Egypt: A Striking Resemblance to Latin America

Wow have I wanted to say something about Egypt for a while now.  I’m amazed with myself that I sat silent for this long.  Egypt is an issue that’s close to heart for many reasons, the obvious being the connection between my family’s history and Israel.  The less obvious connection is in my academic past.

First things first.  Many friends and family with an Israeli connection have expressed serious concerns about the Tahrir Revolution in Egypt.  These concerns range from questions at to whether a democratic Egypt would hold true to their tenuous peace with Israel to whether the end of the Mubarak regime would presage a sweeping Islamification of the Middle East that threatens Israel’s very existence.

While there may be some merit to such concerns, I tend to take a different outlook altogether and I think the difference is borne in my academic interest alluded to above.  I was always intrigued my Latin America for a host of reasons, and early in college I took a class entitled “US Policy to Latin America.”  This piqued my interest in both American foreign policy and Latin American revolutions to the point where I spent the next few years studying any and all Latin American dictatorships and their counterrevolutions.

Why Latin American revolutions?  While much literature pointed to a perceived ideological commonality between the various revolutions, more than anything else the real common thread tended to be anti-imperialism and anti-Americanism, the two run hand-in-hand.  Most revolutions, while “communist” in name, rallied around a distaste for U.S. propagated dictatorships.  Although the revolutionaries were defined by their ideology, the dictators themselves were defined by their anti-ideology.  None were democratic, and few had a vision for progress.  These dictators came to be known as “Caudillos”–authoritarian leaders who shared many common traits:

1. Caudillos rose through the ranks of the military to gain authoritarian control.
2. Their ideology centered around the cult-of personality rather than any progressive vision.
3. They all enriched themselves at the expense of their country.
4. Each maintained a close strategic alliance with the United States which was mutually beneficial in the international ideological battleground.
5. All at some point in time cracked down against popular democratic uprisings and suppressed the freedom of speech.

These are the most basic of the symmetries amongst the various caudillos in Latin America.  Interestingly enough, each is an apt character trait of Hosni Mubarak’s regime in Egypt.  Most recently, Mubarak has been a pivotal figure in the United States battle against extremist Islam in the Middle East.  So much so in fact that former Vice President Dick Cheney has rose to his defense despite the popular uprising.

You see, the War on Terror is really not all that different than the Cold War in several key respects.  Much of the War on Terror is being pursued in the same manner on both sides.  Lost in all the talk about holy wars and national security is this notion from people in the Middle East that they resent and loathe the U.S. meddling in their own affairs.  This is now strikingly true of even moderate Arabs in a country which we formerly considered one of the more stable in the region.  Why is that?  Well the Arabic equivalent of a caudillo used his relationship with the United States to cement his position in power, and used his power in order to enrich his friends and family at the expense of his country and countrymen.

To me, I see Chile as the closest parallel to Egypt.  Both countries have relatively developed, secular civic societies.  When Augusto Pinochet took control of Chile in a military coup in 1973, it was much to the delight (and perhaps even thanks to the help) of the United States.  Pinochet ultimately was not toppled by a violent revolution, but rather a democratic plebiscite.  The opposition had been suppressed for far too long, far too aggressively and Pinochet laundered a little too much money to secret bank accounts outside of his home country.  After enough popular pressure, the autocratic dictator with an iron fist was forced to face an election on whether he could remain the country’s leader.  Over time, Chile’s robust civic society led to a sometimes struggling, but overall healthy democracy and economy.

The revolution in Egypt is one of those binary historic events in which the outcome will be extreme–either extremely great or extremely bad.  It’s hard to imagine a middle ground.  Call me an optimist, but I see a light at the end of the tunnel here.

