“Be joyful in hope, patient in affliction, faithful in prayer. Share with God’s people who are in need. Practice hospitality.”

Romans 12:12-13

South and North Korea Exchange DMZ Gunfire

From Telegraph:

North and South Korea troops have exchanged fire at the tense border between the two neighbours, an official said on Friday.

The exchange of fire in the Demilitarised Zone highlights the security problems faced by Seoul as it prepares to host the G20 economic summit next month.

There were no South Korean injuries and it was unclear whether it was an accident or an intentional provocation, said the official, who asked not to be named.

The firing of the 14.5-mm rounds came hours after North Korea criticised the South for rejecting a proposal to hold military talks and vowed to retaliate.

Despite the incident, previously arranged reunions of hundreds of families separated by the Korean War will go ahead on Saturday in the North as scheduled, South Korean Unification Ministry spokesman Chun Hae-sung said.

The spike in tensions ysterday came two weeks ahead of a global economic summit in Seoul to be attended by President Barack Obama and other leaders.

Last week, the North's military proposed holding talks with South Korea over anti-North Korean leafletting by South Korean activists and other South Korean propaganda activities, the North's military said in a statement on Friday carried by the country's official Korean Central News Agency.

http://www.telegraph.co.uk/news/8096983/North-and-South-Korea-exchange-fire-across-the-border.html

Nothing Seems to Have Changed after G20: Emerging Markets Curb Their Currencies

Many predicted the G-20 meeting wouldn’t change a thing, and it turns out they were right. As long as the U.S. continues on QE path, there may be no other alternative left for emerging economies. This ponzi game has to end at some point and countries have to live with its consequences.

From Bloomberg:

Finance chiefs from South Korea to South Africa signaled they may act to slow gains in their currencies, just four days after the Group of 20 vowed to soothe trade tensions in the $4 trillion-a-day foreign-exchange market.

Asian currencies fell to a one-week low after Bank of Korea Governor Kim Choong Soo said today that measures to mitigate capital flows could be “useful.” Hours later, the rand dropped as South African Finance Minister Pravin Gordhan said his government will use part of higher-than-expected tax revenue to build foreign reserves as it attempts to weaken the currency.

The shifts suggest G-20 members will keep trying to defend their economies from the slide of the dollar and capital inflows even after the group promised Oct. 23 to refrain from “competitive devaluation” and to increasingly embrace market- determined currencies.

“The G-20 made a vague pledge not to manipulate currencies much, but there was no mechanism to ensure that each country will not keep taking unilateral measures,” said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York. “It’s every man for himself.”

“Although what came out of the G-20 meeting was better than expected, it didn’t really have any teeth in it,” said Kieran Curtis, a fund manager who helps oversee about $2 billion in emerging market debt at Aviva Investors in London. “There was still no framework laid out to deal with countries following an ultra-competitive exchange-rate policy.”

The concern of emerging market officials is that failure to counter gains in their currencies will mean exports are choked, removing a source of economic strength. Their exchange rates have risen as investors bet the Federal Reserve will next week introduce more so-called quantitative easing, a policy move which has hurt the dollar.

“The agreements reached so far don’t mean much in practice,” he said. “From the point of view of these countries, as long as the big countries are undertaking QE measures and looking out for themselves they don’t feel any obligation not to act too.”

http://www.bloomberg.com/news/2010-10-27/-every-man-for-himself-as-emerging-markets-curb-currency-gains-after-g-20.html

What the U.S. Quantitative Easing Is Doing to Emerging Economies

As we all know, the U.S. has engaged in “quantitative easing” and is poised to launch another one.

Many experts have pointed out that U.S. quantitative easing is not helping to revive the American economy. Instead it is driving the USD down and foreign currencies up and causing horrific inflation.

Central banks in emerging economies have no choice but to protect their currencies and rein in inflation at the same time.

The U.S. policy choice is not just hurting its own economy and causing hardship in the many parts of the world.

