Black Money - Shell Company game

Since demonetization, everyone wanted to know how the black money will be uncovered. The uncovering of black money is like a game of chess. It is boring to watch but very interesting if you follow it. The government, it seems, has made another move. Shell Companies are under the scanner in the next step against Black Money. Mint first broke the news in this article titled "Govt. plans crackdown on shell companies". The mainstream media is not focussed much on this development. Economic Times put it up recently titled Centre may shut down 7 lakh shell companies in war on black cash. Yet, it represents a significant move.

There are, by one estimate about 600,000 to 700,000 shell companies in India. It was not easy to identify these. Here is what Mint reported:

After monitoring a small sample of these shell companies, it has been found that Rs1,238 crore has been deposited in the accounts of such entities in the November-December period. 

Further, 49 shell companies and other proprietorship concerns have been identified wherein it was found that 559 beneficiaries laundered money amounting to Rs3,900 crore with the help of 54 professionals including chartered accountants. 

The Serious Fraud Investigation Office (SFIO) has filed for criminal prosecution of these entities and initiated the process for winding them up.

Indian shell companies fall into a few categories below (not exhaustive):

1. Companies held by Benami-owners (example owned by driver/servants of politicians)
2. Dormant shell companies  (companies that have not filed any returns, primarily because they do not have any business activity either by design or by lapse of time)
3. Aged shell companies (these are marginal companies not filing returns regularly but having some assets and liabilities)
4. Foreign registered shell companies

Few ways Money is laundered using shell companies

1. Government Contracts are given to Companies held by Benami-owners. [Municipal Corporations tend to like this mechanism]
2. Backdating the Infusion of cash and transactions in dormant shell companies. [Individual money launderers, developers, construction industry participants prefer this]
3. Hiding a high-value asset in aged shell company which has otherwise minimal net worth. [Always a chartered accountant is involved in such deals]
4. Purchase of aged shell company with accumulated losses in combination with point no. 3 above. It delivers double advantage - tax savings and subsequent long-term capital gains (tax-free). [This is also a chartered accountant money laundering technique]
5. Globally registered shell companies do business with India using the P-note route.  [This is sophisticated routes the big fish are here]
6. Alternatively, they interact with legitimate businesses owned by relatives of politically-connected persons at a discount or loss. [Central and State bureaucrats use this modus operandi]

And there are more.

In this context three essential elements need to be tackled. First, the ownership of these companies should be made clearer. Second, the banking channels should be tightened. Finally, P-note route should be closed.

Further Reading - The Global Shell company problem

The shell companies are also on the radar across the world. 

To understand one aspect of the shell company game you can see this post How shell companies launder dirty money? This is the American description of the problem. 

These companies are fronts for money laundering, illegal trade and smuggling. Jo Becker, back in 2010, detailed the mechanism of using shell companies by Iranian arms smugglers in his New York Times article. It is worth a read. 

Huffington post has a great compilation of different aspects of shell companies.

Reuters' investigation Shell Games is a must read.  Read this line from the report:

At a single address in this sleepy city of 60,000 people, more than 2,000 companies are registered. The building, 2710 Thomes Avenue, isn't a shimmering skyscraper filled with A-list corporations. It's a 1,700-square-foot brick house with a manicured lawn, a few blocks from the State Capitol.

Global Witness has taken up a campaign to end anonymity of the shell companies. More on Global Witness' war on anonymous companies is here.

World Bank has released a report on links between corrupt and shell companies in its report titled "The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It". Needless to say it is a fascinating read.

This problem affects Indians through the p-note route.

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RBI minutes of meeting - Was RBI unanimous in its monetary policy?

The Reserve Bank of India released the minutes of the third meeting of the Monetary Policy Committee (MPC). In that meeting two important decisions were made. Firstly, the rates were left unchanged and second the stance was changed to "neutral" from "accommodative". While the first was in the deliberation set of the market, the second truly spooked the market. Markets were not expecting a change of policy stance. There was speculation about if the decision was, in fact, unanimous or not.

Well, the minutes do not give us that clarity. Indian mentality is to deliberate and discuss the differences and then once consensus is reached, the decision is "unanimous". The deliberations and differences are left out of the public statement. 

The statement includes this explanation as such:

3] According to Section 45ZL of the amended Reserve Bank of India Act, 1934, the Reserve Bank shall publish, on the fourteenth day after every meeting of the Monetary Policy Committee, the minutes of the proceedings of the meeting which shall include the following, namely:–

(a) the resolution adopted at the meeting of the Monetary Policy Committee;

(b) the vote of each member of the Monetary Policy Committee, ascribed to such member, on resolutions adopted in the said meeting; and

(c) the statement of each member of the Monetary Policy Committee under sub-section (11) of section 45ZI on the resolution adopted in the said meeting.

