A Made In China Global Recession?

WASHINGTON – After the disastrous 2008 global financial crisis triggered by crazy speculation in the US, the world has enjoyed several years of steady, if modest, growth. However, If history is any guidance, we are due to have another recession in the near future.

China’s recession

But this time it will not be engineered in the West. According to Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, and the author of “Breakout Nations: In Pursuit of the Next Economic Miracles” (Norton, 2012), the next crisis will come from China. In a well crafted op-ed piece Sharma explains why. (A Global Recession May Be Brewing in China, The Wall Street Journal, August 17, 2015)

Abnormal growth 

The fact is that China’s growth since the 2008 crisis has been abnormal. It has been fueled by enormous amounts of debt, all of it accumulated at unprecedented speed in just a few years. As Sharma put it:

“The problem is that China’s economic rise of late has been facilitated by a massive and unsustainable stimulus campaign. No emerging nation in recorded history has ever tacked on debt at such a furious pace as China has since 2008, and a rapid increase in debt is the single most reliable predictor of economic slowdowns and financial crisis. China’s debt as a share of its economy increased by 80 percentage points between 2008 and 2013 and currently stands at around 300%, with no sign of abating.  [Bold added]. Beijing policy makers have been trying to sustain an unrealistic and randomly selected growth target of 7% by steering cheap loans into one bubble after another—first housing, most recently the stock market—only to see each bubble collapse”.

No easy fix 

And there are no easy ways to fix this problem. The recent currency devaluation may help Chinese exporters. But most experts agree that this move looks like yet another attempt to “do something” to support the economy, as opposed to a component of a well crafted strategy.

China’s slow down (Sharma estimates that real GDP growth is about 5%, much lower than the official 7% figure), dragged down all the commodities exporters (including Australia, Brazil and South Africa) which benefited greatly from China’s incredible, debt-funded, infrastructure and construction boom. These countries are now doing poorly, in large part because they have lost their main revenue source.

America is limping along, with 2% growth. Europe is lucky to be in positive territory. Still, many of Germany’s exporters are hurt by China’s slowdown because this means fewer exports.

The next recession 

According to Sharma, the outlook for the global economy is not very good. And a further decline in China may trigger another recession.

“This quarter there is little evidence to suggest that the global economy is breaking out of its first-half rut, with growth still stuck in the 2%-2.5% corridor –continues Sharma. “This means that the world is one shock away from recession. A debt-laden China is now the critical link, and another one or two-percentage point decline in its growth rate could provide that shock. The currency devaluation last week, coming after a string of increasingly desperate and ineffective stimulus measures, added to the sense that the critical link is weak indeed”. 

Cautionary tale

Well, Sharma’s prediction may or may not be accurate. But here is the cautionary tale.

Until not too long ago, half the world, including leading Western pundits, extolled the well-crafted and disciplined Chinese investment-driven model. Some argued that may be the smart Chinese technocrats (a blend of re-engineered socialists spiced with updated Confucianism) had really “invented” a new economic model. They had created a new formula that could deliver 10% growth for ever.

Well, it is not so; not by a long shot.

Mostly cheap labor 

China did extremely well by managing with skill unique (and almost by definition temporary) advantages. They had tens of millions of newly minted factory workers willing to toil, (for long hours and almost no benefits), for wages that were a fraction of their Western counterparts’.

This inherent labor cost advantage created a massive shift of manufacturing activities to China. But cheap labor is far less significant today. Chinese wages have been going up, while automation is diminishing the relevance of labor costs.

Construction boom

Anyway, having exhausted their real advantages, the Chinese leaders, in a desperate attempt to sustain their economy, created a new fantasy world of debt funded growth. They built everything, everywhere, on a massive scale, triggering absurd levels of over production in all sectors that support the construction industry. And now the bubble has been burst.

Of course, there is another option for China. And this would consist in fostering an innovation friendly economy in which future growth would be the result of proprietary, made in China, inventions.


But innovation requires freedom. And this is why the Chinese leaders are not going to pursue that route. Therefore, with or without a China-triggered global recession, expect China to settle on a 4 to 5% developing country rate of growth.

Not so bad, after all. But hardly inspiring.

The Appeal Of Easy Fixes

WASHINGTON – There is great appeal in fundamental beliefs that can be summarized in short sentences. The problem is that some beliefs are better than others, while some are wrong and possibly dangerous. Choosing among them requires judgement.

Good ideas 

For instance, here is how the British magazine The Economist describes itself and its mission. “We are proud of our heritage of editorial and commercial independence, serving no master save the liberal credo of open markets and individual freedom”.

So, there you have it: The Economist’s purpose is all about promoting “open markets and individual freedom”. In a simple proposition you have the essence of the mission: support democratic capitalistic societies in which the protection of individual freedom is the foundation for the pursuit of prosperity.

While many argue against these beliefs, more than two centuries of success in America and other capitalistic countries validate these tenets. Yes, as a rule, free people who are allowed to keep the fruits of their ingenuity tend to engage in new ventures made possible by free markets. Their combined efforts usually bring prosperity to them and to their societies. On balance, the promotion of “open markets and individual freedom” is a worthy cause.

But then there are other beliefs, also expressed in succinct form, that do not support anything useful.

