10/27 Global Strategic Bargain: Positive Reality Therapy for America’s Critical “States of Denial” (full version)
October 27 – (Econotech FHPN) (Nov 1: I have revised this article to include a new section, further material on leveraged buyouts in several sections, and other additions/revisions, noted in the list of sections below.
This article consists of the following 18 sections (revised order) of approx. 17,100 words. It can be accessed for printing at link. The first eight sections of approx. 6,200 words can be separately accessed at link. For further details, especially on the critical subject of hedge and private equity funds and investment banks, there is an extensive set of news summaries for the past month from the mainstream media posted on Oct 24 link.)
* A New Global Strategic Bargain of Energy and National Security -- Revisions Added
* Time to Reconsider Worldview Based on U.S. as Hegemonic Sole Superpower
* "Sensible Center" Historic American Political Realignment Needed -- Revisions Added
* Attempt to Explain America's Massive Denial of Basic Economic Reality -- Revisions Added
* It's the Hyper-Speculative Global Financial Markets -- Revisions Added
* Return on Leveraged Legal Looting (ROLLL)-- New Material Added
* Self-Described "Schmucks" of the Financial World -- New Material Added
* Historical Context for a New Global Strategic Bargain
* World More Dangerous With Loss of U.S. Power and Domestic Political Stalemate
* What Would Happen Politically If the Housing Bubble Really Collapsed?
* Billions of People Without Clean Water, Basic Sanitation, etc.
* Equity Markets Keep Rising, Regardless of Short-term Rate Expectations
* No Domestic Opposition to Global Hyper-Speculators -- New Material Added
* Europe and Japan Offer Little Opposition to Global Hyper-Speculators
* Whither China?
* Whither Russia?
* Time to Regain America's Moral Authority, Credibility and Trust -- New Section Added
* Any Hope for the Dismal State of Politics in America? -- Revisions Added
“North Korea's declared nuclear bomb test program will increase the incentives for other nations to go nuclear, will endanger security in the region and could ultimately result in nuclear terrorism … demonstrates the total failure of the Bush administration's policy toward that country. For almost six years this policy has been a strange combination of harsh rhetoric and inaction.” (William J. Perry, Secretary of Defense from 1994 to 1997, later Clinton’s Special Adviser on North Korea, WP, Oct 11)
“the Bush administration sees diplomacy as something to be engaged in with another country as a reward for that country's good behavior. They seem not to see diplomacy as a tool to be used with antagonistic countries or parties, that might bring about an improvement in the behavior of such entities, and a resolution to the issues that trouble us. Thus we do not talk to Iran, Syria, Hizballah or North Korea. We only talk to our friends -- a huge mistake.” ("Bush's Blunder in North Korea," by Donald Gregg, was a CIA official since 1951 and a liaison to President Carter's NSC and, National Security Adviser to VP George Bush and U.S. ambassador to South Korea from 1989 to 1993, now chairman of the board of the Korea Society, WP, Oct 9)
“[North Korea’s] test appears to represent a stunning failure for the Bush administration's stated goal of blocking the spread of weapons of mass destruction, the foundation of its security policy." (WSJ, Oct 9)
“the American era in the region has ended … Much more likely is the emergence of a new Middle East that will cause great harm to itself and the world … What brought it to an end? Topping the list is the Bush administration's decision to attack Iraq and its conduct of the operation and resulting occupation … Other factors include the demise of the Middle East peace process, a failure by traditional Arab regimes to counter the appeal of radical Islamism, and globalization.” (Richard Haass, Director of Policy Planning in Powell’s State Dept, now President of the Council on Foreign Relations, FT, Oct 17)
“With the Middle East immersed in its worst crisis for years, we call for urgent international action towards a comprehensive settlement of the Arab-Israeli conflict. The outlines of what is needed are well known.” (Newspaper ad signed by numerous famous former global leaders, FT, Oct 4)
“Israeli officials and politicians across the political spectrum are convinced Iran represents an existential threat … Saudi Arabia, in what was considered a dramatic move several years ago, offered to get much of the Arab world to recognize Israel in exchange for a withdrawal from all territory Israel occupied during the 1967 war. Israel rejected the idea.” (WSJ, Oct 3)
“Senate Majority Leader Frist said Monday that the Afghan war against Taliban guerrillas can never be won militarily and urged support for efforts to bring "people who call themselves Taliban" and their allies into the government. [Frist] said he learned from briefings that Taliban fighters were too numerous and had too much popular support to be defeated on the battlefield. "It sounds to me ... that the Taliban is everywhere."” (AP, Oct 2)
A New Global Strategic Bargain of Energy and National Security
N. Korea’s nuclear test, the ongoing deep morass in Iraq, Afghanistan, very high and very volatile energy prices, among many other things, indicate two critical facts about the state of the world today which should by now be crystal clear to anyone not in a deep “state of denial” (to borrow what I consider to be the inaccurate title of Bob Woodward’s new book, explained at the end of this article).
First, the U.S. can, and should, not attempt to police and remake the whole world unilaterally. Second, leading nations need to more rationally, fairly share access to energy, to help create more just, sustainable global economic development.
With a rather belated recognition and acceptance of this glaring reality by the world’s leaders, I believe that there would be the possibility of a new global strategic bargain between, most importantly, the U.S. and China, with the EU, Japan, Russia, India, Saudi Arabia and others also playing critical roles. It would not have to be negotiated nor presented as such, I would prefer gradual but steadfast diplomacy with this bargain in mind.
Bluntly put, the U.S. can not ask, let alone try to pressure or cajole, major powers such as China, the EU and Russia, to act on America’s behalf against its own designated enemies, e.g. N. Korea and Iran, which these other powers may not necessarily wish to confront to the same extent as the U.S. does right now, without offering something very significant, beyond its market access and appreciation, to these major powers in return.
“Because of North Korea's track record as an eager exporter of weaponry, some experts are more worried about the government in Pyongyang spreading nuclear technology to other "rogue" nations than about the possibility of it launching a nuclear attack … most experts said the country would probably refrain from doing so." (LAT, Oct 21)
“Whether the NPT survives this combined assault depends on how the big powers rise to the challenge: by co-operating to press both regimes to abandon their nuclear exploits and uphold the rules, or by competing in the wider struggle for regional influence … North Korea is dangerous, but isolated. An Iran with nuclear weapons, says one senior Bush administration official, would be a “game-changer”.” (Economist, Oct 19)
“Ms. Rice's immediate challenge is to get real cooperation from North Korea's neighbors. Yet she appeared to make little progress on that front during her Asia trip, which ended Saturday.” (WSJ, Oct 21)
“As Rice left China today for Russia, her goal of uniting Northeast Asia in a strong, unambiguous punitive stance against North Korea remained elusive … Rice sought Friday to lower expectations … Beijing believes that if it is identified too closely with a U.S. hard-line stance, it loses the opportunity to broker a solution in the future, with the international prestige that entails.” (LAT, Oct 21)
The essence of a possible global strategic bargain is that the U.S. will greatly scale back its so far unsuccessful efforts at regime change in the “Axis of Evil,” to remake the Middle East, Northeast Asia, etc, and rather share influence in critical regions with major powers, including regional ones.
In the case of the Middle East, this would modify a sixty-year U.S. policy of hegemonic domination of by far the most important source of oil. In the case of East Asia, it would simply accept the reality of China as a leading power with its own strong interests and influence, and try to make the best of it.
In return for this change in current U.S. policy, the other major powers, especially China, the EU and Russia, will fully, unreservedly commit to do all that they can to help stop nuclear weapons proliferation, starting with N. Korea, while the world transitions over the next decades to more sustainable sources of inexpensive, clean energy.
I have long believed, and my web site’s tag line, “finance innovators, not speculators” reflects this, that the most important struggle in the world today is not Bush/Cheney’s “war on terror.” It is about who will control the “commanding heights” of the global economy in the 21st century, via its monetary/financial and energy systems.
These global production and financial networks need to be closely linked as part of this new global strategic bargain, in which the U.S. will once again earn its way, rather than relying upon much of the world’s development capital. The “war on terror” and nuclear non-proliferation will naturally be part of global economic development and security, there can not be global prosperity without global peace and security.
“Global leaders must find a way to unravel lop-sided trade and investment flows or risk a slump in the U.S. dollar that would create havoc for the world economy, ADB Chief Economist Ali said. An international agreement along the lines of the 1985 Plaza Accord ``on a bigger scale'' is needed to unwind the imbalances that have resulted in the U.S. current account deficit swelling to a record $805 billion.” (Bloomberg, Oct 3)
Whether or not this "Plaza II" suggestion is a way to go I'll leave to the true international economic and monetary experts, the unbiased ones that is. I believe that, as I wrote in my Sep 26 article link:
“Reforming the monetary/financial system to make the U.S. earn its way once again, as it had proudly done for two centuries, would profoundly change everything, including the low image of the U.S. in the world and the social/political mass culture of this nation. Wouldn't U.S. corporate innovation become focused on what the rest of the world really needs? And wouldn't Americans be proud in doing so? Wouldn't that be a more positive image and vision for the world?”
Frankly, by running such unprecedented current account deficits, which draw upon the world’s savings that could otherwise go towards global economic development, and by its less than 5% of the world's population consuming about 25% of the world’s oil, the U.S. has lost much moral authority in the eyes of the rest of the world (along with other reasons).
The U.S. asking the rest of the world to do its bidding is like a credit junkie telling his card companies what to do. Likewise with energy, how could the U.S. with a straight face tell China, with 20% of the world's population, and others which nations are politically correct enough for it to cut energy deals with?
Not only is the U.S. heavily dependent on East Asia, and the Arab Persian Gulf, for financing its massive twin deficits. It is also heavily dependent on the former, most especially China, for its supply chains and productions networks.
Indeed, it may not be completely far-fetched to say that East Asia and the Arab Persian Gulf are essentially helping to finance, via the twin deficits, U.S. military presence and operations in regions whose stability is of paramount importance to those major powers with their own strong interests (and influence) in those regions and in stable economic development.
This is an unprecedented situation for a country purportedly trying to dominate the world as the hegemonic sole superpower, and is clearly not a sustainable strategic position. Rather, it means that the U.S. and its creditors and producers will need to cooperate ever more closely in the future, especially on key issues involving energy security and nuclear proliferation.
The sooner U.S. leaders accept and act on that basic reality of the U.S. strategic situation, the better off the nation and world will be.
Time to Reconsider Worldview Based on U.S. as Hegemonic Sole Superpower
Most, perhaps all, in the U.S. foreign policy “establishment” would balk at this bargain, especially when it comes to sharing U.S. power in the Middle East.
One of the biggest “states of denial” that extends clear across the ideological spectrum of the U.S. elite, from Kissingerian “realists” to neocon “idealist” Jacobins, is that the U.S. is the world’s unquestioned, unchallenged superpower or hegemon (sometimes called hyper- or uber-power in Europe), its current global dominance greater than even the Roman and other (in)famous empires of the past.
Since the breakup of the Soviet Union, I have never read, heard or seen even a single solitary public dissent (what is said in private I’m obviously not privy too) from a leading economic, foreign policy and national security expert, of any ideological persuasion, from this characterization of the U.S. as unprecedented, virtually unlimited superpower, regardless of how strongly critical various members of the elite may be of important aspects of U.S. foreign/military policy at any given moment.