In effect, the minutes of MPC are nothing but public statement or press release for the MPC and is duly sanitised. It does not state of any differences between the MPC members. Nevertheless, the committee seems to have been unanimous on both the aspects of the decision. The committee has made some important statements: [formatting changes for improved readability are mine]

On Inflation 

It is important to note three significant upside risks that impart some uncertainty to the baseline inflation path – 

• the hardening profile of international crude prices; 

• volatility in the exchange rate on account of global financial market developments, which could impart upside pressures to domestic inflation; and 

• the fuller effects of the house rent allowances under the 7th Central Pay Commission (CPC) award which have not been factored in the baseline inflation path.  

The focus of the Union budget on growth revival without compromising on fiscal prudence should bode well for limiting upside risks to inflation. 

On GVA growth 

GVA growth for 2016-17 is projected at 6.9 per cent with risks evenly balanced around it. Growth is expected to recover sharply in 2017-18 on account of several factors. 

First, discretionary consumer demand held back by demonetisation is expected to bounce back beginning in the closing months of 2016-17. 

Second, economic activity in cash-intensive sectors such as retail trade, hotels and restaurants, and transportation, as well as in the unorganised sector, is expected to be rapidly restored. 

Third, demonetisation-induced ease in bank funding conditions has led to a sharp improvement in transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs), and in turn, to lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand. 

Fourth, the emphasis in the Union Budget for 2017-18 on stepping up capital expenditure, and boosting the rural economy and affordable housing should contribute to growth. 

The Committee inflation and growth expectations are mapped as follows:

The forecasts do lend legitimacy to the neutral stance. The statement includes emphasis on "caliberated approach" to achieve the 4% target. Urjit Patel clarified that neutral stance implies that rates can move any direction. Thus, in effect turns out to be quite benign policy.

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Tax as a destabilising force - Border Adjustment Tax

John Mauldin, a prolific commentator, is well connected to the Republican establishment. He has recently concluded a three-part series titled Tax Reform: The Good, the Bad, and the Ugly on the coming tax reform in the US. The parts can be found here - first, second and third. It is a must read. 

The US is trying to simplify tax structures. This, by itself, is nothing new. All the countries have been trying since time immemorial to simplify tax codes. Surprisingly, they keep getting more complicated. I do not think "simplify" means what you think it means. But this time, it does seem simpler. Let us not jump the gun, it is still early days. Let the bureaucrats have a go at it and it will come out as complicated as it has ever been. Nevertheless, the intent seems to be right.

The disturbing part is the way BAT or Border Adjustment Tax is supposed to work. John paints a pretty grim picture and rightly so of the adverse consequences of ill-thought out Border adjustment tax. Mauldin and his friend Charles Gave, both seem to suggest that this move will disturb the present equilibrium. Other republicans do not think so. But there is merit in Mauldin-Gave arguments.

And then I read the US intelligence’s ‘Global Trends, Paradox of Progress’ report. That is another bleak report. What is disturbing is that the world seems to be in a precarious balance at present and 5 years out. Some situations in next 5 years as highlighted by the report:

Now the timing of BAT by Trump has become exceptionally crucial. At times in history you get amplified impact because historically small acts happened at unstable times. Here we are faced with a big act at unstable point. In effect, we are beholden to Trump's good sense, pragmatism and sense of leadership.

Interesting times these.

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Why is the current easy-monetary policy ineffective?

Ben Inker, head of GMO's Asset Allocation team had a great article this quarter.

It has been the extended period of time in which extremely low interest rates, quantitative easing, and other expansionary monetary policies have failed to either push real economic activity materially higher or cause in ation to rise. The establishment macroeconomic theory says one or the other or both should have happened by now. It seems to us that there are two basic possibilities for why the theory was wrong. 

The first is a secular stagnation explanation of the type proposed by Larry Summers and others. 

The second possibility for why extraordinarily easy monetary policy has not had the expected effects on the economy and prices is an even simpler one: Monetary policy simply isn’t that powerful. is line of argument (which Jeremy Grantham has written about a fair bit over the years) suggests that the reason why monetary policy hasn’t had the expected impact on the real economy is that monetary policy’s connection to the real economy is fairly tenuous.

In this context, there are some important aspects.

First, monetary policy and economy are connected to each other by feedback loops. By now, every market participant knows that if there is any inflation up-tick the monetary policy will be tightened. This information prods the participants in asset classes where the inflation impact will be low. A look at inflation basket will tell us which are these sectors where price runs will not affect inflation. Exotic assets are in fashion for this reason. Art, diamonds, high-end real estate (trophy), luxury items etc all form part of this group.

