Monday, June 28, 2010

G20

Here is a comment by a foreign exchange expert, Marc Chandler

"While generally agreeing the G20 was a glorified photo opportunity, I don't share Jim's [Jim Cramer] cynicism about the G20 commitment to reducing budget deficits byhalf by 2013 and stabilizing debt/GDP ratios by 2016. To my recollection, this is the first time the G20, or even the G7, has given quantified targets. It also would seem to suggest that much of the difference between the US and Europe is rhetoric. Outside of the periphery, most austerity plans begin kicking in next year, not this year. And the US is not as far away as posturing indicates: 1)Obama has proposed a three-year freeze on non-security domestic appropriations, 2) a 3% deficit-to-GDP target by 2015 and 3) a bipartisan fiscal commission report due Dec 1."

- Realmoney.com, June 28, 2010.

Chandler, as always, is right on money, very balanced view. I believe this is a safe take on G20 proceedings which concluded in Toronto yesterday.

Few other thoughts about what will deeply influence shape of G20 commitments in days to come:

1. I think China will balance the over heating and they will be able to control distortions in their economy from going out of control. Till 2012 the current leadership (Hu and Wen Jiabao) is firmly in saddle. It will be only late 2011 when there could be some chance of intense internal jockeying destabilizing things. But still it is highly unlikely that the Chinese Communist Party will drop any discipline here. They will keep on marching on the same successful beat here for next few years.

2. November 2010 elections in USA will determine the course. The real fear there is Krugman scenario - GOP controlled Congress essentially hammer locking any spending and the nascent recovery is completely chocked off. Anemic growth is much more acceptable scenario here considering suicidal tendencies of GOP and Tea Party. Dems are unlikely to get the 'politics of deficit funded stimulus' right and hence there will not be any new stimulus in USA. As a result, the way out Krugman is looking for - robust growth by attacking unemployment head on - will not happen.

3. German Chancellor Merkel's future will be determined this week when new German President is selected. Overall there are lot of doubts about the durability of this Merkel government and if at all elections do get declared, that will be one more unknown here. Again the danger is not that Germany loosens spending (they have the room); but Germany would refuse to pay the ball for other profligate Europeans and by that disturbing the apple cart of Euro which is stabilizing slowly.

4. Barring some surprises, Cameron and UK government will do well. Chances of bad surprise there continues to be low.

5. Japan - whether the new PM is able to win the election and is able to bring stability, that is again another unknown. If Japanese do not get their act right, continued dropping of that shoe will be expensive to the global growth prospects.

6. Rest of G20 are not expected to bring any surprises unless Turkey goes nuts in Middle East while backing Hamas and Iran

So all in all, bit stable outlook for global economy.

Politics of Depression

Paul Krugman only needs to read another article from the same NYT issue where his column is published in which he warns about the impeding depression - the excess of entitlements and public wages which rob governments of their precious tax dollars.

Try telling people that $1 Million as sick leave payout for 4 retiring police officers is 'stimulus spending' by a city. Try telling people how CALPERS continue to demand more cash from already bankrupt California government. Dwindling tax dollars of State and city governments in USA still have to carry the burden of around half Trillion pension liabilities and half Trillion retiree health care liabilities. Every year Federal government in USA spends half Trillion dollars on uncontrolled medicare and related medical costs. None of our politicians are talking any serious reduction in entitlement payments or reigning in payments to public union labor. Why would American Public believe that spending borrowed money is going to help them to get out of Depression?

The politics of deficit financed stimulus is totally out of whack. Greece reached this calamity because they continued to spend borrowed money in giving 13th and 14th month salary to public employees. Easy to collect VAT tax helps governments to spend, and leverage state cash stream to borrow more to spend, outrageous amounts on bloated labor costs and entitlements. Unless our politicians show the spine to stop this colossal waste of tax dollars, and willingness to take on public union labor as well as entitlement demanding mentality in general, we are not going to get political support for any deficit financed stimulus spending.

Deficit financed stimulus spending may be a right policy, but if you do not get politics of that right, the righteousness of the policy in itself is hardly going to make it a reality. Public, knowingly or unknowingly prefers a depression in absence of willingness from our politicians in taking on waste of tax dollars; assuming that Krugman's reading of History and his theoretical underpinnings are correct.

Sunday, June 27, 2010

Belgium shows the way

The country which cannot get it's government after months of political jockeying, the country which is perceived as perennially on the verge of division shows the way when it comes to 'slapping Vatican and Benedict' in child abuse cases. Belgium Police raids church properties and confiscates documents related to child abuse cases in Belgium. That is a way to go. The question is when would other countries learn from this experience, would start getting tough and start providing the badly needed justice to victims of clergy child abuse instead of relying on homilies of Benedict; the Pope whose hands are maligned in this whole affair too.

It is amusing to see how Benedict is getting purple faced in this humiliation by Belgium Police. But then that is his problem and he brought it himself on Vatican by his own inaction in this matter. There is no way in today's world any country can believe in the internal process of Roman Catholic Church only when it comes to rooting out clergy child abuse. More countries should adopt such a strict approach, rather come to senses without getting fooled by Vatican and pomp of Benedict.

World Cup Commentary - German Dominance

Oh boy, that is thrashing. There is simply no room for doubt, who is the boss whenever England and Germany meet. More and more it seems the loss of German Machine in the Group Matches was a fluke whereas England had barely survived the group. I guess in a way this defeat by Germans free the English fan out of their misery! Now they are free to back 'real soccer teams' of the world without any compunction.

