For most of the world, the past decade’s monetary and fiscal experiments are viewed as failures. See, for instance, French support for the EU project crumbling on both left and right and Why were smart people suckered by Abenomics?

So what do the best and brightest now running global economic policy do when their experiments don’t work? Apparently they double down, repeating the experiment with an even bigger dose. In Japan:

BOJ Needs Massive Move to Shock & Awe, $2 Trillion Investor Says

(Bloomberg) – The Bank of Japan could announce a “massive stimulus program” as the nation seeks to reach a 2 percent inflation target, according to UBS Wealth Management.

“It is how much they do, and whether they can create that kind of shock and awe at this point in the cycle,” said Mark Haefele, global chief investment officer at UBS Wealth Management, in a Bloomberg Television interview, on Monday. “They could announce a massive stimulus program both on the monetary and fiscal side or they could end up reducing their inflation targets. Right now, it looks like they are going to use more stimulus. ”

Governor Haruhiko Kuroda said over the weekend in the U.S. that the central bank won’t hesitate to boost monetary stimulus if needed, and there is ample space for additional easing. He also said at the Federal Reserve’s annual policy retreat in Jackson Hole, Wyoming, that the central bank will carefully consider how to best use policy to achieve its price stability target.

Consumer prices excluding fresh food — the BOJ’s benchmark inflation gauge — fell 0.5 percent in July from a year earlier, government data earlier this month showed. That was the steepest drop since March 2013, the month before Kuroda launched unprecedented stimulus.

Japan central bank failure Aug 16

Benchmark 10-year JGB yields reached a record low of minus 0.3 percent last month before rising to minus 0.07 percent Monday in Tokyo. The BOJ refrained from increasing bond purchases or cutting negative interest rates further in July.

Japan’s inability to achieve its goals has “put that country and that central bank into some kind of jeopardy that they are going to have to work their way out of,” according to Haefele. He oversees the investment policy and strategy for about $2 trillion in invested assets at UBS Wealth Management, according to UBS’s website.

The BOJ is currently undertaking a review of its monetary policy ahead of its next meeting Sept. 20-21. Whether the central bank adopts more stimulus with the yen at its current level or waits to see if it strengthens more is “an open question,” he said.

“It is hard to say that any one move is going to be enough given the history of stimulus in Japan has been erratic,” Haefele said. “But everybody is hoping that they will give it another try because clearly Japan, despite reaffirming their inflation targets, has not been able to hit them.”

Well, yeah, the BoJ doubling down from here would definitely “shock” the markets, but probably not in the positive way its advocates hope. The above chart is a little hard to read (Bloomberg’s esthetic sensibilities have become ever-stranger in recent years) but its point is clear: Three years into an epic debt and money creation binge, the result is approximately nothing. Inflation – that is, the rate at which the yen is losing value – has not only not risen, it has fallen to the point that the yen is gaining value. For a heavily-indebted society, deflation (i.e., an appreciating currency) is an existential threat, as debts that are already too big to manage become even more debilitating.

But if tens of trillions of newly-minted yen didn’t work the first time around, why would tens of trillions more do any better? The answer is that they probably won’t, and are more likely to destabilize the system in one way or another than to produce steady, mildly-inflationary growth.

Meanwhile, if Japan goes for it the way history suggests and most observers now expect, what will they buy with their new yen? BoJ already owns nearly all the available Japanese sovereign debt and a big chunk of domestic equities. So would it buy up the rest of the stock market, or encourage corporations to leverage themselves even further by issuing more debt? Or would it look abroad and start loading up on US and European stocks? All of these possibilities take BoJ outside the bounds of what used to be considered a central bank’s role. So whatever comes next will be new and fascinating from a theoretical standpoint and flat-out crazy from any other angle.

And either way, win or lose, Japan’s next big move will set other players in motion. If it manages to send the yen off a cliff, then Japan’s exporting industries win big – but at the expense of European, US and Chinese counterparts. Europe in particular would have to respond in kind with a big, fast euro devaluation (see the article on France that opens this post).