Second, why does the low-cost debt not push investment for improving productivity for general items that form part of the inflation basket? The answer is there is no demand. When the market concludes that there is a substantial demand to justify the investment then the investments will come. There is no demand because there is excess capacity, predominantly in China for manufactured goods. This is the reason monetary policy is not effective. 

Monetary policy is effective when there is underlying demand is strong. Without demand monetary policy is just an enabling environment for nothing in particular.  That the monetary policy is not working is itself a data point. It is telling us that the masses do not have the purchasing power to fuel a demand pick-up. There are two reasons.

Most of these masses derive their incomes from the products that make up the inflation basket. If inflation remains subdued, their incomes remain subdued. The low-interest rate has reduced the cost of capital meaning it is cheaper to deploy robots instead of people. So in fact machines are replacing some jobs. These two factors currently suppress the purchasing power. To compensate, people want to build higher threshold of income-level before they start consuming normally. So, the general population is busy buttressing their purchasing power. 

The second reason is that the pre-crisis demand was inflated by debt. The low-cost debt created a hyper-demand which may never return. At the same time, the debts from the past consumption binge have come due. So the indebted families are busy working their debts off. If all the debts of the bottom 50% of the population were simply forgiven, it would have been cheaper than QE. But it would have immediately buttressed the purchasing power of the masses. 

It is a complicated explanation, but it cannot be simplified any more. When feedback systems are interacting, you will get complexity.

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Should democracies reclaim power over production of money?

Ann Pettifor writes a blog post drawing on her new book "The Production of Money: How to Break the Power of Bankers" saying as much. At the outset I must say that I love to read her articles and posts and I have tremendous respect for her.

Her diagnosis is that our present predicament is the following: (emphasis mine)

It is my view that current economic disorder is largely caused by the invisibility, the lack of transparency, and the intangibility of the international financial system – the cause of recurring global economic failure. The fact that the system cannot be seen or understood, that it is opaque to society, means that it cannot be changed or transformed by society. Widespread ignorance of the workings of the great public good that is our monetary system has made society vulnerable. Ignorance enables those financial interests that have wrested control of the system away from democracies, to continue to undermine the security of society. 

If democracies are to once again subordinate the finance sector to the role of servant to the real economy, it is vital that the public gains greater understanding of the monetary system – which I believe to be a great public good. That is the ambition of my modest book, The Production of Money.

This book indeed will be interesting. At present, I am only commenting about this post. I am with her up to this point.  Understanding the monetary and banking system is indeed important. But then she cites an example of the system:

The reality of life under a model that elevates the global over the domestic economy was starkly exposed recently by the fate of a small tea room based in Highcliffe Castle, Dorset. The tea-room had been owned and run by a local, Sean Kearney, for 17 years. It was put out to tender by the council. The company that won the tender was a global behemoth – the $14bn Aramark corporation, that owns prisons and canteens worldwide and is headquartered in Philadelphia. 

This ‘storm in a tearoom’ as The Times dubbed it, was a classic example of how today’s economic model fails the people of Britain. It pits the minnow of a locally-owned tea room against a globally powerful and financially mobile shark. This is not free market competition. This is grossly unfair, economic slaughter of a viable business. As a result Sean Kearney may well now become one of those ‘left behind’ by British government policies.

I am not sure I understand this. There are too many confusing ideas at play. Are we against a buyout of small companies by big ones? Are we against a buyout of local companies by foreign companies? Are councils beholden to grant tenders to local individuals? 

Then she says:

Depressingly, our politicians – on both sides of the House – learn nothing from this. Despite all the nationalist rhetoric, we know that the dominant economic model that led to the populist uprising for Brexit has not been seriously challenged by the Conservative party, or any of our politicians. The government will continue to stand aside as footloose, mobile capital uses its absolute advantage to swallow up the enterprising minnows of the economy, and to wreak havoc on society’s social, economic, and political goals.

This example is very casually stated - it does not buttress the case of the book. In fact, governments that intervene in such deals are frowned upon by commentators like Ann Pettifor. Such protectionist interventions are limited to companies where strategic interests are involved. (Ports, dams, critical road or intellectual property etc.) What is surprising are the steps suggested to control the capital are even more onerous.

Capital control over both inflows and outflows, is, and will always be a vital tool for doing so. In other words, if we really want to ‘take back control’ we will have to bring offshore capital back onshore. That is the only way to restore order to the domestic economy, but also to the global economy. 

Second, monetary relationships must be carefully managed – by public, not private authority. Loans must primarily be deployed for productive employment and income-generating activity. Speculation leads to capital gains that can rise exponentially. But speculation can also lead to catastrophic losses. Loans for rent-seeking and speculation, gambling or betting, must be made inadmissible. 

