Europe's Cyprus Crisis Has a Familiar Look

When will we learn?

By Peter Coy 

To most of the world, the banking crisis that broke out in Cyprus in mid-March was as abrupt and unexpected as an outbreak of Ebola. For Cypriots, it wasn’t sudden at all. Many opportunities to steer the country in a better direction came along over the years but were missed or never tried. Now the misbegotten decision by European finance ministers to tax the accounts of ordinary depositors to help pay for a bailout of the country’s biggest banks has become a source of continentwide embarrassment.

The bailout mess roiling the capital of Nicosia and the financial hub of Limassol has plenty of only-in-Cyprus color: Russian oligarchs doing biznes in the sunny Mediterranean, a simmering conflict with Turkey, a former president who was educated in Soviet-era Moscow. Underneath the details, though, is a frustratingly familiar pattern. A small country cleans up its act and joins the international financial community. Money pours in from abroad. The cash is spent or lent unwisely under the noses of inattentive or ineffectual regulators. When losses mount, the money flows out as quickly as it came in. In the end, it’s the little guys who lose the most.

Only five years ago, Cyprus seemed to be in a sweet spot. The country had teetered on the edge since a war in 1974 that left the northern third of the island under Turkish control. For years it also had shaky government finances and a reputation as a haven for foreign money launderers and tax evaders. But successive governments worked hard to lose those bad habits as the price for admission to the European club. Cyprus balanced its budget (for two years, anyway). And it tightened banking regulations so successfully that today it’s in better compliance with the 36-nation Financial Action Task Force’s rules on money laundering than Germany, France, or the Netherlands.

Cyprus was the richest of the 10 countries that joined the European Union in 2004. Just four years later it dropped its currency, the pound, in favor of the euro. There was a brief episode of capital flight after the Lehman Brothers failure in 2008, but it was soon reversed.

For a time, being inside the EU and the euro zone benefited both Cyprus and foreigners eager to invest there. It made the country—whose population of 800,000 or so is no bigger than that of Jacksonville, Fla.—more attractive as a place to do business. It particularly lured wealthy Russians, who appreciated the country’s strong protection of property rights beyond Moscow’s reach and its 10 percent corporate income tax rate (Europe’s lowest), not to mention the balmy weather and a shared Orthodox faith. The storefronts of Limassol are plastered with signs in Cyrillic. Roman Abramovich, the oligarch whose properties include London’s Chelsea Football Club, operates Evraz (EVR), his steel, mining, and vanadium business, through a limited liability company called Lanebrook in downtown Nicosia. There’s no evidence to support German parliamentarians’ allegations that Cyprus is a haven for tax evaders. In January even Russian tax authorities gave Cyprus a clean bill of health.

When Do We Call It A Solvency Crisis?

Don't pop the champagne corks yet

by Michael Pettis

I got back last week from a two-day trip to London, where I spoke at an interesting event organized by the Carnegie Endowment. The attendees were for the most part senior bankers and investors, and I got the impression that several, though maybe not all, shared with me a certain amount of surprise that European bond markets were up this year. We were even a little shocked that the buoyant markets were being interpreted as suggesting that the worst of the European crisis was behind us. The euro, the market seems to be telling us, has been saved, and peripheral Europe is widely seen as being out of the woods.

I cannot name any of the attendees at the Carnegie event because it was off the record, but one of them who seemed most strongly to share my skepticism is a very senior and experienced banker whose name is likely to be recognized by anyone in the industry. After I finished explaining why I thought the euro crisis was far from over, and that I still expected that absent a serious effort from Germany to boost domestic spending – an effort likely to leave the country with rapidly rising debt – at least one or more countries would eventually be forced off the currency, he told the group that he hadn’t made as gloomy a presentation only because he considered it impolitic to sound as pessimistic as I did.

Neither of us, in other words, (and few in the meeting) felt that the recent market enthusiasm was justified. Never mind that the Spanish economy, to return to the country I know best, contracted again in the fourth quarter of last year, that it is expected to contract again this year, that unemployment is still rising, and that the ruling party is involved in yet another scandal that has driven its popularity down to 20%. Never mind that young Spaniards are emigrating (20,000 a month net), that the real estate market continues to drop, that businesses are still disinvesting and popular anger is extraordinarily high. The ECB, it seems, is willing to pump as much liquidity into the markets as it needs, so rising debt levels, greater political fragmentation, and a worsening economy somehow don’t really matter. This crisis continues to be just a liquidity crisis as far as policymakers are concerned – and not caused by problems in the “real” economy – and the solution of course to a liquidity crisis is more liquidity.

