There Is No Way For America To Retreat On Syria

By Paolo von Schirach

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September 6, 2013

WASHINGTON – Whatever your opinion on Obama’s wisdom in warning Syria about not crossing “red lines” regarding the use of chemical weapons and in asserting that military action would be taken by the US, if and when Syria crossed said “red line”, it is abundantly clear to me that an American retreat, at this juncture, would be a major political disaster. (See link above to a related piece).

Wrong policy?

Smart analysts may and do argue that Obama should not have made threats without evaluating the political risks of a military intervention, especially of a “solo” adventure, (backed now only by French military participation). Now –they say– Obama “boxed himself in”, he “painted himself into a corner”. The same analysts may add (with cause) that Obama’s uncompromising, ” tough guy” stance was most ill-advised, especially given the totally unfavorable political climate in the US. Simply stated: it is clear that most Americans do not want to go to war; and quite frankly they do not understand the technical and political nuances between “war”, “boots on the ground”, and “limited strike”.

Isolationist America

Indeed, in the last few years, (in large part due to reactions to the lengthy and costly wars in Afghanistan and Iraq), old-fashioned American “Isolationism”, historically embraced by conservatives, has come back –in full force. Libertarians and Tea Party people are against US military engagements, limited or open-ended. They do not see any justification in getting American resources committed to foreign mission, except in the extreme cases in which there is a clear and direct threat to US national security.

The whole “Internationalist” idea whereby America as the sole Super Power has global responsibilities, including, as in this case, the responsibility to inflict punishment in case of an egregious transgression of established principles of the laws of warfare, (the use of chemical weapons), is lost on them.

On the left there is an equal number of politicians who piously (and in most cases in a rather disingenuous way) recommend to make our case at the United Nations’ Security Council, knowing full well that nothing will be done there, on account of Russian and Chinese vetoes and guaranteed obstruction.

A bad idea

Given all this, all told, this idea of striking against Syria looks pretty stupid. America would have to act alone, with limited and tepid international backing, and with American public opinion strongly leaning against any military action.

Sadly, these are the facts. Still, having gone this far promising retribution for an action that is beyond dispute, (in other words we know the facts), there is no way that the Obama administration can retreat now, without a colossal, perhaps terminal, loss of face. If Obama will accept any kind of face-saving political “compromise” that will let Assad go unscathed, it will be almost impossible to re-establish America’s credibility around the world.

The price of inaction

This is what Secretary of State John Kerry said will happen in case America would not act against Syria:

” I’ll tell what will happen. In Pyongyang, in Tehran, in Damascus –folks will stand up and celebrate….In a  lot of other capitals in parts of the world, people will scratch their heads and sign a sort of condolence for the loss of America’s willingness to stand up”.

There you go, our enemies will rejoice, the rest of the world will mourn.  I recognize that “prestige” and “credibility” are intangible. Still, not much will be accomplished by any (once upon a time) Great Nation that lost them.

Assuming Congressional Approval, The US Military Must Deliver A Truly Powerful Blow Against Assad

By Paolo von Schirach

September 4, 2013

WASHINGTON – Regarding Syria and the US appropriate US response to its flagrant violation of every convention banning the use of chemical weapons, The Economist cover says it all: on top of a picture of President Assad the title is “Hit Him Hard“. I fully concur.

Washington hesitation

There is no point reiterating here the rather sorry history of American timidity regarding the Syrian conflict. Many experts believe that Washington missed a golden opportunity to make a difference by providing real military support (without any direct engagement) to the secular pro-Western rebels about a year ago.

Now it is all much more complicated. The anti-Assad front is divided and disorganized. Assad is more confident, counting on the continuing support coming from Russia, Iran and Hezbollah. The rebels appear weak. Moreover, on the side of the rebels there is now a growing and therefore alarming presence of Islamic radicals, some of them with ties to al Qaeda, many of them foreign fighters.

Action in retaliation of the use of banned chemical weapons

Be that as it may, right now the premise for a US military action is ostensibly new and different. America will not intervene in the conflict on the side of the rebels. America will intervene to punish Assad not because he killed untold numbers of Syrians during this conflict but because this time, on August 21, he used banned chemical weapons to murder them.

