Claudio Guler

Kyle Bass from Hayman Capital, the investor who foresaw and capitalized on the 2008 crash, succinctly explains how the US Government intends to resolve its economic conundrum.

Update, Jan. 25: ZIRP now through late 2014.

Gideon Rachman confessed on Tuesday’s comment page of the Financial Times that “he’s feeling strangely Austrian.” Sebastian Mallaby, referencing Rachman’s article, confessed a similar sensation when contemplating banks on today’s comment page of the Financial Times. I too must confess that over the past year I have come to find substantial appeal in the explanatory power and reform potential of the Austrian School of economics. Too bad inside the beltway policymakers are busy doing the ostrich.

In the mean time, our treadmill economy awaits its next shot of juice over the coming months, the real deal quantitative easing 3 (QE3): a resumption of large scale asset purchases. Primary Dealer forecasts here. QE3-lite – zero percent interest rates through 2013 and “Operation Twist” – was only a bridging mechanism.

Here’s to sticking it to savers and long-term bond holders via dollar debasement, to perennially bailing out the crony capitalists, and to maintaining the domestic socio-economic hierarchy as the US undergoes relative economic decline.

My neighbors in Westchester thank you Mr. Bernanke.

For the US today. And the Europeans in a decade or two tomorrow (if they also do the predictable and gorge their voters with debt):

“How did you go bankrupt? Two ways. Gradually, then suddenly.”
― Ernest Hemingway, The Sun Also Rises

There is life after empire.

The Optimist, FP.com, Charles Kenny. – “Three Cheers for Decline“

Equities are tanking. QE3 is imminent. More dollar debasement to come.

For a disturbingly on point forecast, and blow-by-blow chronicle of American economic decline collapse, make sure to check out the Austrian School whizzes over at ZeroHedge.com.

Two weeks ago, US President Barack Obama proffered his solution to America’s debt problem. The speech came on the heels of several weeks of increasingly bearish sentiment in the US capital markets. It also served as a rebuttal to Republican Congressman Paul Ryan’s welfare state-slaying Path to Prosperity proposal. A political, or fiscal, fix to America’s debt problem is essential, both Obama and Ryan argue. But is it too late? And are America’s politicians simply too divided?

Toward the end of the speech, Obama announced that he has directed his vice president to lead negotiations with the US Congress to save $4 trillion over the next twelve years. The self-imposed deadline for a compromise is the end of June 2011. The US Federal Reserve’s emergency monetary stimulus measure Quantitative Easing 2 (QE2) also ends on 30 June 2011. Coincidence?

So, what happens on 30 June when QE2 ends? Two scenarios are foreseeable.

In the first, America’s politicians come to their senses, devise mechanisms to divvy up a shrinking pie and agree on societally constructive austerity measures; the markets gain confidence that the US will make good on its debts in full. QE2 ends and depending on the underlying health of the private sector interest rates on US debt rise slightly to moderately from their exceptional lows to attract sensible private investors. The US skirts recession or briefly dips back into it.

In the second scenario, America’s politicians don’t come up with a fix and the apolitical end of the system – the Fed and the US Treasury – continues to attempt to keep the ship afloat as the bills inevitably come due. Assuming the private sector has to date not entered a self-sustaining, virtuous circle of economic expansion, once QE2 ends interest rates could spike. Economic contraction would likely ensue and the Fed in the absence of a crisis-induced fiscal solution may feel compelled to launch QE3, QE4, and so on and so forth. How much global investors then hold off before moving to price in US reluctance to bring its books into balance, opting instead to monetize its debt, becomes the $14.3 trillion question.

The latter scenario is unlikely to end the Dollar’s status as world reserve currency for now. It suggests, nevertheless, a continued, secular decline of the Dollar index. And more gloomily, if investors overreact à la Soros reflexivity, a Dollar crash settling at a new lower level. An orderly Dollar devaluation with an eye toward rectifying global imbalances may of course be part of the Fed’s strategy all along.

