The Off-Balance Sheet World

There is a powerful economic trend that unites many seemingly disparate phenomena:

·      The Rise of Private Mercenaries: Wagner and Constellis

·      The Rise of Outsourced Virology Research: Metabiota/EcoHealth Alliance/Global Genome Project

·      The Rise of Private Satellite and Space Companies: Starlink, Space X and the “LEO economy”

·      The Historic Expansion of Central Bank Balance Sheets: Fed + G7 Central Banks

In each case, we see governments and businesses that are overburdened by debt trying to find ways to push whatever they can “off-balance sheet”. This pressure leads to extensive outsourcing and fancy accounting that makes the official balance sheet of any organization look prettier than it actually is.  Obviously, capitalism itself inherently generates competitive pressure to produce top-performing balance sheets. Democracy too creates immense pressures for financial accountability. Both encourage the movement of ugly problems to off-balance sheet locations. But, whatever the various causes, the efforts to move problems off-balance sheet and to diminish costs by outsourcing, have created a series of intertwined problems that underpin many of today’s most important geopolitical and economic questions:

·      How long can Russia keep up its efforts in Ukraine. Let alone elsewhere?

·      Is there any truth to Putin’s claim that the US Department of Defence funded biological research and bio-facilities in Ukraine and Wuhan?

·      Is satellite dominance the key to winning today’s wars? If yes, whose satellites? Whose images? Who dominates the space where satellites reside?

·      Can the Fed and other central banks tighten while all the above is going on or will the off-balance-sheet activities have to be absorbed onto central bank balance sheets (again)?

Privatizing of Militias

Both the US and Russia have been privatizing their militias for decades. The result has been the rise of private military contractors (PMCs) on both sides. The most well-known American firm is Blackwater/now called Academi/Constellis (formerly called Blackwater). The most famous Russian firm is Wagner Group. But, there are many such organizations on both sides. They are very different in many respects, but similar in others. Both employ principally highly trained ex-Special Forces. Both offer governments the opportunity to outsource activities and missions. Both offer those governments plausible deniability. Both offer un-uniformed personnel who work for profits rather than patriotism or profits and patriotism. Many consider Wagner as President Putin’s private army, effectively modern Cossacks employed by a modern Tsar. Wagner and its peers are not accountable to the Duma or the Russian military by design. Academi are not The President’s private Army, though detractors would say the US has been outsourcing its wars to PMCs for decades. But, being a private capitalist enterprise, Academi is answerable to its clients who include the US Department of Defence. So, one can understand why some, like Russia and China, might perceive the US to be relying on assets that are rather like Wagner Group.

Putin’s Wagner Group, and associated firms, are able to provide all kinds of personnel (Little Green Men they are sometimes called), activities and services that Russian law does not permit. When assessing Putin’s military capabilities, the West makes a mistake by only considering the official headcount and by failing to include this global capability. The Little Green Men are deployed in many places according to the UN – all over Africa, The Middle East, Latin America, Europe and parts of Asia. They don’t have a web site or any social media presence. They recruit covertly and operate even more covertly. Wagner is said to be deeply tied to the GRU (Russian Intelligence) and was founded by former GRU staff. Here is a Brookings report on Wagner, which they call “nominally private, but state-linked”.

Putin recently called for Wagner staff and units in Libya and Africa to be redeployed to Ukraine. The British GCHQ (which some view as the off-balance-sheet arm of the NSA) reported it as below:

This all matters because we cannot properly understand the war if we do not understand who is conducting the war and whether they have the resources to persist with it. There may be a massive difference between the “on-balance-sheet” view of the war in Ukraine and the “off-balance-sheet” view of the war in Ukraine.

 Funding of Bio Research

The principal reasons suggested for Russia’s invasion of Ukraine were twofold:

1.    NATO was encroaching too forcefully

2.    The US, particularly the Department of Defence was funding bioweapons research in bioweapons labs in Ukraine.

We’ll be debating point one for decades to come. But, on point two, we already know that the off-balance sheet trend gave rise to the optics which cast the doubts that led to the war in Ukraine. In short, yes, the US Government was funding biological research and facilities in Ukraine and China and elsewhere – but not necessarily with malintent. The question of intent is the key question among the superpowers now.