Yet it is precisely this hubristic delusion of America’s unprecedented, unlimited, and unchecked power on the part of Bush, Cheney, Rumsfeld and the neocon’s that has now gotten the U.S. into the huge mess described by leading bipartisan former government officials and mainstream "establishment" experts quoted at the very beginning of this article.
The harsh reality is that the U.S. of today has nowhere near the economic, industrial, technological and most especially financial power in the world that it did in 1945, when an ailing FDR met with Saudi Arabia’s first monarch, Ibn Saud, on a Navy ship in Egypt to seal the foundation "oil for security" deal of the postwar era between the two nations, nor even in 1980, as U.S. industrial descent was already picking up steam just before the disastrous precipitous decline in Reagan's first term, when the “Carter Doctrine” of unchallenged U.S. control of the Persian Gulf was explicitly declared.
The accelerating decline in key economic parameters of U.S. power, military excluded where the U.S. almost outspends the rest of the world combined, since that time has become so glaringly obvious by now that it seems to me it takes almost deliberately willful blindness on the part of the U.S. elite to continue not to see the evidence and deny it. How can one read any leading news publication without noticing what is happening to the underpinnings of U.S. power? One could find many quotes any week from the mainstream media like the following recent ones:
“During the past five years America has accounted for only 13% of global real GDP growth, using purchasing-power parity (PPP) weights. Asia has accounted for over half of the world's growth since 2001. Even in current dollar terms, Asia's 21% contribution exceeded America's 19%.” (Economist, Oct 19)
“IBM has moved its global procurement headquarters to southern China from New York to ``capitalize on emerging market opportunities.'' IBM spends 30 percent of its $40 billion annual procurement in Asia. This is the first time the company is moving the headquarters of one of its biggest divisions to China … The move ``places us closer to the core of the technology supply chain.”” (Bloomberg, Oct 12)
“Azim Premji, chairman of Wipro, the Indian outsourcing group, has warned that the US faces a more acute skills shortage in information technology than India, blaming failings in America’s education system and restrictive immigration policies. “Math is not considered as important, and students are not getting a premium when they graduate as engineers,” he said.” (FT, Oct 26)
“Global trading in futures and options contracts on lending rates, currencies and stock indexes increased to $484 trillion from $429 trillion in the first quarter, the Basel, Switzerland- based BIS said in a quarterly review.” (Bloomberg, Sep 11) To put the last quote in context, U.S. current dollar annual GDP is $13.3 trillion.
As best I can tell, it seems that the U.S. elite actually believes that Wall Street, along with its City of London ally, dominating this orgy of global derivatives trading and structured finance is THE viable basis of U.S. economic power.
"Sensible Center" Historic American Political Realignment Needed
For many years now, the current U.S. political party alignment has proven to be incredibly dysfunctional. E.g., the two critical issues of Iran and N. Korea have been barely mentioned by either party in the current election, yet both will be sure to have major consequences following it.
To head off the possibility of increasing internal and international conflicts based on genuine frustration and anger, a new historical political realignment is needed.
A critically needed political realignment can be done simply by combining the moderate, progressive, centrist majority of the two major parties into whichever party decides to come to its senses first (don’t hold your breath), rather than allowing the "sensible center" majority to continue to remain divided, frustrated and trapped in two separate parties, due to the heavy influence in both parties of their extreme wings.
Such an obvious realignment would leave the anti-evolution right of the ultra-cynical Rove and the ultra-liberal left of Hollywood in their own self-made minority camps. My choice of adjectives to characterize the extremes is an attempt to distinguish between sensible views of the right and left, and those of the extremes.
The vast majority of Americans doesn’t believe either extreme has a self-proclaimed monopoly on morality and ethics, and understandably is tired of the extremes’ attempting to impose their small minority, personal views in Rove's highly cynically orchestrated "culture wars."
This is not to deny the critical and vital importance of morality, ethics, religion, lifestyles, etc. in American lives and culture. My site emphasizes the critical link between morality and ethics and finance, economics and business.
Rather, it is simply to draw some boundaries which, until the advent of Rove's ultra-cynical "negative" "attack" politics, were usually respected between private views and deliberately contrived and manipulated public divisiveness. I think it would be a mistake to get down in the mud and fight Rove's "culture wars" on his divide-and-conquer terrain, as some seem to advise doing.
A progressive "sensible center" majority realignment would produce a durable, powerful, ethical coalition of business people and labor force focused on innovation for real, sustainable, fair wealth creation, hopefully relegating Rove’s “culture wars” to history’s trashbin, and pre-empting any ridiculous charges of "soft on terror" and "class war" also.
It seems increasingly likely that, barring a huge pre-November election surprise, Rove’s pipedream of a durable realignment may go up in smoke, not so much because of Foley or Iraq, but rather because it was based on a very negative, inherently unstable coalition of the anti-evolution right and “conservatives” who didn’t want to pay taxes but did want pork-barrel, not “free market,” handouts and subsidies, to the point of corruption.
A new progressive realignment would be historically similar to the Republican industrial ascendancy in the 1896 election and the Democratic social safety net one in 1932, less similar to the racial “wedge issue” Republican "Southern strategy" realignment in 1972, the clear precursor to the even more dismal negative politics of Rove in this era.
(Rove's lifestyle-religious-oriented wedge issues of "guns, gays, and God" were preceded by racially-oriented ones of busing, urban crime and affirmative action, both sets of issues were very deliberately used to break up the FDR "New Deal" coalition.)
These major political realignments seem to occur every 30-40 years, along with significant economic/financial crisis.
Perhaps it was no historical accident that the creation of Lincoln’s Republican party, which was based on promoting northern industrial capitalism, came with the great crisis of the Civil War; McKinley’s Republican industrial capital consolidation with the major economic/financial crisis in the 1890s; FDR’s Democratic “New Deal” with the 1930’s “Great” Depression; and Nixon’s 1972 Republican racial “Southern strategy” with the 1971-73 collapse of the Bretton Woods post WW II monetary system and the end of the era of ultra-cheap oil with the assertion of the OPEC cartel's power.
Attempt to Explain America’s Massive Denial of Basic Economic Reality
For years I have found it almost impossible to believe that elite policy-makers could seriously think that the U.S. is performing a great service for the rest of the world by being the global “shopper of last resort.”
The only explanations for this massive denial of basic economic reality by both elites and the average American that I have been able to come up with over the years are the following, I’m sure I’ve missed other crucial ones.
First, the CEOs of U.S. global corporations no longer have significant incentives, most especially financial, for national self-interest, so the U.S. skill gap, decline of industrial competitiveness, etc. simply doesn’t matter too much to them. Even the corporations of those few well-meaning leading CEO’s who consistently warn about such dangers to the U.S., such as IBM’s Palmisano and Intel’s Grove and Barrett, must constantly shift their resources and efforts to outside the U.S.
Fifty years ago American industrial CEO’s actually believed that “what is good for General Motors is good for America,” as GM’s CEO and Secretary of Defense "Engine Charlie" Wilson said in 1955, so for example, a perceived lag in science and math education, especially following Sputnik in 1957, was actively addressed.
This is no longer the case today. What is good for any major global corporation is now good for its CEO stock options and hedge funds, which inevitably has meant massive outsourcing offshore, not building up U.S. domestic capabilities.
That is a major change in mindset, and until the rules of the game are changed to alter it, there is very little hope that the growing problems of the U.S. can and will be altered, because there is not the power, money and incentive to do so in corporate America.
Second, the U.S. has become a nation of middle-class homeowners who are doubling as inadvertent (mostly) speculators, especially in real estate, whose economic self-interest in their home equity makes it virtually impossible for them to tell, or even be aware of, the difference between real economic wealth creation and the paper version. (I've written about this several times, starting with my Feb 14 article, "Mommy, Where Do McMansions Come From?" link,
also see the section below titled "What Would Happen Politically If the Housing Bubble Really Collapsed?")
As I've previously mentioned a number of times, the same applies to their political leaders and pundits, especially in the liberal “blue states,” where real estate speculation has been most egregious.
Their financial self-interest makes it all but impossible for them to see how U.S. economic policies are negatively affecting the rest of the world they usually sincerely would like to help, because it seems almost impossible to honestly understand the huge negative impact of the rest of the world funding the U.S. massive twin deficits, when one is sitting on huge real estate capital gains resulting from those twin deficits and the policies that helped create them.
Again, this is particularly difficult for liberal leaders, pundits, advisors, even economists, to come to grips with (not to single them out, there's plenty of blame to go around), but until they do, the prospects of truly meaningful change is very limited, if not impossible.
Btw, one big negative side effect of the real estate bubble is the even greater huge disparities in public education systems funded by local property taxes, which makes a mockery of the chance at equal opportunity in this country that both liberals and conservatives supposedly embrace as a core value (see my Feb 12 article, "Home-Equity ATM of Blue-State Liberals and Inequitable Funding of American Education" link).
Third, somewhat related, the average American doesn't know a great deal about subjects that have rapidly become in just the past few years critical to his future, such as China, derivatives/structured finance, the Middle East, N. Korea, etc., etc., , in part due to the abysmal oligopolistic state of the mainstream mass media and two major political parties.
It’s one thing if decades ago voters, let alone the highest government officials, didn’t know much about the differences between Sunni and Shia, Iraq and Iran, it’s quite another for that to be the case when the U.S. now has a declared national security strategy of pre-emptive/preventive undeclared, in the Constitutional sense (which doesn't seem to bother the "strict constructionist" faction on the Supreme Court), war all over the globe.
Fourth, key parts of the technology elite in the U.S., which I've long considered perhaps its "last best hope," as reflected in my site's name, "econotech," now actually seems to believe that the 24/7 narcissistic obsessive social networking of MySpace, YouTube, etc., combined with relentless massive media advertising and branding, is the economic and technological equivalent of developing leading edge advanced industrial capital goods, new genuinely high-tech sources of cheap, sustainable energy, and affordable, good quality basic consumer goods and services to help raise desperately low global living standards.
Again, the financial self-interest of massive stock options, usually to unjustified excess, even backdated at times, and IPO’s seems to have something to do with this Silicon Valley shift to the fantasy worlds of Hollywood and Madison Ave. in the real estate bubble consumer boom of the 2000s, from the emphasis on tools for corporate and individual productivity in the 1990s (see my Feb 27 article, "The New, Old Thing: Silicon Valley, Hollywood, Madison Ave.," link).
I guess what all four reasons boil down to, in the final analysis, is that if humans can get a "free lunch," which the U.S. has been able to do since 1971 with its paper dollar, then it is simply hard-wired in their nature to take it, and then make up all sorts of plausible-sounding reasons, at least to oneself most importantly, and hopefully to one's close family and friends, for why that's not what they're actually doing.
Modern academic psychology has shown the amazing power of humans to delude themselves in this way many times in small lab experiments, so why should it be any different on the scale of the global economy?
It’s the Hyper-Speculative Global Financial Markets
James Carville said after the 1992 elections, "It's the economy, stupid," often attributed to Bill Clinton. I've updated that slogan for this era, leaving off the "stupid."
