Friday, December 29, 2017

Lying to Russia

The recent dump of early 1990s documents on the National Security Archives website provides the world with an insider's glimpse at the events of the period during which the former Soviet Union was collapsing.  In February 1990, U.S. President George H. W. Bush and Soviet President Mikhail Gorbachev and their respective representatives negotiated the end of the Cold War and the all-important re-unification of the two Germanys.  It was during this negotiation that the issue of NATO was raised, an issue that was of great importance to the Soviet Union since it was NATO that provided the military balance in the region that kept the world's two greatest military powers from expanding into each other's territory.  The Soviet team was concerned that, once the Soviet Union completely collapsed, NATO would expand into the former Warsaw Pact nations and threaten the stability and existence of Russia.  To put this into perspective, one has to keep in mind that during the Second World War, Germany invaded Russia through Poland, Lithuania, Latvia, Romania and Ukraine as shown on this map:

This invasion ultimately resulted in the deaths of at least 25 million Russians including 9.75 million military personnel and threatened the very existence of the Soviet Union.  By way of comparison, in the Second World War, the United States lost 418,500 Americans including 416,800 military personnel. 

Here is a map showing the extent of the former Soviet Union and the Warsaw Pact in particular in 1955, showing how the Soviet Union has protected its eastern flank:

Here is a map showing the members of the Soviet Union in 1991:

Let's briefly look at NATO to put everything into perspective.  In 1949, NATO was founded by 12 member states; Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, the Netherlands, Norway, Portugal, the United Kingdom and the United States.  Other than the United States and perhaps the United Kingdom, none of the 12 members would have been considered a world power by the end of World War II.  Greece and Turkey joined NATO in 1952, Germany joined in 1955 and Spain joined in 1982.  As shown here, under Article 10 of the charter:

"The Parties may, by unanimous agreement, invite any other European State in a position to further the principles of this Treaty and to contribute to the security of the North Atlantic area to accede to this Treaty. Any State so invited may become a Party to the Treaty by depositing its instrument of accession with the Government of the United States of America. The Government of the United States of America will inform each of the Parties of the deposit of each such instrument of accession."

Here is a map showing the current membership in NATO:

The "new NATO" is now comprised of 29 member states; the Czech Republic, Hungary and Poland joined in 1999, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia joined in 2004, Albania and Croatia joined in 2009 and Montenegro joined in 2017.  Currently Bosnia and Herzegovina (formerly part of Yugoslavia), Georgia and Macedonia (also formerly part of Yugoslavia) are potential members.

With that background on the Soviet Union and NATO, let's look through some of the key documents in the recent release from the National Security Archives that show us how the United States handled the issue of NATO's expansion into the former territories of the Soviet Union.  We will outline the key contents in several of the documents that specifically discuss the expansion of NATO into the Warsaw Pact nations:

1.) Document 1 - U.S. Department of State Cable dated February 1, 1990 - outlines a major policy address by Germany's Foreign Minister Genscher which outlines his vision of a united Germany and its place in the "new European architecture".  A unified Germany (including Berlin) will remain as a member of the European Community and a member of the western alliance (i.e. NATO); he also states that the U.S. role in ensuring security and stability in Europe is contingent on the continued existence of NATO.  Genscher notes that German unification must not lead to an "impairment of Soviet security interests" and that "NATO should rule out an expansion of its territory to the east, i.e. moving it closer to the Soviet Borders.".

2.) Document 4 - record of conversation between the U.S. Secretary of State James Baker and Soviet Minister of Foreign Affairs Eduard Shevardnadze dated February 9, 1990 regarding the unification of Germany.  Here is a comment by James Baker:

Note the comment that "There would, of course, have to be iron-clad guarantees that NATO's jurisdiction or forces would not move eastward.".   He also notes that one of the biggest dangers of a neutral Germany is that it could become militaristic in the future and that the only solution to security and stability is to ensure that Germany remain in NATO and that United States troops remain within Germany.  He also notes the future threat of an aggressive nuclear Germany.

