US Troops In Syria?

WASHINGTON – What do we make of the announcement by the Obama administration about its decision to send about 50 US Special Operations troops into Northern Syria? Is this part of a larger strategy? Is America about to get serious in its declared fight against ISIL?

No strategy 

I would not count on any of this. Quite frankly, it is hard to detect any US strategy. When President Assad reacted violently against any political dissent that was stimulated by the Arab Spring, America did nothing. After the situation in Syria got worse, America made noises but did essentially nothing. When ISIL, taking advantage of the mess in Syria took over a big chunk of the country, America did nothing. Worse yet, when an emboldened ISIL launched its invasion of Iraq from its bases in Syria, Obama reacted with surprise; but continued to do essentially nothing, while blaming (with some cause) the Shia majority government in Baghdad for its failure to establish good relations with the Sunni minority.

The coalition did little 

Sure enough, after months of hesitation, Obama announced that America had formed a large and powerful coalition (more than 60 countries, we are told) whose objective was and is to degrade and ultimately destroy ISIL.

Well, notwithstanding a few bombing raids here and there, ISIL is still pretty much in control of a large chunk of Syria and most of North Western Iraq.

Put it differently, America is not winning. (Allowing a terrorist state to keep its grip on a large piece of territory in the heart of the Middle East has huge detrimental political implications. Just by being there, the self-described Caliphate can claim victory. But we shall not focus on this pernicious aspect of the crisis here).

Others stepping in 

In the meantime, under ISIL’s attack Syria is falling apart, while the US $ 500 million program to train and arm pro-Western Syrian rebels went absolutely nowhere. And now? Now it is an even bigger mess.

Iraq is openly supported by the Iranians in its fight against ISIL. Assad is supplied by the Iranians and is assisted by Hezbollah fighters. Most recently, Russia decided to intervene militarily in order to support Assad. It may impossible to regain control over the entire country, but at least Russia will to its best to allow its weakened ally to keep a piece of it, while Moscow will retain its valuable military bases.

What about America? 

And what about America? Well, who knows, really. The anti-ISIL “Grand Coalition” was and is a fiction. The US-led military effort against ISIL is modest, in fact pitiful.

And now, what? Well, now Washington is sending about 50 military advisers to help the Kurds in Northern Syria.

Not what I would call a game changer.




The Disastrous Consequences of China’s One Child Policy

WASHINGTON – “[China’s] one child mandate is the single greatest social-policy error in human history.”

— Nicholas Eberstadt, political economist at the American Enterprise Institute in Washington, DC. (The above quote is from his op-piece China’s New Two-Child Policy and the Fatal Conceit, WSJ, October 30, 2015).

 




If The US Enters A Recession, Clinton In A Tough Spot

WASHINGTON – Democratic presidential candidate Hillary Clinton just declared that the Obama administration deserves an “A” when it comes to its (stellar?) management of the US economy.

A loyal Democrat

Yes, you can say that this is to be expected. After all, she is a Democrat. As Secretary of State during Obama’s first term, she was part of the team. Therefore, no wonder that she gives the President whom she served a high grade.

The new normal 

Fine. Except that this absurd exaggeration does not raise any eyebrows, even among competent practitioners. No outcry from serious economists. And the reason for this is that these days mediocrity is the new gold standard.

We all know that this has been the worst recovery that we have had in modern American history. Notwithstanding rivers of liquidity supplied by the Fed, and stupendous, trillion dollar plus, budget deficits in the first few years after the recession, economic growth averaged only 2% during this long but painfully slow recovery. This is 30% less than the historic US 3% average.

This is hardly inspiring. On the other hand, if 2% growth is the same as 3%, then Obama did well. Likewise, if the lowest labor participation rate in modern history, stagnant wages, and millions of Americans on food stamps are totally acceptable, then Obama did well.

A recession? 

That said, what if we get into a recession next year, right before the elections?  As the defender of Obama’s policies, Clinton would be a tough spot. The possibility of a recession is not a fantasy. GDP growth decelerated to only 1.5% in the third quarter of 2015. The US consumer has no more discretionary cash. And, if we look at the global economy, we do not see many prospects for a fast pick up.

China is dealing with the devastating consequences of its own immense over capacity, and it stopped buying stuff. Most of Europe, QE notwithstanding, is in stagnation or decline. Japan is not out of the woods. Brazil, Canada, South Africa and Australia have been hit hard by the collapse of commodity prices. Russia is doing poorly on account of truly depressed oil prices. Saudi Arabia is dealing with fiscal deficits also caused by reduced oil revenue. And let’s not even talk about Venezuela, literally on the verge of collapse.

