4/20 Leaders of Military, Heartland, “Eastern Est,” High Tech Moving Too Slowly to Limit Potential Damage on Iran, Energy Prices

Sen. Lugar Supplies Crucial Link to Energy in Iran Crisis

On April 16 on ABC’s "This Week," Sen. Richard Lugar (R-Indiana), chairman of the Senate Foreign Relations Committee, said of direct talks between the U.S. and Iran, ""I think that would be useful ... the Iranians are a part of the energy picture. "Clearly their ties with India and with China, quite apart from others, are really critical to (international energy issues)," he said. "We need to talk about that. Maybe we need to focus our attention less right now on the centrifuges than on how [energy] power is going to come out ... to all of these countries in some more satisfying way," he said." link Lugar is highly respected in D.C. Time Magazine just called him the "wise man" of the U.S. Senate in naming him one of the ten best senators.

Indicating the seriousness of the current international situation, a number of retired top military officers have recently weighed in with their views on how Iraq was mishandled.

A couple of former officials with ties to Colin Powell also tried to slow-down the U.S.-Iran confrontation. In an Op-Ed on April 12 in the FT, Richard Haass, president of the Council on Foreign Relations and a top State Dept. official under Powell, wrote: "Washington should be searching harder for a diplomatic alternative, one that entails direct US talks with Iran ... Iran would be allowed no - or at most, a token - uranium enrichment programme (one too small to produce a militarily significant amount of nuclear material over the next decade) coupled with the most intrusive inspections. In return, Iran would receive a range of economic benefits, security guarantees and political dialogue. If Iran refused, the United Nations Security Council would ban investment in Iran's oil and gas sector."

Richard Armitage, deputy secretary of state under and close confidant of Powell, also came out in favor of direct talks with the Iranians, telling the FT on April 13, "It merits talking to the Iranians about the full range of our relationship . . . everything from energy to terrorism to weapons to Iraq. We can be diplomatically astute enough to do it without giving anything away."

Reports have appeared in the past couple of days in "The Asia Times" link and elsewhere that The Shanghai Cooperation Organization (SCO) is now considering allowing Iran, India, Pakistan, and Mongolia in as full members, previously they had observer status, joining, China, Russia and four central Asian states.

Rubin Seems to be Re-hashing 1990's Solution for 2000's Problem of Low-Cost Sustainable Energy

In a separate, seemingly unrelated development, Robert Rubin, former Treasury Secretary under Clinton, now a top executive at Citigroup (and co-head of Goldman prior to the Clinton admin), announced on April 5 The Hamilton Project, according to the FT, to chart a course "diametrically opposed to the current policy regime." Its first white paper warns that rising income inequality "risks a backlash that threatens the very stability of democratic capitalism itself."

Strong words, indeed. Rubin focused on deficit reduction under Clinton, and he appears to be doing so again. Deficit reduction was sold to Clinton by Rubin and Greenspan and then by Clinton to his party as a way of reducing long-term interest rates and hence ultimately create jobs and finally raise real incomes. Rubin also sold Clinton on NAFTA, which was going to save U.S. manufacturing jobs and stem immigration by leading to rapid development in Mexico link.

Low interest rates in 1990s did in fact happen, as did huge job creation and even the only reversal of the more than thirty-year decline in average real weekly earnings, aided of course by the Internet boom/bubble. Yet long-term rates have remained low in the 2000s, but with only mediocre employment growth (the loss of 3 million manufacturing jobs), and zero average real weekly earnings growth.

Unfortunately, as most recently shown in the new book "The Disposable American," Rubin was never very concerned about the devastating impact of layoffs (his answer being education and re-training, what his fellow Democrat policy advisor Gene Sperling dubbed "funeral insurance" in his latest book, which did not go much beyond that).

Rubin's is a Democratic version of "trickle down" economics, i.e. placate the financial markets, and things will work out in the long run. But they haven't. Since 1972 average real weekly earnings are now down 17%. That would seem to be long enough to say that the post-Bretton Woods experiment doesn't seem to be working very well for the average American. Rubin was Kerry's key financial advisor in the 2004 election, and the inability of Kerry to come up with a credible economic program cost him key states, especially Ohio, battered by layoffs (and now increasingly foreclosures).

Something else seems needed, though none in the "elite" seem to know what. Sen. Lugar's emphasis on the energy issue re Iran is close to the target. The world is going to have to solve the need for inexpensive, sustainable energy for global economic development. Solving that problem will cut through many others. It will perhaps also mean some "sacrifice" on the part of the U.S. in the transition period. Perhaps some Americans can no longer drive their huge SUVs to pick up a half gallon of organic milk.

Unless the U.S. population shows it is serious about solving the global energy and related issues, which include clean water in many of the critical areas of the world, I expect the world to continue to go down its current unpromising path.

Needed: Another "Grand Vision" as Followed WW II, Only Far Better

Bush's "War on Terror" is not a positive vision. The U.S. ultimately "won" the "Cold War" by offering hope of a better life. The same is needed now.

Following the end of WW II, some leading Wall Street investment bankers/lawyers, grouped around a far more influential Council on Foreign Relations, managed to cobble together a coalition with previously isolationist midwest industrial conservatives and the U.S. military around a policy of Soviet "containment" and economic development of the core capitalist sector of the global economy.