3.) Document 5 - record of conversation between the U.S. Secretary of State James Baker and Soviet President Gorbachev and Minster of Foreign Affairs Eduard Shevardnadze dated February 9, 1990 regarding details of German reunification.  Here are the key comments from James Baker:

Again, note that the United States clearly declared to the Soviet Union that NATO would not extend its forces "one inch to the east".   As well, once again, Mr. Baker notes the dangers of a Germany with its own independent nuclear capability; he makes it clear that he's rather that Germany and the rest of Europe depend on the deterrent power of the United States.

4.) Document 8 - letter from U.S. Secretary of State James Baker and Germany's Chancellor Helmut Kohl dated February 10, 1990 in which they discuss German unification and an update on Mr. Baker's meetings in Moscow.  Here is the key passage from the letter with "him" referring to Soviet President Gorbachev:

As you can see from these documents and others that I have not included in this posting, in 1990 the leadership of the former Soviet Union felt that they were supplied with ample assurance that NATO would not expand eastward into the Warsaw Pact nations   Whether the United States deliberately misled the Soviet Union into believing that this was not its intent all along is up for debate, however, the relative rapidity by which the Czech Republic, Hungary and Poland joined NATO suggests that the American negotiators were quite likely hiding their true agenda.  Given Russia's experience during the Second World War, it is not terribly surprising that the moves by NATO since 1990 are cause for great internal concern.  After all, Russia's national consciousness includes the deaths of millions of its citizens over a relatively short 4 year period during the 1940s.

Thursday, December 28, 2017

Low-Yield Nuclear Weapons - The Pentagon's Choice for the Future?

A set of recently released documents provides us with some significant insight regarding the direction that the United States planned to take after the collapse of the Soviet Union.  The first document is dated August 17th, 1992 and was authored by two scientists, Thomas W. Dowler and Joseph S. Howard II, at the Los Alamos National Laboratory in New Mexico.  The second document with less detailed information is dated December 18 - 19, 1991 and was a briefing overview delivered to the Joint Defense Policy Board and the Defense Science Board Task Force on Non-Strategic Nuclear Forces or NSNF.

Let's look at the document from 1992 first.  In their paper, Dowler and Howard note that the post-Soviet world is a far different place and that there is a growing potential for a "wide spectrum of regional conflicts".  In this new post-Cold War global reality, the two scientists note that there will be a requirement for a new type of low-yield nuclear weapon that have the capability to "deter well-armed tyrants" among others.  The actors observed that, while the United States will maintain its presence in the world as a major owner of strategic nuclear weapons, the drawdown in the numbers of servicemen and women in the Armed Forces will affect the type of combat that the United States is used to fighting.  It is important to keep in mind that, at the same time as this research was ongoing, in September of 1991, President Bush I announced that the United States would eliminate its inventory of ground-launched, short-range nuclear weapons including Army and Marine nuclear artillery shells and Lance missiles.  In addition, the Bush I Administration committed to bring the Navy's inventory of tactical nuclear weapons back to the United States.  At the time, the authors projected that the national nuclear weapon inventory would contain 3500 strategic nuclear weapons and 1600 tactical nuclear weapons, all of which are designed to deter or win a war against the Soviet Union.  To provide America with the weaponry needed to both deter and fight a war, the authors spent 18 months focussing not he development of low-yield nuclear weapons for the following reasons:

1.) Provision of stability, insurance and deterrence by maintaining America's leading role in the continued development of nuclear weaponry.

2.) Meet America's forward-deployed commitments to NATO with the goal of continuing to provide stability to Europe.

3.) Added insurance against a resurrected threat posed by a resurrected Soviet Union.

4.) Deterrence for nuclear-armed third-world nations.

The authors focussed on the use of low-yield nuclear weapons as a point of deterrence.  These very low-yield nuclear weapons could be used to protect U.S. forces during the early stages of a deployment when conventional forces are still highly vulnerable to attack by a third world nation.  They note that the use of such low-yield weapons would result in far less political cost to an American administration than the use of a high-yield weapon that would result in the destruction of  vast urban areas.  The authors use the example of Operation Desert Storm; had Saddam Hussein attacked with all of his forces before the coalition had time to get its forces in theatre, the United States may have found itself choosing between the loss of a division of soldiers and the deployment of a strategic nuclear weapon which would have caused a disproportionate level of collateral damage.  By having a low-yield, low-collateral damage weapon, the United States would provide itself with an option that is militarily advantageous at the same time as it causes relatively little collateral damage.