Beyond that, many developed countries have devalued their currencies in order to boost their exports, while emerging nations have seen their currencies lose altitude because of their shrinking economies. Hit by highly unfavorable exchange rates and non performing economies, these nations are not going to buy a lot of American products. And forget about hordes of new visitors coming to America for a vacation, given the high dollar.

No good signs

In the US we have had a significant inventory build up in the second quarter, while consumers do not have much discretionary spending any more. And major exporters are doing poorly. For example, due to the global slow down, Caterpillar’s sales abroad collapsed. And thanks to the dramatic oil prices drop, the entire US energy sector, one of the key drivers of the recovery, is now in recession.

So, there you have it. Excess inventory and soft demand at home. US exports, already down, are headed south. In the meantime, the US will be hit by a new wave of Chinese imports sold here at discounted prices. (This is how China will try to get rid of its excess inventory). This will put already struggling US producers at a further disadvantage.

Given all this, a US recession in 2016, while not certain, is not a fantasy scenario. And what are the political implications? It is quite simple.

Clinton will be in a tough spot 

Hillary Clinton, running as a defender of the Obama glorious record on the economy, will find herself in the embarrassing position to distance herself from this administration, after she just said that they deserve an “A” on the economy, while arguing that she will follow a similar course, if elected President.

This should help the Republicans 

If this were a reasonable world inhabited by rational people, should the US economy enter a recession in an election year, this should really help qualified Republican candidates.

The Republican Governors, (John Kasich, Ohio), or former Governors (Jeb Bush, Florida), who have a proven record as capable chief executives and competent stewards of their states’ economies, should be able to capitalize on this.

They should be able to argue, with some vigor, that they have both the sound policy remedies and the demonstrable leadership skills necessary to get the US economy back on track.

Irrational voters 

Well, they may try this. But I would not count on such solid arguments getting any traction. God knows what people respond to. We are now in an era in which emotions and whims dominate. Records, substantive programs, policy platforms, and proven leadership skills –the very foundations of competent and sound government– do not matter that much.

These days, people follow strange instincts. And these instincts are often divorced from reality.




Political Change in Argentina?

WASHINGTON – American politics is beginning to look like a Hollywood farce. The Marx Brothers are in charge. They decided, just for the fun of it, to pick Donald Trump and Bernie Sanders as leading characters. Whereas, in perennially chaotic Argentina things may get better. Argentina is actually sobering up.

Delusional leaders 

Argentina has been led by a delusional political couple who dished out populist recipes that practically ruined the country. It all started with Nestor Kirchner and, after his death, it continued with his wife Cristina Fernandez de Kirchner. Their version of Peronism is all about price and currency controls. On top of that, Cristina Fernandez’s dogged determination not to settle with foreign creditors who still have claims after Argentina’s 2001 default made Argentina into a semi-pariah state, incapable of raising funds in international financial markets.

Enter Daniel Scioli 

Worst of all, it seemed that, in a perverse way the Argentines liked this populist regime. While Fernandez could not run again, it appeared almost a done deal that Daniel Scioli, the Governor of the large Buenos Aires Province, and her hand-picked successor, would be elected president. This would almost guarantee that her disastrous policies, with high inflation and the misery that it entails, would also continue.

Mauricio Macri as a credible alternative 

Well, all prognostications turned out to be wrong. Daniel Scioli has not been elected in the first round. On November 22 he will have to go to a run-off with Mauricio Macri, the center-right Mayor of Buenos Aires who surprisingly came in a close second. Scioli is ahead after the vote. But only by a small margin, (36.9% to 34.3%). And it is very likely that Sergio Massa, a dissident Peronist, who came third (with 21%) after this vote, may decide to support Macri instead of Scioli.

Just the prospect of an end to the 12 years old Kirchner-Fernandez regime generated waves of optimism in financial markets. Investors cheered.

Sound policies

Macri promises to go back to sound macro-economic policies. He promises to confront inflation, while liberalizing currency trades, and more. He also promised to negotiate a solution with foreign creditors, in order to allow Argentina to be once again a normal player in all international matters that affect its economy and finance.

Change coming? 

This is not a done deal. Macri may indeed win on November 22; but Scioli is still a strong opponent who can count on the backing of the state apparatus. Be that as it may, the very fact that a large chunk of the electorate voted for sensible change is positive.

Argentina has had enough. Time to sober up with a common sense, market-friendly new President Macri.

What about America? 

I wish I could say the same about the United States. Many Americans are fed up with left-wing liberal policies. But if they pick unelectable Donald Trump or Ben Carson as their champion, we are practically certain that Hillary Clinton will be the next US President, and this means more of the same.