So too would China, the US and maybe even the emerging markets that will be destabilized by hot money inflows if the developed world escalates the currency war.

Whatever way you slice it, 2017 is looking like quite a show.

And as always these days, gold looks like the main beneficiary.

The Foundations of Pacific Stability

Eric K. Fanning

US Army

WASHINGTON, DC – This month, I completed a two-week, six-stop tour of the Pacific, beginning with a visit to the United States Army’s 25th Infantry Division in Hawaii. It was a fitting way to start the trip, a reminder that the US Army is critical to forming the foundation for security in the Pacific.
The 25th Infantry Division, which in its early years earned the nickname “Tropic Lightning,” marks its 75th anniversary this autumn. The men and women stationed there – and, indeed, all US soldiers in the Asia-Pacific region – have been working to secure regional stability for much of the last century. Since US President Barack Obama’s strategic rebalance to Asia, they have been doing even more.
Today, the US Army has a lot on its plate outside the region. It is at the forefront of the US-led coalition’s campaign against the so-called Islamic State, as well as efforts to support the people of Afghanistan.
Yet we also continue to play a critical role in maintaining peace and security in the Asia-Pacific region. Though security in the Pacific is often associated with the efforts of the US Air Force and Navy, the Army is assuming an increasingly important role in strengthening regional partnerships. At a time when six of the world’s ten largest armies are located in the Pacific theater of operations, and 22 of the region’s 27 countries have army officers as their defense chiefs, the need to invest in the US Army’s mission in the region is clear.
A key component of that mission is the Pacific Pathways program, which involves “joining multinational partners to conduct a series of military exercises intended to increase Army readiness through additional training and strengthened partner-force relationships.” Engaging with US soldiers participating in Pacific Pathways exercises in Hawaii, Malaysia, and Alaska, I saw firsthand how these efforts advance regional security.
In Hawaii, American and Singaporean soldiers participated in their 36th year of joint exercises.

From the newest privates to the most experienced generals, US soldiers have developed strong ties with their counterparts and deep pride in their shared security mission. In this sense, these soldiers are also serving as important ambassadors in the region.
The US Army’s partnership with Malaysia is more recent. But during an annual joint exercise, I witnessed our forces improving familiarity and interoperability, and noted growing satisfaction with the strengthening of ties. In the event of, say, a natural disaster in the Pacific, the bonds that the US and Malaysia have fostered could help save thousands of lives during a combined crisis response.
We know that we must continue working to sustain and strengthen our engagement in the Pacific, even as US soldiers continue to carry out diverse and demanding missions in other parts of the world.
One way we can help to meet this need is through the use of rotational brigades.
At Camp Casey in South Korea, I had lunch with soldiers from the 1st Cavalry Division, who had trained for nine months at Fort Hood, Texas, before embarking on a nine-month rotation to the peninsula. Over the course of the deployment, the readiness of these forces actually increases, because of the quality and rigor of the training they undertake with partners from the Republic of Korea’s Army.
Another way the US Army is maintaining flexibility, resiliency, and depth in the Asia-Pacific region is by placing pre-positioned stocks – strategic stockpiles of critical combat equipment – on allies’ territory. In Japan, for example, the US Army stores more than 100 watercraft that can be used to deliver supplies quickly in the event of a natural disaster or other contingency.
Beyond storing the equipment, we train with our partners to use it, and we develop our logistical capabilities to distribute it effectively. In effect, the US Army provides rapid response capabilities to the US Joint Force (the Army, Navy, Air Force, and Marines acting in tandem) and our allies and partners.
The US Army is also pursuing tactical innovation in the Pacific. While our budget for modernization is below that of the other US armed services, we must continue to develop capabilities rapidly and equip our people with the latest technology. That is why, for example, soldiers have been learning to fight in formation with robots in Hawaii, and we have engaged in bilateral training with unmanned aerial systems in Malaysia.
A final element of our involvement in the Asia-Pacific region is the effort to improve our capabilities in difficult tactical environments. We engage in exercises in Alaska that develop our capabilities in extreme climates – capabilities that will help us to ensure that the Arctic does not become a contested region. And, through our training in Hawaii and Malaysia, we have strengthened our capacity to fight in a jungle environment.
The US Army has a broad array of missions and responsibilities. From Hawaii through Guam, to Northeast Asia and the Alaskan frontier, it is pursuing a crucial one: providing a foundation for security in a dynamic region – and for America’s future there.