Forget Spain and Italy. It’s France that’s Greece-ifying before our very eyes

The French Economy is Going Down the Drain

By Gwynn Guilford 

France has so far dodged the “problem child” reputations that Spain and Italy have earned. But it looks like that will be increasingly hard to keep up. Data today on France’s business output hinted not just that its economy is decaying—but that it’s doing so rapidly.

Markit’s preliminary March purchasing managers’ index—which measures monthly changes in private-sector output—came in at 42.1 (pdf), down from 43.1 in February. (Anything lower than 50 reflects a drop in output.) That’s the fastest slowdown in business activity France has seen since March 2009. And Jack Kennedy, economist at Markit, says this likely augurs a larger crumbling of the French economy.

“My take is it’s really a continuation of the sharp weakening pattern we’ve seen in recent months—so very much a trend rather than a blip,” Kennedy tells Quartz. “Most of the anecdotal feedback from the survey panel points to a general lack of confidence and clients reining in spending accordingly.”

To frame it in another horrifying perspective, the PMI of the euro zone’s second-largest economy was lower than that of Spain and Italy—and almost down to Greek levels (video), as Reuters’ Jamie McGeever explains.

What’s most worrying is when you look at how France’s data stacked up against the euro zone’s as a whole, which were also published today. While the euro zone’s PMI (blue line) and its GDP growth (orange line) have moved pretty closely in sync, France’s PMI has become unhinged in the last couple of years. And that’s bad because, as PMI reflects business confidence, it’s typically a leading indicator of GDP growth:

One of the biggest sources of concern: France’s service sector, which contributes something like four-fifths of France’s GDP. Even as the pace of decline for France’s manufacturing output slowed, the services PMI hit 41.9, indicating the steepest drop since February 2009.

“Notably in the latest survey we saw service sector future expectations plunging to [their] lowest since [December 2008,] in the wake of the Lehman collapse which really underlines the scale of the worries at the moment,” says Markit’s Kennedy, adding that that “in turn seems to be feeding back into lower activity.”

But even if PMI continues to fall, the chart above shows that France’s GDP has proven fairly resilient—especially compared with the euro zone’s trend. So things should be okay, right?

Probably not. Kennedy chalks this ”puzzling” gap in GDP and PMI up to the difficulty in accurately measuring service-sector output in the official data. The recent blindsiding slump in French industrial production may show official data finally falling back in line with PMI, he says.

That means that the gap you see in the above chart could be about to close. GDP growth for the first quarter of this year could come in surprisingly low. If so the country’s chances for a near-term recovery are receding faster than its leaders may be willing to admit. 

JPMorgan On The Inevitability Of Europe-Wide Capital Controls

EU's Ponzi in imminent danger

With the Cypriot government still 'undecided' about what to 'take' and the European leaders very much 'decided' about what to 'give', the fact of the matter is, as JPMorgan explains in this excellent summary of the state of affairs in Europe, that because ELA funding facility is limited by the availability of collateral (and the haircuts applied to those by the central bank), and cutting the Cypriot banking system completely from ELA access is equivalent to cutting it from the Eurosystem making an exit from the euro a matter of time. This makes it inevitable that capital controls and a capital freeze will be imposed, in their view, but it is not only bank deposits that are at risk. A broader retrenchment in funding markets is possible given the confusion and inconsistency last weekend's decision created for investors relative to previous policy decisions. Add to this the move by Spain, which announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing, and the chance of sparking much broader deposit outflows across the union are rising quickly.

By JPMorgan,

Capital Control Risks

What was widely viewed as an ill-conceived Cyprus deal last weekend renewed fears of a re-escalation of the euro debt crisis. The original proposal to hit insured depositors below €100k caused a bank run and set a new precedent in the course of the Euro area debt crisis, with potential negative consequences for bank deposits not only in Cyprus but also in other peripheral countries. Once again, as it happened with the Greek crisis last May, the Cyprus crisis exposes the fragmentation of the deposit guarantee schemes in the Euro area and its inconsistency with a monetary union.

Even if the original deal is eventually revised and the guarantee for depositors with less than €100k is respected, the damage from the original proposal will be difficult to undo, in our view.