Because Dollar debasement and rising yields tend to erode the real underlying value of US bonds, Bill Gross, bond guru and long-time manager of PIMCO’s $236 billion Total Return Fund, isn’t sticking around to see how things pan out. On the contrary, lately Mr. Gross thinks he can make money shorting the lot some. The Monday before last’s negative outlook by the Standard & Poors ratings agency on US creditworthiness provides yet another ominous sign.

America’s failure to bring its debt situation under control is resulting in 11th-hour breakdown maintenance. Is it up to the task?

Must-read: Brad Setser’s If the US Dollar Plummets, a contingency memorandum he penned before joining the White House Council of Economic Advisors.

To understand the United States’ role in the world, familiarity with the various frames that decision makers in Washington rely on when formulating foreign policy is helpful. Most statecraft blends these, kind of like a color wheel. The basic contours, however, personified by four giants of American history, are as follows:

The Extroverts

Hamiltonianism maintains that the US should pursue a realist foreign policy, balancing interests, especially material ones, and fundamentally seeks to promote an expansionist agenda. Hamiltonians support a robust national security establishment, a strong dollar policy and a muscular industrial base; in effect the US from WWI to the Great Recession. Domestically, these are the establishment Republicans exemplified by figures such as father George H. W. Bush.

Wilsonianism also subscribes to the furtherance of the Pax Americana. But whereas Hamiltonians favor material interests, Wilsonians emphasize the normative, touchy-feely moral aspects of foreign policymaking. Wilsonians are frequently labeled idealists, like to set up international institutions, are bleeding-heart humanitarian interventionists, prefer to co-opt other states rather than impose their will on them, and ultimately seek to consolidate a global society defined by liberal American values. Recently, Presidents Obama (Libya), more cynically George W. Bush (Iraq after WMD failed to materialize) and Clinton (Bosnia) have all incorporated elements of Wilsonianism in their prosecution of US foreign affairs.

The Introverts

Jeffersonianism boils down to super-sizing pre-industrial Switzerland; trade but focus on the domestic, set a – but don’t strive to lead by a – moral example, keep the national security state at a minimum (the ideal is none whatsoever), don’t pick fights abroad with the army you don’t have. The hitch with Jeffersonianism is that it’s hard to square with America’s post-WWII superpower status and easily derided back home as pusillanimous.

Jacksonianism is Palinesque populist and like Jeffersonianism isolationist at heart. Jacksonians are equally suspicious of the moneyed, power-centralizing Hamiltonians. But they depart from the Jeffersonians when it comes to the use of force. A Jeffersonian will almost always turn the other cheek. A Jacksonian is almost always up for a fight against an enemy he perceives as intrinsically menacing the national interest. And once blood and treasure are committed, surrender, or for that matter showing mercy, is no longer an option. Chest thumping is welcome. Both Jacksonians and Hamiltonians, but the former more forcefully so, tend to shun international institutions and view them as constraints on US freedom of action. The knee-jerk, outraged and ultimately fabulously expensive neoconservatives’ reaction to 9/11 under George W. Bush was Jacksonian through and through.

So, what’s President Obama? My guess is something approximating a longing Jeffersonian with a Wilsonian bent operating in a Hamiltonian world inexorably in relative decline.

Original Print: http://isnblog.ethz.ch/government/the-isms-of-american-foreign-policy

Creative Commons – Attribution-Noncommercial-No Derivative Works 3.0 Unported

Western monitoring missions to Sudan announced Saturday that the country’s recent executive and legislative elections failed to meet international standards, but marked an important step in the northeast African state’s democratic transformation.

The Carter Center delegation, headed by former US president Jimmy Carter, and the EU Election Observation Mission, led by Member of the European Parliament Veronique de Keyser, both said that a mix of alleged electoral improprieties, a lack of transparency, logistical issues and party boycotts marred the vote.

Implications: Keep reading.

Original Print: http://www.examiner.com/x-44036-Foreign-Policy-Examiner~y2010m4d18-Sudan-votes-update

Sudan Sunday kicked off three days of national elections as called for by the 2005 Comprehensive Peace Agreement (CPA) that ended the two-decade long north-south civil war – albeit almost a year late. Note: The National Election Commission (NEC) on Monday extended the vote by an extra two days.