At least in Argentina the opposition has a real candidate who represents a credible alternative.

 




US Navy Challenges Beijing In The South China Sea

WASHINGTON – The Obama administration does not have a stellar record either on national security issues or on upholding basic principles of international law. Just look at its retreat from Iraq, the tentative, in fact unserious air campaign against ISIS, and the near disaster in Afghanistan. Not to mention its passivity regarding Putin’s neo-imperial ambitions in Ukraine.

Freedom of navigation

Precisely because of this disappointing record, it is important to note Washington’s clear intention to affirm freedom of navigation in international waters in the South China Sea. This strong position on a matter of principle –protecting freedom of navigation– is a big deal. Indeed, if Obama is serious about upholding this cardinal principle of international law, this may put the US and China on a collision course.

Enter the US Navy

Today’s news is that the USS Lassen, a US Navy guided missile destroyer, openly and intentionally sailed within 12 miles off the Spratly Islands, in the South China Sea. The point was and is to challenge Beijing’s bogus claims that the islands belong to China and that no ships have the right to sail within what China claim to be its territorial waters.

What is the end game?

I applaud Washington’s move. But I am not sure that there is a clear end game here. The point of asserting freedom of navigation is that you have to keep doing it. One isolated gesture simply will not do it.

Since the Chinese will not unilaterally give up their “rights”, Beijing’s claims need to be voided by showing that they will not be enforced. And this means US and other vessels sailing through these waters claimed by China, routinely.

But this could become dangerous. What if the Chinese decide to react with force, claiming that this is only “self-defense” against an “American invasion”? Then, what next?

China’s build-up

Let’s go back a bit. Here is the story. For the past few years, the Chinese have been busy occupying several reefs and disputed rocks spread around the South China Sea. They have simply taken them over, sometimes forcing out vessels belonging to other countries, like Vietnam. They have built these reefs up, including the construction of ports and runways that can accommodate military aircraft. And now they claim that these artificial islands are, and have always been an integral part of China’s territory.

On the basis of this most extraordinary claim based essentially on nothing, the Chinese Government also claims sovereignty on almost the entire South China Sea where these various reefs and rocks are located. Beijing’s contention is that China has exclusive sovereignty on the waters around its islands (a 12 mile radius). By the same token, Beijing states that it also has a much larger Exclusive Economic Zone around them.

Bogus claims

According to international law, this would be indeed the case when we are talking about the coast line of a country, or real islands belonging to that country. The problem is that these are not real islands, and therefore they cannot be the basis for any territorial claims.

The additional problem is that, given the geography, there are other states that claim part of the those waters as their own. Taiwan, Vietnam, the Philippines and others have asserted that they should have control over at least some of the waters surrounding these rocks. And all the other parties agree that these territorial and maritime disputes should be settled through diplomacy and negotiations.

Well, the Chinese disagree. They have simply take over and established firm control over these rocks, turning them into Chinese islands.

Challenging America?

Now, let’s look at the broader context. How could this happen? America used to be a super power with a large and unchallenged naval presence in the Pacific. Twenty or thirty years ago China would not have done this. But now it did.

Is this reckless behavior, or was it a calculated move? Did Beijing act unilaterally counting on Washington’s weakness and passivity? Certainly, when Chinese diplomats observe Washington’s tepid reactions vis-a-vis Putin’s open aggression in Ukraine, it is easy to conclude that America is in retreat. Hence an opportunity to grab stuff and expand Beijing military presence in a strategic area, without any fear of retribution.

What next?

But now (unexpectedly?) Washington is taking a stand. The Obama administration, through Secretary of Defense Ash Carter, declared that China’s claims are invalid, and against international law. Sending a US Navy ship close to islands that Beijing claims belong to China is a clear signal. Needless to say, Beijing loudly protested, accusing America of creating a crisis.

OK for now. But what about later? If the US Navy keeps doing this, Beijing may capitulate and give up its preposterous claims. Or it may not capitulate. It may instead decide to “do something” to assert them.

Well, you get the picture. You see where this can go. We are talking about a possible military escalation, with the possibility of Chinese and American vessels colliding, or even shooting at each other.

China cannot retreat

If the Chinese simply miscalculated, if they engaged in this significant build-up in the South China Sea on the assumption that a weak America would do nothing, then we may have a real problem. Having gone this far, China cannot simply quietly retreat, and pretend that nothing ever happened. Talk about “losing face”.

But if America is serious about asserting freedom of navigation in what are indeed international waters, then we may get into unknown territory. America still has an impressive Navy. But not as impressive as it used to be. Besides, the action is taking place close to China. And this gives beefed up Chinese naval forces an inherent tactical advantage.