How to Appease the Deficit Hawks Without Hurting the Economy

The Deficit Paradox

So despite the fact that Treasury markets are showing no signs of impending doom, many argue that we need to act in order to preempt a buyer’s strike of US government debt.  Deficit cutting is a dangerous path for our country to head down right now, as doing so leads to the shrinking of aggregate demand/GDP.  I went through this in my recent post on a Different Shade of Political Risk:

As Bill Gross astutely observed, “Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator.  In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!” [emphasis Gross']  While conventional wisdom may hold that reducing spending will close a deficit gap, reality has consistently demonstrated that reducing spending ultimately increases deficits.  Aggregate demand is equal to the sum of consumer expenditures + investment + government expenditures +/- the balance of trade (at the same time, ΔAD=ΔC+ΔI+ΔG+ΔBalance of Trade).  A drop in government spending triggers a drop in aggregate demand, which resultingly triggers a further drop in consumption and investment.

There are two ways for a country to make the deficit shrink as a percentage of GDP: one is to cut the deficit, the other is to increase the rate of GDP growth.  The quote from Bill Gross above is particularly apt, as Gross is a huge owner of US Treasuries, and as such, his words give us insight and perspective into what market participants really think.  Cutting deficits is a difficult paradox, in that doing so can lead to a drop in GDP and subsequently INCREASE the government’s deficit as a percentage of GDP.  I am utterly baffled at how many are calling for the immediate cutting of US government spending, while simultaneously calling for tax cuts, as if that is a solution to this problem (I’m looking at YOU Larry Kudlow…I can’t listen to the guy anymore).  This is especially true considering the budgetary troubles on the state level.

While cutting government spending would not be the best idea right now for the broader economy, there are two areas in which the government CAN cut spending without unleashing negative consequences on the economy at large, and possibly even helping the economy.  One such way is one of the most politically popular areas of the budget to cut (and something in which both Keynesians and Free-marketers alike agree should be cut) and the other is one which seems too politically taboo to even mention.  Let’s start with the popular–agricultural subsidies.

Agricultural Subsidies

As of 2009, agricultural subsidies in the US totaled $20 billion, or the rough equivalent of 0.5% of our entire federal budget.  While the percentage may sound small, that amount can have a major impact over the long run.   I propose to completely abolish agricultural subsides in this country altogether.

An Economist/YouGov poll from early April of 2010 found that aside for foreign aid (which is pathetically small in our country relative to other spending areas) and the environment (I guess people think we treat it well enough as is), agricultural subsidies were the component of our budget enjoying the most support for cuts (27% of Americans polled).  I am sure much of this has to do with the changing nature of agriculture in the country.  When these subsidies first began, we were largely an agrarian nation in which much of the population earned their livelihood via farming.  Today things are completely different.  In Making Globalization Work, Joseph Stiglitz offers the following statistical breakdown of the state of agricultural subsides in the US today:

…the vast bulk of the money goes to large farms , often corporate ones.  These subsidies have become simply another form of corporate welfare.  Looking across all crops, some 30,000 farms (1% of the total) receive almost 25% of the total amount spent, with an average of more than $1 million per farm.  Eighty-seven percent of the money goes to the top 20 percent of the farmers, each of whom receives on average almost $200,000.  By contrast, the 2,440,184 small farmers at the bottom–the true family farmers–get 13 percent of the total, less than $7,000 each.  The huge subsidies…actually drive out the small farmer.

Additionally, 90% of these subsidies are for staple crops, such as corn, wheat, soybeans and rice.  It is neither in our economic nor nutritional interest to focus so extensively on grain subsidization.  Besides, a large portion of the corn in this country isn’t even grown for food consumption purposes.  Ten million hectacres of arable land are used to grow corn for ethanol, adding up to a subsidy of $0.45 per gallon.  Ethanol is demonstrated to have only a marginal improvement in environmental efficiency at best, and this subsidization is leading to an economic inefficiency in our agricultural markets.  More land than would otherwise be used for corn is used for corn solely because of these subsidies. This cheapens corn relative to alternative edibles and drives up the price of other food staples, such as fruits and vegetables.