Third, money lent must not be burdened by high, unpayable real rates of interest. Rates of interest for loans across the spectrum of lending – short- and long-term, in real terms, safe and risky – must, again, be managed by public, not private authority if they are to be sustainable and repayable, and if debt is not going to lead to systemic failure. Keynes explained how that could be done with his Liquidity Preference Theory, still profoundly relevant for policy-makers, & largely ignored by the economics profession.

This takes the pendulum in the other direction. I have a problem with this approach.

Removing the power of creating money from Banks 

It is a bad idea. The function of banks in a properly governed system is to create money where there is a potential for creating value. This distributed money creation helps create money at the point where it is most useful. And the same time if it is not useful a money incurs a cost that is interesting and expense on the bank's balance sheet. The core principles of this process have been undermined in the recent years. But that does not mean the principle is bad. 

Dr Pettifor suggests that a public body needs to take charge of this function. In fact, governments or public agencies are absolutely the worst agency to create money. If you imagine a bureaucratic agency like central bank to take it over then you will end up with delays. Further such bureaucratic institutions are open to regulatory capture by the same banks.

The alternative is the political system. Political systems are best geared to determine "policy direction" and not operations. Thus, without expertise, if you let politicians determine the money creations you will have a worse system than what you have.

The problem with the present system is not that it has failed. But it is that it does not fail enough. The regulatory mechanisms are mollycoddling the banking industry. Because of regulatory interventions, banks do not fear the losses from risk-taking. In my book, Subverting Capitalism & Democracy I call this failure of attribution. Regulation should make these losses more directly attributable to the banks. So no bailouts. Increase capital buffers - Anat Admati recommends 30%. There should also be an unlimited liability to shareholders to the extent of losses caused by their firm. 

The "bad" debt and capital issue

Dr Pettifor is right when she says that interest rates cannot be ridiculously high. Credit-card industry is a prime example. It is in a dire need for regulatory oversight. The Elizabeth Warren's initiative to reduce the credit-card agreement to readable short form is commendable.

She is also right to the extent that loans should not be made for non-productive uses. In effect, she implies we need to differentiate good debt from bad debt. This is absolutely critical and I have said so before. Productive debt creates an asset of higher value than the debt itself.

The question we need to ask is why banks were ready to lend for non-productive activities. The answer lies in the export-led growth model pursued by developing countries - first Japan, then South East Asia and then finally China. To hold their exchange rates low they created dollar reserves sending large amounts of capital into the US. The US has benefitted enormously from this available capital. It pushed the risk curve lower thereby sending funds (venture capital) into high-risk ventures. Without the return-lowering effect of this capital Google, Yahoo, Facebook none of this would be possible.

Another side of the problem, the expert central banks have kept interest rates too low for too long. This low-interest rate regime has caused some damage resulting in mal-investment. It has also pushed capital as an alternative to labour leading to lower quality employment.

In recent years the tide has turned. The new capital was generated by consumption overseas. This capital does not want to return to the US - because of taxes and other reasons. But more importantly, this capital does not want to finance bad investment (debt or equity). If you really think it through most of the low-hanging "productive" opportunities are in developing countries. In effect, what the capital is saying is that - on a post-tax level the capital cannot create a positive, real return in the US. If such returns were possible this capital would have flown back to the US.

The real problem

Dr Pettifor's line that "you need to cut out the bankers from the production of money" may be paraphrased for marketing reasons but it is not a solution. However simple we want life to be, the reality is it is quite complex. The solution to the 2008 financial crisis is fixing the various failed incentives structures created by public systems. The solution is not the let public systems go berserk in other areas. The solution is to reorient the incentives - one by one. It is not a glamorous solution but it is the only thing that will work.

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Unmanufacturing Revolution - Is it the future?

Today I came across an article about Apple wanting to sell refurbished iPhones in India. The author, Tim Culpan, goes on to state that India could disassemble the iPhone for Apple. In this, there could be much more value. I agree.

Unmanufacturing is organised processing of manufactured products to their basic salvageable state. It is not new. India is a leader in Ship-breaking. There is no reason to believe we can do far better in unmanufacturing for electronic goods too. For quite some time we have focussed on manufacturing jobs and manufacturing contributing to the GDP. There could be substantial value in this activity too. 

Electronic waste processing is just one aspect of the work. As companies focus more on sustainability and recycling, we should be able to process all products - automobiles (cars, ships, aeroplanes), electronic goods (computers, phones etc.) durables (washing machines and etc.) to demolition (processing of buildings etc.).

