad regulation a day.) The only real reason to have economists at the CFTC or any agency is to provide critical evaluation of pending or existing rules and regulations. It is beyond absurd to preclude economists from working on exactly those things, when they could upset some politically-driven regulation.

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April 10, 2016

What Happens in Panama Doesn’t Stay in Panama, Apparently

Filed under: Politics,Russia — The Professor @ 9:01 am

The media has been aflutter during the last week over the Panama Papers. Much of the excitement has focused on Putin’s presence-or lack thereof, actually-in the Biggest Leak Ever.

My reaction: BFD.

Insofar as what about Russia is actually in the leak: can you honestly say that it provided you with any new information? Hardly. Offshoring of dirty Russian money has been a thing since the USSR collapsed. Before, actually. Putin has actually made an issue of it. To the extent that the leak reveals anything, it shows the hypocrisy and political nature of Putin’s anti-offshoring drive. The politically favored can still do this, although with the knowledge that the Sword of Damocles hangs over their heads. If favor turns into disfavor, the offshoring can be used to destroy them.

At most, the leaks regarding Russia provide some interesting information as to how the offshoring works in practice. But this mere detail which provides no new insight on the nature of the Russian system.

The hypocrisy is also evident in China, where family members of anti-corruption crusader CCP General Secretary Xi Jinxing have been disclosed to have offshore shell corporations. But again, the hypocrisy should not be a surprise. As has been the case with autocrats since time immemorial, Xi’s anti-corruption drive has been more of a means of extending his power and control, than an idealistic effort to clean up China’s government and economy.

Insofar as Putin is concerned personally, why would anyone expect his name to be on any document detailing ownership of anything? Do you think he’s that stupid?

For all the hyperventilating by Bill Browder and others of Putin’s alleged massive fortune (which Browder puts at $200 billion), a little common sense is sufficient to discount these stories. Actually formally/legally owning things provides little benefit to Putin, but poses risks. It is all downside, with no upside.

If evidence of such a massive fortune was uncovered, it would be an embarrassment, or worse, for Putin: his very pretense of being a servant of the people who earns a very modest salary demonstrates that he believes that being revealed definitively as a plutocrat (rather than merely an autocrat) would be dangerous for him politically.

And what does he gain by having his name on some legal papers documenting ownership of vast amounts of wealth? Absolutely nothing. In this current role, he has practical ownership of pretty much everything in Russia. That is, if you view ownership as a bundle of rights to use assets, Putin has ownership, regardless of whether his name is on pieces of paper or not. If he wants use of this asset or that, who is going to deny his request? Further, there are myriad ways that he can use the power of the Russian state to direct wealth to those he favors (e.g., through massively corrupt contracting practices for projects like Sochi, or through Gazprom), who in turn direct some of that to people or purposes that Putin requests. And all of this can be done with Putin not having formal legal ownership of anything.

Furthermore, Putin realizes that formal ownership would not secure him a quiet retirement of opulent luxury. His informal ownership rights exist only so long as he is in power, and as soon as he is out of power any formal ownership rights over vast assets would be too tempting a target for his successor to resist. He could never enjoy the benefits of such wealth when out of power, and doesn’t need it when in it. So what’s the point?

So I would put a different spin on it: the very absence of Putin’s name in the Panama Papers is exactly what is informative. It reveals that he is not leaving power in a vertical posture, of his own volition, because when he does, his practical ownership rights evaporate with his power. This also makes it plain why he is doing things to secure domestic control in advance of the 2017 Duma election and the 2018 presidential “contest”. The creation of a National Guard under his personal control, for instance.

As to speculation regarding who leaked and why: meh. These parlor games bore me, and are essentially forms of ad hominem argument that have no bearing on the truth or falsity of the information.

The claims by Russian authorities (including Putin personally) and Julian Assange (who first praised the leak then turned on it) that it is a CIA/State Department/Soros plot to undermine Putin and Russia are implausible. If anything, the leak was very helpful to Putin. By far the biggest casualty of the leak has been Ukrainian president Poroshenko, who was revealed to have been negotiating moving his assets overseas at the same time his army was being slaughtered in the Donbas. The already divided and shaky Ukrainian polity has become even more so as a result of the revelations, and this redounds to Putin’s benefit. Most of the other casualties have been western democratic politicians, notably David Cameron. In other words, if this was a CIA/State Department plot, it was an epic miscalculation.

Following this cui bono logic, others have swung to the opposite extreme. Most notably, Brooking’s Clifford Gaddy mooted that since Putin has benefited, this may be a Russian operation. I agree that despite the initial frenzy Putin has been a beneficiary, but believe that it is far more likely that it is just another episode in his recent streak of good luck.

As for the ethics of the leak, and how the material has been handled, the entire episode points out the ambiguities and dilemmas of this means of holding public officials and private individuals accountable. Unlike Wikileaks, the entire set of material is under control of a set of journalists and publications, and is not open for search by the public. This creates the potential for manipulative select disclosure. This is problematic, and this very possibility also creates a narrative that can be used to discredit the entire project. But since innocent private individuals’ information is also in the database, open access would impose huge collateral damage. The choice is binary (selective disclosure controlled by a group of self-selected gatekeepers who may have an agenda, or open access), and the severe downsides to either alternative call into question the utility of leaking as a means of revealing (and perhaps punishing) misconduct by government officials, or private individuals.