Talking of real European soccer teams, it looks like Germany, Netherlands and Spain are the ones who will be making the European stand among the continued great run of South American teams. Quite fascinating to watch.

Saturday, June 26, 2010

World Cup Commentary - USA Out

Weak defense, poor finish and chronic weakness of conceding first goals; all that finally cost USA its quest for further advance in the World Cup. No doubt Ghana team deserved this win because their defense was compact, the players over powered Americans in stealing balls and when it mattered they had good finish. Only thing going forward is Ghana players will need to be less dramatic on field and be more sportsman like.

One senses that just when larger America was warming up for Team USA progress, the quest came to a sudden halt; breaking the virtuous cycle of further popularity of soccer in USA. Americans achieved their goal of going past the group level, but could not make much advance. I suspect it will be many years before soccer will catch the imagination of Americans. USA Soccer Team will have to continue it's uphill battle again, possibly without any perceptible change in the public support.

Wednesday, June 23, 2010

World Cup Commentary - Happiness London

With the dramatic late goal by London Donovan, USA tops the group and is in the round of 16 teams. With at least 3 chances missing in the first half, American Team was discouraged though they were able to over come their usual weakness of conceding a goal first. But again with this clear and emphatic victory in the game of 'nerves', Americans are probably entering the next round with a psychological advantage. Performance in last three matches by USA, though exposing certain weaknesses, would make them to stand equal with the giants of this Cup - Argentina, Brazil and others. Quite an impressive run by Americans.

With England's victory over Slovenia, London will be happy too. It is a relief to English fans.

Sunday, June 20, 2010

Politics of Deficit Funded Stimulus

With the defeat of stimulus measures in Congress, the chorus of 'need to continue deficit funded stimulus' is raging on Left. We have Ezra Klein arguing how deficit cutting at State level is negating any gains in jobs financed by Federal stimulus (implying that we need more stimulus), Time publishing the horror story of deficits at state levels and Paul Krugman railing against all the deficit cut talk coming out of Europe. Even White House is joining the debate by President Obama disapproving European actions of early stimulus withdrawal and austerity. All in all coming G20 meeting will be interesting and it will prove whether that grouping has any purpose as well as an ability to deliver anything concrete. (China declaring its willingness to free float Yuan is an attempt to portray a picture of 'China doing it's part' without actually doing anything concrete so far.)

The thing Left is not able to grasp is why Centrist Democrats, Republicans and general public are not ready for more deficit spending to stimulate the economy when unemployment is around 10% in USA. Krugman goes a step further and declares that the misplaced urge to balance budgets in times of recession / uneven recovery is bound to force American, European and consequently the global economy in double dip due to the lack of demand.

In an ideal world that is true. But public and market have a point too in demanding austerity when everyone knows that this Great Recession started precisely because of excessive debt. Deficit funded stimulus is nothing but increasing that indebtedness further and hence the reluctance from the general public. How does deficit spending make sense if Greek does not change its practice of awarding 13th and 14th month salary to public workers? In absence of flexible labor market how more deficit spending in Spain will help that country and Europe?

This means 'austerity' is indeed required when it comes to state entitlement commitments to an individual. In America what people are looking for is commitments from our politicians that America will not be on the road Europe has traveled so far (which ends in its current crisis) - VAT lubricated entitlement expansion beyond what a society can afford collectively. As long as such demonstrable resolve on part of our politicians is not manifested, public will continue to be sour on any deficit funded stimulus.

As and when White House and Democrats in Congress show such a resolve and enact concrete entitlement reductions, can they go back to deficit funding then? I doubt. (Needless to say Heath Care Reform actually pulled America in the direction of entitlement expansion and hence the general anger about that, even though such an expansion would have a solid moral case and purportedly reform is fiscally responsible.) There also I suspect public is favorably disposed towards spending that is for 'common good' rather than any individual oriented entitlement like expansion of unemployment allowance or saving jobs of unionized teachers, police and state workers. The obvious candidate for such stimulus spending is 'infrastructure spending' since it is one of the effective ways of stimulating economy. Granted, the negative for such a spending is it's longer gestation period to start and complete. But it is better than no stimulus spending at all. Such a stimulus may not solve the problem of unemployment and increase in demand in shorter term (though China exactly did that in this recession successfully even thought one accepts the legal system over there is more favorable to State than individuals); it is better than nothing. Politically also it is much easier and 'sunny' for politicians to talk about 'infrastructure spending' than sustaining bunch of unemployed folks, howsoever morally right that is. It basically goes according to the American ethos of 'self help' by not creating more 'welfare dependencies'.

The question is whether President Obama and Democrats want to understand this dynamics or to continue to hit wall as they have while trying to increase unemployment funding in their latest attempts. No matter what, the 'political message' from this President is more of creating more of 'welfare queens' (apologies for using this derogatory term, but that is what is perceived by the public) than the fundamentally positive message of inspiring each individual's own 'industriousness' to meet America's challenge of gainful employment.

Yuan Flexibility - Update

Two observations here:

1. I exactly had the same thought as Fallows and Ma think - it is not a hopeless case of America's influence on China. For sure China was motivated by the raging inflation, but one cannot negate the pressure of America (Administration, but more of Congress) and rest of the world to make China change the policy. Pissing of America and rest of the world is hardly good for China and it dawned on China.