A little history will help us understand the off-balance-sheet trend here. After the demise of the Soviet Union, the US government appointed the Pentagon’s Defence Threat Reduction Agency (DTRA) under the Nunn-Lugar Program to eliminate the risk that Soviet bioweapons might get loose. The Soviets had a massive bioweapons program called Biopreparat which was ominously established in 1973 right after US and The Soviet Union signed the UN Biological and Toxin Weapons Convention, in a deal that was supposed to ban biological weapons. The massive program (detailed by BBC Producer Tom Mangold in the very readable Plague Wars: The Terrifying Reality of Biological Warfare) came to light when Dr. Kanatjan Abelikov, a senior Soviet Bioweapons scientist, defected with his family to the US. As the NYTs reported in 1998, Abelikov revealed that the Soviet Union had “''hundreds of tons'' of anthrax bacteria and scores of tons of smallpox and plague viruses” and the ability to mount them “on intercontinental ballistic missile warheads on several days' notice”. Later it became clear that the Soviets had created “5,500 tons of chemical agents, including Sarin and VX” which everyone now knows from the movies is so toxic that a few correctly placed drops can wipe out a city. The details can be found in The Soviet Biological Weapons Program: A History Illustrated Edition.

A highly respected pair of Senators, Richard Lugar (a Republican) and Sam Nunn (a Democrat), responded to the problem of “loose WMD” by introducing the Nunn–Lugar Act,  the Soviet Nuclear Threat Reduction Act of 1991 which also came to be known as the Cooperative Threat Reduction (CTR) Program. It was administered by the Pentagon’s Defense Threat Reduction Agency (DTRA) which hired Black and Veatch in 2008 (a private defense contractor that the Pentagon has long outsourced to). This program eliminated nuclear weapons from Ukraine and seems to have kept the biolabs that were already there, while overseeing the building of new ones including a Level 3 Biolab in Odessa, according to Black and Veatch’s own website.

Fast forward to today. China and Russia became unnerved by a small US biotech startup called Metabiota which exemplifies the off-balance-sheet/outsourcing trend. It seems that the son of President Biden (now confirmed by the NYTs) was raising money for the award-winning Metabiota, which was founded by @virushunter. Metabiota’s stated aim is to identify pandemics before they happen. But, inconveniently, this founder also happens to sit on the board of the firm that received funds from NIH to study the coronavirus viruses in the Wuhan Lab, which has allowed the conspiracy theory media hacks to run amok. The fact that Metabiota is backed by the US Department of Defence and In-Q-Tel, Google and a VC called Rosemont Seneca created by the children of many American political leaders, further fans the flames of conspiracy fears in Russia and China. Oh and Metabiota seems to work closely with Black and Veatch.

Russia claims is that Metabiota is a US government front that is being used to create pandemics, not prevent them. Putin himself is suffering from some sort of disease and seems to believe that this was created by the Americans one way or another. It is worth reading Andrew Hessel’s famous article, Hacking The President’s DNA from 2012, which outlined the ways in which genetic sequencing would allow the creation of a disease that would only hurt a single person or a single genetic category of persons. Keep in mind that this potential problem is definitely growing now that a desktop genetic sequencing machine has cost less than an IPhone since 2019.

In-Q-Tel itself if another example of this off-balance sheet/outsourcing trend. It was created in 1999 when the US intelligence agencies decided to commercialize technologies that no longer needed to be classified. Its creation also reflected the realization that the most innovative research breakthroughs would no longer be coming from government efforts but from the private sector. The decision was taken to move such research off-balance sheet and outsource it to private entities.

Russia and China seem to believe that these activities and facilities are offensive in nature. The Western experts on the subject say that everything hangs on the definition of “facilities” and Bioweapons” “biological” “funding” and “virology” research. The most experienced biological weapons experts on these subjects keep saying that virtually all bio facilities and research is “dual-use”, meaning that it can be deployed for positive purposes or for combative ones. The implication is that the US would only ever undertake such research for peaceful purposes. This may be true. But, the off-balance sheet and outsourcing trend here has made for sufficient terrible optics to give both Russia and China sufficient doubt to justify military action.

Meanwhile, it seems apparent now from FOIA request materials that NIH funded the research into Sars-CoV-2 (COVID’s root) in the Wuhan Lab. NIH does not allow their funds to be used to weaponize a virus (undertake Gain of Function Research) but the recipient of the money, Eco Health Alliance, it seems, may have done it anyway. Metabiota and Eco Health Alliance also seem to have worked together. Worse, Vanity Fair has now written a “Who Done It?” expose that intimates that somebody effectively murdered (removed) part of the DNA sequencing that had been done around the virus, thus reducing the chances of finding the original culprit that engineered it. Emails and documents have been released which show that many of the world’s top scientists expressed doubted that the virus was from nature and intimated that it may have been engineered. These further deepen the dark take on the situation.

