Monday, August 21, 2017

How Not To Spend U.S. Tax Dollars in Afghanistan

With the conflict in Afghanistan now grinding into its 16th year despite the fact that the war was officially over in 2014 and the Trump Adminstration putting its own spin on Afghanistan's future, recent developments show that taxpayers who have already ponied up $1.07 trillion to put the Taliban "in their place" are spending money on luxury items that they cannot afford themselves.

On August 9, 2017, U.S. Senator Claire Connor McCaskill (D-Missouri), the top ranking Democrat on the Senate Homeland Security and Governmental Affairs Committee, released information that should cause American taxpayers to have an apoplectic stroke.  According to her press release, Senator McCaskill had demanded answers back in May 2015 when it became apparent that an audit of the money spent in Afghanistan on national reconstruction by the Special Inspector General for Afghanistan Reconstruction (SIGAR) was "questionable" and that at least some of the spending on the Afghanistan Infrastructure Fund was unsustainable, recommending that further taxpayer funding be prohibited and that a further investigation of spending be undertaken.  Under this request, the Defense Contract Audit Agency (DCAA) reviewed the "Legacy East" contract, a contract which was given to subcontractor New Century Consulting.  The purpose of the Legacy East project was to provide counterinsurgency exports to mentor and train the Afghan National Security Forces.

According to Senator McCaskill, when the DCAA audited the contract and subcontractor, they found that New Century Consulting had billed the U.S. government for over $50 million in questionable costs including the following:

1.) purchases of seven luxury cars including Porsches, Alfa Romeos, a Bentley, an Aston Martin and a Land Rover

2.) expenditures of $42,000 in cash on automatic weapons and $1500 on alcohol despite regulations or contract provisions that forbade such expenditures.

3.) NCC kept its CEO and CFO on payroll as "executive assistants" at salaries that reached an average of approximately $420,000 in 2012.  According to the press release, these employees worked at home and never travelled to customer locations.  As well, no documentation exists to prove that any work was actually done by the individuals.

According to the latest report by SIGAR, NCC spent $143.3 million on the Afghanistan Source Operations Management (ASOM) training and mentoring program as a subcontractor o Jorge Scientific Corporation.  The report did conclude that NCC "successfully performed the tasks required by the contracts", however, we find that following:

"...CTTSO’s (Combatting Terrorism Technical Support Office) attempts to assess contractor performance relied, in part, on contractor-provided data, such as NCC’s self-assessments created by its mentors and compliance officers. SIGAR reviewed the self-assessments and found that NCC deemed the Legacy and ASOM programs a success, but provided few specifics to support its claim."

Here is a screen capture of New Century's website:

Here is some background information on NCC's executive and management teams:

And, in case you wondered, here is NCC's response to the accusations made by Senator McCaskill:

Here is a quote from the company's letter to Mr. John Sopko, the Special Inspector General for Afghanistan Reconstruction:
"With respect, we regret the general negative tone of the wording in your report, and the way it has portrayed both New Century and the highly professional US Government entities who have managed programmatic delivery, such as ARL and CTTSO. This has led to sensationalized press comment labeling the programs a “failure” when these programs are regarded by all exposed to them in an operational setting as hugely successful and a sound investment by the US Government.

We have always striven to deliver a valuable and cost-effective service in support of what have been (and continues to be) very challenging missions. We are fully aware that if we do not consistently deliver tangible, positive results then our services will no longer be in demand. We are proud that the majority of our work comes from second and subsequent contracts with the same clients, so we are reassured that what we offer is valued, relevant and effective.

Our personnel had deployed in support of Coalition Forces in Afghanistan in a very challenging and hostile environment, initially to a province where some other contractors would not even deploy due to the level of threat. We are disappointed that the audit report has failed to acknowledge the dedication, professionalism and commitment of the mentors and trainers who delivered the programs; or recognize that in their delivery one of our personnel, Ken McGonigle, paid the ultimate sacrifice whilst preventing an RPG attack on an Osprey aircraft carrying Vice-Admiral Robert Harward and his staff. Despite being a contractor, Ken was decorated by the US Government for his bravery and was posthumously awarded the Queen’s Gallantry Medal in the United Kingdom."