2. However, Roubini says that Yuan actually would not appreciate that much. That is a conclusion of his fundamentally bearish view of Chinese Economy (i.e. China will not be able to control labor costs and inflation) and his bearish case for depreciation of Euro against Dollar which will force China to continue the depreciation of Yuan against Dollar too. Roubini's bearish case about Europe has many more economist agreeing (IMF, Martin Wolf, Paul Krugman, etc. because according to this view Europe is retrenching earlier than warranted). But other than that I do not tend to keep too much of stock with Roubini, he is more of Media Attention Grabber than a rigorous Economist who is ready to submit himself for the 'timing test' for his predictions. (Read JJ Cramer for more Roubini criticism.)

Saturday, June 19, 2010

$470 Millions vs $20 Billions and More

That is the difference between Union Carbide Bhopal Gas tragedy compensation amount and what BP is offering as the 'initial down payment' for the BP Gulf Oil spill. BP is in all probability likely to pay more and it needs to pay more for sure. Number of confirmed direct deaths for Bhopal Gas Tragedy is 3,787 whereas for BP Oil Spill it is 11.

That is the difference between 'lives of Third World people' and lives and life style of 'First World people'.

I agree that Union Carbide would have got money from India operations in the order of $1 Billion at the most whereas for BP the intake will be of the order of multiple Billions from affected states of USA only. One would also accept that the amounts we are taking are in differing time periods - Bhopal Gas Tragedy amount is in the context of 25 years back in time whereas BP amounts are of today.

Still, is the difference acceptable and just? Who dropped the ball?

No doubt the difference is due the 'arrogance of the First World' in assuming lives of their people are superior to lives of Third World people. Agreed, lot of water has gone in the last 25 years and the attitude of folks in USA has dramatically changed towards India. But still it is difficult to ignore the superiority complex of the First World People here.

Who else is responsible for this neglect? What about the glacial speed of Indian Judicial System as well as it's 'no balls attitude'? That is too a reason why people of Bhopal never got timely and effective help.

But I guess the most blame goes to the Central Government of India and the Indian National Congress Party which ruled during those crucial periods. There is a kind of belief among Indian politicians that unless they are 'thick skinned and callous' they cannot keep aside annoying cases like Bhopal to continue the enrichment of elite classes in India under the name of Liberalization. Dr. Singh, Sonia Gandhi and Rahul Gandhi are not immune to such a disgusting fallacy.

I guess at some point the sheer shame of all this must be forcing Indian rulers to take some steps to rectify this unacceptable injustice and hence we see some belated moves by Indian Government to address the imbalance here. Dr. Singh better gets things right here and quickly too.

Yuan Flexibility

James Fallows, the resident China expert at The Atlantic, was speculating whether China would do something about Yuan Exchange rate before the G20 meeting in Canada. His contention was if China at all wanted to do something, they would do during this window.

Fallows is vindicated here and China is out with it's statement in this regard. Follows comments are here.

It is true that there is no concrete action there yet. Either China will fool again USA and West one more time, or China would indeed start to take it's global leadership more seriously to do the necessary after waiting for conditions to develop for such exchange rate liberalization. Even after this statement, jury is still out. However, if indeed China does not follow this announcement, the feeling of 'getting fooled' will entrench in USA, Europe and rest of the world. That will not be easy on China. In other words, if China did not want to free the Yuan, it would not have released this statement in some sense to elevate expectations. To release this statement and not to do anything will be really stupid for China and I doubt Chinese Communist Party will be that foolish.

Friday, June 18, 2010

World Cup Commentary – USA vs Slovenia

This was one of the finest soccer games so far in this World Cup – 4 solid field goals. It would have been 5 goals if not for the last disqualified USA goal and USA would had dramatic win. Nevertheless, coming from behind 2 goals is pretty dramatic and USA team deserves credit for regaining their composure and nerve.

Needless to say USA needs to improve their defenses, especially in early part of the match. Against England USA conceded the goal within 5 minutes of start of the match, against Slovenia within 15 minutes. There is some improvement there, but quite unlikely to withstand on slaughter of power house teams like Argentina, Brazil, Netherlands etc.

Though diminished, chances of USA to qualify second round are not totally nil yet. It depends on how rest of the group matches develop.

Thursday, June 17, 2010

World Cup Commentary - Nate Speaks

Our top notch, favorite psephologist and statistician is back with his magic. According to Nate, contenders for winning World Cup in that order are:

- Brazil
- Netherlands
- Argentina
- Spain (despite early humiliation)
- England (bit of a surprise)
- Germany

Wednesday, June 16, 2010

Obama Speech

There have been number of reactions to speech - many saying the speech fell flat whereas others saying the speech followed by BP announcement of funding escrow is finally bringing Obama ahead of the curve in this BP Spill saga. My point is about one specific issue where I am looking for answers and Obama speech yesterday definitely was not the place where I would find those answers. It is illustrated by what I wrote first on Ezra's blog as comments (with some minor corrections):

"It is hard for Americans to accept that companies have technologies to dig so deep holes, but neither these companies nor our government have any technology to stop an experiment gone awry. This is the seismic shift, colossal loss for our Technology based Life. What we need is our President to explicitly recognize this fundamental disconnect which has occurred, say that publicly and then vow that his government will work to bridge this gap. It cannot happen in time to plug this BP hole. That will have to be via ‘drilling the relief well'. That expectation setting is needed from the President. But this commitment to put in motion a process so as we Americans are never at the mercy of some such long distant solutions to address ‘accidents’ is what we need. Granted, it is abstract at this point – but as he said, you got to start it. Remember this is not talking some distant hazards of Global Warming and addressing those. We are talking a concrete mechanism in place to address ‘accidents’; what some call as ‘incident/ situation room’ where relevant technologies are always brought.

