Fleshing out the Obama doctrine...

I have maintained for some time that there is now a modern corollary to the Monroe Doctrine. This "Obama Doctrine" will emphasize the antipodes, and more specifically Latin America and Africa.

Obama's selections thus far for the Treasury (and I am of the opinion that Larry Summers will be Fed Chair) and other cabinet positions reinforce my opinion that this is a pragmatic administration.

Realpolitik is back (if indeed it ever left). The results from the G20 "coordination" meetings will be telling on this account.

Thus this article is corroborative evidence for the above thoughts:

http://www.iht.com/articles/2008/11/21/america/russia.php
Medvedev faces hard sell in Latin America
By Simon Romero, Michael Schwirtz and Alexei Barrionuevo
Friday, November 21, 2008
CARACAS:

When President Dmitri Medvedev planned his forthcoming trip through Latin America, Russia seemed poised to present one of the most visible challenges in years to U.S. influence in the region.

With oil prices high, Russia was flush with cash and planning a range of measures, from helping Venezuela build a nuclear reactor to strengthening military ties with Cuba, a Cold War ally of the Soviet Union.

But when Medvedev reaches the region next week, he will find it drastically altered by events - and in some cases, less receptive to his overtures. Plunging oil prices and the global financial crisis, which have hammered Russia particularly hard, have raised questions about Russia's reliability as an economic partner, while Senator Barack Obama's victory in the presidential race has raised hopes throughout Latin America of a new era of improved relations with the United States.

In this rapidly changing landscape, most Latin American countries are recalibrating their political interests, frustrating Russian efforts to deepen regional ties as China did in the last decade.

"Russia's elites, including President Medvedev, look on China's rising diplomatic and economic successes in Latin America and in Africa with envy," said Stephen Kotkin, the director of Russian studies at Princeton University. "They also perceive an opportunity, much exaggerated, to send the U.S. a message in its supposed backyard."

But throughout the region, Medvedev faces a hard sell. In Cuba there are lingering suspicions about Russian intentions, after the Cuban economy collapsed when the Soviet Union withdrew in the 1990s, as well as a reluctance to alienate the incoming Obama administration that might push to end the trade embargo.

Brazil, Latin America's largest country, which also places a high priority on relations with an Obama administration, wants to engage Russia not as a source of weapons or military assistance but as an equal partner.

Signal filters.

People operate with different filtering devices to sort, process and deflect information. In my view elections in this country are sort of a vetting process whereby the electorate votes a preference for a set of signal filters.

A new executive administration brings new "signal filters" that determine policy going forward. This makes markets nervous as new investment decisions must be made in a changing environment.

Mr. Obama continues to demonstrate he knows this, and makes appointment after appointment that solidifies his pragmatic credentials.
Obama Plans to Retain Gates at Defense Department

By PETER BAKER and THOM SHANKER
WASHINGTON — President-elect Barack Obama has decided to keep Defense Secretary Robert M. Gates in his post, a show of bipartisan continuity in a time of war that will be the first time a Pentagon chief has been carried over from a president of a different party, Democrats close to the transition said Tuesday.

Mr. Obama’s advisers were nearing a formal agreement with Mr. Gates to stay on for perhaps a year, the Democrats said, and they expected to announce the decision as early as next week, along with other choices for the national security team. The two sides have been working out details on how Mr. Gates would wield authority in a new administration.

The move will give the new president a defense secretary with support on both sides of the aisle in Congress, as well as experience with foreign leaders around the world and respect among the senior military officer corps. But two years after President Bush picked him to lead the armed forces, Mr. Gates will now have to pivot from serving the commander in chief who started the Iraq war to serving one who has promised to end it.

In deciding to ask Mr. Gates to stay, Mr. Obama put aside concerns that he would send a jarring signal after a political campaign in which he made opposition to the war his signature issue in the early days. Some Democrats who have advised his campaign quietly complained that he was undercutting his own message and risked alienating war critics who formed his initial base of support, especially after tapping his primary rival, Senator Hillary Rodham Clinton, for secretary of state.

Sparks...

...next to timber soaked in lighter fluid.

Honduran coup early test for Obama's Latam policy

Sun Jun 28, 2009 8:38pm EDT

By Ross Colvin

WASHINGTON (Reuters) - The Honduran military's ouster of President Manuel Zelaya on Sunday could be an early test for U.S. President Barack Obama as he tries to mend the United States' battered image in Latin America, a regional expert said.

