Thursday, April 19, 2018

Iran, The United States and the Imposition of Democracy

With Washington being positively apoplectic about the possibility that a foreign nation was involved in U.S. election meddling in 2016, a look at a Congressional Research Service document from February 17, 2017 entitled "Iran: Politics, Human Rights, and U.S. Policy" by Kenneth Katzman is particularly relevant.  In this report, the author looks at the complex political relationship between the United States and Iran and how, since the fall of the Shah of Iran in 1979m, Washington has attempted to manipulate Iran's political system, an issue that is of interest given the recent unrest among some Iranians.

While the United States has a long history of using sanctions to push Iran into changing its "evil ways", it has also had an extensive track record of attempting regime change in Iran going all the way back to 1953 when the CIA played a role in the coup d-etat that saw Prime Minister Muhammad Mossadegh overthrown (Operation Ajax), largely because of his nationalization of Iran's hydrocarbon reserves.  At that time, the United States and the United Kingdom replaced the democratically elected Mossadegh with General Fazlollah Zahedi who allowed Mohammed Reza Pahlavi aka the Shah of Iran to rule Iran as a monarch until 1979.  In the fall of 1978, protests against the Shah's rather brutal rule ended up seeing him leave Iran and go into exile in January 1979.  At that time, a national referendum was held and a new theocratic constitution was put into place with the Grand Ayatollah Ruhollah Khomenei becoming Iran's Supreme Leader.  In 1989, Grand Ayatollah Ali Khamene'i was selected by the elected Assembly of Experts.

Iran has a fairly complex parliamentary system consisting of both elected and appointed bodies according to the nation's Constitution.  Here is a diagram showing Iran's balance of power which is shared between religious and secular institutions:

The bulk of the secular and religious power in Iran falls under the control of the Supreme Leader (i.e. the Grand Ayatollah) who is appointed by the twelve member Guardian Council.  Along with the Guardian Council, the Supreme Leader controls the government institutions that are in place to both elect and supervise him.  The elected president is deemed to be the second highest ranking official in Iran, however his power is controlled by the constitution which ultimately places the executive branch under the direction of the Supreme Leader. 

Here are the Supreme Leader's responsibilities:

- set the tone and direction of Iran's domestic and foreign policies

- commander-in-chief of the armed forces and controller of the Islamic Republic's intelligence and security operations.

- appoints and dismisses judges

- supreme commander of the Islamic Revolutionary Guard Corps.

- appoints half of the 12 members of the Guardian Council

- second in charge behind the Supreme Leader

- responsible for Iran's economy (i.e. natural resources etcetera) and national budget

- executes the Supreme Leader's foreign and domestic policies

- appoints ambassadors and government cabinet ministers

Presidents serve a four year term with the option of running for a second term with an option for a third non-consecutive term.  All presidential candidates are revised by the Guardian Council.  The presidential election is won by gaining an absolute majority; if this threshold is not met, a run-off vote is held between the two candidates that received the most votes. 

The Iranian Parliament is a 290 member legislative body which is publicly elected once every four years.  The parliament is responsible for drafting legislation, approving budgets and ratifying international treaties.

With that background on Iran's political ecosystem and remembering Washington's outrage at the possibility that an outside entity may have tried to impact the outcome of the 2016 presidential election, let's look at what Washington has spent trying to influence Iranian politics by "promoting democracy" by fiscal year since fiscal 2004:

FY2004 - Foreign operations appropriation (P.L. 108-199) earmarked $1.5 million for “educational, humanitarian and non-governmental organizations and individuals inside Iran to support the advancement of democracy and human rights in Iran.” The State Department Bureau of Democracy and Labor (DRL) gave $1 million to a unit of Yale University, and $500,000 to National Endowment for Democracy.

FY2005 - $3 million from FY2005 foreign aid appropriation (P.L. 108-447) for democracy promotion. Priority areas: political party development, media, labor rights, civil society promotion, and human rights.

FY2006 - $11.15 for democracy promotion from regular FY2006 foreign aid appropriation (P.L. 109-102). $4.15 million administered by DRL and $7 million for the Bureau of Near Eastern Affairs.

FY2006 - Total of $66.1 million (of $75 million requested) from FY2006 supplemental (P.L. 109-234): $20 million supp. for democracy promotion; $5 million for public diplomacy directed at the Iranian population; $5 million for cultural exchanges; and $36.1 million for Voice of America-TV and “Radio Farda” broadcasting. Broadcasting funds are provided through the Broadcasting Board of Governors.

