Archive for the ‘International Relations’ Category

China: Responsible economic policy

October 5, 2010

Higher prices for GI Joe? Source: Google Images

Very nice, short piece today from CSFB (below) on what China is doing to correct the global imbalances (i.e., to reduce its trade surpluses, which mirror US and other countries’ trade deficits) and to shift its economy to a healthier foundation based on domestic demand.  While President Obama gets pre-election press pressuring China’s prime minister to let his currency appreciate, and while Dems in Congress led by Chuck Schumer grandstand, threatening to raise tariffs on China before the election, the Chinese authorities have instituted large wage increases across the board.  As a result, the real value of the Chinese currency could appreciate sharply, even if the nominal value (the focus of American politicians) appreciates in baby steps.  Hopefully, Schumer, Obama and Co., and above all the angry voters they are courting, understand the economics: that wage inflation undermines the competitiveness of a country’s goods as much as does currency appreciation.  

In spite of President Obama’s tough talk (or because of it?), he appears to have received a boost from China’s prime minister, who lauded his administration’s economic policies, much-maligned these days by the Republicans (who have few ideas of their own).  But, what China bashers don’t realize, and CSFB points out, is that low inflation in the US (i.e. the affordability of America’s consumption binge) has been underpinned over the last 10-15 years by China’s low wages cum undervalued exchange rate, Sir Alan Greenspan’s claims to perfection notwithstanding.  From computers to home improvement, Chinese goods have been cheap.  We won’t be able to count on this any more.  With America still in a near-recessionary funk, we’re not worried about inflation, but that could change.  Enormous government budget deficits have been accommodated by a massive monetary stimulus.  Hence, inflation, and all the economic distortions implied, may be one of a slew of economic problems facing the world’s leading (though declining) power in the years to come. 

From CSFB today: 

In contrast to the exchange rate, wage rates among migrant workers have risen much more aggressively, and we believe that this marks the beginning of the end of China’s export empire. Among 31 provinces, 27 have raised the minimal salary by an average of 22% this year and the remaining four will introducing legislation for salary hikes later this year. We think the move has been pushed by Beijing as part of an effort to shift the economy from export-driven to domestic-consumption-driven. In a survey Credit Suisse conducted, 39% of CEOs from multinational corporations placed a wage increase as something about which they were “very worried” or “extremely worried,” versus 18% for exchange rate appreciation.

The key question to be answered is whether foreign direct investments will leave China or move to the inland provinces. We believe most will move inland rather than leave China. China’s domestic demand is a major attraction for FDI. Besides, China’s infrastructure and administrative efficiency probably will keep FDI coming, for now. However, we project 20%-30% salary increases at the migrant workers’ market every year over the next four years (at least). This would eventually erode China’s competitiveness and push up its export prices. Perhaps we have seen the best time for China as the anchor of global disinflation, though it may take more than a decade for China’s export machine to fall.

Dong Tao +852 2101 7469 dong.tao@credit-suisse.com

Christiaan Tuntono +852 2101 7409 christiaan.tuntono@credit-suisse.com

05 October 2010

The RMB exchange rate saw a surge in appreciation in recent days, but we doubt the trend will last long. The Chinese currency saw nine consecutive days of appreciation against the USD, amidst USD weakness and heightened pressure from the White House and the Capitol Hill. But to us, Beijing has, in fact, been pushing for real exchange rate appreciation through salary increases, much more aggressively than with the nominal exchange rate. With export orders softening and domestic salary surging, we project only marginal nominal appreciation, which is politically motivated. We look for USDRMB at 6.67 by end of 2010 and 6.35 by 2011.

USA: Lay off the president, man!

September 28, 2010

Coming from me, a defense of Barack Obama may surprise my readers.  That’s because they may not have read the fine print!  Some of his policies I haven’t exactly agreed with (principally, the expensive health care reform, which at a time of rapidly rising sovereign debt, was imprudent).  I reluctantly supported Obama for president in 2008 because he was the better of the two candidates.  Reluctant because we could have chosen a more experienced hand (read here), especially on economic policy. 

Nevertheless, the president has done an exceptional job in tough times.  He has been lucky both before and after the election, but, judging by the recent grilling from his erstwhile supporters, his luck may be running out. They even talk about Obama losing his mojo.  You can criticize Obama and the Democrats, for sure, but what is the alternative?  The only thing innovative in the Republican Party these days is the Tea Party, and I for one don’t want to be dumbed down by the likes of Sarah Palin and the former witch from Delaware (Christine O’Donnell). As for the more “mainstream” Republicans such as future Speaker Boehner, is the answer really more tax cuts at a time of skyrocketing government debt?

What really gets me about this country is the electorate’s emotional bipolarity.  First Obama is viewed as nearly Jesus Christ, now he’s a bum.  C’mon people!  C’mon Velma Hart!

I cringe at charisma.  The Obama-euphoria of the campaign trail scared me, as many of his supporters failed to think critically about the choice.  Instead they anointed a messianic figure and expected him to deliver paradise.  Obama fanned the flames of euphoria then and is now getting burned.  Today, even though the administration managed to sidestep a 1930s-style economic meltdown by rescuing the banks and providing a huge Keynesian stimulus, we hear from Velma and Company that they’re upset they don’t “feel it yet.”  Jon Stewart is “saddened.”  As I have said before, Americans are spoiled. Unlike citizens in emerging markets, accustomed to crisis, accustomed to lines outside of banks, Americans want it all.  Now they are mad at Obama for only achieving what is humanly possible. He has delivered far more than Bill Clinton did by this time in his administration, and is even delivering on the liberal agenda – for example, by appointing two very young, very liberal female lawyers to the Supreme Court.