Perhaps one of the most fundamental of America’s states of denial is the simple failure to admit the obvious, i.e., that the U.S. economy and government is now mainly one of, by, and for hyper-speculators, not the people.
A simple way of trying to show this is that Wall Street’s estimate before third-quarter results started coming in was that “the financial industry will account for 48 percent of the S&P 500's third-quarter growth, according to Thomson.” (Bloomberg, Oct 16)
The other nine sectors of the economy together add up to the other half. This probably understates the role of finance in the U.S. economy, as many large non-financial corporations make significant profits from their financial activities.
Regardless of the exact percentage after all the results have been reported, finance now occupies the “commanding heights” of the U.S. economy after a thirty-plus year transformation.
The same conclusion is shown looking at tax receipts. Bush closed the budget gap this year because of much greater than expected capital gains taxes. Payroll tax receipts increased far less.
For more details on the dominance of the hyper-speculators in the global economy, please see examples of the "wall of liquidity" in the section below titled "Equity Markets Keep Rising ... ", and especially the first section on hedge and private equity funds and investment banks in my Oct 24 news summaries link. Here are a couple of examples from the section below:
“U.S. leveraged-buyout activity is on pace for a record. 371 leveraged buyouts worth about $124.6 billion have closed in the first nine months, a 50% increase from the $83.1 billion in deals for the same time period a year ago … The total for deals announced but not yet closed this year is a whopping $238.7 billion across 405 deals, up from $111 billion across 317 deals at this time last year.”(WSJ, Oct 9)
“Takeovers involving European companies have climbed to $1.26 trillion this year from $819 billion in the same period a year ago … Finance has been the most active, with $341 billion of deals involving banks and insurance companies … Private-equity firms record $160 billion they have raised this year.” (Bloomberg, Oct 9)
Bottom line, the U.S. is not a service, information or any other fad term economy, but rather a hyper-speculative one.
It is also very self-delusional and even arrogant, not surprisingly for those who don't like advanced math and science, to label the hyper-speculators, and those who do very well-paid professions in their service in some way, as somehow more creative than those designing, engineering and manufacturing the actual products and services we use. Scientists and engineers, like true artists, are very creative.
Return on Leveraged Legal Looting (ROLLL)
Global finance now means what I have labeled ROLLL, return on leveraged legal looting, by hedge and private equity funds and the largest investment and commercial banks, usually in private, deliberately opaque non-transparent, even to the regulators, transactions, and usually at the expense of the public in one way or another, which has long since superceded the emphasis on “shareholder value.” E.g.,
"Cheap credit is everywhere … the most avid consumers of leveraged loans have been private equity groups. Many corporate executives sniff at what they see as financial engineering, especially when private equity groups quickly sell their investment or lock in their returns by floating a portfolio company on the stock market. It is even harder for a CFO to announce that he is planning to trash his employer’s credit rating just for the sake of returning capital to investors. The current situation has created an arbitrage that is being exploited by private equity groups at the expense of public shareholders. Either defaults begin to rise and corporate credit conditions tighten again, limiting the scope for buy-outs, or companies will inevitably conclude that they should be more aggressive in their borrowing." (Peter Thal Larsen, FT, Sep 26)
"As dozens of collateralized loan obligations (CLO) structures have set up shop, buy-out groups have been issuing waves of leveraged loans into this pool of demand. Investment bankers have also been creating tailor-made instruments for buy-out groups. These instruments have been gobbled up so eagerly by hedge funds and other investors that the price of raising funds has fallen to extraordinarily low levels. many buy-out firms have started to raise cash to pay themselves dividends … if big corporations are not willing to leverage themselves up, they could fall victim to hostile bids from private equity groups themselves." (Gillian Tett, FT, Sep 26)
Much of modern finance, based on innumerable arbitrage games, doesn’t create real economic wealth, as most corporations do through innovation, but rather simply redistributes it to the super-wealthy, via their control and use of the credit system with which to expropriate real wealth. Calling this looting financial innovation doesn’t change its essential nature.
"[management buyouts] should simply not be allowed at all as a matter of law … they buy the assets on the cheap and sell them off for their own management benefit, or they manage the company differently for the benefit of themselves and their buyout partners … breaching that fiduciary duty … management is seeking to pay the least it can get away with for the assets of the public holders, while the public holders want the most they can get. irreconcilable conflict of interest … lack of full disclosure … [buyout] memos are not disclosed to the stockholders or to the market generally … insider trading. what is a management buyout other than trading on inside knowledge?" (Ben Stein, NYT, Sep 3)
ROLLL has been based on a few obvious one-time tricks, some of which may not be repeatable, at least on the same scale, such as the global real estate bubble. Unfortunately, by the time that becomes more obvious to most people, whatever breathing room these tricks have bought the U.S. over the past decades to begin to transition to a much more healthy U.S. economy will have disappeared.
Here's a timely example of hyper-speculators’ big gains. I discuss in a section below on China how long it might continue to play along with the Goldman's of the world.
“The first-day stock gains give Goldman Sachs, the world's most profitable securities firm, a paper gain of $4.9 billion on its investment. Goldman paid almost $2.58 billion in April for 16.48 billion shares of ICBC for itself and its employee- and client-owned private-equity funds.” (Bloomberg, Oct 27)
“[Goldman’s] China bonanza is the result of more than 70 visits by former Goldman Chief Executive Officer Paulson, who became U.S. Treasury Secretary last June.” (Bloomberg, Oct 23)
“Goldman will announce on Oct. 25 its new class of partners, who will join the 287 who currently hold that title. Last year, that group shared more than $2 billion, or about 20% of the total compensation Goldman paid. That averages out to about $7 million per partner. Goldman's partners also are offered opportunities to invest beside the firm when it buys stakes in other companies, which can be lucrative.” (WSJ, Oct 13)
Politically, splitting actually economically innovative corporations, and countries for that matter, those that create real products and services, away from control by global hyper-speculators, in the case of corporations via CEO stock options and buy-outs, will be critical. The purpose of the changes proposed in this article is to encourage everyone to get very wealthy the “old-fashioned way,” by actually creating something of economic value, not as the hyper-speculators have done.
"Private-equity firms have notched seven of the 10 largest leveraged buyouts of all time this year … [CEOs] are both buying and selling the company … fraught with potential conflicts of interest. "Every private-equity firm markets itself to its potential investors on the basis of its access to deals, preferably exclusive access to deals" without competitive bidding, says a merger-and-acquisition lawyer … little that is more important to a private-equity firm than courting the management. offer management … as much as a 10% stake … when the company is recapitalized or goes public, the executives often get windfalls valued at hundreds of millions of dollars." (WSJ, Sep 8)
Good business is a very morally uplifting endeavor, it's all about creatively meeting the needs of customers with innovative ways of providing products and services. Good business is thus the essence of creativity and connection, the two things that psychologists have shown are the keys to personal happiness. Therefore, we want as many people as possible to be involved in business in a creative and connected way, so that they will be as happy and fulfilled as possible by "doing well by doing good."
“Former NYSE chairman Grasso must return tens of millions of dollars in compensation to the exchange, a New York state judge ruled on Thursday. Mr Spitzer filed a high profile law suit in 2004 arguing that the $139.5m in salary, bonus and benefits paid to Mr Grasso in 2003 for his eight years as NYSE chairman violated New York law requiring that compensation for executives at not-for-profit organisations be “reasonable” and “commensurate with services performed.”” (FT, Oct 19)
I only mention Grasso’s case because, if I recall correctly, in a recent tv interview perhaps the most celebrated, respected CEO of the prior two decades defended him, before the verdict, on the grounds that no executive would turn down huge sums of money if legitimately offered by its board.
But are these offers really legitimate, even when perfectly legal most of the time? Buffett recently said of current corporate morality: “many perpetrators of corporate scandals acted because they felt others were doing it.” (FT, Oct 10)
Corporate morality is not going to change by hiring more moral CEO’s and MBAs with ethics classes. It is critical to break the systemic link of corporate America, the repository of crucial talent, know-how and technology, that is tethering it in its now more than two-decade alliance with the global hyper-speculators. (See my April 10 article, "SOX counterproductive; Corp America responds to distorted incentives," link.}
Self-Described “Schmucks” of the Financial World
The larger ROLLL becomes, the worse off America’s and the global future ultimately will be, as capital/savings is siphoned off in pure hyper-speculative activity solely designed to line the pockets of the super-wealthy, with no useful or redeeming economic value whatsoever, rather than being rationally invested to raise global living standards.
Who are these hyper-speculators, and what drives them? A revealing self-description was in the lead article on page one of the Sept 30 WSJ:
“Mr. Tepper, 49 years old, is head of Appaloosa Management, a $4.5 billion hedge fund that owns 9.3% of Delphi's stock. Mr. Tepper has gotten rich investing in America's broken companies and declining industries … Mr. Tepper says he is not causing economic pain -- he is just capitalizing on it … Delphi wants to close many plants and lay off thousands of people. It also intends to cut wages and benefits … On [Tepper’s] desk sit three plastic pigs. He jokes that he rolls them for guidance on difficult trades. If all three snouts point down, in the eating position, it's a signal to buy. "The media says that hedge funds are the new masters of the universe," he chuckles. "We're just a bunch of schmucks."” (WSJ, Sep 30)
Tepper’s amorality is not an aberration, it is the norm. The world’s financial system is being run by people who make the 1987 character played by Michael Douglas, Gordon “Greed is Good” Gekko, seem benign (despite their philanthropic activities of returning some of the legal looting).
“After Weetabix, the maker of Britain's best-selling breakfast cereal, fired 7 percent of its workers and canceled the employee bus service to free up cash for debt from a leveraged buyout, [it] borrowed $249 million so it could enrich owner Lion Capital. This year more than 80 companies controlled by LBO firms have borrowed at the expense of workers and debt investors just so they can pay themselves dividends … The payments have helped the firms recoup 86 percent of their investments within two years … Weetabix will pay annual interest of 13 percent for the next decade because of the dividend to Lion Capital. That's almost double the cost on loans it used earlier this year to refinance debt from its 2004 buyout. Interest costs like those may force the company to cut more expenses … Robin Smith, a spokesman for Weetabix, declined to comment. Lion Capital spokeswoman Mani Pillai also had no comment.” (Bloomberg, Nov 1)
There is now a whole MBA army of Gekko’s on financial steroids and with very little adult supervision whatsoever, a key point as to who might possibly restrain these “masters of the universe,” that I will get back to shortly.
Historical Context for a New Global Strategic Bargain
At the risk of seeming even more hubristic and self-deluded than the elite that I've just criticized, such a global bargain as the one I sketched above would be of the same historic importance for long-lasting peace and prosperity in the 21st century as the creation of the post WW II Bretton Woods institutions and economic reconstruction along with security alliances.
Sixty years ago, the latter without the former could very well have ended up in yet a third round of the 20th century’s extended “Thirty Years’ War,” with even many more tens of millions dead, this time in nuclear holocausts. Everything possible must be done ASAP to avoid going down that path toward international anarchy today.