We hear many deficit hawks talk about the stimulus as “socialist” , deficit spending crowding out the private sector, and the inefficient allocation of capital from the public sector, yet very rarely do we hear anyone lambaste agricultural subsides.  Somehow health insurance for Americans is evil and un-American while agricultural subsidies are what exactly?

The Politically Unmentionable

Let’s end the wars in Iraq and Afghanistan.  Forget about the past debate.  With the benefit of hindsight, we know we went into Iraq for the wrong reasons and we still know of no “end-game” through which a “victory” can be achieved.  Not much more needs to be said here; however, one thing that is particularly interesting is that most people do not even realize that the wars in Iraq and Afghanistan are not accounted for in our regular budget.  Rather, wars receive special budgetary treatment.

Despite not being included in the regular budget, these wars have a major impact on our fiscal balance.  It would go a long way towards quelling any potential bond market jitters to make clear that an end is in site for these wars and that US dollars will stop going down this completely unrewarding sinkhole of simultaneous foreign quagmires.

Conclusion

If we cut both of these areas of our fiscal spending, not only can we appease deficit hawks, but as a country we might even have some more wiggle room for more stimulus.  Speaking of stimulus, should China actually let the Yuan rise relative to the dollar, they would be doing the US a major favor in stimulating the economy.  That is why market futures went up so much ahead over the weekend following the announcement.  It works like this: through all this time in pegging the Yuan to the dollar at an artificially low price, China has been accumulating a horde of US dollar reserves.

Effectively, this policy allowed the US to export inflation to China.  In allowing the Yuan to rise, China will slowly release some of these stored dollars into the global economy, ultimately providing a stimulant to global aggregate demand.  This is just what the doctor ordered at a time when it is needed most.  Let us just hope that China follows through on their promise, as this could help grow the US GDP, thus decreasing the fiscal deficit as a percentage of GDP.

Yuan Small Step

Heading into the weekend the big news  on trading desks was a blown call in Friday’s US soccer match against Slovenia.  Friday’s “Quadruple Witching” was about as uneventful as possible.  Over the weekend China decided to stir up the pot by announcing that it “has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.  To do so, China will place continued emphasis…[on] reflecting market supply and demand with reference to a basket of currencies.”  As is evident by the reaction of index futures over the weekend, this news was somewhat unexpected and a largely positive development.  In anticipation of the G-20 summit set to kick off in Toronto next week, China and US Treasury Secretary, Tim Geithner alike were both facing mounting pressure with regard to China’s exchange rate policy.  Both should now be breathing a sigh of relief.  The question begs whether the news is as significant as the market reaction to it.

It remains unclear as to how exactly China will pursue a more market-based exchange rate.  The statement itself is particularly vague as to this point and leaves a lot of room for speculation.  I agree with Barry Ritholtz’ statement that “the Chinese announcement is only that — an announcement which may or may not be followed through. As such, we should treat it as a precursor, and not the significant shift the market seems to be making of the announcement.”  Until there is clarity of action and an actual plan, these words are merely conjecture.  That being said, these words are significant conjecture and reflect a change in policy and posture from China on a significant issue of international significance.

In order to discuss the impact, we first have to understand the policy as to why China pegs the yuan to the dollar.  As a result of the Asian crisis in the late 1990s, countries learned that in order to whether an economic storm in which a currency crisis is but one component, countries need to stash a reserve of the dominant global currency (the dollar) in order to intervene and maintain an equilibrium for export prices.  These countries were very reliant on the international export market for domestic demand, and as such, exchange rate volatility led to export volatility.  Additionally, the IMF’s response to the crisis called for currency protection (i.e. the raising of interest rates) in a time when monetary policy should have been deployed to stimulate the domestic economy (i.e. the cutting of interest rates).  With a stash of US dollar reserves, countries learned that they could increase their level of control over their domestic economies, without having to rely on international decision-makers whose preference was to protect international players.