What kind of weapons are we discussing?  The authors have three classifications of low-yield nuclear weapons:

1.) Micronukes - have a yield equivalent to 10 tons of high explosive

2.) Mininukes - have a yield equivalent to 100 tons of high explosive

3.) Tinynukes - have a yield equivalent to 1000 tons of high explosive

By way of comparison, the bomb that devastated Hiroshima had a yield of approximately 15 kilotons (i.e. 15,000 tons) of explosive and the bomb that devastated Nagasaki a few days later had a yield of approximately 20 kilotons (i.e. 20,000 tons) of explosive.  

The authors then look at the possible roles for micronukes. Micronukes could be effective in several scenarios:

1.) destroy leaderships facilities and command centres that are too deep to be destroyed by conventional weapons.

2.) crater enemy runways and destroy enemy air forces which would prevent enemy air operations from taking place.

Since these micro weapons have very low yields, the radioactive fallout resulting from their detonation would be minimal; a 10 ton weapon buried at 15 metres would have a fallout area of only 0.05 square kilometres and a 30 ton weapon buried at 10 metres would have a fallout area of only 2 square kilometres as shown on this graphic from the paper:

Tinynukes could be used to deter an enemy attack in the case where enemy forces outnumber U.S. forces.  The lethal radii from a tiny nuke is still small but its lethal radius is still substantial enough that it would result in far less effective enemy forces as shown on this graphic from the paper:

The fallout from a tiny nuke could cover as much as 60 square kilometres and extend nearly 20 kilometres downwind from the airburst location.  

The authors close their paper with this paragraph:

"We believe that the long-term nuclear stockpile of the US should include several hundred low-yield nuclear weapons.  These weapons would help provide long-term stability and deterrence against world-wide contingencies, as well as insurance against technological surprises.  They could be used to meet our forward-deployed commitments to NATO and to provide insurance against any possible resurrection of a tactical nuclear threat from the former Soviet Union.  But their mail role would be to help deter aggression by future third-world nuclear states."

Now, let's take a brief look at the briefing overview given to the Joint Defense Policy Board and the Defense Science Board Task Force on Non-Strategic Nuclear Forces in December 1991.  Here is the title page of the heavily redacted document:

Here are the pages showing the goals of the Non-Strategic Nuclear Forces: 

Here are the pages showing the categories of low-yield nuclear weapons and the rationale behind using them:

These recently released documents provide us with an interesting insider's glimpse at the mindset of the Department of Defense and the Department of Energy's facilities at Los Alamos.  Even with the possibility of political backlash that would face the administration that chose to use nuclear weapons in any form, for the Pentagon, it was full steam ahead when it came to unleashing the power of the atom.  In this time of a resurrected anti-Russian stance by Washington and a Russia that is flexing its military muscle is that this research into micro nuclear weapons could well become increasingly pertinent to the war mongers in the hallowed halls of the American federal government.

Wednesday, December 27, 2017

The High Cost of Secrecy in Washington - Who is Protecting Whom?

Back in September 2014, then President Obama made the following promise about open government:

Screcy in government is largely what allows it to do pretty much whatever it wants behind closed doors and it is this secrecy that often leads to abuse of power.

While most of us are aware of the Freedom of Information Act (FOIA) which was enacted in 1967 which allows citizens the "...right to access information from the federal government...", most of us are unaware of how much it costs Washington to keep its behind-the-scenes activities from seeing the light of day.  A recent study by the Information Security Oversight Office (ISOO) released on the National Archives website provides us with data showing how much U.S. taxpayers spent in fiscal 2016 to keep federal government secrets from hitting the cold, hard light of day.

The ISOO Report to the President is required by Executive Order 13526, "Classified National Security Information" and contains an analysis of the federal government's security classification system, the National Industrial Security Program and the Controlled Unclassified Information Program based on data collected from executive branch agencies and departments.  In this report, ISOO includes the cost of security classification activity.

