by David Steven | Jan 11, 2009 | Climate and resource scarcity, East Asia and Pacific, Global Dashboard, Global system, London Summit, North America
[youtube]http://www.youtube.com/watch?v=iRzr1QU6K1o[/youtube]
In last month’s New Atlantic, James Fallows had a fascinating interview with Gao Xiqing, Chief Investment Officer at China’s sovereign investment fund, and the man responsible for a significant chunk of China’s huge holdings of American dollars.
Gao – who Fallows dubs one of the US’s new banking overlords – thinks Americans need to learn some humility and fast.
“The simple truth today is that your economy is built on the global economy,” he says, “and it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money.”
The US should disentangle itself from expensive overseas conflicts, Gao believes, raise its diplomatic game, and – above all – tell its citizens to get saving as part of a “long-term, sustainable financial policy.”
It’s all well and good, but maybe Fallows should have pushed Gao a little harder on whether China’s own financial policy is sustainable. After all, despite recent appreciation, the yuan remains substantially under-valued against both the dollar and the euro – the main reason why the Chinese has ended up holding so much Western debt.
Gao’s comments on the dollar are somewhat contradictory (and reflect all the ambiguity of China’s own dollar position). On the one hand, it defends its status as a reserve currency. The US is still the most viable and predictable market, he says. But on the other, Chinese investment in the dollar is widely unpopular at home. According to Gao, China’s citizens ‘hate’ its support of rich Americans (“people eating shark fins”) at the expense of “poor [Chinese] people eating porridge.”
More significant than public pressure, perhaps, is Gao’s belief that the dollar is highly likely to lose value over the short to medium term (with a corresponding appreciation for the yuan). This will wipe billions of Chinese reserves (reserves that have only been built up through consumption foregone) – while challenging China’s export-led growth model:
We are not quite at the bottom yet. Because we don’t really know what’s going to happen next. Everyone is saying, “Oh, look, the dollar is getting stronger!” [As it was at the time of the interview.] I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors.
But after a short while, the dollar may be going down again. I’d like to bet on that! The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.
Unravelling these imbalances seems certain to be ugly. Reading George Cooper’s book, The Origin of Financial Crises, on a plane the other day, I was struck by strong parallels between today’s economic woes, and a crisis we have heard little about recently – the ‘Nixon Shock’ that led to the end of the Bretton Woods system. (more…)
by David Steven | Jan 10, 2009 | Global system, North America
Optimism is in short supply at the moment, so I was psyched to read that Larry Kudlow – the National Review’s economics editor and (in his owns words) “a renowned free market, supply-side economist armed with knowledge, vision, and integrity acquired over a storied career spanning three decades” – has read the tea leaves and seen clear signs that the US economy is now bottoming out from a recession that hasn’t been “that big a deal”.
Phew. We can all stop worrying then. After all Kudlow’s stunning track record proves he really has his finger on the pulse of US economic performance. Let’s review some of the highlights from his analysis over the past couple of years:
Feb 2007: Praises Ben Bernanke for “laying the groundwork for what is virtually a runaway bull market” – one he assures us a few months’ later has guaranteed the US’s role at the epicentre of a “a global boom, marked by a spread of free-market capitalism like we’ve never seen before.”
Sept 2007: Warns us that “it’s very easy to be totally pessimistic and bearish right now, but that’s precisely why I will avoid falling into that trap. Optimists are winners. Pessimists are losers.”
Sticks to this creed throughout the quarter in which the recession got underway… October (“if things are so bad, why are they so good?”), when he says growth is accelerating…November (subprime is “just not that big a deal”)…and December (“the prophets of recessionary doom…have been proven wrong once again”)
In Feb and March 2008, admits that a mild recession is possible, but assures us that “Bernanke’s emergency machinations to fight the recession in housing and housing-related credit are starting to show very positive effects.” There is no “genuine, across-the-board credit crunch,” he tell us in April. As a result, any slump “could be over by late summer.”
In September (with summer a memory and the economic clouds darkening), swoons for Henry Paulson who has embraced the gales of creative destruction and promised “no more federal bailouts. Not for Lehman Brothers. Not for global insurer AIG.”