This may get ugly

As of now, military clashes, (let alone a real war), between the US and China are a pretty remote possibility. But when you have two navies with orders to challenge each other because governments have to stick to their script, sparks may fly.

Stay tuned, because this may get a lot worse.




Fusion: The Next Energy Revolution

WASHINGTONTIME‘s cover story (November 2, 2015) has this tantalizing title: “Unlimited Energy. For Everyone. Forever. FUSION, It might actually work this time”.

Fusion 

Yes, the long article is about “fusion”, the Holy Grail for all those who seek a way to produce and harness abundant, cheap, and emission free energy. However, this is still a distant dream. Indeed, the inside joke among those who have been working on nuclear fusion is that “fusion is about 30 years away, and it will always be 30 years away”.

Therefore, fusion is something theoretically possible, but so removed from practical reality that it is in fact only a fantasy. Indeed, even if we take it literally, “we shall have nuclear fusion 30 years from now” does not mean “never”. But it is a very long time away for a world that is seeking practical, commercially viable alternatives to fossil energy –today.

The global energy picture 

When it comes to energy, we know where we are. Contrary to even recent predictions, we still have plenty of oil and gas, not to mention enormous coal reserves. In fact, thanks to the US-led “hydraulic fracturing” revolution, now we can tap into large oil and gas shale reserves that we believed to be economically non viable until very recently.

However, energy from fossil fuels is still too expensive for many developing countries. Hundreds of millions of people in Africa and Asia lack electricity and modern transportation systems simply because they cannot afford them.

Emissions 

Besides, fossil fuels extraction, processing and consumption contributes to environmental degradation, while their emissions increase the amounts of greenhouse gases that cause global warming.

Those who really worry about climate change (they seem to be a majority) declared that, because of global warming, we have to curb the use of fossil fuels now, while switching to emission free renewable energy.

Good intentions 

The intentions are good. However, the problem with this approach is that it is not cost-effective, at least not yet. At its current level of technological development renewable energy (mostly wind and solar) is still too expensive and not reliable. In many cases, it is adopted only because of imposed legal mandates. This may make environmentalists happy, but it is bad economics.

Enter fusion 

How would fusion change all this? Well, if indeed fusion would move from quasi-science fiction to commercially viable reality, its impact would be equivalent to the invention of the electric light bulb.

Fusion is what takes place in the sun, at extremely high temperatures. Imagine that we would learn how to provoke fusion while properly containing it, and use the tremendous amount of power released by it. This would be a real revolution. As TIME put it: “Unlimited Energy. For Everyone. Forever.”

Cheap, no radiations 

And the beauty of all this is that fusion is cheap. The raw material for fusion is super abundant hydrogen. And fusion is much more powerful than fission (this is what happens in nuclear power plants), without the disadvantage of creating nuclear waste, or radiations. Besides, just like nuclear power, but unlike wind or solar, fusion would generate a constant supply of energy.

Imagine the consequence of this energy revolution. We could power almost anything at a fraction of today’s cost. Forget about drilling oil wells, transporting and then refining crude oil. Forget about coal mines. Forget about gas wells, and pipelines.

Energy for developing countries 

We could give clean, affordable energy to all poor countries, so that they would be able to kick-start their economic development without the huge up front costs associated with the construction of power generation plants, and the additional expenses related to fueling them and running them.

A game changer? 

Well, has there been any breakthrough? Have we removed the “we shall have fusion, 30 years from now” insurmountable barrier? Not quite. In this respect the article disappoints a bit. We are still not “there”. However –and here is the good news– we have entered a new dimension that may be indeed the prelude to a real game changer.

State-run programs

Here is the thing. Until recently fusion research was the domain of publicly funded researchers. And this was and is a systemic weakness. The allocation of (relatively scarce) public funds devoted to fusion research and experimentation is governed by too many rules, procedures and endless bureaucratic protocols.

And it seems that risk averse program managers dominate this process. As a result, everybody is doing pretty much the same stuff. New frontiers are not explored. Hardly any progress registered.

Mega international projects, such as ITER (International Thermonuclear Experimental Reactor) in the South of France, are years behind schedule and billions over budget. ITER started in 2008. It is now estimated that the reactor will be operational in 2027. In the meantime, projected costs ballooned from $ 5 billion to $ 20 billion.

Private capital 

But something has changed. And the change is that private capital is now bankrolling small and generally unknown start-ups. And these start-ups (like Tri Alpha, Helion Energy and General Fusion) are experimenting new technology approaches that seem to be more promising.