This global strategic bargain should have been attempted thirty years ago during the huge energy, monetary, foreign policy and political crises of the 1970s. If it had, perhaps a great deal of unnecessary pain and suffering could have been avoided, and a huge amount of global development achieved.
But global leadership on all sides, trapped in a Cold War mindset, clearly was nowhere close to being up to the task back then. Hopefully this time around they will be, better late than never, although as a result the U.S. has already unnecessarily squandered huge amounts of historically earned goodwill and prestige, “soft power” if you prefer, or "political capital" as Bush might put it.
World More Dangerous With Loss of U.S. Power and Domestic Political Stalemate
And make no mistake about it, this is a huge loss, even if Wall Street currently doesn’t seem to care.
E.g., I recently saw a Bloomberg tv interview with Jesper Koll, Merrill Lynch’s chief Japan economist who has been there for two decades, in which he quickly brushed aside any concern whatsoever about the recent N. Korean nuclear test.
Not to single out Koll, he seemed a nice enough guy and is a good market economist, but this is extremely short-sighted, to say the least (as if that would be unexpected from Wall Street).
Financial markets globally remain extremely complacent about the potential dangers ahead, as market players are already spending their huge year-end bonuses, counting on the ongoing global rally to continue (see my Sep 26 article, "Global Markets Hope ..." link). E.g.,
“The Chicago Board Options Exchange volatility index, or VIX, dropped 0.27, or 2.5%, to 10.63 -- its lowest closing level since late 2005.” (WSJ, Oct 21)
Barring a major late turnaround and/or last minute surprise, come November, there may be a huge political stalemate in D.C.
“A last-minute "October surprise" -- a dramatic news event that shakes up the U.S. election -- could be a big wild card in the final three weeks of the fight for control of Congress. With Democrats threatening to sweep Republicans out of power in Congress in the November 7 elections, a late-breaking foreign crisis, terrorist attack or a new scandal could change the debate and shape the ultimate outcome.” (Reuters, Oct 17)
Wall Street thinks that such a stalemate will be okay:
“Investors are banking that a Democratic victory will mean political stalemate with President George W. Bush rather than passage of an anti-business agenda.” (Bloomberg, Oct 24)
But it very well might make the world, already teetering on the brink of war in many volatile areas, an even far more dangerous place.
With the possibility of tremendous political warfare in Washington, the loss of U.S. global power and prestige, right now dangerously palpable, could become even worse, and with it the prospects for global stability.
That risk doesn't influence how I feel about the absolute necessity for huge change in the political situation, in fact it only makes the need for such change that much more imperative, as I try to argue in the final section of this article.
But it does mean that the nation's leaders should be very much aware of what happened in the 1970s under wounded Nixon and weak Ford and Carter, and the effects of a relentlessly hounded Clinton in the 1990s.
And also remember what happened with the worldwide collapse of the elite’s moral authority associated with the Vietnam War and the year 1968, not only in the U.S. and Europe, but also in the enormously devastating “Cultural Revolution” in China.
No one wants to relive those times of upheaval, and we’re far way from that right now, but the negative international surprises keep coming. Very few expected Israel to do what it did to Lebanon this summer. Nor for N. Korea to test a device so soon, even though:
“North Korea's leadership is under severe economic pressure. Financial sanctions imposed by the US in September last year appear to have had a tougher than expected effect. (FT, Oct 5)
What’s next? Will Gaza explode, with unforeseen consequences, perhaps for Egypt? More unrest in Eastern Europe, whose current account deficits might make them somewhat vulnerable to another markets contagion effect if things start to get out of hand, as happend in East Asia in 1997?
“Police in Budapest charged at protesters to end a day of riots on the 50th anniversary of Hungary's anti-communist uprising. The violence extended a month of pressure on Prime Minister Gyurcsany to resign.” (Bloomberg, Oct 24)
“The average monthly wage in Hungary was 847 euros ($1,067) at the end of last year, a third of the 2,542-euro average in Germany. The frustrations in Budapest mirror those of people around Eastern Europe as governments from Estonia to Slovakia struggle to fulfill promises that capitalism would bring a better life. Gyurcsany's Socialists were the first Hungarian party to win a second consecutive term since the fall of communism when it won re-election in April. Czechs, Poles and Slovaks have all replaced the parties that led them into the EU two years ago.” (Bloomberg, Oct 20)
“Attempts at forming stable governments in some of the 10 nations that joined the EU in 2004 have foundered as voters cast their ballots for a growing number of parties and as politicians struggle to forge coalitions with a common goal. Alliances have shattered as political leaders seek to implement budget cuts demanded by the EU without breaking campaign spending promises.” (Bloomberg, Oct 3)
My point is that the loss of U.S. prestige and status globally, combined with the tensions inherent in an inequitable hyper-speculative version of globalization, have created potential tinderboxes all over the world, with not necessarily completely foreseeable but still very serious risks.
Unfortunately, when the structural foundations of stability are steadily weakned, reality has a nasty habit of intervening into situations based upon massive denial and delusion. As the ancient Romans and other erstwhile empires found out to their everlasting chagrin.
No one can predict how with any certainty. But one thing is obvious so far, unanticipated geopolitical surprises have become more frequent, and Wall Street doesn't seem to care in the least, as the good times continue to roll. For now.
What Would Happen Politically If the Housing Bubble Really Collapsed?
“Is this what a housing bust looks like? New home prices fell last month by the largest amount in 35 years and owners are being warned to brace for further declines, especially in formerly hot markets. After years of increases, some buyers say prices are still out of their range. The Commerce Department reported that the median price for a new home sold in September was $217,100, a decline of 9.7 percent from September 2005. That was the lowest median home price in two years and the sharpest year-over-year decline since December 1970, providing dramatic evidence of the slowdown in the once-booming housing market.” (AP, Oct 27)
“The decline in home prices after a five year real-estate boom will cause the economy to slow and force the Fed to lower rates to avoid a recession, McCulley wrote on Pimco's Web site on Oct. 19. ``To think otherwise after a bubble is to not understand bubbles.''” (Bloomberg, Oct 23)
"Moody's Economy.com projects that the median sales price for an existing home will decline in 2007 by 3.6 percent, which would be the first decline for an entire year in home prices since the Great Depression of the 1930s. 133 of the nation's 379 metropolitan areas would suffer price declines. account for nearly one-half of the value of the nation's stock of single-family homes … the rebound in prices is not expected to occur quickly." (AP, Oct 3)
“The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding. The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998.” (Bloomberg, Oct 23)
""Since the start of 2005, the inventory of unsold new homes has climbed 29 percent, while the stock of unsold existing homes is up a staggering 82 percent'' … cancellations are rising, and they aren't being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated. " (Caroline Baum, Bloomberg, Sep 29)
““I don’t think that the [housing market] boom came from a 1 per cent Fed funds rate or from the Fed’s easing. It came from the collapse of the Berlin Wall,” Mr Greenspan told a private audience in Canada on Friday … the collapse of Communism in eastern Europe and the shift towards more market-based economies in China and other parts of the developing world brought “billions of cheap labourers onto the scene”. This, he said, “brought disinflation and lowered inflation risk premiums and long-term interest rates, creating a decline in real interest rates and equity-risk premiums.” In consequence, “the real market value of assets increased faster than GDP.”” (FT, Oct 9)
""The rate of [real estate] decline is going to dramatically slow,'' Greenspan told an audience of insurance-industry executives in White Sulphur Springs, West Virginia. ``We are beginning to see some evidence that all the data are not going south,'' he said, citing statistics on mortgage applications." (Bloomberg, Oct 10)
If Greenspan fully believed his explanation of what he calls the “boom,” then why did he lower interest rates to 1% in the first place and keep them there so long?
It wasn’t just the “billions of cheap labourers onto the scene” that was key, it was the decisions to transfer to that labor by stateless multinationals advanced technology and management, developed over decades by innovative individuals standing on the shoulders of their societies’ progress, now expropriated for the benefits of the very few at the very top running those multinationals, via their stock options, and the financial hyper-speculators driving them to do so.
But I digress. The key point to be made for the purpose of this discussion is the potential political problem arising from the American middle-class not understanding and accepting what Greenspan said above.
Five or ten years ago, if you had told the American middle-class that their homes would be worth what they are today, you would have been considered insane. Everyone knew such valuations would be completely absurd based on all their prior experience, not only with their own home prices, but also with decades of stagnation of their own real incomes.
Yet today, the American middle-class very strongly believes that these previously insane valuations are normal, and more importantly politically, that they somehow earned their massive increase in home equity.
They have no real idea how it happened, magically perhaps, they don’t particularly care. They don’t fully understand the role of East Asia that Greenspan mentioned above, because no leader has ever clearly told them, no one has explained to them the so-called "Bretton Woods II" marriage of convenience between the spending Americans and the saving Chinese, implicitly agreed to by "independent" central bankers in the U.S. and CCP leaders in China.
Nor do they fully appreciate how they've benefited from massive government tax breaks of a couple hundred billion dollars per year on mortgage interest and capital gains, the latter enacted clearly to pump a bubble, huge government mortgage security subsidies, government supply restricting zoning and land use regulations, etc., all of which was not in the news report on Greenspan that I quoted above.
If the middle-class homeowners thought about it at all, they might think their huge home equity gains was the “free market” at work, and since they took the "risk," they deserve the huge capital gains, even the small number who weren't fully honest.
“the use of liar loans has become epidemic. In 2005, mortgages underwritten with minimal documentation sometimes accounted for as much as 50 percent of subprime mortgages. almost 60 percent of the stated-income amounts are exaggerated by more than 50 percent.” (sfgate.com, Oct 6)
Regardless, they know possession is nine-tenths of the law, so it's their hard-earned home equity, period, end of story. They’ve even spent a good chunk of it, via home equity extraction, which has continued even through rising rates, though at a slower pace, down from about $800 billion a year to less than $500 billion. But there’s still far more of that new paper wealth left.
The Fed is doing everything it can to maintain this mass delusion about real estate values, otherwise they would be far lower, while keeping inflationary pressures under control, at least until after the Nov election.
But what if this truly massive social “state of denial” was ever threatened, what would be the consequences? Who would be blamed? Who would the middle class lash out at, as it historically has been prone to do when its living standards are very seriously threatened? Who would pay the price, be the target, for their sublimated anger?
For three decades, as their real incomes stagnated (average real weekly earnings are still -17% below the level of 1972) working and middle class people’s lives were spindled, folded and mutilated on the premise and promise, by both political parties and the mass media, that what came to be called "globalization" would somehow ultimately pay off for them.
It did, finally, but in an unanticipated way, not through better new jobs , 1996-2000 was the only period of modestly rising real wages since 1972, but rather through the by far largest speculative bubbles in history, first in the equity markets, then more importantly in real estate in the 2000s.
Social science research gives clues as to who would be targeted should the real estate bubble significantly deflate (see the end of the Social – U.S. and Political – U.S. sections of the 10/24 news summaries link).
Billions of People Without Clean Water, Basic Sanitation, etc.
Two generations with Gordon Gekko’s amoral attitude are now endemic to global financial markets.The global economy essentially consists of billions of very poor people going nowhere fast, while global stock markets and all other speculative activity make all-time highs.