Let's start by looking at the two main program activities:

1a.) Classification:  Original classification authorities are those individuals who are designated (in writing) by the President, agency heads or senior agency officials and are authorized to determine what information could be reasonably expected to cause damage to national security if specific information is disclosed.  Here is a graphic showing how the number of original classification authors has declined over the past decade:

Here is a graphic showing how many classification decisions were made for each year over the past decade:

In fiscal 2016, 1,850 Top Secret, 27,133 Secret and 10,277 Confidential decisions were made with each decision involving the date or event when the information will become declassified.  Of the classification decisions in 2016, 30 percent were determined to be declassifiable in 10 years or less compared to 15 percent in 2015 but down from 74 percent in 2010.

1b.) Derivative Classifications:  We also have to keep in mind that there is other classification activity occurring.  Derivative classification is "the act of incorporating, paraphrasing, restating or generating in new form information that is already classified.  There were a total of 55.21 million derivative classifications in fiscal 2016 with 9.95 million being classified Top Secret, 50.48 million being classified Secret and 4.87 million being classified Confidential.  While the 55 million derivative classifications is down from the 2012 peak of 95.18 million, it is up substantially from fiscal 2007 and 2008 when roughly 23 million derivative classifications were made.

Classification decisions made by original classification authorities are not always well received; when holders of information who believe that the classification of their information was not assigned the correct status, they can challenge the classification.  In fiscal 2016, there were 954 formal classification challenges with 633 coming from the Department of Defense, 281 coming from the Department of the Navy and 47 coming from the Department of the Army.

2.) Declassification: Declassification is defined as the authorized change in status of information from classified to unclassified.  There are four types of declassification; automatic (which occurs when the information reached the 25-year threshold), systematic review, discretionary review and mandatory review.  During fiscal 2016, a total of 102.17 million pages were revised under the automatic, systematic and discretionary declassification programs and 43.94 million pages were declassified.  Here is a graphic showing the breakdown by type of review for fiscal 2016:

Here is a graphic showing the number of pages reviewed and declassified for the past ten years (excluding mandatory declassification):

With that background, let's get to the bottom line.  How much does classification of government activities cost U.S. taxpayers?  The total security classification cost estimate within the federal government for fiscal 2016 was $16.89 billion.  This includes the cost estimates of the Intelligence Community which totalled $2.38 billion.  Here is a breakdown of the costs of classification for fiscal 2016:

Here is a graphic showing how the cost of government security classification has risen over the past decade noting that Intelligence Community costs were first included in fiscal 2013:

As you can see, in the grand scheme of Washington's multi-trillion annual budgets, the cost of secrecy is relatively small, however, it is still greater than the entire annual budget of some of America's smaller states as you can see here:

As well, there is an even greater non-cost-related problem.  According to a report from the House Committee on Oversight and Government Reform dated December 7, 2016 which examined the costs of over classification on transparency and security, Steven Aftergood, Director of the Project on Government Secrecy at the Federation of American Scientists made the following observations about issues with the federal government's current classification policies:

1.) Classification restricts desired information sharing.

2.) Classification impedes Congressional oversight.

3.) Classification undermines government accountability.

4.) Classification limits public awareness  of national security threats.

5.) Classification clouds the historical record of U.S. government operations.

6.) Classification is inefficient and increases financial costs.

7.) classification is susceptible to massive single-point failures through unauthorized disclosures. 

In his opening comments, Committee Chairman Jason Chaffetz made the following comment:

"Sunlight is said to be the best disinfectant, and without knowing what our government is doing, we can’t ensure it is operating efficiently and effectively. It is also important to remember that the American people pay for the Federal Government. The Federal Government works for the American people. It is not the other way around, and so it is, you would think, logical to make sure that we are as open and transparent and accessible as possible, but this is always a running battle. We always have to find the proper balance between safety and security and openness and transparency, but we can’t give up all of our liberties in the name of security. And so we have this hearing today with four experts, people who have poured their time, effort, talent, their careers really, into this topic. There is a wealth of information that they are going to share with us, and that is what we are excited to hear about today.