Now, this renewed enthusiasm about fusion is no guarantee of success. But it indicates both optimism and impatience among dedicated scientists, and beyond. Obviously there are many people, including funders, who believe that the science has been properly addressed, and now the trick is to move to the next step, by making the machines that will make fusion possible and commercially viable.

Getting there? 

Again, let’s stress that optimism and the availability of venture capital is no indication of ultimate success. However, many more smart people focusing on fusion may increase the likelihood of faster progress.

One again, the very idea of fusion seems to be the classic example of something that is “too good to be true”, and therefore impossible. Still we may, just may, get there. And may be sooner than we think.

 




Where Is The New African Middle Class?

WASHINGTON – In a recent article focusing on why the African middle class is still rather small, The Economist points out that rosy expectations about more broad-based prosperity failed to materialize. Indeed, while sub-Saharan African economies have experienced significant economic growth in recent years, this is simply not enough to expand the ranks of a new middle class.

Scaling back 

The news is not entirely negative. There has been some expansion. But far less than what many had predicted. For example, the article points out that Shoprite Holdings, a major South African retailer, just a few years ago announced that it planned to open anywhere between 600 and 800 stores in Nigeria, Africa’s most populous country, (173 million).

Well, Shoprite ended opening up only 12 stores. You see the difference. 600 stores assume a large, reasonably affluent middle class that can afford supermarket shopping, as opposed to low income buyers who do their shopping with street vendors who barely get by with a tiny volume of sales. A total of 12 stores in a country of 173 million indicates that this scenario of more widespread prosperity failed to materialize. Most Nigerians are still poor.

The commodities boom is over

In truth, many African economies are growing. But in recent years this growth was the result of the global commodity prices boom triggered in large measure by Chinese unprecedented demand. This commodities explosion proved to be a short-lived, exceptional phenomenon. Now that China’s artificial boom is over, demand for Africa’s raw materials has declined. And this means lower revenues and stagnant standards of living.

Beyond this, you have to add Africa’s chronic malaise, a mixture of inefficiency, cronyism, lack of accountability, and corruption. This malaise in many cases translates into large income inequalities. Those in power and the well connected benefit in a disproportionate way from whatever growth is produced. Most of the others get little. Hence a small middle class.

Fine. We get all this. However, while good governance matters, the real reason why the middle class is not expanding in Africa is that the economic base is still very narrow.

Lack of electricity is the number one problem 

And by far the main reason for this is lack of electricity. Yes, lack of electricity. We can talk all we want about democracy, transparency, the need to fight corruption while creating systems that improve accountability. However, the fact is that without electricity you cannot have broad-based economic growth.

For many readers in developed countries this may sound really odd. We take electricity for granted. But imagine a situation in which, if you live in a city, power is cut off for several hours, every day. And if you live in a rural area there is no electricity whatsoever, period. Imagine doing routine things, (reading, ironing, riding an elevator, running a washing machine, watch TV, use your computer), without any power.

No power, no growth 

Of course, if you are a rich city-dweller in Africa, you can buy a generator. But making your own power is expensive. Imagine running a small manufacturing company relying on your generator for several hours, every day. This is possible, of course. But it adds to costs, in a major way. And this means non competitive products and smaller markets. If you live in a city and you are poor, forget about expensive generators. Lack of electricity means no lights, no refrigeration, no chance to watch TV.

If you live in an African village with no power, you are essentially cut off from the larger economy. Sure enough, these days you probably have a cell phone, and you may have access to a solar-powered phone charger.

The rural poor stay poor 

But you have no electricity. This means using wood or charcoal for cooking. Alternatively, you have to spend a large percentage of your truly small income, (we are talking about people surviving on a couple of dollars a day), to buy fuel for a stove.

And forget about basic developed world amenities such as refrigerators. Forget about switching on the (non existing) lights at night. In such circumstances of basic deprivation it is very difficult, in fact nearly impossible, to advance to the middle class. Lacking electricity, most African are condemned to a life of perpetual poverty in which at best people survive thanks to subsistence agriculture.

Other factors also matter 

Of course, there are additional factors that prevent economic growth, and therefore the expansion of a fledgling middle class. Health and education are key issues. Difficult to have economic progress with too many semi-illiterate and sick people.

Right next to these constraints, you have infrastructure, or lack thereof. While electricity is fundamental to any kind of economic development, good road, ports and modern customs systems that allow the easy movement of goods are also critical.

Yes, while this may sound odd, moving goods by truck on old roads is quite complicated in Africa. Likewise, clearing goods through antiquated (and often predatory) customs systems may take several days, or even weeks. All these obstacles hurt commerce and all companies that want to be engaged in international activities.