It was better than thermonuclear brinkmanship "rollback," but a far cry from what was really needed, and resulted in more than a forty year "Cold War" (except for the many hundreds of millions unfortunate to be caught in the hot spots) and delayed economic development over most of that period for the vast majority of humanity.

Unfortunately, every time a critical opportunity for real global peace and development came along, someone would yell "commie! commie!" and the media and populace would give the inevitable pavlovian response.

But today something more is needed. The genie is out of the bottle, and it can't be put back, the vast majority of the world is focused on economic development, with or without the U.S., no matter how much Bush/Cheney shout "terrorist! terrorist!"

One of the author's of that post WW II policy, Dean Acheson, wrote a book about that period called "Present at the Creation." As things are currently going, some future historian may well have to write a concluding volume, "Present at the Dissolution," referring to "The American Century." It doesn't have to be that way, but it will come down to leadership, and so far, that is sorely lacking.

The power and influence of the "Eastern Establishment" is far less than it was from 1945-71 (famously described for the Vietnam War generation in David Halberstam's "The Best and the Brightest"). If that crowd has anything left, now is the time to show it. But the key issues are not diplomatic, as it prefers to see things, they are economic and military. (Haass' book last year "The Opportunity" barely touched on global economic issues.)

High-tech, Wal-Mart, Don't Get It: Asset-Light Supply-Chain Cost Shifting Not Sufficient

Similarly with the high-tech set, which just doesn't seem to realize that the world needs energy, water, housing, health care, education, etc., not iTunes and incessant Internet celebrity gossip.

The high-tech set, along with the Wal-Mart's, have deluded themselves into thinking that by cost-shifting, in the name of "productivity" and "shareholder value," all the onerous burdens of real production, including fixed assets, fully loaded compensation, environmental "externalities," etc., onto weaker members of their global supply chains in Asia that somehow these costs have miraculously disappeared.

I.e., if they don't exist on their balance sheets and impact their stock options, these economic realities don't exist in the minds of most American CEO's, and especially for the unregulated hedge funds and private equity funds to whose tune they dance.

The Failure to Face Reality: "The Curse of the Dollar"

For more than two decades, American business has had it drummed into its head to listen to and respond to the market and customers. But as a nation, the U.S. doesn't think this way, because it has an unlimited credit card, the dollar, the world's reserve currency. So the thought has never entered the national conscience, how do we find and win customers to pay for all this stuff we are buying on debt.

Since 1971, the global financial markets have not forced Americans to face and deal with this crucial reality. Most experts think this has been a big advantage underwriting American hegemony, but in the end, it will perhaps prove to be its undoing.

Economists call the tendency of most countries (Norway excepted) heavily endowed with petroleum to fritter away their luck in graft, waste and corruption the "curse of oil." The U.S has been "blessed" with the "curse of the dollar." One can not change thirty-five years of bad habits overnight, but the sooner we start, the better for everyone.

How Much Longer for Unstable Equilibrium of Bretton Woods II?

As I currently see it, to much of the world, the U.S. appears to be unilaterally, "pre-emptively" embarked on policies which seem to have the effect, well-intended, unintended or otherwise, of helping to destabilize key regions, such as the Mideast, Iran, central Asia, North Korea, the former Soviet republics, etc. East Asia and Saudi Arabia are in effect financing the ability of the U.S. to pursue these unilateral policies by holding huge amounts of very low-yielding U.S. debt securities which will most likely significantly depreciate.

Stability in these key regions is critical to the paramount interest of most of these Eurasian nations, economic development. In addition, most of East and South Asia have huge internal infrastructure development needs, on the order of $400 billion per year, which are not being met, about equal to the amount it is adding to its forex reserves.

Thus, taking into account other costs and benefits (access to U.S. market, technology, management, etc), how much longer will the rest of the world finance U.S. military policy? How Iran is resolved might go some way to resolving that question.

4/10 Repost--Sarbox counterproductive; Enron trial: Corp America responds to distorted incentives of speculative fncl system; What is Leadership?

I originally posted an article on the ongoing Enron trial with the above title on March 8. With Enron ex-CEO Skilling taking the stand in his defense today, I am re-posting it unchanged with a new concluding section on leadership and the addition of sub-heads, because the article's main point remains both valid and completely missed in the mainstream press.

I.e. due to the strong linkage between corporate governance and capital markets, via executive stock options, CEO's mainly respond to market signals grossly distorted by financial hyper-speculation. In a few infamous cases, such as Enron, this results in alleged crimes.

The far bigger issue, however, is how well-meaning, hard-working corporate America mis-allocates its enormous resources on the basis of short-term financial pressures from hedge and private equity funds. These funds are not "owners" in any traditional sense of the term, and do not have the long-term best interests of other stakeholders/partners such as customers and employees at heart. Rather, they are simply out for a quick buck, which often results in slash-and-burn tactics of outsourcing, layoffs, looting pension plans, etc.

The original article also contends that Sarbox is aimed at the wrong target and highly counter-productive. If current trends continue, what is needed is not saddling productive corporate America with paper-trail busywork, but rather reining in the putative "masters of the universe," the parasitic global hyper speculators who are currently feeding off the productive real economy and providing very little value in return, so that global savings, of which there is not a "glut," Bernanke notwithstanding, can be better redirected to finance useful, real innovation.

