GOOD NEWS, BAD NEWS ON THE U.S. ECONOMY

This is big picture, long term stuff. OK, first the Good News ...

Good News ...
Because of advances in technology, innovation, and significant improvements in U.S. productivity, America's share of total world output has remained remarkably constant at a little more than 25%, despite the significant increases in output around the world, especially in Asia.

Bad News ...

With the rise of other national economies, our bloated national debt, and the slow collapse of the dollar, the world has slowly dropped it's use of the dollar for trade and as a store of value ...

So, are we on the right track given the rise of the rest of the world (since we're holding steady), or is something amiss?

We'll be discussing this in class on Monday.

- Mark

LESSONS FROM PETER THE GREAT (for President Obama, and our pampered elite)

In 1696 Peter the Great decided he was going to turn Russia into a modern power, capable of competing with Europe's best. To do so he determined that he would need access to Europe's greatest minds and to its ports. Because feudal custom and traditions prevailed at the time turning Russia into a modern power required calling on outsiders to bring new ideas. It also meant challenging entrenched conservatives (who hated foreigners) and confronting financial elites, who not only hated the idea of paying taxes but believed they deserved special privileges in Russia.

While Peter the Greats commercial goal was to gain access to European ports and it's trade routes through the Sea of Azov ...

(... which accesses the Black Sea, the entrance point to the the Mediterranean Sea ...)

... the real goal was to modernize Russia's military, solidify Russia's southern flank (raided regularly by the Tatars), and to build it's first navy.

Building a navy and waging war meant Peter the Great would have to secure the funds that would eventually help make Russia a modern nation-state. And this is where it gets interesting.

Every group that could afford to help - the church, rich landowners, and merchants - would be forced to help Peter the Great bring the nation into the modern era. For example, while the government would provide the timber, and brought in expert shipbuilders from abroad, every great landowner, church officials/monasteries, and the merchant class were forced to pay for building and supplying sea going vessels.

Compliance was demanded by the state.

Those who failed to go along had their property confiscated. When the merchants of Moscow and other major cities balked at building 12 ships, and then petitioned the Czar to lighten their burden, Peter the Great ordered them to build two more than scheduled. National greatness would not tolerate petitions from would be lobbyists.

I bring all of this up because - like Peter the Great - our country is confronted with serious problems that threaten to drown our nation in petty provincialism (racism and xenophobia) and financial irresponsibility. Like Peter the Great we're confronted with an entrenched elite who believe their station in life grants them special privileges that absolves them from contributing their fair share to the nation.

Challenges of Modernity in America
In 2009 the American Society of Civil Engineers (ASCE) issued it's annual report on America's infrastructure. In 15 categories that range from airports and bridges to schools and solid waste facilities the highest grade received was a "C+" (Solid Waste), with 5 categories receiving a "D-".  Overall our nation's infrastructure received a "D" from the ASCE. This is what it looks like when we don't do the maintenance ...

The ASCE estimates that it will take $2.2 trillion over a five year period to repair what we haven't been paying to maintain in the past. This is only the beginning.

Like in the period before Peter the Great, we've also been indulging the wishes of our wealthiest class. For reasons that can be explained by looking at people who embrace a conservative but failed ideology (trickle down), we've been steadily reducing the percentage that the rich pay ...

... and what corporate America contributes to our nation's tax base.

In the process they've become richer than they ever were, but our nation's finances have suffered. We now owe $11 trillion more (and counting) than we did in 1980. Worse, we're engaged in wars that we believe we don't have to pay for in the present. Like Peter the Great we face a dilemma.

We can continue to indulge a conservative, pampered, and increasingly clueless elite who believe custom, tradition, and xenophobia are the path to our nation's future. Or we can force them to pay their fair share as we try to pay our debts, pursue war, and rebuild our infrastructures for the 21st century.

The choice, in my view, isn't difficult.

- Mark

RENT A WHITE GUY ... WALL STREET STYLE

Oh, how the tables have turned. Check out this article on Chinese business practices in The Atlantic. We all know that Wall Street has turned itself into a empty but glitzy casino that no longer produces anything. But renting white guys in ties as show pieces in China is a little like NASCAR renting hot women. They're bit players in a circus sideshow.