This is not waste processing - which is a different and also lucrative business. This is about high-value items being disassembled to recycle the critical parts such as precious metals etc.

Done at a large enough scale, in a proper systematic manner, it can open up huge opportunities for employment.

  

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Is India still rising?

I came across this superb talk by David Mulford, former US Ambassador to India given in October 2016. Some positive highlights (I paraphrase):

1. India is a genuine democracy unlike China or such other countries. The data is more dependable and governance is more transparent, unlike non-democratic countries.
2. India has leapfrogged the fixed line telecom revolution by going to mobile directly.
3. India is also likely to leapfrog the credit card system.
4. India had the best monsoon 1954 this year.
5. The way to look at India is not to compare it with China, Singapore and others but to think of India as 19th Century America with robber barons. 
6. India has a service-oriented economy but Modi is pushing for manufacturing. Many of these projects particularly in defence and technology will materialise sooner.
7. By the enhanced transfer of funds to State Modi is trying to create competition between States for growth. Young people are joining the state politics and the political climate is likely to see a drastic change. India constitution is explicit as to the division of powers between State and Center and that helps the political leadership in the states to set correct goals.
8. Religious stability is high in India. Despite having about 250 million Muslims, Indian Islam seems to be softer and therefore radicalisation is much lower.
9. Cooperation between US and India increased after the 26/11 attacks (hotel attacks as he calls them). FBI teams from US helped Mumbai police. Some cooperation as to how to coordinate intelligence between local-central agencies is being shared.
10. India's Nuclear disaster liability law is not correctly worded which has prevented capital from coming into the country for nuclear power. The liability currently is on the suppliers and not the operators.

It is a must watch.

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Demonetisation: Penalty of equal amount on cash transactions greater than Rs. 300,000!

After the budget, Finance Secretary spoke to TV channels and clarified that Government will be imposing 100% penalty for accepting cash greater than Rs 300,000/- per transaction. The penalty will be levied on the receiver. Mint has an article reporting this.

Immediately a few thoughts came to mind:

1. This move is trying to choke the points through which black money becomes white in large sums but few transactions. Example, purchase of luxury cars, watches, exotic items like liquors etc. Such businesses have no reason to be in cash except to serve the black economy fellows.
2. There are still points where we have black money exchange is based on small sums but large transactions. This is excluded. Most of these transactions may be legitimate cash transactions in the white economy and it would be impossible to differentiate between legitimate and black money transaction in this space. An example could be payments made to the large contract labour force.
3. Now imagine normal businesses such as eateries which collect most of sales through cash transactions. These eateries cannot make payments above Rs. 300,000/- to their vendors using cash. It means they necessarily deposit the cash into the bank and then push it through the electronic pathways.
4. Allowing such businesses to work is humane. But it also serves another advantage. If the government wants to move to a less-cash economy, these businesses will suck out the cash from the system gradually.
5. At the same time, the black money holders use this mechanism to launder money. The modus operandi is simple, open a saloon or service shop. This shop does not sell any product with upstream or downstream purchases required. It simply sells services. Imagine a wellness spa. This spa has a large number of fictitious customers who make payments of Rs. 2000 or so per transactions. The spa employs few employees - for argument sake - one masseuse. This fellow does more than 100 massages (!!) per day to launder 200,000/- per day. You can tweak the numbers based on your fancy. The owners get the share of profits based on the equations you use. Now comparing the employee productivity with legitimate massage centres can expose these easily.
6. So now the government is isolating the black economy from the white economy. I assume the white economy will get all sorts of benefits while the black economy will get penalties. Going by honest-friendly orientation.

The government has made an interesting move. Small move big impact seems to be the new motto. The next steps to demonetization seem to be in the works. In the budget, we also got some glimpses of the benefits. V. Aanatha Nageswaran has a super post on that.

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World War 3 watch 02 - Gorbachev thinks World is heading for war

Former President of Soviet Union Mikhail Gorbachev has written a piece in Time Magazine titled "It All Looks as if the World Is Preparing for War".

The article, however, is sparse on details. He based the possibility of war on some statements that go like this:

the militarization of politics and the new arms race. 

More troops, tanks and armoured personnel carriers are being brought to Europe. NATO and Russian forces and weapons that used to be deployed at a distance are now placed closer to each other, as if to shoot point-blank. 

While state budgets are struggling to fund people’s essential social needs, military spending is growing. Money is easily found for sophisticated weapons whose destructive power is comparable to that of the weapons of mass destruction; for submarines whose single salvo is capable of devastating half a continent; for missile defense systems that undermine strategic stability. 

Politicians and military leaders sound increasingly belligerent and defense doctrines more dangerous. Commentators and TV personalities are joining the bellicose chorus. It all looks as if the world is preparing for war.

