A Reversal of Fortune

Over the past 30 years, there has been a significant redirection of global capital flows. One of these capital flows has been the flow out of the wealthy but mostly energy resource poor OECD countries towards the energy producing states largely in the Middle East but also in Latin America and more recently Africa. The other major new capital flow is from the OECD in general but significantly more from the United States towards China. The Chinese, it turns out, have also been on a shopping spree. They have been buying, well, us. This year China surpassed Japan as our largest lender. China now holds over 10% of the US dollar denominated debt, a little more than a trillion dollars.

From the New York Times comes a must read article on China's rise and our fall:

In March 2005, a low-key Princeton economist who had become a Federal Reserve governor coined a novel theory to explain the growing tendency of Americans to borrow from foreigners, particularly the Chinese, to finance their heavy spending.

The problem, he said, was not that Americans spend too much, but that foreigners save too much. The Chinese have piled up so much excess savings that they lend money to the United States at low rates, underwriting American consumption.

This colossal credit cycle could not last forever, he said. But in a global economy, the transfer of Chinese money to America was a market phenomenon that would take years, even a decade, to work itself out. For now, he said, "we probably have little choice except to be patient."

Today, the dependence of the United States on Chinese money looks less benign. And the economist who proposed the theory, Ben S. Bernanke, is dealing with the consequences, having been promoted to chairman of the Fed in 2006, as these cross-border money flows were reaching stratospheric levels.

In the past decade, China has invested upward of $1 trillion, mostly earnings from manufacturing exports, into American government bonds and government-backed mortgage debt. That has lowered interest rates and helped fuel a historic consumption binge and housing bubble in the United States.

China, some economists say, lulled American consumers, and their leaders, into complacency about their spendthrift ways.


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2008 World Elections: The Good, The Bad and The Ugly

This weekend elections in Ghana (a second round run-off) and in Bangladesh will mark the end of the 2008 world election cycle. In sum, national elections were held in 33 countries plus regional and referenda in about a dozen more. On balance, the world is a more democratic place at the end of 2008 than it was at the start and that's a good thing. And while all democratic outcomes should be celebrated, I'd like to highlight two landmark changes and for the better in the world's political landscape.

The Maldives
In the first open elections in the Islamic Republic of the Maldives, the opposition led by 41 year old Mohammed Nasheed won his country's Presidency ousting Asia's longest-serving President, Maumoon Abdul Gayoom in power 30 years having never previously permitted contested elections. Mr. Nasheed, a former political prisoner known as the Nelson Mandela of the Maldives, won in the run-off phase after the first round saw no candidate win a majority. It's a stunning development for the small Indian Ocean archipelago best known for its coral atolls and world-class scuba diving and luxury resorts. It's significant because the Maldives becomes just one of four Islamic democracies. The election in Maldives helps to dispel the notion that Islam and democracy are incompatible.

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Holman Jenkins' Lost Decade

Holman W. Jenkins Jr. is a member of the editorial board of The Wall Street Journal and yesterday he tried to spread some holiday cheer amongst his readership by pronouncing the coming decade a "lost" one arguing that bad times don't produce good policy.

Policy is always bad to a degree, but long periods of prosperity tend to be self-reinforcing since powerful interests are born with the means and motive to preserve the status quo. That status quo may really be a contributor to prosperity, such as regulatory restraint and moderate tax rates. That status quo may in some respects be ill-advised, such as excessive subsidy to housing debt.

But once prosperity blows up, the quasi-virtuous policy circle becomes an unvirtuous one as new interest groups come to the fore to exploit an appetite, previously weak, to impose their costly or vindictive wish lists. And even well-meaning policy gets twisted and rendered incoherent.

The first sentence tells you all you need to know about Holman Jenkins and conservative ideolgoues, policy is always bad to a degree. Government is inherently evil or at best inept in the conservative world view. Well, it is when you staff it with sycophants that profess to hate government and yet run up the size of government and its obligations in the trillions of dollars.