And what’s the difference? Well the difference is that America will not tolerate the flagrant violation of a century old prohibition. Indeed, if America would let this open violation go unpunished, there would be consequences, mostly bad. Other rogue states, from Iran to North Korea, would read America’s inaction as some kind of green light to go ahead and develop and possibly at a later date use their own weapons of mass destruction. (Yes we are back to discussing WMDs).

Therefore, an American strong reaction to the flagrant use of WMDs by Assad should be viewed by the world as a demonstration of Washington’s resolve to uphold international law and as a warning, (not just to the Damascus government, but to all others who may harbor similar intentions), that additional violations will not be tolerated.

Slowly gearing up

In its (unfortunately) now customary messy fashion, Washington is gearing up to “delivering this message” via missile attacks against Syria. Now Obama has added another major step by requesting congressional approval. There is legitimate concern that such an endorsement of the action proposed by the Obama administration may not be forthcoming. Plenty of people in Congress who are against yet another US military engagement. Still, the indications so far are reasonably reassuring. The House Republicans who on balance are inclined to vote “No” on anything this president sends to them, this time will support Obama. Not all of them, but most of them. John Boehner, the House Speaker, and Eric Cantor, the Majority Leader (both Republicans) came out in support of the President. This is a very good sign.

“Hit Him Hard”

That said, even assuming congressional approval, the real test will be the size and scope of the US military action. This will be the real test of our resolve. America’s credibility is clearly at stake. Indeed, if this is going to be just a symbolic action, a mere “shot across the bow”, then it is a waste of time, possibly an additional embarrassment. Whereas, if this action will result in a truly mighty blow that will truly degrade Assad’s military and place him on the defensive in the ongoing civil war, then the message will have had its intended effect. Assad, the Iranians, Hezbollah, and North Korea will see that we mean business.

As The Economist said: ” Hit Him Hard“. Really, really hard, I might add.

In China Easy Credit Led To High Growth But Also Many Bad Investments – In The Long Run This Is Unsustainable

By Paolo von Schirach

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September 3, 2013

WASHINGTON – I pointed out in a recent piece how China’s still impressive 7.5% rate of growth hides a large amount of poor investment choices that led to high levels of bad debt and insolvent corporations kept alive only by more easy credit provided by state-owned banks (see link above to related piece). Left unchecked, over time this system of easy money to undeserving borrowers leads to a fate quite similar to what befell on Greece: insolvency.

Political loans

Of course China, with its enormous cash reserves and still relatively low levels of debt, is not even near a Greece-like scenario. But some of the dangerous dynamics, such as “political loans” to inefficient state-owned corporations made by complacent state-owned banks are quite similar.  Over time no economy can survive, let alone thrive,  if a growing percentage of its “investments” turn into bad loans.

But how can Chinese banks afford to dole out all this cash? Professor Michael Pettis, Finance Professor at Peking University, provides a very clear explanation in an excellent op-ed piece in The Financial Times (China has a choice – short-term growth or sustainability, September 3, 2013). Quite simply, Chinese state banks can provide extremely easy credit simply because they give almost nothing to depositors.

Mountains of free cash

Essentially, all the Chinese state-owned banks get plenty of cash at almost zero cost from hundreds of millions of depositors who have no other choice. And so they can afford to lend it at extremely favorable rates. And here it gets tricky. In a “normal” market driven environment it would be smart to lend cheap money only to promising enterprises.

But China, whatever its new capitalistic inclinations, is not yet a market economy. And therefore lending decisions are largely political. If the political imperative is “growth”, so that the leadership can show impressive economic ascendance, year after year, then the implicit instruction is to get the money out the door as quickly as possible, so that it will finance any and all projects, good and bad.

Money to friends

It is not very difficult to understand that in this context featuring a “guided economy” largely driven by political, as opposed to economic, priorities a lot if not most of the cash will go to the well connected, as opposed to the most deserving. And this is pretty much what happened.

Hence gigantic, but mostly empty shopping malls dotting China, brand new model cities with no people, way too many luxury apartments built only as investments for speculators, along with factories and steel mills operating way below capacity because of over supply of almost anything. But, thanks to more credit, hardly anybody goes bankrupt in China. And state owned enterprises are totally protected.