I do not doubt the ability of that man to sense the war is around. Each of the statement made above is quite loaded. But it can be argued it is nothing new.

But is he right?

A fire is caused only when certain conditions - the presence of fuel or inflammable material (base), spark (trigger) and oxygen (enabler) are present. Take away one and there cannot be fire. Similarly, war too only happens when certain conditions are met. We get a sense of war from a few things. 

First, there must be a technical capability to wage a war. The capability comes from technology. War tech is not about technology itself but how much of it is deployed. It is not easy to manufacture and deploy it quickly. So there is necessarily a lead time where powers of the world deploy advanced weapon systems. 

The second element is people to fight the war. Large unemployed mass of youth means there are people. If people feel wronged then such population may be volatile. 

Third, there should be mutual hostilities. Absent the hostilities, no amount of tech and people can enter into the war. Thus, say around 2001 there were no hostilities between countries. So when 9/11 happened it was a bit of a surprise and it was not a national act. Today, we have certain hostilities emerging. US middle class feels wronged by China. China feels wronged by the US intervention in the South China Sea. The western world has been targetted by the ISIS and its affiliates. ISIS believes US is to blame for all its ills.

Fourth, there should be a trigger. The trigger is the last and essentially the most dangerous bit of the whole deal. If the peoples of the world have made up their mind to go to war they will find a trigger. It cannot be avoided. Thus the doctrine of peace should rest on disabling the first three. Obama fought ISIS with capability attrition doctrine.

Are we there?

In a sense, we are at the threshold of major war. But the tech is not yet in place. Hostilities are rising, people factor is primed. Technical capability exists but lead time is not enough. The fellow who will get ready first will look for the trigger. 

Russia, it seems, is not inclined to wage a war against anyone. It may go to assist Turkey and Syria and stuff but that is more operation than a war. Russia is tough when it is in trouble. But I doubt it will want to engage with the US.

In the present scenario, ISIS will not have the technical capability to wage conventional war. It can wage unconventional war. It is already waging this war. The counter strategy for such attacks is not well-evolved. The most development of these strategies was done by Israel. But Israel is small and homogenous and thus the strategies are simpler. At a large scale, we still do not have well-evolved strategy.

China has the technology to wage a conventional war with the US. But it is short of numbers. It needs more weapons. It is possible that China is developing them secretly. It is possible for China to do it. It is the only capable power which can threaten the US. 

It is also possible that Chinese augment the ISIS capabilities with superior tech. In fact, that would be the most efficient way for China to attack the US. China does the tech and manufacturing and ISIS does the fighting. The problem is ISIS does not have the people scale to engage in conventional war. 

Let us be careful

The conditions are fast approaching the break-point. The political leaders have the duty to step back from this brink. Looking at the political rhetoric and the media discussion, it does not seem likely. Brinksmanship is the new game in town, apparently. Let us hope sense prevails. War benefits no one.

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Journalism 05: The Journalism Process

So how do stories get published? Where does it start? This is what is called the journalism process. In this post, we will examine the value chain from idea to story. This is what the conventional process:

Rahul Deodhar Journalism process

The process gives us necessary and sufficient conditions that allow for minimum standards journalism. To enumerate a few:

1. Source coverage
2. Access to news wire
3. Beat reporting coverage to trigger news stories
4. Proper investigative process including field work, fact checking, sourcing etc.
5. Supervisory resources that can guide the reporters through the investigative process
6. Editorial teams cleaning up the content and fact checking and verification.
7. Story selection from the point of view of the reader.
8. Publishing infrastructure.

There have been some changes that take place that modified the process. 

For example, since substantial data is now available online thanks to government databases and global institutions making the data available. The names and contact details of the potential sources are also available. Unfortunately, there is no substitute to fieldwork when it is required. On the other side, communication infrastructure, publishing has become almost costless. 

The New Process

The old process is not necessarily sacrosanct. In fact, the world of blogging has added something new to this - "process journalism". It refers to published stories which involve the readers INSIDE the journalism process. Jeff Jarvis describes it much better in his piece Product V Process Journalism.

Here is his map of journalism process in the tech age:

From Jeff Jarvis

Jarvis calls this "Journalism as beta" and refers to two explanations of the process  [formating modification are mine]

Darlin touches on one such new view when he writes:

[TechCrunch founder] Mr. Arrington and the other bloggers see this not as rumor-mongering, but as involving the readers in the reporting process. One mission of his site, he said, is to write about the things a few people are talking about, “the scuttlebutt around Silicon Valley.” His blog will often make clear that he’s passing along a thinly sourced story.