Europe’s Long War with Islam

George Friedman
Editor, This Week in Geopolitics


The Romans occupied both shores of the Mediterranean and created a single integrated political and economic system around it. As the Roman Empire declined, the system fractured. The general outcome was that Christianity was prevalent on the northern shore of the Mediterranean, and Islam became dominant on the southern shore.

Over time, both extended beyond the Mediterranean basin. Christianity extended to the east (into Russia) and north of the Alps (into Germany, Britain, and Scandinavia). Islam extended south (deeper into Africa) and east (into the Indian Ocean basin and the South China Sea).

But the Mediterranean remained the center of gravity and the flash point of their relationship, as it is today.

The Early Years of Christianity and Islam

The fourth century was a critical time for Christianity. Constantine converted to Christianity and declared Byzantium (today’s Istanbul) the new Rome. His ascent was bloody, and he used Christianity to hold together the remnants of the Roman Empire. One reason that he chose Byzantium as his seat was to try to control the northern and southern shores of the Mediterranean under one set of beliefs.

From the beginning, Christianity was both a religion and a political force, though never united into a single entity. It was divided into regional churches with different doctrines. The primordial split was between the Roman church and the Orthodox churches of the east.

Muhammed founded Islam about 300 years later on the Arabian Peninsula. Islam was a political religion as well, uniting the faithful and the empire. Islam surged eastward into Persia and westward into the southern shore of the Mediterranean, where it supplanted most of the fragmented Christian regions.

Then a few centuries after Muhammed’s death, Islam fragmented into the Shiite regions of Persia and the Euphrates valley, and the Sunni regions in the west, the southern Mediterranean in particular.

Conquering Lands across the Sea

One of the most important sea lanes in the Mediterranean connected Tunisia and Sicily. The main land routes were along the eastern Mediterranean (through today’s Israel and Lebanon) into Christian Turkey. Another route was in the west, across the narrow Strait of Gibraltar (from today’s Morocco to the Iberian Peninsula).

By the early 700s, Muslims crossed into Spain. They began a conquest that was not ended by the Christians until the 1400s. The Muslims, having consolidated their control of Spain, pressed across the Pyrenees Mountains and moved toward the English Channel. Running on extended supply lines, they were defeated by forces under Charles Martel, grandfather of Charlemagne.

That defeat put Islam on the defensive, fighting to hold Iberia. The advantage shifted to the Christians. Beginning in the 11th century, the Europeans launched a series of wars designed to force the Muslims back to the southeast. After the Crusades failed to hold the land bridge from Turkey to Egypt, the initiative shifted to the Muslims.

The Ottomans attacked and seized Constantinople in the 15th century. They proceeded to push northwest into Europe through a combination of direct combat and alliances with Christians at war with other Christians. They pushed west into the Mediterranean in collaboration with Venice.

The Ottomans and allies controlled the Balkans, seized Budapest, and drove west to Vienna, where they were defeated. Still, they controlled parts of the Balkans until after World War I, and the Muslim populations of Bosnia and Albania are remnants of their presence.

Wars Continue in the Modern Era

In the 19th century, the initiative swung back to the Europeans with attacks on North Africa. The French seized Algeria in 1827 and Tunisia in 1881. The British dominated Egypt in 1882 and then built the Suez Canal.