Economic growth will lead to the expansion of the middle class 

So, what about the future of the African middle class? Very simple. Hard to picture any significant expansion without basic modernization that will make more economic growth possible. Africa has come a long way. There are hundreds of millions of cell phone users, there are plenty of ATM machines, and internet penetration is improving. But African societies must fill huge gaps. While many issues are relevant and should be addressed, the number one problem is still power generation and distribution.

In Africa this is literally the difference between day and (hopelessly dark) night.

 




Thanks To The Central Banks, The Equity Bubble Is Getting Bigger

WASHINGTON – Imagine this. There are lots of chronically sick patients in the hospital. Many of them are deteriorating rapidly. The right therapies cannot be administered because of absurd delays caused by infighting within the Ministry of Health. 

Give them morphine 

The physicians in charge of the hospital know what is needed to take care of the patients. But they have no resources. The only thing they have got is morphine, lots of it.

Well, since we cannot cure the patients, at least let’s alleviate their severe pain. “Morphine for everybody!” orders the Director of the hospital. “But sir, this is no cure”, argues a young doctor. “What do we do when the effect of morphine wears off?”, he asks. “Well, we will give them some more. We have ample supply”, replies the Director.

Quantitative Easing is morphine

This may be a far-fetched analogy, but here it is. The patients are the sick economies in Europe, Japan, the US and now –in a major way– China. The Ministry of Health are the Governments incapable of tackling the structural issues of lack of productive investments, labor market rigidity and high public spending. The hospital Director are the Central Bankers. And the morphine is an ample supply is Quantitative Easing, (QE).

Central Bank left alone to manage the economies

The Western economies are really sick. There is too much leverage, low productivity, too much private debt and out of control public spending. But Governments do essentially nothing about any of this. They are paralyzed by ideological disputes and bogus arguments about austerity and income redistribution. The only institutions that can do “something” are the Central Banks. They have no real “cure” for any of this. But they can provide temporary relief by keeping interest rates close to zero, (here is the morphine, in the form of QE), thereby giving everybody the illusion that the situation, while difficult, is manageable. The patients are still very sick. But (thanks to ample doses of QE-morphine) they feel no pain; and so they are led to believe that they have been cured.

More QE, it is still party time!

This is totally absurd. But this is exactly what is happening. The European Central Bank, after having launched its own QE a while ago, just declared that the Eurozone economies need some more monetary easing. The Central Bank in China just announced some more easy money measures, in a country, mind you, that accumulated a monstrous amount of debt (much of it bad debt) in just a few years.

Watching all this unfold, Wall Street correctly concluded that in this environment where everybody is injecting even more liquidity there is no way that the US Federal Reserve will go against this powerful current and raise interest rates in 2015. With US rates still near zero, it still makes sense to put money in equities, since everything else will give you no financial reward.

Investors got the message. “It is still party time!” And so, Wall Street shot up on Thursday. The Dow Jones added 300 points. There was further growth on Friday. Has this optimism about equities got anything to do with the real economy? Not really.

Perverse incentives 

This is yet another Fed-induced rally. (By indirectly signalling that it will not raise rates in 2015, the Fed gave the green light). Needless to say, this is madness. Equity prices in developed economies now are largely disconnected from the fundamentals.

Even worse, thanks to QE governments in highly indebted countries, from Europe to the US, are under no pressure to reform their public finances, because they can keep borrowing at very low interest, this way creating and sustaining the insane delusion that more and more debt is a good way to finance chronic over spending.

Commodities took a dive 

In the meantime, though, emerging countries whose commodities fueled the crazy debt-driven Chinese construction investments binge are feeling the pain. As China could not sustain its own truly over sized madness, it stop buying stuff.

Therefore, commodity prices collapsed. As a result, Brazil, Australia, South Africa, Chile, Argentina, Zambia, and many others are suffering, in a major way. They built their budgets with the unwarranted assumption that commodity prices would stay in the stratosphere for ever. Now they have to go back to the drawing board.

In the meantime, their semi-impoverished people have no extra cash to buy new things, while their currencies are worth a lot less. This penury will further depress exports from industrial countries, this way further reinforcing the global downward spiral.

No incentives to engage in serious reforms 

So, here is the picture. The global economy is doing poorly, in large part because of minimal growth in the debt-burdened West where Governments still spend money on unaffordable entitlements instead of creating a business friendly environment that will encourage private investments in wealth-creating innovation.

Most emerging markets are in recession or close to it.

But at least in Europe, Japan, the US (and now China) the real extent of the problem is disguised. Developed countries enjoy a drug-induced financial markets buoyancy (QE is morphine) because the Central Banks keep pumping in liquidity, this way allowing the stock market bubbles to continue.