Cypriot banks are relying on ECB’s Emergency Liquidity Assistance (ELA) to avert a collapse once they open next week. ELA reflects collateralized borrowing from the national central bank rather than the ECB directly, not only at a more punitive interest rate relative to refi rate but more importantly with much larger collateral haircuts. The ECB is still on the hook under ELA because the national central bank borrows these funds from the ECB, i.e. it generates a liability against the Eurosystem. The ECB’s provision of liquidity via ELA is admittedly not a given but it will be provided to Cypriot banks for as long as Cyprus is looking to finalize its revised bailout plan, the so called Plan B.

Although the ECB always states that it provides liquidity to only solvent and well-capitalized institutions, past experience with Irish and Greek banks and even with Cypriot banks shows that the ECB has tolerated long periods of liquidity provision to undercapitalized institutions. Greece is the most characteristic case. Greek banks had access to ELA even when the bank recapitalization was pending between April and December 2012. And Greek banks had access to ELA in-between the two Greek elections when it was not even clear whether Greece would stay in the euro. Cutting the Cypriot banking system completely from ELA access is equivalent to cutting it from the Eurosystem making an exit from the euro a matter of time. This is a political decision rather than a decision that the ECB can take alone. This would effectively cut the Central Bank of Cyprus off from TARGET2 and force it along with the Cypriot government to eventually issue its own money.

But even assuming that a new deal is agreed between Cyprus and the Eurogroup and ELA continues for the Cypriot banking system after Monday, this does not mean that this ELA is unlimited. ELA is limited by the availability of collateral and the haircuts that the central bank applies to this collateral. The Greek case is the most characteristic example of how punitive haircuts on ELA collateral can be. As of the end of January Greek banks used €122bn of collateral to borrow €31bn via ELA, i.e. an implied haircut of 75%. In contrast, they borrowed €76bn via normal ECB operations posting collateral of €97bn, i.e. the implied haircut on their normal ECB borrowing was 22%. The higher haircut on ELA collateral i.e. is mostly the result of the lower quality of this collateral, typically credit claims, vs. that accepted in normal ECB operations, typically securities. But it perhaps also reflects the higher riskiness the ECB sees with its counterparty, i.e. the national central bank and eventually the sovereign, when a country's banking system has to resort to ELA.

The economics of bubbles, in Cyprus and here at home

If something can’t go on, it won’t

By Conrad Black

Thursday’s federal budget was a commendable effort that plausibly forecasts a modest surplus in two years, along with a federal debt level that amounts to 28% of GDP (barely a quarter of where the corresponding U.S. figure will be). My own view is that the government should further stabilize the country’s finances by raising the sales tax on elective spending and cut the income tax (in a way that also serves to discourage income-tax increases by the provinces). But since the federal fiscal policy generally has been sensible since the Mulroney years, a steady-on course is not a bad thing — especially as the world around us hobbles toward the finish line in the 80-year devaluation of money.

An examination of the writing of a British 18th Century author such as Dr. Johnson, and a writer from 100 years later, such as Charles Dickens, reveals that there was no increase in that time in the cost of a loaf of bread or the rental of a simple but respectable residential room in London. There were soaring economic bubbles and bone-cracking depressions, and prices followed supply and demand, but the essential currency value was constant. Unfortunately, that would change: There was no way to pay for the appalling hecatomb of the First World War, where almost the whole populations of all the Great Powers except the United States and Japan were at total war for over four years, except to increase the money supply by printing more of it.

In the Roaring Twenties, the New York stock market, especially, was a bubble, fed by the fraudulent notion that permanent growth was assured, and based largely on borrowings secured, in circular fashion, by the stock that was acquired with the borrowed funds. As soon as the market turned, it came down hard. Forced sales of the pledged stocks accelerated and broadened the plunge. Eventually, governments inflated the currencies by flooding the private sector with borrowed money.

The profusion of new, unearned money generates increased demand and starts to push prices and wages higher, but in currency of deteriorating value. This practice has stalked and haunted the world ever since.

This is essentially the trade-off that our civilization has made: Destitution will be spared all but a few people, but savings, investment, and the quest for security will be an endless treadmill on which he who earns and tries to accumulate wealth is in a constant race with the deterioration in the buying power of the currency in which he measures his wealth. Meanwhile, most useful, durable assets, such as homes and fine arts, given some astuteness on the part of the acquirer, increase in value, though they endure severe fluctuations in marketability, according to changing tastes and economic conditions.

Let us be under no illusions about the implications of these trends. Even a Cézanne painting of a bowl of fruit costs 200 times what it did 50 years ago. And, at the risk of seeming an unutterable philistine, great artist though Cezanne was, his bowl of fruit was not a better depiction than the real thing, which with a comparable bowl could be replenished with fresh fruit from the local super market, at today’s prices, for 200,000 years for less than what the Cézanne canvas would cost.