After World War I and the collapse of the Ottoman Empire, Britain directly or indirectly dominated the Arabian Peninsula, Iraq, and Palestine. The French held Lebanon and Syria. Most important, the Europeans collectively dominated the entire Mediterranean Basin—for the first time returning to the geopolitics of ancient Rome.

When France and Italy were defeated and the British deeply weakened in World War II, the Europeans lost control of North Africa. They no longer had the power to control the region.

After the United States blocked a British-French-Israeli attempt to keep control of the Suez Canal in 1956, the Europeans ceased to be a factor in the southern Mediterranean Basin. But even without the Suez affair, the French and British were finished. The United States’ only real interest was in blocking the Soviet Union and taking over the British concern for Arabian oil.

The British defeat of the Ottoman Empire in World War I fragmented the heart of the Muslim World. That fragmentation gave way to massive disorder after the European mutual destruction in World War II.

Since then, the initiative has been shifting back to the Muslims. At first, they continued to behave as if Europe still dominated them. Then, they became caught up in the Cold War, manipulating the Americans and Soviets.

After the collapse of the Soviet Union, the underlying realities of the Islamic world began to re-emerge, just as the realities of southeastern Europe had re-emerged when the Ottomans weakened.

The Islamic World’s Resurgence Today

The Muslim world is still chaotic. Minimal American and Russian forces are struggling to maintain some sort of order in the eastern Mediterranean. However, the forces are trivial compared to the enormity of the situation.

This is one of the periodic shifts that take place between Islam and Christianity—between North Africa and the eastern Mediterranean on one side and Europe on the other. And for nearly 500 years, the Muslim advantage has been their control of Istanbul.

We are seeing a massive population movement triggered by the chaos in the Muslim world. The unrest comes from the collapse of European power in the region. It also stems from the conflict inherent in reconstructing regional political structures and dealing with internal battles.

The current turmoil is no different than the chaos in the Balkans that continued long after the Ottomans left. Such matters can take many decades or even centuries to sort out.

The terrorist attacks in Europe are also part of this process. Various strands of Islam are battling, and the battle will spill over into Europe, as it has for over a thousand years. Just as European quarrels have spilled over into North Africa.

The Thousand Years’ War

European unity was perhaps greatest when the Turks were at the gates of Vienna and southeastern Europe was under their heel. North Africa was most stable when the Europeans dominated it.

But the Europeans lack the strength and will to dominate North Africa, and the Muslims are capable of only pinprick attacks, called terrorism. The Ottoman occupation of Europe lasted four centuries, as did the Christian Crusades. The Mediterranean basin is not a place where things are settled quickly.

There is talk of a long war, lasting decades. This is a long war that has lasted 1,300 years. But it has not been simply war. There’s been economic cooperation, cross-religious political alliances, and enough complex corruption to fill many books.

It is an intimate relationship, bound together by the Mediterranean Sea. It is also a bad relationship, with both sides seeing themselves as the victim.

It is important to bear in mind the similarities between the two sides of the Mediterranean. Both Christianity and Islam are political religions, combining internal conflict with foreign adventures. Both are committed to their own beliefs and the falsehood of others.

Yet the two sides of the Mediterranean traded, made alliances across religious lines, and fought each other bitterly. Each feared the other. For Muslims, the memories of the Crusades still generate fear. For the Christians, there is a prayer going back to the Ottoman era and a visit by a comet: “Lord Save us from the Devil, the Turk and the Comet.”

Obviously, what I’ve laid out is an oversimplification of history, but it’s intended to show the interconnections. I am not making the case that understanding the other side will lead to peace.

On the contrary, I am reminding readers of the constancy of the conflict between Christianity and Islam. And in any conflict, understanding both yourself and the other is the key to survival.

This is one of the oldest wars still active in the world—the war between the northern and southern shores of the Mediterranean. It was old when Hannibal left Carthage to go north and overthrow the Romans, and the Romans came back to destroy Carthage.