FY2007 - FY2007 continuing resolution provided $6.55 million for Iran (and Syria) to be administered through DRL. $3.04 million was used for Iran. No funds were requested.

FY2008 - $60 million (of $75 million requested) is contained in Consolidated Appropriation (H.R. 2764, P.L. 110- 161), of which, according to the conference report $21.6 million is ESF for pro-democracy programs, including non-violent efforts to oppose Iran’s meddling in other countries. $7.9 million is from a “Democracy Fund” for use by DRL. The Appropriation also fully funded additional $33.6 million requested for Iran broadcasting: $20 million for VOA Persian service; and $8.1 million for Radio Farda; and $5.5 million for exchanges with Iran.

FY2009 - Request was for $65 million in ESF “to support the aspirations of the Iranian people for a democratic and open society by promoting civil society, civic participation, media freedom, and freedom of information.” H.R. 1105 (P.L. 111-8) provides $25 million for democracy promotion programs in the region, including in Iran.

FY2010 - $40 million requested and used for Near East Regional Democracy programming. Programs to promote human rights, civil society, and public diplomacy in Iran constitute a significant use of these region-wide funds.

FY2011 - $40 million requested and will be used for Near East Regional Democracy programs. Programming for Iran with these funds to be similar to FY2010.

FY2012  - $35 million for Near East Regional Democracy (NERD), and Iran-related use similar to FY2010 and FY2011.

FY2013 - $30 million for NERD, with Iran use similar to prior two fiscal years.

FY2014 - $30 million for NERD, with Iran use similar to prior fiscal years.

FY2015 - $30 million for Near East Regional Democracy, with Iran use similar to previous years. Request mentions funding to be used to help circumvent Internet censorship.

FY2016 - $30 million for NERD, with Iran use likely similar to prior years.

FY2017 - $30 million for NERD, with Iran use likely similar to prior years.

FY2018 -  $15 million requested with Iran use likely similar to prior years.

Since fiscal 2004, at least $500 million has been spent by Congress to promote democracy (i.e. the America's preferred version of democracy) in Iran.

Let's close with this quote from an updated version of the report issued in January 2018t:

"The Trump Administration has not adopted a policy of regime change, but there have been several Administration statements that indicate support for that outcome. In his speech on May 21 in Saudi Arabia, President Trump stated that his Administration is hoping that Iran’s government will change to one that the Administration considers “just and righteous.” In testimony before two congressional committees in June 2017, Secretary of State Rex Tillerson said the Administration supports a “philosophy of regime change” for Iran (Senate Appropriations Committee) and that the Administration would “work toward support of those elements inside of Iran that would lead to a peaceful transition of that government” (House Foreign Affairs Committee). In his October 13, 2017 policy announcement on Iran, President Trump appeared to indicate support for changing Iran’s regime by stating that:

"...we stand in total solidarity with the Iranian regime’s longest-suffering victims: its own people. The citizens of Iran have paid a heavy price for the violence and extremism of their leaders. The Iranian people long to—and they just are longing, to reclaim their country’s proud history, its culture, its civilization, its cooperation with its neighbors."

Administration officials stated that President Trump, in his statements of support for the December 2017-January 2018 protests, was seeking to implement his administration’s policy to challenge and confront Iran’s regime where possible." (my bold)

With Washington seeming to be gunning for a fight with Iran, it is only a matter of time before the Iranian political system is forced to defend itself against outside aggression.

Wednesday, April 18, 2018

Scorched Earth - The Middle East Oil Denial Policy

In a fascinating look back in time, recently released documents on the National Security Archives website show what plans the United States and its key ally in the Middle East at the time, the United Kingdom, had for Iran and other oil producing nations in the region.  The Top Secret National Security Council NSC 26 Report dated August 19, 1948, provides us with a plan of action should the Soviet Union make aggressive moves into the Middle East.  With the Middle East currently on "high alert", the information in this posting seemed, to me, to be particularly pertinent.

NSC 26 also known as "Demolition and Abandonment of Oil Facilities and Fields in the Middle East" was collaborative effort by the National Security Agency, the Central Intelligence Agency, the State-Army-Navy-Airforce Coordinating Committee or SANACC and the State Department and became part of what was known as the "denial policy". 