In other important news

Lockheed Martin Moves Closer to Affordable Water Desalination

Lockheed Martin has been awarded a patent for Perforene™ material, a molecular filtration solution designed to meet the growing global demand for potable water. 

The Perforene material works by removing sodium, chlorine and other ions from sea water and other sources.

“Access to clean drinking water is going to become more critical as the global population continues to grow, and we believe that this simple and affordable solution will be a game-changer for the industry,” said Dr. Ray O. Johnson, senior vice president and chief technology officer of Lockheed Martin. “The Perforene filtration solution is just one example of Lockheed Martin’s efforts to apply some of the advanced materials that we have developed for our core markets, including aircraft and spacecraft, to global environmental and economic challenges.” 

The Perforene membrane was developed by placing holes that are one nanometer or less in a graphene membrane. These holes are small enough to trap the ions while dramatically improving the flow-through of water molecules, reducing clogging and pressure on the membrane. 

At only one atom thick, graphene is both strong and durable, making it more effective at sea water desalination at a fraction of the cost of industry-standard reverse osmosis systems.  

In addition to desalination, the Perforene membrane can be tailored to other applications, including capturing minerals, through the selection of the size of hole placed in the material to filter or capture a specific size particle of interest. Lockheed Martin has also been developing processes that will allow the material to be produced at scale.

The company is currently seeking commercialization partners.

The patent was awarded by the United States Patent and Trademark Office.

Yet another prescription for a far greater disaster

Mario Draghi’s Opiate of the Markets

By Luigi Zingales

From the standpoint of European stability, the Italian elections could not have delivered a worse outcome. Italy’s parliament is divided among three mutually incompatible political forces, with none strong enough to rule alone. Worse, one of these forces, which won 25% of the vote, is an anti-euro populist party, while another, a Euro-skeptic group led by former Prime Minister Silvio Berlusconi, received close to 30% support, giving anti-euro parties a clear majority.

Despite these scary results, the interest-rate spread for Italian government bonds relative to German bunds has increased by only 40 basis points since the election. In July 2012, when a pro-European, austerity-minded government was running the country, with the well-respected economist Mario Monti in charge, the spread reached 536 basis points. Today, with no government and little chance that a decent one will be formed soon, the spread sits at 314 points. So, are markets bullish about Italy, or have they lost their ability to assess risk?

A recent survey of international investors conducted by Morgan Stanley suggests that they are not bullish. Forty-six percent of the respondents said that the most likely outcome for Italy is an interim administration and new elections. And they regard this outcome as the worst-case scenario, one that implies a delay of any further economic measures, deep policy uncertainty, and the risk of an even less favorable electoral outcome.

The survey also clearly indicated why the interest-rate spread for Italian government bonds is not much wider: the perceived backstop provided by the European Central Bank. Although investors believe that the backstop is unlikely to be used, its mere presence dissuades them from betting against Italy. In other words, the “outright monetary transactions” (OMT) scheme announced by ECB President Mario Draghi last July has served as the proverbial “bazooka” – a gun so powerful that it does not need to be used.

Big Russian money out of Cyprus

Still, crisis endangers flows

By Polina Devitt and Katya Golubkova

If Russian oligarchs still have money in Cyprus, where a lot of them base their businesses, they aren't letting on.

"You must be out of your mind!" snapped tycoon Igor Zyuzin, main owner of New York-listed coal-to-steel group Mechel , as he dismissed a suggestion this week that the financial meltdown in Cyprus posed a risk to his interests.

His response is typical across the oligarch class of major corporations and super-rich individuals, reflecting the assessment of officials and bankers on the Mediterranean island who say the bulk of the billions of euros of Russian money in Cyprus comes from smaller firms and middle-class savers.

The collapse of an economy 75 times smaller than its own may not have much impact in Russia, though the crisis has strained relations with the European Union, raised questions on Russian influence over Cypriot politicians and highlighted geopolitical competition for new offshore gas fields. But some would suffer.

As much as losses likely to be sustained on deposits held in Cypriot banks, pain for the Russian economy could come from a disruption in money flows between Russians which pass through the island - transfers that dwarf Cyprus's own national income. 

Light regulation and taxes, cultural ties through Orthodox Christianity and the weather have long attracted the capital and savings of Russians - many keen to keep their wealth out of the sight of often predatory bureaucrats at home.