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Forum of Gas Exporting Countries

"The time of cheap energy resources, and cheap gas is surely coming to an end." Vladimir V. Putin

This past Tuesday in Moscow and largely at the behest of Russian Prime Minister Vladimir Putin, fourteen large natural gas-producing countries met to establish an organization that will study ways to set global natural gas prices by limiting production, much as the Organization of Petroleum Exporting Countries does for crude oil. For now, the organization is to be called the Forum of Gas Exporting Countries (FGEC. The forum members include: Algeria, Bolivia, Brunei, Venezuela, Egypt, Indonesia, Iran, Qatar, Libya, Malaysia, Nigeria, the United Arab Emirates, Russia, Trinidad and Tobago and, as observers, Equatorial Guinea and Norway.

Russia, the world's largest producer, accounts for 21.6% of global natural gas production. Other top ten global producers attending the meeting include Iran, Norway (as an observer) and Algeria. However, only eight of the 14 countries are world top 20 producers. As an aside, it's noteworthy that none of the large coming on stream Central Asian producers attended the meeting.

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Rethinking Empire

The New York Times in a series of editorials has been offering an assessment on how to pay for a "21st Century Military." The New York Times specifically calls for more ground forces, less reliance on the Reserves, new equipment and training to replace cold-war weapons systems and doctrines. All this costs a fair bit of money, which we don't have, so the sensible editors at the nation's paper of record have also offered a modest proposal as to which weapons systems to cut or defer so as to pay for the more troops and the new equipment which the Times feels we must have.

Money will have to be found to pay for all of this, and the Pentagon can no longer be handed a blank check, as happened throughout the Bush years.

Since 2001, basic defense spending has risen by 40 percent in real post-inflation dollars. That is not counting the huge supplemental budgets passed -- with little serious review or debate -- each year to pay for the wars in Iraq and Afghanistan. Such unquestioned largess has shielded the Pentagon from any real pressure to cut unneeded weapons systems and other wasteful expenses.

As a result, there is plenty of fat in the defense budget. Here is what we think can be cut back or canceled in order to pay for new equipment and other reforms that are truly essential to keep this country safe:

-- End production of the Air Force's F-22.
-- Cancel the DDG-1000 Zumwalt class destroyer.
-- Halt production of the Virginia class sub.
-- Pull the plug on the Marine Corps's V-22 Osprey.
-- Halt premature deployment of missile defense.
-- Negotiate deep cuts in nuclear weapons.
-- Trim the active-duty Navy and Air Force.

One thing the New York Times didn't mention is our overseas empire. Few, apart perhaps from Chalmers Johnson and Noam Chomsky, ever do which is strange since we have troops in over thirty countries and installations in 40 countries and overseas territories. It is difficult to tell because the Defense Department (DoD) doesn't make it easy to decipher but according to the DoD Base Structure Report for Fiscal 2008 the United States seems to boast 761 military installations overseas down from 823 military installations in 2007. It is important to note that these are installations as opposed to bases. Though many are full-fledged military bases, some of these installations are simply radar tracking sites or weather gathering information sites.

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Clinton's State Department

The New York Times is reporting that Senator Clinton if confirmed as the nation's 67th Secretary of State will seek "to build a more powerful State Department, with a bigger budget, high-profile special envoys to trouble spots and an expanded role in dealing with global economic issues at a time of crisis." A more robust State Department is certainly a welcomed change and the idea of special envoys is also a good one because it engages dialogue above normal channels but it is concerning that Clinton's State Department may be expanding into a domain traditionally held by the US Treasury Secretary. To a degree, some clarification of the role Mrs. Clinton is hoping to carve out is required.

Mrs. Clinton's push for a more vigorous economic team, one of her advisers said, stems from her conviction that the State Department needs to play a part in the recovery from the global financial crisis. Economic issues also underpin some of the most important diplomatic relationships, notably with China.

In recent years, the Treasury Department, led by Henry M. Paulson Jr., has dominated policy toward China. Mr. Paulson leads a "strategic economic dialogue" with China that involves several agencies. It is not yet clear who will pick up that role in the Obama administration, although Vice President-elect Joseph R. Biden Jr. is frequently mentioned as a possibility.

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The President Wonders "How Did We Get Here?"

In Sunday's New York Times, there is this gem:

The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, "scared the hell out of everybody."

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

"How," he wondered aloud, "did we get here?"

