Wednesday, January 17, 2018

Seeing Further - Russia's Developing Over-the-Horizon Radar Defense Shield

A recent article in the December 2017 edition of the United States Army's Foreign Military Studies Office (FMSO) provides us with an interesting look at Russia's recent advances in the field of defending Mother Russia from hypersonic weapons, the latest version of weapons that can deliver a conventional warhead anywhere on earth in as little as one hour.  The information in the article is, in part, taken from a Russian language September 5, 2017 article in Russia's Svobodnaya Pressa written by Vladimir Tuchkov.

According to the English language translation of the Svobodnaya Pressa article, the completion of the Global Missile Attack Warning System (SPRN) continuous radar field, known as Konteyner (container radar) or 29B6, should will take place in 2018.  The system became operational in 2013 and was developed by PKP NIIDAR for a price of 10 billion rubles ($176 million US at current exchange rates).  For the first time in Russia history, the nation will be protected by a continuous radar field with the ability to "see" over-the-horizon to a radial distance of 3000 kilometres (at 50 sweeps per second), a coverage area of 60 degrees and an altitude of 100 kilometres (i.e. it is not capable of seeing into outer space).  In the case of traditional radar, the use of ultra-short wavelengths (i.e. microwaves) prevent the system from seeing beyond the horizon.  Long-wave radars have the capability to see beyond the horizon but are impractical because they use a huge array of antennas and consume very large amounts of power.  The ability to see over-the-horizon is created by the reflection of shortwave radio bands from the ionosphere which travel back towards the surface of the earth as shown on this diagram from RF Wireless World:

If the wave hits an object, it returns to the receiving antenna along the same route and continues to track the trajectory of the object.  The radar is capable of seeing unmanned aerial vehicles and ballistic missiles, however, it is most effective at determining the location of fast-moving objects like cruise missiles and aircraft.  Russia's Aerospace Troops (VKS) estimates that, in order to combat hypersonic weapons, the system must be able to detect and provide targeting information to VKS interceptors at a range of no less than 1033 kilometres.

The system has a reception field with 144, 35 metre-tall antenna masts in an area covering 1300 by 200 metres.  The transmitting antennas are located 300 kilometres from the receiving array near Gorodets town, Nizhegorodskaya oblast.   The first field was placed in the Mordovian city of Kovylkino, located 550 kilometres southeast of Moscow.  The current system is capable of seeing all of the objects in Western Europe's airspace including Poland, Germany and the Baltic as well as Turkey, Syria and Israel.  

When the Konteyner over-the-horizon radar is combined with the Voronezh radar which is capable of looking into outer space, Russia is able to get complete information on all airborne and space objects that may be threatening its airspace.  The next Konteyner station is slated to be constructed in the far east of Russia with plans for up to as many as six installations by 2020.  
The development of a defense system that is designed to protect Russia from hypersonic weapons is particularly pertinent given the U.S. Navy's recent announcement that it is testing its Prompt Global Strike weapon system can deliver its payload to any point on the globe within an hour of launching from a guided missile submarine.  This technology is being developed to supplement America's nuclear strike capability and serve as a further deterrent against attack.  Given Washington's penchant for a first-strike attack, it's looking more likely that Russia will need to avail itself of its over-the-horizon radar defense shield.

Tuesday, January 16, 2018

The Multi-Trillion Dollar Vulnerability of America's Banking Sector

While the global stock market, particularly the American stock market, seems to be on an endless upward trajectory, there is a little discussed aspect of the business sector that could bring the global economy to its knees as you will see in this posting.

Let's open this posting with a definition:

"A derivative is a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage."

Derivatives can be traded over-the-counter (OTC) or on an exhange with OTC derivatives comprising the majority of derivatives that currently exist.  These OTC derivatives are unregulated and have a far greater risk for the counterparty (i.e. one of the two parties that participates in the derivative transaction) than exchange traded derivatives.

Derivatives started out as a means for international traders to ensure that the exchange rate for internationally traded goods were balanced.  As is typical in the financial sector, the use of these contracts has mushroomed into the speculative world and are often characterized by very high levels of leverage and risk.

Here are some common types of derivatives:

1.) Futures Contracts - an agreement between two parties for the sale of an asset at an agreed upon price.  Futures contracts can be used to hedge against risk and can also be used to speculate on the future price of a commodity/stock etcetera.   Futures contracts are standardized so they can be traded on a futures exchange.  

