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CONTENTS

22 Sep. 2015: Dennis Lockhart, "The Federal Reserve Board's monetary policy"

20 Oct. 2015: James Clad, “The Shale Revolution”

Sunday 13 Dec. 2015 6:30 pm: Joe Klein, Time columnist. (AWAC members are invited to this community event, no reception.)

19 Jan 2016: Reflections by Gen. Cleveland, "Korea--Win, Lose or Draw"

08 Mar 2016: Philip Brenner, "Behind the Scenes of the US-Cuba Turnaround"

10 May 2016: Air War College faculty, "Report to Alabama on Regional Tours"

NOTES ON SPEAKERS

22 Sep. 2015: Dennis Lockhart, "The Federal Reserve Board's monetary policy"

Last week's FOMC held rate effectively at zero. Statement said steady growth, reducing unemployment and inflation well below target. Global economic volatility.
Summary of economic projections by 17 experts on FOMC. Quarterly forecast of growth unemployment inflation. And fed funds rate to align them.
Targets 2% growth, unemployment below 5%, inflation rising to 2% gradually.

Chinese have 3 effects on global market:

devaluation, stock market decline, and slowing economic growth.
Emerging markets have commodities declining. China demand for commodities tailing off.
Factors above caused volatility, and DAX forward index spiked in mid-August.

US: Possibility of shock or just nervous spasm of markets in US. My view is that things will settle for US.

Monetary policy always forward-looking because of 2 year lag, like turning a ship.
US first quarter 2015 was weak, second quarter showed rebound, and now in tracking estimate there is some slow down. So, continues on moderate growth but solid.

Lift off of interest rates when?

Criteria are improvement of labor markets, and confidence that inflation will be up to 2% in medium term.
Unemployment close to 5%, on target. Underemployed still there but found progress down from 10 to 5.1.
Inflation by various measures is 1-1.5%. To be confident on inflation is a little more challenging than on unemployment side.
Also some confidence from continuing expansion of economy which should bring upward pressures on price. Hard to gauge inflation given oil price fluctuations.
My strategy is prudent risk management, given the weights in decision that I take personally on the issue of timing of lifting off interest rates.
Still 'sometime this year' operative.

Daily operations of Federal Reserve?

FOMC shares stewardship with others like states and FDIC. More dollars outside US than inside. Atlanta does check processing for country, no longer jets flying across country, checks now less common, and scanned. Team of economists researches in Atlanta.

Why 2% inflation?

Never able to measure perfectly decline in purchasing power of currency. Inflation broad phenomenon. Central banks good at dealing with inflation by raising interest rates but not sure of tools for deflation.  Consumer based economy.

International trade declining?

TPP (Trans Pacific Partnership) and TAP (Atlantic) will aid trade but globally tariffs are lower now so intellectual property more significant constraint.
FOMC 17 members have light hearted exchange, and avoid political questions and is an extremely functional body. Not a contentious environment.

Relative success of quantitative easing?

Purchased mortgage backed securities to press down interest rates in 3 rounds. Growth is evidence of success. Flight into dollars from abroad helped press down US interest rates. Hard to separate those effects but mortgage rates still a bargain in US.

EU and Iran deal effects?

Iran oil needs heavy maintenance before online. Does affect forward contracts.
Greece immediate danger past but depends on implementation.
I am concerned with US environment only, and foreign effects only where significant to US.
China holding US debt? 3 trillion and sold 100 billion recently to aid renminbi. Fear of Chinese dumping is far-fetched, for they are far too invested in US.

•inflation in country is running well below target
Needs to be a challenge to get inflation rate at a healthy level
Summary of economic projections

All 17 of participants in committee submit a quarterly forecast
Federal funds rate would be in line with state of economy
Quarterly report showed majority of the committee to see growth
2% target

The committee of knowledge global economic and financial stuff began in August.  Factors related to China, decline in Chinese stock market, growing awareness and growing concern that China was swelling.

Emerging market weakness that has been developing.
Decline of oil price.

What would a more expensive dollar do to our exports as well as our inflation?