Another big bubble 

This is a gimmick. A dangerous gimmick. At some point it will have to stop. I am not sure when. But it cannot go on for ever. I do not even want to think about what will happen when this gigantic bubble will explode.




The Republicans Are Immature And Hopelessly Divided

WASHINGTON – I really like Paul Ryan; but I am skeptical about his ability to bring order, cohesion and a sense of shared purpose among the House Republicans. I wish him well in his new job as House Speaker. But I doubt that he can succeed. Not because he is not smart, but because the Republican Party is now a horrible mess. It is a composite of some moderates, religious fanatics and fiscal radicals with insane ideas. You put all of them in the same room, and they will agree on almost nothing when it comes to policies and priorities. 

Ryan is a good man 

Paul Ryan is a principled, smart and humane conservative. He really understands the challenges facing America. He really understands the Federal Budget, fiscal policy issues, and the pressing need to reform all major entitlement programs.

And this is not just about cutting costs. He has good ideas about how to reformulate welfare programs so that they do not continue to be part of a perverse trap of perpetual, multi-generational poverty and perpetual dependence on modest public assistance.

Mission Impossible 

There is no doubt that Ryan is intelligent, capable and energetic. But I am not sure about his ability to recreate unity among the House Republicans, so that they can work together and create a credible alternative to the tired, and yet still appealing, slogans of the left.

This is not about Ryan’s leadership and skills. This is about hopeless ideological animosities among House Republicans that make lasting agreements on just about anything next to impossible.

Donald Trump leads

More broadly, if we look at the potential Republican voters as the primaries season begins to shape up, one should get even more worried. The very notion of Donald Trump as a serious candidate for President should make people laugh.

But here is the thing. Donald Trump is a candidate for the Republican nomination, and he is leading in all the polls. His numbers are not staggering. But with about 25% he has a comfortable lead on everybody else. And this includes former Florida Governor Jeb Bush, by all accounts an accomplished policy-maker with stellar credentials on key issues such as public education and immigration reform.

But would-be voters are uninterested in policy. Bush barely gets a nod from a few moderates, and he is now relegated to the second tier of improbable candidates, with very few chances of breaking out.

Tough guy, with Instant solutions 

The fact is that a sizable number of Republicans are now literally unhinged. They are not interested in real world policy choices, and they have little interest in the complicated process that is necessary to make things happen.

They want “The Man with Magic Formulas”. They want stuff done –today. They want all the illegal immigrants out, (that’s 11 million people); and Trump –a Real No-Nonsense Guy– in the White House, so that he will be able to outsmart the Chinese, the Russians and the Japanese because –you know– he is a tough negotiator.

Never mind that the American constitutional make up, (with divided powers and a complex system of checks and balances), makes instant change virtually impossible. These voters are willing to listen to Trump because –despite the Constitution– he promises immediate results. And they just love his swagger and braggadocio.

Leading in all the polls 

And so Trump is way ahead, (for the moment anyway), because he promises to make America Great, because he is irreverent, openly offensive regarding all his opponents, and “good on TV”. Never mind that his speeches are a mixture of semi-incoherent stream of consciousness free associations, invective, and grandiose promises. A sizable number of would-be GOP voters (about 25%) like this stuff and obviously like this style.

Divided GOP 

And so, here is the irony. The GOP won the 2014 mid-term elections, by a large margin. And yet the Republican Party at the national level is so divided and so immature that it cannot produce credible leaders, leaders who can translate real credentials into national appeal. And so, reality TV hero Trump is up. Two terms Florida Governor Bush is down, and probably out.

Soon to be Speaker Paul Ryan will do his very best to unite the House Republicans. I wish him well; but I doubt that he can succeed. Again, not because he lacks talent; but simply because this looks like “Mission Impossible”, given the depth of the internal ideological divisions within the GOP.

If Trump is the nominee, Clinton will be the next President 

And if we look at the upcoming 2016 presidential elections, if Donald Trump gets the Republican Party nomination, (this is now becoming a distinct possibility), we can rest assured that Hillary Clinton, (unless she is indicted because of her “private e-mail server problems”), will be the next President.

Clinton is not insane, thank God for that. But she has proven to be opportunistic and coldly unprincipled. In this campaign she has calculated that she needed to re-engineer herself as a left of center candidate, in order to please those who want more state interventions, more public spending, more welfare programs, and higher taxes for the rich. Not a good prospect for America.

Clinton is a real politician 

If Donald Trump is preposterous, Clinton is real. If the choice is between her and Trump, she will get elected. If this is the case, following 8 years of anti-growth Obama policies, her left wing agenda will continue to drag the US down into a future of Europe-like welfare and global irrelevance.