The following is the original March 8 post, "Enron trial: Corp America responds to distorted incentives of speculative financial system; Sarbox counterproductive, 1806 words" with subheads added:

3/8/06 Reuters "Enron's Fastow says Lay lied about company problems" link "Ken Lay, a former chief executive of Enron Corp., repeatedly lied to investors about the company, portraying it as financially sound even as it spiraled toward bankruptcy in 2001, the company's former finance chief, Andrew Fastow, testified on Wednesday."

I'm leading with the Enron trial story today, but there's no need to read the new stories on the trial, they're basically old re-runs that still completely miss the critical point.

Sarbanes-Oxley (Sarbox) is the Wrong Solution to the Wrong Problem

The corporate scandals of 2001-2002 during the crash of the TMT equity bubble led to the passage of Sarbanes-Oxley (Sarbox). The Wrong Solution to corporate governance problems such as those exposed at Enron is to saddle productive corporate America with all sorts of very burdensome busywork bureaucratic rules and regulations, a la Sarbox.

That is extremely counter-productive, especially for innovative and/or small companies which help drive the U.S. economy. E.g. I recall an accounting firm study that said the biotech industry, one of the key industries for the future of the U.S. economy, lost more than $6 billion in 2004, I believe, and about $1 billion of that was due to the costs of Sarbox compliance. (I will give the old link if I can track it down.)

Besides being economically counter-productive, Sarbox is also very unfair and not in the American tradition of presumed innocence and fair dealing. Corporate America, which all but an infinitesimally small part of (on which the mass media focused) is honest, productive and well-meaning, was put in the perpetual Sarbox penalty box.

It is simply NOT fair and honest to punish very hard-working entrepreneurs, executives and managers with this onerous regulatory burden when they have never done anything wrong, and never will.

Sarbox has just been the Wrong Solution to the Wrong Problem all along. Unfortunately, nothing has really changed to address the Real Problem since the corporate scandals of 2001-02. Yes, Sarbox was passed, but it was simply a knee-jerk political response--just what you would expect--most definitely barking up the wrong tree.

Real Problem of Corporate Governance is the Hyper Speculative Version of Globalization

The Real Problem running through all the corporate scandals of 2001-02, which the mass media NEVER got right despite the huge coverage, was, and still is, that corporate America, through the direct link via CEO stock options to actions to maximize short-term shareholder value, for many years now has been explicitly governed to slavishly respond to the grossly distorted market price signals and profit incentives created by global speculative financial markets. (See my 3/6 review of Jim Cramer's "Real Money" on how the hedge-fund dominated equity market currently really works.)

This very close corporate governance-global capital markets link might be fine if the latter were operating properly. But they are not, they are clearly very overly speculative, hence they are misallocating real activity and real resources in the real economy via the distorted financial signals that the corporate CEOs are responding to.

My key point is that the TMT equity bubble of the late 1990s essentially Caused the corporate governance scandals, not the other way around. If the banks, venture capitalists and Greenspan had taken away the bubble, which they were not incentivized to do (the financial system has no real anchor), then that would have had the effect of also removing the distorted market incentives that led to the corporate scandals.

I would guess that most of the corporate executives who went astray during the TMT equity bubble, especially those at more mainline firms, did so because they saw their peers becoming so extraordinarily wealthy so quickly and easily, especially those in newly formed IPO's that didn't have profits or even viable business plans. Remove that source of greed and jealously, and corporate America probably would have acted its normal self.

In Enron's case, it was no surprise, in fact it was almost inevitable, that bubble's perverted market incentives (which culminated in and was best exemplified by the merger of "new, new thing" AOL and real thing Time Warner) is what people like Skilling, Fastow, Lay, et al would respond to, in the way that they did.

So did all the investment bankers and venture capitalists complicit in issuing hundreds of essentially fraudulent, if legal, IPOs, during that period, which also was almost inevitable under the circumstances. NASDAQ lost 78% and the equity markets $8 trillion in market cap, March 2000 top to October 2002 bottom, one of the two largest crashes in history, and most IPO's lost far more than the market averages.

I apologize to those, especially fair, honest people in the financial industry, who may take exception with such a strong characterization, I fully realize that most probably believe the "irrational exuberance" explanation of that bubble. Since this is not the time nor place to rehash that discussion, I hope they will continue to read on.

A Real Solution to the Real Problem that caused the corporate scandals, and this is where most readers might start to disagree with me, if they haven't done so already, must address the core issue of the increasingly pressing need to start to rein in the worst excesses of the global speculative financial system.

In this credit cycle, these excesses may be even more out of control than during the TMT equity bubble. But up until now, they remain far more hidden from the media and public view in the credit and derivative markets (hence the credit excesses may have a chance to build up to dangerous levels before recognized by investors in public markets that may be affected, similar to an undetected gas leak that results in an unexpected explosion).

A Secondary Solution, the one that interests honest investors like Buffett, is to focus on excessive CEO compensation in relationship to subpar performance, and perhaps to lessening the overly strong short-term link to equity markets' obsessive focus on quarterly earnings reports and "guidance."

The Issue of Excessive Executive Compensation

I should make it clear, especially to new readers of this blog, that I am not an uncritical cheerleader for Corporate America, which has its hands full dealing with an intense global competitive environment.

E.g. elsewhere on my blog, I have been very critical of excessive executive compensation, as has Warren Buffett, the world's second wealthiest man and most successful investor, most recently in his "Chairman's Letter" in the just released "2005 Berkshire Hathaway Annual Report." link (Also see the 2004 book "Pay Without Performance: The Unfulfilled Promise of Executive Compensation" by two respected academics published by Harvard University Press link.)