Nothing about this is new, and both sides have given as good as they got. But we are in a period when the initiative is shifting—this time away from Europe to the Muslim world.
Europe has lost its grip on North Africa and the Levant, and the first population movements and small attacks are occurring. It will not stay this way.

Proof the Economic Recovery Has Ended

By: Michael Pento

The primary data point that the perennial bulls on Wall Street claim as evidence for an improving economy is the monthly jobs number. The Non-farm Payroll Report claimed that 255,000 jobs were added in July on a seasonally adjusted bases. This number was well above the 12-month average of 190,000. And according to the Bureau of Labor Statistics (BLS), at total of 1.66 million additional people have been employed thus far in fiscal 2016, making this the one bright spot in the economy.

Total Non-Farm Payroll Employment

And with 1.66 million additional paychecks flooding the economy, one would assume the U.S. Treasury was flush with new tax receipts, which would assist in reducing the budget deficit.

However, according to the Treasury Department, the deficit came in at $112.8 billion in July, the highest since February's $192.6 billion. For the first ten months of the fiscal year, which ends Oct. 1, the budget deficit was $513.7 billion, up from $465.5 billion a year earlier.

Obviously, the government runs a deficit when it spends more than it collects in taxes and other revenue, as is almost always the case. But this year the Congressional Budget Office (CBO) is predicting the 2016 deficit will total $590 billion, up more than 34% from last year's budget shortfall. Most importantly, this growing gap comes primarily because of lower-than-expected receipts to the Treasury.

A closer look at tax receipts over the past few years reveals that the growing number of employed has not had the effect on cash flows to the Treasury that you would expect. Receipts from the Federal Unemployment Tax Act (FUTA) have been falling steadily since 2012, according to the Office of Management and Budget, moving counter to the growing number of people employed. The FUTA tax is levied at 6% on the first $7,000 of an employee's wage.

In 2012 receipts totaled $66.6 billion, in 2013 those receipts fell to $56.8b, in 2014 they were down to $54.9b, and in 2015 they dropped to $51.8b.

The decrease in the FUTA rate in July of 2011 from 6.2%, to 6.0% may explain some of the shortfalls, but FUTA has continued its decline since 2012 despite the steady rise in employed persons.

In the past fiscal year of 2015, FUTA also fell short of the US Treasury's own estimate of $56.35 billion coming in at just $51.8 billion, creating an 8% shortfall.

In the fiscal year 2015, Social insurance and retirement receipts also came up short at $1,065.3 billion, $5.1 billion lower than the Mid-Session Review estimate.

This begs the salient question: If the employment condition is booming why are payroll taxes falling?Â 

There are a couple of answers to that question and neither is favorable. The BLS numbers are either wrong or the quality of new jobs created must be very poor. The latter response seems the most credible; a combination of an increase in the proportion of part-time workers and full-time jobs that provide lower compensation. This would also explain the economy's falling rate of productivity. After all, it's hard to increase the output per hour of barmaids and waiters.

The true employment condition, as well as the quality of those jobs, can be found in the tax receipt story, which is more comprehensive than the BLS's estimate. But it's not just payroll taxes that have declined; corporate tax receipts have fallen 12.8% year-to-date, while individual taxes are down 0.4%.

Again, the only consistent outlier amongst all of the weak data is the monthly Non-Farm Payroll Report. But if the quality of those net new jobs created is extremely poor, then the headline BLS number can be easily reconciled with the economic data points that point towards recession.

The bottom line is that our standard of living cannot be improving when Productivity has been negative for 3 quarters in a row. The economy isn't getting better while earnings on S&P 500 companies have been negative 5 quarters in a row, and are projected to come in negative for the 6th time. There can be no real growth when tax policy remains unchanged and receipts are falling. And finally, it's hard to be upbeat regarding growth when nominal GDP is up just 2.4% year-over-year.