Now he is branded as anti-business.  There were a pair of articles in The Economist on this (see below).  I noted in my blog during the 2008 election that it did not make sense to elect a man with no economic policy experience to pilot us through the economic storm, who, as a young man, quit a job as an economic analyst because he didn’t want to become a tool of corporate exploitation.  Two years later, people have noticed that his passion is not for business.  Well, lay off him now.  His policies are not particularly anti-business – this government has spent more bailing out corporations than any previous one.  Furthermore, he is in good company taking on corporate abuse.  Anyone remember Teddy Roosevelt’s trust-busting?  Finally, if we continue to harp on this anti-business thing, it will become self-fulfilling.  The Obama administration’s credibility growing the economy could be irreparably damaged, which will hurt us all.

It is human to fight the last war.  So, to avert a depression, the Obama administration took actions that were not taken in the thirties.  Yet our undoing will be something unforeseen, and in my view, this is likely to come on the fiscal side.  Government debt is around 90% of GDP and deficits are in the double digits.  With economic growth likely to remain sluggish (economists have declared a “new normal”), it is not far-fetched for the United States to be in a Greek-style sovereign default over the medium term if a road map to solvency is not charted soon.  There are as yet few signs of determination in this administration to deal with this problem (they appointed a panel), not least because of the recent turnover in the economic team.

What I don’t like about Obama is the spin.  Spin is less than truthful.  I know all politicians do it, especially the successful ones. But, Barack Obama ran as a change agent, a post-partisan, and he has been, is, and will probably always be an aggressive left-of-center partisan.  Centrists, such as Evan Bayh, Joe Lieberman, Norm Coleman, Ben Nelson, Olympia Snowe and Susan Collins, need not apply.  He admires Ronald Reagan and is his heir in terms of image-making.  Now he is going around the country discussing his Christian faith.  Good timing.  The other side does it too.  It is demoralizing for a centrist like me to hear John Boehner savage Obama’s economic policy record and Obama call Boehner’s Pledge to America irresponsible.  Where lies the truth?  Same thing happened on health care.  The problem is, partisanship wins elections. 

On foreign policy, Obama savaged Bush for adventurism and questionable methods in war.  Yet in office, he has ramped up the use of targeted assassinations, sometimes resulting in the deaths of innocents.  The end justifies the means, the saying goes.  As a candidate, he lashed out at David Petraeus for the “surge” in Iraq; now he has hired him to salvage his Afghan policy.  Yet Obama supporters don’t bat an eye, as they swing from indicting Bush for torture to arguing for the necessity of targeted assassinations.

I would like to see a stronger Republican Party.  The country would benefit from an energetic opposition.  Yet, by shifting toward the loony right, Republicans are squandering the opportunity to harness the country’s frustration.  This could work out in the end for Barack Obama.  Taking a page from the Big Dog’s script in 1994-96 — after the Democrats in Congress suffer a beating this year, Obama finds a “Dick Morris” to guide his policy rightward over the next two years.  The Party of No (GOP) nominates someone or other like Sarah Palin in 2012, and No Drama wangles himself another term.  The country could do worse.

From The Economist, September 23, 2010:

WINSTON CHURCHILL once moaned about the long, dishonourable tradition in politics that sees commerce as a cow to be milked or a dangerous tiger to be shot. Businesses are the generators of the wealth on which incomes, taxation and all else depends; “the strong horse that pulls the whole cart”, as Churchill put it. No sane leader of a country would want businesspeople to think that he was against them, especially at a time when confidence is essential for the recovery. From this perspective, Barack Obama already has a lot to answer for. A president who does so little to counter the idea that he dislikes business is, self-evidently, a worryingly negligent chief executive. No matter that other Western politicians have publicly played with populism more dangerously, from France’s “laissez-faire is dead” president, Nicolas Sarkozy, to Britain’s “capitalism kills competition” business secretary, Vince Cable (see article); no matter that talk on the American right about Mr Obama being a socialist is rot; no matter that Wall Street’s woes are largely of its own making. The evidence that American business thinks the president does not understand Main Street is mounting (see article). A Bloomberg survey this week found that three-quarters of American investors believe he is against business. The bedrock of the tea-party movement is angry small-business owners. The Economist has lost count of the number of prominent chief executives, many of them Democrats, who complain privately that the president does not understand their trade—that he treats them merely as adornments at photocalls and uses teleprompters to talk to them; that he shows scant interest in their views on which tax cuts would persuade them to hire people; that his team is woefully short of anyone who has had to meet a payroll (there are fewer businesspeople in this White House than in any recent administration); and that regulatory uncertainty is hampering their willingness to invest.
Ignorant but not antagonistic That Mr Obama has let it reach this stage is a worry. But negligence is not the same as opposition. True, he has some rhetorical form as an anti-business figure—unlike the previous Democrat in the White House, Bill Clinton, who could comfortably talk the talk of business. Mr Obama’s life story, as depicted in his autobiography and on the campaign, was one of a man once mired in the sinful private sector (at a company subsequently bought by The Economist), who redeemed himself only by becoming a community organiser; his wife had a similar trajectory. There are the endless digs at Wall Street and Big Pharma, not to mention the beating up of BP. He remains a supporter of “card check”, which would dispense with the need for secret ballots in establishing a trade union. His legislative agenda has centred on helping poorer individuals (the health-care bill, part of the stimulus bill) or reining in banks (the financial-reform bill). The only businesses he has rescued are the huge union-dominated General Motors and Chrysler. Against this, it could have been much worse, especially given the opprobrium that now dogs Wall Street. A president who truly wanted to wage war on business would have hung onto GM, not rushed to return it to the private sector. Card check has not been pushed. The finance bill, though bureaucratic, is not a Wall Street killer. With the exception of a China-bashing tyre tariff and a retreat on Mexican trucks, Mr Obama has eschewed protectionism. A lot of government cash has flowed to businesses, not least through the stimulus package. And above all his policies have helped pull the economy out of recession. So what should he do? The same leftist advisers who have led Mr Obama into his “anti-business” hole are doubtless telling him that it is just a matter of public relations: have a few tycoons to stay in the Lincoln bedroom; celebrate Main Street’s successes, rather than just whining about bonuses; perhaps invite a chief executive to replace Larry Summers, the academic who announced this week that he was standing down as the president’s main economic adviser. Well, maybe. But once again this is advice from people who have never run a business. The main thing that is hurting business is uncertainty. Mr Obama was right to tackle big subjects like health care and Wall Street, but too often the details were left to others. Why, for instance, should a small American firm hire more people when it still does not know the regulations on health care, especially when going above 50 workers will make it liable to insurance premiums or fines? Fiscal policy is even more uncertain, thanks to Mr Obama’s refusal to produce a credible plan to rein in the deficit. Why should any entrepreneur plough money into a new factory when he has no idea what taxes he will eventually be asked to pay? These are questions that business needs answering in a businesslike way—and so does America. Otherwise the horse will not pull the cart.