To quote Gawker founder Nick Denton, when we put up “half-baked posts” we are saying to our public: Here’s what we know, here’s what we don’t know, what do you know. I believe it is critical to clearly label that, giving caveats and context. The same is true of 24-hour cable news, where the viewer must become the editor, understanding the difference between what is known now and what what can be confirmed later (see: the West Virgina mining disaster). In short: We who publish must learn how to say what we don’t know at least as well as we say what we know. 

This is journalism as beta.

Without the relevant change in the reporting standards, such process reporting quickly devolves into post-truth reporting. But when properly communicated, the model presents an innovative approach.

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Journalism 04 - All journalists need to watch the movie Mad City

In 1997, a movie featuring John Travolta and Dustin Hoffman was released. I recommend this movie to all my journalist friends. It is a must watch.

In 1997, it showcases the effects of post-truth news. They hadn't coined that word yet then. But most of the things you will see in the movie are surreal.

However, it is not a futuristic film. Whatever is depicted is an extrapolation of sorts from the Lady Diana's death which happened in Aug 1997. In the years leading up to it, there were discussions of possibility of papparazi getting killed while chasing her. Sadly, she ended up in that accident.

But it tells you of power of media, the responsibility and the effects.

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Journalism 03 - Arianna Huffington on the media

Arianna Huffington spoke to Editor-in-Chief of The Economist Zanny Minton Beddoes on the role of the media.

Some interesting points here:

We can come out of this but it depends on how wise our leaders are going to be.

There is lot less time for reflection.

At the start of election process Trump was given lot of uncritical publicity that was not justified by anything except the ratings.

We have to get back to the world where there is such a thing as truth.

Sometimes there are no two sides to the story - like in climate change. "everything has two sides" gives an impression that there is no truth.

Some comments:

Huffington is right on many counts. I am not sure Huffington Post was above it all though. In any case there is nothing wrong with what she is saying.

Journalists did abdicate their responsibility to dig out the truth. 

Opinion war type journalism

Most of the journalist  deal with opinion war. In an opinion war journalists as one person about their views on some subject or better still some person. Then they go to a person who holds opposite views on the topic and ask them to comment about the adverse remarks of the former. 

This is fine if the debate was based on correct facts or it was about interpretation of facts. But sadly the debate is about "facts" themselves. Or it is pure opinion - with a topic like "What do you think Kim Kardashian do next?" or something.

This makes for a good road-side brawl and gets that type of rubber-necking attention but no further. It does however demean the institution of journalism. 

In case of climate change, this is absolutely true. The whole truth about human action causing warming was reduced to a bunch of opinions on global warming.

Cold-war effect

It is possible that decline of journalism started during cold-war times when the press gave up their values and got themselves a pop-corn and soda and eagerly bought into the cold-war propaganda.

Not all did it, I admit. And some did it because other side would not respond properly and facts were difficult to ascertain. But some did buy into the propaganda completely.

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Future Work 01 - Work not education makes people dumber!

How can we ensure that the workforce in a country continues to create jobs, create value and economic and other returns for its people in the current environment? The current environment is quite challenging for the employees. Those laid-off due to automation feel frustrated and find that they cannot find equivalent employment.

Economic value chains are changing rapidly. They are spreading out geographically. Skill obsolescence is quite high too with robots and computers being able to take up quite a bit of work. The profile of jobs is becoming polarised - extreme high value adding jobs (chip designer, chef, super specialist surgeons etc.) and extremely low-end (janitors etc.) Further, it is happening at an unprecedented pace.

On the contrary, the speed at which skills are being acquired and developed is quite slow. Thus, the people who have lost their manufacturing jobs to automation are not quite employable in similar pay-grade in as quick time. Two factors hinder in the process. First, the laid-off people are older and thus slower learners. Second, the skill spread is so wide that betting on the right skill, acquiring it and making a life by using it is difficult. Few unlucky ones have seen their new skills become obsolete too.

This dichotomy is a mismatch between the job profile of the economy and the skill profile of the economy. As the mismatch widens people feel more frustrated.

This wasn't the case in early years because of the nature of manufacturing jobs. The skills gained by the people working in the first factories were about organising and basic skills (turning, fitting etc.) These skills did not become obsolete only their demand did. But today these skills have been replaced by better fabrication machines and instrumentation. Thus, the skills that the workers have are not required.

The job profiles so developed as to reduce the judgement factor within the job. This makes people dumber as Adam Smith notes. Here is the quote from Adam Smith

"In the progress of the division of labour, the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations, frequently to one or two. But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging, and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it."

Thus drained of the vitality of growth, initiative, the determined decision-making, the application of thought and the generation of ideas, such worker is thrown into the open world which values exactly that. So it may have been work and not education, as argued by Sir Ken Robinson,  that makes people dumber.