The stashing of reserve dollars overall results in the suppression of a large chunk of global aggregate demand and ultimately leads to large, pervasive imbalances in trade between nations.  This heightens global economic volatility (in a sense, these countries w/ dollar reserves gain stability by exporting volatility to the global market at large).  The impact of the change in policy from China (should it truly materialize) will be reflected in three key areas: 1) the price of exports from China to the US will increase; 2) the pricing of other countries’ exports to the US will be increasingly more competitive in international trade markets; and 3) China’s purchasing power on a global level will increase.  Each of these are significant in their own right.

In pegging the Yuan to the dollar, China has placed a significant burden on other global exporters and resource rich countries in order to compete internationally.  China’s policy directly led to Brazil placing capital controls on foreign purchases of assets and to New Zealand’s direct intervention in currency markets in order to make their dollar more competitive internationally.  Furthermore, the pegged Yuan has been one factor in the US undertaking an unprecedented trade deficit.  To many, this is the most significant component to watch as this news lays out.  While a freer floating yuan should have some impact, it remains to be seen whether this alone is enough of a step in order to really change the situation.  As Joseph Stiglitz said in March of this year, the rebalancing of the Yuan  “won’t do very much for the U.S. trade imbalances….the adjustment to the exchange rate will not be the full answer for global imbalances.”  We run a significant trade imbalance with the oil producing nations of the world, and until we figure out another way to harness energy, the bigger imbalance problem will persist.  All in all, I see this as one small step that deserves an optimistic, but tempered response.

Ass Kicking No More

President Obama just finished his latest in a series of ongoing speeches about British Petroleum and gave his best stock market value investor analysis.  The President proclaimed that he is “absolutely confident BP will meet its obligations.”  This is in contrast to the President’s recent remarks about looking for whose “ass to kick” with regard to the oil spill.  Listening to the speech, and watching the reaction in BP’s stock (an aggressive rally for those yet to see) I couldn’t help but think that President Obama had a long, difficult talk with his British counterpart, Prime Minster David Cameron, that went something like this (please take note, this is a FAKE conversation that I imagined in my head):

Barrack Obama: Hey David, how’s it going?  Things are a bit rough here and I just wanted to let you know that I am going to be kicking some British Petroleum ass pretty soon.  I figure since you’re new to the job you deserve a little heads up.

David Cameron: Cheers mate, in all honesty this is a serious call and I want to get right to the point.  While things are clearly not great in the Gulf, I would prefer if you would refrain from arse kicking for the time being.  This is ver…

BO: …What do you mean Dave…can I call you Dave? or is it David.  What you have to realize is that the pressure on me in this country from these Teabaggers is immense.  I mean one dayI talk about using alternative energies so that we don’t need to take oil from dangerous place and they call me Communist and Socialist and Hitler and Stalin all in one, and the next day they’re blaming me for the spill as if it’s MY fault.  What am I to do other than kick some ass?  I gotta tell you Dave, welcome to the top of world politics, but get out while you can.

DC: Well Barack, it turns out that a lot of our country’s pension plans and wealthy people are HEAVILY invested in BP stock.  Many people in my country LIVE off of this dividend.  I implore you to take that into consideration when proceeding with your arse kicking.  Our country is completely and utterly broke in both the public and private sectors.  I mean seriously Barack.  We are broke.  If your people think your deficit is a problem, I don’t even want to imagine what they would be saying over here.  We too bailed out our banks, but our recovery is far from robust like you Americans.  Besides, it’s our banks that own the most toxic of your assets over there.  Were it not for our power to print money, we too would go Greek.  There cannot be a second Tea Party in which you Americans kick our arses back across the pond.  Please throw me a bone here.

BO: Dave, you have some points there.  This is a complex situation and we need to find some sort of middle ground.  We need to find a way in which I appear to be kicking some what’s that British word you use for it?  Arse? without actually kicking that arse.  We need to find a way through which BP the company will take some pain, but its shareholders will take no more.  We just need to find some common ground in order to build a consensus.  Let’s work together and speak strongly while letting others take care of the actual planning and execution of our actual plan.  Does that sound like a viable approach?