China: Would Machiavelli be proud?

September 22, 2010
Chinese President Hu Jintao reviews army troops.  Source:  CCTV
Chinese President Hu Jintao reviews army troops. Source: CCTV

Machiavelli, more than any thinker in history, made his name synonymous with a type of human behavior — self-interested, cunning, ruthless.  He wrote about ancient Rome as well as Italy and the Mediterranean world of the 15th-16th centuries, extolling such leaders as Ferdinand of Aragon, the successful king of Spain who oversaw his empire’s aggrandizement, as well as the expulsion of alien elements from the Iberian peninsula. 

The extent to which a truly Machiavellian leader must be  cruel has been exaggerated.  If you read his treatises closely, the Florentine statesman was no fan of cruelty if it failed to strengthen the state.  Orgies of killing usually engender hatred in a state’s subjects, and Machiavelli argues that being hated is worse than being feared.  Being feared is better than being loved, he says, if one cannot be both.  According to Machiavelli, leaders must imitate both the lion and the fox — employing both military power and diplomacy — in order to outwit the wolves. 

I have argued for some time in this blog that the West, led by the United States, has done a fairly good job of anchoring China into international institutions wrought after the Second World War (see my post “Anchoring the Dragon,” of October 2009).  Privileges and power must be matched in international relations in order to avoid instability and conflict.  Machiavelli, were he around today, might not criticize Western diplomacy on the China question. 

Since 1979, China too has managed its foreign relations relatively well.   Deng Xiaoping, who led China after 1978, opened his isolated nation to the world, culminating in 2001 in China’s accession to the World Trade Organization, which this giant nation has used as a platform to become the greatest manufacturing juggernaut the world has known.  Likewise during the Cold War, China and the U.S. deftly used each other in classic Machiavellian fashion to balance against their mutual enemy, the Soviet Union, a quasi-alliance that deserves some credit for burying the Soviet empire late last century.

China’s exchange rate policy can be called Machiavellian.  The currency is kept low to promote exports in order to avoid the dependence on foreign capital that drove China’s Asian brethren — Korea, Thailand and Indonesia — to the brink of bankruptcy during the 1998 Asian financial crisis.  Still, China periodically revalues its currency in baby steps in order to blunt the anger of its trading partners, whose external borrowing expands to finance nagging trade deficits.

A NYTimes article today discussed how China is currently seeking to mend fences with the Obama administration over its exchange rate policy, as well as over tensions related to the Korean peninsula, the South China Sea and Taiwan.  Things are not as cozy with the United States these days because the US government is run by Democrats.  Democrats are more prone to grandstand against China on currency manipulation, human rights, and the environment than Republicans were.  The Chinese will compete this century with the U.S. for hegemony in Asia, not to mention globally, yet today they wish to do so quietly.  Surpassing Japan as the world’s second largest economy this year with GDP in excess of $5 trillion, the Chinese economy still falls well short of US GDP of over $14 trillion.  Hence, the need to be both a lion and a fox.   

Do not doubt that China intends to take over its renegade province of Taiwan one day, or to become the dominant power in East Asia.  China does not yet have the actualized military capability to obtain these prizes, so it bides its time and makes nice with the global hegemon as necessary.  On the other hand, China builds strong economic and diplomatic links globally to secure sources of raw materials and moral support, and continues to pump money into its military.  It plays a cute game on the Korean peninsula (see The Economist article below), alternately prodding and bolstering the tottering regime in Pyongyang, in order to show the Americans it is a player to be reckoned with on all things Asian.   Machiavelli would be proud.

(From a Sept. 9, 2010 post.)

From The Economist, September 2:

What lies behind the Dear Leader’s latest trip to China?

Sep 2nd 2010 | Beijing

NORTH KOREA’S leader, Kim Jong Il, must have been on an urgent mission when he boarded his bulletproof train and headed to China for the second time in less than four months on August 26th. With America’s former president Jimmy Carter in town, devastating floods in the north and a rare conclave of his ruling party only days away, Mr Kim had much to keep him at home. But buttering up China appears to be a new priority.

Both China and North Korea, as is their wont, kept quiet about the visit until after Mr Kim’s return on August 30th. By then Mr Carter had left with an American, Aijalon Gomes, who had been serving eight years’ hard labour for entering the country illegally in January. Mr Gomes’s release was a rare gesture of conciliation to America after months of heightened tension caused by the sinking in March of a South Korean naval vessel.