"This is a golden opportunity to make a clear break with the past and show that he is unequivocally siding with democracy, even if they (Washington) don't necessarily like the guy," former Costa Rican Vice President Kevin Casas-Zamora told Reuters in Washington.

Shortly after news of the coup broke, Obama issued a statement expressing his "deep concern" at Honduran troops arresting Zelaya at his residence and exiling him to Costa Rica. The leftist president had angered the army, Congress and the courts by pushing for constitutional changes to allow presidential re-election.

Casas-Zamora said he had heard reports that the U.S. State Department had got wind of plans for a coup and had tried to prevent it, but this could not be independently confirmed.

Obama's statement urged Hondurans to resolve the dispute peacefully but did not explicitly call for Zelaya's reinstatement as president. A senior administration official said later, however, that the United States recognized only Zelaya's government as legitimate.

The Obama Doctrine

Over a year ago I made the argument (available in the "PAPERS" section to the left on this blog) that The Obama administration would consider an "Obama Doctrine" that would effectively focus efforts on the Antipodes; focusing on counteracting infiltration efforts by commodity dependent exporters, interdicting the import of socialist doctrine into Africa and South America, etc.

Now my attention turns to South America. Africa as proxy battlefield between the U.S. and China has become well-known to those who need to know these things.

But South America, which has experienced a commodity and property boom, will also face significant pressure from markets. Brazil will not be spared and the Andean countries will certainly suffer from decreased capital flow and rising real interest rates.

I fully expect the foreign policy stance of the Obama administration to shift towards the antipodes and away from the drama in Europe.

The Obama Doctrine

A short essay concerning Mr. Obama and some implications assuming he is elected. (see "papers" section on this blog)

Abstract:

This essay seeks to outline some of likely implications and responses given an election victory by Barack Obama. The main conclusion derived here is an antipodean leaning towards U.S. foreign policy: an “Obama doctrine”, analogous to the Monroe Doctrine of the early 1800s, seeking influence in Africa and Latin America. It seeks to define the broad brush strokes, leaving specific investment strategies to later papers.

(update: the paper is only available via email contact)

Effective Weapons...

...are not always guns and bombs.

Most of this is filler and cover for the politician uttering them...but the world had better get used to the U.S. as Realpolitik operative

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market," said Topolanek.

Get used to it...its called Finance as foreign policy weapon and is no different from the armed forces in their traditional role of political weapon.

STRASBOURG, France (AP) -- A top European Union politician on Wednesday slammed U.S. plans to spend its way out of recession as "a way to hell."

Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, told the European Parliament that President Barack Obama's massive stimulus package and banking bailout "will undermine the stability of the global financial market."

A day after his government collapsed because of a parliamentary vote of no-confidence, Topolanek took the EU presidency on a collision course with Washington over how to deal with the global economic recession.

Most European leaders favor tighter financial regulation, while the U.S. has been pushing for larger economic stimulus plans.

Topolanek's comments are the strongest criticism so far from a European leader as the 27-nation bloc bristles from recent U.S. criticism that it is not spending enough to stimulate demand.

They also pave the way for a stormy summit next week in London between leaders of the Group of 20 industrialized countries.

The host of the summit, British Prime Minister Gordon Brown, praised Obama on Tuesday for his willingness to work with Europe on reforming the global economy in the run-up to the G-20 summit.

The United States plans to spend heavily to try and lift its economy out of recession with a $787 billion economic stimulus plan of tax rebates, health and welfare benefits, as well as extra energy and infrastructure spending.

To encourage banks to lend again, the government will also pump $1 trillion into the financial system by buying up treasury bonds and mortgage securities in an effort to clear some of the "toxic assets" -- devalued and untradeable assets -- from banks' balance sheets.

Topolanek bluntly said that "the United States did not take the right path.".

He slammed the U.S.' widening budget deficit and protectionist trade measures -- such as the "Buy America" -- and said that "all of these steps, these combinations and permanency is the way to hell."

"We need to read the history books and the lessons of history and the biggest success of the (EU) is the refusal to go this way," he said.

"Americans will need liquidity to finance all their measures and they will balance this with the sale of their bonds but this will undermine the stability of the global financial market," said Topolanek.

Obama insisted Tuesday that his massive budget proposal is moving the nation down the right path and will help the ailing economy grow again. "This budget is inseparable from this recovery," he said, "because it is what lays the foundation for a secure and lasting prosperity."