This is what Peggy Noonan talks as 'big picture Presidency'. Her contention, if it was Regan; he would precisely talk this situation of our society. I wish Obama had talked about this Technological Failure of American Society. Compare that with Apollo 13 mission and many other miracles done under duress. America today is not able to repeat that. Whether it is BP or public sector, that is besides the point.

No matter what, collectively we need to accept this limitation of ours in this situation. There is none other than the President who can talk this. It is he who is expected to start putting pieces in place so that tomorrow we deal such accidents better.

True, being an engineer it is very hard and troublesome for me and many like us that within reasonable period and multiple chances; finally technology could not be mastered to contain the leak. That is the shame."

Beyond this speech and wherewithal to contain BP leak now, there are number of issues which need to be addressed over a period. One is what are the legal grounds when State can demand any such technology from a private party when stakes are larger and damage to Public Good is involved? What will be the practical mechanism to achieve such sourcing of know how from any non-government party? Do we regard it as one more consequence of 'big government' philosophy or there is some room to accept such intrusive role of the State in such extraordinary circumstances? Correct, none of these are suitable for one such speech, but the idea is President Obama starts the conversation. Today, we not talking any of these longer term issues of how we conduct our business and in that sense I found Obama speech and his overall approach quite disappointing. If our President does not talk about the 'big picture', then who will?

In a way it is easier when private banks make enormous accidents and blow out the market - the State monopoly of printing currency and making whole People to pay for it collectively can help you to avoid the financial Armageddon. No such luxury in accidents like BP Spill. The State which has organizations which send humans to moon or armies and navies which deploy the most cutting edge weapons looks feeble; technologically and organizationally incapable of pulling off something which saves Public Good.

Sunday, June 13, 2010

Jurgen Habermas

(In my University days Habermas and Silicon Valley based Richard Rorty - deceased - were the 2 most influential and fashionable Philosophers on the campus. So commenting on Habermas is kind of exciting business. This post is a comment on Habermas, based on his article translated in The Nation.)

This is a classic Left critique from a traditional German Philosopher.

- The single most omission Habermas tends to do is why German Elites and Capitalist Establishment are reacting in this manner - the manner of decrying excess of Greece and reluctance to help weaker European economies? Clear culprit here is the European excess of VAT lubricated welfare state with extra-ordinary pampering of Labor. To refuse to acknowledge the role played by borrowings as well as refusal by State to change ultra-Labor favored laws; is to be intellectually weak. That is what Habermas type of critics sound notwithstanding their reputation and pedagogical credentials

- Next, Habermas does not resolve the tension and contradiction between his urge to bring greater accountability / democracy to European Institutions as well as the his exhortation to German Politicians to be bold in ignoring German People's will in not underwriting any further bailouts. In a way that is the core political dilemma. That was the exact dilemma Obama tried to solve in his speech - "I am not bound to succeed, but I am bound to be True" - when he finally asked Congressional Democrats to pass Health Care Reform in face of the visceral opposition and lukewarm public support. Ever since Obama's Political Capital Well is fully depleted. You see, the problem is Political Capital is a replenishable commodity only if your core political 'calls' turn out to be correct. In case of Obama with European edifice of welfare state crumbling in front of world, further expansion of medical entitlement does not sound any wiser. That is the problem for Merkel. She is not yet sure to make the call of her political life. Helmut Kohl made that call (may be it was easy) when he committed fully for the German Unification.

Or it may be convenient for Habermas to forget why France and other European nations allowed the German Unification in the first place - as famous FOREX trader Mark Chandler says that the implicit deal was: rest of the Europeans allowing Germany to unit to become the most dominant partner only when Germans were ready to pay the full price in terms of 'net transfers' of tax contributions to Europe while introducing Euro. Germans legitimately feel that the expiry date of that deal has come near and countries like Greek cashed unfairly on the guarantees made available by Germans.

Don't mistake that I support these Conservative instincts of many Germans. I agree with Habermas contention in the end, of need for Germany to continue this European project. Reintroducing Deutsche Mark will be economically beneficial for German, but that is not an option given the political ramifications of that.

However, not understanding many of these constraints means refusal by Habermas to leave his Left cocoon of comfort.

World Cup Commentary

English goal keeper 'spills' the ball and Americans get the equalizer in their opening group match. Compared to the BP Spill in Gulf Mexico, Americans love this spill by the English goal keeper. England will change their goalie and will try to regroup in next matches. But it is difficult to see how this weak and lackluster English Team can advance much further than quarter finals.

Americans, they are still in the process of proving themselves. American Team is with limited arsenal and quite visible limitations. It is not yet a Soccer Power let alone Super Power of Soccer. (Brazil, Argentina, Germany and Italy are traditional Soccer Super Powers whereas England, Netherlands and Spain are other powerhouses, with Spain being especially on roll this time.) Since coming from behind and holding England in the second half well; Americans have a psychological advantage. American goalie Tim Howard was as good as his reputation says. The question is whether they will be able to build on top of that to pass the first round or not. Americans started the last world cup in Germany by a draw against Italy, but lost 2 others matches and failed miserably to advance any further. The objective for this American Team will be to build up on this result to advance to the round of 16 Teams. Any advance beyond that for the American Team will be a bonus. As American Team improves performance going forward, VP Biden's trip to wow FIFA to hold the 2018 World Cup in USA may not be a pure waste.