Testimony by The Undersecretary of State, Victoria Nuland, threw more fuel on the fire when she testified, “Ukraine has biological research facilities which, in fact, we are now quite concerned Russian troops, Russian forces, may be seeking to gain control of” … “So we are working with the Ukrainians on how they can prevent any of those research materials from falling into the hands of Russian forces should they approach.” The very next day, Zhao Lijian, Chian’s Government spokesperson said “Russia has found during its military operations that the US uses these facilities to conduct bio-military plans” and that "according to data released by the US, it has 26 bio-labs and other related facilities in Ukraine, over which the US Department of Defense has absolute control."

The White House, and many others, are now investigating all this.

But, the real question is, “Why was this kind of virological research being done in places like China and Ukraine?” It’s simple. It was cheap and it was far away, thus “safer”, at least from an American point of view. The US wanted all this stuff “off” of its balance sheet.

Satellites and the LEO Economy

The defense community recognized long ago that it had to outsource space innovation to the private sector. Ever since NASA inadvertently killed civilians in space in 1986, it became nearly impossible to get Congress to appropriate funds for sending humans back into space. The solution was to move the research off-balance sheet and outsource it to private companies. This is the origin of space as an investable space (The Space Space). It is the origin of Elon Musk’s cozy relationship with the US government and helps explains the rise of Space X, Starlink and what NASA calls the “Low Earth Orbit economy”. It is also true that America’s military satellites were very big, slow, and obvious targets in space warfare. Starlink’s nano and shoe-box-sized satellites are much harder for opponents (read Russia and China) to take out. So, the US military shifted its outsourcing attention to private firms that could move into the “Space Space” much faster and for a lower cost. Now the best satellite imagery for conducting warfare no longer comes from governments. It comes from private businesses backed by governments.

The Expansion of Central Bank Balance Sheets

Ultimately, all these off-balance-sheet wanderings allowed firms and government entities across a wide range of disciplines to create a world where far more activities and risk exist off-balance-sheet than on balance sheet. We first saw this in the financial sector where off-balance-sheet activities became a bigger source of risk than on-balance-sheet activities. This became the source of the 2008 Financial Crisis. The solution since then has been for governments to national the losses from off-balance sheet activities. The Federal Reserve alone now has a $9t balance sheet and off-balance sheet debts owed to it by many foreign central banks as well. The true nature of the US Government’s off-balance-sheet picture is one of the most hotly debated questions of modern politics.

If it turns out that we have underestimated the extent of off-balance-sheet activities, and thus we misjudge the true nature of what is going on, then we can probably expect the continued nationalization of the losses. Problems seen through a more realistic lens are likely to be larger than they currently appear.

What if we are fighting off-balance-sheet opponents with off-balance-sheet-assets, using off-balance-sheet resources ourselves?  

Could it mean that the Russian war efforts in Ukraine and elsewhere will not be conducted exclusively by official and uniformed government personnel? Could it be that having US national security objectives being served by off-balance-sheet PMC’s might prove more expensive than the costs it was meant to contain?

If virology and biological research is conducted by private entities which are perceived to be backed by governments with agendas, can we really be surprised to find that nation-states may take military actions against those seemingly private entities? When private firms we have to consider whether this was an accident or an act of war. The shadowy nature of the off-balance sheet world leads to shadow wars. This deepens the tendency towards conspiracy theories about shadow governments. Having been part of the post 911 crew that volunteered to run the government from a bunker, if things came to that, I personally think governments don’t have the creativity or imagination to run very much without it leaking. But, I could be wrong. What seems sure is that all this creates really bad optics.

If it is just a question of optics (hopefully so!), could it be that this off-balance sheet/outsourcing approach is now proving more expensive than the costs it was meant to save?

Does the outsourcing of space capabilities to private firms mean that war is effectively now being conducted by private firms? Have we tried to move war itself off-balance sheet? Can this be sustained? Will war itself ultimately embroil the superpowers and their proxies rather than just their off-balance-sheet assets? Will these off-balance-sheet and outsourced activities boomerang back onto government balance sheets, forcing central banks to catch these activities with their own balance sheet? It seems strange to think the Fed might raise rates and face further additions to its balance sheet at the same time. But, this is possible.

Our pretty balance sheets may be an ugly problem.

What is the true size and nature of the risk in the world economy? We may have moved a good deal of activity off the official balance sheets of this world, but that does not mean we eliminated the risks associated with these activities.

It’s time to really think through the Off-Balance-Sheet World.

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