Obama also claimed early progress in his aggressive campaign to lead the United States out of its worst economic crisis in 70 years and declared that despite obstacles ahead, the U.S. is "moving in the right direction."

The Obama Doctrine...a continuing series...

(For my initial report outlining the Obama Doctrine of October, 2008, see the "PAPERS" section under the "useful links" heading on this blog)

In my previous post regarding Mr. Das and his "bullseye" understanding of the macro factors surrounding China, the following quote encapsulates and sets the trajectory for the Obama Doctrine:

China’s mercantilist strategies have important implications for other developing countries. Chinese investment in and trade with Latin America and Africa is concentrated on securing access to resources forcing these nations to specialise in commodities. This reversion to a 19th century trend may not be compatible with Latin American and African long term development and stability.

The U.S. has no choice but to enforce boundaries and ground rules for resource-hungry China and this will eventually manifest itself as the Obama Doctrine.

Foxes, henhouses...

...and point/counterpoint.

"Although the tax disclosures provided a bump in Geithner's confirmation process, he appeared to have wide support from both parties.

Grassley said he recognizes that many in Congress view Geithner, who worked closely with the outgoing administration on financial bailouts as head of the New York Federal Reserve Bank, is "possibly the only man for the job of healing the recession before us and a very fractured economy."

"To some, he is not only the best choice, he is the only choice," said Grassley."

...and the rejoinder:


By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.

citation: http://www.ritholtz.com/blog/2008/11/what-obama-geithner-aig-fiasco/

The opposite is equally likely.

When there are "strong" conclusion arcs presented by journalists, politicians and (most of all) academics, I always make time to question assumptions, introduce counter-factual scenarios, and attempt to determine if an opposite conclusion can rest on the same premises.

A good example of this is contained in the below article. The history of China has several examples of periods characterized by rapid international engagement, followed by economic success, followed by a disillusionment, followed by a "re-boot" (typically achieved through violence) to more traditional political and economic structures. There is a non-zero probability that China will simply replay the early 1900s (or the late 1800s, the early 1600s, the late 1500...etc.).

Again, I believe the compass of the United States influence will point towards the antipodes. China will certainly be a power, but not to the extent the current meme suggests.

http://search.japantimes.co.jp/print/eo20090103fc.html

China key to U.S. foreign policy success

By FRANK CHING
U.S. President-elect Barack Obama, asked about his foreign policy priorities when named Person of the Year by Time magazine, listed nuclear proliferation, climate change and global poverty as well as Iraq, Afghanistan, Iran, the trans-Atlantic alliance, Russia, the Israeli-Palestinian conflict — and then, almost as an afterthought, "managing our relationship with China and the entire Pacific Rim."

In a way, this is good since it reflects the relatively calm state of that relationship, with no crisis that needs immediate presidential attention.

But the next president must recognize that China is not just a relationship to be managed. It is perhaps the key relationship that the United States must sustain if Obama is to achieve success in virtually all his other foreign policy priority areas.

In the 21st century, there is no relationship more important to the U.S. This does not mean that Washington can give up its network of alliances in Europe and in Asia. Those alliances are important. But Washington must give greater recognition of China's role in the coming decades.

It also does not mean that the U.S. should no longer stand up for democracy and human rights. In fact, the inauguration of Obama and the shutting down of the Guantanamo detention center should help restore Washington's moral stature and put it in a stronger position to support human rights around the world since it should no longer be accused of hypocrisy.

The Obama Doctrine...

...at work in the antipodes. A larger U.S. presence in Africa was predicted here as soon as Obama was president both as a vehicle for proxy competition with other nations as well as a bulkhead for energy security and inexpensive labor.

This is just the beginning.

BANGUI, Central African Republic - U.S. Special Forces troops have set up a base in the Central African Republic as part of their regional hunt for fighters from the Ugandan-born Lord's Resistance Army (LRA) group, military sources said.

"The deployment of this contingent, the size of which is unknown, was carried out very discreetly with Ugandan military aircraft," a Central African military official said Dec. 19 on condition of anonymity.

The U.S. troops set up a base in Obo and are expected to coordinate their efforts with local government forces and Ugandan soldiers.

U.S. President Barack Obama in October announced he was sending 100 Special Forces troops to Kampala, Uganda, to help Uganda track down LRA chief and international fugitive Joseph Kony, who has wreaked havoc over four nations for more than two decades.

Besides Obo, the U.S. forces also have a forward base in South Sudan. They began deploying in Uganda earlier this month.