Germany Criticizing U.S. Hypocrisy on Currency Manipulation

The thesis underlying the following article is in line with the points I’ve been making in this blog re how the U.S. has been printing in a futile effort and why the emerging countries including Korea has to fend off asset bubbles and speculative capital inflows. The major Korean media outlets pay little attention to this significant issue like American mainstream media.

From Bloomberg:

The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said.

Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank’s efforts to jumpstart the world’s largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle.

European Central Bank President Jean-Claude Trichet said that the G-20 made “no particular conclusion” after some members expressed concern about proposals for further quantitative easing in the U.S.

“The remark was made that the accommodating policy vis-a- vis the U.S. might mean problems for the emerging economies, at least in terms of inflation,” he said. “The point was made that it was much more complicated than that” and that combating deflation “was also a contribution to global prosperity. It was an exchange of views, with no particular conclusion.”

Low interest rates and weak recoveries in industrialized economies such as the U.S. have forced investors to flood emerging markets with capital, providing resources for growth yet also threatening to spur inflation, asset bubbles and over- valued exchange rates. Such concerns have prompted economies from South Korea to Brazil to take steps to slow the inflow of speculative cash.

Emerging-market equity mutual funds attracted more than $60 billion this year and bond funds lured $41 billion, both on pace for record annual inflows, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based research firm. Forty- nine percent of money managers are now overweight developing- markets equities, the highest level since 2009, according to a BofA Merrill Lynch survey released this month.

“Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate,” Bruederle said. The minister has taken a pro-market stance in his first year in office, criticizing state intervention in cases such as providing aid for General Motors Co.’s German Opel unit.

U.S. Treasury Secretary Timothy F. Geithner dismissed prospects of mounting criticism of the Fed’s approach in his press conference after the G-20 meeting yesterday. When asked whether he expected Germany’s criticisms to gain steam, he replied: “I do not.”

http://www.bloomberg.com/news/2010-10-23/germany-says-u-s-federal-reserve-heading-wrong-way-with-monetary-easing.html

China Shouldn’t Follow Other Nations’ Failed Policies

There seem to be more than a few things China has done right since they have learned their lessons from other nations’ growth and hardship.

China seems to be fully aware of borderless forces of global corporatism and play the long-term game accordingly.

They have generated their productive power on their own terms and secured their positions in essential industries. They have also invested in developing their human capital.

Meanwhile, there are many potential problems facing China as we have discussed.

China shouldn’t follow other nations’ failed policies on many fronts.

The bottom line is: how much the Chinese leadership would care about the people or well-being of the nation rather than their personal gains.

China could learn from other countries’ experiences.

For instance, given a fault in export-driven economic growth strategy, wealth concentration at the top wouldn’t generate sufficient income and purchasing power to balance production and consumption.

They can’t continue robust growth when bubbles have been blown to pop. Speculation and bubbles could gut the productive capacity as the case of the U.S. has shown.

China could learn that there are limits government can do. Well, again, China is the communist regime. So is it too much to ask?

Michael Hudson: Finance Has Become the New Form of Warfare

Michael Hudson explains what the U.S. has been doing to the rest of the world to win the finance war in his excellent article titled “why the IMF meetings failed and the coming capital controls”. Many of us have been aware of the state of the world economy, yet it is still appalling to comprehend who is behind the U.S. Fed’s decisions and why they are doing this. While real economies are being destroyed, so much money is being made by financial speculation. One may feel that s/he can’t recognize the U.S. any more in some sense.

From Michael Hudson’s article:

What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale, in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1% interest cost? This is the game that is being played today.

The outflow of dollar credit into foreign markets in pursuit of this financial strategy has bid up asset prices and foreign currencies, enabling speculators to pay off their U.S. positions in cheaper dollars, keeping the currency shift as well as the arbitrage interest-rate margin for themselves.

Finance has become the new form of warfare – without the expense of military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign real estate and natural resources, infrastructure, bonds and corporate stock ownership.