America responded, however, by giving details of sanctions on several North Korean individuals and entities suspected of “illicit activities”, such as dealing in weapons or drugs, or procuring luxury goods for Mr Kim or others. The decision to impose them had been announced in July.

China has complained loudly about America’s recent muscle-flexing, particularly its joint military exercises with South Korea. These are due to resume on September 5th with drills in the Yellow Sea, which China regards as uncomfortably close to its own shore. China began its own naval exercises in the Yellow Sea on September 1st. The official news agency, Xinhua, called them “routine”, but a decision to draw attention to them could be intended to show resolve in the face of the American and South Korean manoeuvres. The results of an international investigation into the sinking of the South Korean ship, which blamed it on North Korea, were released after Mr Kim’s last trip (his first foray abroad in four years). China has refused to accept the findings. By rolling out the red carpet again, it showed it has no plans to reconsider.

Less clear is why Mr Kim wanted to go back so soon. Much speculation has suggested that it could be related to the forthcoming party conclave, the first on such a scale since 1980. North Korea says it will be held early in September. One popular theory is that Mr Kim wants the gathering to endorse the appointment of his son, Kim Jong Un, to a senior party post. The idea would be to groom him to succeed his father, whose health has not been robust. The younger Mr Kim is in his late twenties and is believed to be jobless. Rumours of his rise as heir apparent have long been circulating, and it is plausible that his father would want to inform China if confirmation of this is imminent.

No mention was made of Kim Jong Un or the succession issue in official Chinese and North Korean reports. It is not even known if he went on the trip. But Kim Jong Il did spend some time inspecting sites related to the revolutionary days in China of his own late father, Kim Il Sung. Mr Kim spoke of the need to “hand over to the rising generation the baton of the traditional friendship” between the two countries.

China’s president, Hu Jintao (pictured with the Dear Leader), wished the party meeting in Pyongyang a “signal success”. The Chinese media played up Mr Kim’s reported agreement with his hosts on the need for an “early resumption” of multinational talks on North Korea’s nuclear programme. Prospects for this remain dim, but some analysts believe that North Korea might try to get negotiations restarted as a way of relieving economic pressure. For the moment, China is North Korea’s lifeline. Diplomats say trade between the two countries has picked up in recent months. In return for food, North Korea has given China a new lease on harbour facilities in the north-eastern port of Rajin.

The prospect of a power transfer in Pyongyang worries China. Global Times, an English-language newspaper in Beijing, accused America and South Korea of wanting to “create turmoil” in North Korea and said a smooth transition there was “vital” for stability in north-east Asia. Victor Cha of the Centre for Strategic and International Studies, a Washington think-tank, says that Mr Kim’s mysterious visit at least made it clear that China would stick with its ally to “the bitter end”.

McChrystal Affair: When Campaign Rhetoric Drives Foreign Policy

September 3, 2010
Obama and his general -- he doesn't look "uncomfortable and intimidated."  Source: www.media.syracuse.com
Obama and his general — he doesn’t look “uncomfortable and intimidated.” Source: http://www.media.syracuse.com

Insubordination by top military officers to civilian authority is unacceptable in America.  As presidential biographer Robert Dallek argued in today’s NYTimes, McChrystal’s defiance of his civilian masters may warrant dismissal.  However, there is another important issue here: how hubris on the campaign trail can lead to sub-par policy choices.

President Obama’s decision early in his administration to withdraw US forces from Iraq and build them up in Afghanistan came right out of the commitments he made on the campaign trail.  Obama’s meteoric rise owed a lot to his charisma and natural talents, but also to his successful argument  before the American people, embraced by almost all Democrats, that Bush was a buffoon and his policies failed ones.  Obama savaged W on the campaign trail like no other candidate.  On foreign policy, he argued that Bush had taken his eye off Al Qaeda and the Taliban when he irresponsibly invaded Iraq.  As a result, as president, Obama had little choice but to wade into a war in a country that bled the British and Russians into second-rate powers and is now going badly wrong and causing dissension within NATO. 

This is what happens when foreign policy is written by political hacks.  Orchestrated by bare-knuckles political operative David Axelrod, Obama’s take-no-prisoners 2008 presidential campaign was much like the Rovian strategy criticized by Democrats.  Whatever Bush did was bad; the opposite was thoughtful and insightful.  Notwithstanding his Kennedyesque image, Obama has not been a practitioner of bipartisanship, of new politics, of change we can believe in.  He, like the Kennedys, is an aggressive partisan out to demolish opponents. 

I am not going to re-open the debate about whether or not Iraq should have been invaded.  I believe there are reasonable arguments for and against.  But, the left in this country tends to characterize anyone that supported the ouster of Saddam Hussein in 2003 — on legal, moral and strategic grounds — as virtually a war criminal.  W is unfairly pilloried as such. There is even a play out now putting W up against a war crimes tribunal. 

In November 2008, I supported Barack Obama for president, somewhat belatedly and reluctantly, because I felt he was the better of two sub-par choices (see my blog on the matter). But I have always seen his hubris as his Achilles’ heel.  Here was this guy with virtually no foreign policy experience (not even serious academic study of American Foreign Policy) claiming he was the best choice to run the single superpower’s foreign affairs.  More recently, I wrote, “Barack Obama made the point last year on the campaign trail that, unlike Hillary Clinton, he has good judgment, never supporting an invasion of Iraq, even making a speech to that effect in the Illinois state legislature, where grandstanding on the issue had no policy effect at all.  Putting aside whether we should have invaded Iraq to rid the world of this dictator with bad intentions if not bad weapons, it is a legitimate debate whether we should wind down Iraq, a country central to stability in the Middle East — given its location, ethnicity, and oil wealth, and wind up Afghanistan, arguably a mountainous backwater that has bled imperialists from Russia to Britain to the United States for centuries.  True, instability in Afghanistan triggers instability in nuclear-armed Pakistan.  I said there were good points on both sides of the issue.  I merely wish to get under the teflon a little and question the wisdom of President Obama’s foreign policy choices.”