ZIRP and tax

Not good for fixed income, if this passes (and prediction markets place a greater than 75% chance of the bill passing)

March 18 (Bloomberg) -- Democratic congressional leaders would raise to 3.8 percent the Obama administration’s proposed new Medicare tax on investment income to generate an estimated $210 billion to help fund a health-care overhaul plan.

The rate is higher than the 2.9 percent President Barack Obama proposed in February. The new tax would apply to income from interest, dividends, annuities, royalties, capital gains and rents for individuals who earn more than $200,000 annually and joint filers reporting more than $250,000, according to the legislation.

“It’s a big deal,” said Clint Stretch, a tax analyst for the consulting firm Deloitte Tax LLC. “It extends dramatically the reach of the Medicare hospital insurance tax.”

The first-time Medicare tax on investment income would start in 2013. It would push tax rates on capital gains and dividends that year to 23.8 percent for high-income people if Congress goes along with Obama’s proposal to let those rates rise to 20 percent in 2011 from the current 15 percent. It would be the highest rate for long-term capital gains since 1997.

Strange analogy of the week...

The U.S. and China are locked in an "unhealthy embrace"...

April 1 (Bloomberg) -- Presidents Barack Obama and Hu Jintao meet for the first time today to discuss a global economic crisis each is trying to combat with policies that may further complicate U.S.-China relations.

As they meet ahead of a gathering in London with other leaders from the Group of 20 advanced and emerging economies, the two presidents are directing a combined $1.4 trillion of stimulus spending.

While their efforts will soften the impact of the global recession, analysts say U.S. spending to stimulate demand and China’s focus on investment in public works are likely to exacerbate the global imbalances that inflated asset bubbles and brought on the collapse of credit that helped trigger the current crisis.

The two countries remain locked in “an unhealthy embrace,” said Charles Freeman, a U.S. trade negotiator who is now at the Center for Strategic and International Studies in Washington. “How we ease that embrace so we can stay embraced but not choke ourselves to death in the process is going to be a serious thing that we deal with in the next decade.”

Obama’s $787 billion stimulus package runs up budget deficits to be financed by more Chinese purchases of U.S. debt. Such a prospect leaves Chinese Premier Wen Jiabao “worried” about the safety of China’s $740 billion holdings of U.S. Treasury securities, the world’s largest, he said March 13.

China’s Stimulus

Meanwhile, Hu’s 4 trillion yuan ($585.4 billion) stimulus plan doesn’t help build the domestic consumer demand that China needs to support its own industries and reduce its reliance on exports, says Ha Jiming, chief economist at China International Capital Corp. in Beijing.

The plan will “delay a rebalancing toward greater consumption-driven growth because about 75 percent of its spending is for infrastructure,” Ha says.

Unless the two countries break a cycle that requires China to continue lending so the U.S. can keep spending, “we’re headed to another major crisis, and it could be worse than this one,” Stephen Roach, Morgan Stanley’s Asia chairman in Hong Kong, said in an interview.

Obama administration officials say that, with the global economy forecast to shrink in 2009 for the first time in more than 60 years, this isn’t the time to address such issues.

The Protocol of change...

After observable events prove a theory or a process to be wholly incorrect and imprudent, at what point does a rational thinker change his/her protocol for understanding a given issue?

On a theoretical level, Moody's insistance that "ability to pay" comes from "ability to raise funds via taxes" is wrong. A sovereign issuer of currency does not need to collect its own currency in order to pay in that currency. Furthermore, external "funding" from other currencies that grant creditworthiness is a misnomer. We live in a fiat floating currency world and Moody's continues to think constrained by the manacles of gold.

On an experimental level, one need only look to Japan to note the inadequacies of Moody's approach to sovereign creditworthiness.

NEW YORK (Reuters) – Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.

The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.

Review of fiat currency systems and national debt.

The below remarks by Mr. Schiff beg the question of whether or not the premises he relies on to formulate predictions are correct. Being right for the wrong reasons (thus destroying any chance of future generality) is a terrifying prospect for policy makers and economic theorists.

And so today I respond to this notion that foreign nations "fund" American national debt (or the corollary "what if no-one buys our debt??) in an era of floating, fiat currency.

I am not advocating a monetary system here, only recounting what I see as true. The government has sole control over our monetary system. This does indeed make me somewhat nervous given the history of same. I am also not discussing geo-political concerns, which are of paramount importance in my opinion on all economic matters...this is only a little discussion on monetary economics.