The government's own measurement claims Core Consumer Inflation is up 2.2% YoY. This means real economic growth is just 0.2%. But even that paltry growth rate quickly vanishes if you believe inflation is higher than what the Bureau of Labor Statistics reports.

The truth is the economy is most likely already in a recession and there never was a viable economic recovery. Just an anemic, ersatz and transitory bounce in GDP derived from artificial, record-low interest rates and asset bubbles. Investors need to keep their eyes open as equity prices march further into all-time high territory. And, most importantly, have a strategy to protect their portfolios once sanity returns to the market.

When Gold Breaks Over $1,400 It's Going To Spike Toward $2,000 - Gerald Celente

by: Lawrence Williams

Mike Gleason of Money Metals Exchange interviews Gerald Celente of the Trends Journal. With his always hugely controversial opinions, Gerald has some extremely interesting comments on the upcoming presidential election, the bizarre disconnect between some dismal economic reports and the roaring stock market, and the key level he's looking for gold to break through on its way to new all-time highs.
Gerald Celente: Well thank you, Mike.
Gerald Celente: The stock market's being propped up. We said this beginning with Quantitative Easing when it began, and we said that this is not a recovery. It's a cover-up. The numbers don't lie. The liars lie, and the markets are lying. You look at the facts, and here are the facts.

All this has done is juice the equity markets. You look at fact after fact, the numbers don't lie.
Mike Gleason: When we had you on back in the spring, I asked you if we were going to see another interest rate increase from the Fed following the paltry 25 basis point hike they did, and you said they couldn't raise them because the market couldn't handle it. You said the banks simply can't operate without the continuance of low rates from the Fed, and just like you predicted, the Fed did nothing.


They keep BS-ing that. Go back to May, they never stopped. Then, poof, they shot down the price of gold, and that's what they're doing. That's what all the central banks are doing.
They're talking up strength. They're talking up probabilities of raising Fed rates to push down the price of gold because once the price of gold breaks …

So this bubble, when it bursts, we're going to see gold prices hit through levels they've never hit through before. And remember, even when gold hit its high back in the autumn of 2011, it still didn't reach the high it left back when it hit the high in 1980, when you adjust it for inflation.
Gerald Celente: You said the word, polarizing issues. And I began by saying the polarizing wealth effect. Is that all of it? No, of course, it's not, but that's a big part of it. There's no middle class, the middle class is shrinking out. When people lose everything and have nothing left to lose, they lose it.
This is what we thought would have happened back when the markets crashed, when the panic of '08 hit, when we saw all those disturbances going on. What they've been doing is you don't have bread lines anymore, so they keep shooting the people to keep them off the bread lines.
Then you have huge drug issues on top of that. America is consuming, 80% of the world's opiates and we're only 5% of the world's population. Look at all the prescription drugs people are on. Again, you have no future. It's a futureless future. Then you have a militarized society.

There're ways out of it, but we have a corrupt political system and how much more proof do people need? They start wars based on lies and they steal all our money, in the names of "Too big to fail" and any other words that they can make up. So there're ways out, but not under the current system.

We believe that the debates are going to really be the turning key of this whole election, and they'll be the most watched events probably of any TV event in history. So we're going to wait until that happens, but the election was Trump's to win or lose, again, based on the numbers.
Go back to 1992. There was a campaign slogan they used to have in Clinton campaign offices around the country, "It's the economy, stupid." And that's all it is. These other issues, the wedge issues, they're side issues. It's the economy, stupid.

That's the kind of things we're looking at.
On the technological end, boy, look for advances in robotization, virtual reality and artificial intelligence. We're really going into a new age and we don't think in this level it's going to be a dot-com bust. We think it's going to be real and there's going to be a lot of profit opportunities in it.


How to Free Big Banks From Weight of Dead Money

Excess deposits imply costs and a capital burden, more regulators should address the latter

By Paul J. Davies

Mark Carney, governor of the Bank of England. The central bank has embarked on cutting central bank reserves from leverage calculations this month. Photo: Reuters

Big banks have long complained about the costs of holding large pools of inactive deposits, especially in countries where interest rates have turned negative. Increasingly, they are charging customers to look after their cash.