It also shows the costs of privacy and transparency, which highlights a fault line in the current debate. In that debate, Privacy and Transparency are both praised as ideals even though they are obviously in substantial tension. What information should be private and what should be transparent, and whose information should be private, whose information should be transparent, and who should make these choices are extremely difficult questions. Even if one can identify the ideal boundaries in the abstract, respecting them in practice is devilish hard. The Panama Papers case reveals that in spades.

 

 

 

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March 27, 2016

A Practical President, Who Believes Himself Exempt From Intellectual Influence

Filed under: Economics,Politics — The Professor @ 7:26 pm

Obama caused a kerfuffle with his remarks in Argentina on Thursday. The most common interpretation of his remarks was that he was drawing an equivalence between communism/socialism and capitalism. Yes, one can interpret his speech that way, but I don’t think that’s the most accurate way to parse it.

Obama was denigrating all ideological frames as interesting subject matter for academic debate, but of little interest or relevance to practical politics:

I guess to make a broader point, so often in the past there’s been a sharp division between left and right, between capitalist and communist or socialist. And especially in the Americas, that’s been a big debate, right? Oh, you know, you’re a capitalist Yankee dog, and oh, you know, you’re some crazy communist that’s going to take away everybody’s property. And I mean, those are interesting intellectual arguments, but I think for your generation, you should be practical and just choose from what works. You don’t have to worry about whether it neatly fits into socialist theory or capitalist theory — you should just decide what works.

In short, he advocated a rigorously pragmatic approach. Or put differently, a Chinese menu theory of government: take one item from menu A, another from menu B, depending on your taste and what “works” for you.

The criticism here should be directed at his vapidity and superficiality and question begging. By what criteria are the things that “work” to be determined? How do liberty, individual autonomy, and reliance on coercion and repression come into play when evaluating what works?

Further, real world decisions always involve trade-offs. Works-Doesn’t Work is binary: trade offs aren’t.

Obama also apparently believes that it is possible to design policies without a theoretical framework. Hayek was closer to the truth when he said without theory the facts are silent. Theories are about causal mechanisms, and policies are all about manipulating cause to achieve particular effects. You can’t make a reasonable evaluation ex ante of what policies will “work” (based on your objective function) without some theoretical framework. Further, those who don’t think deeply about cause and effect when designing policies inevitably unleash unintended consequences that are usually more baleful than beneficial.

All that said, the fact that Obama apparently believes that some socialist or communist policies “work” by any criteria held by non-socialists/communists is revealing. All empirical experience is that explicitly communist and socialist systems have delivered lower standards of living (often dramatically so), less freedom, and more coercion. Further, their alleged virtue–equality–is largely chimerical. There is always a privileged elite in socialist/communist systems, and what equality there is tends to be an equality of misery. What’s more, inequality can be palliated (and is considerably even in the US) by transfer programs that fall well short of communism or socialism. The Bernie worshipping millennial idiots who point to Denmark or Sweden as socialist paradises have no clue: they are welfare states, which is a very different kettle of fish.

The examples from Cuba that Obama cited as things that “work” in a communist system are something of a joke. Non-communist/socialist systems deliver better education and health care than Castro’s Cuba.

Obama was not revealing that he is a closet commie, although he clearly does not think communism is inherently a bad thing. In fact, he was being an old school progressive, making arguments old school progressives have made since Wilson and through FDR. The New Dealers were of a similarly pragmatic bent, and like Obama, openly advocated using policies adopted by fascist or communist countries if they “worked.” Stalin, Hitler, and Mussolini all had admirers among the New Dealers, who believed that they had found better policies than voluntary contract and exchange, and open competition.

When I read Obama’s remarks, I immediately thought of FDR’s speech at Oglethorpe University in May, 1932 (while he was running for president):

Do not confuse objectives with methods. When the Nation becomes substantially united in favor of planning the broad objectives of civilization, then true leadership must unite thought behind definite methods.

The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.

“Bold experimentation” is basically a prescription to try anything and see if it “works.” If one thing doesn’t “work,” (i.e., “if it fails”) try something else. Once the “broad objectives” are defined, any method that achieves those objectives is fair game. Roosevelt in Georgia, like Obama in Argentina, was saying that all methods should be open for consideration and evaluated on purely pragmatic grounds.

Roosevelt was also making a favorable reference to planning, which at the time was associated with the USSR. Like Obama, he was saying don’t rule out a particular policy just because it originates in communism.

Of course, the implementation of this theory of government in the New Deal led to a confused hodge-podge of policies that largely failed to achieve their stated objectives, and indeed, in many cases worsened the nation’s economic crisis: that is, these policies were rife with unintended consequences.

This provides an excellent example of Hayek’s dictum. Those operating based on standard microeconomic (e.g., capitalist) principles/theories rightly predicted that cartelizing product and labor markets would not lead to higher output, and they were right. Contrary to Obama, “capitalist theory” was more than an intellectually interesting subject for classroom debate: it was a very useful guide to evaluating the practical effects of policies, which the New Dealers ignored, to the nation’s detriment.

And those progressives like Wilson, FDR, and now Obama who touted the superiority of pragmatism, and claimed their practicality and independence from theoretical abstractions and systems, were largely fooling themselves. The Pragmatism (note the capitalization) that has infused progressive thought for well over a century isn’t a-theoretical or a-ideological. It is an ideological and philosophical system developed in Germany in the 19th century. Not that Obama gets that.

No, Obama seems to be exactly the kind of man that Keynes so trenchantly described in the General Theory 80 years ago:

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

What Keynes describes is a form of intellectual conceit common among politicians, and especially progressive ones. That conceit, rather than some soft spot for socialism, is the problem with Obama’s “do what works” nostrum.

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