DC: Brilliant!  That is an outstanding idea Barack.  Let’s not worry about the details about how exactly this will work, let’s just ensure that we are neither tough nor soft, neither loud nor quiet, neither right nor wrong.  I look forward to an outstanding piece of rhetoric from you yet again.

BO: Thanks Dave, much appreciated.  I work hard on these speeches of mine.  It’s pretty demanding with all these crises one after the other to come up with original ways to say pretty much the same thing.  Anyway, it’s time for me to get my speech writing on and to step up to the podium and delivery.  We’ll continue this conversation later in the day after your high tea.

DC: Pip pip cheerio Barack.

BO: Speak soon Dave.

A Turning Point in Afghanistan?

Last night the New York Times reported that the US Geological Survey discovered vast mineral resources in Afghanistan worth up to $1 trillion.  This is potentially an incredible break for the deeply impoverished war-torn country whose GDP is a mere $12 billion per year.  The US intervention in Afghanistan is now the longest war in America’s history, and despite these vast mineral discoveries, there remains no end in imminent site.  While this is an incredible breakthrough, it requires patience and a balanced approach in order to ensure that this new-found wealth ultimately ends up a positive development for the country.

Natural resources often are a double-edged sword for developing countries, particularly those divided by persistent ethnic strife and civil war.  Just look at a country like Sudan in which the Muslims in the north and Christians in the south continue to wage a never-ending battle with one of the contentious points being oil rights in a war that has plagued the country essentially since obtaining its independence from Great Britain.  Often times much of the wealth from mineral deposits ends up in the hands of foreign international corporations who benefit from discreet handshake deals for mineral rights with corrupt government officials.  Additionally, the pricing of resources are incredibly volatile, and a country with a volatile political landscape needs to ensure that it deploys these new economic resources in the most stable way possible.

Article Nine of the Afghan constitution declares that “Mines, underground resources are properties of the state.  Protection, use, management, and mode of utilization of the public properties shall be regulated by law.  Clearly the constitution grants ownership of such resources to the national government of Afghanistan; however, the country continues to be plagued by regional allegiances and alliances that trump the interests of national unity.  Pursuant to the constitution, the nation’s Ministry of Mines manages the “research, exploration, development, exploitation, and processing of minerals and hydrocarbons.”  On the Ministrky website, they proclaim that “The long term vision…is the creation of an effective administration, utilization of natural resources, creation of jobs, the encouragement of private investment in the mining…sectors, and increasing government revenue.”  The right idea is in place, but the execution needs to remain consistent with this mission.

It is essential that the government maintain an ownership interest in these mines and use it in order to build equity in the country.  Many will argue for the privatization of these resources, but it is incredibly important that the US and World Bank prevent this from happening.  Creating jobs is not nearly enough.  The people of Afghanistan need to believe that they have a stake in the success of this new wealth and that its benefits will be allocated for the good of the country. In order to do so, the country needs to build upon some of the developing world’s top success stories in order to bring these minerals to market.  Petronas in Malaysia is a prime example for how best to proceed with a development program.  From Joseph Stiglitz’, Making Globalization Work comes the following observation:

Malaysia did not just turn over its oil to foreign oil companies, but had them help it develop its resources, learning all the while; today its government-owned oil company, Petronas, is providing training for other developing countries.  By managing its own oil company, it was able to ensure that more of the value of resource stayed in Malaysia, rather than being sent abroad as profits….(pages 33-34).

Malaysia’s former prime minister…says his country receives a larger fraction of the value of its resources than countries elsewhere who have privatized, and a larger fraction than it would have received had it privatized (page 142).

Malaysia’s success sits in stark contrast to the failures of the Russian state to equitably expropriate their resources in the wake of the collapse of the Soviet Union.  We know the good, we know the bad.  It’s important to take these lessons to heart and pursue things the right way this time around.