Here is the cover letter from the report:

The report examined the implications of a "determined attack" by the USSR on the Middle East region.  This attack would have resulted in a Soviet takeover of all of the Middle East's oil production facilities, a move which would have meant that the USSR would have been able to use the oil and associated refined products to fuel its military machine.

In the Analysis section of the report, it is noted that the Joint Chiefs of Staff concluded that, at the time of the analysis, the United States and its allies would not be able to protect Middle Eastern oil against an attack by the USSR and that, to deny the Soviets of Middle East oil reserves, they would have to destroy surface installations including refineries, loading, storage and transportation facilities as well as plugging and abandoning all oil wells.  The analysis suggests the following:

1.) surface oil facilities could be effectively destroyed within a few hours

2.) plugging and abandoning wells would require from 30 to 60 days provided that the necessary personnel and equipment was available.  While this would render the wells unproducible in the future, the oil and natural gas reserves would remain intact and be available for later production.

NSC 26 Report goes on to note that it will be necessary to stockpile demolition material and plugging equipment in the oil producing areas as well as organizing and training crews and assigning responsibilities for issuing the orders to proceed with both demolition and abandonment.  Here is a quote:

"Such plans and preparations would at relatively little cost give the United States the capability under favourable conditions of denying Middle Eastern oil to the enemy and of making more difficult damage or destruction of the oil reserves.  This capability need be exercised only as a last resort, after it is determined that there is no reasonable probability of keeping any particular field out of the possession of the enemy."

The nations included in this plan are as follows:

1.) British-owned refinery and fields in Iran

2.) American-owned refineries and fields in Saudi Arabia and Bahrain

3.) Joint US - UK-owned field in Kuwait

4.) Joint US-French owned fields in Iraq and Qatar

It was determined that the U.S. Secretary of State "should exercise general control over abandonment and demolition plans and preparations and should be responsible for issuing the orders to execute such plans."

Of course, as with any foreign policy action, there are downsides as shown on page 3 of NSC 26:

It was noted that "if it becomes necessary to implement these programs affecting a primary economic resource of a friendly sovereign country, due consideration must be given to minimizing unfavourable political and economic consequences" (my bold) - to the United States, of course!  

Here are the conclusions of NSC 26:

As an aside, the U.S. Secretary of State would disclose the denial policy's existence at his/her discretion.  Saudi Arabia was not informed in both 1952 and 1956 since the United States expected a negative reaction. 

Given the British responsibility for the foreign relations of Kuwait, Bahrain and Qatar and its involvement in Iran's oil industry, let's take a quick look at the minutes of a meeting on Oil Denial that took place on April 30 and May 1, 1951 with the U.S. State Department:

Under Plan NECKPIECE (aka SMARTWEED), the main objectives of the British were as follows:

1.) deny Russia from accessing refined oil products that would allow them to transport their troops from Russia, through Persia (Iran) and Iraq to Egypt

2.) to prevent the Russians from obtaining machinery for export and use in their own country

3.) to prevent the Russians from obtaining aviation fuel and other products for use in their own country and elsewhere

Most ironically, one of the main British oil denial objectives  was to "prevent them (the Russians) from ultimately denying the oil fields to the world".

By 1955, the U.K. Chiefs of Staff/Joint Planning Staff had altered their oil denial plans as we can see here on this document from the minutes of a meeting held on December 13, 1955:

Since the oil companies in the Middle East were hiring an "increasing number of local workers in responsible positions", it was seen as unlikely that they would co-operate with the United States or the United Kingdom in their plans to destroy oil infrastructure.  As such, the "increased Allied nuclear capability would be used to hold the Russians in the Zagros Mountains of northern Iran and attacking their lines of communication with nuclear weapons".  Should that line of defense fail to hold back the "Red hordes", the Allies could use the following method to deny oil:

In looking through these historical documents, one has to wonder exactly what plans NATO and, in particular, the United States have for denying the world's largest oil reserves to the non-oil producing nations like China, given that Russia has massive reserves of both oil and natural gas.  We can be assured that the "Allies" are more than willing to see key parts of the world's oil infrastructure utterly destroyed if it means that certain regimes cannot access much needed hydrocarbons.