First off, its been a brave new world since 1971. The gold standard set limits to bank reserve multiplication and money supply. This is no longer the case with the current "modern" system.

The U.S. does not need to borrow, tax, or do anything of the kind in order to spend. That statement itself throws people off when I try to explain current monetary economics. The U.S. dollar is a currency of the Federal government's creation. It spends in that currency. It does not have to "get" dollars from anywhere or anyone in order to spend them.

But what happens when government issues Treasuries?. It simply offers banks and foreign countries an opportunity to exchange cash (and non-interest earning reserves) for interest-earning Treasuries. It inures to our benefit if countries do not wish to earn interest on their reserve assets. The Fed spends, adds reserves to the banking system, then "borrows" if it wishes to drain the reserves.

So our (wonderful and benevolent) Federal Government spends (literally creating money by crediting bank accounts), then taxes and we are left with the remainder.

Thus, if China, Japan, OPEC members, et al., decided no to buy our debt, what would really happen? Recall that Real goods and services are leaving said countries. We have been getting those real goods and services, and providing the world's only reserve currency. In order for the trade surplus to balance, we tacitly agree to later export our goods and services at whatever prices we wish. We have benefits and they have costs, promises, and the peace of mind that comes with holding 2 Trillion dollars in U.S. securities that only decrease in "value" when panicked holders sell them.

In other words, they are in an epic Gordian knot. If we did not design this knot, then we should have because it near-guarantees the continued reliance on the dollar and the international security that only the U.S. can provide. This is the greatest non-military victory in the history of the world. One wonders if Nixon realized the power he granted to the U.S. when leaving the Gold standard. It also has the added benefit of (hopefully)ensuring relative peace during harsh economic circumstance.

Of course, with our military being 20 times as effective as the next 8 countries combined...


The World Won't Buy Unlimited US Debt
2009-01-23 02:27:40.359 GMT

By Peter Schiff

Barack Obama has spoken often of sacrifice. And as recently as a week ago, he
said that to stave off the deepening recession Americans should be prepared to
face "trillion dollar deficits for years to come."

But apart from a stirring call for volunteerism in his inaugural address, the
only specific sacrifices the president has outlined thus far include lower
taxes, millions of federally funded jobs, expanded corporate bailouts, and
direct stimulus checks to consumers. Could this be described as sacrificial?

What he might have said was that the nations funding the majority of
America's public debt -- most notably the Chinese, Japanese and the Saudis --
need to be prepared to sacrifice.
They have to fund America's annual trillion-dollar deficits for the
foreseeable future.

These creditor nations, who already own trillions of dollars of U.S.
government debt, are the only
entities capable of underwriting the spending that Mr. Obama envisions and that
U.S. citizens demand.

Shalom Ben...

...have fun back at Princeton...

 June 17 (Bloomberg) -- President Barack Obama said Federal
  Reserve Chairman Ben S. Bernanke has stayed in his post “longer
  than he wanted,” one of the clearest signals the central bank
  chief will leave when his current term expires next year.

     “Ben Bernanke’s done an outstanding job,” Obama said in
  an interview with Charlie Rose that airs tonight, when asked
  about nominating him for another term subject to Senate
  approval. “He’s already stayed a lot longer than he wanted or
  he was supposed to.”

Supply squeeze...

...for Treasuries? Very interesting. Likely just post election pandering and positioning, but still, the debt ceiling is generally something viewed as a squisky moveable target that has not been taken seriously as a constraint.

Republicans are planning to demand major spending cuts next year before they would agree to raise the amount of federal debt that can be issued, setting up a clash between the Obama administration and a Congress stocked with lawmakers who campaigned as deficit hawks.

The U.S. can't accrue debt above a certain ceiling set by lawmakers. In the most extreme scenario, the government would default on certain debts if the cap doesn't move.

Republican lawmakers, including South Carolina Sen. Jim DeMint, and congressional aides have said major spending cuts are the primary demand they will make going into the discussions over whether to raise the limit.

It isn't clear whether the White House would agree to significant cuts so quickly, though, and Obama administration officials could try to portray the GOP as playing political games with the country's ability to borrow.

The U.S. currently has $13.7 trillion of debt outstanding, just shy of the $14.3 trillion limit Congress set in February. Barring big changes in federal spending, taxes or the economy, the government is expected to hit the ceiling by May, and administration officials have already said it will have to be raised by then.