I have been particularly critical of excessively compensated CEO's asking working Americans, whose average real weekly earnings have declined 17% since 1972 (see "2006 Economic Report of the President," Table B-47, pg 338, link) to "give back" hard-earned gains in binding legal contracts, often under the threat of outsourcing or bankruptcy.

Intense corporate competitive pressures notwithstanding, I simply don't think that's a fair and honest way to deal with things, and again not in the American tradition of fair dealing.

I also think it has greatly damaged the credibility of Corporate America with ordinary Americans, which came back to haunt Corporate America with the passage of Sarbox, and could do so again with even more onerous laws and regulations in the future. "Enlightened capitalists" should take heed and learn that lesson before it's too late.

The Real Corporate Scandal is Financial

Imho, the Real Scandal of the corporate scandals is that the major global financial institutions got off with essentially light slaps on the wrists (in terms of fines compared with their enormous profits), and have been free to go on their merry way (with some regulations that they have said they don't like), creating even larger credit excesses than during the TMT equity bubble.

For the past five years, global speculative financial markets, with the help of their good friends at the central banks, have deliberately created a global real estate-led consumer boom, hence that is what corporate America is currently responding to, again directly through the incentive link of CEO stock options. (E.g. see my 2/27 article, "The New, Old Thing: Silicon Valley, Hollywood, Madison Ave," link.)

At some point, who knows when, it is likely that those new excess credit chickens will come home to roost, just as they did previously with the Enrons of the corporate world. Hopefully, whenever the next crisis hits, it will be handled better than the crash of the TMT equity bubble and the corporate scandals.

Those credit excess problems in the last cycle were financially "papered over," so to speak, in the new cycle by a massive expansion of credit into the global real estate markets, and also by a government-mass media shift in focus away from the corporate "bad guys" at domestic places like Enron, to terrorist "bad guys" at very foreign places like Iraq and now Iran.

But that has just resulted in more credit excesses to ultimately be resolved, without other obvious, at least not to me, areas of potential credit expansion on a large enough scale to take up for any slack in global real estate, along with a lot of very costly, thorny geopolitical issues contributing to mounting government debt and declining U.S. leadership in world public opinion polls.

The deliberate opacity of the credit and derivative markets (which is being addressed behind the scenes in places such as the Counterparty Risk Management Policy Group) makes the current credit excesses potentially dangerous, especially given the unfathomable size of the markets (derivatives are $300-400 trillion in notional value).

The big speculators in these markets ultimately expect to get bailed out, yet once again, should their overly leveraged trades ever blow up in their faces, e.g. as they have been going all the way back to the Latin American debt crises of the 1980s, through the S&L crisis, the Mexican bond crisis, Asian financial crisis, Russian default crisis, Brazil and Argentina crises, and ultimately the TMT equity crash, in the last case through Greenspan's negative real interest rates for three years igniting a global real estate boom and Japan's zero rates funding speculative global "carry trades." Yes, it's long list, and these bailouts have been a bipartisan political policy.

This combination of enormous gains on opaque private trades with the public providing implicit insurance against economically-destabilizing losses (the "too big to be allowed to fail syndrome," a la the LTCM precedent in October 1998) is blatantly NOT fair and honest and creates immense "moral hazard" which greatly distorts global capital flows into speculative activity and away from real productive uses.

Frankly, I doubt that the Real Problem will be adequately addressed before the next crisis happens. The global speculative financial vested interests are too powerful; whatever alternatives that exist are far too weak and unorganized; and it is just human nature for most people not to face up to the most difficult issues until a crisis forces them to do so.

What is Leadership Nowadays?

The Enron trial, and many other stories in the news, raise the issue of what is leadership. Below is my work-in-progress shot at defining it, based on my personal views and some recent books on leadership and high-performance teams, I use that currently popular term to mean any group, including nations and global communities.

Leadership is a "softer" and more easily pretentious and frivolous area than the economics and technology which are the more usual subjects of my econotech blog, just look at the leadership shelves in the bookstores, but given the situation in our country, perhaps just as necessary. As the tune says, what makes the world go round, go round, money, or leadership?

Two authors of widely used organizational behavior textbooks give simple definitions of leadership. Jerald Greenberg says "leadership is the process whereby one individual influences other group members toward the attainment of defined group or organization goals." Stephen Robbins defines "leadership as the ability to influence a group toward the achievement of goals."

I would like to offer my own somewhat longer definition and then explain it:

"Leadership is having the courage, integrity, intelligence (critical/creative), and empathy to do whatever is right for one’s customers, stakeholders and partners, disciplined and focused no matter what, in that specific situation, for that particular team; to always treat team members with trust and respect as 'smart' mature adults intrinsically motivated to create innovative opportunities, emphasizing their strengths, subordinating one's ego, being authentic; to build an 'alert, agile, adaptable, aligned' team with access to all the necessary information through technology and social networks; in order to successfully exceed the team’s mutually accountable goals to help customers' needs for solutions, hope and meaning.”

If I had to use just one word to describe leadership, it would be "courage," adding a few more, "courage always to do the right thing for others," especially so that they empower themselves in their best interests. A new book defines integrity as "the courage to meet the demands of reality."