Vix index- index of options in US equity stocks. Spiked in mid August.

Are we seeing the beginnings of some kind of economic shock or is it just some kind of nervous spasm in markets?

 Monitory policy is always forward looking.
Analogous to driving an ocean liner

We are concerned about the outlook of the economy but there is little we can do about it right now.
The mainstream economy is our focus.

The US economy is growing at a moderate pace.
Second quarter rebounded from the first quarter and the growth was 3.7 %
Real final sales looks very respectful.

We set down two criteria for this situation.

-improvement in labor markets.
-reasonable confidence that the inflation will rise 2% by the end of term

10%- official unemployment rate
 2 factors:
        People working involuntarily part time
        Number of people who are detached from work force (available for work but don't wish to)
We don't need to be in full employment.
Number of diff measures of inflation: 1.2-1.5% below target.
2 forces at work:
        inflation expectations: based on surveys of public.Inflation

compensation of security has been declining

Continuing expansion of the economy: see labor markets and product markets will create upper pressures on prices.

Most of decision rate pruned risk management related to global developments.
Thinks the expression of views is still an operative expression. Can't predict what the committee will decide.
Expects a gradual case of increase.
 There is more of US dollars circulating out of the country than inside.

In a varied career, Clad held academic research fellowships, wrote articles for the Far Eastern Economic Review and served at the US Department of Defense under Robert Gates.

Prepared remarks (with projected maps and graphs)
Introduction to the Shale revolution

While shale is not clean oil, gas from shale is cleaner and cheaper than cleaning coal.
China’s growth kept the global oil price high for some years.
Electric propulsion is developing , though not yet ready.
The US is now the biggest oil and gas producer, a surprise.
Renewables are a significant part of the energy market, and we now have a broader spread of energy sources.
There is admittedly tension between oil shale extraction and environmental degradation, but the best should not displace the good. For example, the efficiency gains from modern gas turbines have been impressive. The Obama administration is right in that shale is a good bridge fuel.
Oil companies are investing private money in shale oil production.
Although the displayed map shows only US shale fields, Canada and Mexico (when it improves the Pemex monopoly) will be players.
Graph shows US shale oil production has resurged to more than the 1983 figure of 9 million barrels per day.

Technologies rapidly improving, becoming cheaper and more efficient:

Deep water drilling technology (which the Chinese have still not mastered)
Diagonal drilling (a far-reaching octopus of horizontal pipes can be drilling from a single rig in 18 days.)
Hydraulic fracturing is rapidly evolving and becoming cleaner
Seismography is more accurate
Government and public opinion has turned to favoring shale extraction
Shale refining itself
Therefore, while US oil production has rapidly increased, the number of rigs operating has dropped dramatically.
New well gas output is increasing rapidly also.

Global shale oil reserves, beyond North America

Most accessible reserve is in Argentina, but exploitation is limited by the history of nationalization of foreign industries.
Bulgarian extraction is limited by the Russian FSB, which is feeding the environmental opposition.

The changing mix of energy sources

Growth in China and India of a mix of coal, gas, nuclear and renewables is rapid, and the US would do well to persuade China that reducing coal is preferable for environmental reasons (smog in Chinese cities).
US coal is retreating in favor of gas production, which has now overtaken coal for power generation.
Nonetheless, coal stocks held close to power stations are convenient backup for peak periods, since the US gas distribution net is still in a primitive stage.
Chinese coal is very dirty, but the PRC is using it to meet their goal of economic growth.
Chinese cost structure is now expensive, narrowing the gap between them and the US and other developed countries – and China fails to protect intellectual property, a disincentive to foreign investment.
The US chemical industry finds great benefits in US natural gas, prefers it not be exported to China.
Transport of shale oil: crude is transferred by rail rather than pipe, and faces less NIMBY reaction.