But the problem isn't only that inactive cash is a drag on profits, this dead money also ties up bank equity capital, too. Now a new push is brewing to cut the capital impact and it was just given a bit of help by the Bank of England.

The equity effect is most relevant in markets where the capital demands from simple leverage ratios are close to or higher than from risk-based ratios. That mainly means Switzerland, but also the U.S.
To lessen the strain, banks such as J.P. Morgan JPM -0.09 % and UBS, which attract an outsize share of banking-system deposits, want the reserves they hold at central banks cut from calculations of the size of their balance sheets for leverage-ratio purposes. These “central bank reserves” are deposits that banks themselves keep at their central bank. They have expanded hugely as central banks created money to buy assets during the years of quantitative easing.

Removing reserves from leverage calculations could release tens of billions in equity capital at the world’s biggest banks, which in some cases could be handed back to shareholders or used to back more productive loans to the real economy.

The argument for doing this is that the deposits banks hold at a central bank are risk free—no central bank is going to fail to honor them. They are typically matched on the liabilities side of the bank balance sheets by customer deposits.

The Bank of England acknowledged this when it cut central bank reserves from leverage calculations this month. It estimated the change would reduce leverage ratio capital requirements across U.K. banks by about £11 billion ($14.4 billion).

However, U.K. banks won’t release any equity, because their capital requirements are higher under risk-weighted asset calculations than under simpler leverage calculations. Plus U.K. regulators plan to add the capital requirements back in other ways, because their only motivation for the change was to ensure future quantitative easing programs wouldn’t force banks to hold more equity.

In Switzerland, however, a similar change could make a real difference because banks have to hold more equity to meet leverage ratios than they do to meet risk-based measures.
For example, UBS currently holds something like Swiss francs 50 billion of Swiss central bank reserves, tieing up 1.75 billion francs of equity. If that were no longer required, it would still have a risk-based common equity capital ratio of 14%, which is more than healthy by most European standards.

In the U.S., risk-based capital calculations still produce higher equity requirements than plain leverage calculations, but U.S. leverage ratios are higher than in many European markets and more trusted by investors.

The biggest U.S. lenders want to see central bank reserves cut from leverage calculations because it could significantly cut the costs of holding inactive deposits on their balance sheets.

Banks don’t get a lot of sympathy for their profitability problems, but where monetary policy is having perverse effects, like increasing the cost of credit, regulators should act. Burying the problem of dead money would make life easier.

Quantum Keys for Classic Codes: China's New Satellite

Beijing’s recent quantum satellite launch gives us a glimpse at the future of secure communications.

By Jacob L. Shapiro

China's quantum satellite - nicknamed Micius after a fifth century BC Chinese scientist - blasts off from the Jiuquan satellite launch center in China's northwest Gansu province on Aug. 16, 2016. STR/AFP/Getty Images

China announced on Aug. 16 that it had successfully launched the world’s first quantum satellite. The technical name of the satellite is Quantum Experiments at Space Scale (QUESS), and according to Xinhua News Agency, the satellite will establish “ultra-secure quantum communications” that will be “un-crackable.” China Daily noted it was just the first step toward China’s goal of creating a space-based unbreakable quantum communications system by roughly 2030.

QUESS is going to be performing a variety of experiments over the course of its two-year mission. One will be conducted in conjunction with the Austrian Academy of Sciences and will test the phenomenon known as quantum entanglement. Another will be an attempt to set up extremely secure communication between Beijing and Urumqi in Xinjiang province using what is called Quantum Key Distribution.

Quantum entanglement is what makes all of this possible. It is possible to “entangle” two very small particles, meaning that the two particles share physical properties. When a feature of one particle is measured, the other particle’s corresponding feature is instantly known, no matter how far away the two particles have been moved from each other. Einstein famously called this phenomenon “spooky action at a distance.”