“more than 1 billion people were without clean water in 2004 … 2.6 billion people worldwide without access to proper sanitation.” (Reuters, Sep 28)
“President-elect Calderón recently admitted that violence has escalated out of the control of the authorities in several states and in Mexico City … Big investors appear to shrug off the violence, as they have the disputes after Mr Calderón's election. "It's not a concern," said Damian Fraser, chief Latin America strategist of UBS Warburg. As Mr Fraser spoke last week, the IPC index of the Mexico Stock Exchange set fresh records.” (FT, Oct 4)
“Maoist guerrillas are active in a quarter of the country's 602 administrative districts. Transport infrastructure is woefully inadequate. Nor is there a coherent energy policy … average age is 23 and there are 300m children aged between six and 16 poised to enter the workforce - but education is poor and jobs are scarce … only 35m Indians [out of 1.1 billion] - less than 7 per cent of the workforce - are employed in the formal economy and 21m of those work for the government.” (Victor Mallet, FT, Oct 19)
But “India will have at least 50 property- related initial public offerings in the next year as the real- estate industry booms” (Bloomberg, Oct 3)
“The world's ecosystem is being degraded by humans at an unsustainable rate that risks causing ``irreversible damage'' to the planet, the conservation group WWF said. ``by 2050 humanity will demand resources at double the rate at which the Earth can generate them.'' "At this level of ecological deficit, exhaustion of ecological assets and large-scale ecosystem collapse become increasingly likely.'' Almost half of the ecological footprint is due to emissions from fossil fuels. ``Humanity is no longer living off nature's interest, but drawing down its capital,'' WWF said.” (Bloomberg, Oct 24)
And almost as if to celebrate the stock market bull markets?
“the video of a Merrill Lynch [private] banker having a sexual encounter on a Spanish beach with an ex-girlfriend of Brazilian soccer star Ronaldo … has crashed computers on trading floors in Sao Paulo and Rio de Janeiro.” (Bloomberg, Sep 29)
Equity Markets Keep Rising, Regardless of Short-term Rate Expectations
Before continuing with the main themes of this article, the following section gives my patient investment readers a brief update on financial markets, which I will cover in more detail once again in future articles.
The prospects of short-term rates going down was a key rationale often cited for both the stock and bond markets strongly rallying in the third quarter following a sharp May-June correction, even though each market was betting on a diametrically opposite economic forecast, as noted in my Sept 26 article, “Global Markets Hope … ,” link.
Since then, a few key data releases and Fed speeches convinced financial markets that the Fed was not going to cut rates anytime soon.
“Federal Reserve officials may leave interest rates alone until the middle of next year, confident of ``moderate'' economic growth and abating inflation pressures. Futures traders anticipate the Fed's benchmark lending rate will stay at 5.25 percent through May." (Bloomberg, Oct 26)
The result? Of course global equity markets continued to go up anyway, while the U.S. bond market has had a small correction of its previous very strong advance.
I.e., in an equity bull market, it doesn’t matter what the rationale of the day is, s-t rates expected to go down, s-t rates expected to stay flat, all news is okay, including bad news, especially with decent earnings reports.
“[S&P 500] has risen 4 percent in October, which would be the biggest monthly gain since December 2003. As of yesterday, with about half the companies in the S&P 500 reporting earnings, 73 percent have posted profits that exceeded analyst forecasts, while 12.5 percent reported results that trailed estimates.” (Bloomberg, Oct 26)
“The MSCI Asia-Pacific Index set for its highest close since May 18. The measure last rose for six straight days in the period ended Jan. 31. U.S. stocks advanced, sending the Standard & Poor's 500 Index to its longest winning streak since March.” (Bloomberg, Oct 26)
“The Shanghai Composite Index, which tracks performances in the bigger of two Chinese stock exchanges, rose 53 percent this year, the sixth-best performer out of 80 global indexes tracked by Bloomberg.” (Bloomberg, Oct 13)
“The DJ Stoxx 600 [Europe] Index at the highest since February 2001. Stocks have risen 17 percent from their low on June 13 as takeovers, a three-month retreat in oil prices and better-than- expected earnings bolstered prospects for profit growth and underpinned stock values.” (Bloomberg, Oct 21)
“Lead rose 2.7 percent in London, earlier touching the highest ever. Nickel climbed 1.2 percent to the highest since at least 1987.” (Bloomberg, Oct 13)
“Shares of Nippon Building Fund Inc., Japan's biggest real estate trust, reached a record last week as land prices and rents soared.” (Bloomberg, Oct 12)
Consider what would have been the equity market’s reaction had N. Korea detonated a nuclear advice during its sharp decline in May-June. Yet rising global geopolitical risks do not register at the current time, with equity market volatility (VIX) once again extremely low.
The most basic reality of the global financial markets continues to be, as the FT said Sep 26, “Cheap credit is everywhere … the most avid consumers of leveraged loans have been private equity groups.”
“U.S. leveraged-buyout activity is on pace for a record. 371 leveraged buyouts worth about $124.6 billion have closed in the first nine months, a 50% increase from the $83.1 billion in deals for the same time period a year ago … The total for deals announced but not yet closed this year is a whopping $238.7 billion across 405 deals, up from $111 billion across 317 deals at this time last year.”(WSJ, Oct 9)
“Takeovers involving European companies have climbed to $1.26 trillion this year from $819 billion in the same period a year ago … Finance has been the most active, with $341 billion of deals involving banks and insurance companies … Private-equity firms record $160 billion they have raised this year.” (Bloomberg, Oct 9)
China’s ICBC $19.11 billion IPO received more than $500 billion in orders. “"I am staggered by the wall of liquidity that exists in the capital markets right now," says Steven Barg, UBS AG's head of equity capital markets for Asia.” (WSJ, Oct 21)
“Asian hedge funds starting operations increased to 215 in 2005 from 95 in 2002.” (Bloomberg, Oct 27)
“Assets at commodity hedge funds rose 87 percent to $22.5 billion in the past year and may grow to $30 billion in 2007. The number of funds increased to 95 from 70 a year ago.” (Bloomberg, Oct 23)
“Since 1999, the amount of money invested in commodities by pension funds, mutual funds and endowments has soared almost 17- fold, to $100 billion from $6 billion. Hedge funds, commercial banks and Wall Street firms, meantime, have poured about $50 billion into the market.” (Bloomberg, Oct 10)
“the sea of cash flooding the Gulf [Arab oil producers] these days has produced an explosion of investment companies. New names spring up almost every week. Arab companies' acquisitions abroad are announced with as much frequency … Gulf oil producers' current account surplus will increase 37 per cent this year to $227bn. (FT, Oct 19)
Here's a few things to worry about:
“U.S. stocks fell on Friday [Oct 27] as a report showing third-quarter U.S. economic growth was the weakest in more than three years raised concerns about the outlook for corporate profits. The market pulled back after two weeks of gains. The government said GDP expanded at a 1.6 percent annual rate -- much slower than the 2.2 percent rate economists had expected and down from a 2.6 percent rate in the second quarter. Stocks showed little reaction to a report from the University of Michigan that its consumer sentiment index rose to a stronger-than-expected reading of 93.6 in October, up from 85.4 in the previous month.” (AP, Oct 27)
“The Fed's [staff] number-crunchers threw out previous conclusions about how fast the economy can grow without fueling inflation. They concluded that the speed limit is lower than previously thought. The implication: Unless the economy slows more than the Fed now expects, the central bank may have to resume raising interest rates sooner rather than later to control inflation. In effect, policy makers were told last month that time is running out for inflation to fall.” (Bloomberg, Oct 23)
“The Conference Board index of leading indicators edged up just 0.1% to 137.7 in September, but noted that consumer expectations have improved. The index fell by a revised 0.2% in August. "The economy has slowed but the evidence to date doesn't suggest it will stall or go into a recession." "To the contrary, the economy retains considerable strength," given the rise in stock prices and drop in energy prices. employment remains robust and inflation relatively low.” (WSJ, Oct 20)
“The Institute for Supply Management's manufacturing index dropped to 52.9, the lowest since May 2005.” (Bloomberg, Oct 2)
“Caterpillar shares had the biggest drop in 19 years. Sales of construction equipment will be less than the company anticipated as a housing slump triggers a period of slack economic growth.” (Bloomberg, Oct 20)
“[Investor] Sentiment has reached a level of extreme optimism, according to an indicator compiled by Ned Davis Research.” (Bloomberg, Oct 9)
“For the year ending August 31, "86.8 per cent of the $118.56bn in equity flows has headed overseas."” (FT, Oct 4)
“Gulf oil producers will continue buying dollar-based assets with their windfall revenues, but not all the money will flow into the US, according to [the IMF]. Gulf oil producers will record current account surpluses of $239bn this year, rising to $259bn in 2007.” (FT, Oct 10)
“In 2006, fuel exporters expected to generate a $505 billion surplus, vs. $462 billion from Asian nations … oil-exporting countries have recently taken the lead in buying U.S. bonds and Treasury bills … If they tumble to $50 per barrel, the boom in petrodollar purchases of U.S. securities could evaporate.” (BW, Oct 9)
“the possibility of a disorderly unwinding of the external deficits … The rest of the world may no longer need further increases in the US external deficit. But it would not want to see it contract too brutally or too quickly either. If US domestic demand weakened, however, a big correction of the external deficit is exactly what most Americans would want, since that would be preferable for them to a domestic recession. They would wish to export their slowdown.” (Martin Wolf, FT, Sep 28)
But until that seemingly inevitable but much-delayed day of reckoning, for now the huge global “wall of liquidity,” actually a tsunami, has prevailed. Until I give an updated market/chart review in a future article, I will close this section by just repeating what I wrote Sep 26 link:
“as I have written a number of times since June 2 link when global financial markets were sharply declining, equity markets still remain in their now 4-year bull market, judged on the most simplistic trend criteria (e.g. MSCI World (ex US) and the NYSE are currently well above their rising 200-day moving averages), indicating the equity markets’ recent diminution of concern over the prospects of a successful "soft landing"”
No Domestic Opposition to Global Hyper-Speculators
But this is not about the hyper-speculators' personal morality. It’s not about somehow replacing the current hyper-speculators with more ethical ones, as if that could be done. It’s about a monetary/financial system that is being run to benefit a very tiny group of global hyper-speculators. And in the final analysis, it is all about political/economic/military power.
The U.S. is not going to significantly rein in the global hyper-speculators, one of whom is currently Treasury Secretary. Perhaps there may be a little more policing at the margin to make sure the speculative orgy doesn’t get out of control and finally wake someone up, but it won’t amount to much.