Three days later, however, swoons for Paulson again, this time for preventing what would have been an “unfathomable” – an AIG collapse. Bailouts, it turns out, are a simply wonderful idea – not only will they save capitalism from doom; for taxpayers they’re a “win-win-win-win.” The government is sure to get its money back – even better it’s highly likely to make “a handsome profit” – enough to “pay down the national debt.”
October 2008: Is appalled by the “fear and panic” that have gripped the economy. “It is one of those moments in history when people feel helpless, frustrated, and bewildered about what’s going on and why it’s happening.” But still assures us that “much good may ultimately come of this terrifying correction.”
November 2008: Is cock-a-hoop at the “economic-primer” George Bush has left for his successor-elect Barack Obama, who apparently now has “an outsized responsibility [eh?] to mend and revive the economy.” Obama needs to access Bush’s wisdom and follow his economic-growth model, one “that has worked so well and so long for this country.”
Yes – that’s right. Bush (“the top economic forecaster in the country”) and his administration have left the US poised for recovery. If it all goes wrong, we’ll all know who to blame – that “extremely liberal-left” guy who is just about to take over. But as long as the new President tries to do what Bush would have done, then everything – my friends – will be alright.
by Richard Gowan | Jan 3, 2009 | Climate and resource scarcity, Global system, North America, Off topic
Charlie has got some debate going with his ten predictions for 2009, and I’m not going to try to rival it. But after a year of following food prices unusually closely, I’ve decided to go where even Alex Evans has not gone before in an effort to tell the future: the official US Poultry Outlook Report – December 2008. And no, this isn’t about avian flu. It’s about how the global downturn is going to create a rift between increasingly internationalist turkey farmers and isolationist, America-first chicken and egg producers. Feathers will fly!
Let’s start with chickens (to the initiated, “broilers”). For the first nine months of last year, production was growing strongly. But as food prices slumped over the last few months, so did the number of “chick placements” – which I assume is code for “fattening the little critters up in a big shed until they can’t walk”:
Over the last 5 weeks (8 November to 6 December, 2008), the number of chicks placed for growout averaged 7.4 per cent lower than for the same period in 2007. With uncertainties about the domestic and world economies, the trend of year-over-year declines in chick placement is expected to continue well into 2009. With smaller chick placements forecast, the estimates of broiler meat production have been adjusted downward in fourth-quarter 2008 and in the first three quarters of 2009.
Who are we going to blame for this? Foreigners. Unless they like brown meat:
All the uncertainties in the global economy have combined to sharply reduce the demand for broiler exports . . . but declining exports may be slightly mitigated by lower prices for leg quarters, the primary export.
So expect the chicken farming lobby to turn inwards. Their disinterest in foreign affairs will only be compounded by increasing imbalances in the egg market:
Shipments of all shell eggs and egg products in October totaled 17.9 million dozen, down 13 per cent from the previous year. Much of the decline is due to lower shipments to Mexico and Hong Kong.
But it’s all very different on the turkey front. There’s a glut of the damn things – more and more are being put into cold storage – and production is expected to slow as a result. With supply higher than demand, the U.S. needs to offload large quantities of its national bird. Fortunately, there are proven markets available:
Turkey exports remained very strong in October, totaling 71.8 million pounds, up 36 per cent from the previous year. Much of the increase in October’s turkey exports was due to higher shipments to the largest markets — exports to Mexico, Canada, and the combined China/Hong Kong markets were all up considerably from the previous year.
So that’s good news… but wait a minute! Not only is China propping up the U.S. economy by buying vast quantities of American bonds, but now we discover that it will start underwriting the turkey industry? What if Beijing stopped buying? Even Mexico slapped a temporary ban on birds from some U.S. plants just before Christmas on health grounds. And last Tuesday Russia demonstrated its resurgent nationalism by slashing its total poultry import quota from the U.S. by 1.25 million metric tons to 952,000 metric tons. So here’s my first big question for 2009: can the U.S. poultry industry adapt to a multi-polar world?
Next week: a post in which I explain the new world order by tracking trends in the price of tea-leaves.
by Daniel Korski | Dec 11, 2008 | Conflict and security, Cooperation and coherence, UK
A couple of posts ago, Charlie drew our attention to the fact that a new report would be recommending the appointment of a Minister for Security Diplomacy. “What the f*** is security diplomacy?”, our resident security expert asked.