“I can negotiate a better deal” 

Republican presidential candidate Donald Trump argues that America is losing ground internationally because our leaders are “stupid” and are therefore outwitted by clever foreign negotiators. The remedy to this? Simple, elect Trump and he will renegotiate everything, with far better outcomes. Well, that’s an easy solution for our chronic balance of payments shortfalls.

Except that Trump’s way to frame the issue and the solution is wrong. Sure we could use better negotiators. And may be he could be better than most. But in the end the problem is not just about getting a better deal at the negotiating table. The problem is about American global competitiveness, or lack thereof. This is the issue. And there are no quick fixes that President Trump could mandate.

Improve the business environment 

America must address an outdated corporate tax system, patent laws that inhibit innovation, excessive environmental protection regulations, the declining quality of our work force, the mediocrity of the public education system that produces it, the excessive cost of child care and how it impacts women’s participation in the work force. All this is very important, and quite complicated. Improving all this is essential in order to make America strong. And addressing all these issues will require a lot more than a clever negotiator determined to get a better deal from China.

“Black Lives Matter”

Then you have the “Black Lives Matter” grass-roots movement. This has been prompted by what many describe as a surge of racially motivated killings of innocent Blacks by biased White police officers.

All of a sudden, the key issue confronting millions of African-Americans is reforming police departments across America in order to stop the carnage. There are some elements of truths in all this. Yes, there have been several cases of police brutality and killings, some of them apparently stemming from racial animus. This is a fact. And this problem needs to be fixed. Police officers should be charged and prosecuted. All racist officers should be expelled.

The real problem 

That said, this focus on police brutality has become a form of escapism. A few unjustified police killings are bad. But the thousands of “Black on Black” killings that take place every year in so many American cities are a lot worse. And yet they are dismissed as a non issue by most African-American leaders. It would appear that only the lives of Blacks killed by White police officers, (a very small fraction of the total number of Blacks killed), matter.

In all this, not even a word about the crisis of the African-American family. Indeed, what about the future of Black children? More than 70% of all Black babies are born out-of-wedlock. In most cases their mothers are very young, uneducated and poor.

Many studies show that young, indigent single mothers cannot provide for their children. Therefore, these kids will be raised in poverty, with some public assistance. They will not have a decent (let alone good or superior) education. In fact, a huge percentage will never graduate from high school. Most of them will be poor. Many will choose crime as a way to escape poverty.

These are the real problems. But it is a lot easier to believe that the number one issue affecting African-Americans is police brutality.

“Income inequality” 

And then you have Democratic presidential candidate Bernie Sanders and his income equality crusade. According to him (and tens of thousands of enthusiastic followers) most Americans get a raw deal because a few clever people gamed the system. They managed to take almost everything off the table before tens of millions of honest workers could even begin to figure out what actually happened. Remedy? Redistribute these ill-gotten gains in a fair way. Spread the wealth. Sounds simple, and morally right.

It all sounds reasonable. And it allows the poor and the not so well off to dream of a benign President Sanders who will give them free money. But it is not so. Sadly, this is another pipe dream concocted by an old left-wing politician who calls himself a socialist.

Well, aside from the fact that Bernie Sanders has slim chances of becoming the next US President, this whole income inequality crusade is a gigantic distraction. Sure enough, we could and probably should debate the problem of inequality.

Low growth 

But the real issue confronting the US is that the great engine that powered the American economy is sputtering. We do not grow that much anymore (around 2%), and therefore there is far less wealth produced.

Redistributing what we have according to fairness principles sounds appealing; but, even assuming that it could be done without damaging the entire system, this economic justice policy will not even begin to address the loss of momentum due to lost competitiveness.

The point is that even if we decided to tax to death each and every American millionaire, that would not solve the problem of a slow economy that has lost momentum. Major income redistribution is a one time deal. What will President Sanders do to grow the economy, later on? This is the issue. (As Sanders is a socialist, he may recall that Karl Marx himself pointed out that Socialism should not be about the socialization of poverty).

Most easy fixes are wrong 

So, there you have it. People love easy answers to complicated problems. In a political campaign those who claim to know the right answers –and who act as if they really did know– get a lot of attention.

Unfortunately, they are mostly wrong. It is up to rational, reasonably well-informed voters to know the difference between plausible policy programs and feel good slogans.



UK Cannot Exploit Its Shale Gas Reserves

WASHINGTON – The US is enjoying the immense economic benefits of the hydraulic fracturing (“fracking”) revolution that made it possible to exploit previously untapped vast shale gas and shale oil reserves. The energy extracted from these enormous “unconventional” shale deposits has transformed the American, and indeed the world energy outlook.

Hemispheric Energy Security

From the standpoint of “Hemispheric Energy Security” North America is almost totally energy independent. If you add imports from Canada and Mexico to the increased US supply, we are almost there. While the US still buys some oil from OPEC countries and other producers, most of its supplies now come from within North America. This transformation has and will have significant geopolitical implications.

More shale across the globe

That said, it is important to note that there are immense shale reserves across the globe. Plenty of shale gas in China, Argentina and elsewhere. Therefore, is it reasonable to expect that the fracking revolution that began in the US will continue in other countries, following the American example?