Yet courage is rarely mentioned in the OB textbooks, usually not even listed in the index. But without courage, one can not do all the things that the textbooks say an effective leader must do, e.g. to make the most difficult critical decisions, communicate a clear strong message, take full personal responsibility for the team’s success, instill trust and a sense of confidence in one’s team members, etc.

To continue parsing my definition, "intelligence (critical/creative), and empathy" combines key capabilities from both the “hard” and “soft” (emotional intelligence) views of leadership.

A spiritual expression of similar qualities is the well-known "Serenity Prayer" by Reinhold Niebuhr, which in its original version is far more memorable than my long-winded pseudo-academic definition, beginning, "God, give us grace to accept with serenity the things that cannot be changed, courage to change the things which should be changed, and the wisdom to distinguish the one from the other."

In terms relevant to this blog, basic human nature can not be changed, financial/economic rules of the game should, and can, be, they are not "immutable laws of nature," as so many would have us believe.

“To do whatever” means being goal-oriented, determined, adaptive, flexible, resourceful, ready to roll up one’s sleeves and pitch in. It does not mean pretending that the very real issues created by global competition can somehow be solved with just a little more sacrifice, education, retraining, networking, individual initiative, etc. They can't, a whole new global approach is required.

“Right for one’s customers, stakeholders and partners" means to fairly balance the often conflicting demands of customers for consistently beating their expectations, team members for fair consideration, and investors and financial markets for very high returns.

Achieving this balance is one of the most difficult things for leaders to do in today's hyper speculative globalization environment, with team members usually getting the short end of the stick. Often a fair balance can NOT be currently achieved internally. It need not be this way with better global financial and corporate governance systems.

"Disciplined and focused no matter what" means the drive and determination to dependably execute, to overcome any fears that team members, especially oneself, might have that get in the way of exceeding goals, without crossing any ethical/moral lines in pursuit of one's self-interest. It does not mean asking one's employees to make unfair sacrifices for the good of the team that one is not prepared to make oneself.

"In that specific situation, for that particular team" means that more so now then ever leadership is contingent, not fixed, especially in a global context of different cultures and values, and hence must be very creative.

Academics say leadership is mainly situational, but unfortunately the situations leaders, especially corporate, often find themselves in because of hyper speculative globalization creates ethical/moral dilemmas on how to do the right thing, for the demands of increasingly parasitic hyper speculative financial markets, or according to one's conscience.

I've always thought it revealing that some MBA programs have found it necessary to add a course in ethics as part of the core curriculum, as if their students needed to re-learn that subject. It seems the MBA programs think it is increasingly difficult for their students to be ethical and moral, perhaps due to the demands, and temptations, that will confront them from the hyper speculative financial markets.

"To always treat team members with trust and respect as 'smart' mature adults intrinsically motivated to create innovative opportunities" means that building the optimal environment for execution, including being a good listener, unbiased observer and effective communicator, is at least as important as being a vision creator and strategic thinker.

Without trust, built on integrity, a team has no chance to succeed, as unfortunately we see all too often today in different arenas, including political. Again, this is something that currently is very difficult to achieve without a dramatic change in the overall financial/political environment.

"Emphasizing their strengths, subordinating one's ego, being authentic" means team members can tell when a good leader genuinely puts his/her team's best interests before his own personal needs. Authentic seems to be a current buzzword, it's even on a cigarette poster, but it can't be faked, people intuitively recognize genuine leaders when they see them, which is not often enough nowadays, at least among the "rich and famous," imho.

“To build an 'alert, agile, adaptable, aligned' team with access to all the necessary information through technology and social networks” means to empower team members to do their very best.

"Successfully exceed the team’s mutually accountable customer goals" means that in today's ultra-competitive global markets one must beat customer, internal or external, expectations, and the team must "buy in" to those goals and hold each other accountable.

"To help customers' needs for solutions, hope and meaning" is increasingly the key to long-term customer acquisition, satisfaction and loyalty, and hence team success.

4/4 EFM Market political risks rising: U.S. immigration, Delphi labor contract, French employment law, China currency/trade, Iran 3401 words

In my 3/24 "Economic/Financial Monitor: Potential Tipping Points Could Make Spring Very Interesting" link, I noted a number of economic and financial risks that could possibly increase this spring. Of these, the rise in long-term interest rates and Fed policy continue to get considerable attention.

The FT's lead editorial today says, "The bad news is that this cyclical adjustment [in long-term rates] may have further to run. Moreover, if the structural underpinnings of today's low interest rate environment ever came under pressure, the resulting sell-off would make recent price falls look like a picnic."

Immigration Issue is About NAFTA's Failed Promises, Who Really Benefits from "Free Trade"

This post will focus on political risks. The U.S. immigration debate is an example of the American public yet once again being emotionally divided and pitted against each other, absent any viable political leadership from either major party nor intelligent debate in the mass media, over an issue in which the president greatly oversold the reasons for and beneficial impact of his policies.

In this case, I'm not referring to Bush II and the invasion of Iraq, but rather to Bush I, Clinton and NAFTA. Not mentioned in the mainstream media, the immigration issue is really about the unfulfilled promises of NAFTA "free trade" and the current market distorted, hyper speculative version of globalization.

Bush I and then Clinton sold the American public on NAFTA on the dual promises that it would help save high-paying American manufacturing jobs as the U.S. exported to a rapidly developing Mexico and other "developing" nations for which Mexico would be the model, leading to reduced immigration to the U.S.