Question Time

China is already top in production of energy from wind and solar sources.
Chemical pollution from fracking? Less dangerous than previously thought; Methane has been found in groundwater in Pennsylvania since colonial times.
Is the Chinese economy facing a hard landing? Capital flight slowing the Chinese economy, and growth is worse than official figures.  There is less need to coal plants (but the Chinese engineers build them quickly.
Saudi entitlement system is large, burdening their economy now oil is cheaper, and Saudi is now involved in two regional wars, in Yemen and Syria.
Consumption side? More efficient now.
Chinese and Indians want to electrify society (much like the TVA).
Coal will be replaced in US by gas turbines, a fairly seamless transition.
Water scarcity for shale production? China does have a major limitation of water in shale areas, but US existing shale sites already have their water rights arranged, and water pollution is less of an issue.

Joe Klein, award-winning Time columnist and book author, spoke and signed books at a Temple-sponsored event.

Although a critic of the war in Iraq, he was invited to the seminars at Fort Leavenworth conducted by Den. David Petraeus, then embedded with marines in Fallujah.  He emerged with a renewed sense of the qualities and skills of the military. He was further impressed subsequently, with the ability of a few marines and soldiers to overcome their PTSD by organizing works of charity in disaster relief, beginning with the Haitian earthquake. Their teamwork, decisiveness, and comfort level amid chaos and danger helped them not only to serve stricken humanity, but also each other -- to reduce the trauma from the loss of comrades in warfare.

19 Jan 2016: Reflections by Gen. Cleveland, "Korea--Win, Lose or Draw"

Gen. Cleveland, immediate Past President of AWAC, reviewed the historical controversy over whether the Korean conflict was a strategic victory, a loss in terms of blood and treasure, or a draw in terms of land (since the postwar border returned to the 38th parallel). He concluded, though all of these had some evidence based on maps and facts, the US should be credited with strategic victory by achieving its goals of defending South Korea, expelling North Koreans, and containing Chinese communism.

08 Mar 2016 Philip Brenner, "Behind the Scenes of the US-Cuba Turnaround"

Dr. Brenner gave a narrative of the ad hoc academic relations among US and Cuban faculty interested in peace studies that developed (over just a couple of years) notions of empathy for each other's perspectives on the history of US-Cuban relations. (He sketched out the Cuban view of US interventions throughout the twentieth century). Quickly these exchanges turned into plans for a rapprochement between Cuba and the US.  These were then overtaken by a secret diplomatic track between the governments that led to the historic normalization of relations between the two countries, and the re-opening of the tourist trade in 2016.

Dr. Mark Conversino (SAASS; PhD, Indiana University) introduced the panel and spoke on Ukraine, the Baltics and Russia.
Dr. Anna Batta (AWC; PhD, University of North Texas) spoke on Greece, the Balkans, and the refugee crisis.
Dr. Dawn Murphy (AWC; PhD, George Washington University) spoke on Korea, Japan and Mongolia, with reference to China.

As always, the Air University faculty spoke from personal perspective and not from US government policy. The panel were united in seeing a rising threat environment with unstable and nationalistic leadership in Russia, China, and North Korea. The democracies of Japan, South Korea, Mongolia, Ukraine, Estonia and Latvia they saw as threatened by these neighbors, and capable of drawing the US and NATO into defending them on unfavorable terms.  Several Baltic states have 25% Russian ethnic population, concentrated on their Russian borders.

Trouble spots included the South China sea and the disputed islands of South Asia; Eastern Ukraine; the Korean border and surrounding sea; and the Russian border areas of the Baltics where US war simulations demonstrate that NATO would be hard pressed to reinforce and defend its member democracies. Stimuli for aggressive action from communist and former communist states were plentiful, during a slump in oil prices (especially Russia) and in trade (China). Even though the US had taken steps to strengthen its position in the Baltics [and, it might be added, the South China Sea], it had not supplied lethal weaponry to the Ukraine.

The minor regional partners of the US were found concerned that Russia was taking more initiative than the US.  Indeed, Dr. Conversino (referring to the pathbreaking article by George Kennan that called for President Truman to establish the containment of communism as the centerpiece of his strategy), went so far as to conclude that the US has reached a second 'Long Telegram' moment.