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World War 3 watch 01 - Some developments

Actually, this should the third post but I summarise what I observed in the past.

Monday, May 18, 2009

Probability of war seems to have increased. It is still small but definitely increased. Though it is unlikely that India will be involved in one (we never invaded any country in 5000 years - so we dont have the mindset) But, look how different war-indicating trends are catching up.

1. China has more males in its population - typically when the pop ratio gets skewed the chances of war increases. Further, income polarization is very high in China. 
2. Recession will make more people (mainly youth) unemployed and in financially distressed situation - implying combative etc
3. US-china have classical debtor-creditor problem any strong arm by China will not be taken lightly by US. China believes it may be wronged by the US. If US dollar devalues then you can be sure things wont be easy on this front.
4. War is by far the biggest domestic stimulus one can give - creates domestic jobs and stuff hence politicians are ok with war in such times.
5. The typical flash points are visible - Afghanistan Pakistan is now a flash-point. If Us forces are attacked or get in some trouble then we could see drastic actions. Earlier North Korea, Malaysian protests, Demonstrations in Greece were some flash points ( though none as big as Af-Pak)
6. Religious alignments are getting more stricter - talibanization of SWAT valley in Pakistan is an indicator. To certain degree, Obama election has reduced any polarization along religious lines that we saw earlier in US.
7. US policies and other global stimuli are going to result in more income polarization. As global inflation strikes the differences will become more evident - I can foresee Mary Antoinette - "if you don't have bread eat cake" statements. 
8. Usually such conditions are off-set by economic growth (that promotes peace) - but that has near about halted in past few months. Now if things do not improve we could be in for much tougher times.

In October 2016 I reiterated this issue 

1. In 2015 Japanese parliament permitted their army to go aggressive( with US blessings). They have been making ships and aircraft carriers since few years ago displayed in Aussie, Singapore, Japan and US joint exercise - small allegedly helicopter carrier or something. 
2. Last week I was seeing Singapore Air Force Fighter planes on evening patrols. Also every day they have the another surveillance plane - it is not the boeing posiedon in the air. 
3. On friday, India announced surgical strikes on terror bases in Pakistan Occupied Kashmir. 
4. Last week, Singapore PM met Japanese PM Abe. Last month he met Obama. Chinese news paper is accused Singapore of siding with US. This week Singapore PM is meeting Narendra Modi.
5. Last week Japanese PM Abe met Narendra Modi and promised him some military tech and other assistance including manufacturing assistance.
6. Phillipines has abandoned US and is courting China. Durtete made a statement that he received encouragement from China and Russia on his anti-US remarks.
7. Last month the International Arbitration Tribunal restrained China from claiming rights on South China Sea.
8. Last month Austrailia published a white paper on maritime defence highlighting the need to protect the interest in the northern coasts and in the Pacific. Australia does not have any threat from any country in the Pacific save China. It is way far out and super friendly with most of the major powers. It has a love-hate relations with some island countries where China has become active.
9. US is offering F-16 (yeah the old ones) to India for make-in-India option. (The tech is old but the offer is quite lucrative)

A few more developments are have taken place since then,

1. Russia unveiled Satan -2 ICBM range exceeding 11,000kms
2. India successfully tested Smart Anti-Airfield Missile (Bunker busters)
3. Israel has received its F35s which will be fitted with Israeli tech
4. Russia launched massive war drill involving civilians.
5. Russia has also deployed nuclear missiles in Kaliningrad.
6. Great Britain stated that it will sail its ships through south China Sea in 2017 and station ships and aircraft in 2020.
7. The US activated the missile shield in Europe last year. 
8. The US will be deploying THAAD systems in South Korea soon.
9. Japan's helicopter carrier seems to be a disguised aircraft carrier.
10. Chinese second aircraft carrier a replica of first one will be commissioned in 2017 or 2018. The third carrier may be equal to the biggest aircraft carriers of US.
11. http://www.popsci.com/chinese-cargo-ships-get-military-optionChinese government issued directions in 2015 that certain civilian ships may be used by navies in an emergency to augment its naval supply chain.
12. US-India have finalised a deal for M777 Howitzer.

While these military developments are taking place, Trump is busy questioning one-china policy, the trade arrangements with China and anti-dumping duties. China detained 9 armoured vehicles headed to Singapore after Singapore conducted some military exercises with Taiwan.

Another event is sustained Japanese visits to countries across the Asia-Pacific. These are being made at the highest level and with consistency.

All these developments are not healthy. Unless there is concerted effort to diffuse this situation, it can quickly get out of hand.

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Journalism 02 - Key Events in history of Journalism

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