In principle, yes. But it is unlikely that shale development will move at the same pace. In part this has to do with geography and geology. For instance, it seems that many Chinese shale deposits are located in hard to reach, less developed North Western regions. Getting there is complicated. Extracting shale gas will be difficult, because these arid regions lack the large amounts of water necessary for fracking operations. Finally, moving natural gas from there to the densely populated Eastern regions will require the construction of expensive new pipelines.

Bad politics, bad rules 

That said, geography is not the only obstacle. Take Great Britain, for example. It appears that there is plenty of shale gas in the UK. But almost nothing has been done to exploit it. And this is essentially for two reasons.

Reason one is that the country is a prisoner of an environmentalist culture that fabricated and disseminated lies and distortions about the “dangers of fracking”. Untrue stories (created by US environmentalists) of fracking disasters, plus alleged clear threats to water and soil, are used in the UK to make the case that Britain must avoid this environmental calamity by banning fracking.

Ideological prejudice 

Well, guess what, none of this is true. If energy companies follow, as they should, proper protocols and procedures, fracking is safe. This is the evidence gathered over many years of fracking in Texas, Pennsylvania, Louisiana, Oklahoma, Ohio, West Virginia, Colorado and other states . Thousands of wells have been safely drilled in the US. A major report just released by the US Environmental Protection Agency, EPA, (no friend of the US fossil fuels industry), indicates this much. But this reassuring evidence does not matter.

Environmentalism is now akin to a religion. It is based on beliefs, not facts. The UK anti-fracking crowd will continue to oppose drilling no matter what the evidence gathered after more than a decade of shale oil and gas exploitation in the US says. Needless to say, this vocal and well-organized political opposition is a huge impediment. They will vote for local officials opposed to fracking. They will disrupt operations of energy companies.

Bad rules 

Reason two. In the US the fracking industry advanced rather fast because the legal and regulatory framework (state and federal) allows speedy action. Needless to say, in the US energy companies have to obtain permits, comply with state safety and environmental rules, and more. However, in general these are sensible regulations that have been created to establish and uphold reasonable safety and environmental standards, and not with the intent to block the energy industry in general, or fracking in particular.

But the real incentive is that shale gas exploitation is a true economic win-win proposition in America. And this is because in the US land ownership includes ownership of the mineral rights. In other words, a Pennsylvania farmer owns the shale gas deposits that exist under the surface of his or her land. And this means that by leasing his or her land to an energy company he or she will get rich, possibly very rich.

No such economic incentive exists in the UK. In Great Britain, the state, and not the land owner, has the mineral rights. This being the case, beyond the energy companies that see a profit opportunity, there is no natural constituency favoring fracking, while there are large environmentalist groups that loudly oppose it, (see above).

The UK Government is aware of this. It has created new incentives by mandating that the counties and localities that will allow fracking on their land will get some of the proceeds. This may be a good attempt to create pro-shale development constituencies. We shall see.

In the US land owners benefit

But nothing beats the obvious direct interest of the individual American land owner who welcomes the energy companies interested in drilling on his or her land because he or she stands to gain from fracking.

Pro-business laws make a huge difference

What’s the point of all this? The point is that mastery of the new technology and favorable geology are only half the story. Whether we are talking about fracking or some other industry, a key variable is having a pro-business legal and regulatory environment.

Look at the UK. This is a modern, capitalistic country that really needs more domestic energy. Well, luck has it that there is plenty of shale gas under its soil.

And yet it cannot be extracted because of a nasty combination of ideological prejudice and bad laws that do not help the development of the domestic energy industry.





Lift The US Oil Export Ban

WASHINGTON – At the time of the first OPEC oil embargo (1973-74), in an attempt to protect shrinking domestic oil supplies, the US Government passed a law that forbids exporting American crude oil. 

Plenty of oil

Whatever the merit of that policy, now –40 years later– we are in a totally different environment. While in the 1970s we feared shortages, now the world has plenty of new supply.

And we know that America increased its production, in a major way. Time to do away with the export ban? Not so fast, some argue. Even though we are producing a lot more oil, we are still a major net oil importer. It makes no sense to export oil when we are importing it.

This argument would make perfect sense, but only if any oil, regardless of its origin, were essentially the same. But we know that there are different types of oil.

Lift the export ban

And this is why it would make sense to lift the export ban. Many have spoken on this issue, including MIT Professor John Deutch, a highly respected energy expert with a distinguished public service record. (Amplify the Oil boom by Liberating US Exports, The Wall Street Journal, August 12, 2015).

Here are the facts. America now produces a lot more oil. However, much of the additional supply (coming mostly from shale deposits in North Dakota), is light crude. Nothing wrong with that. Except that most US refineries are designed to process heavy crude. For this reason it is more difficult for US shale producers to sell their product domestically. In many instances they are forced to sell at a discount.

If the same shale oil producers were free to sell internationally, they would get better prices from buyers in other countries whose refineries are designed to process light crude.

Buy heavy crude from Canada 

Well, and what about America? If we sell abroad, then we lose some of this additional supply. This means that we shall have to import more. Yes, this is true.

But there is a solution to this. There are enormous quantities of heavy oil in Western Canada. (in fact Canada has the third largest proven oil reserves in the world, surpassed only by Venezuela and Saudi Arabia). Of course, we already import quite a bit of this Canadian crude.

But we could get more, a lot more.