Who needs an army when you can obtain monetary wealth and asset appropriation simply by financial means? Victory promises to go to the economy whose banking system can create the most credit, using an army of computer keyboards to appropriate the world’s resources.

U.S. officials demonize countries suffering these dollar inflows as aggressive ‘currency manipulators’ for what Treasury Secretary Tim Geithner calls “‘Competitive nonappreciation,’ in which countries block their currencies from rising in value.” Oscar Wilde would have struggled to find a more convoluted term for other countries protecting themselves from raiders trying to force up their currencies to make enormous predatory fortunes.

U.S. officials demonize foreign countries as aggressive “currency manipulators” for keeping their currencies weak. But these countries simply are trying to protect their currencies from arbitrageurs and speculators flooding their financial markets with dollars.

Mr. Bernanke proposes to solve this problem by injecting another $1 trillion of liquidity over the coming year, on top of the $2 trillion in new Federal Reserve credit already created during 2009-10. This quantitative easing has been sent abroad, mainly to the BRIC countries: Brazil, Russia, India and China. “Recent research at the International Monetary Fund has shown conclusively that G4 monetary easing has in the past transferred itself almost completely to the emerging economies … since 1995, the stance of monetary policy in Asia has been almost entirely determined by the monetary stance of the G4 – the US, eurozone, Japan and China – led by the Fed.” According to the IMF, “equity prices in Asia and Latin America generally rise when excess liquidity is transferred from the G4 to the emerging economies.”[4]

This is what has led gold prices to surge and investors to move out of the dollar since early September, prompting other nations to protect their economies.

The problem for all countries today is that as presently structured, the global financial system rewards speculation and makes it difficult for central banks to maintain stability without recycling dollar inflows to the U.S. Government, which enjoys a near monopoly in providing the world’s central bank reserves by running budget and balance-of-payments deficits.

Such inflows do not provide capital for tangible investment. They are predatory, and cause currency fluctuation that disrupts trade patterns while creating enormous trading profits for large financial institutions and their customers. Yet most discussions treat the balance of payments and exchange rates as if they were determined purely by commodity trade and “purchasing power parity,” not by the financial flows and military spending that actually dominate the balance of payments. The reality is that today’s financial interregnum – anarchic “free” markets prior to countries hurriedly putting up their own monetary defenses – provides the arbitrage opportunity of the century. This is what bank lobbyists have been pressing for. It has little to do with the welfare of workers in their own country.

This capital outflow from the United States has indeed helped domestic banks rebuild their balance sheets, as the Fed intended. But in the process the international financial system has been victimized as collateral damage.

The problem is that the supply of dollar credit has become potentially infinite. The “dollar glut” has grown in proportion to the U.S. payments deficit. Growth in central bank reserves and sovereign-country funds has taken the form of recycling of dollar inflows into new purchases of U.S. Treasury securities – thereby making foreign central banks (and taxpayers) responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature – for purposes that many foreign voters oppose – makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative.

On the deepest economic plane today’s global financial breakdown is part of the price to be paid for the Federal Reserve and U.S. Treasury refusing to accept a prime axiom of banking: Debts that cannot be paid, won’t be. They tried to “save” the banking system from debt write-downs in 2008 by keeping the debt overhead in place while re-inflating asset prices. In the face of the repayment burden shrinking the U.S. economy, the Fed’s idea of helping the banks “earn their way out of negative equity” is to provide opportunities for predatory finance, leading to a flood of financial speculation. Economies targeted by global speculators understandably are seeking alternative arrangements. It does not look like these can be achieved via the IMF or other international forums in ways that U.S. financial strategists will willingly accept.

http://michael-hudson.com/2010/10/why-the-imf-meetings-failed/

Is China the Scapegoat for U.S. Unemployment?

It’s an election coming up in the U.S. We are seeing many reports on the U.S. criticizing China for manipulating its currency and destroying the U.S. manufacturing jobs through their mercantilist policy.