2.) Forward Contracts - a customized contract between two parties to buy or sell an asset at a specific price on a future date.   Forward contracts can be used for both hedging and speculation. Since forward contracts are not standardized (i.e. commodity type, amount and delivery date can vary), they are traded as an over-the counter instrument.  As noted above, forward contracts are riskier than futures contracts since defaults can occur when a counterparty fails.  These contracts are often used by corporations to hedge currency and interest rate risks. 

3.) Swaps - a contract between two parities agreeing to trade loan terms.  

4.) Options - an agreement to buy or sell a security from one party to another at a predetermined future date.  In contrast to a futures contract, the buyer or seller is not obligated to complete the transaction if they do not wish to do so.  Options can be short, long, puts or calls.

5.) Credit Derivative - an agreement to sell a loan from one party to another at a discounted price.

6.) Mortgage-backed Securities - similar to other types of derivatives with mortgages as the underlying asset.

Let's look at the world of derivatives from the viewpoint of the Office of the Comptroller of Currency.  In its latest quarterly report, we find the following exposure to derivatives (in billions of dollars):

At a total of $188.3 trillion, the notional value of derivatives is roughly 9.7 times as large as the entire U.S. economy (using Q3 2017 GDP of $19.501 trillion) with interest rate derivatives making up 75 percent of the total.  You can also see that the total notional value of derivatives in the banking sector has grown by 6.1 percent on a year-over-year basis with interest rate derivatives rising by $8.251 trillion over the year.  If we exclude the 22.4 percent drop in the value of credit derivatives over the year, since Q3 2016, the notional value of derivatives has risen by $13.336 trillion or 68.4 percent of the U.S. economy.

With the background on the types of derivatives, here is a breakdown in the value of four main types of derivative contracts outstanding in the third quarter of 2017 (in billions of dollars):

The four largest banks with the most derivative activity hold 90.2 percent of all banking sector derivatives, totalling $169.8 trillion dollars.  The largest 25 banks in the United States hold basically 100 percent of all derivative contracts as shown on this table:

Here is a graph showing how the notional value of derivatives have changed since 2000:

While down from its peak of $249 trillion in the second quarter of 2011, the value of derivatives has mushroomed since the first quarter of 2000 when the notional amount of derivatives in U.S. commercial bank portfolios was a rather measly $37.6 trillion.

What is the potential downside of all of this "paper"?  The 2017 edition of the Financial Stability Report from the Office of Financial Research outlines the vulnerability posed by derivatives, particularly in the case of a failing financial firm.  The report notes that, historically, there have been problems resolving nonbank financial firms' over-the-counter (OTC) derivatives positions through bankruptcy.  Under current law, there is a significant risk that a run will take place on a bankrupt firm's derivatives counterparties, a situation that occurred when Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008.  Counterparties terminated most of Lehman's 6000 plus derivative contracts (which accounted for only 5 percent of the global derivative markets) resulting in losses on its derivatives portfolio, magnifying the impact of Lehman's failure on the American banking system.

Here is a graphic showing the notional value of derivatives held by the United States global systemically important banks (G-SIB) and their banking subsidiaries to the end of 2016:

The authors of the report note that finding assignees for the over-the counter derivatives portfolios held by larger United States global systemically important banks could be difficult since there are very few potential buyers at that level.  If a derivatives portfolio is "out of the money", selling the failed bank's portfolio might be impossible at any price, causing a cascade of issues for the banking sector. 
As we can see from this posting, there is a very significant potential risk to the global economy related to the extremely large derivatives positions held by America's largest banks.  Should an unexpected shock like 2007 - 2008 roil the markets again, the systemically important banks in the United States and around the globe could find themselves holding paper that is nearly worthless.  If one party (i.e. counterparty) to a derivative contract fails, the impact can cascade through the financial system, a repetition of what happened as the contagion spread during beginning of the Great Recession.  

Apparently, when it comes to the U.S. banking sector, some lessons are never learned.

Monday, January 15, 2018

The Collapse of the Social Security Ponzi Scheme

While Capitol Hill's denizens frequently discuss how their budgetary changes are going to impact the taxes paid by Main Street and Corporate America, they rarely mention the impact of these changes on the entitlements that most Americans feel are their birthright.  This is particularly the case for the nation's Social Security system, a key part of retirement funding for tens of millions of Americans.  Thanks to the Committee for a Responsible Federal Budget (CRFB), we have a glimpse into what lies ahead for this key aspect of life in the United States.

Let's open this posting with a graphic from another one of the CFRB's studies showing how the population in the United States is projected:

As you can see, the number of Americans 65 years of age and older is projected to more than double from around 50 million currently to over 100 million in 2070.  Obviously, this is going to put a strain on age-based entitlement programs.