If we built the proposed Keystone pipeline, it would carry much more Canadian crude all the way down to Texas. The Texas refineries are designed to process heavy crude.

Open energy markets 

This way, by opening up different avenues for different types of crude, each one would get to its optimal destination.

This sounds reasonable. But it is very difficult to do, mostly for political reasons. Lifting the oil export ban may be a bit easier. There seems to be a bipartisan coalition in the making in the US Congress that would have enough votes to pass a new law that would repeal the export ban. This is hardly a done deal, but it looks possible.

Keystone pipeline blocked 

Unfortunately, the Keystone pipeline project is blocked, at least until Barack Obama is US President. Indeed, just like exporting US oil, getting more oil from Canada is not based on market forces, old-fashioned demand and supply. Creating this channel for additional supplies of Canadian oil is entirely contingent on President Obama approving the Keystone pipeline. And he will not do this.

Mind you, this pipeline project has been reviewed, assessed, and vetted a million times by the US State Department, the agency technically in charge because this is a pipeline that will go across the Canada-USA frontier. Armies of experts who worked on this for many years could not find any flaws with this project.

Energy policy dictated by ideological prejudice 

But President Obama will not approve it, simply because powerful US environmental groups are opposed to it, as a matter of principle.

They just do not like any new infrastructure that will lead to any oil consumption increase, foreign or domestic. In other words, it is all about ideological prejudice.

Sadly, this is how we craft the energy policy for the most important economic power in the world.

Capitalism In Peril?

WASHINGTON – In a well crafted WSJ op-piece (The World-Wide Undermining of Free Markets, August 11, 2015), financial adviser Romain Hatchuel points out some worrisome truths. Western policy-makers, monetary authorities in the lead, have pursued policies that have undermined the foundations of capitalism.

Years of ZIRP 

This is what central bankers have done. Many years of zero per cent interest rates, (ZIRP, for Zero Interest Rate Policy), plus massive asset purchases and quantitative easing have created a dangerous new environment. As a result of easy money, the price of many assets has been inflated. Current high stock market valuations are false, in as much as they are largely the outcome of stimulative policies that made cheap money available to investors, while traditional savings vehicles are out, because of the prolonged zero per cent interest policies pursued by all major central banks.

China manipulates markets 

At one extreme, you have China. Obviously China is not a capitalist market economy. But, according to its apologists and many admirers it is well on its way to become one. Really?

Most recently the Chinese authorities prevented a stock market meltdown by suspending trades, distributing essentially free cash to stock brokers so that they would buy shares and forcing share holders to hold on to their stocks. All this, of course, with the noble objective of preventing major losses for millions of improvident investors.

Still, be that as it may, all of the above indicates that China does not have –and has no immediate plans to create– real capital markets in which buyers and sellers freely determine share prices. It is all manipulated.

Inflated stock prices 

But what about the rest of the world? We used to have real capital markets. Well, we do not have Chinese extremes, but we are getting there. Fed mandated ZIRP has created a bubble. So much so that every time a credible rumor of any type of Federal Reserve rate hike comes out, investors reflexively sell stocks.

Why is that?

Very simple. Because most of them know that they are holding stock portfolios whose value is artificially inflated by the Fed’s zero per cent interest policy that has been kept in place for 6 years, that is well after the end of the 2008 Financial Crisis. Therefore, it makes sense to believe that if and when rates go back to normal stock prices will go down because the artificial incentives to buy expensive stocks will vanish.

So, Wall Street may be not the Shanghai Stock Market, but in both of them transactions are heavily affected by non market factors that support or inflate share prices.

Unaffordable entitlements 

At a different level, what about large and growing fiscal imbalances? It is amazing to notice that by and large there is almost total indifference vis-a-vis large fiscal deficits that over time caused the additional growth of an already immense national debt in Japan, Europe and the US.

Large fiscal deficits are largely caused by unsustainable entitlement programs designed in a different era, with different cost structures and different demographic trends.

No reform 

To put it simply, these programs now cost too much. But instead of dealing squarely with the issues and devising sensible ways to reform the programs, this way making them sustainable, elected leaders prefer to side step the politically thorny decision to reduce benefits. They decided to finance the same, essentially unchanged, programs through more and more debt.

Japan’s debt 

Japan is leading the way. This once energetic economy now has a national debt equal to 240% of GDP. This is astonishing. What this means is that, even with a Japanese version of ZIRP currently in place, almost half the country’s total revenue has to be devoted to debt service. This means that Japan has to divert scarce capital from investments to paying interest on this monumental debt.

And yet, all seems normal in Tokyo. Nobody talks about this absurd level of debt as an emergency that requires drastic action.

Issue ignored in Washington 

Well, move to Washington and, while the numbers are less frightening, we have the same complacency. It is implicitly understood by almost all candidates for national office, (we have a presidential campaign underway), that even talking about entitlement reform is political suicide.

Social Security, Medicare and Medicaid (these are the big entitlements) are essentially untouchable. And this is folly. The costs of these entitlements will inevitably go up. The baby boomers are retiring. The active population that pays into the system is shrinking. This is like watching a train wreck in slow motion. We know exactly what is going to happen.

Much more can be said about the damage caused to business creation by heavy corporate taxes and absurd regulations. Taken altogether, the outcome of the policy mix is highly toxic. We have fake money that causes inflated asset prices. Unstoppable entitlement spending that is destroying public finances, and excessive regulations that are choking enterprise.