The Paper Dragon as beacon for the world

...infiltrating our "thought leaders". My comments in italics. This is a strange article that pines for a more "honest" approach to solving the U.S.'s internal problems. It then furnishes an example of a country that has experienced highly transitory success and suggests we follow suit. Hilarity ensues.

By Fareed Zakaria
Monday, December 13, 2010

This is the wrong time to raise taxes, say the politicians. The economy is fragile, say the economists. The recovery is halting, say the pundits. In a few years, they all affirm, we will need to get our fiscal house in order. Of course, just a few years ago, the economy was doing fine, and Washington decided it wasn't the moment to worry about the deficit. Instead, over the past decade, we cut taxes, added a massive entitlement program (prescription drugs for the elderly) and spent trillions on two wars. Somehow, no matter what the economic clock says, it's never time in Washington to cut spending or raise taxes. Call it mañana economics.

Hard to argue with this...
Procrastination economics

The best one can say about President Obama's compromise plan with Congress is that it will do some short-term good - at long-term cost. The only parts of the plan likely to have a significant effect in stimulating the economy are the extensions of unemployment insurance, cuts in payroll taxes and, perhaps, tax credits for businesses ("perhaps" because they are temporary and thus would only bring forward investments). To get these measures, worth about $250 billion, Obama agreed to an extension of the Bush tax cuts that will cost around $750 billion, and eventually much more since the tax cuts are now more likely to become permanent. It makes the original stimulus plan of 2009 look stunningly efficient.

The original stimulus plan was indeed inefficient. Tax cuts and organic growth via market forces allocate capital and investment much more efficiently than top-down governmental edict. Setting up the arithmetic here as a simple 750>250 is disengenuous.

The first act of the newly empowered Republican Party has been to add a trillion dollars to the deficit. Republicans have now fully embraced the Keynesian arguments that they routinely denounced. John Maynard Keynes argued that when private demand weakens, the government should pick up the slack. He advocated either of two paths: government spending or tax cuts. Republicans have simply chosen the latter course.

Spending cuts on the way?

So when will we get serious about our fiscal mess? In 2020 or 2030, when the needed spending cuts and tax hikes get much larger? If we cannot inflict a little pain now, who will impose a lot of pain later? Does anyone believe that Washington will one day develop the political courage it now lacks? And what if, while we are getting around to doing something, countries get nervous about lending us money and interest rates rise?

Once again, the popular delusion of "funding" being the issue leads to inaccurate conclusions with respect to the yield curve. And even if these causalities (foreign governments lend us "money") were true, can export reliant emerging economies withstand the attendent currency movements from these yield fluctuations?

I understand the politics of compromise and the politics of reelection, and this deal makes sense on both grounds. It doesn't make much sense for the long-term growth of the American economy. What Washington is trying to do is reignite the consumption bubble - hoping to get Americans to spend money and take out loans. This plan, presidential adviser Lawrence Summers tells us, will get the economy to "escape velocity." It's an intriguing theory. If Americans keep spending money, using their credit cards, and buying houses, this will trigger the next technological and economic revolution.

Take Mr. Summers's (aka, "the smartest guy in the room") advice at your peril.

China has a different theory of how to get long-term, sustained growth. The Chinese have doubled their spending on education - with stunning results - and continue to build the world's best infrastructure. Reuters reports that Beijing is contemplating a plan to invest $1.5 trillion over the next five years in seven crucial industries. The targeted sectors are alternative energy, biotechnology, new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, and energy-saving and environmentally friendly technologies. Somehow, housing and retail didn't make the list.

A model for sustained growth based on a corrupt totalitarian police state that has zero respect for international intellectual property "law"? Housing and retail don't make the list because the happiness of the plebs are an afterthought to the "Communists".

The basic problem in the U.S. economy is that for a generation now, we have been consuming more and saving and investing less. Consumption ranged from 60 to 65 percent of gross domestic product for decades; then it started moving up in the early 1980s, reaching 70 percent of GDP in 2001, where it has stayed ever since. More spending has not been triggered by rising incomes but entirely by an expansion of credit - the underlying cause of the crash of 2008. And yet our solution to our problems is to expand credit and consumption.

Since Savings equals investment, but does not equal spending, the phenomenae of consumption growing as a % of GDP is partially attributable to the importance of a knowledge, service intensive economy.

Of course, we don't have the money to pay for our new tax plan, so we will borrow it, in part from foreign central banks. While China spends its money to invest in long-term growth, it lends us cash so that we can give ourselves one more big tax break. Someone in Beijing must be smiling.