Without knowing what our government is doing, we can’t ensure it is operating efficiently and effectively, as I said. Transparency is the basis ultimately for accountability." (my bold)

Government secrecy has its place, unfortunately, those in power often use it so that they can abuse the power that the voting public has granted them.  The spending of nearly $14 billion in fiscal 2016 just to keep the public ignorant of federal government machinations is just another example of what lengths those in power are willing to take to retain their elected office.  

As I stated in the title of this posting "Who is Protecting Whom?".

Friday, December 22, 2017

The Search for Yield - A Warning to Investors

A brief section entitled "Has the Search for Yield Gone Too Far" in the IMF's most recent Global Financial Stability Report provides investors with a summary of all that is wrong in the global bond market today. and why investors must be wary.

As all investors know, the current extended period of ultra-low interest rates has pushed investors to "seek yield".  This means that in order to get a decent return on an investment, investors have had to take on additional levels of risk, risk that they may not ordinarily have been willing to take.  For example, investors that normally invested in the "safest assets" (at least in the eyes of the market) like ten-year Treasuries, have seen the yield do this since the Great Recession began:

In order to get a return that meets traditional expectations, fixed income investors may have invested in higher risk corporate junk bonds which have a higher yield as shown here:

The IMF notes that the global universe of fixed income products looks far different than it did before the Great Recession.  While the investment grade fixed income market has mushroomed from $19.5 trillion in 2007 to $45.7 trillion in 2017, the portion of bonds that yield over 4 percent has dropped from 80 percent in 2007 to less than 5 percent as shown here:

In fact, of the $45.7 trillion in investment grade fixed income investments, only $1.8 trillion have a yield of over 4 percent, down from $15.8 trillion in 2007.

This has created a dynamic shift in the bond market.  Foreign investors have shifted away from their traditional investments in U.S. Treasuries into higher-yielding U.S. corporate bonds with non-U.S. investors now holding nearly 30 percent of U.S. corporate debt, up from 12 percent and1990 and up 25 percent from before the Great Recession.

Not only has the search for yield impacted the U.S. corporate bond market, it has had a profound impact on the issuance of debt by the world's emerging market economies.  The current prolonged period of ultra-low interest rates has led to increased borrowing by many of the world's lower-rated nation as shown here:

...and here:

What is not terribly surprising is, that with the desperate search for yield, non-resident investors are buying increasing volumes of higher-risk emerging market debt since the Great Recession as shown here in billions of U.S. dollars:

...and here shown as a percentage of GDP:

In the first eight months of 2017, non-resident investors picked up $205 billion of emerging market debt, the highest level since 2015 and 2016 and 2017 looks set to approach the levels last seen during the period from 2010 to 2014.

The great concern about the move by investors into lower-rated debt issued by nations with questionable economic futures is that the level of interest owing on the increased level of outstanding debt has risen substantially when measured against revenues as shown here:

It is also concerning that the demand for lower-rated debt has pushed the spread in bond yields  (i.e. the risk premium) between emerging market nations and higher-rated U.S. debt as shown here:

The global bond market is no longer reflecting the level of risk that investors face when buying debt from emerging market nations, nations that will likely face debt crises similar to the PIIGS crisis back in the first half of the current decade.  In fact, if you want a sense for how the debt market has lost its way and no longer reflects reality, look no further than the yields on the following PIIGS debt (2 year bonds):

It is hard to imagine that either nations' fiscal picture has improved to the point where the yield on their 2 year debt should be either negative (Italy) or just below 1.75 percent (Greece).

Let's close this posting with a quote from the IMF on the current search for yield:

"The low-interest-rate environment has stimulated a search for yield in markets, pushing investors beyond their traditional risk mandates. This has compressed spreads, reduced the compensation for credit and market risk in bond markets, contributed to low volatility, and facilitated the use of financial leverage. While these supportive financial conditions have helped boost growth, as intended, they have also raised the sensitivity of the financial system to market risks. Prolonged normalization of monetary policy could extend these trends. Unless well managed, these rising medium-term vulnerabilities could lead to significant market disruptions if risk premiums and volatility decompress rapidly." (my bold)

In other words, investors beware.  You have been lulled into a false sense of bond market security.  This time is not different; high risk debt is still high risk debt no matter what yield may suggest and the odds of a cascade of defaults is certain to rise over time, leaving investors with a very uncomfortable haircut.