Now that policy shift is going badly wrong — with the mission failing in Afghanistan and the inconclusive Iraqi elections leaving partisans poised to take up arms, just as US troops are boarding transports out. 

Hubris prevailed when Obama, driven to surpass his predecessors by passing health care reform, left foreign policy priorities floundering for months.  This was reportedly one of McChrystal’s frustrations.  The McChrystal Affair underscores the disarray not only in the president’s “Af-Pak” group, but also in the broader foreign policy team.  Some of the personalities on the president’s team leave something to be desired — notably, Holbrooke and Biden, the former with more conceit than the Commander-in-Chief, the latter a shallow extrovert.  I have long argued that Obama should bring in some experienced hands like Nick Burns, the boyish career foreign service officer who served both Democratic and Republican presidents and was recently Sec. of State Rice’s number three.  

The warning I and others gave about Obama, that rhetoric and inspiring speeches alone cannot govern,  is relevant to the McChrystal Affair.  At issue is the age-old dichotomy between good government and good politics.  President Obama has proven himself  a masterful politician – recasting his failures as Republican ones, snatching political victories from the jaws of defeat, as he did with health care reform.  Obama could even turn the McChrystal Affair into good politics.  He and his Reaganesque image-makers can make the Afghanistan policy look like his Bay of Pigs.  That is, a young president with good intentions is misled by his generals to undertake a failed foreign adventure.  Then, this rightly angry president fires the general in charge, apologizes to the American public on television, becoming the latter’s darling again, and alters the policy course.  Good politics, but good government is trickier. 

Ironically, the man most responsible for Obama’s rise, that is, W, was also a success at politics (i.e. two terms), but fell short at government.  Good government requires experience and advisers other than David Axelrod and Karl Rove.  My optimistic belief is that ultimately good government wins elections.  Bring Nick Burns, and others like him, back…

(From a 6/23/10 blog post.)

Choose: MoveOn.org or Patraeus

June 24, 2010
President Obama and General Petraeus.  Source: www.tolerance.ca/image/photo 
President Obama and General Petraeus. Source: http://www.tolerance.ca/image/photo

Mr. President, you can’t have it both ways.  You can’t have General Petraeus come in and save your Afghan policy at the same time as you have been associated with MoveOn.org, which called him “General Betray Us” on the pages of the New York Times in 2007.

I don’t want to be the guy always criticizing President Obama – I think in many ways he is doing a good job.  But I cannot help but shine light on hypocrisy in politics, on whichever side of the aisle it occurs.  With Obama, who cultivates an image of new politics and bipartisanship, I feel compelled to draw readers’ attention to misperceptions of the man.

The facts:

– In 2003 MoveOn.org, funded in part by anti-Bush billionaire George Soros, allowed an ad on its website that compared Bush to Hitler, later claiming they had nothing to do with it.

– In 2007, MoveOn.org posted an ad in the New York Times, calling General Petraeus “General Betray Us,” and accusing him of cooking the numbers in order to make President Bush’s surge in Iraq look effective.  Senator (and Candidate) Obama relentlessly criticized the surge in Iraq and its architect, General Petraeus, only later admitting it might have worked and employing a similar strategy as president in Afghanistan.  Candidate Obama in 2007 failed to heed calls to criticize the “General Betray Us” ad.

– On February 1, 2008, MoveOn.org endorses Barack Obama for President of the United States, and Obama accepts.

– On June 23, 2010, President Obama calls in General Petraeus to head up the NATO mission in Afghanistan, which involves a surge of troops and counterinsurgency operations, much like what successfully ended the Iraq civil war under Obama’s predecessor.

Can Obama supporters at least admit the hypocrisy please, even if it is true that most politicians do the same?  I know many say, the election is over, forget about what happened in the heat of the campaign.  I say, let’s be fair and hold all politicians accountable for what they do and say on the campaign trail, especially when it affects policy.

Will General Petraeus run for high office one day?  Interesting question…

Couples therapy: China and the U.S.

June 16, 2010
Nixon & Mao: Mutual dependence goes back a long way.   Source: www.china-profile.com
Nixon & Mao: Mutual dependence goes back a long way. Source: http://www.china-profile.com

I have long said in my China posts that China does not have a lot of options right now besides buying US treasuries.  The AP article below describes how China has increased its purchases of US debt in recent months.  If you are going to hold your currency undervalued in order to run massive current account surpluses and amass fx reserves — because you were spooked by how the likes of Korea, Indonesia and Thailand were brought to their knees with low fx reserves in the 1998 Asian Crisis — then you will have to invest your massive fx reserves somewhere.  The dollar is a logical choice because of trade, deep US markets and the dollar’s reserve currency status. 

Since the beginning of the Great Recession of 2008-09, many observers warned that Chinese fx reserves could be shifted suddenly to other currencies, perhaps the euro and the yen.  Even before the sovereign debt crisis in Europe unfolded earlier this year, I suggested that euro assets did not look so great — given the slow-growth, sclerotic economies in the euro zone.  The same goes for yen assets, given that Japan has barely grown in the last twenty years.   Other emerging market economies (Brazil, India) are growing smartly, but they have small asset markets, compared to the depth and variety of markets in developed countries.  Ben Bernanke used to argue before the Great Recession that capital floods the US market and causes, rather than finances, US current account deficits.  This is because the return on US assets — driven by robust US output growth — is better here than elsewhere.  Now, with the euro crisis in full swing and Japan still stagnant, his argument has some appeal again.  It is still specious because it gets US households with their abysmal savings record off the hook, and it gets Bush and his irresponsible tax cuts off the hook as well.  The latter got Bernanke appointed to the Fed, so was all in a day’s work.