Messy capitalism 

Here is my conclusion. Markets are hardly perfect. Capitalism is a messy and often wasteful system. The 2008 Great Recession is illustrative of what can happen when investments turn into crazy speculation, while people keep buying over inflated assets (and fake securitized mortgages) with the certainty that prices will never go down.

Bad remedies

Yes, 2008 and its aftermath was a horrible show of human folly. And yet the cure may be even worse. Public policy has created a new false semi-prosperity, in the context of sluggish economic growth. Asset prices are once again inflated. Millions of people keep get unaffordable benefits financed through soon to be unsustainable debt.

And politicians keep offering more free goodies. There is a little bit for every one. Higher minimum wage. A policy that in practice amounts to debt forgiveness for student loans. More categories of workers entitled to over time compensation. More food stamps for low-income people. And subsidized heath services for millions through Obamacare. In all this, the Democrats propose redistributive tax measures so that more wealth will be transferred to the poor and to the lower middle class.

Drifting away from capitalism 

I fully concur with what Hatchuel wrote in his WSJ op-ed piece about America slowly drifting away from its capitalistic roots. Indeed, current policies largely focused on support and subsidies, while they  ignore the need to promote economic growth, have slowly eroded the fundamentals of free market capitalism.

The way it used to be 

It used to be the case that you would get ahead in America mostly because you were part of the productive, money-making sectors of the economy. You got rich because you produced wealth, and not because you were part of a protected class.

As I said, the capitalistic system is most imperfect. It is prone to excess and speculative frenzy, while even seasoned players make gigantic errors. But I have yet to see a better alternative.

The idea that savvy policy-makers can successfully manage markets, and grow the economy, so that we can all prosper within a fine-tuned system is a complete absurdity. Many failed experiments –from Fascism to Communism to Social-Democracy– amply demonstrate this assertion.

Kenya Held Back By Lack Of Accountability, Corruption

WASHINGTON – According to a BBC story, only 26% of money spent and collected by the Kenyan government has been fully approved in an audit for 2013-2014. Kenya’s auditor-general, whose report covered an annual budget of about $16 billion said there were “disturbing problems” in government’s accounting.

Spending with no justification 

The recently released report indicated that there are “still persistent and disturbing problems in collection and accounting for revenue”. According to the auditor-general, about 16% of all government accounts data is “misleading”, a polite way to say that several government agencies release to the public a great deal of false information aimed at hiding graft, embezzlement and worse.

False payrolls 

The BBC indicates that “Among the numerous items being questioned [by the report] are empty office spaces paid by the police and 32 faulty armored vehicles for the military. The health department’s accounts were particularly worrying as they failed to account for 22 billion Kenyan shillings ($216 million) worth of spending, the report said. The auditor-general also noted that $2 billion had been transferred to an offshore account, against regulations”….”When the authorities started biometrically registering all civil servants in 2014 they found more than 12,000 false names in the government’s payroll.”

Only 1.2% of total spending properly documented 

A WSJ story on the same topic notes that, according to same auditor-general’s report, only 1.2% of all Kenyan government spending is properly accounted for. About half is murky, while a quarter lacks any documentation.

There you go. 25% of the entire state spending cannot be justified.

Notwithstanding all this, Kenya is held up by the IMF and other multilateral institutions as one of Africa’s important success stories. An example to be followed by others. Many point out its IT companies and its successful M-Pesa mobile phone based payment system, used by millions.

Too much corruption 

And yet Kenya is ranked among the world’s most corrupt countries. It came 145 out of 174 nations on the Transparency International’s Global Corruption Perception Index.

President Uhuru Kenyatta tried to get rid of or punish corrupt officials. In March 2015 four cabinet ministers and other high-ranking officials have been suspended.

Obviously this is not enough.


A New President Who Knows Nothing About Foreign Policy?

WASHINGTON – The recent Cleveland debates featuring all 17 Republicans who want to be president revealed that within this vast array of mostly professional politicians, there are only a couple with some international affairs knowledge, and no one with real, hands on, experience.

Governors make good Presidents

For sure we have a sizable number of Governors and former Governors who are running. Here is the long list: Scott Walker from Wisconsin, John Kasich from Ohio, Chris Christie from New Jersey, Bobby Jindal from Louisiana, Jeb Bush from Florida, Jim Gilmore from Virginia, George Pataki from New York, Mike Huckabee from Arkansas. And this is good, (at least we hope so).

The conventional wisdom is that good Governors are potentially good Presidents. After all, they do most of the things that Presidents do, albeit on a smaller scale.

They are states’ CEOs. They run things. They are responsible for large budgets. They have to create coalitions. They have to prioritize and lead in order to promote the economy, business creation, employment, education, and general welfare.

No foreign affairs experience 

However, Governors have almost nothing to do with foreign and security matters. At best, some of them are involved in some limited international economic and trade issues, such as investment and export promotion.

And so, here is the picture. If any of these 17 GOP candidates gets into the White House, America will be led by a President who has practically zero experience in international and security matters. This is not good. (I should mention that Senator Lindsey Graham from South Carolina is a defense and security issues expert. However, his chances of getting the GOP nomination are extremely low).