The short answer is Milton Friedman, Arthur Laffer, Robert Hall, Jude Wanniski, Robert Mundell and Michael Boskin in theory as well as Ronald Reagan, Donald Regan, James Baker, Newt Gingrich, and Alan Greenspan among many others in practice. A longer answer would take a volume but to perhaps put it succinctly for 28 years the Republican party has advocated a deadly framework of economic policies revolving around lower taxes, free markets and free trade. And within this mix is the answer to how we got "here".

The conservative recipe for economic prosperity had three main ingredients: cut taxes, low inflation through monetary policy controls and free the market which is an euphemism for unfettered and unregulated markets. The first and last are simply toxic to any large economy. Low inflation is a laudable goal but it's not clear that monetary policy alone is capable of controlling inflation. From the early 1980s through this year, one can make the case that inflation was largely the result of one key factor, we had cheap energy prices. Absent that, inflation can rear its ugly head at any point and earlier this year as oil prices approached $150 a barrel we began to see global inflation tick up. And tapping China's cheap and vast labor reserves also has been a significant factor in checking global inflation since 1991. Both of these factors are outside the control of US monetary policy.

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The President-elect's Weekly Address

"The truth is that promoting science isn't just about providing resources--it's about protecting free and open inquiry. It's about ensuring that facts and evidence are never twisted or obscured by politics or ideology. It's about listening to what our scientists have to say, even when it's inconvenient--especially when it's inconvenient. Because the highest purpose of science is the search for knowledge, truth and a greater understanding of the world around us. That will be my goal as President of the United States--and I could not have a better team to guide me in this work." -- President-elect Barack Obama

President-elect Obama announced the appointment of Dr. John Holdren as Assistant to the President for Science and Technology, Director of the White House Office of Science and Technology Policy, and Co-Chair of the President's Council of Advisors on Science and Technology (PCAST). Obama also named Dr. Harold Varmus and Dr. Eric Lander as the other co-chairs of PCAST. Addtionally, he named Dr. Jane Lubchenco as his choice to lead the National Oceanic and Atmospheric Administration.

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Brown on Prop 8 and Schwarzenegger on the Budget

Here is some California news:

California Attorney General Jerry Brown Urges Overturning Prop 8

California's Attorney General Jerry Brown has filed a brief to the California Supreme Court which is reviewing the anti-gay marriage Proposition 8 arguing that  the measure is constitutionally indefensible and should be overturned. Brown wrote in the brief that "Proposition 8 must be invalidated because the amendment process cannot be used to extinguish fundamental constitutional rights without compelling justification." In essence, the Attorney General is arguing that minority rights should not be subject to the whims of the majority. More from the New York Times. Jerry Brown is expected to run for Governor in 2010.

Governor Schwarzenegger Orders Unpaid Furloughs for All California State Employees

California Governor Arnold Schwarzenegger issued an executive order to all California state employees mandating two unpaid days of leave per month beginning in February 2009 and lasting through June 2010. The executive order is the latest salvo in California's budget battle. The state faces a $41.8 billion dollar deficit.

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The Political Imperative of Universal Healthcare

Universal Healthcare: A Moral Obligation, An Economic Necessity and A Political Imperative

Since 1948 the progressive wing of the Democratic party has fought for universal healthcare largely from the standpoint that it is a moral obligation of the modern state to provide for the general welfare of its citizens and moreover that it makes economic sense to enact it.  Harvard economists David Himmelstein and Steffie Woolhandler have estimated the bureaucratic waste from private medical insurance is some $350 billion per year, or just under 2% of GDP. On these merits alone, enacting universal healthcare is worth it. But there's another reason to enact healthcare reform, it is a political imperative. The GOP is deathly scared of it and for good reason--enacting healthcare may just lead to the demise, or perhaps at the very least the long-term political irrelevance, of the Republican party.

"If the Democrats succeed in redistributing economic power, we're screwed."

I say, let's screw them then. After all, they have screwed us long enough. The truth is that I haven't read Tom Daschle's book but now I feel I must for it seems its contents are sounding a clarion call among Republicans to wage jihad against Obamacare as once they waged it against Hillarycare. The particulars of their crusade don't really matter, only that it is a threat not to the American way of life, though they do claim that taking care to insert the word "socialized" at every opportunity, but rather that enacting universal healthcare is a threat to the political viability of the GOP.  Thomas Frank in the Wall Street Journal and James Pethokoukis of US News & World Report have already penned alarms.

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Diaries

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