On a side note, I came across a sad video about a Haitian soccer player who scored America's goal against England in that famous upset. It is really perplexing to know that in the first place this soccer player did not get American Citizenship and then American Politics was more consumed by purported 'anti-communist' utility of then Haitian 'Papa Doc' ruler than asking that government to spare the life of this player. One more sad story of America's continued ways of relegating Human Rights to background when it comes to Foreign Policy. For whatever domestic and international political reasons, unfortunately Obama Administration does not seem to be on any high road in this regard.

Saturday, June 12, 2010

Corrosive Effects of Anti-Incumbency Fever

Washington Post publishes two good articles in this regard:
- growing pains of Tea Party where competition in proving one's anti-incumbency / anti-Washington credentials is reaching breaking points and
- another one about Colorado Democratic nominee for Senate.

Media invented this non-sense of 'anit-incumbency' and every politician in this country is resorting to a cheap political act of 'anti-Washington'. These politicians are acting as if all ills of USA are only because of what happens in Washington and all other towns and cities in rest of the America are squeaky clean! Give us a break.

It all started with Barack Obama. (You see it is always easy to start from the top...) He campaigned 'to fix Washington', won the election on that plank and ever since we are getting these waves after waves of politicians whose only 'program' is to fix broken Washington. True, that is how politicians have been coming to the American capital since ancient times. But there is a small detail. These politicians need to know more about 'what is broken in specific and how to fix'. Hurling wrong accusation against your political opponent that he or she is 'Washington insider' is basically used as a cover to hide total ignorance, unpreparedness and lack of home work by these politicians.

May be Barack Obama comes forward and tells once and for all that such 'useless and shrill arguments in absence of specifics' are not useful to America. I know, that is unlikely to happen soon. Till then reports like as filed by Dana Milbank are our only answers to over come banality and misguided campaigns going around.

Friday, June 11, 2010

Benedict and Catholic Church

Few weeks back Time published a great article about the turmoil in Vatican, challenges Catholic Church is facing and how square and central Pope Benedict is to that drama.

The article talks about the quandary Benedict faces in accepting his personal failure and sins as well as historical context why Church has been loath to report these abuses to the local law enforcement authorities. It is a problem for Benedict to breach open the subject of personal failures because Papacy is infallible for Catholicism. Well, but today's world with increased scrutiny of any 'morality preacher' is unlikely to be sympathetic to this dilemma of Pope (how to compromise Pope's majesty while acknowledging personal failures) and hence would not much lessen the demand for a full mea culpa by Benedict. In that regard Pope Benedict's apology and pleading yesterday is a good start, though enforcement of any relevant changes is still need lot of progress to happen.

Vatican may be a State in itself, but even it cannot contend that local laws of perishes should not be applied for any wrong doing undertaken by perishes spread all over the world. Sovereignty of Vatican State hardly results in any kind of 'immunity' for local priests in avoiding consequences of child abuse. In no uncertain ways anyone can accept any dilly dallying by the Church in bringing these child abusing priests to face consequences of local laws.

Beyond all this, Catholicism and over all belief in God is facing bigger challenges like 'creation of artificial life'. There is a time before all these genetic engineering and related science experiments result in crossing of a line. For sure that is where scientists are heading. But may be we need something like 'trust in God' to navigate vagaries of daily life. In that sense what one Vatican official said ages back 'Napoleon cannot destroy Catholic church because we (meaning Catholic Clergy) ourselves have not been able to do it so far' could be the truth.

Tuesday, June 08, 2010

Stupid Punditry Bites Dust Once More

That is what Arkansas Sen. Blanche Lincoln's victory tonight in the Democratic Primary shows. She was written off against an insurgent candidate who was cock sure of his victory.

There are three things to note here:

This blogger is sick and tired of the foolish Media Narrative of 'anit-incumbency wave' in this election cycle. This is some concoction of Media who wants to show its misplace relevance here. Even our own beloved Ezra could not resist to accept glibly the premise of 'anti-incumbency'. The truth is polarization in American Politics has not decreased. Earlier it was 'Iraq war and anit-Bush' sentiments which drove electorate. Now it is 'fiscal irresponsibility, big Government and Comrade Obama'. As a result elections are still quite close and difficult to predict. There is possible churning among voters but as a result of this churning, surprisingly, no one group is becoming larger at the cost of another. Voters are leaving one block to join another but a third block voters join the first one which results in relatively stable size of vote banks. So it will be worthwhile to watch whether Media ditches all this non-sense of 'anti-incumbency' and becomes more careful or not. Chances are low, but worth to watch. It is true that, all of today's elections were primaries and not general election. Nevertheless, to hastily foist the hypothesis of 'anti-incumbency' does not seem to improve our understanding any better.

Next, one is almost tempted to say Sen. Lincoln's opposition was financed by Bankers after Bankers got enraged by Sen. Lincoln's provision of banning banks from derivative business. Of course, there is no such evidence that bankers financed opposition candidate Bill Halter though these Bankers must have wished so. Bill Halter was primarily financed by Move On Org and Labor Organizations; the fact which Sen. Lincoln seems to have exploited quite well. However, for whatever reasons Sen. Lincoln's primary contest was rendered as the 'proxy' on her amendment in the Finance Regulation Bill. Media was thick with the speculation that more or less that provision was dead. With her victory it will not be so easy to brush aside this provision out of the conference committee bill. One can imagine that with this victory shot, Sen. Lincoln will energetically defend her provision despite the White House opposition. In fact after the early endorsement of Sen. Lincoln, it was perceived that Obama White House stayed away from spending any political capital on Lincoln candidacy. Now that the decks have turned, it is easy to understand that White House would be quite weak in dealing with the Lincoln amendment. Given all this, bankers are not going to be happy and in a way the Finance Regulation Bill might remain tougher on Banks. (Left loved the provision but never liked traditionally centrist candidate Sen. Lincoln.) It is still early and for all we know Sen. Lincoln might even drop her provision now that it has delivered the electoral victory!