“Top US policymakers believe fresh regulation of hedge funds may be needed to avoid a catastrophic hedge fund failure and that relying on banks and other counterparties to manage their exposure to the booming industry may no longer be enough. The development marks a shift in thinking on hedge fund oversight since a US court in June struck down a rule that hedge fund managers register with the SEC … One focus of concern was that hedge funds had access to financing from multiple prime brokers … official said. “The real concern is the transmission mechanism of the failure of a hedge fund into entities of a size that really are of systemic consequence.”” (FT, Oct 15)
“Hedge funds present a risk to the financial markets and tighter regulations are needed, a majority of private economists said in a new WSJ.com survey … little is known about their borrowing. Banks have been aggressive in extending credit, sometimes requiring little or no collateral on loans … Geithner, president of the NY Fed, recently called upon regulators to examine whether banks and securities dealers are requiring sufficient collateral from hedge funds … Thomsen, the SEC's director of enforcement, said the agency will be monitoring hedge funds through their relationships with broker dealers, and those ties will face more scrutiny.” (WSJ, Oct 13)
“Snow, the former U.S. Treasury secretary named chairman of Cerberus Capital Management this month, said investors, not policy makers, are the best regulators of hedge funds. Snow said he came to favor a ``lighter'' touch for hedge funds because the $1.3 trillion industry was too big for the government to monitor effectively … Senate Finance Committee Chairman Grassley told Snow's replacement, Paulson, that hedge funds pose too big a risk to the U.S. pension system, and asked the Treasury to find ways to boost transparency in the funds. the SEC is focused on insider trading by hedge funds ahead of corporate merger announcements, Chairman Cox said. Snow, who had amassed personal wealth of about $100 million when he joined the Bush administration, said joining a private equity fund seemed a natural evolution.” (Bloomberg, Oct 31)
The “enlightened capitalist” factions that for years now have expressed deep concern about the direction of the global economy and financial markets, e.g. those around Rubin, Volcker, Peterson, etc., have no political leverage to push for more significant reforms (e.g. Rubin supported Kerry), except perhaps via the Clintons (the same is true in foreign policy). That’s because the domestic political power to fundamentally change the speculative system was destroyed decades ago, with the U.S. labor movement.
The “enlightened capitalists” heavily contributed to this destruction, e.g. Carter’s Volcker ultra-high interest rate-ultra strong dollar policy “hollowed out” the U.S. “rust belt” in Reagan’s first term; Clinton’s Rubin Nafta-WTO “free trade”-strong dollar policy formally institutionalized the decades-old shift (first to the anti-union south) of U.S. industrial capacity abroad; with Bush Jr. delivering the final U.S. industrial deathblow in his first term, a truly bipartisan effort over the decades, with this final result:
“Wal-Mart is pushing to create a cheaper, more flexible work force by capping wages, using more part-time workers and scheduling more workers on nights and weekends … workers assert that the company is making changes with an eye to forcing out longtime higher-wage workers. Investment analysts and store managers say Wal-Mart executives have told them the company wants to transform its work force to 40 percent part-time from 20 percent. Wal-Mart denies it has a goal of 40 percent part-time workers, although company officials say that part-timers now make up 25 percent to 30 percent of workers, up from 20 percent last October. Wall Street analysts praising the new approach to managing its workers … A big area of discrepancy between what Wal-Mart says and what the workers say is whether the company has a policy of “open availability.”” (NYT, Oct 2)
“Wal-Mart Stores Inc. is paying a former advisor to President Clinton at least $3 million over the next two years to direct a rapid-response team to handle mounting criticism of the world's largest retailer.” (LAT, Aug 30)
Not all that surprising, considering that Hillary Clinton was on Wal-Mart's board for six years.
Europe and Japan Offer Little Opposition to Global Hyper-Speculators
Since being defeated in WW II, the continental Europeans have consistently abdicated in the fight with Wall Street and its City of London ally, as has Japan. The BoJ usually seems to be just another branch of the Federal Reserve supplying virtually limitless liquidity to the global hyper-speculators via “yen carry trades,” that isn’t going to change under Abe, who will institute much harsher fiscal austerity than Koizumi.
Japan actually got uncharacteristically a little bold with the U.S. during the 1997-98 “Asian” financial crisis, proposing an Asian Monetary Fund, for which it was promptly slapped down and put in its place by the Treasury Dept of Rubin/Summers. Japan, especially "Elvis" Koizumi, hasn’t uttered a peep since that the U.S. doesn’t like.
The rest of East Asia learned its lessons the very hard way from that 1997-98 experience regarding the ultra-tight relationships between global “hot money,” the IMF, and the U.S. government, something Mexico and the rest of Latin America had learned long before in crises throughout the 1980s and 1990s, and as a result East Asia has accumulated a $2.4 trillion “war chest” of foreign exchange reserves, and entered into the Chiang Mai Initiative of swap networks.
As for Europe:
“Germany was also expecting opposition from the UK to its [renewed] plan to examine the risk posed by the activities of hedge funds. "We tried to get hedge funds on to the [G8] agenda in 2005 but we hit a brick wall from Britain and the US," the official said.” (FT, Oct 19)
“Productivity may be about to do for [the ECB’s] Trichet what it did for Greenspan … European workers are catching up to their American counterparts after lagging behind for most of the past decade. One sign of the times: Last month's agreement between Volkswagen AG, Europe's largest carmaker, and union leaders to extend the workweek [4.2 hours] without additional pay.” (Bloomberg, Oct 16)
That’s “productivity” and “catching up” from the viewpoint of the global hyper-speculators, but not in any sane economic sense, not that they would care about the difference.
Thus, with very limited domestic and international opposition, that basically leaves China and Russia left standing in the way of total global domination by the hyper-speculators, two states which the U.S. government can not currently strongly influence, to the obvious chagrin and anger of those pushing U.S. hegemony in the current hyper-speculative version of globalization (there is a good version), hence the trotting out of Paulson's and Rice's current “soft cop” approach to China.
The U.S. is not really interested in “free trade," it no longer has much that countries like China seem to want to buy, except Boeings and soybeans, since as noted above U.S. industry has long since been hollowed out, as opposed to Japan's and the EU's, which are more slowly getting there, to their great dismay.
Rather, what the U.S. mainly wants from China, and everywhere else, is unlimited capital mobility for its mega- global financial institutions, so it can ROLLL (again, return on leveraged legal looting) over them as they have the rest of the world. Both China and Russia seem aware of this, and their elites are playing a fascinating game with the global hyper speculators.
For the past decade, China has been the prime beneficiary of “globalization,” but that is mainly due to China’s efforts and also somewhat to multinational foreign direct investment, the good kind, of $60 billion per year, not to the global hyper-speculators, who want that to change. Now a little-noticed battle is gearing up for control of China's economy, especially its financial sector, as I’ve mentioned in an earlier article.
“there is a growing perception that foreign companies have done too well from their investments. The Party leadership has publicly accused a few of capturing "excessive" market shares, acquiring too many stakes in China's strategic industries, and buying state assets at bargain prices. Above all, there seems to be a concern that overseas investors own too much of the technology crucial to China's economic development … The main focus is on making it more difficult for foreign companies to operate in China … China is also attempting to build "national champions" … China's economic nationalism is a marginal adjustment to, rather than a fundamental repudiation of, Beijing's broader embrace of globalization.” (Harry Harding, Eurasia Group, WSJ, Oct 24)
“Carlyle Group agreed to reduce the size of a planned investment in a Chinese company in an effort to close a deal that has stirred government and public concern about foreign inroads into China's economy … Increasing numbers of Chinese officials and scholars have been speaking out against the strong market position some foreign companies have achieved in China.” (WSJ, Oct 18)
“Buyout firms should give up on taking control of companies in Asia because of rising nationalism and sensitivity toward overseas investments, said Hsu Ta-lin, chairman and founder of H&Q Asia Pacific … ``It's increasingly hard to buy control of companies in Asia and I do think negative control is probably a way to it,'' said Frank Tang, managing director of Temasek Holdings Pte, Singapore's state-owned investment company.” (Bloomberg, Oct 11)
“The U.S. may file new complaints with the WTO because China is showing signs of ``backtracking'' on its pledge to allow foreign investments and cut subsidies, the top U.S. trade official said. China is favoring domestic producers including steel producers and hasn't done enough to crack down on intellectual property violations.” (Bloomberg, Oct 13)
One of the most important areas to focus on is control of the financial sector. Huge Western financial institutions have made significant investments on very favorable terms in China’s four main banks, but China is clearly reticent to give up too much control of its key financial institutions and its nascent capital markets, as with Citigroup's efforts to take a stake in Guangdong Development Bank.
“overseas firms that invested $17 billion in China's four biggest publicly traded banks in the past two years. The mainland lenders have handed investors $10 billion in gains since they first sold shares in Hong Kong last year.” (Bloomberg, Oct 9)
As it did with its industrial state-owned enterprises, China is using the club of foreign competition to do much of the politically unattractive dirty work, so to speak, to shake up its four large banks and the financial sector.
“China is pushing its biggest banks to sell shares to the public so that tougher international accounting rules, tighter stock market regulation and scrutiny of overseas investors will help improve corporate governance and management.” (Bloomberg, Oct 27)
In the long term, the Goldman’s will ultimately need China far more than China needs the Goldman’s. China is at the center of East Asian production networks that generate real savings/capital, which the U.S. currently does not.
It is critical that China continue to channel its capital where it is needed, into China’s internal development, not into very low-yielding U.S. securities, it holds $1 trillion in foreign exchange reserves, that are just being printed up in massive amounts to control and confiscate real wealth. E.g.,
“an engineering project is attempting to divert billions of tons of water from China's flood-prone south to the Yellow River and the cities that rely on it. [China] has one-quarter of the per capita water resources of the world average; in Beijing, it is one-thirtieth. Some 136 cities face severe shortages. More than 300 million people, almost a quarter of the population, lack access to clean drinking water, as more than half of major waterways are badly polluted. The entire project, which could take decades to complete at an estimated cost of more than $60 billion, would build three canals. Many worry that funneling water north fails to address problems of waste and inefficiency.” (WSJ, Oct 20)
(Of course the same need for massive internal investment holds true for India and all the rest of the developing nations. “Last week [Prime Minister] Singh doubled the estimate of investment needed in India's roads, ports and other infrastructure to $320 billion by 2012 to accelerate economic growth to as much as 10 percent from the 8.1 percent expansion in the past three years.” (Bloomberg, Oct 13))
A couple of recent examples of China’s growing commercial and geopolitical clout:
“China International Trust & Investment Corp. will pay $1.9 billion to buy the Kazakhstan oil assets of Canada's Nations Energy Co. The acquisition follows China National Petroleum Corp.'s $4.2 billion purchase of PetroKazakhstan Inc. last year. China is beating India and the U.S. in bids for Central Asia's oil. Kazakhstan's reserves are twice as big as those of the North Sea.” (Bloomberg, Oct 26)
“China's economic planners have approved the construction of a natural-gas pipeline from the country's northwest to its south to transport gas imported from Turkmenistan. will be more than double the capacity of the existing West-East pipeline … part of Beijing's plans for as many as six natural-gas pipelines crisscrossing the country.” (WSJ, Sep 28)
“Airbus SAS won an order from China for 150 A320 aircraft. [Airbus] will also set up a final assembly plant for the A320 in the northeastern Chinese city of Tianjin China will also sign a letter of intent for 20 A350 aircraft, which Airbus is redesigning to compete with Boeing Co.'s 787 model.” (Bloomberg, Oct 26)
The profitability of China’s companies is a hotly debated issue, as is its susceptibility to a U.S. economic slowdown, I don’t have space to go into the latter here. E.g.,
“profits of [China’s] industrial companies have soared by an average of 36% a year since 1999. The average pre-tax return on equity by state-owned firms increased from 2% in 1998 to 13% in 2005; private companies' return went up from 7% to 16%. most corporate investment is now financed out of companies' own cashflows and only one-third from outside sources. [return on capital] has risen steadily since the late 1990s. A fifth of all industrial firms (and a third of state-owned enterprises) continue to lose money.” (Economist, Oct 19)
“Profits at Chinese industrial companies increased 29.6 percent in the first nine months from a year earlier. Higher earnings may ease concerns about overcapacity, causing the government to refrain from taking additional steps to curb investment.” (Bloomberg, Oct 24)
“The largest SOEs are reporting burgeoning profits and financing new investments themselves, but they are the exceptions: in 2005, the 10 largest accounted for more than 53 per cent of total SOE revenues and the 165 SOEs owned by the central government for more than 70 per cent of profits. The implication is that banks' exposures are likely to be greater to the thousands of smaller government-dominated firms whose profits appear to be much less certain.” (Dobson and Kashyap, FT, Oct 19)
Things in China are not very clear, at least not to me sitting on my duff in the U.S., so I’m really not sure how power between the Party, both central and local, capitalists, both industrial and financial, and military will play out.