Yet precisely because investors can hide their wealth behind nominee structures - often held in the name of a local lawyer - it is difficult to say just how much Russian money is tied up on the Mediterranean island. Or how much has already left.

Where it is going is also unclear, though a possible rise in Russian deposits in fellow EU member Latvia, a former Soviet republic that hopes to enter the euro zone next year, has raised concerns of displacing instability northward.

Cyprus Lifts the Curtain

The Cyprus Plan Was Too Transparent To Survive In A World Dependent On Deceit

By Peter Schiff

This week financial analysts, economists, politicians, and bank depositors from around the world were outraged that European leaders, more specifically the Germans, currently calling many of the shots in Brussels and Frankfurt, could be so politically reckless, economically ignorant, and emotionally callous as to violate the sanctity of bank deposits in order to fund a bailout of Cyprus. The chorus of condemnation may have been the deciding factor in giving the Cypriot parliament the confidence to unanimously vote down the measures in hopes that Berlin will cave or Russia will swoop in with a bailout.

The decision to inflict pain on both large and small depositors was almost universally described as a historic blunder. But the mistake was to do so in a manner that was not camouflaged by financial smoke and mirrors. In truth, rank and file depositors have been paying, and will continue to pay, for all manner of bailouts and stimulus. Whether it's through lower interest payments on deposits, inflation, higher taxes, higher borrowing costs, or the accumulation of unsustainable sovereign debt, Cypriots will bear the burden of past profligacy. But the new plan for Cyprus was far too transparent, simple, and direct to survive in a world dependent on deceit and obfuscation. It was dead on arrival.

All over the world, most notably in the United States, Britain and Japan, central bankers are actively pursuing inflation targets of two to three percent. But isn't inflation, which allows governments to pay off debt through the creation of new money that transfers purchasing power from savers to borrowers, just a deposit tax in disguise? (Read more about Japan's plan to do just that). British citizens of all means have been living with such a three percent stealth tax for the past three years, and it is expected to stay that high for at least two more years. Yet a one-time tax of 6.75% in Cyprus is seen as the ultimate act of betrayal?  

Many are lamenting that Cyprus' membership in the EU prevents it from devaluing its own currency to get out of the jam. How would such a course be morally superior? Taking actual losses on deposits is no different than taking losses through devaluation and inflation. Both result in the loss of purchasing power. Asking for a depositor haircut at least deals with the problem honestly and immediately. Although it's not quite as honest, devaluation can also be effective.

The same dynamic holds true with bailout funds. Suppose the EU were to come through with more funds? All that means is that Cypriots will have to pay more in future debt and interest repayments. In so doing they would saddle future generations with a burden that they had no hand in creating. How is that fair?   

And it's not as if depositors at Cypriot banks, many of whom are reported to be Russian citizens seeking tax havens, were not complicit in the risk taking. Bloomberg reports that over the past five years euro deposits at Cyprus banks returned more than 24 percent cumulatively, almost double the returns on comparable German accounts. The banks were able to offer such returns because they were exposed to riskier assets (i.e. Greek government bonds). What's so wrong with asking those who took greater risks to earn higher returns to give something back when their decisions go bad?

Cyprus : Designed for Failure

What are the alternatives?

by Thorsten Beck

The Cypriot banking system is insolvent; it needs a large capital injection. As in several other peripheral states of the Eurozone, Cyprus cannot resolve the crisis alone. Given an already high debt-to-GDP ratio and an oversized banking system, recapitalising the banks via sovereign debt would produce unsustainable sovereign-debt levels and, ultimately, sovereign default. In short, Cyprus’s banks are too big to fail, and too big to save.

This is why Cyprus negotiated a rescue package with the Troika – ECB, European Commission and IMF. The ‘bailout’ agreement (in quotation marks, as it is not quite sure who is supposed to be bailed out here, certainly not Cypriot taxpayers and their children, to be burdened with debt for a long time) is still in the making and might even fall through. The damage, however, has already been done. There has been a complete loss of confidence, not only in the Cypriot banking system but also in the crisis-management capacity of the Eurozone.

The Saturday morning hangover

The decision taken in the early hours of last Saturday caused indignation and rejection across Europe, and rightly so. While imposing market discipline is a useful aim, and long overdue after four years of bailouts at the expense of taxpayers and future generations, the way it was originally to be imposed in the case of Cyprus has been more than counter-productive.

Economists and practitioners alike point to a couple of common principles in bank resolution. One is respect for creditor ranking:

·         Equity holders take a hit before junior debt holders;

·         Junior debt holders take a hit before senior creditors and uninsured depositors.