Little noted by the pro-globalization mainstream media in the ongoing immigration debate is that these two promises, saving U.S. manufacturing employment and reduced immigration, about NAFTA have not been fulfilled since it went into effect on Jan 1, 1994.

Yet though the Mexican economy clearly remains mired in low growth, the Mexican stock market has tripled since the beginning of 2003, so Mexican "oligarchs" and U.S. hedge and private equity funds and mega-banks must certainly be very happy. Perhaps if they look carefully at the immigration issue, some Americans might finally begin to question whether isn't that really the goal of the hyper speculative version of globalization that currently prevails?

Mexican Economy Mired in Slow Growth Doesn't Create Enough Good Jobs

Mexican economic growth from 1993 to 2003 was a mere 2.7% per year, even after the massive devaluation of 1994, which helped drastically cut Mexican living standards at the time (in a bailout for U.S. speculator bondholders arranged by Clinton's Treasury Secretary and Goldman-Citigroup banker Rubin), and is currently stuck in the 3-4% range, and even that increase is mainly due to high prices for its oil exports. About half of Mexico's population of more than 100 million lives on less than $5 per day, with huge income and wealth inequality (I may expand on Mexico in a follow-up article).

Over that same ten-year period, the U.S., whose GDP per head is over six times that of Mexico (more than four times in purchasing power parity terms), grew 3.3% per year; China, with thirteen times the population of Mexico, 8.9%, 9-10% the past two years; India, with ten times the population, 6.2% per year, 1-2% higher that that most recently; and Vietnam, with 84 million people, at 7.4% annually.

These high growth rates are due mainly to each country's own efforts, along with the benefit of outsourcing by global corporations that have much preferred China over other "developing" nations for manufacturing, especially following its 2001 accession into the WTO.

At least some serious development economists have noted the limitations of NAFTA. Here is a view of its impact on Mexico, from an interview with Daniel Lederman, World Bank senior economist, co-author of “Lessons from NAFTA for Latin America and the Caribbean Countries: A Summary of Research Findings”:

“The main lesson is that a free-trade agreement is not a substitute for a development strategy. It is but one of the ingredients in a much broader development framework. According to one of our estimates, without NAFTA, Mexico’s GDP per capita would have been 4 to 5 percent less than it was at the end of 2002. This indicates that NAFTA had a net positive effect on the economy, but a rather small one after almost a decade of implementation. NAFTA alone hasn’t been enough to propel Mexico onto a path of fast-paced and sustainable long-term economic growth. There are some structural factors, related to domestic policies that are impeding its development. Three key factors are constraining the country’s ability to catch up to the levels of development in the United States and Canada. They center around the quality of institutions, a lack of innovation, and deficiencies in infrastructure."

One of the lead articles in the pro-globalization "The Economist" this week with this sub-head, "Settling America's migration now requires a stronger NAFTA as well as wiser legislation," calls for more of the same "free market" medicine, with a twist, concluding:

"Nowadays, Mexico creates decent jobs for only around a quarter of the 800,000 who join its workforce each year. The main way to change that is for Mexico's next president, who will be elected in July, to push through long-delayed reforms of taxes, energy, labour, and competition laws ... A North American infrastructure fund--in which the United States matched Mexican investment--makes much more sense than spending money on a border wall."

U.S. Mfg Jobs Down 19% since 1998, Real Earnings Declining Despite "Tight" Labor Market

Turning to the U.S. side of the immigration issue, manufacturing employment is down 3.4 million, 19.3%, to 14.2 million, from its most recent peak (seasonally adjusted) in March 1998, with most of that decline, 2.8 million, coming in the first three years since Bush II took office, with a slight decline since then for the past two years despite strong economic growth in the U.S. and worldwide.

The average weekly real (inflation-adjusted) earnings of U.S. workers are up a mere 1.3% total, 0.2% annually, since Bush II took office, and are actually down 1.6% the past two years, despite a so-called "tight" labor market with a low reported unemployment rate, most recently 4.8%, during that period. This follows a 9.6% increase in worker earnings from Jan 1996 to Jan 2000, the only sustained increase since 1972, having declined 17% over that entire period (see Table B-47, pg 338, 2006 "Economic Report of the President," link.)

(The ongoing debate over the tightness of the U.S. labor market is just one of many that make little sense to me. How could the labor market be tight if real wages are not increasing? There is a global "oversupply" of labor due to the failure to adequately invest savings in productive employment generating businesses rather than in m&a and hyper speculation. This is part of the endless inflation debate, where wages and tradable goods have been deflating while financial assets and commodities have been massively inflating. Cutting costs through labor arbitrage, i.e. shifting production from higher to lower wage regions, is not true productivity nor innovation. I am similarly baffled by all the debate re the strength of U.S. capex taking over from the American consumer if necessary in the second half. There has been a huge capex boom for the past five years, it just happens to be in China.)

Here are a few quotes from recent news articles in the mainstream media about the economic facts behind the U.S. immigration debate. My point in citing these is most definitely NOT that immigrants are hurting U.S. workers, the real issue is lack of a just global economic development, including in both the U.S. and Mexico, but rather to note the underlying economic source of the U.S. backlash.

"The Center for Immigration Studies, which is in favor of some restrictions on immigration, recently issued a report looking at jobs and undocumented workers. One of its conclusions was that between March 2000 and March 2005, only 9 percent of the net increase in jobs for adults went to people born in the US. "This is striking because natives accounted for 61 percent of the net increase in the overall size of the 18- to 64-year-old population," writes Steve Camarota, director of research. Howard Hayghe, an economist at the Department of Labor, confirms that this number is correct." "Immigration debate crux: jobs impact," "Christian Science Monitor," March 30, link.