Finally, Politico is running a story in its Arena section asking a question whether Labor union backing to a candidate is not as effective as what everyone perceives. One clear effect of Bill Halter defeat will be that Democratic candidate will be less beholden to Labor. This blogger would like to be misty eyed and imagine, may be, just may be Democratic Party will finally start getting out of the vice like grip of Teachers Union which is detrimental to effective use of tax dollars on Education. It will be interesting to watch how far Democratic Party travels on that wiser road.

China Turning on DPRK?

Most analysts think that there are not that many scenarios when China starts raising heat on North Korea (DPRK). One of these rare scenarios is to high light when China's interests are compromised by North Korean action. This particular news item is a concrete manifestation of that. There is no independent confirmation of this because both regimes are 'hermit' regimes in their own ways....

Surprise is China actually making the leap to enact actually one of such ways to pressurize DPRK. This is unlikely to happen without Chinese Communist Party bosses concluding that all the nuisance (sinking of South Korea ship, refusal to international talks, etc.) caused by North Korea has crossed a line. If this is true, it is a great opening for South Korea, Japan, USA and West to bring North Korea to the table for some meaningful talks.

The peace with DPRK (and eventual unification of two Koreas) is possible only when China thinks that the costs of current belligerent path of DPRK have outwitted benefits, if any are there. But as like any other foreign policy issues, we will see two steps forward, one step backward for long before any meaningful resolution starts to appear. One can expect next the firm public affirmation of China's strong relations with DPRK. But it seems there can be a cat among pigeons though we are not sure yet.

Sunday, June 06, 2010

Global Economic Challenges

There are 3 possibilities right now:

A. White House Scenario
American recovery shows inherent strength and withstands the slowdown in Europe as well as decrease in export due to higher Dollar. China is able to soft land successfully to slowly fuel commodity market late in this year or early next year. India and Brazil are able to hold on to their roaring economies. All in all American Economy joins the growth trajectory of China, Brazil, India and others and as a result Global Economy overcomes the dramatic contraction of demand in Europe. In fact improving global economy in subsequent months starts helping Europe to heal and recovery.

B. Krugman Scenario
Deficit hawks and bond vigilantes win the argument at G20 forcing entire Europe to go deficit cut by removing any direct governmental stimulus as well as monetary easing. Europe, Japan and rest of the world do not listen to Geithner. China, Japan and Germany do not commit for any domestic demand increase and as a result American Economy 'muddles' through dragging down rest of the world too since Europe will be already crippled. The key distinction here is Krugman many not allude to the darker scenario as Roubini would describe.

C. Roubini Scenario
Collapse in European demand triggers world wide contraction including America. Deflation takes over everywhere and we are facing another Great Depression synchronized globally which would make it devastating. Double dip will be certainty. Political consequences, including wars, will be inevitable.

With piling of lukewarm employment numbers months after month, Chistina Romer's mission of ridding through Great Recession is not working. May be she originally asked for the stimulus of the size more than 1 Trillion which Obama could not deliver for political reasons; or may be the design of that stimulus was not right; or may be she is not that much 'tuned' to the reality to keep on improvising so as to finally get the result. Whatever may be the case, but it does not look like she is bringing results for what she was appointed. In case of President Obama this is important because as Frank Rich comments, his core style of governance is 'soliciting expert advise' and executing that with as much less input as possible from the political side.

With the looming failure of employment policy, doubts are creeping mighty. Add to that, it is for everyone in the world to see what happens when 'debt driven Socialism' goes unchecked as in Europe. Looking back it is clear that passing of Health Care Reform was not only the final stop of 'progressive politics in USA'; it very likely has set America on the same road on which Europeans are traveling. To assume Americans do not see or understand the predicament of Europe is to assume Americans are stupid. That is untenable when we know that 'cost control' provisions of Health Care Reform may still come out insufficient. When Politics of a country is unable to check social welfare expenses, as like in Europe; no tax collection is going to be enough. Easy money of VAT set Europeans on the road to keep spending lot more borrowed money on social welfare.

Part of the message from Tea Party - when you have the core problem of expenses on hand; don't try to 'camouflage' that by focusing on the revenue side. But heeding to this message - meaning no tax increases except apart from elapse of Bush Tax cuts at the most - is one thing, but to adopt the other part of Tea Party recommendation can be suicidal. Tea Party is also demanding that there be no deficit spending in order to increase employment. And this is the puzzle Obama is unable to solve - how do you politically sale the 'short term deficit' for longer term more tax collection via increased employment which will reduce the longer term deficit. This is problematic because Obama has no 'credibility' left when it comes to spending now to create jobs. Given all this, it is only the matter of whether it is going to be the Krugman Scenario or Roubini Scenario unless Obama Administration comes up with some creative plans to keep the 'credit wheel' greased for small businesses and solvent individuals. Such plans are important because the standard solution of increasing monetary tap, as like Gagnon Plan, is not going help the credit reach end users.

By committing minimal to no tax increase, by committing reductions in hard to control Medicare and Defense Expenses (these are the only ones where any money can be practically saved apart from Social Security which is reasonably solvent today); President Obama can buy some political cover from Tea Party and Fiscal Conservatives. Only when such a cover is coupled with a new, creative stimulus with balanced budget funding; American Government can avoid looming economic crisis.