Is there a problem with all this foreign investment in US assets?  Yes.  The US must reduce its imbalances with the rest of the world in order to avoid the financial havoc that a massive dumping of dollar assets in the future could wreak.  We’re okay now because dollar holders have few options and the rest of the world looks a bit dodgy.  But foreign holdings are large.  Foreign holdings of US treasuries represent 28% of US GDP, with China holding 23% of this and Japan coming in second with 20%.  The US government is in hock to East Asia.  

Another nettlesome problem of this foreign appetite for the relative safety of US treasuries is that it keeps interest rates low in America, putting less pressure on Barack Obama & Co. to come up with a medium-term fiscal consolidation plan.  They’re still talking about another fiscal stimulus.  US government debt is set to rise above 90% of GDP next year and deficits will hover near 10% this year and next.  Government debt is often measured relative to GDP, but a better measure is debt relative to government revenues; this is because governments after all must service debt with revenues.  US government debt to revenues last year was 300%, higher than just about any other investment grade country in the world, with the notable exceptions of Japan and India.  (Debt by this measure was likewise higher than in such euro-crisis countries as Greece and Italy.)  So, the US has a fiscal migraine, while the Obama administration fiddles.  The Economist last week said this about Obama: “…he has done little to fix the deficit, shown a zeal for big government and all too often given the impression that capitalism is something unpleasant he found on the sole of his sneaker.”  Scrape that off your sneaker, tell OMB Director Peter Orszag to zip up his pants, and get to work!

And let’s be glad the Chinese are still buying, but not get too cozy in the knowledge of the same…

Image above: Nixon and Mao: Mutual dependence goes back a long way.  Source:  http://www.china-profile.com

From AP:

China and other countries buy US Treasury debt

China boosts holdings of US Treasury debt by $5 billion, second consecutive monthly gain

ap

Martin Crutsinger, AP Economics Writer, On Tuesday June 15, 2010, 11:38 am EDT

WASHINGTON (AP) — China boosted its holdings of U.S. Treasury debt in April for the second straight month as total foreign holdings of U.S. government debt increased.

China’s holdings of U.S. Treasury securities rose by $5 billion to $900.2 billion in April, the Treasury Department said Tuesday. Total foreign holdings rose by $72.8 billion to $3.96 trillion.

The sizable gains are being driven by fears that Greece and other European governments could default on their debt. Worries over possible defaults have sparked a flight to safety and that has benefited U.S. Treasury securities. Treasurys are considered the world’s safest investment — the U.S. government has never defaulted on its debt.

The April increases eased concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt with private economists forecasting strong gains in May as well because of the debt crisis.

“We will state the obvious that flight to safety will most likely continue to favor the United States in the second quarter,” said Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York. “Given that the European crisis intensified in May, we would expert further large-scale inflows.”

Gregory Daco, U.S. economist at IHS Global Insight, said that demand for U.S. debt was also being helped by the fact that the profit outlook for many U.S. companies is bright and the U.S. economy is forecast to grow at a stronger pace this year than Europe.

China is the largest foreign holder of Treasury securities. The monthly gains in March and April came after six consecutive months when China was either reducing its U.S. holdings or keeping them constant. The stretch raised concerns that China might shift money away from Treasury securities.

The 1.9 percent rise in total holdings of U.S. debt in April followed an even bigger 3.5 percent increase in March.

The Treasury reported that net purchases of long-term securities, covering U.S. government debt and the debt of U.S. companies, increased by $83 billion in April. That follows a record monthly gain of $140.5 billion in March.

The higher interest in U.S. bonds has helped push interest rates lower. It’s a welcome development for the government, which faces the task of financing record federal budget deficits. The federal deficit hit an all-time high of $1.4 trillion last year. It is expected to remain above $1 trillion this year and in 2011 as well.

Japan, the No. 2 foreign holder of Treasury securities, also increased its holdings in April. It boosted them by $10.6 billion to $795.5 billion.

Other countries registering gains in their holdings in April were the United Kingdom and various oil exporting nations.

Is there a Yuan bloc in Asia?

June 8, 2010
Asian currencies tracking China's yuan?  Source:  Google Images
Asian currencies tracking China’s yuan? Source: Google Images

Interesting Economist article (below) discussing whether other Asian currencies — the Korean won, Thai Baht, Singapore dollar, Malaysian Ringgit, New Taiwan dollar, Vietnamese dong, Indian rupee, Indonesian rupiah — track the Chinese yuan in order to maintain competitiveness in US markets relative to China as well as access to the Chinese market.  There have been a number of econometric studies on the matter.  The bottom line is that many Asian currencies, like the Chinese yuan, track the US dollar closely — some call it Bretton Woods II — though the correlation has declined since the economic crisis, as the US economy and US monetary policy have been going through anomalous conditions.  Tying strictly to the US dollar right now might mean some unwanted inflation in accelerating Asian economies.  Still, China’s currency remains essentially fixed to the dollar.  Ultimately, a revaluation of the Chinese yuan, and its Asian brethren, is needed to address the current account imbalances that persist and threaten global economic stability.  The euro crisis has, however, thrown a wrench into that adjustment, leading to some safe haven capital flows into the US dollar, just when the greenback needs to decline in an orderly fashion.