The article is actually kind of funny ... until you realize that using white guys as props is really an indicator of what's happening to the American Empire. Unfortunately the new face of America's Empire is increasingly dominated by sideshow circus freaks (in a tie, of course) who aren't interest in creating anything of value. And that includes Wall Street.

- Mark

OBAMA'S NATIONAL SECURITY SPEECH

In a blunt and forceful review of the previous administration's war on terror policies, President Obama outlined the vision and policy approach that his administration would follow. He did so against the backdrop of the National Archives Building in Washington, which houses the U.S. Constitution.

I watched the first part of it on television while the kids were eating breakfast and have to say it was a triumph of American values and moral inspiration. President Obama recognizes that America is more than a nation-state with weapons and a powerful military. We are also a nation of ideas that inspires in others what previous empires, civilizations, and dynasties could not.

What I particularly enjoyed was when he said that our policies should not be driven by fear ... In a few words, he gets it.

- Mark

GOOD THING WE'RE NOT HERE ...

With the U.S. economy in shambles, record budget deficits, and the wholesale looting of taxpayer money by the financial sector it dawned on me that what's happening here would not be tolerated by the U.S. in other parts of the world.

Anyone familiar with the history of economic development knows that when countries start running large budget and balance of trade deficits, and then experience the type of meltdown we are experiencing, that the U.S. and its Western allies have arrived to impose "structural adjustment reforms" on the country that has lost its way economically. This usually means draconian budget cuts, imposed policies, and forced financial terms.


In the past - using the U.S. Embassy as its base to direct events - the U.S. has even forced unwanted leaders from power. With this in mind, after being asked about developments in the U.S., Chile's President Michelle Bachelet joked:

The reason why in the United States there has never been a coup d'etat is because in the United States there is no United States embassy.

Keep in mind that this is from the president of Chile, one of two nations in Latin America that tries to do what we ask of them (Colombia is the other, but doesn't really count because we stuff them with arms and money for their war on drugs). President Obama has a lot of work in front of him.

- Mark

WHAT IT MEANS ...

The U.S. Supreme Court will maintain its integrity.

American democracy and the rule of law are reborn.

The American ideal once again means something to the world.

There's more, but it appears that the 21st Century can become, like the previous one - an American Century ...


- Mark

OBAMA & THE NEXT AMERICAN CENTURY ...

The NY Times' Nicholas Kristof has an excellent article that explains how the U.S. could start regaining its international position and moral standing around the world with an Obama victory. What he's really saying is that with Barack Obama in the White House we could collectively recapture the Soft Power that allowed America to lead in the 20th Century. Read the article to find out why.


- Mark

ROBERT M. GATES: "WE CANNOT KILL OR CAPTURE OUR WAY TO VICTORY ..."

In what can only be seen as a stinging slap at the ill-conceived policies and hubris of the neo-cons who came to power with George W. Bush, Defense Secretary Robert M. Gates said that the State Department should take the lead in U.S. engagements with other countries. Warning of "creeping militarization" in the U.S. Gates - a former CIA director - said that civilian agencies should have more funding because ...

... the most persistent and potentially dangerous threats will come less from emerging ambitious states, than from failing ones that cannot meet the basic needs -- much less the aspirations -- of their people.

With more and more states unable to meet basic needs, Gates warned against allowing the military take the lead in distributing U.S. aid and rebuilding countries around the world (as is the case in Afghanistan and Iraq), cautioning that "We cannot kill or capture our way to victory" in the war on terror.

For those of you who read this blog regularly, you know that Gates is advocating that the U.S. go back to building it's "soft power" - which is the capacity to attract others to your side. Soft Power is not a novel concept. After winning WWII we were able to convince many nations to side with us because other nations saw that ideas and moral conviction matter in the U.S. And the democratic ideal was just one part of this equation.