“China said its top statistician, Qiu Xiaohua, was fired because he was linked to misuse of Shanghai's state pension fund, a scandal that has already brought down the city's party chief Chen Liangyu … At least 16 billion yuan of China's national social security fund, valued at more than 1.8 trillion yuan in 2005, has been embezzled since 1998, the official Xinhua News Agency said on Sept. 15.” (Bloomberg, Oct 19)
To just sketch out a little background on China’s power relationships, China’s pragmatists, led by Deng, asserted control over the Maoists (“Gang of Four”) in 1976-80 after Mao’s death, and implemented market opening reforms. Deng then re-asserted his initiatives in his 1992 “Southern Tour” over more conservative, old-line leftist comrades (e.g. Chen Yun, one of the "Eight Immortals," for you few sinologists) who wanted to pull back after Tiananmen in 1989. Zhu’s WTO accession in 2001 and Jiang’s “Three Represents” finalized that ideological political victory over the older leftists.
Hu’s and Wen’s recent emphasis on a “harmonious society” is a nod toward concerns about growing inequality, pollution, corruption, etc. E.g.,
“China's government said it will double social security coverage to at least 1 billion people by 2020. The party will build more low-cost houses. China's annual urban unemployment rate surged to a record 8.4 percent at the end of 2005.” (Bloomberg, Oct 12)
“[In China] to qualify for the top 500 today a person must be worth at least $100m compared with a cut-off of $6m for a top 50 listing eight years ago … China's richest mostly live in Guangdong or Zhejiang provinces, and are often active in real estate or manufacturing … there are no information technology entrepreneurs in Hurun's top 10 for the first time since 2003.” (FT, Oct 11)
“[China’s] luxury-goods market is growing as much as 60 percent a year … an estimated 300,000 U.S.-dollar millionaires in China … About 200 million Chinese live on less than $1 a day.” (Bloomberg, Oct 16)
“China estimates that the economic cost from China's industrial pollution reached $64 billion in 2004, or about 3% GDP. The cleanup cost of that mess in 2004 alone would have cost another $36 billion. China actually spent about a third of that amount two years ago. China would need a one-off investment of $135 billion to install the latest pollution-control technology. That's about 7% of China's economic output. from 2006 to 2010, China will commit $175 billion to clean up industrial pollution. some 20% of the population lives in "severely polluted" areas, 70% of the country's rivers and lakes are in grim shape. local environmental regulators owe their allegiance to local Communist Party officials.” (BW, Sep 28)
“China's securities regulator said shareholders must return any fund that may have been misused by the year's end or they will face ``legal responsibilities.'' Up to 102 Chinese publicly traded companies, or 7 percent of the 1,400 listed, have had 25.4 billion yuan ($3.2 billion) of funds misappropriated by their parents or affiliates.” (Bloomberg, Oct 13)
For additional recent details than I don't have space for, please see the China and also India sections of my Oct 24 news summary link.
As for Russia, Putin continues to flex his energy muscle. Note, this is the only secion of this article consisting solely of news summaries, all the others are mainly my analysis.
“Energy is at the heart of EU-Russian ties, with oil and gas making up more than 60 percent of Russian exports to Europe … Putin today also rejected calls to introduce investment rules modelled on the EU's free-market principles. The EU is pushing for an energy agreement with Russia, saying a free-market framework would bring in foreign capital to upgrade Russia's energy production.” (Bloomberg, Oct 20)
“near Sakhalin Island, culminating a $17 billion project led by Exxon Mobil and local partner OAO Rosneft. About 350 miles to the south, at the tip of the island, engineers for a $22 billion venture led by Royal Dutch Shell. The Shell project has no Russian partners. The attack on Shell is more about OAO Gazprom's attempt to get a piece of the project than protecting wildlife, analysts say. Sakhalin contains the equivalent of 45 billion barrels of oil, equal to the North Sea's reserves, Shell estimates. About 30 percent of Russia's energy exports will flow to Asia by 2020, up from 3 percent today, President Putin said.” (Bloomberg, Oct 19)
“Analysts said Gazprom's decision on Shtokman was almost certainly linked to frustration at what Moscow saw as US foot-dragging on the WTO deal and a broader increase in perceived US hostility towards Russia. While the Kremlin has denied linking the two issues, most observers believe they became heavily entangled this summer … the explanation from Alexei Miller, Gazprom's chief executive, that the shortlisted foreign partners had not offered suitable assets in exchange, might contain some truth … many previous deals had turned out to be highly unfavourable to Russia.” (FT, Oct 11)
“Gazprom said yesterday it would develop Russia's massive Shtokman natural gas field alone - and switch eventual output from the US to Europe - dashing the hopes of foreign companies vying for stakes in the $20bn project … The announcement highlights the Kremlin's determination that Russian companies should take the lead in developing the country's oil and gas. It follows pressure on the Royal Dutch Shell-led Sakhalin-2 project, and signs that state-controlled Gazprom wants to buy out private Russian shareholders of TNK-BP, the Anglo-Russian joint venture. The news is a particular setback for the US.” (FT, Oct 10)
"OAO Russian Railways, the state-run monopoly led by Putin confidant Vladimir Yakunin, is planning to complete a rail line crossing the North Korean-Russian border. While the project doesn't violate UN sanctions on North Korea, it shows Putin's drive to expand Russian influence. Despite delays over financing and feasibility, Russian Railways is keeping the $2.5-billion project alive. Yakunin traveled to Seoul to press South Korea to guarantee the freight that would make the Eurasian rail link economically viable. A pipeline with Sakhalin gas that would follow the path of the railway into North Korea has been under consideration by OAO Gazprom." (Bloomberg, Oct 25)
“OAO Russian Railways, the country's rail monopoly, plans to raise billions of dollars selling shares in the company or its units by 2010. Sales last year surged 55 percent. The company transports 40 percent of Russia's freight.” (Bloomberg, Oct 23)
Time to Regain America's Moral Authority, Credibility and Trust
To regain its moral authority, credibility and trust, at home and abroad, U.S. leaders must start to once again not only "talk the talk" but also "walk the walk."
Specifically, they can not in good faith and conscience ask people, including some of their own and others, and nations to make huge sacrifices and do things that they themselves are not willing to do.
That is the moral code of a fair leader and just warrior. Any leader, political, corporate, military, etc., who does not follow it will be discredited and not taken seriously today.
E.g., look at corporate CEO's who go on about how we're all in this together, then accept huge stock option grants, sometimes backdated, from controlled boards, institute mass layoffs, and renege on contractual wages, working conditions and benefits.
This is perfectly legal, especially under threat of outsourcing/offshoring or bankruptcy protection, but no worker respects these putative corporate leaders, and never will again.
Granted, most corporate leaders honestly anguish over the hard decisions they have to make, and the decisions seem to be forced on them by the cold, hard economic realities of the current version of globalization.
That's why this hyper-speculative version needs to be changed ASAP. Because in the end, the corporate leaders do make those hard decisions, incentivized by their stock options to do so.
They come out on top, and most learn to live with it, quite well of course, rationalizing it in one way or another as due to their hard work and effort in increasing "shareholder value."
U.S. elites, financial, corporate, foreign policy and others, must once again operate according to the best American traditions of plain speaking AND fair dealing.
For far too long now, they haven't always done so. That must change ASAP, before this nation loses whatever moral authority, credibility and trust it still has left, at home and abroad.
Any Hope for the Dismal State of American Politics?
“Two leading Republican senators [Lugar and Specter] joined Democrats on Sunday in calling for direct talks with North Korea aimed at easing a nuclear standoff. Sen. Biden said Japan, Russia, China and South Korea have privately urged the U.S. to allow direct talks with the North. Lugar and Specter joined Biden in calling for direct talks with Iran.” (AP, Oct 22)
“Leading Republicans and the Bush administration yesterday projected a deepening sense of American disarray over Iraq, as they argued with each other over the current state of affairs and the way forward. Several senators took issue with the administration's policies in Iraq, distancing themselves from the White House in the run-up to next month's mid-term elections to Congress.” (FT, Oct 23)
“Former Secretary of State Baker said he agreed with Republican Senator Warner that Iraqi leaders have two to three months to demonstrate concrete evidence of progress … Baker's comments and the remarks made last week by Warner are adding to the pressure on the president to change his strategy in Iraq.” (Bloomberg, Oct 8)
Let me say at the very outset of this final section, I have NOT written this article in overt support of either major party, and most definitely NOT to give election advice. I have no favorite dogs in the fight, although my biases should be obvious. Please keep that very clearly in mind as you read the following.
Key Republican and Democratic senators are increasingly publicly voicing their dissatisfaction with the current direction of the country, especially with respect to Bush/Cheney/Rumsfeld policies on Iraq. It’s not yet anywhere close to the level of Fulbright in the 1960s and Church in the 1970s, but this will probably intensify after the election, unless there is a miraculous change.
My hope is that rather than descending into an intense partisan battle between the extreme wings of the two parties, the moderate centrists in both parties will eventually unite to take control of the situation. If the former occurs, and especially if the Bush/Cheney administration is greatly weakened, then the chances for global instability rapidly escalating will probably significantly increase.
That said, my personal hope is that sensible bipartisan politicians in D.C. do whatever is necessary to rein in Cheney, in particular, before it really is too late and irreversible damage to the U.S. is done.
It is a huge mistake to under-estimate Cheney’s determination and capabilities, and also that of Rove.
Both have shown, over and over again, that unless one really finishes them off politically, once and for all, they will always come back, just like the Terminator, even more determined to push through their divisive, radical agendas. Cheney’s pushing through the Military Commission Act through Congress was just the latest example.
“Officials said Mr. Cheney’s staff and its bureaucratic allies were closely involved in guiding the talks with Republican senators. Their adversaries in the administration had to scramble just to keep up with details of the bargaining. “Basically, they were left to get back whatever they could from Congress,” one senior administration official said of the Cheney group. “And they did.”” (NYT, Oct 1)
Cheney’s and Rove’s relenteless, unremitting pursuit of their very clear agenda is why I mentioned earlier that I don’t agree with the implication of the title of Woodward’s book, “State of Denial.” Cheney and Rove are most definitely not in a state of denial, while anyone who believes so most definitely is.