 From the Economist on-line:

 Asian currencies

Chips off the block

Currencies around Asia are more flexible than you think

Jun 3rd 2010 | HONG KONG | From The Economist print edition

AMID all the diplomatic ding-dong over China’s yuan, it is easy to lose sight of emerging Asia’s other currencies. There is not much din over the dong, for example. While China has kept the yuan pegged to the dollar since July 2008, ignoring complaints that it is artificially cheap, Vietnam’s currency, the dong, has depreciated by 13% against the greenback over the same period, unremarked and unprotested. South Korea and Taiwan, the only countries besides China ever to be labelled currency manipulators by America’s Treasury, have seen their currencies cheapen by 17% and 6% respectively.

China’s critics justify their preoccupation by invoking a “yuan block”. China’s neighbours and rivals are reluctant to allow their currencies to rise too far against the yuan, for fear of losing China as a customer, or losing out to it as a competitor. Thus although China accounts for only 19% of America’s imports, its peg, it is argued, frustrates a broader realignment of currencies in the region.

Does such a yuan block exist? For over a decade before July 2005, it was impossible to say. Since the yuan did not move independently of the dollar, it was hard to know if China’s neighbours were in thrall to its currency or America’s. But for the following three years, China allowed the yuan to crawl slowly upwards against the dollar. A 2007 study by Chang Shu, Nathan Chow and Jun-Yu Chan at the Hong Kong Monetary Authority took advantage of this interlude to measure the influence of China’s yuan on other regional currencies.

Using a method popularised by Jeffrey Frankel of Harvard University and Shang-Jin Wei of Columbia, they looked at the fluctuations of Asian currencies against the Swiss franc. Insofar as the Thai baht and the dollar mirrored each other’s moves against the Swiss currency, the authors could conclude that the baht was under the dollar’s spell. But if the baht and the yuan strengthened against the franc when the dollar did not, they could identify the separate pull of China’s currency.

That pull was strongest on the Korean won, Thai baht, New Taiwan dollar and Singapore dollar. But it also seemed to reach as far as the Indonesian rupiah and even the Indian rupee. The economists’ results suggested that if the yuan were to appreciate by 1%, independently of the greenback, the Singapore dollar, New Taiwan dollar and the Thai baht would rise by 0.58%-0.68% in sympathy. The Korean won would strengthen one for one.

Since July 2008 the yuan has not moved an inch against the dollar. Does that mean that other members of the yuan block have also stood still? Hardly. Malaysia untethered its currency from the dollar one day after China in July 2005. But unlike China it did not retether it during the crisis. The ringgit fell by 15% from April 2008 to March 2009, before regaining much of that ground over the next 14 months. The won’s wobbles have been even greater. It lost 40% of its value from February 2008 to March 2009, and remains 25% below its pre-crisis peak.

Most of emerging Asia’s currencies strengthened against the dollar this spring. The ringgit rose by 8% from February to May, after Malaysia’s independent-minded central bank raised interest rates in March and again on May 10th. In April Singapore’s Monetary Authority said it would allow a “gradual and modest” appreciation of its currency. But since the debt crisis in Greece unnerved investors, these currencies have mostly lost value again.

This block isn’t scared any more

The flexibility shown by Asia’s currencies is noteworthy, even if most of their flexing has been downwards. Economists used to accuse the region of a “fear of floating”. In 2003 Michael Dooley of the University of California, Santa Cruz, with David Folkerts-Landau and Peter Garber of Deutsche Bank argued that a de facto dollar standard prevailed in much of the region, akin to the “Bretton Woods” regime of fixed dollar parities that emerged after the second world war. But a paper published on May 19th by Ila Patnaik and her colleagues at the National Institute of Public Finance and Policy in Delhi documents a gradual thinning out of the Bretton Woods II regime.

They use a similar method to Messrs Frankel and Wei to show how closely Asia’s currencies track the dollar, euro, yen and pound. They give each country a Bretton Woods II score, based on the rigidity of its currency, especially relative to the dollar. In 2003 the average score in Asia was about 0.85 (a score of one represents a hard peg to the dollar). But the score has since dropped steadily to 0.75.

The new flexibility should stand Asia’s economies in good stead. Their ties to the dollar once guaranteed stable prices at home, as well as competitive exports abroad. But America’s monetary policy, suited to an economy with flat prices and high unemployment, is too loose for a region now growing so rapidly. As Asia’s recovery outstrips America’s, the region’s central banks will have to raise interest rates, as Malaysia, Vietnam and India have already done. Their currencies will appreciate as a result.

This appreciation will be easier to stomach if the yuan also strengthens. But China’s neighbours should not wait for this to happen. Even members of the so-called yuan block should not let the yuan block their progress.

China: A bully like Wilhelmine Germany?

June 2, 2010
South China Sea where China and its neighbors dispute control over strategic islands and energy resources.  Source:  Google Images
South China Sea where China and its neighbors dispute control over strategic islands and energy resources. Source: Google Images

People like the analogy.  The rise of Germany after 1890, mismanaged by Germany and its adversaries, and the rise of China today — mismanaged or well-managed?  A NYTimes article today discusses the conflicting claims over rich offshore oil resources in the South China Sea among China and its much smaller neighbors, notably Vietnam, with which China fought a war in 1979 (though that was over Cambodia).  These conflicting claims on China’s flank remain unresolved.  Tension in the South China Sea bubbles dangerously below the surface, not unlike the way Morocco and the Balkans did for decades before WWI.  The US takes no sides in these disputes, but the South China Sea constitutes a potential flashpoint for tension between the US and China, in addition to Taiwan.  Some estimates put the quantity of shipping that takes place through the strategic sea lanes in the South China Sea at around 50% of world shipping, depicted with arrows in the map shown above.