In this respect, at least looking at formal credentials, Hillary Clinton, the likely Democratic Party nominee, looks a lot better. She has been Secretary of State for 4 years. Prior to that, as Senator from New York, Clinton served on the prestigious Armed Services Committee.

Nobody focused on this weakness

Well, be that as it may, nobody pointed out this huge weakness of total inexperience in a crucial area. The issue of foreign affairs competence does not even come up in any analysis of the GOP candidates.

In fact, it looks as if nobody really cares about this huge shortcoming. Within the Cleveland main debate, (featuring the 10 top candidates), there was only little time devoted to foreign policy. And the few questions that were asked focused entirely on current affairs: Iran, ISIL and Putin’s Russia.

Europe and Japan, America’s key post-war allies, were not even mentioned. Nothing specific about the rise of China. Nothing about major international trade negotiations. Nothing on the impact of globalization on the US economy. Nothing about large emerging countries such as Brazil or Indonesia. Nothing about relations with the Arab world. Nothing about the future of US-Israel relations.

A new President who knows nothing about foreign policy 

So, here is the thing. Assuming a Republican victory, America may get (I hope) a competent, “let’s-get-things-done”, former or sitting Governor as Chief Executive.

But this new President, even if he is excellent on domestic issues, will be totally clueless about US foreign policy. He will have no intuitive understanding about the national interest and how best to protect it. And he will be unknown in the rest of the world.

Given all this, most likely he will depend upon the advise of experts whose judgement is often clouded by ideological agendas.

Please remember the Iraq disaster ordered by former Texas Governor George W. Bush. Bush was another state CEO who came into the White House knowing practically nothing about the world.

Because of his ignorance, he relied on the supposedly sophisticated insights of the neo-cons who had a dream about creating democracy in Iraq. And so he ordered an invasion, and spent close to US $ 1 trillion trying to make Iraq into a modern democracy. The whole enterprise was and is a gigantic failure, due mostly to gigantic bad judgment.

Who will be in charge? 

This being the case, let’s hope that the next President, lacking any substantive understanding about foreign and security affairs, will have the common sense of picking level-headed people to run the Pentagon and the State Department, and a sensible professional as National Security Adviser.

If he picks ideologues with agendas, then we are in deep trouble.

In America Politics Is Theater

WASHINGTON – Along with 24 million Americans, I watched the TV debate organized by Fox News in Cleveland, Ohio featuring the top 10 (in terms of popularity in opinion polls) Republican presidential contenders.

Donald Trump

Of course everybody wanted to see how Donald Trump, a successful real estate developer turned into most unorthodox political candidate, would do. He came to the debate leading in all the national polls, by a wide margin.

Well, I thought that his participation was a positively deplorable spectacle.

Trump did not surprise me. He was essentially himself. Boisterous, grandstanding, and gratuitously offensive. Besides, he made several outlandish statements about what he would do as President, without any explanation whatsoever as to how he would accomplish any of this. Not to mention his unapologetic admission about having donated  money to politicians in the past (mostly Democrats), so that they would do for him all he asked them to do. So, he says he “bought” politicians, and he is proud of it.

It was theater 

In other words, he gave a performance. It was theater. Nothing to do with engaging in a serious debate. And yet, the day after the Cleveland event the media commentary was all about conjectures as to how this colorful show most likely will help Trump in the polls.

This is unbelievable. How could this spectacle help anybody who is running for President? Look, Trump is a successful businessman, (no question about that). And in America we respect success.

However, his business talent mixed with his bizarre personality does not translate well into the national political/policy-making arena. His debate performance, while perhaps entertaining, certainly did not indicate that he has the knowledge, the rationality and the poise that I would like to see in a good President.

Millions of Americans like Trump 

But here is the thing. Millions of Americans actually like Trump precisely because of his boisterous, irreverent and, to say the least, inelegant style. The fact is that a sizable chunk of the American electorate wants to be entertained, in fact enthralled, by a man “with real guts”. These voters really like a would-be President who says, actually shouts, that all his competitors are weak and stupid, and therefore cannot get anything done.

For them, this is really refreshing! “Tell them like it is, Donald!”, “We are sick and tired of professional politicians who talk a lot and deliver nothing”. These fans think of Donald Trump like Clint Eastwood playing the tough cowboy who rides into a town run by the bad guys and methodically kills them all.

Except that this is real life, not a movie.

“Throw the rascals out”

I do not know what to say. In fairness, it is hard to praise the political status quo.

It is true that gridlocked Washington, run mostly by mediocrities and now paralyzed by partisan rancor, offers a sad spectacle of immobility; while the country needs urgent action on many fronts: fiscal policies, entitlements, taxation, and education.

Because of all this, the old, if simplistic, American “solution” of “throwing all the rascals out” sounds very appealing, at least to some. And Trump presents himself as the guy who will actually throw the rascals out. For a sizable number of conservative Americans, (for the moment, at least), he is the savior we desperately need.

Indeed, for them Trump is the tough and experienced pro who will come in and fix things, in no time. After all, he has done well in his real estate business. So, why can’t he do the same in Washington? He will go in, fire all the bad people, promote the few good ones, and finally get things done. Simple, no?


Yes, great idea. Except that it is impossible.