Here we go, we do not need to fund the deficit via foreign "money". Someone in Beijing must be very nervous...becuase if the export driven gravy train is halted or even slowed slightly, the entire edifice of economic driven "progress" in china goes the way of that emperor who wore no clothes.

Nice commentary by Hassett of Bloomberg about the Obama economic team.

Economics is not "science". There is no course of action that will lead to predictable results.

Summers knows this...or at least has written at length about the fallibility of economic analysis (See "The Scientific Illusion in Empirical Macroeconomics, Scandanavian Journal of Economics, Volume 92 No. 2). And yet there is a body of anecdotal evidence that he ignores his own medicine and comes across as intensely positivistic in the presence of other humans who may harbor differing opinions.

http://www.bloomberg.com/apps/news?pid=20601039&sid=af4p4gEwXznM&refer=home
Drank the Water

But collectively, the team that he assembled is long on people who are predisposed to agree with him and short on those who steered clear of the Keynesian water of Cambridge.

The list of Cambridge insiders includes the chairwoman of Obama’s Council of Economic Advisers, Christina Romer (MIT); council members Cecilia Rouse (Harvard) and Austan Goolsbee (MIT); and even senior adviser Paul Volcker (Harvard). All told, of the 27 top advisers on the White House economic team or its Economic Recovery Advisory Board, 14 went to Harvard or MIT and 20 are Ivy Leaguers. As an individual, each of these team members is worthy of bipartisan praise. As a group, there is a disappointing lack of diversity.

Is it any wonder, then, that we would see a stimulus package that puts so much faith in Keynesianism? It would be like inviting only American League fans to a debate about the designated hitter.

Treasuries...

..."the" reason for today's moves (full statement here). I still do not understand how the U.S. will indentify U.S. citizens with foreign accounts in order to activate the witholding tax.

Another problem is that only "investments" are covered in the bill. So, for example, it "might be possible" (read: someone will do this STAT)for a foreign investment bank to offer a product that mimics the returns (but are not actually U.S. securities) on U.S. indices, DENOMINATED IN DOLLARS, without triggering the witholding conditions in the bill.

This may be the dawn of a new "EuroDow" market, mirroring the Eurodollar market (itself the product of regulatory challenges levied against USSR, IIRC), and is a strange move by the U.S. at a time when it thinks it needs foreign holdings to shore up demand for Treasuries.


Senate Floor Statement on the Enactment of the HIRE Act

Today President Obama signed into law the Hiring Incentives to Restore Employment Act (H.R. 2847), which will help put Americans back to work. More must be done on to help fight the unacceptably high unemployment rate, and I hope we can soon address other factors holding back our recovery, and particularly that we make it easier for businesses to obtain the funds they need to survive and grow.

While we work in Congress to get people back to work, I also want to take a moment to focus on another benefit of today’s new law.

The HIRE Act is a significant victory for law- abiding U.S. taxpayers, and a significant blow against those who dodge their responsibilities. The Permanent Subcommittee on Investigations, which I chair, has spent years investigating offshore tax abuses which together cost the federal treasury an estimated $100 billion in lost tax revenues annually. In addition to its provisions designed to help foster economic growth, the HIRE Act contains Foreign Account Tax Compliance provisions that represent a major new and positive development in the efforts to stop offshore banks from using secrecy laws to help U.S. taxpayers evade their taxes.

These offshore tax compliance provisions are the culmination of over a year’s worth of study, debate, and drafting efforts to protect America’s honest taxpayers. The drafting effort involved a host of Members of Congress from both the Senate Finance Committee and the House Ways and Means Committee, and the work drew upon multiple bills, including the Stop Tax Haven Abuse Act, S. 506, which I introduced with Senators McCaskill, Nelson, Whitehouse, Shaheen, and Sanders, and which Congressman Lloyd Doggett introduced in the House with 67 cosponsors. I would like to commend Senator Baucus and Congressman Rangel, in particular, for leading this drafting effort, and for involving us in producing a strong bill that President Obama is signing into law today.

This is a big bill, and its offshore tax provisions are complex. I want to provide some explanation of how this legislation is intended to work, both to guide the development of implementing regulations and to inform the courts of our legislative intent.

