Friday, February 20, 2009

Russia - Movement in our Peripheral Field of View

It is an unfortunate reality of the "complex" composed of (i) the mainstream press and (ii) those with their hands on the levels of power in Washington, that only one thing can be the focus of attention at any one time. With talk of nationalizing the major banks, the Dow testing new lows and GM and Chrysler accompanying their business plans (which were required in connection with their previous bailout) with a new request for billions, there is no doubt that the focus is on the economy.

Unfortunately for America, independent actors around the world are constantly assessing, and reassessing, their chances of advancing their own agendas. Often, their best chance is when the US is distracted by other things.

The current US economic situation has no obvious solution (other than time) and pretty much everything that anyone has suggested that the federal government do, has been tried. But we are incapable of turning our attention to other things while the remedies which have just been approved are given a reasonable period of time to suceed or fail. We must continue to stare at the problem to the exclusion of our other myriad interests. The economy is the "mother" of all distractions.

Nevertheless, if we try to attend to the information streaming in from peripheral fields of view, and try to make sense of the information, some pretty troubling things come to mind.

Let me briefly discuss one: Russia. In the recent past, Russia has:

  • Fought a war with one of its small neighbors (that used to be part of the empire) and occupied a portion of its territory and "recognized" the sovereign independence of two regions thereof (while at the same time issuing Russian passports to persons resident in those areas, which suggests incorporation into the new Russian Empire, not independence). This country has a vital oil pipeline crossing its territory which is owned by western (i.e. non-Russian) interests carrying Azeri oil to western markets. This pipeline was built at great expense, and with massive American diplomatic support, precisely because it would afford a transportation route for the oil that did not run through Russian territory.
  • Induced another former part of its empire, through a combination of threats and the promise of remuneration, to close down a NATO airbase that is vital for operations in Afghanistan.
  • Demonstrated to Europe, for the second time, its total dependence on Russia for energy supplies by turning off the taps, while bringing to its economic knees a former Soviet Republic that dared to seek incorporation within western organizations (EU and NATO).
  • Threatened two eastern European countries who had agreed to base US anti-ballistic missiles (designed to protect the US and Europe from Iranian nuclear attack) that it would install nuclear missiles in Kaliningrad (on the Baltic) and aim those missiles at those two countries.
  • Proceeded full bore with its plan to supply Iran with nuclear material for a nuclear reactor which will produce waste that can be made into weapons grade material.
  • Sold weapons and provided other forms of encouragement to the South American country which is doing the most to promote anti-Americanism in the region and which is seeking to undermine democratic governments in the region by massive infusions of money to leftist politicians running for high office.
  • Triggered a global struggle for resources in the Arctic oceans with provocative acts such as planting Russian flags on remote islands and even the seabed.

And that is just the stuff we know about. We are not attuned to the myriad things passing under the radar: pressure on oil-producing Kazakhstan, energy deals with China in return for China remaining ineffective with respect to reigning in North Korea, massive interference in the internal politics of Ukraine and Moldova, theft and confiscation of western economic interests in Russian industry and energy production, and heavy-handed pressure on western majority owners of the CPC Pipeline to cede effective management control of the only oil pipeline to transit Russian territory not within state control.

A few years ago people were wringing their hands about identifying a new mission for NATO. We need to remember the original mission; the job is not done.

What I have outlined above would be sufficient to establish Russia as the number one threat to American interests around the globe without even considering the harm wrought to American interests by the American response to such provocations. That response is less than anemic. Our policy toward Russia (started by Bush and heightened by Obama/Biden/Clinton) is to treat Russia as a slightly wayward friend who is not smart enough to perceive that its own best interest lies with alignment with the US. A wayward friend whose help needs to be solicited (and purchased) with respect to a major problem: Iran. The Russians are happy to continue playing the Iran card and collecting concessions about as long as The Great Leader is prepared to play the nuclear card and collect round after round of economic bribes from the US and South Korea.

The world is a tough neighborhood. You have to pay attention and have your wits about you. If your mental construct of the world is fundamentally flawed, you are not equipped to make sense out of the actions of others, let alone anticipate their next move. If you can not think three or four or five moves ahead, you are destined to lose; it’s just a matter of time.