Even assuming that Trump had an elaborate and credible policy agenda, (and he does not, at least not yet), the idea that any President can implement his or her program by first offending almost everybody he would have to work with is a bit unrealistic.

Yes, it is true that Washington has become exceedingly, in fact absurdly, complicated. There is the executive branch centered in the White House, and then two very independent and very petulant branches of Congress, with a myriad of committees and subcommittees sometimes run by overly ambitious, media hungry chairmen. These committees have subpoena powers. And they can call any member of the administration to testify under oath on practically anything. And any member of the Senate has the power to delay or block almost any presidential appointment. In practical terms, this means that in this system it is extremely easy to delay, block or derail almost anything.

And then there is a gigantic federal bureaucracy. Finally, this unwieldy blob is kept together by tons of often incomprehensible federal legislation, a good mix of executive orders that are in fact new laws in disguise, and trainloads of regulations.

A President needs to forge and lead a coalition 

This is hardly an ideal setting for any President who wants to govern. However, the problem is that this is how things are today.

Which is to say that a good President would need good ideas, and will power, for sure. But he or she would also need to forge and keep together a broad-based coalition, with many, many true allies who will help him or her move anything forward.

I can hardly believe that President Trump would have a lot of people in his corner, since he has already offended most of the actual and potential players, by calling them incompetent, weak and stupid.

How about the others? 

Well, if Trump appeals to many registered Republicans who will vote in the primaries, how about the others candidates who shared the Cleveland stage with him?

Again, here I am also mystified.

After the debate, I heard sophisticated commentators praise rather cheap appeals to raw emotions uttered by other mediocrities on that stage. “This was good stuff” –they said. Using this “appeal to emotions” metric, Texas Senator Ted Cruz and Florida Senator Marco Rubio are also considered good presidential material. And why? Because they said a few banal things –but they said them with passion. Same about former Arkansas Governor Mike Huckabee.

And so, these otherwise ordinary and truly uninteresting politicians are considered debate “winners” because their radical ideas (Huckabee articulated a truly bizarre idea that should lead to the end of legal abortions), or irrelevant claims (“I was born poor”) were expressed in a way that looked sincere.

More theater

So, here we go again. Back to politics as theater. The made for TV would-be President has to have “empathy”. He has to “connect” with the emotions of his audience. He has to make them believe that “he is one of them”. And if he can do this with a happy mix of ease and gravitas, delivering a few clever lines, with occasional humor, then he is almost there. Delivering entertainment that stirs emotions: this is what we call “presidential” substance, these days. Forget about policy agendas.

All this shows that TV audiences want politics as a gripping spectacle that will mesmerize them, excite them. Never mind the substance. Never mind how plausible or implausible the ideas and policy solutions presented by the candidates are.

The important thing is to articulate anything, including banalities and glaring factual errors, with eloquence and passion. This makes people believe that the candidate is sincere, therefore likable, and therefore electable.

Sadly, this is about all there is to it.

Bush is too ordinary 

The candidate I actually liked, Jeb Bush, did not even get a nod from the critics. The pundits dismissed him. “He did barely OK. The most that we can say in his favor is that he did not embarrass himself. But he did not say anything memorable. If he wants to make an impression and get some real traction with the voters, he has got to show that he has some fire in the belly,”.

Well, I thought that Bush’s quick but clear outline of his achievements as a two term Governor of Florida, one of America’s largest states, was impressive. His record on fiscal responsibility, well above average economic growth, immigration issues and education reform is very good. His goal to grow the economy by 4% as President is difficult, but achievable –showing incidentally that he aims high.

But no, according to the critics, this was only about resume recitation, and boring wonkish blah, blah, blah.

The people like passion and drama 

In the end, nobody cares about fiscal surplus figures and economic growth statistics. Who cares about a former two term Governor who actually did something really substantial  –for 8 years? (By the way, this –a record of real achievements–  also applies to sitting Ohio Governor John Kasich, also a candidate on that same stage).

These days, in a national political campaign substance is irrelevant, in fact, unwanted. We need clever lines, well placed jabs at opponents, and above all an attitude that exudes strength and self-confidence. This –attitude– is what separates a leader from the rest of the pack. This is what people want and what people will remember.

Sadly, it is through this show business process that we shall nominate a candidate for President. We are treating this political contest as if it were the American Idol talent show.

If this is really so, God help us. It would mean that, as a nation, we really lost any connection with reality and rational thinking. Forget about a record of competence and achievement as credentials for the highest office in America. We’d rather have a guy with “fire in the belly”.



End Of The US Recovery?

WASHINGTON – Ultra-contrarian David Stockman (davidstockmanscontracorner.com) is warning us that the tepid economic recovery America has enjoyed so far, modest as it is compared to our historic average, (growth a bit above 2% a year), may be about to end.

Average recoveries 

Indeed, history is on his side. US post war recoveries lasted on average for 61 months. Just a few went much further, but they are the exception. We are now in month 74 of the Obama recovery, significantly above average. How much longer have we got?

Too much debt 

Not much according to Stockman, simply because the US consumer is still over leveraged. Let’s remember that the average American got into the 2008 recession with massive amounts of debt. That load is a bit lighter today, but it has not vanished. Clearly an indebted consumer cannot spend much. And tepid consumer spending means (at best) slow growth in an economy in which consumer spending amounts to more than 70% of GDP.