Again, not a good prospect for America.




The Real Benghazi Story Is The False Explanation Of the Tragedy, Motivated By Politics

WASHINGTON – The much-anticipated appearance by Hillary Clinton, former Secretary of State and now leading Democratic Party presidential contender, before the House Committee on the Benghazi terror attack, has not added anything new.

Nothing new 

I have seen nothing that makes me change my mind on what happened in Benghazi in 2012, on that unhappy anniversary of September 11, when the US Consulate was attacked by radicals, and 4 Americans, including Christopher Stevens, the US Ambassador, were killed.

Here is the story 

Here is my (perhaps) over simplified summary. The US Government, in this particular case the State Department led by then Secretary Clinton, did not appreciate that post-Gaddafi Libya was a very dangerous place. Indeed, requests for additional security made by the US Embassy, and personally by Ambassador Stevens, were not seriously considered. As a result the Libya posts had inadequate protection.

Sadly, when the Benghazi facility came under attack on September 11, 2012, insufficient American defenses were overwhelmed. People got killed.

Well, this is sad. Of course, in hindsight it is always easy to point fingers and conclude that then Secretary Clinton was and is responsible for these deaths. But this would be somewhat unfair. Hundreds, possibly thousands of possible threats to US diplomatic posts come in every day. Hard to respond to all of them. Hard to prioritize in the most appropriate manner.

Bad judgment 

In the case of Benghazi, it is obvious that everybody, including then Secretary of State Clinton, dropped the ball. They did not understand the severity of the situation, and they did not beef up security.

Well, what can we say. This was a huge mistake. But we are all human, and therefore fallible.

Here is the real story 

However, this is not the real story.

The real story is about how the Obama administration –and this includes then Secretary Clinton– reacted to this tragedy. Indeed, after the news of the Benghazi attack came out, the Obama White House, fearful of the possible negative political repercussion on Obama  –keep in mind that this happened just week before the November 2012 presidential elections– deliberately introduced a bogus explanation about what caused the attack.

Avoid political repercussions 

It is clear that they desperately wanted to avoid any accusation that the Obama administration had under estimated the possibility of more terror attacks against Americans.

And why this concern?

Well, because President Obama had claimed that his administration had successfully decimated al Qaeda. The official narrative throughout the 2012 political campaign had been that, after the killing of Osama bin Laden on May 2, 2011 by US special forces, the terrorism threat was essentially gone –for good.

Therefore, one had to find an “explanation” for the Benghazi tragedy –clearly an act of terrorism– that would say that the attack was in fact about something else.

Nothing to do with terrorism.

Hence the introduction of the “video did it” bogus story. In order to muddy the waters, the Obama people came out with the clever explanation whereby the Benghazi attack was a spontaneous popular reaction to a video released in America that attacked Islam, and was therefore considered blasphemous by many believers in the Arab world, including Libya.

Ambassador Rice sent out to tell the bogus “video” story 

This being “the truth” that they wanted American voters to believe  –again, remember that all this occurred just weeks before the presidential elections– the Obama White House sent then UN Ambassador Susan Rice to appear on many TV programs, so that she could deliver this false narrative whereby “the anti-Muslim video caused the Benghazi attack”.

This was not said casually. This was carefully plotted. They all knew that they were telling a lie, with the obvious goal of protecting a President on the eve of a crucial vote. Once again, as the record of her public and private pronouncements indicates, Secretary of State Clinton, was a willful participant. She repeated the bogus story about “the video”, while she knew the truth, as her own e-mails –now public– revealed.

Deliberate manipulation 

In my judgment, this is the real problem. Yes, we can all agree that Secretary Clinton and her staff showed poor judgement in handling the security of US posts in Libya. As a result, the US Consulate in Benghazi was not properly protected. This is bad. But it was an error. May be an egregious, unforgivable error. But it is still an error.

What followed instead was deliberate manipulation motivated by politics. This may have been clever, but it was and is morally reprehensible.

Willful distortion 

And this is the real problem. We cannot accuse Hillary Clinton of having deliberately overlooked the security situation of the US diplomatic posts in Libya. But she happily joined the conspiracy aimed at distorting what actually happened in the night of September 11, 2012 in order to help her boss, President Obama.

Again, all this is morally reprehensible. If we give Hillary Clinton a pass on this, by saying that “It is a well-known fact that all politicians lie or at least engage in willful distortions”, we are deliberately lowering our moral standards.

A democracy run by duplicitous liars is not going to be a healthy place. If we choose them as our leaders, whatever damage they will cause in the long run, will be our fault.