Only time will tell if Senator McCaskill's assessment of the New Century Consulting expenditures is correct.  If it proves to be correct, it is yet another prime example of why the war in Afghanistan continues to be among the most costly in history.

Friday, August 18, 2017

The Health of Brand USA

With the Trump Administration taking a great deal of criticism for its policies, it begs the question; how has the American brand been impacted.  In Pew's most recent versions of its Global Attitudes and Trends survey, we get a sense of how the public in many nations regard the United States, a view that is quite important in this time of endless criticisms of many nations by Washington.

The poll was taken during the first quarter of 2017 and respondents were interviewed by telephone or with a face-to-face interview.  Between 1000 and 1500 people in 37 nations took part in the survey with a total of 40.477 respondents.  Pew Research Center international studies target the permanent adult population (aged 18 and older) with attempts to cover as much of the adult population as possible, limiting their coverage to areas that are extremely remote or subject to insecurity (i.e. parts of Pakistan).  The margin of error is generally between 3.0 and 5.0 percentage points 19 times out of 20.  With that background, let's look at how the world views "Brand America".

Let's start with a look at how various regions and countries view the United States:

A global median of 49 percent of respondents held a favourable view of the United States, a significant drop from the median of 64 percent during the later years of the Obama Administration.  Let's look at a breakdown by region:

1.) Europe - the median for Europe was 52 percent unfavourable and 46 percent favourable.  Four out of ten EU countries surveyed had a more positive view of the United States; Poland (most favourable at 73 percent), Hungary, Italy and the United Kingdom.  The remaining six nations surveyed had a negative view with Germany having the highest unfavourable rating at 62 percent.

2.) Asia - the median for Asia was 57 percent favourable and 23 percent unfavourable with all 7 nations surveyed having a more positive view of the United States.  The the most positive view of the United States was held by Vietnam at 84 percent with only 11 percent negative. 

3.) Middle East - the median for the Middle East was 64 percent unfavourable and 27 percent favourable.  Only one of the five nations surveyed had a positive view of the United States; Israel at 81 percent.  The most unfavourable rating came from Jordanians with an 82 percent unfavourable view.

4.) Africa - the median for Africa was 56 percent favourable and 26 percent unfavourable with all six nations having a positive view of the United States.  The most positive view of the United States was held by Nigeria with a 69 percent favourability rating.

5.) South and Central America - the median for South and Central America was 47 percent favourable and 38 percent unfavourable.  Four of the seven nations surveyed had a more positive view of the United States; Columbia (most favourable at 51 percent), Peru, Brazil and Venezuela.  The remaining three nations had a negative view of the United States with Mexico having the highest unfavourable rating at 65 percent.

6.) Canada - 43 percent favourable, 51 percent unfavourable.

7.) Russia - 41 percent favourable, 52 percent unfavourable.

It is interesting to see how outsiders' view of the United States varies with age.  In 16 of the 37 nations surveyed in 2017, young adults between the ages of 18 and 29 have a more favourable view of the United States than their older counterparts, sometimes by a very wide margin.  For example in France, 64 percent of people between the ages of 18 and 29 viewed the United States positively compared to only 40 percent of people aged 50 and older.  As well, there is a gender gap with men expressing a more positive opinion of the United States that women in ten nations; in the case of Australia, 58 percent of men viewed the United States positively compared to only 38 percent of women.

Let's close with a table showing how much the world has changed its view of the United States with the change in political leadership in 2017:

As you can see, of the 37 nations in the study, respondents in only six nations have a more positive feeling about the United States since the Trump Administration took control with Russia heading the group with a 26 percentage point improvement in favourability, rising from 15 percent to 41 percent despite the ongoing anti-Russia sentiment in the United States.  On the other hand, Mexicans view of the United States took the biggest plunge with favourability dropping by 36 percentage points from 66 percent to 30 percent.