I haven’t read the report, but the question got me thinking. What, indeed, is security diplomacy? I don’t mean in a traditional way — working with NATO; on security policy issues; and managing defence relationships. I mean in a 21st century kind of way. So here is my stab at what it could be.
One of the 21st century’s biggest national security challenges – and therefore diplomatic tasks — will be to affect people who we cannot affect. By that, I mean that European governments have to affect security outcomes in countries with whom they have only weak links or little leverage over. They have to do so because what happens in these countries affect our security, well-being, safety. . . you know the arguments.
Take the case of Pakistan and the country’s military-security establishment. Everyone acknowledges that working with the Pakistani military will be key in lessening Indo-Pakistani tensions, containing the Taliban insurgency, clamping down on WMD proliferation, and defeating Al Qaida. Everyone acknowledges that achieving these goals is vital to Britain’s and Europe’s security.
But there are only four countries that have any real leverage on Pakistan and her security establishment: the U.S, China, Saudi Arabia, and Turkey. Despite being Pakistan’s largest trading partner and a major donor, Europe has only limited leverage over Islamabad (and the military HQ in Rawalpindi), even if Britain is a (small) exception to the rule.
So the question becomes – how can Europe get the countries that do have leverage over Pakistan to act, or act in ways that may be beneficial to Europe’s interests? What incentives can be offered? Could the EU, for example, ask Turkey to lead diplomatic talks with Pakistan on the EU’s behalf, with the Turkish Prime Minister briefing the EU Heads of State? And if that is indeed what is needed, what can Turkey be offered in return?
If this is “security diplomacy” does it go beyond what it traditionally the focus of bilateral relationships and diplomacy in a non-polar world i.e. where we cannot rely on the hegemon to sway third-countries to its will? Many diplomats will argue that this is already what they doing. They are already lobbying diplomats in Beijing for China to help in Afghanistan etc.
But perhaps using the rubric “security diplomacy” makes this a concrete line of activity, ensures resources and prioritization? Much like the way Britain’s European network of embassies now focus primarily on how to leverage votes in the European Council rather than on, say, managing the UK-Romanian relationship, so implementing this kind of diplomacy may mean suborning the normal bilateral links in a number of cases (of which Pakistan is clearly one), to the so-called “diplomatic security interest”.
I am not arguing for a Minister for Security Diplomacy. Rather, I have long argued for a top-to-bottom assesment of the government’s capabilities, a National Security Review, rather than piecemeal solutions. But I’d be interested to hear what people think of the notion of security diplomacy.
by Daniel Korski | Dec 9, 2008 | Conflict and security, Cooperation and coherence, Europe and Central Asia, Global Dashboard, Influence and networks, North America
Following Barack Obama’s election, the intellectual market has filled up with policy papers about how the U.S and Europe can cooperate on substantive issues like China, Russia, CT, climate change etc. But little time has been devoted to the way in which the EU and the U.S cooperate, that is, the institutions of the trans-Atlantic relationship.
NATO will continue to have an important role in the Euro-Atlantic community, but the North Atlantic Alliance is no longer the place where Americans or Europeans go to talk about big strategic questions. This is true not only for non-military topics such as the global financial crisis or climate change, but also for classic foreign policy problems.
In this paper I — and two other colleagues — have tried to lay out what kind of new institutions could boost U.S-EU cooperation. Recommendations include:
- That the President of the United States be invited once a year to the European Council
- Back-to-back EU and NATO summits
- That the US Secretary of State join the GAERC twice a year
- That American Cabinet officials be invited to European Commission meetings from time to time
- That US/PSC discussions be held alternately in Brussels and Washington.
- “Double-hatting” the EU Head of Delegation in Washington as an EU Special Representative
- Establishing a small European Legislatures Liaison Office in Congress, comprising representatives from the EP and national legislatures, as well as setting up Congress/EP task forces on key issues like Afghanistan/Pakistan and climate change.
- Setting-up a US-EU Conflict Prevention Task Force, with a permanent secretariat housed in Brussels.
- Establishing a NATO/EU School for Conflict, Post-Conflict and Stabilisation to provide training for deploying personnel
New transatlantic institutions cannot in themselves help the EU develop policies or come up with a better way of thinking strategically about foreign policy issues; but at a time of considerable transatlantic policy convergence, the absence of a solid framework for US-EU discussion will see both sides miss out on a valuable opportunity for cooperation on shared challenges.