The vote comes amid allegations of electoral improprieties and a boycott by Yasser Arman of the southern Sudan People’s Liberation Movement (SPLM) and former prime minister Sadiq al-Mahdi of the northern opposition Umma party, effectively securing a win for President Omar al-Bashir of the National Congress Party (NCP) and an indictee of the International Criminal Court (ICC) for war crimes and crimes against humanity in Darfur. EU election observers have also pulled out the western Darfur region, citing security concerns.

Critics charge that the exercise in suffrage will do little more than legitimize the despotic rule of Bashir, increase his defiance toward international opprobrium, and possibly reinvigorate his proclivity to use excessive force against rebels in Darfur and South Sudan.

This may be the case, but election observers and foreign governments must still certify the results. Moreover, although his legitimacy may be ostensibly bolstered in northern Sudan, internationally Bashir will remain a pariah as well as a fugitive, and his credibility in Darfur and South Sudan is unlikely to improve.

Proponents of the election, on the other hand, point out that the poll sets a precedent for Sudan and Bashir, and will complicate future attempts by the autocrat, should he so feel inclined, to argue against holding a referendum for southern secession scheduled for January 2011.

Much but not all of Sudan’s oil reserves, a lifeline of the Khartoum government, are located in the south.

NATO’s mission in Afghanistan has less to do with the fight against ‘terrorism’ than member governments maintain.

Western forces entered into Afghanistan back in October 2001 for security purposes, and security purposes alone. The issue is: the security imperative now fails to impress.

Recent developments, namely the Fort Hood shooting in Texas and the attempted Christmas day bombing on board a Detroit-bound airliner, illustrate the futility of NATO’s anti-terror operations in Afghanistan.

There is nothing special about Afghan real estate. Yemen, Somalia, Pakistan, Nigeria, the US, the UK, the Internet, etc…all make for promising substitutes. The developments have also brought into stark relief the matter of fact that the global jihad ideology championed by al-Qaida is highly fungible, transnational and probably impossible to stop without a genuine waning of anti-American and anti-Western sentiments in the Muslim world.

It follows then that ending the West’s military presence in the Muslim world in particular, or at minimum limiting it as best as possible, is a crucial step in mitigating this threat. NATO in Afghanistan, above all else, is kindler for the fire it is ostensibly in-country to suppress.

A more reasonable and less abrasive approach would entail heightening homeland defense measures domestically, working by way of multilateral channels where possible internationally, and carrying out any remaining international security objectives (particularly in the field of terrorism) in a more clandestine fashion.

Adopting such a posture would significantly reduce public expenditures, create jobs back home by expanding the payrolls of national security organs and generally work toward bankrupting the arguments used to recruit young jihadis.

Some commentators, moreover, point out that NATO’s protracted stay in Afghanistan is as much about safeguarding Pakistan’s nuclear weapons as it is about taking the fight to al-Qaida. Maybe, but…

The US already slips Islamabad a billion plus dollars per year, in part, expressly for that purpose. Concerns over Taliban and al-Qaida fighters overrunning the Pakistani military are equally misplaced. Pashtun militants, the ethnic group from which the Taliban hail, can already launch strikes against the Pakistani government and military from inside Pakistan. So far, they have managed to shake, but hardly dislodge the ruling establishment. What is more, since its formation following independence in 1947, the Pakistani military has been a Punjab-dominated institution, one unlikely to afford marginalized Pashtuns a greater say anytime soon.

The West’s security rationale for staying in Afghanistan is weak. That said, inertial forces are likely to secure NATO’s sojourn for a good while longer. They include:

(1) the financial incentives provided by a bloated US military-industrial complex;

(2) the impulse to maintain a Western foothold in this geographically isolated yet geostrategically significant corner of the world;

(3) the reality that US troops are scheduled to pull out of Iraq by late 2011 and as such are surrendering an important western flank against Iran, undermining US containment policy and, without Afghan territory, largely limiting US access to Iran in the event of a US-Israeli strike against the country’s nuclear facilities to the Persian Gulf.

Fifty-odd years on, Colonel Mathieu’s admonition persists. “Should we remain in Algeria? If you answer “yes,” then you must accept all the necessary consequences.”