It is true that the majority of the U.S. manufacturing base has been shipped to China, which has triggered the destruction of the U.S. middle class to some extent.

Both the U.S. and China have been printing out their fiat currencies. The currency manipulation has been going on both sides.

The U.S. sold treasuries to sustain its system and China got manufacturing, technology, capital and a market to export. China’s trade surplus was recycled into U.S as a form of cheap credit. This reciprocal relationship has sustained the extent and pretend scheme.

Again (I raised this issue before), who is profiting most from this peculiar relationship?

Again, the U.S. has gutted its industrial base by policy choice.

Appreciation of the Yuan wouldn’t fix the structural problems of the U.S. Most of the American problems are home grown. The U.S. leadership knows that.

BOK Poised to Expand its Gold Holdings

From the FT:

South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering buying gold to diversify its dollar-heavy portfolio, the country’s central bank said, adding it would be cautious in making any final decision.

Even a small realignment of South Korea’s reserves would have a powerfully bullish effect on the gold market. With just 14 tonnes of gold – or 0.2 per cent of its $290bn reserves – Seoul is one of the smallest holders of gold among large economies. The world average is 10 per cent, according to the World Gold Council, while countries such as the US, Germany and France hold well over 50 per cent of their reserves in gold.

Kim Choong-soo, governor of South Korea’s central bank, told a parliamentary committee on Monday that Seoul would have to tread carefully because of record gold prices and market volatility. “We need to give careful consideration to the matter of increasing gold volumes in the foreign reserves,” he said.

Nonetheless, his statement marks the first time the possibility of buying bullion has been seriously discussed in public by the Bank of Korea, which has in the past been dismissive of gold.

It comes as other Asian countries including China, India, Thailand and Bangladesh are stocking up on gold amid concerns that an escalating global currency war and a fresh round of quantitative easing in the US will drive the value of the dollar lower. South Korea holds 63 per cent of its reserves in dollars.

With emerging market countries buying and central banks in Europe halting their sales of bullion, central banks are set to become net buyers of gold this year for the first time since 1988, according to GFMS, a precious metals consultancy. That shift helped drive prices to a new nominal record of $1,387.10 a troy ounce on Thursday, up 27 per cent since the start of the year.

Historically, Seoul has favoured Treasury bills over commodities because they are more liquid and can be used as a weapon to control the notoriously volatile won. However, this reliance on the dollar has attracted widening criticism in recent years as commodity prices have soared.

http://www.ft.com/cms/s/0/74576bd6-da90-11df-81b0-00144feabdhtml

What Would the Currency Wars Lead to?: Much Ado about Nothing?

Some argue that a currency war would eventually evolve into a military war, pointing out history has shown that a currency war in conjunction with a trade war ultimately evolves into a military confrontation

Others contend that this whole currency fuss is merely a show for the U.S. November elections.

The USD is on the way to becoming toast. Quite a few countries seem to be fully aware that the USD is weakening, thereby preparing for the ramifications of a weak U.S. dollar. We may see the stronger U.S. dollar for a short period of time as the stock market tanks down the road. Yet the long-term trend is clear as the U.S. Fed prepares to launch a new round of QE.

Perhaps the bottom line regarding this currency matter would be: how long could the USD can maintain the reserve currency status?

The U.S. Fed seems to have effectively monetized the dollar’s reserve currency status so far. That may change if OPEC and other suppliers demand to be paid in a currency basket instead of the USD. The Chinese appears to know that, so they have had some talks with several countries to make oil traded in something other than the USD. Then that would be a sea change.

China Knows Exactly What the U.S. Fed Is Up To

From China Daily:

A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days. Some developed countries have begun to intervene in their exchange rates. The recovery of the global economy will suffer a negative impact if this trend is not checked.

It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active.

The U.S. Federal Reserve's statement that it might restart quantitative easing — a policy central banks use to increase money supply — triggered the depreciation of the dollar. The dollar's value against the basket of currencies has decreased by 7 percent since the U.S. Federal Reserve began talk of possible quantitative easing.