Many nations saw how the U.S. acted during WWII and understood what it meant for humanity. For example, while the U.S. won kudos for fighting and defeating fascist and dictatorial powers, the world also saw a big difference between how the Japanese and Germans treated their POWs. They also saw a big difference between the emerging police state in Russia, and the open society that existed for most Americans in the U.S.

Rather than taking out our guns and telling the world to follow our lead, the U.S. benefitted from the success of its ideas and the power of example.

To be sure, a strong military helped us make our points. It still does. But the ability to attract others to your position means you don't have to force your will at the point of a bayonet. This often leads to acquiesence, and even subordination. The 20th Century became the American Century because of this.

- Mark

THE ROOTS OF MARKETS & WEALTH

As I noted a few weeks back, from time to time I will post snippets from my book project, The Roots of Markets and Wealth, here on my blog. The goal is to have the book finished and shipped off to the publisher by the end of this month. The photo to the left is Juan Peron, president of Argentina from 1946 to 1955, and from 1973 to 1974.


... Soon after the Japanese attack on Pearl Harbor in 1941 “Argentina blatantly obstructed efforts by the United States to persuade the Latin American nations to break relations with the Axis” powers. Because of this and other Argentine activities, throughout World War II many in the United States believed Argentina’s war time neutrality was little more than political cover for deeper pro-Nazi sympathies. In line with these sentiments, statements made by Secretary of State Cordell Hull during WWII suggested Argentina was hiding German spies and escaping Nazis. U.S.-Argentine relations took a turn for the worse after 1946 when, in an effort to undermine Juan Peron’s presidential bid, the State Department issued a “blue book”. The book detailed collaboration and links between successive Argentine governments, the military, and the Axis powers.

Later, in 1948, the United States decided Marshall Plan dollars could not be used to purchase Argentine goods. The U.S. effectively punished Argentina by mandating American Marshall Plan dollars only be used on U.S. farm products and those of favored allies. The Agricultural Act of 1948 cemented these policy goals. Specifically, America’s “federal government would increase grain production by subsidizing American farmers and would finance grain sales in Europe” through the Marshall Plan. The impact was both immediate and devastating for Argentina. By 1952 Argentina’s share of world wheat markets dropped from 23 percent to 9 percent while the United States’ share of wheat markets grew from 7 percent to 46.1 percent. By the early 1950s not only were American grain exports to Europe eight times greater than before the war, but its global share of corn markets grew from 9 percent to an astounding 63.9 percent!

Denied access to “Marshall Markets” Argentina was forced to sell to smaller markets, which deprived them of needed dollars. While Argentina’s post-war problems were no doubt compounded by Peron’s populist policies, the decision to shut Argentina out led to lost market share, compounded their dollar shortage, and helped precipitate a balance of payments crisis. These dynamics undermined Argentine development and fomented civil unrest. Both would help force Peron from power and bring military dictatorship by 1955. Today, many will argue competitiveness and the logic of the market are sufficient to explain America’s post-war agriculture fortunes. The reality is quite different. Expanded market share after WWII also depended on U.S. military victories and the subsequent divvying up of the spoils of war – which speaks as much too economic nationalism as it does to free market competition.

- Mark

THE END OF AMERICA'S "EXORBITANT PRIVILEGE"?

OLD EUROPE’S WISDOM?
Maybe it has to do with being part of “Old Europe” – where devalued money, inflation, and bubble economies have a long history. However you slice it, it appears Europe may understand the root of our economic woes better than the Federal Reserve’s Ben Bernanke, or the Bush administration. EU Economic and Monetary Affairs Commissioner Joaquin Almunia said falling equity markets in the U.S. – and fears of a U.S. recession – are a result of America’s trade deficits. We spend too much, yet fail to produce and sell enough goods to pay for our spending.

Left unsaid, but very much implied, is the U.S. can’t keep spending and pushing dollars out, and expect the world to hold on to our dollars without suffering some consequences. Simply put, if you put out too much of anything its price, or value, will go down. This is especially the case with the U.S. dollar as we continue to run massive budget deficits, which puts even more dollars into circulation.

Some may ask, So why does an oversupply of deficit dollars matter? Here’s why.