Maybe we should make a concerted effort to enlist our best and brightest (and most experienced) to focus on our international interests, not just our most politically ambitious.

Tuesday, February 3, 2009

Schizophrenic Advice

Imagine that your brother has come to you for advice. He says that he is in debt up to his ears and is having trouble making ends meet.

You advise him as follows:
  • Arrange a debt consolidation to reduce the interest cost.
  • Stop using all credit cards - spend only cash based upon a strict family budget
  • Set out a schedule of debt repayment and stick to it
  • Reduce your discretionary spending by 80% (teach your wife and children that it is a time of austerity and that everyone has to pull together)
  • Urge your children to get after-school jobs to fund their discretionary spending wishes (and ask them to set aside 20% of their earnings to help contribute to family debt reduction)
  • If you get any raise at work, use 100% of the after-tax increase to accelerate debt reduction
  • When all non-first mortgage debt is paid, start using the money stream previously dedicated to debt reduction for savings growth.
  • Try to maintain a savings rate of 15% of gross income.
  • If and when family income increases, as long as the savings goals are met first, family spending may increase accordingly.
Sound about right?

The fundamental economic problem that our economy is facing is that too high a proportion of our families and business corporations are in the same position as the imaginary brother. The advice given to one is sound for all. In other words, the sound course of action is what is referred to in Wall Street as "straightening up the balance sheet" - that is, reducing liabilities and increasing assets.

And the result is a depression, as demand for goods and services and credit collapse.

If he follows the advice, the brother's family spending will not recover for quite a while; not until the debt is paid off and a steady family savings program is established, and then only as family income rises. This process takes time.

During that time the "economy" of the brother is "depressed", in the sense that aggregate spending per year is reduced. But note that it is "depressed" from an artificial and unsustainable high level.

So too our national economy.

Our national politicians only gauge the health of the national economy based on the level of economic activity, not by looking at the economy's balance sheet. Thus, a healthy correction for the balance sheet is treated as a disease which must be stopped.

The politicians are using Keynesian justification to substitute federal government spending for the missing private spending, to try and maintain overall spending at a level which was clearly artificial and beyond the sustainable means of the economy as a whole. Even if this policy worked (it won't) it is inappropriate, because it is neutralizing the effort of the private economy to "straighten-up" the national balance sheet.

As if this were not bad enough, much of the federal spending is structured to induce the private sector to resume spending at the old level before the balance sheets are repaired. That would be like telling the brother that the decline in family spending is a disease that must be stopped, that he must resume his spending and borrowing immediately, and then offering him financial inducements to do just that.

In light of all this, if I had the foresight, I would have added two additional points to the advice to the brother:
  • Resist financial blandishments of credit card companies and retail discount sales
  • If the government gives you a stimulus check or reduces your taxes, use the money to reduce debt.
The proper role of Government in this crisis is to allow the balance sheet correction to work its way through the system, in other words, patience.

During this period the Government should ensure that individuals are not pushed to an economic level where starvation or homelessness result. That does not mean keeping people in homes that they can't afford; it means keeping them off the streets.

On the business side, the Government should save basically sound businesses, particularly those who are imperiled by an absence of customary credit. Government should do this because the bankruptcy of a business involves not only the rearrangement of asset ownership but the destruction of the the engine of wealth represented by the intangible assets of the accumulation of knowledge and skills of the employees and the organization of that knowledge and skill in a wealth-producing cooperative. However, it is not a proper government role to bail out fundamentally unsound businesses.

And Government should reduce taxes, to reduce the burden it places on the backs of individuals and businesses.

I said the Keynesian stimulus will not work. Why? Because, unless the stimulus money is nothing more than the result of running the government printing press flat out (which will eventually cause a massive wave of inflation resulting from the debasement of the currency), this spending must be funded by borrowing or taxes. Borrowing is funding deferred. So it must be paid for either with higher taxes now or higher taxes later. Taxes reduce the ability of the taxed to spend or invest - dollar for dollar.