Section 501 on Foreign Bank Accounts

Section 501, “Reporting on Certain Foreign Accounts,” gives foreign financial institutions a choice. If those financial institutions hold U.S. investments of any variety -- from U.S. treasuries to U.S. stocks and bonds to debt and equity interests in U.S. businesses -- they must either pay a 30% withholding tax*** on their investment earnings, or disclose any and all accounts held by U.S. persons. The legislative intent behind this choice is to force foreign financial institutions to disclose their U.S. accountholders or pay a steep penalty for nondisclosure. The 30% will be withheld by a withholding agent in the United States before the funds are permitted to exit the U.S. financial system.

The reason for this strong approach was seen dramatically in hearings before the Permanent Subcommittee on Investigations. A July 2008 hearing, for example, showed how two foreign banks, UBS AG of Switzerland and LGT Bank of Liechtenstein, used a variety of secrecy tricks to help U.S. clients open foreign bank accounts and hide millions of dollars in assets from U.S. tax authorities. One 2004 UBS document indicated that 52,000 U.S. clients had Swiss accounts that had not been disclosed to the IRS. UBS estimated that those hidden accounts contained a total of about $18 billion in cash, securities, and other assets. In order to defer a criminal prosecution against the bank by the U.S. Department of Justice, UBS admitted that it had participated in a scheme to defraud the United States of tax revenues, paid a $750 million fine, and agreed to stop opening accounts that are not disclosed to the IRS. UBS also agreed to reveal the names of a limited number of U.S. accountholders, although the bulk of the 52,000 still may escape U.S. tax enforcement actions due to Swiss secrecy laws that continue to conceal their identities.

In order to avoid the 30% withholding tax, this new law will require each foreign financial institution to enter into an agreement with the Secretary of the Treasury to obtain and verify information which will make it possible for them to determine which of their accounts belong to U.S. account holders, report key information about those U.S. account holders, and comply with any request by the Treasury Secretary related to those U.S. accounts. The bill is written to end wide spread abuses. There are several issues that must be addressed in implementing this provision. For instance, it is clearly intended that the definition of foreign “financial institution” be applied broadly, to include banks, securities firms, money services businesses, money exchange houses, hedge funds, private equity funds, commodity traders, derivative dealers, and any other type of financial firm that holds, invests, or trades assets on behalf of itself or another person.

***"The Treasury will need to construct a withholding regime that will efficiently withhold the 30% tax on all U.S. investment earnings held by a noncooperative foreign financial institution. This statute will not be effective unless the 30% tax is withheld promptly, reliably, and in a comprehensive way. In devising this withholding regime, it is our purpose to apply the term “withholdable payment” broadly to cover all types of payments from sources in the United States, including interest payments, dividends, rents, wages, stock gains, and derivative payments originating in the United States."

Expropriation risk...A continuing series...

I have written about the Andean region several times on this blog, and its propensity for upheaval and traditional sympathy to communism and socialism. These events will garner the attention of the Administration very quickly. Perhaps there is hope yet (from my perspective) for a more formal delineation of the "Obama Doctrine" that I wrote about shortly after Obama's ascension.

April 8 (Bloomberg) -- Ollanta Humala campaigned for Peru's
presidency in 2006 wearing red T-shirts and expressing admiration for
Venezuelan socialist leader Hugo Chavez. This year, he's donning
business suits and vowing to expand ties with investor-favorite Brazil.
The former army officer's change in raiment and rhetoric has helped
boost him into first place in polls ahead of the first round of voting
April 10. Investors including Barclays Capital, who in December
dismissed him as a "radical" also-ran after Peru grew 8.8 percent last
year, now say the outcome of a likely runoff on June 5 is too close to
call.
While abandoning the anti-capitalist rhetoric has allowed Humala to
build support beyond his rural base, it's unclear if he'd govern with
the same restraint, said political analyst Alvaro Vargas Llosa. Peru's
stocks, bonds and currency fell in the past three weeks as Humala
overtook congresswoman Keiko Fujimori and two other rivals who are tied
for second place.
"There is real reason to fear that Humala won't be part of the
modern left," said Vargas Llosa, a senior fellow at the Independent
Institute in Washington. "It's a real risk because we've never had it so
good."
Humala had 26 percent support in a nationwide poll taken March 26
to April 1 by Lima-based researcher Ipsos Apoyo, up from 21 percent a
week earlier and 10 percent in January.
Fujimori, the daughter of jailed former President Alberto Fujimori,
trailed him with 18 percent support, while former President Alejandro
Toledo had 17 percent support and Toledo's former Finance Minister Pedro
Pablo Kuczynski had 16 percent.