Quantum communication as we understand it today means that, if both sides’ equipment is properly set up (which is by no means an easy thing to do, as Chinese scientists have noted), they can share access to a large set of entangled particles.

What we are really talking about is Quantum Key Distribution (QKD), which proposes to use some of the peculiar phenomena observed in the behavior of entangled particles to develop keys that are extremely difficult if not impossible to hack or steal. Due to the unique attributes of entangled particles, anyone attempting to intercept the message would cause it to, in effect, self-destruct.

If the Chinese are successful in their experiment, they will still use a code and a key to communicate between Beijing and Urumqi. The novel part of this will be that the code it uses will have a key generated by QKD beamed down from a satellite orbiting the earth.

Much has been made of the notion that China’s quantum satellite means China is on its way to creating an unbreakable communication system. However, unbreakable codes already exist. The encryption technique known as the one-time pad (OTP), if done correctly, is mathematically unbreakable.

The problem with OTP is that it is horribly inconvenient. For it to work, the key must be truly random, must be at least as long as the text being transmitted, must never be reused and must remain secret. Assuming the two sides trying to communicate are not in the same place, that means you also must somehow get the key from one place to another without it being intercepted. OTP is 100 percent secure, but executing it is extremely difficult. So difficult, in fact, that scientists suggest that it is easier to shoot a satellite into space and use it to beam down entangled photons to different stations equipped to receive them.

Many of the codes used for covert communication are themselves quiet secure. The reason QKD is so attractive is because, to a degree, it mitigates the biggest security liability in the equation: human frailty. Still, it hardly eliminates this vulnerability altogether. The satellite could conceivably be hacked, or the person on one receiving end of the entangled particles could be followed or coerced into giving up the information.

The reason China and others are looking to space is because of one of the key limitations in employing this technology right now. Dr. Ned Allen, chief scientist for Lockheed Martin, told the Center for Strategic and International Studies that the biggest problem when it comes to using QKD for communication is the degradation of the signal over distance. You cannot employ an amplifier to boost the signal because that would have the same effect to the signal as someone attempting to steal it and result in the destruction of the message.

One of the things the Chinese are testing with this satellite is whether, as they suspect, there will be less signal interference between a space-based satellite and an earth-based station than there would be between two points far away from each other on earth, whether transmitting through fiber optic cables or some other means.

Behind all of this is the question of whether Beijing is going to be able to continue investing in this kind of research and technology over the course of the next 20 years. The chief scientists of the QUESS project told China Daily that, if QUESS does well and China sends more of these satellites into orbit, a global network of communication using QKD could be set up around 2030. China has been investing much more money in its space program and research than it did in the past. Funding for basic research doubled from 2005 to 2015, and an OECD report said that China’s space program’s budget was approaching $11 billion as of 2013. For a point of reference, NASA's 2015 budget was roughly $18 billion.

That investment growth came as China was in the throes of its growth miracle. The Chinese economy is now slowing down and the government is attempting to pull off a massive economic transition without much precedence for success. As China’s economy slows down, the question will become whether these types of endeavors remain a priority for the Chinese government, or whether they will be seen as wasteful drains of money that could be better used in other parts of the country.

Still, for now, as the U.S. relies more and more on private companies instead of NASA for the future of some of its space operations, it seems that the Chinese and their strong, centralized push can yield impressive results on sophisticated space-based operations in a very short time period.

I am not a scientist, nor a cryptologist. But one does not have to be either, I think, to understand what quantum communication is and what China’s launch of QUESS means. This is not a breakthrough that puts Beijing in first place in a race for the domination of space (the Europeans, Russians and U.S. are all working on this too), or even the imminent development of an impenetrable communication system. It does, however, speak well of the Chinese space and quantum research programs, and gives us a glimpse into what the future of communications looks like on, and increasingly off, this planet.