What are the chances of this happening? Very low unless White House assumptions about scenario A turns out to be right like how they got their 'no bank nationalization' call right. But odds are stacked against President Obama unless he becomes bold here.

Update - When I say "Only when such a cover is coupled with a new, creative stimulus with balanced budget funding..."; for balanced budget I meant balanced over a period of time, not necessarily in the same budget year. So it could be deficit now, but it is balanced by corresponding cuts in future budgets with iron clad commitments.

Israel - America's Choices

Helene Cooper in NYT reports that:

"America has three choices. Either say, it’s politically too hot a potato to touch, and just pay the consequences in the rest of the world. Or try to force through a peace deal between Israelis and Palestinians, so that the Palestinian grievance issue is no longer a driving force or problem. The third choice is for America to say, we can’t solve it, but we can’t pay the consequences, so we will distance ourselves from Israel. That way America would no longer be seen, as it has been this week, as the enabler of excesses of Israeli misbehavior.”

-- Daniel Levy, director of the Middle East Task Force at the New America Foundation and a member of J Street

The idea of Obama Administration was the road to choice #2 goes via choice #3. As Israeli's will realize that American backing cannot be taken for granted, expectation was that they would make the way for choice #2. This was never expected to be a quick detour. But before Israeli Politics (and I mean even majority of Israeli public too) could realize how their current extremist approach would cost them relations with America, Obama Administration has lost the nerve and is opting for the choice #1.

We see the pattern - first the President goes to Kabul and gives an earful to Afghan President; but then Conservatives in USA criticize the President and he then melts. He gives red carpet treatment to Karzai and in the end Obama abandons what is good for America. End result is creation of new war lords in Afghanistan funded by American Tax payers. Same is the case with Israel. This administration simply does not have the nerve to withstand the extreme Zionists in America and hence clearly Obama Administration has settled for the choice #1.

Saturday, June 05, 2010

Private Rocket and it's Enemies

Wall Street Journal has understandably a glowing account of Space Exploration Technologies Corp. (SpaceX) and Mr. Musk - the promoter, financier and principle rocket designer of the company. Yesterday SpaceX successful launched Falcon 9 rocket from Florida. Mr. Musk deserves all this glowing praise and Wall Street Journal is right to high light this private sector accomplishment. The reporting is balanced too in pointing out various areas where SpaceX technology needs further improvement.

The political context for all this is President Obama's NASA and Space Exploration Policy. President Obama wants to use private sector launching abilities for manned space exploration and spend money to fund more risky, innovation oriented, science focused projects at NASA. He wants NASA to get away from the business of rockets.

But Congress would not have anything with it. Some Congress members even want to continue the outdated, expensive shuttle program! Misguided and fiscally irresponsible Democratic Congress Members backing the shuttle program or opposing involving private sector in NASA rockets is quite expected. But it looks like this 'love for government involvement' also extends to Republicans too as this Wall Street story reports about Republican Senator Kay Bailey Hutchison of Texas (who lost her Texan Governor bid to Rick Perry, not particularly an enlightened politician himself).

So whenever these Republicans want to criticize President Obama, they will blame him for bringing 'government involvement' everywhere. But when he actually proposes retrenchment of government and private sector involvement, these very same Republicans have a different idea. It is hypocrisy as well as parochial instincts to protect local jobs dependent on government largesse.

If these Congress members want Obama Administration to be careful in increasing private sector involvement on the basis of safety (as BP oil spill is showing amply), that is different but a welcome part. But that does not seem to be the case so far. Also Challenger or Columbia Shuttle accidents were no less tragic just because those were funded by tax payers.

This country needs to save every dime in the government budget as continued deficit is unlikely to be accepted for long by Capital Market as the European mess shows clearly. World governments are realizing the folly of unending deficit funding even though parliamentarians may not be on the board in many cases. USA is no different and it needs to save tax payers dollars possible. If involving Private sector helps to save few billions, then that should be encouraged.

Mr. Sharad Pawar

He is India's Union Agricultural Minister, President of Nationalist Congress Party, arguably the tallest Maratha Leader in last 4 decades after Yashwantrao Chavan (Pawar's mentor); one of the most powerful politicians from Maharashtra ever and the doyen of - now defunct - Co-operative Movement in Western Maharashtra. But, if anyone sees the danger of 'corruption' and how it is basically going to ruin India permanently; there is no way one would wish Mr. Sharad Pawar to continue in the Union Cabinet Ministry of Dr. Manmohan Singh who wants to 'clean the house of India' with the help of Rahul and Sonia Gandhi.

Let us understand the background of Mr. Pawar. He has the reputation as the guy who has never lost any election in his entire life time (except to India's past PM PV Narsihan Rao for the PM post) and he has been contesting elections ever since this blogger was a baby. He wins all of his elections fair and square with colossal margins. He defines what it is to be undefeated in the independent India. He personifies the concept of a true 'grass root ruler' in the contemporary, democratic India. He had every ingredient to be truly India's Lula da Silva.

But alas, he could not resist the temptations of corrupt ways of contemporary India. He succumbed to wealth accumulation by ill means. The thing is, he is so smart and genius in the game of 'democracy and electoral politics' that for many decades he has been able to avoid the dragnet of Law and Indian Court. But with this IPL blow off, time may have arrived for Mr. Sharad Pawar to hang his gloves.

