What a topsy-turvy world

The US is going broke and going rogue, says Bill Bonner.

The new Japan is China. It's an export economy with too much capacity, like Japan in 89.

The new Greece is Spain. It's got mortgage debt up the kazoo.

The new Ireland is the old Ireland. Yes, Ireland is now exporting people again, at the fastest rate since the 19th century.

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Our old friend Jim Davidson, says the new America is Brazil. But what happened to the old America? It's the new Argentina. Whoa! What a topsy-turvy world! The US is going broke, and going rogue. Just like Argentina in the 80s.

First, here's the story on China, from The New York Times.

HONG KONG China announced on Thursday that growth in imports had unexpectedly come to a screeching halt in April rising just 0.3% from the same period a year earlier, compared with expectations for an 11% increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore and computer chips.

China has been the largest single contributor to global economic growth in recent years, and a sustained slowdown in its economy could pose problems for many other countries. Particularly exposed are countries that export commodities like iron ore and oil and depend on demand from China's voracious steel mills and ever-growing ranks of car owners.

And here's the lowdown on the pain in Spain from Bloomberg.

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by €54bn ($70bn) to €166bn. That's enough to cover losses of about 50% on loans to property developers and construction firms, according to the Bank of Spain. There wouldn't be anything left for defaults on more than €1.4trn of home loans and corporate debt.

When an organisation goes rogue, it takes up a new mission, of its own choosing; often in cahoots with the enemy it was supposed to be fighting.

You can see this phenomenon in many different places in many different activities. Poor African nations were supposed to be fighting poverty and hunger. But leaders found that losing the battle was more rewarding than winning it. Famine brought aid. And top-end Mercedes sales went up in the capital cities shortly after new aid programmes were announced.

Likewise, US cities such as Baltimore and Detroit largely destroyed their own middle class tax bases. So, they came to depend on federal aid programmes with perverse incentives. The outside world saw city governments as corrupt and dysfunctional, but they were really responding, rationally, to the choices before them. The worse off you are the more money you get. They went rogue, because that's where the money was.

The clearest example of this phenomenon is the 'war on drugs'. The anti-drug warriors went rogue many years ago. They found common cause with drug dealers, both of them now work against the public's interest. The drug fighters gain power and money by putting resources to work against the drug dealers. The drug dealers gain power and money thanks to the drug fighters who, like regulators, create high barriers to entry, keep out competition, push up prices, and protect the dealers' profit margins.

The drug dealers should thank the drug fighters. And here, one did:

"I couldn't have gotten so stinking rich without George Bush, George Bush Jr, Ronald Reagan, even El Presidente Obama, none of them have the cojones to stand up to all the big money that wants to keep this stuff illegal. From the bottom of my heart, I want to say, Gracias amigos, I owe my whole empire to you."

- Joaqin 'El Chapo' Guzman, head of Mexico's Sinaloa cartel, as reported by a close confidant (via the Huffington Post)

Colleague Justice Litle explains:

The war on drugs a war that America has lost is an excellent example of why the world is so hard to change. Bad laws, bad ideas and bad arrangements persist by the will of stakeholders behind the scenes.

It's a 'tragedy of the commons': costs are shouldered by the oblivious many, while profit concentrates in the hands of the few.

There is no way the cartels could have prospered so mightily, for so long, without a symbiotic relationship between criminals, politicians, and the lobbying agents who love them both. If not for the long arm of the law - and the helping hand attached to it - El Chapo and his ilk would have been rubbed out by Fortune 500 corporations (via free competition in a regulated market) quite some time ago.

"Whoever came up with this whole war on drugs," one of El Chapo's lieutenants reports he said, "I would like to kiss him on the lips and shake his hand and buy him dinner with caviar and champagne. The war on drugs is the greatest thing that ever happened to me, and the day they decide to end that war, will be a sad one for me and all of my closest friends. And if you don't believe me, ask those guys whose heads showed up in the ice chests."

But the biggest rogue of all is the only one still retains the faith and respect of the people - the US military. That alone is remarkable, considering that the Pentagon has a record of failure that stretches back over the last 60 years. In Korea, it accepted a draw. In Vietnam, it withdrew, shamefully. In Iraq, we replaced one corrupt government with another, probably just as corrupt and incompetent too. In Afghanistan, it is ready to get out, leaving the country in the hands of its enemies.

Still, instead of sending military personnel to the back of the bus, the airlines board them along with the first class passengers and even move them up to business class if there are seats available. Mother Teresa can stay in economy!

Additional 'investments' in security have been arguably the least productive use of capital in American history. From an outsider's perspective, it looks like the US military was suckered into spectacularly bad outlays in Iraq and Afghanistan. The New York Timesreported as follows:

Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the US? In a survey of estimates by the New York Times, the answer is $3.3 trillion or about $7 million for every dollar al Qaeda spent planning and executing the attacks.

The insiders knew better. The Pentagon has gone rogue. It no longer protects the US from war; it causes wars. It no longer seeks to win wars; it wants them to go on forever. It no longer avoids wasting US resources; it sucks up all it can get.

Like drug fighters and poverty fighters, the fighters in the military were happy to have an enemy, especially one that couldn't do them any real harm.

Where does this lead? How does it progress? Stay tuned...

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