All in all, this is an incredibly optimistic development for a country badly in need of something to rally around.  This can be a major generator of some sort of national cohesiveness and unity, but with the delicate situation in Afghanistan it is even more important that the nation itself reap the benefits of these discoveries.   This is a war in which one of the underlying issues has been and remains the fact that the country feels as though it has been exploited as a tool in the war of ideas between more significant global powers (and to a large extent, it has).  Even amongst the regions loyal to the US there is a sense that the country does not control its own destiny.  Some of these ideas stem from the sharing of ideas between the Taliban in Afghanistan and Al-Qaeda coming from oil rich Muslim nations in the Middle East.  Regardless, we must acknowledge this underlying tension and use it to our advantage in nation-building around these resources.

It will be impossible for the US to “win” our longest war ever without winning on the battleground of ideas.  This is not just an opportunity for Afghanistan, but also one for the US and other big international players to deploy a new model for pursuing development and equitable management of resources in an impoverished nation.  Successful execution on the expropriation of these minerals can go a long way towards building a unified civil society in the country.  This discovery provides that opportunity, let’s do it right.

Steve Wynn Misses the Point

…in proclaiming the Chinese government more favorable to investors than the U.S. government.  Wynn proclaimed that “Macau has been steady. The shocking, unexpected government is the one in Washington” along with a handful of other choice words directed at the U.S. government’s handling of the credit crisis.

Of course Steve Wynn likes working in China.  He’s dealing only in Macau, a province much like Hong Kong in that it is one of the “one country, two systems” regions in China.  Macau enjoys freedom and liberties unthinkable on mainland China.  To equate Macau with all of China is just wrong.  Moreover, to equate China with the United States is not only morally reprehensible, but economically naive.  Question the economic policy of the U.S. government all you want, but this country unquestionably has one of the least spotty human rights records.   Sure from Steve Wynn’s perspective tax policy is important.  But there are serious risks when dealing with a country that can change its stance towards your business and your customers on a whim.  Until China improves its track record on human rights and civil liberties there will be an implicit risk to any investment in the country.  Of course totalitarianism opens the door for profit opportunities.  Favoritism, protectionism and corruption, all inherent elements of totalitarianism, come with exceptional money-making opportunities.  It’s easy that way!  But watch out, because as quickly as you can come into favor and profits, you can fall out of it.

Not too long ago CNBC’s Jim Cramer said something echoing that sentiment and I offered Cramer the following fake news story in response:

A new survey of portfolio managers revealed a shocking new trend developing in the investment universe: portfolio managers prefer investing in countries with Communist dictatorships, military coups within the last five years, oligarchies who dominate wealth coupled with a former lieutenant colonel in the KGB pulling the strings, and a civic society which largely favors strong-handed rule to democracy than they would the world’s longest-standing and most free democracy. Investors cited concerns over “wealth destruction” as the primary catalyst for this shift in sentiment, as they believe only strong-handed rule, with high barriers to entry can adequately protect their hard earned wealth.

Following this alarming survey, President Obama declared that “Although I am not a socialist, after learning the results of this poll, I have decided to ask Congress to put together a bill that would pave the way for a movement towards totalitarian Communism.” Not to be outdone, the Republican National Committee hired Goldman Sachs as an outside consultant in order to explore the availability of former global military and intelligence leaders available at this time to orchestrate a military style coup in the United States in order to attract investments to the slumping domestic economy. A spokesman from Goldman revealed that this is a new line of business for Goldman Sachs and revealed that the opportunity in political orchestration came from a message that G-d left Lloyd Blankfein on his voice mail during the week of January 15th.

In response to these latest developments, stocks initially flew on the news that the United States would explore alternate forms of government. What started as a morning rally turned into an afternoon collapse, as investors expressed concerns over the ability of Democrats and Republicans to reach a consensus as to the most beneficial form of totalitarianism.