·         Insured depositors should take a hit last.

Such a creditor ranking is based not only on legal rules, but also on the idea that claims should be priced according to their risk and expected repayment in case of failure.

The ‘bailout’ deal with Cyprus foresees, however, a tax on deposits, originally imposed on all deposits even those covered by the EU-wide deposit insurance. Put differently, insured depositors suffer a haircut, while uninsured depositors still maintain a large share of their claims. This seems a violation of the creditor ranking, in spirit if not in the letter of the law.

In order to not violate the promise of deposit insurance of up to 100,000 euros, what the agreement calls a tax is effectively an insurance co-payment. There is nothing to be said against co-insurance, which can improve market discipline, but introducing it ex-post constitutes a clear violation of trust. And if it walks like a duck and it quacks like a duck, let’s call it a duck! This is not a tax, but an ex-post insurance co-payment and loss-sharing arrangement.

But there is more. Imposing losses on depositors is to be done in order to reduce the risk of sovereign over-indebtedness and thus guarantee repayment of current sovereign-bond holders. Imposing losses on insured bank depositors to thus guarantee repayments to sovereign-bond holders violates another political priority of putting (certainly more sophisticated) bond holders above (mostly less sophisticated) holders of small deposits.

Finally, imposing a tax on depositors of all banks, independent of the financial situation of each bank, further undermines market discipline. Yes, it seems an easier option, requiring less administrative effort, but it sends the message that investors do not have to price investments properly as the haircut is the same across banks. And it increases herding trends towards aggressive risk-taking.

Addressing the problem at its core

The Cypriot economy is in crisis, for many reasons. But the insolvency of the banking system is at the core of the current crisis, and should therefore be the focus of the resolution. The literature on resolving bank crises has pointed to several important lessons. On is that losses should be recognised early on, allocated and then managed. While the flow solution, i.e. re-establishing solvency of the banking system through retained earnings or future government earnings, seems attractive as it avoids immediate pain, it comes at high risks.

For Earth Hour, let’s celebrate electricity as a ‘gift of the gods’

The difference between the Dark Ages and the present

By mark perry

“On the evening of March 23, 1.3 billion people will go without light for the rest of the night—just like every other night of the year. With no access to electricity, darkness after sunset is a constant reality for these people. See the video above from Bjorn Lomborg’s environmental think tank - the Copenhagen Consensus Center - with a different message for this Saturday’s Earth Hour.”

According to the WUWT blog, the picture below shows a satellite view at night of North Korea, the winner for Earth Hour in every year since 2003. Odds favor them to be the winner again this year. Earth Hour has been such a stunning success in North Korea, that it’s “always Earth Hour there”, according to Alan Caruba, who comments that “electricity is truly a gift of the gods. It is the difference between the Dark Ages and the present age.”

How Do You Say “Quagmire” in French?

Embers of War: The Fall of an Empire and the Making of America’s Vietnam

President Lyndon Johnson in Vietnam with Gen. Westmoreland and South Vietnam's Lt. Gen. Nguyen Van Thieu and Prime Minister Nguyen Cao Ky

By LEON HADAR

Graham Greene’s novel The Quiet American—adapted into films in 1958 and 2002—was inspired by the author’s experiences as a war correspondent in French Indochina in the early 1950s, in particular by his conversations with American aid worker Lee Hochstetter while the two were driving back to Saigon from a tour to Ben Tre province in the countryside in October 1951.

As the Swedish-born historian and Cornell University professor Fredrik Logevall recounts in Embers of War, during their ride to the city Hochstetter, who had served as the public-affairs director for the U.S. Economic Aid Mission in Saigon, lectured Greene about the need for a “Third Force” in French-ruled Vietnam, one not beholden either to the French colonialists or to their main adversaries, the guerilla forces led by Ho Chi Minh.

Ho’s fighters—the Viet Minh, a nationalist and communist movement—operated from Hanoi in the north of the country and were resisting French attempts to re-establish control over Indochina after the end of Japanese occupation in 1945, part of a wider strategy of restoring the French empire in Southeast Asia and elsewhere.

But as Hochstetter explained to Greene, French efforts to defeat the Viet Minh militarily while denying the non-communist Vietnamese real independence were doomed to fail. The Vietnamese fighting on the side of the French against Ho had to be convinced that they were advancing the cause of democracy for their own country, the young American aid worker insisted. “The only way to make them so convinced was to build up a genuine nationalist force that was neither pro-Communist nor obligated to France and that could rally the public to its side,” writes Logevall.