Higher interest rates?  

Given this dangerous trend, argues Professor Pettis, it is somewhat encouraging that the Chinese monetary authorities began to phase out this perverse incentive that results in the financing of too many unproductive ventures. Indeed, real interest rates have moved higher, even though in the near term this policy clearly hurts growth.

But Pettis argues that the test is right now. As the Chinese economy is confronted with even slower growth, the temptation is very strong to revive economic activities by cutting interest rates, this way boosting investments. However, the smart thing would be to keep interest rates high, this way making credit more difficult. Tighter credit would favor the most efficient borrowers, while the others would not survive.  

Furthermore, by pursuing this higher interests rates policy, the Chinese authorities would tilt the financial balance in favor of consumers. Indeed, ordinary people would get a higher return on their deposits. The flip side, of course, is that the overall economy would suffer. Without the artificial booster of more easy credit, most likely many weak companies would go under, and many more would be unable to increase production. This would inevitably result in slower growth, further deflating the already questionable myth of an endless Chinese economic miracle. 

More balanced economy; but slower growth

The stakes are very high. As Professor Pettis writes, it will be extremely interesting to see which way the Chinese Government will go: less credit so that only worthy enterprises will survive, or easy money so that this dangerous party will keep going?

I suspect that in the end politics will trump good economic stewardship. Even an illiberal government needs broad-based political support. Beijing is likely to opt for relaxed credit, simply because this will keep more people employed , avoid social unease, and it will buy time.

3 D Printing Will Kill Millions of Jobs – Can We Adjust To This New Era?

WASHINGTON – An excellent  TIME magazine story about robots and automation, (The Robot Economy, September 9, 2013), delivered a clear warning to anybody currently in jobs that consist mostly of fulfilling routine, repetitive tasks: “Find something else to do, in sectors that require personal creativity, and/or the provision of constantly changing personal services, because your current job is about to disappear“. (These are my words).

Most repetitive jobs will disappear 

Indeed, at this stage in the automation revolution, most repetitive tasks, such as stacking a warehouse, or welding auto parts are performed or will soon be performed by robots. The trend is unmistakable. The only unknown variable is the speed of this historic transformation that will largely depend on the sophistication of the new machines and their cost. Clearly, from a social and economic perspective, a slow transition will give people more time to adapt to a new, mostly automated economy.  But this is not something we can control.

Technology replaces human labor

Broadly speaking, there is nothing new in this process of technological innovation . Since the beginning of the industrial revolution in the late 18th Century there has been a relentless “machine replaces human labor” process. Still, until not too long ago, machines favored employment growth. Indeed, they allowed (for the first time in human history) the mass production of consumer goods. This novel large-scale process required a significant amount of human inputs and therefore the use of human labor on factory floors. Thus machines boosted employment. A growing manufacturing sector implied employment growth. Think of the assembly line that allowed to mass produce automobiles.

But now we have come full circle. Assuming that we shall still make large number of cars for decades to come, most of them will be made entirely by robots. No more assembly line workers. At most there will be some super qualified engineers who will monitor from control rooms the work performed by the robots.

3 D Printing: “home manufacturing”

And if we go beyond traditional manufacturing, we see that the scope for enormously disruptive change is potentially much larger. Take 3 D Printing, now still in its infancy. Without getting into too many details, think of a 3 D printer as a mini do-it-yourself manufacturing plant that will soon be able to “make” even sophisticated objects you desire, in your own home.

Right now, if you want to buy a coffee machine, and you do not have much time, you go on-line. You check brands, prices, what’s on sale, and then you place your order, using your credit card. A well oiled logistics chain managed by Amazon or equivalent will receive your order, place your coffee machine in the hands of FedEx, UPS or the Post Office and in a couple of days you get your order, delivered to your door. This system (now common place) is pretty good: user-friendly, cost-effective and reasonably fast.

No more factories, no more FedEx

Well, fast forward to a not so distant day in which when you want a new coffee machine, you buy the software containing the design and the “assembly process” on-line and then you literally “manufacture” your coffee maker at home using your 3 D printer. Same coffee machine, mind you, but obtained via an entirely different process.