Cheney has known exactly what he wants to do with military policy (I hesitate to call it foreign policy at this point) since the 1970s, when he determined that a weakened presidency was disastrous for America. He controlled the personnel process in the formation of the Bush Administration to re-shape the basic nature of American government and military/foreign policy.
Likewise for Rove, his dream of a permanent Republican realignment dominance using his ultra-cynical wedge issues of “guns, gays and God” has been crystal clear for a very long time, at least by the time he started implementing it back when he got Bush elected governor of Texas.
To many, the Bush Administration has exhibited remarkable incompetence and hubris. Personally the thing that has always bothered me the most has been its obvious unwillingness to be upfront with the American public, especially about its clear intentions. I won't speculate why it chose this route, perhaps it sincerely felt it had to do so.
Bush's style of governing has always been obvious, and can be easily seen in Woodward’s two previous books on the Bush Administration prior to “State of Denial,” and in a number of other recent well-researched books by respected mainstream journalists.
But to me at least, calling any of this “denial” is letting Bush/Cheney et al off the hook with an easy psychological label, as pop psychologists have done for Americans for decades.
As for the Democrats, for years now they have repeatedly folded under the relentless onslaught of Rove and Cheney, greatly aided by the oligopolistic electronic mass media, which is a huge, perhaps insurmountable, obstacle to true democracy and rational discourse in the U.S.
Thus the Democrats have ended up being far too often unwillingly, sometimes even unwittingly, complicit in the Bush/Cheney resulting massive loss of America’s standing in the eyes of the world and its assault on Constitutional rights at home.
Frankly, there is no other term for the Democrats’ abysmal performance as an opposition party than national disgrace. They have been the Chicago Cubs of politics, except I hardly consider the Democrats lovable losers, given the serious consequences of their inability and/or unwillingness to often offer effective opposition, for the good of the country, to Bush/Cheney.
Because of my disappointment in their performance, I am probably being even harder on the Democats than on Bush/Cheney, the latter have always been just exactly who they are, as I fully expected. But at least the Democrats have not sunk to the level of Rove, whose ultra-cynical, extremely divisive and negative political strategies and tactics are often almost beneath contempt, and have done great harm to this nation, both at home and abroad.
There may be some reading this who view it as an attack on the Republicans. Nothing could be further from my intention. Bush/Cheney do not represent traditional Republican values and policies of prudent, limited government at home and abroad, but rather essentially the exact opposite, to the great detriment of the party and nation.
“the Bush team goal is to accumulate just enough power to use the energies and passions of the base to effect ideological change in the nation’s laws and institutions, even if — sometimes especially if -- those changes might be at odds with majority public opinion … Democrats chosen alternative -- in which they swallow their true beliefs on important national issues -- demoralizes their own base … the core of their enunciated message — both vowing to stop the president’s right-wing policies and blurring their differences with Republicans on highly charged issues -- has in recent elections been a recipe for defeat … uninspiring to both the Democrats’ base and the center.” (Mark Halperin, political director of ABC News, NYT, Oct 1)
Many feel that this mid-term election is the final chance for the Democrats to put up or shut up.
“Boiled down to a line, Roveism says that Republicans can win by mobilising and motivating their core supporters. The 2004 election seemed to prove the theory right. My skeptical reaction is that we have not yet had the true test of Mr Rove’s strategy – one that tells us whether it can deliver for Republicans in less propitious circumstances and without a blundering Democratic opponent. But on November 7, we will get it.” (Jacob Weisberg, editor of Slate.com, FT, Oct 18)
“As the Democratic strategist James Carville [said] in August, “If we can’t win in this environment, we have to question the whole premise of the party.”” (NYT, Oct 1)
Personally, I felt that question was already on the table with the inept Gore campaign in 2000, and most especially with the lamentably inept campaign of Kerry in 2004.
Like millions of other American voters at the time, I was very dissatisfied in the 1980s with the direction of the country, the capture of the Democrats by its ultra-liberal wing in the 1970s, and thus its failure to at least try to protect the average working American from the already decade-long assault on its jobs and living standards, finally offering little more than discredited "re-training" schemes.
That Democratic failure to stand up for their base is what really created the white blue-collar "Reagan Democrats" in the pivotal battleground states in the industrial midwest, destroying the FDR "New Deal" coalition, and gave Rove his openings to wage "culture wars," especially in the south.
The gutting of the industrial unions, along with the waning of the civil rights movement, removed two powerful forces through which the concerns of ordinary people could be organized and focused. Instead the population became increasingly fragmented and atomized (e.g., see the work of Robert Putnam), with each family pre-occupied with individually trying to survive the decline in real wages, benefits cuts, less power over working conditions, etc.
Rove and his allies, on the other hand, were able to recruit and mobilize highly motivated political foot-soldiers from one of the few social institutions that was rapidly growing, the Christian right churches.
(As mentioned earlier, Rove's lifestyle-religious-oriented wedge issues of "guns, gays, and God" were preceded by racially-oriented ones of busing, urban crime and affirmative action, both sets of issues were very deliberately used to break up the FDR "New Deal" coalition.)
Now in the 2000s, the political pendulum has swung way too far in the other direction, and I have become even more dissatisfied with the direction of the country and the capture of the Republicans by its extreme right-wing,
Perhaps like a lot of other Americans, I am tired of this swinging back and forth between two unappealing extremes. As I tried to sketch out earlier in this article, I think the time has come for another massive, historic realignment of the political parties in America, so that the "sensible center" majority vote can once again take control of the U.S. government.
I honestly don’t care how this realignment comes about, as I said, I have no favorite dog in the fight, and under whose banner it would occur, call it Republocrat if you like, just so that it finally happens.
But I just don’t see yet how it will.
Politics, like life, is all about power, money and status (Freud would add sex). Ideas are nice, that’s why I write these articles, but ideas are meaningless without the power and money to do something about them. For there to be a major political realignment, there needs to be a huge source of power behind it and money to fund it.
As I said earlier, I think the Democrats desperately need to break the financial control of their party by the Hollywood left and the Wall Street hyper-speculators, who are now heavily contributing to them again, via Schumer and the Clintons. The Republicans are clearly captured by mega-corporate America, especially oil and gas and military industries.
So where is the money and power to come from to fight a major realignment battle? The unions are moribund.
Many in the technology elite have extremely good intentions and a huge amount of money to do something about them. Microsoft’s Gates and Google’s Page and Brin are just a couple of the most obvious examples. Moreover, unlike the Wall Street hyper-speculators and the Hollywood fantasy crowd, the technology elite is strongly connected to the real economy and is deeply committed to global progress.
Obviously I am very biased in favor of the technology elite, my web site’s name, "econotech," clearly indicates that. That is why I have been so disappointed with the direction of Silicon Valley since the collapse of the 1990s TMT equity bubble.
It has dramatically moved away from being the Valley of Intel's Grove, Moore, and Noyce, physical scientists and electronics engineers, great American heroes whose innovations positively affected everything in modern life, and of Oracle's Ellison and Cisco's Chambers, great American business leaders who helped to dramatically improve corporate productivity, to one that is now dominated by media and advertising, by the popular fantasy culture mentality of Hollywood and Madison Ave.
It would have been far better for the U.S. if the bi-coastal technology elite, some with midwest roots, had allied with the midwest industrial elite in the 1980s, when both were under relentless assault from Japan, where such an alliance still exists, as in other advanced industrial nations such as Germany, which is one reason they can still make big-screen tv’s and great cars.
Unfortunately, that didn’t happen, and now the once-proud and globally dominant American midwest industrial elite is a tiny shell of what it was fifty years ago when GM's "Engine Charlie" Wilson made the quote I noted earlier about "what's good for General Motors is good for the country," along with the blue-collar industrial unions such as the UAW, both prey to “vulture capitalists” like Tepper who described himself above as “not causing economic pain -- just capitalizing on it.”
A couple of decades ago, a younger Steve Jobs once asked his prospective CEO and future nemesis, do you want to spend your life selling sugar water, soda pop? Nearly half of Apple’s revenues are now dependent on music, mostly pop pop. Purely coincidentally, the stock of Google of Mountain View, which just acquired YouTube, is once again hitting new highs, while that of Peoria's Caterpillar just had a sharp drop.
At this point, I wouldn’t be surprised to open Yahoo’s home page one day to see a headline in small text in the news section such as “Another War Breaks Out in Middle East” buried underneath a banner headline for a video, “Next 15-Minute of Fame.”
If too harsh, I’m sorry. I really hope I’m wrong, and that the Internet, like television over fifty years ago, really does live up to its hope, hype, promise and potential of making the world a much more informed and better place, as Google's founders have always worked for.
“Politicians with profiles that get the most traffic know that on MySpace, it is important to do as the under-30 crowd does: make public what is personal -- and don't skimp on the trivial.” (WSJ, Oct 14)
I judge good intentions by the bottom-line results.
In 2004, a President was re-elected with the strong support of Rove’s political base, many of whom did not know the most simple, basic facts regarding the President's stated reasons for going to war in Iraq long after the truth had become known, as repeatedly shown in polls to this day. Presumably some of these voters had broad-band Internet access to find out the truth buried in the blogosphere, along with their car's talk radio.
If a stronger nation invades a weaker one in a so-called "pre-emptive" war, then it, its government, and its citizens, have a legal and moral duty, especially to the armed forces it puts in great danger and to the people of the invaded nation whose lives will be greatly impacted, to know the reasons why it is doing so, what to reasonably expect, including worst case scenarios, and what needs to be done to minimize them.
Now look at the results after that 2004 re-election:
“early September poll of 1,150 found: Almost four in five Iraqis say the U.S. military force in Iraq provokes more violence than it prevents. About 61 percent approved of the attacks [on U.S. forces] — up from 47 percent in January. A solid majority of Shiite and Sunni Arabs approved of the attacks. The increase came mostly among Shiite Iraqis … The State Department has also conducted its own poll, found that two-thirds of Iraqis in Baghdad favor an immediate withdrawal of U.S. forces.” (AP, Sep 28)
“More than 2,660 Iraqi civilians were killed in the capital in September amid a wave of sectarian killings and insurgent attacks, an increase of 400 over the month before, according to figures from the Iraqi Health Ministry. The increase came despite an intensified U.S.-Iraqi sweep of Baghdad that was launched in mid-August to try to put down the wave of violence that has swept over the capital.” (AP, Oct 11)
So until I see otherwise, I will remain highly skeptical about positive political change in this country, from either major party.
Despite all I’ve said above, please don’t forget to vote, it’s our right, privilege and duty.
Who knows, perhaps some day a political statesman-entrepreneur with Lincolnesque courage and compassion eventually will come along to do what historically needs to be done. I hope so, but as they say, hope is not a strategy.
For those patient enough to get to the end of this very long article, I will go back to reviewing and analyzing the financial markets in a future article.
And thanks very much, I greatly appreciate your time and interest.