In The Quiet American—set in 1952, and which Greene started writing that year in his hotel room in Saigon—the character of Alden Pyle was modeled after Hochstetter (and not, as some have speculated, after the legendary Cold War-era counterinsurgency strategist Edward Lansdale). Pyle’s views are described to the novel’s protagonist, a British war correspondent named Thomas Fowler (based on Greene himself), as follows: “There was always a Third Force to be found free from Communism and the taint of colonialism—national democracy, he called it; you only had to find a leader and keep him safe from the old colonial powers.”

The End of Innovation?

A new and unnecessary law restructures the U.S. patent system for the worse

by Richard A. Epstein 

This past week, patent lawyers were feverishly preparing reams of new patent applications to be filed under the 2011 America Invents Act (AIA), which took effect on March 16, 2013, a year and a half after Congress passed that unwise measure. The AIA replaced the old First-to-Invent standard with a First-Inventor-To-File standard. To the outsider, that shift in legal rules may seem like no big deal. But there are firms to which patent priority is worth many millions of dollars. Under the new paradigm, firms must ensure that they “file as early and as completely as [they] can!”

Structuring a patent system is no easy business, for it requires a delicate balance between two competing imperatives. The first is to give inventors the incentive to create new products; the only reliable device here is the exclusive right to market the product for a limited period of time. The second is to ensure that the invention is disseminated widely, which requires limiting the scope and duration of the inventor’s monopoly. In general, the first function is more important for it incentivizes innovation. After all, it is not possible to widely disseminate inventions that were never made.

In large measure, the huge political fight over the AIA (in which I participated for my client DataTreasury on the losing side) is over the calibration of that balance. The powerful industry coalition in favor of the AIA sought to displace the more property-protective Patent Act of 1952, which the AIA supporters denounced in these harsh terms:

Much-needed reforms to our patent system are long overdue. The last major patent re­form was nearly 60 years ago. Since then, U.S. innovators have developed cell phones and launched the Internet. And yet the laws protecting the technologies of today are stuck in the past.

Our outdated patent system has been a barrier to innovation, unnecessarily delaying American inventors from marketing new products and creating jobs for American workers. It takes over three years to get a patent approved in the U.S. American innovators are forced to wait years before they can hire workers and market their inventions. Meanwhile, our competitors are busy developing new products that expand their businesses and grow their economies. . . . We need a system that ensures patent certainty, approves good patents quickly and weeds out bad patents effectively.

This overheated rhetoric cannot withstand any scrutiny.

A Brief History of Patent Law

To see how and why the AIA will flounder, it is useful to understand the history of patent law in the United States.

The creation of a national patent law in the United States virtually coincides with the founding of the country. One of the enumerated powers that the Constitution conferred on Congress is “the power . . . To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

MIT Develops Meltdown-Proof, Nuclear Waste-Eating Reactor

A trillion dollar industrial market

By Brian Westenhaus 

Transatomic, a Massachusetts Institute of Technology spinoff is developing a nuclear reactor designed to overcome the major barriers to nuclear power.  For the anti-nuclear folks the design offers to burn up the existing spent fuel from the world’s fleet of nuclear reactors in a design that doesn’t offer a chance for a meltdown.  That should be nirvana for those alarmed about atomic energy and weapons proliferation.

For everyone else, the first offering is we would see a reduction in spent fuel containment costs and get electrical energy, lots of it, instead.  The second is the design would be factory produced cutting build costs in a huge way and the reactors would be larger than the currently trendy Small Modular Nuclear Reactors (SMNRs) offering the chance to install at existing locations saving on the generation and grid connection costs.

Transatomic, founded by a pair of very smart and innovative young nuclear engineers, has updated the molten-salt reactor, a reactor type that’s highly resistant to meltdowns. Molten-salt reactors were demonstrated in the 1960s at Oak Ridge National Lab, where one test reactor ran for six years.  What remains is raising $5 million to run five experiments to help validate the new basic design.

Russ Wilcox, Transatomic’s new CEO estimates that it will take eight years to build a prototype reactor at a cost of $200 million.  The company has already raised $1 million in seed funding, including some from Ray Rothrock, a partner at the venture capital firm Venrock.

The cofounders, Mark Massie and Leslie Dewan, who we met here in April last year, are still PhD candidates at MIT. Yet the design has attracted some top advisors, including Regis Matzie, the former CTO of the major nuclear power plant supplier Westinghouse Electric, and Richard Lester, the head of the nuclear engineering department at MIT. 