I urge Wynn and Cramer alike to speak with some Australians and/or Rio Tinto about some of the complexities of working in China.  Just recently, China jailed several Rio Tinto employees on charges of bribing officials and “stealing commercial secrets.”  The Australian Foreign Minister Stephen Smith had the following words to say about the secretive trial and murky process: “This was an opportunity for China to bring some clarity to the notion or question of commercial secrets….As China emerges into the global economy, the international business community needs to understand with certainty what the rules are in China.”  All the charged employees surprisingly plead guilty, and were “tried” in a closed trial in which Australian officials were wrongfully denied access to.  Many insist that these actions by China were in response to aggressive pricing negotiations over iron ore, an essential input good in steel production.

Whether these officials were guilty of bribery or not, there is seemingly rampant bribery in China.  Not only that, the country places significant limitations on civil liberties and its human rights record is far from clean.  While there have been improvements, China uses capital punishment on political dissenters, censors dissent, limits religious freedoms, discriminates against ethnic minorities and exposes its poorer workers to inhumane conditions.  These are substantial issues that companies and investors must consider in allocating capital to Chinese endeavors and significant barriers to entry in working in China.  Just ask Google about their experience in the country.  Google refused to succumb to China’s harsh censorship laws, and as a result, the company was forced to shutdown their Chinese search engine.  Sure there are profit opportunities in China, but there are also very real obstacles created by the People Republic’s spotty and inconsistent record on human rights and civil liberties.  The country is inherently unpredictable with arbitrary spurts of complacency and aggression.

I am well aware of the challenges faced by the U.S. in the midst of this rolling credit crisis.  These are frequent themes that I discuss and dissect.  Yet despite our troubles, to remotely equate conducting business in and with a country with questionable regard for its citizen’s lives is rather absurd.  Talk about the world’s largest population maturing in one country.  Talk about the urbanization, modernization, industrialization of a major global power.  Talk about these things and invest accordingly.  But please don’t compare the governments of the two and say that China is more predictable and stable than Washington.  (Off-point, but relevant: Ever notice how there is an inverse relationship between tax policy and civil liberties from presidential administrations.  Ronald Reagan gave us supply side economics, but he also supported some oppressive regimes around the world in the name of “anti-communism.”  George W. gave us lower taxes, but he also gave us the Patriot Act.  Also interesting is that the same people who lambaste America’s “socialist policies” offer glowing praise for China’s government and their preferable treatment to investors.)

Economic policy is but one element as to what a government does.  This overemphasis on tax policy is a big part of why some greatly over-exaggerate the political risk in this country right now.  There are way more variables to governing than just how you approach taxes.  Policy generally speaking is much broader than how governments treat investors.  Our system is stressed, but it is not broken.  We in this country have longstanding principles and traditions that have withstood the test of time and have afforded generations of people an opportunity to partake in the American Dream.  If a cheaper tax rate for Steve Wynn is worth assuming the political risk of China that’s his choice, but in the grand scheme of things, there is just no way to compare the governments of the two countries.

The Bondholder Bailout

I hinted at it the other day, but would like to take a moment to dig a little deeper.  The framework with which we discuss the “Greek Bailout” is demonstrative of the POLITICAL challenges that both the U.S. and Europe will face moving forward.  Let me be clear about one thing off the bat and that is that the risks of a Greece default are two-fold: first, there is the risk to Greece in their future ability to access capital markets moving forward; second, there is the risk to bondholders of Greek debt.  This bailout in many respects did far more to protect bondholders than it did Greece.  Greece has/had options.  They can outright default and not pay back ANYTHING to their bondholders (like Russia in 1998), in which case there would be massive losses across asset classes in Europe and around the world (just the consideration of such a risk is crushing assets globally); OR they can negotiate a better deal with their bondholders and arrange a way through which both Greece and their creditors can share some of the pain.