The move nominally aims to further drive down the interest rate in America to prevent the occurrence of a double dip. But it will affect the value of the dollar too, prompting the dollar's devaluation. In light of the history low short-term interest rates in the United States, a further decrease in the interest rate will drive the flow of short-term capital toward markets of emerging economies, quickening the appreciation of their currencies.
　
Second, the U.S. government's strategy to double its exports within five years needs the considerable depression of the dollar. For America, boosting exports is a must in the post crisis era, because it cannot pin its hope for economic growth on the prosperity of its real estate market and consumption based on borrowing money.

Obviously boosting exports relying on the competitiveness of U.S. companies is not realistic in the short term. Nor is it possible to be realized by the strong demand of its trade partners. None of America's trade partners — except those emerging economies — are able to achieve growth independently. Judging from the course of history after World War II, considerable depreciation of the dollar is the sole possible option that enables America to realize the goal. In this sense, driving down the value of the dollar has become an important choice in policy for the United States to recover the sluggish economy..

The last but the most important point is that in the long run the considerable depreciation of the dollar will help America to transfer its debts to others. If we say the international financial crisis nationalized the private debts, then in the post-crisis era, the United State sees an urgent need to internationalize its debts.

A great amount of bad debts of American financial institutions have been converted to government debt through government aid measures. In 2009, America's fiscal deficit stood at 1.42 trillion dollars, 3.1 times the 2008 level. The deficit ratio surged from 3.2 percent in 2008 to 10 percent to a new high since World War II. The debt of the federal government increased to 6.7 trillion dollars, representing 47.2 percent of its GDP. In 2010, the fiscal deficit is expected to be around 1.32 trillion dollars. How America retains economic growth while reducing the deficit is a big problem for the country.

Historic experiences show debt-to-GDP ratio is not directly linked with economic growth and inflation (even devaluation) in most countries. But the United States is an exception because the dollar serves as the world currency. For instance, the ratio decreased from 121.2 percent in 1946 to 31.7 percent in 1974. Of that number, inflation accounted 52.6 percentage points, economic growth contributed nearly 56 percentage points and federal surplus contributed negative 21.51 percentage points. Even if the United States denies its motives to transfer their debts, it will unavoidably happen in reality.

Given a sluggish economy and huge amount of debts, driving the value of the dollar down is in line with America’s interests, both in short term and in long term. The international community ought to stay vigilant about the strong motive for active devaluation under the guise of a market-based move.

By Li Xiangyang, translated by People's Daily Online

http://english.peopledaily.com.cn/90001/90780/91421/7165351.html

What the U.S. Is Doing to the Rest of the World To Win the Global Currency Battle?

One can get the parts that explain what the U.S. is doing to the rest of the world in the currency wars from the following FT article.

Of course this currency matter is associated with the sovereign issue and a trade war, as discussed before.

Who would be the major casualty of a trade war?

To answer this question, one has to understand the various dynamic factors and their interactions involved in the global economy.

For example, what is driving the debasement of the US dollar? Why has the U.S. maintained the low interest rate policy and what impacts has it had on its domestic economy and the global economy?

The U.S. may win in the short run, but is in long term decline.

In the meantime, the global economy suffers.

From Financial Times:

Currencies dominated this year’s annual meetings of the International Monetary Fund. More precisely, two currencies did: the dollar and the renminbi, the former because it was deemed too weak and the latter because it was deemed too inflexible. But, behind the squabbles, lies a huge challenge: how best to manage the global economic adjustment.