If India to have any future in 21st century, Rahul and Sonia Gandhi need to understand that ultimately they need to distance from dinosaurs like Mr. Sharad Pawar.

And by the way, if international Cricket wants a genuine and legitimate care taker for the game of Cricket, it would stop by any means Mr. Sharad Pawar to become the chief of International Cricket Council (ICC). One just has to look at comprises BCCI effected when Mr. Pawar was the chief, in kick starting the corrupt IPL. Such an institutional destruction should be avoided by ICC and remedy involves at least stopping Mr. Pawar in taking over ICC.

Friday, June 04, 2010

Questionable Journalism by NYT

As Ezra Klein reports, there is a bit of controversy going on about Dartmouth College research related to spending patterns of Medicare money. But the whole NYT report smells sloppy journalism. Based on the research the NYT report validly argues that there is no linkage between spending and quality offered by a hospital. Given that, then why will not any sane tax payer react as - "then it means lot of tax dollars are getting wasted where hospital costs are much more than average and hence this presents the saving opportunity". Why is it wrong? The NYT report completely ignores this commonsensical interest of taxpayers and goes on something totally useless.

It is not clear by mentioning 'insurance industry' sponsoring Dartmouth College research, does NYT want to imply that this research is biased since insurance industry has an interest in spending less? (Medicare reimbursement rates eventually influence insurance industry payments.) If so, they better investigate that aspect thoroughly and separately. It is difficult to accord any credibility to NYT compared to prestigious research journals like New England Journal of Medicine Study in which many of these Dartmouth research papers were originally published. Piling on 'insurance industry' is only going to give you so much benefit. Larger saving had to be found if Medicare to remain solvent.

How about accusing NYT that it publishes reports which will enrage Labor Unions to become more protective about their expensive medical insurance plans regardless of how it is a wrong financial model for the whole nation? In reality that is happening here. Ill understood labor benefits are protected at all costs, even if it means throwing 'cost benefit' analysis out of the window.

Wednesday, June 02, 2010

Naivety of Tom Friedman

Tom Friedman, the celebrated reporter and famous opinion columnist from NYT, who honed his skills while reporting Middle East; is totally naive to think that Turkey can be persuaded not to go away from Israel. How laughing is that call. Let us see:

- To start with Turkish Prime Minister Recep Tayyip Erdogan is from Islamist Party who has got a solid untainted mandate from Turkish people to continue his Islamic oriented politics. He has been governing in his term solidly and consistently on that mandate.
- Erdogan and his Islamist Party are able to neuter the perennial, overwhelming and secular presence of Turkish Army in politics and now it is seems a settled fact that Turky is firmly ruled by a popular Islamists Leader.
- It seems without the allowance of Turkish air space, vaunted Israeli Air Force cannot conduct the basic air force training since in itself Israel is so small. If that is the case, Turkey holds an enormous card over Israel and can literally make Israel to beg for Turkey's cooperation.
- Along with Brazil, Turkey most recently had the core deal making role with Iran and with that has firmly established itself as the bridge between Sunni Arab and Shiite Iran. That bridge is far more relevant and important to Turkey than the age old, non-paying bridge between East and West. (That whole notion is so old and outdated today.)
- Turkey tried hard to get into Euro. Germany hesitated till the end and along with other paranoid Christean European nations essentially did not accept Muslim majority Turkey. But Turkey with an independent currency and booming economy is having the last laugh while all the travails of Europe are fully exposed by now. Rest is history.
- Finally, most of the 9 confirmed deaths are of Turkish citizens in the 'flotilla stoppage mess'.

With so much going on for Turkey, what does friendship with Israel buy for Turkey? Except forfeiting the role of mediator between Israel and Palestine, everything is upside for Turkey by terminating pro-Israeli policy. It is no brainer that Turkey would walk away from Israeli relationship, no matter how much Americans try. Friedman is simply wrong to expect anything else from Turkey.

Tuesday, June 01, 2010

Japan - The Malaise Continues

I guess Barack Obama cannot convince Japanese Public that 'it is not the problem of Japanese Obama that Okinawa base cannot be moved, but it is the strategic necessity' and as a result finally Japanese PM Hatoyama has decided to bow out. No doubt Hatoyama might be honest, but the 'political ineptitude' he showed to box himself had sealed this sad outcome unless he was ready to destroy his party DPJ thoroughly.

USA Marines and Okinawa, these two things cannot be separated since the entire allure and legend of USA Marines is built around what happened there many decades back. I am not sure how much of that plays into the insistence by Marines in keeping their stations on that island. However, when one looks at the map then one can understand why Americans may be compelled to keep this base despite how many Japanese PMs commit 'harakiri'. Here is how one can understand the centrality of Okinawa if one measures distances on Google Earth:

Taipei, Taiwan - 400 miles
Shanghai, China - 512 miles
Seoul, South Korea - 784 miles
Hong Kong, China - 877 miles
Pyongyang, North Korea - 890 miles
Manila, Philippines - 900 miles
Tokyo, Japan - 956 miles
Beijing, China - 1141 miles

You are talking within a circle of 2 hour flight all these important cities of 21st century. No wonder American military bosses will be loath to move away from the Okinawa base no matter how much pain it renders to Japanese leaders.

I guess the larger lesson here is don't indulge into promising something on the stumps when you may not be able to deliver once in power.

What is next? Hatoyama and Ozawa's DPJ may be able to salvage some electoral fortune here. Opposition LDP does not seem to be in any great shape too. But all in all the continued story of Japan - unable to get its political act together - remains intact and that is unfortunate.