I am in no way insinuating that Greece acted in the “right” way during the time leading up to this crisis.   They had a bloated public sector that should have been more vulnerable and/or expendable following the post-Lehman deflationary storm.  My point is more that the purpose of this bailout is to ensure that the losses suffered in Greece do not spread too mightily beyond the country’s borders.  Bailouts are inherently a conservative institution, as they are designed to protect the status quo, rather than accepting the costly need for short-term pain and change. Let me set the record straight once and for all: these bailouts protect wealth across Europe and not entirety of the Greek welfare state.

Those who lambaste Germany for bailing out Greece fail to realize that a considerable chunk of the losses in Greece will fall on the German economy no matter which way you slice it.  Greek consumers buy loads of German goods and German banks own plenty of Greek sovereign debt.   It is in their own self-interest that Germany is taking the unfortunate step of propping up sovereign debt across Europe.   Forget about the moral hazard.  This bailout offers sovereign debt owners a way to get out of their stupid investments without taking too much of the pain.  This is yet another example of the privatized upside and nationalized risk we saw play out in the United States throughout much of 2008.  One thing that is abundantly clear for Greece is that regardless of which solution they opt for (or that the powers that be arrange), the country MUST cut their spending and take a lot of pain.  This is not a bailout of the Greek welfare state.  It is dead.  The people can riot all they want, but in the real world, there is absolutely no way Greece can maintain the status quo.

Where’s the Change?

This week, the Obama Administration, via Attorney General Eric Holder, hinted that they would like to pursue an exemption to the Miranda Rights for “international terrorists” in an effort to appease critics.  I am pretty disturbed, to say the least.  I wrote briefly last week that I hate that fact that reading the Miranda rights is even a debate.  Ok, pursuing a legal exemption is far better than just ignoring the law, but has the Administration even contemplated the complexities of such an exemption?  Let’s begin with the fact that Faisal Shazad, the failed Times Square bomber, is in fact an American citizen.  Not only that, Shazad spoke openly and freely and was cooperative with interrogators following the dissemination of Miranda.  What tangible benefit would this provide for police officers in obtaining information?  If anything, it shapes up a battle between the Executive and Judicial Branch in which principles of law will butt heads with an executive order.  Will the judicial branch accept a carved exemption?  Legal precedent seems to indicate otherwise, outside an imminent threat (New York v. Quarles).

These are just the basic problems, but let’s dig a little deeper.  A Miranda exemption is ripe for potential abuse, as there is no objective standard for what an “international terrorist” actually is.   The law as an institution frowns upon police powers that lack quantifiable, objective standards that leave unmitigated discretion in the hands of individual officers.  Who qualifies as an international terrorist?  Would you have to know of an allegiance to an international group?  Would it have to be a non-citizen?  Where would someone like John Walker Lindh–the American Taliban–had he been captured in the U.S. fall on the spectrum of international terrorism?

Would a state like Arizona use this in conjunction with its racist anti-immigration law in order to target illegal immigration?  Some of these questions are just skimming the surface of the issues raised by a Miranda exemption.  Will we codify a legal distinction between a terrorist like Timothy McVeigh verse a group like the original World Trade Center bombers in 1993?  If so, then what is the policy reason for granting a higher level of legal rights to a McVeigh than an Arabic terrorist? Again, there is absolutely no valid objective metric to apply such an exemption.

I am completely and utterly perplexed by the consideration of such a drastic change to the 5th Amendment rights in America.  To me, this raises far more questions than it does answers and leaves a majorly important decision subject to a potentially emotionally charged, on-the-job police officer, rather than a uniform set of laws.  Our President is supposed to make difficult decisions irregardless (I did it again…I can’t resist using this word) of political pressures and suggesting a Miranda exemption is nothing more than bowing to short-term emotional pressures.  This is one of my biggest areas of concern with President Obama–the level of continuity of the fear-based policy decisions which so clearly led to the destruction of President Bush’s mandate and ability to effectively govern.  These are the types of policies that have dogged our country for the last decade and led to the entrenchment of a deep partisan divide.

More to follow on this topic in the coming days.