"According to his [Camarota's] study, published in March, unemployment among the native born with less than a high school education was 14.3 percent in 2005; the figure for the immigrant population was 7.4 percent ... George J. Borjas, a professor of economics and social policy at the Kennedy School of Government at Harvard University, said he believed that the flow of migrants had significantly depressed wages for Americans in virtually all job categories and income levels. His study found that the average annual wage loss for all American male workers from 1980 to 2000 was $1,200, or 4 percent, and nearly twice that, in percentage terms, for those without a high school diploma. The impact was also disproportionately high on African-Americans and Hispanic-Americans, Professor Borjas found. "What this is, is a huge redistribution of wealth away from workers who compete with immigrants to those who employ them," he said." "Immigrants and the Economics of Hard Work," "The New York Times," April 2, link.

"Mexico touts annual job growth of 550,000. But that doesn't begin to soak up the million who are added to the work force. No wonder 400,000 illegal workers arrive in the U.S. every year. The biggest problem is education. Mexico spends just 5% of GDP on schooling"

"The [income] gap is now wider than it was when Mexico, the United States and Canada signed the North American Free Trade Agreement in 1992." "Immigration debate seen skirting root cause," Reuters, March 29, link.

Unfortunately noting such basic facts, as mainstream liberal economist Paul Krugman did in a recent NYT op-ed article, was twisted by neocon British bulldog Tony Blankley on the last "McLaughlin Group" to try to tag Krugman with supporting the economic views of the anti-immigration right, such as those of another regular on that show, Pat Buchanan.

Real Issue is about Creating Good Secure Jobs, Not Pitting Employees Against Each Other

I am not going to go through all the devious political calculations of both major parties on immigration that are fully covered in the mainstream media. Suffice it to say, I repeat, the immigration debate can NOT be fairly and successfully resolved if it is posed in that way, pitting illegal immigrants against low-paid American workers. In the final analysis, this is really all about creating good, high-paying, secure jobs, in the U.S., in Mexico, globally, not mainly about building fences, guest worker programs, amnesty, etc., etc.

Perhaps in a worse case scenario, the U.S. would run the risk of alienating a very large group of hard-working, underpaid workers within its borders whose aspirations were raised and then seemingly dashed. Long-standing grievances and rising expectations not being met erupted in several years of massive urban riots in the U.S. in the 1960s. That is not going to happen now, but the prospects of having huge numbers of angry people already here would not be a good one.

The Mexican immigration issue was high on Bush's agenda when he was first elected. Like a lot of other key issues, most especially N. Korean nuclear armament, it was pushed way down on the administration's priority list by the Bush/Cheney pre-occupation following 9/11 with invading Iraq for neocon rationales.

Imho, as I briefly noted in my 3/24 article, at the root of many of the stories currently in the general news, such as those listed in this post's title, is a growing reaction and backlash to the inexorable increase in global inequality and a widespread basic sense of unfair justice, both "distributive" and "procedural," as seemingly inherent features of the current hyper speculative version of "globalization."

I.e., the rich just keep getting richer, with the number of billionaires and corporate profit margins at record levels, while the poor and "common man" don't seem to matter very much, and there's nothing one can do about it, since "globalization" is considered by the mainstream media the economic equivalent of a "force of nature." (I strongly favor everyone getting as wealthy as possible through innovative and ecologically sustainable new products and services, but not through economically wasteful and immoral financial hyper speculation, with light taxes on the former real wealth creation and heavy ones on the latter "paper" one.)

Popular Backlash to Hyper Speculative Version of Globalization a Faint Echo of Earlier Protests

Up until now, popular backlash to "globalization" has been virtually non-existent in the U.S. With the domestic population seemingly not a problem, the most likely source of tension that the elite seemed concerned about was geopolitical, between the U.S. and so-called "rogue states," especially Iran, and perhaps ultimately between the U.S. and the "peaceful rise" of China, currently manifested in threatening protectionist action over currency and trade, with the U.S. and Europe filing a WTO action against China.

Unlike the U.S., other areas have felt rising internal tensions, e.g. Europe, most recently in the massive demonstrations in France over its employment law and before that immigration issues, and China, with confrontations (at last count over 80,000 per year) over land seizures and local official corruption.

In these areas, memories of the social convulsions of the late 1960s, especially the worldwide wave in 1968, most well-known in Europe but which also engulfed China in the "cultural revolution," are starting to faintly echo once again. Even in the usually much more flexible labor markets of the U.S., according to one news story, a few young high school protestors against proposed changes in immigration law decided to sit down, because one of them vaguely remembered something about sit-down antiwar strikes in the 1960s. Perhaps there may even be a UAW strike this spring, with that union in a far weaker position than it was in the very bitter Lordstown, Ohio strike of 1972.

Battle over U.S. Industrial Base and Mfg Jobs Lost Long Ago in Reagan Era

Btw, the main concern in the financial markets re the massive loss of auto industry jobs this time around has been its possible impact on GM credit derivatives, a far cry from the Chrysler bail out of 1980 in which jobs and U.S. industrial capability were the main concerns. The battle to save U.S. manufacturing employment was actually lost in the Reagan administration, the first large wave of millions of lost manufacturing jobs was in Reagan's first time, the second wave in Bush II first term.