Vietnam is pursuing the negotiating strategy of the weak — internationalize the conflict.  This reminds me of Yasser Arafat’s never-ending call back in the day for an “international conference” over the Arab-Israeli conflict; whereas Israel, like the Chinese, always preferred bilateral talks.  Both China and Israel resist international conferences where smaller countries can gang up on them.  Recall the Madrid Conference on the Mideast in 1991, cobbled together by the Bush administration (with the gifted handiwork of Sec. of State  Jim Baker).  Israel was isolated and ganged up on in Madrid.  Israel ultimately preferred secret bilateral talks with the Palestinians in Oslo.

In any event, the South China Sea issue won’t go away, and one wonders if, like Wilhelmine Germany, China will succeed in alienating everyone with its bullying tactics or will seek to find a mutually beneficial solution.  It is hard to find such a win-win solution in a dispute over territory and resources.

(from a Feb. 5, 2010 blog post.)

Update: China imposes sanctions on US

January 29, 2010

“Canceling military discussions and calling in the American ambassador have been two standard Chinese measures in response to previous American arms sales to Taiwan. But the announcement of restrictions on the Chinese operations of American companies involved in the arms sales represents an unusual twist…” quoted from a NYTimes article today on the US-Taiwan arms deal.

Update on yesterday’s post on the US-Taiwan arms deal:  China’s reaction is sanctions, a response which apparently goes beyond previous diplomatic action against the U.S. regarding Taiwan.  This raises some questions: First, are the Chinese imposing Iran-style sanctions, that is, similar to sanctions the U.S. advocates to pressure the government of Iran? Is this therefore a diplomatic nose-thumbing at the United States?  Second, do they think they can push President Obama around more than the average American president?  While I am not seeking to question the president’s credibility, it is valid to ask the question — would they have imposed these sanctions on a McCain or a Hillary administration?

China: Obama continues to arm Taiwan

January 29, 2010
The Mainland looms over 23 mln Taiwanese  Source: Google Images
The Mainland looms over 23 mln Taiwanese Source: Google Images

The government of China has expressed indignation over the Obama administration’s decision to sell $6.4 billion in defensive weapons to Taiwan.  Taiwan is part of China, Beijing argues, and the U.S. is meddling in a domestic dispute.  See article on the arms deal.

Obama — with no “reset” button on China — is acting in accordance with the 1979 Taiwan Relations Act, which was passed after Jimmy Carter chose the Mainland over Taiwan as the “one China” the U.S. would recognize.  The Act nonetheless provided for a defensive arming of Taiwan.  With Reagan in power in the 1980s, the opening to China was not reversed, but the U.S. government “assured” Taiwan it would not recognize Beijing’s sovereignty over Taiwan without negotiations, even though the U.S. position remained that there was only one China.  When I was a US foreign service officer in the 1990s, I remember one of my colleagues having to “resign” temporarily from the foreign service in order to represent the US in its non-embassy in Taipei (called the “American Institute in Taiwan”).  More diplomatic gymnastics than Nadia Comaneci.

The Obama administration, like previous American administrations, heard back from Beijing that this arms transfer would harm US-Chinese relations.  The Chinese weren’t even impressed that President Obama decided not to sell F-16s to Taiwan.  Perhaps these could be construed as offensive weapons.  As crazy John Mearsheimer’s crazy Offensive Realism theory would have it, you can’t trust anyone out there because all weapons, even defensive ones, can be used offensively.  Mearsheimer should be feted in Beijing for this reason,  just as he is in Beirut and Ramallah.  Well, F-16s can be deployed as offensive weapons, John, but the weapons going to Taiwan — helicopters, Patriot missiles, minehunters and communications equipment — are not exactly the basis of a blitzkrieg.  One wonders if a President McCain would have sold Taiwan the F-16s.

The deal seems sizable, though I am no defense analyst, but only a modest economist/political analyst.  Still, Taiwan is not among the largest purchasers of US weaponry.  On an annual basis, the top ten acquirers of US arms in 2008 in descending order were:  Israel (just as you suspected, John), Saudi Arabia, South Korea, Egypt, Poland, Canada, Iraq, Turkey, Jordan and Pakistan, according to data compiled by the Federation of American Scientists.    (Add up all the arms purchased by states Israel has shaky or no diplomatic relations with, John and Steve, and you may understand why the US supplies such a level of arms to Israel — but after all, this post is about Taiwan!)

According to data compiled by the Stockholm International Peace Research Institute (SIPRI), a purveyor of lots of defense-related data, the top ten arms exporters in 2007 in descending order were: the U.S., Russia, Germany, France, the Ukraine, the Netherlands, the UK, South Korea, Italy, and Sweden (found on Wikipedia).  SIPRI also lists the top 10 defense budgets in 2008, spent predominantly on domestic forces: the US, China, France, the UK, Russia, Germany, Japan, Italy, Saudia Arabia, and India.  Here, the US dwarfs everyone, spending over 7 times as much as the number two largest defense spender, China, and over $80 billion more than the 9 next largest spenders combined.  Does this mean Taiwan is safe?  For now perhaps.

China is the 800-pound gorilla, so one understands why most nations see the gorilla as the one and only China.  However, with such a fuss made by Wilsonian defenders of the self-determination of peoples — witness support for Kosovar, Palestinian, Georgian, and other minority rights — why has the world given the shaft to 23 million Taiwanese?  They clearly do not want to become part of the one-party state that governs 1.3 billion people across the straits.  I am no Barry Goldwater, but we should ask this question nonetheless.  Henry Kissinger didn’t, but we should.