According to CRFB's analysis of the 2017 Social Security Trustees Report, we find the following:

1.) On a combined basis, the Old-Age, Survivors and Disability Trust Funds (OASDI) face a theoretical 75 year shortfall of 2.83 percent of taxable payroll or 1.01 percent of Gross Domestic Product and will be insolvent by 2034.

2.) Social Security will pay out $27 billion more in benefits than it receives in tax revenue this year.

3.) Social Security will generate cash flow deficits of $1.4 trillion over the next 10 years and $4.9 trillion over the following decade as shown here (as a percentage of payroll):

Social Security deficits will reach 1.36 percent of GDP by 2037 and 1.54 percent of GDP by 2091.  

4.) On a present value basis, the program's 75 year  unfunded obligation will reach a total of $12.5 trillion.

5.) The Social Security Disability Insurance (SSDI) trust fund will deplete its reserves in 2029, the Old Age and Survivors Insurance Trust Fund (OASI) will be depleted in 2035 and, on a combined basis, the OASDI trust fund will run out of reserves by 2034 as shown on this graphic:

Here is an interesting table showing how the OASI funding has changed over the period from 1937 to 2016, noting in particular the dropping "net increase":

In the current legal environment, if a trust fund becomes depleted, there is a conflict between two federal laws.  Under the Social Security Act, beneficiaries are still entitled to receive their full scheduled benefits.  Under the Antideficiency Act, governments are prohibited from spending an excess of available funds.  This means that the Social Security Administration would not have legal authority to pay full Social Security benefits.  After insolvency, Social Security would continue to receive tax income which would allow it to pay out a majority of scheduled benefits.  According to a study by William Morton and Wayne Liou at the Congressional Research Service, Congress could restore Social Security's fiscal balance by one of two means with actions taking place in 2034:

1.) Reducing scheduled benefits by 23 percent in 2034 with the reduction in benefits growing to 27 percent by 2091 as shown here:

A benefit cut of 23 percent in 2034 will look like this:

a.)  Newly retired 62 year olds (in 2017) would see a cut in benefits of $3700 per year in 2034.

b.) A beneficiary that reached full retirement age (67) in 2033 will see a cut in benefits of $5800 per year (in today's dollars) in 2034.

2.) Raising the Social Security payroll tax from 12.4 percent to 16 percent following insolvency in 2034 and then gradually increase it to 16.9 percent by 2091 as shown here:

With a significant proportion of state and private pension plans underfunded and the funding issues facing the Social Security scheme, it is looking increasingly like the pension Ponzi scheme has finally   reached the point where it will collapse under the weight of the aging American population.  If Congress hopes to achieve any sort of fiscal balance in the Social Security scheme, they will have to act quickly to phase in either cuts in benefits, increases in payroll taxes or some combination of the two.  The longer that Congress waits to take what will surely be unpopular action on the looming Social Security time bomb, the worse the situation will become.  Instead of focussing on this issue that is of great importance to the vast majority of Americans, Congress seems to be focussing its energies on the current Donald Trump reality television show that has taken over Washington since the 2016 election.

Friday, January 12, 2018

Israel, Palestine and the Use of Tear Gas

While news from the ongoing Israeli-Palestinian conflict seems to be on the back burner, recent research by Rohini Haar and Jess Ghannam at the Human Rights Center at the University of California's School of Law examines one of the rarely discussed issues facing Palestinian refugees.  In their "No Safe Space" paper, the authors look at the impact of exposure to tear gas on the health of residents of two Palestinian refugee camps, Aida and Dheisheh which are located just outside Bethlehem on the occupied West Bank.  This issue is of particular concern given that long-term residents of these camps report that they have been exposed to tear gas 2 to 3 times weekly and, in some cases, almost every day.

Let's look at some background information on both camps:

1.) Aida - established in 1950, home to 6400 refugees (population has quadrupled since the camp was established), areal extent is 0.071 square kilometres, population density is 90,000 per square kilometre, two schools are located in the camp, there is no health centre in the camp and residents with health issues access the UNRWA health centre located in Bethlehem (1 kilometre from the camp), the camp is partially surrounded by Israel's West Bank Barrier.

Here is a map showing the location of the Aida camp:

2.) Dheisheh - established in 1949, home to around 15000 people (camp was built to service 3,000 refugees), areal extent is 0.33 square kilometres, population density is 45,454 per square kilometre, four schools are located in the camp serving 2150 students, there is one health centre in the camp.