Yet Reagan swept Mondale in a landslide in the 1984 realigning election, gaining the support of disaffected blue-collar workers, north and south , partially because the Dems did nothing to save their jobs, one of the main reasons they became susceptible to losing the so-called "culture wars." In addition, in the mid-1980s, Silicon Valley, under relentless attack from Japanese semiconductor manufacturers at that time, eventually was "seduced" by and allied with Wall Street, much later also Hollywood, rather than the industrial heartland.

Clinton expended much of his political capital after his 1992 election following the advice of Greenspan and Rubin, the Goldman Sachs and Citigroup banker, to balance the budget to placate the bond market and to pass NAFTA, with its sham labor and environmental side agreements to placate the liberal wing of his party. NAFTA passed the House 234 to 200, with 132 Republican votes and 102 Democrats.

Afterwards, Clinton was unable to gain any traction with what he had considered the key item on his agenda, massive health care reform. Now, old-line manufacturing companies such as Delphi are buried in red ink, in part due to highly costly healthcare and benefits packages, and are trying to rip up their legally binding labor contracts via bankruptcy (which is now denied individuals due to the new draconian bankruptcy laws). See my 3/16 "FHPN Krugman's NYRB long essay, "The Health Care Crisis and What to do About It," brief excerpt," link.

Btw, the Delphi "turnaround specialist" president initially proposed wage cuts of about 50-60% percent. Wouldn't it be a little more fair if all American CEO's instituting massive layoffs and cutbacks also fired themselves, forfeiting their stock options and golden parachutes, for so blatantly failing at expanding their market share and profits with innovative new products and services? After all, they take credit in their stock options for all the "value creation" when their stock goes up, why not when they fail, how about CEO givebacks, as they ask of their employees? To just ask such questions shows how unfair things have become.

Parallels With Another Period of Huge Global Economic Imbalances, "Deja Vu All Over Again"

I will try to have more to say on global development issues in a follow-up article, time permitting. For now, let me close by putting these recent stirrings of popular backlash against the current hyper speculative version of globalization in an historical context. As I alluded to earlier, the first signs of stirrings of popular unrest against globalization are starting to evoke faint memories of the late 1960s and 1970s.

Ever since the "Asian" financial crisis of 1997-98 (sometimes known in Asia as the "IMF" crisis for the harsh conditions imposed by Rubin-Summers to help bail out hyper speculators at the expense of Asian living conditions, standard operating procedure for the "Washington Consensus" of Republicans and Democrats), I have experienced a growing feeling of "deja vu all over again" with the late 1960s and 1970s.

This might be explained by both Kondratieff-Elliott Wave stock market pro-capitalist types, the most well-known being Robert Prechter, and at the opposite end of the spectrum the few remaining marxists, as indicative of some sort of regular crisis in the capitalist global economy and financial markets that seem to occur at roughly thirty year intervals. There was a secular bear stock market from 1968 to 1982, whether a new one started in 2000 is still open to question. I will not discuss those views here, but simply note the uncannily eerie parallels between the two periods.

Among the many parallels between these two eras, first and most fundamental are very deep global economic imbalances, which in the earlier period led to a massive dollar crisis and the breakdown of the Bretton Woods gold-linked fixed currency rate monetary system in 1971. In the current period, it is claimed a "balance of financial terror" has resulted in what some economists have very misleadingly dubbed a "Bretton Woods II" arrangement between the world largest debtor, the U.S., and its creditors, in this case East Asia and Mideast oil producers.

Among the other similarities, both periods also experienced the following: the hugely overvalued "nifty fifty" of the earlier era, the unprecedented TMT equity bubble of the late 1990s; huge equity bear markets, 1973-74 and 2000-02; rapidly rising prices of oil, gold, and other commodities in both eras; large real estate inflation in both eras; political crisis, such as Watergate and the near impeachment of Nixon, the actual impeachment of Clinton, the 2000 presidential election decided by the Supreme Court, and the current political scandals in D.C.; an increase in terrorism in both periods; major shifts in geopolitical alignments, in the earlier era in detente with the Soviet Union and the thawing of relations with China, e.g. the recent India nuke deal; major shifts in the global economy, with Japan and Germany coming into prominence in the earlier era as challengers to U.S. industrial supremacy; populism in Latin America, with Venezuela's Chavez now targeted as Chile's Allende was then; Mideast wars, the 1967 Six-Day War and the 1973 Yom Kippur War, which brought the U.S. and the Soviet Union to the brink of nuclear showdown. I've probably left a few more out.

The last parallel is probably currently the most troublesome, with continuing statements from the Bush administration similar to those just once again exposed last week in talks between Bush and Blair a few months prior to invasion of Iraq. The major difference this time being that the U.S. now has a doctrine of using "tactical" nuclear weapons if deemed necessary, and the Clinton centrist Dems continue to try to out-Cheney Bush on Iraq and Iran. I will try to deal with the very real dangers of nuclear proliferation in a later article.

(Btw, the U.S. gained half a million square miles. one third of Mexico's territory at the time, after provoking the Mexican War in 1846, which the first two Republican presidents criticized, Lincoln speaking out against it at the time in his only term as a House member, and Grant, who served well there, later calling it "one of the most unjust ever waged by a stronger nation against a weaker nation.")