AMERICA’S “EXORBITANT PRIVILEGE”
In the 1960s Charles de Gaulle became a vocal critic of U.S. policies that spread deficit dollars around the globe. Specifically, de Gaulle complained about America’s “exorbitant privilege” to create and use dollars without suffering the consequences of inflation at home. No other country enjoyed this privilege. We were able to do this because the world wanted and needed U.S. dollars immediately after WWII. This made the dollar the world’s currency. Problems emerged when we created and spent more dollars than we could back with gold. Charles de Gaulle saw this and cried foul.

So what happened after de Gaulle called attention to U.S. spending habits? We continued to spend. And when de Gualle’s criticisms failed, we spent even more.

The question for us then is, Why didn’t the U.S. suffer the inflationary consequences from creating more dollars? Very simple: The U.S. and its cold war allies came to an agreement. As Benjamin J. Cohen explained, the U.S. agreed to pay for the defense of the West and our Western allies agreed to hold dollars. This was both an economic and geo-strategic decision.

Our allies benefited because instead of spending on tanks and guns they could concentrate on producing better cars and stereos. In essence our allies said, “Go ahead and write those checks (i.e. create more dollars), we won’t cash them (i.e. we won’t send them back).” For our part, we maintained our perch as the undisputed leaders of the free world.

HEAR NO EVIL, SPEAK NO EVIL, SEE NO EVIL …
With the collapse of the Soviet Union the U.S. no longer needs to pay for the defense of the West. And market players know this. With other currencies to bank on – and with continued concern over U.S. spending and deficit policies – market players are telling us to get our financial house in order. Unfortunately, by cutting interest rates Fed Chief Ben Bernanke is telling these market voices “I can’t hear you.” Worse, George Bush doesn’t want to discuss how his deficit spending binge (he's added $3.5 trillion in debt) really impacts markets. Squaring this “Hear No Evil … See No Evil” triangle, most of the American public can’t see, let alone understand the issues.

All of this is allowing President Bush to kick this economic can of worms down to the next administration. The Fed’s recent rate cuts may help bail out some of America’s irresponsible financial institutions, and may even encourage market players to continue buying U.S. assets - for the moment. This moment, however, is borrowed time. Markets can’t ignore that we’re running record budget deficits, and have done little as our national debt rocketed from $950 Billion to roughly $9.2 Trillion in just 27 years. In the long run, deficits matter.

My friends, we have to accept one simple fact. We are living on borrowed time, and borrowed money.

- Mark

A WORD ON THIS SATURDAY'S "TORTURE" PROGRAM ...

Like the Civil War, the War on Terror and our "wink and a nod" torture policy is pitting America against herself and creating a great divide ...

It’s creating a divide between people who, as our Founding Fathers wrote, believe we are a City on a Hill, a shining beacon for all of humanity, and those who believe we need to hide what we do ... It's creating a divide between those who believe respect for “inalienable rights” is part of America's value system, and those who think water boarding and chaining prisoners in a fetal position until they urinate & defecate on themselves are the best America can do ... It's creating a divide between those who think torture makes us stronger and contributes to our security, and those who believe torture undermines our values and make us weaker by forcing us into the morally bankrupt defense that “At least we’re not as bad as the Nazi’s” ... It's creating a divide between people who believe human dignity and the rule of law are driving forces in American history, and those who believe human dignity is negotiable and the ends justify the means.

America is an idea as much as it is a country. Only America can live up to its ideas. Let me give you an example of how this works ...

During and after WWII the West was faced with a dilemma: “What do we do with captured Nazi’s and their sympathizers?” We had every excuse in the world to execute and seek reprisals against people who acted as extensions of a cruel and vile criminal state. And, at the time, not many would have cried foul if we had decided to summarily execute, torture, or compel forced labor for everyone involved in the Nazi machine. There were not many willing to stand up for the Nazis. In fact, execution, torture, and forced labor were among the choices given to President Roosevelt and President Truman. In the end, it was not the choice either took.

On the program we'll discuss those options, and how the choices America made then helped create the moral authority that facilitated American leadership throughout the cold war, and helped the United States shine like a City on a Hill.

- Mark