In his foreword to the new World Economic Outlook, Olivier Blanchard, the IMF’s economic counsellor, states: “Achieving a ‘strong, balanced and sustained world recovery’ – to quote from the goal set in Pittsburgh by the G20 – was never going to be easy ... It requires two fundamental and difficult economic rebalancing acts.”
The first is internal rebalancing – a return to reliance on private demand in advanced countries and retrenchment of the fiscal deficits that opened in the crisis. The second is external rebalancing – greater reliance on net exports by the US and some other advanced countries and on domestic demand by some emerging countries, notably China. Unfortunately, concludes, Professor Blanchard, “these two rebalancing acts are taking place too slowly”.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

Above all, today’s low and falling inflation is potentially calamitous. At worst, the economy might succumb to debt-deflation. US yields and inflation are already following the path of Japan’s in the 1990s (see chart). The Fed wants to stop this trend. That is why another round of quantitative easing seems imminent.

In short, US policymakers will do whatever is required to avoid deflation. Indeed, the Fed will keep going until the US is satisfactorily reflated. What that effort does to the rest of the world is not its concern.

The global consequences are evident: the policy will raise prices of long-term assets and encourage capital to flow into countries with less expansionary monetary policies (such as Switzerland) or higher returns (such as emerging economies). This is what is happening. The Washington-based Institute for International Finance forecasts net inflows of capital from abroad into emerging economies of more than $800bn in 2010 and 2011. It also forecasts massive intervention by recipients of this capital, albeit at a falling rate (see chart).

Recipients of the capital inflow, be they advanced or emerging countries, face uncomfortable choices: let the exchange rate appreciate, so impairing external competitiveness; intervene in currency markets, so accumulating unwanted dollars, threatening domestic monetary stability and impairing external competitiveness; or curb the capital inflow, via taxes and controls. Historically, governments have chosen combinations of all three. That will be the case this time, too.

Naturally, one could imagine an opposite course. Indeed, China objects to the huge US fiscal deficits and unconventional monetary policies. China is also determined to keep inflation down at home and limit the appreciation of its currency. The implication of this policy is clear: adjustments in real exchange rates should occur via falling US domestic prices. China wants to impose a deflationary adjustment on the US, just as Germany is doing to Greece. This is not going to happen. Nor would it be in China’s interest if it did. As a creditor, it would enjoy an increase in the real value of its claims on the US. But US deflation would threaten a world slump.

Prof Blanchard is clearly right: the adjustments ahead are going to be very difficult; and they have also hardly begun. Instead of co-operation on adjustment of exchange rates and the external account, the US is seeking to impose its will, via the printing press. The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.

It would be far better for everybody to seek a co-operative outcome. Maybe the leaders of the group of 20 will even be able to use their “mutual assessment process” to achieve just that. Their November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang them all separately.

http://www.ft.com/cms/s/0/fe45eeb2-d644-11df-81f0-00144feabdc0.html

Why Have Firms Offshored Their Production Overseas?

Offshoring is a global thing. The U.S., Japan, and Korea’s production have been moved to China and South Asian countries while German production offshored to Eastern Europe, Russia, and the Ukraine.

The core reason is profits.

I have explained on numerous occasions why firms have shipped parts of their production overseas.

There has been the contention between technonationalist goal and homegrown firms’ overseas expansion.

The Korean president Lee Myung-bak emphasized social responsibilities of Korean chaebols at a meeting in July and again recently.

It should be stressed that a nation’s specific policy choice facilitates offshoring and the resulting erosion of the productive capacity, as the case of the U.S. has demonstrated.

“Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love.”
Romans 5: 3-5

Is America’s Innovation Engine Eroding?

The U.S. has retained the best technology in many areas as I mentioned before. Its innovation was developed under a free-enterprise system. Despite China’s astonishing growth in the recent years, this is a big difference between the U.S. and China in terms of their approach to industrial development and innovation capacity building.

As the U.S. is becoming more of state-led capitalism in which the state and big business play a big part, its entrepreneurial spirit and innovation mechanism may be significantly stifled.

The U.S. has gutted much of its industrial base by policy choice. The industrial base is a backbone of further innovation.

The U.S. still has talent and potential for innovation, but it may well lose them if they continue to remain the path they have chosen.