Lower consumer spending 

As Stockman put it: “The reason for the tepid [consumer spending] trend is not hard to identify. Most households are still not in a position to increase their leverage, and are therefore constrained to spending what they earn…Accordingly, it should come as no surprise that July was the third month in a row in which the average American spent less than they did in the same month a year ago, as recorded in a Gallup Daily consumer spending survey. Indeed, of the seven months in 2015, five have seen a decline in consumer spending year over year.” [emphasis in the original].

Got that? Consumer spending was not that robust to begin with. And now it is actually declining. This does not look good.

Excessive public debt 

More broadly, America as a whole is suffering under the weight of a combined US $ 59 trillion public and private debt. Therefore, do not count on the Federal Government for more stimulus. While the annual deficits are down from the horrific trillion dollar plus of the early Obama years, we are still in the red. In the meantime, Washington accumulated a colossal US $ 18 trillion in total debt. There is just no room for any significant debt-funded spending expansion.

More exports? 

Well, what about exports? Will they save us? Not really. US exports are declining, in part because of a rising dollar that makes US goods more expensive, and in part because the world has been hit by a gigantic wave of Chinese and Asian excess capacity sold at rock bottom prices.

In Stockman’s words: “So what we have now is staggering excess capacity on a planet-wide basis. That means gale force deflation is being propagated outwards from China and its supply base as they desperately attempt to ship materials and goods at any price which will produce positive cash flow after variable costs, and thereby service the towering pyramids of debt that have been erected in the last two decades”.

Glut from China 

Well, colorful language aside, Stockman is probably right. China’s slow down means that the Beijing leadership needs to unload massive amounts of excess capacity into other markets. And we already see the impact of increased amounts of ultra-cheap imported Chinese steel. They are causing economic devastation in the US steel sector.

Given these trends, hard to think of an export-led buoyant recovery going on and on.

In A Speech At The American University Obama Defended Iran Deal

WASHINGTON – On August 5, US President Barack Obama delivered a speech aimed at promoting his Iran nuclear deal at The American University in Washington, DC (just a short walking distance from where I live).  

Get more Democrats on board 

The point of this speech was to increase the support for this agreement among the Democrats in Congress. Right now the numbers do not look good. The Obama administration knows that most Republicans will vote against the agreement. But, in order to eliminate the specter of a veto-proof majority made out of Republicans and some Democrats, it needs a sufficient number of Democrats to be in favor. If Congress would have a veto-proof majority against adoption, the US would in fact reject the deal, this way embarrassing Obama.

Analogy with JFK speech? 

Hence the American University speech. The venue has been chosen because it was at the same American University that President John F. Kennedy on June 10, 1963 (52 year ago) gave a landmark speech in defense of arms control negotiations with the Soviet Union. Obama tried to point out that if JFK could engage the Soviet Union at the height of the Cold War, America can do the same with Iran today.

I am not sure how this attempt at creating a cogent historic analogy with earlier chapters of the US nuclear weapons negotiations history worked out. Obama chose the same venue selected by JFK in 1963. He quoted from that famous Commencement Address by JFK several times during his speech. Still, I very much doubt that most Americans –today– will be able to see the connection between US-Soviet relations 50 years ago and current US-Iran relations. US-Soviet arms control negotiations covering arcane subjects –negotiations that took place more than two generations ago– are ancient history for most Americans.

Nothing new 

Beyond this long-shot attempt to link Obama’s foreign and security policies to eternally revered (and Democratic Party icon) President Kennedy, the American University address did not reveal anything new. Obama defended the deal negotiated by Secretary of State John Kerry, and pointed out that his loud critics have yet to come with any alternative.

Obama’s central point is that this agreement prevents Iran from obtaining a nuclear weapon. Even the proponents of a hard line recognize that any bombing campaign targeting Iranian nuclear facilities would at best delay Iran’s nuclear program. Therefore, argues the President, this deal is better than any military action.

Will this work? 

Will Obama’s (Kennedy-like?) address sway some of the reluctant Democrats? Will his veto be sustained? Will his policy “win”? This is important. But, at this stage, it is mostly a US domestic politics issue.

Here is the thing. Whatever the Republicans (aided by some Democrats) in the US Congress say, as far as the world is concerned, clearly “this is a done deal”. The UN Security Council endorsed it, unanimously. The European Union (28 countries) loves it because it is a precondition for going back to business with Iran. China and Russia are in favor, and so on.

Even if the US Congress rejects it  with a veto-proof majority, (because Obama lost support among some Democrats), what difference does it make in the real world?

Can anyone really believe that America, all by itself, will keep the sanctions against Iran –for ever? It is obvious that economic sanctions have a chance of working only if most countries enforce them.

The deal will not be renegotiated

In the end, no matter what happens to the agreement in the US Congress, this nuclear agreement train left the station. The entire world wants peace with Iran. And if “peace” means accepting an agreement that is mostly wishful thinking, (in as much as it is unenforceable), so be it. If this means accepting a stronger Iran in the Region, so be it. Renault, Siemens, ENI, Airbus and Total are keen on new business deals.

Quite frankly even if all Republicans (joined by a few Democrats) in Congress keep chanting that this a “bad deal”, they are in no position to force, not just Obama, but the entire international community, to change course so that we can get a better deal.