Tuesday, April 17, 2018

The Debt Cycle

With the level of consumer debt in the United States doing this:

...and this:

...and with house affordability in some markets declining like this:

...and this:

...and with the Canadian housing market doing this:

...I thought that it was the perfect time to look at a paper written by Paul McCulley during the height of the global financial crisis of 2008 - 2009 which was largely triggered by "stupid debt".  In this paper which looks at the shadow banking system, the author discusses Hyman Minsky's theory of the nature of financial instability and how a period of prosperity can lure investors to take on levels of debt that are unsustainable, creating an economic cycle.  This theory, called the Financial Instability Hypothesis was first released in May 1992 and goes a long way to explaining the Great Recession and why the economy, in large part, seems to be retracing the steps that it took in the years prior to 2008.

The financial instability hypothesis is simply explained as a theory of the impact of debt on the economy and the manner in which that debt is validated.  In a capitalist economy, the money flows from depositors to banks from banks to firms and, in the future, from firms to banks and then back to depositors.  The flow of money to firms occurs because there is an expectation of future profits and the flow of money from firms is financed by profits.  Therefore, as you can see, in a capitalist economy, the past, present and future are linked by financial relationships between parties.  The capitalist system is complicated by the accrual of debt; households use credit to purchase consumer goods and houses, businesses use debt to expand and governments use debt to fund their operations.  The financial instability hypotheses focuses on the profit-seeking activities of banks who grow their profits through financing economic activity in both the consumer and corporate sectors.  

Minsky proposes three distinct types of debt units:

1.) Hedge (no relation to hedge funds) - these financing units can fulfill all of their contractual payment obligations through cash flow.

2.) Speculative - these financing units can meet their payment commitments on the "income amount" on their liabilities but cannot repay the principal out of their cash flows.  These debt units need to roll over their liabilities to continue to make their payment commitments, for example, these units need to issue new debt to meet the commitments on their old debt - a prime example being government bonds which is never repaid but is rolled over as new bonds are issued to replace the maturing bonds.

3.) Ponzi - these financing units have cash flow that is insufficient to fulfill either the payment of interest due on the outstanding debt or to repay the debt principal.  These financing units can only sell assets or borrow more to pay what is owed.  As we all know, a Ponzi financing unit is an unsustainable model of debt and greatly lowers the margin of safety for debt holders.

Now that we have that background, let's look at Minsky's key conclusion:

"It can be shown that if hedge financing dominates, then the economy may well be an equilibrium seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system."

The financial instability hypothesis has two theorems:

1.) the economy has financing regimes under which it is stable and financing regimes under which it is unstable.

2.) over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system i.e. the system will move from hedge finance units to speculative finance units to Ponzi finance units.

Here is another quote:

"In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values."

In other words, the longer that people make money by risk-taking, the more likely they are to make incautious financial decisions.  We need think no further than the massive economic instability created by the American banking sector which graciously extended mortgage funding to people who could ill-afford to purchase a house and the investment banking sector and their imaginative use of mortgage-based securities backed by these mortgages that ultimately proved to be worthless.

Here is a quote from the paper by Paul McCulley:

"The essence of the hypothesis is that stability is destabilizing because capitalists, observing stability in the present, have a herding tendency to extrapolate the expectation of stability out into the indefinite future, putting in place ever-more risky debt structures, up to and including Ponzi units, that cause stability to be undermined.

…the expectation of a reward to risk taking is self-fulfilling on the way up. If everybody is simultaneously becoming more risk seeking, risk premiums shrink, the value of collateral goes up, the ability to lever increases, and the game keeps going. Human nature is inherently procyclical, and that is essentially what the Minsky thesis is all about."

Minsky's theory clearly explains the boom-bust cycles that those of us who live in a capitalist system are very well acquainted with.  Economic stability begets economic instability because of the asset price increases and resulting credit excesses that they create and our inherent belief that nothing will ever go down in price, most particularly housing, a belief that proved to be profoundly wrong.

Given the fact that consumer debt in the fourth quarter of 2017 is now 18 percent above its post-Great Recession low in 2013 and is now $473 billion above its 2008 high, it is increasingly appearing that, once again, we are retracing the steps taken prior to the Great Recession and are setting ourselves up for the next economic contraction.  With central bankers around the world lulling us into a sense that the "interest rate good times" will never really end (or, if they do, they will quickly retrace their steps back to zero percent), consumers are creating the next period of economic instability, suggesting that the painful debt lessons of the Great Recession have long been forgotten.