Here is a map showing the location of the Dheisheh camp:

As you may have noticed, the population density of both camps is very high.  To put these numbers into perspective, here is a table showing the population densities (in people per square kilometre) for the worlds largest urban areas:

It is quite apparent that the population density in both of these camps is extremely high by world standards.

Here is a bit of background on tear gas.  Tear gas, a chemical irritant, is composed of a synthetic CN (chloracetophenone) or CS (2-chlorobenzalmalononitrile gas that is intended to cause short-term pain including a burning sensation on exposed skin and tearing of the eyes.  Newer forms of CS (i.e. CS1 and CS2) are siliconized to increase the half-life and potency of the chemical.  Interestingly, since 1993, tear gas is banned for use in warfare under Article I (5) of the Chemical Weapons Convention which states that:

"Each State Party undertakes not to use riot control agents as a method of warfare."

...however, there is no such ban on the use of tear gas by local security and police forces when it comes to controlling the "sweaty masses", Palestinian or anywhere else in the world for that matter. 

With that background, let's take a deeper look at the research by Rohini Haar and Jess Gahnnam.  To complete their analysis, in August 2017, the authors conducted 10 focus groups with over 75 participants and interviewed 236 individuals aged 10 years and older.  Most of the surveys were conducted in the Aida camp.  The survey asked questions regarding exposure to tear gas as well as any long- or short-term medical or psychological symptoms that appeared as a result of tear gas exposure.

The authors found that 100 percent of the residents had been exposed to tear gas in the past year with 55 percent stating that they had been exposed to tear gas between three and ten times in the month prior to the survey.  In the same time period, 84.3 percent had been exposed to tear gas in their homes, 9.4 percent at work, 10.7 percent in school and 8.5 percent elsewhere.  As well, 22.5 percent of people stated that they had been directly hit with a tear gas canister in the past.  Not only have Palestinian refugees been exposed to tear gas on a regular basis; 87 percent of respondents had been exposed to stun grenades, 85 percent to skunk water and 54 percent to pepper spray.  As well, 52 percent had witnessed the use of rubber bullets.

The repeated use of tear gas (and other means of force) by Israel's security forces has led to both physical and mental health issues:

1.) Physical health - fainting, seizures, miscarriages, loss of consciousness, eye irritation,  sweating, dizziness, loss of balance, breathing difficulties and rashes were reported.  Respondents also stated that they associate several chronic health conditions with tear gas exposure including asthma, headaches, allergic dermatitis, neurological irritability and blunt trauma from canister impacts.  More than 75 percent of respondents reported eye-related complaints (tearing, burning and pain), skin irritation and respiratory problems that lasted more than 24 hours after exposure.  Despite all of these tear gas exposure health-related issues, only 23.6 percent stated that they received medical care because of a tear gas-related incident.

2.) Mental health - the 12 question General Health Questionnaire used by the authors to identify minor psychiatric disorders in the population showed that a level of distress was present among the refugee population that included high levels of anxiety and depression, sleep disruption and chronic post-traumatic stress disorder.  Community focus groups reported that fear, worry, hyper-arousal, poor and disrupted sleep, lack of safety and disruptions in basic life activities was related to the frequency and unpredictability of Israeli security forces raids which created a state of hyper-arousal and fear.  Parents reported that they were unable to provide a "safe space" for their children.

While it's a situation of "their word against my word", many residents stated that the use of tear gas by Israel's security forces is not directly correlated to political tensions, violent or non-violent protests or stone throwing incidents.

The authors close with the following recommendations:

"The primary responsibility for protecting Palestinian civilians in occupied territory and ensuring their welfare is with Israel, the occupying power. All Palestinians living in the occupied areas are considered protected persons under international law. Israel must respect and protect their rights. We urge the State of Israel to encourage methods to avoid the use of crowd control weapons more broadly. We need to use safe and effective crowd control weapons in limited roles may be accepted but note that the utilization of tear gas in these camps appears to be well beyond any appropriate use. The Israeli government and security forces are the only stakeholders in this context that can limit the use of tear gas, and we urge you to reconsider how this weapon is currently deployed...

We note that the use of tear gas in the Aida and Dheisheh camps appears to be at an unprecedented scale. We hope that the international community, other UN actors and state parties can advocate on behalf of these refugees to limit the sales of these weapons, increase transparency on what chemical is actually being used, and advocate for the discriminate, proportionate, and minimum use necessary of all crowd control weapons."

With Washington's recent proposal to move its embassy to Jerusalem, we can be certain of one thing; tensions in the occupied Palestinian Territories are only going to worsen, leading to even greater exposure of its residents to tear gas and other means of "corrective behaviour" by Israel's security apparatus.