How long can a surplus state reasonably be expected to swallow grim inflationary prospects emerging in America’s headlines? This is the question that has weighed heavily in China’s recent monetary debates and it will be the 800-pound gorilla in the room at next week’s G-20 talks in London. With ominous fiscal clouds brewing on the horizon, China has understandably set a course that leads away from the US dollar—the existing reserve system is not sustainable under the pressures of a budget that may call for $20 trillion in debt within ten years. In pursuing a global currency, though, Bellum wonders whether China might instead be tacking for the doldrums of an internationally subdued economy… or worse, toward a craggy shore where military engagements are the only recourse for recovery.
Esteemed strategist Leslie Gelb’s Sunday editorial, It’s Time to ‘Go to Strength’ on Foreign Policy, recommends that US foreign policy focus on areas of comparative strength, steadily withdrawing from those arenas where regional complexities prevent American force from being a “sure thing”. Gelb’s argument hinges on the idea that US foreign relations require a black-and-white decision—either leaders can focus on hotspots like Afghanistan, Iraq and Iran at the expense of developing “greater power” alliances or they can engage fully in proven modes of diplomacy in a way that avoids unilateral involvement. Parsing this construction, unilateralism is weakness and US-directed multilateralism is strength. On this point, Gelb cites the Truman administration:
Nearly a year ago, Austin-based forecasting agency Stratfor published an overview of Mexico’s cartel wars warning that the May assassination of Federal Police Commissioner Millán Gómez presaged a slippery slope: If high-level officials continued to be targeted so casually, the justified use of the “failed state” moniker would not be long in coming. Should Mexico’s post-PRI institutions (still in relative infancy—See GEN McCaffrey’s December lecture notes, Sec 4: D-F) falter, Stratfor’s George Friedman claimed that intercartel competition over supply chains would spill over the border into major market cities like Los Angeles and Chicago:
This week, the Financial Times has introduced a new series, “The Future of Capitalism,” that purports to tell us how our world will look after the credit crisis sputters to equilibrium. The featured editorials are thus far a mix of told-you-sos, opportunistic re-readings of history (take that “inherited truths”!) and alarmist sermons on the gathering of social specters soon to haunt our lives. Bellum has enjoyed seeing so many prominent names in FT’s Op-Ed pages, but the generalizations put forth as guidelines for the New World leave something to be desired. Take for instance LSE economics professor Richard Layard’s platitudinous advice for the brutes among us who find progress in measures of money:
In little over two weeks, the Federal Reserve and Treasury will start administering funds to qualifying lenders in what some publications are calling a critical effort to save US credit markets. Under the conditions of the Term Asset-Backed Securities Loan Facility (“TALF”), $200bn will be set aside to provide financing to private investors to support their purchases of AAA-rated asset-backed securities (“ABS” securities). An ABS vehicle is created when a lender collects several standard loans (auto, small business, student, etc.) into packages that it then sells to a bankruptcy-remote special purpose vehicle (“SPV”). The SPV amalgamates the individual loans into the ABS securities that are then sold to outside investors in varying tranches (ranging from high-risk “unrated” slices to premium grade AAA slices). In good times this process helps isolate the direct risks of lending away from local banks with little appetite for danger and in turn allows them to offer more favorable terms in their community lending activities. Since October 2008, though, consumer ABS markets have atrophied as general faith in finance dropped off with Lehman’s stock price. Treasury rationalizes this process in terms of weariness on the part of those institutions who acted cavalierly so as to merit weariness themselves:
The Hermit Kingdom has been getting awfully crabby in recent headlines, and Bellum proposes that it’s time to step back and formulate a recourse to the inevitable: Parallel to intimating that it will shoot down South Korean aircraft that enter its airspace during the course of war games with the United States and that it will confront the “puppet state” on its disputed western sea border, North Korean authorities claim that they will soon launch an innocuous “communications satellite” that it has been preparing since January. Of course, as with most snarky announcements out of DPRK’s state-run Korean Central News Agency, the noise has got analysts up in arms on suspicions that the object-in-question may instead be a malevolent Taepodong-2 missile capable of reaching the western United States (and thereby picking up where Yasuyo Yamazaki left off in 1943, harrying Aleut-Americans just trying to go about their business). Upon further inquiry, NK’s spokesman betrayed juche by responding with a Buddhist coan, legacy of an earlier subjugated age: “One will come to know later what will be launched”. Zen indeed.
Yesterday in Brussels, EU leaders rejected calls for a $129bn bailout fund intended to stabilize Eastern European states racked by the financial crisis. German Chancellor Angela Merkel advised that the plan was too generalized and that “shotgun spray” recovery would do little to stave off the region’s ailments. The East’s outlook for the time being will remain gloomy on concerns that one or several of the Visegrád Four may have to cope with a fate similar to Latvia’s impending bankruptcy. With Czech Prime Minister Mirek Topolánek now running the EU show (much to the chagrin of Nicolas Sarkozy), the EE’s push to integrate with Western Europe in order to resist Russian dependency will have a committed voice through the entirety of 2009:
Earlier this morning, General Motors posted a 4Q loss of $9.6 billion, culminating a dismal 2008 that saw the Detroit automaker lose $58,789.95 for every minute of every hour of every day last year. Conditions are abysmal in the markets writ large, but America’s Big Three carmakers face an especially tough task in justifying continued government financing to stave off bankruptcy. Bellum is as patriotic as the next guy, and we would be more than willing to entertain the idea of short-term “buy American” provisions to save a valuable industry with manufacturing pedigree. That said, clear evidence shows that on a “domestic content” basis, many of those cars to which we grant the “USA” stamp are indeed less American than perennial “import enemies” (who would have thought that a Toyota Tundra is 10% more American by parts and manufacturing than the Ford Mustang?). Added to this are further production inefficiencies best seen in the relative costs that go into each automobile—Way back in 2005, George Will was already raising serious concerns that more money ($1,525) in each GM price tag went toward employee health benefits than went toward the steel used to form the vehicle’s frame.
Supplementing Scott’s fine analysis of the “Munich paradigm” from yesterday, I want to briefly consider the proper scope of appeasement in interwar Europe. Specifically, while Scott is correct in identifying 1935—and not 1938—as the point of no return for reigning in a militarized Nazi Germany, I suggest on a different front that too little was done to mollify Germany in 1931—I claim that in the Permanent Court of International Justice’s decision to block the Austro-German Customs Union laid out in the Protocol of March 19th, 1931, the European community exercised its authority in an unnecessarily punitive way.
Thomas Barker argues in his plan to revamp the mortgage market that boredom is stability’s biggest friend. Bubbles, he insinuates, stem from the usual suspects of greed, poor oversight, misdirected incentives and plain stupidity. Given this, sheer familiarity with a particular market does the most good toward correcting things in the long view even if the road there unavoidably involves severe potholes.