And what are the implications of this new process made possible by 3 D printing? Enormous, truly revolutionary and truly scary, if you are in the manufacturing/logistics business.

Right now your coffee machine is probably made in China, because Chinese labor is cheap, and therefore this is the country where small electric appliances are made. Once produced and boxed by the factory, your coffee machine, stacked with many others inside a container, endures a long journey entailing a trip by truck or freight rail to a port. There the container is loaded onto a ship. After having sailed across the Pacific Ocean, your container is unloaded in California. From there it is taken by truck to an Amazon warehouse.

Complex distribution system 

After you placed your order on-line, the Amazon distribution system determines the most efficient way to deliver this item to you. In order to make this happen, they usually partner with a major shipping service, like FedEx or UPS. And so, your coffee machine takes another trip by truck and then by plane. Once unloaded at an airport close to you, it is loaded onto another truck that will deliver it to your door.

This is the best we can do today. And it is cost-effective. You place an order on line, pay by credit card, and soon enough you get a reasonably cheap, made in China, coffee maker, delivered to your door.

Even if you account for the added cost of shipping, warehousing, sorting and delivery, you get a very good deal. And consider the added bonus: you saved time. You did not need to get to a store to buy your item. You just spent some time on-line checking options and prices, until you made your final choice.


Well, think for a moment about the incredibly disruptive consequences of the unfolding 3 D printing “revolution”. No more Chinese factories making coffee makers. This means no more factory jobs. And no more business for the Chinese logistics companies transporting these goods to the nearest port. By the same token, the container ships become scrap metal, while the US logistics network that handles the goods upon arrival is also redundant.

Amazon may survive as a supplier of software. Or it may altogether disappear because the consumer will be able to buy the software for his/her 3 D printer directly from the inventor.

Are we ready?

Now, let’s look at the implications of this unfolding technological revolution. The most obvious is that over time millions of jobs –from manufacturing to logistics– will be lost. This is inevitable and of course scary. If you own a small appliances factory in China you really do not want to see rapid progress in 3 D printing, because you know that this little devilish machine will eventually kill your business.

More broadly, it is obvious that rapid, highly disruptive technological changes create an enormous challenge for political leaders. By and large elected leaders (too many of them lawyers with modest understanding of science, technology or business) are several steps behind technology. American scientists jokingly call this inauspicious state of affairs a huge gap between a “Digital Nation” and Analogue Washington“.

Lack of understanding 

Indeed, because of their lack of understanding of historic trends and because of their short term political calendars, elected leaders rarely look into the future. They are accustomed to respond to the pressures of the organized interests that fight for the preservation of the status quo –meaning existing businesses and existing jobs. And therefore, in the name of economic and social stability, and for the sake of saving jobs, incomes and families the politicians usually engage in rear guard, ultimately losing battles aimed at preserving the economic interests of their constituents. The net effect of these battles usually is to delay unavoidable change.

Unprepared policy-makers

That said, it would be very hard for any politician to run on a platform of technological change that will imply large-scale jobs destruction. Human beings like change. But only up to a point.

And if change implies the loss of their livelihood, then it is a catastrophe. The problem about capitalism “creative destruction” is that it is hard to anticipate which new sectors my be created after the destruction of the old ones.

Indeed, what if there will be no new sectors? Or what if the new sectors will require just very few people? What will all the others do?

However, one thing we do know. The era in which people with even a modest education could still find factory/clerical jobs with decent union wages is over. Going forward, we know that any repetitive task –in industry or services– can and therefore will be automated.

It is just a question of time.

Opportunities only for creative people

Furthermore, truly disruptive technologies will not just automate certain tasks; they will cause the total disappearance of manufacturing sectors and of all the logistical services that have been created mostly to support them.  And what is the alternative? Professions that require personal creativity.

Well, fine; but how many screen writers, marine biologists, cancer researchers, fashion designers, actors, singers, musicians, investigative reporters, yoga instructors, personal shoppers, architects, CEOs and deal makers will the world need? And what will all the others do?

We better start thinking. While many will not like any of it, a world with fewer and fewer conventional employment  opportunities is in our future.