It is interesting to see how Brand America is under pressure during the first six months of the Trump Administration.  While nearly half of respondents around the world still give a positive overall rating to the United States image, there has been a substantial growth in the number of people, particularly among America's traditional allies in Europe and the Middle East (save Israel), who believe that the United States is not following a favourable path.  That is particularly evident when one looks at Donald Trump's international confidence rating as shown here:

Wednesday, August 16, 2017

An Economic Issue That the Federal Reserve Can't Fix

While the media focuses on the Federal Reserve's interest rate projections, very little attention is paid to one of the Fed's biggest problems; low inflation.  Inflation is the friend of central bankers around the world; without inflationary pressures, consumers will delay purchasing and the value of debt will grow.  

As we can see on this graph, when compared to the U.S. economy (in red), Japan's economy (in blue) has struggled for three decades with ultra-low inflation and even deflation:

This has led the Bank of Japan to massively increase its balance sheet, particularly since 2011 in an effort to kick-start Japan's economy as shown here:

In fact, as we can see from the Bank of Japan's accounts for August 10, 2017, the BoJ's balance sheet situation has continued to worsen:

According to FRED, Japan's GDP in the second quarter of 2017 was ¥545.253 trillion yen; this means that the Bank of Japan's balance sheet is now 93.4 percent of the size of Japan's entire economy!

Now, let's look at what is facing the Federal Reserve.  As we know, a key part of the Fed's two-part mandate is the maintenance of a 2 percent inflation target.  Let's look at what the market expects for inflation over the next five years, taken from the yields on five- and ten-year TIPS:

As you can see, over the past two years, future inflationary expectations have been stuck between 1.5 percent and 2.1 percent, well below the Fed's comfort zone of 2.5 percent to three percent seen during the period between 2010 and 2015.  This is particularly unusual given that the economy is at full employment, a factor that has historically led to higher inflation levels.  Even Janet Yellen has found this confusing as shown here from her testimony in July 2017:

"As I mentioned earlier, we are watching inflation very carefully.  I do believe that part of the weaknesses and inflation represents transitory factors.  Inflation has been running under our 2 percent objective.  There could be more going on there.  It is something we will watch very carefully." (my bold)

Ms. Yellen's comment suggests that the Federal Reserve is not as confident about inflation as they have led us to believe.

The forward inflationary expectations, if they come to pass, could prove to be problematic for the Federal Reserve,  particularly when the economy falls into its now overdue recession.  The next economic contraction in the United States could create that Japan-style, long-term ultra-low inflationary and even deflationary environment that central bankers dread because they simply haven't got the monetary tools to fix the problem.  Given the structural changes in the global economy thanks to demographics, it certainly looks like this will be the economic issue that the Federal Reserve can't fix.

Blaming Russia for America's Alt-Right

In case you didn't think that the anti-Russia movement in the United States had reached the point of ridiculousness, in light of the events in Charlottesville, Virginia this past weekend, at least one man believes that there is a direct tie between Russia and America's far right.

Here's Jim Ludes' tweet:

Here's another one from August 12th:

He even goes on to quote a tweet from Molly McKew, a foreign policy consultant and writer at the Washington Free Beacon and former adviser to Mikheil Saakashvili, the former president of Georgia who has a strong anti-Russian bent as you can see in this listing of her contributions to the Kyiv Post and in this article at Politico: 

In case you were wondering who Jim Ludes is, he is a vice president of Public Research and Initiatives at the Pell Center for International Relations and Public Policy.  Here is Dr. Ludes page from Salve Regina University:

Interestingly, Dr. Ludes was a member of president-elect Obama's transition team in 2008 - 2009 and worked inside the Department of Defense, running the confirmation team for DoD nominees selected for the roles of Deputy Secretary of Defense,  Under Secretary of Defense for Policy, Comptroller and General Counsel.  He has a long track record of working with the Democratic Party and has a strong anti-Trump bent as shown here:

He even feels that the secessionist movements in California and Texas are somehow linked to Russia:


I guess when you are anti-Russia, it's easy to blame everything bad that happens in America on Putin and the Russian Federation.  It's reminds me of the old saying, "When you only have a hammer, everything looks like a nail.".