The new reactor design called the Waste-Annihilating Molten Salt Reactor (WAMSR) so far exists only on paper.  Ray Rothrock says the company will face many challenges. “The technology doesn’t bother me in the least,” he said. “I have confidence in the people. I wish someone would build this thing, because I think it would work. It’s all the other factors that make it daunting.”  We’ll get to those daunting factors in a moment.

King Coal looks set for a long, long reign

Coal Is the Fuel of the Past and the Future

By Llewellyn King 

Hal Quinn, president of the National Mining Association, says coal in 2016 will again be the world’s favorite carbon fuel, pushing out petroleum as the world's largest source of energy.

This may seem especially surprising at a time when the use of coal in the United States is in decline, edged out by cheap natural gas and increasingly strict regulations from the Environmental Protection Agency. Yet a rising tonnage of coal is being used for electric generation worldwide.

The Third World is hungry for coal, as it increases electricity production. In the developed world, nuclear setbacks -- most notably the aftereffects of the Fukushima-Daiichi nuclear power plant accident, when a tsunami wave knocked out six reactors -- have helped boost the commitment to coal. The accident has forced the Japanese to burn more coal and the Germans to begin phasing out their nuclear power plants. Other European countries are dithering, and the cost of building nuclear plants is rising.

If you do not have an abundance of natural gas, as here in the United States, then coal is your default choice. It is shipped around the world in larger and larger quantities. The more the world has resisted the burning of coal, the more it has had to fall back on it. Alternative energy, attractive in theory, is yet to make its mark.

Because coal has always had an environmental price, it has always been under attack, and at the same time it has proven stubbornly hard to replace. King Edward I of England, who reigned from 1239 to 1307, was the first known major opponent of coal. He banned it in 1306.

Tales of why he did this vary. One story goes that his mother, Queen Eleanor of Provence, when staying at Nottingham Castle, was so affected by the coal fumes from the town that she had to move out.

Wood was hard to come by in towns, and it does not heat like coal. Anyway England was a cold place and wood was in short supply, so the ban was not very effective, despite the fact that the death penalty was standard for disobeying royal orders.

Two and a half centuries later, Queen Elizabeth I tried to ban coal with not much effect. The prospect of a coal ban was even more draconian then as her father, Henry VIII, had largely denuded the English forests to build his navy and she was even more committed to sea power.

Le Monde Headline "No, France is Not Bankrupt"

Today France, tomorrow, the world!

By Mike "Mish" Shedlock

This amusing headline story by Bruno Moschetto, a professor of economics at the University of Paris in the French newspaper Le Monde has me laughing out loud this morning: "No, France is Not Bankrupt" 

 No, France is not bankrupt ... The claim is untrue economically and financially. France is not and will not bankrupt because it would then be in a state of insolvency.

A state cannot be bankrupt, in its own currency to foreigners and residents since the latter would be invited to meet its debt by an immediate increase in taxation.

In abstract, the state is its citizens, and the citizens are the guarantors of obligations of the State.

In the final analysis, "the state is us." To be in a state of suspension of payments, a state would have to be indebted in a foreign currency, unable to deal with foreign currency liabilities in that currency.

Economic Illiteracy

Economic illiteracy is nearly everywhere you look and that article is a prime example. Bruno Moschetto suggests France is not bankrupt because the state is not indebted in a foreign currency.

Actually, France does have its debts in a foreign currency, euros. Note that France cannot print euros at will to pay its debts (the very essence of a foreign currency).

Moschetto says citizens would be "invited" to help France meet its obligations. Invited? The same way citizens of Cyprus were "invited" to bail out Cypriot banks?

The ability to tax citizens to death to bail out the state is hardly a reasonable measure of non-bankruptcy. I suggest having to confiscate the wealth and savings of citizens to bail out the state is proof of bankruptcy. Greece is a nice example. 

Hollande has tried 75% taxation.  He has tried government takeover or threats of takeover of various auto manufacturers. Hollande also seeks financial transaction taxes.

Many French citizens have had enough of Hollande and his socialist policies and have fled to Belgium, the UK, and Switzerland.

The French economy is imploding as I type. 

Thought of the Day

France is Bankrupt, and it is the policies of socialist fools that put France in that state.

The thought of the day comes from reader "PTCruiser" who chimed in with "Aujourd'hui, la France. Demain, le monde entier."... Today France, tomorrow, the world!