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WAVING GOODBYE TO HEGEMONY
A long and interesting article by Parag Khanna appeared in the Sunday New York Times magazine (featuring this great cover) on the future of big-power relations, with the end of America's capacity to project its will unilaterally. The piece is truly epical in describing and imagining the evolving big picture from a certain orthodox "big guys moving pieces around the chessboard this is the world" perspective. That the analysis evolved from first-hand observation, rather the stratosphere of some think tank, was obviously no small help.
Khanna does display a telltale lack of imagination one might expect from something published in a totem establishment mouthpiece. For example, he does not appear to entertain the possibility of a Soviet Union-style U.S. political and financial collapse, which would render much of his analysis moot. And, the thought never seems to cross his mind that one "solution" to the "problem" of declining American hegemony is for it to start minding its own business, Switzerland style, and regenerate its former economic dynamism internally. Let the resulting investment capital and quality do the talking. He begins by disrupting the dreamworld the U.S. is still living in:
Turn on the TV today, and you could be forgiven for thinking it is 1999. Democrats and Republicans are bickering about where and how to intervene, whether to do it alone or with allies and what kind of world America should lead. Democrats believe they can hit a reset button, and Republicans believe muscular moralism is the way to go. It is as if the first decade of the 21st century did not happen -- and almost as if history itself does not happen. But the distribution of power in the world has fundamentally altered over the two presidential terms of George W. Bush , both because of his policies and, more significant, despite them. Maybe the best way to understand how quickly history happens is to look just a bit ahead.
It is 2016, and the Hillary Clinton or John McCain or Barack Obama administration is nearing the end of its second term. America has pulled out of Iraq but has about 20,000 troops in the independent state of Kurdistan, as well as warships anchored at Bahrain and an Air Force presence in Qatar. Afghanistan is stable; Iran is nuclear. China has absorbed Taiwan and is steadily increasing its naval presence around the Pacific Rim and, from the Pakistani port of Gwadar, on the Arabian Sea. The European Union has expanded to well over 30 members and has secure oil and gas flows from North Africa, Russia and the Caspian Sea, as well as substantial nuclear energy. America's standing in the world remains in steady decline. ...
Condoleezza Rice has said America has no "permanent enemies," but it has no permanent friends either. Many saw the invasions of Afghanistan and Iraq as the symbols of a global American imperialism; in fact, they were signs of imperial overstretch. Every expenditure has weakened America's armed forces, and each assertion of power has awakened resistance in the form of terrorist networks, insurgent groups and "asymmetric" weapons like suicide bombers. America's unipolar moment has inspired diplomatic and financial countermovements to block American bullying and construct an alternate world order. That new global order has arrived, and there is precious little Clinton or McCain or Obama could do to resist its growth.
The Geopolitical Marketplace
At best, America's unipolar moment lasted through the 1990s, but that was also a decade adrift. The post-cold-war "peace dividend" was never converted into a global liberal order under American leadership. So now, rather than bestriding the globe, we are competing -- and losing -- in a geopolitical marketplace alongside the world's other superpowers: the E.U. and China. This is geopolitics in the 21st century: the new Big Three. Not Russia, an increasingly depopulated expanse run by Gazprom.gov. Not an incoherent Islam embroiled in internal wars. And not India, lagging decades behind China in both development and strategic appetite. The Big Three make the rules -- their own rules -- without any one of them dominating. And the others are left to choose their suitors in this post-American world.
The more we appreciate the differences among the American, European and Chinese worldviews, the more we will see the planetary stakes of the new global game. Previous eras of balance of power have been among European powers sharing a common culture. The cold war, too, was not truly an "East-West" struggle; it remained essentially a contest over Europe. What we have today, for the first time in history, is a global, multicivilizational, multipolar battle.
In Europe's capital, Brussels, technocrats, strategists and legislators increasingly see their role as being the global balancer between America and China. ... The Europeans play both sides, and if they do it well, they profit handsomely. ... It may comfort American conservatives to point out that Europe still lacks a common army; the only problem is that it does not really need one. Europeans use intelligence and the police to apprehend radical Islamists, social policy to try to integrate restive Muslim populations and economic strength to incorporate the former Soviet Union and gradually subdue Russia. Each year European investment in Turkey grows as well, binding it closer to the E.U. even if it never becomes a member. And each year a new pipeline route opens transporting oil and gas from Libya, Algeria or Azerbaijan to Europe. What other superpower grows by an average of one country per year, with others waiting in line and begging to join?
Robert Kagan famously said that America hails from Mars and Europe from Venus, but in reality, Europe is more like Mercury -- carrying a big wallet. The E.U.'s market is the world's largest, European technologies more and more set the global standard and European countries give the most development assistance. And if America and China fight, the world's money will be safely invested in European banks. Many Americans scoffed at the introduction of the euro, claiming it was an overreach that would bring the collapse of the European project. Yet today, Persian Gulf oil exporters are diversifying their currency holdings into euros ... With London taking over (again) as the world's financial capital for stock listing, it is no surprise that China's new state investment fund intends to locate its main Western offices there instead of New York. Meanwhile, America's share of global exchange reserves has dropped to 65%. Gisele Bündchen demands to be paid in euros, while Jay-Z drowns in 500 euro notes in a recent video. American soft power seems on the wane even at home.
And Europe's influence grows at America's expense. While America fumbles at nation-building, Europe spends its money and political capital on locking peripheral countries into its orbit. Many poor regions of the world have realized that they want the European dream, not the American dream. Africa wants a real African Union like the E.U.; we offer no equivalent. Activists in the Middle East want parliamentary democracy like Europe's, not American-style presidential strongman rule. Many of the foreign students we shunned after 9/11 are now in London and Berlin: twice as many Chinese study in Europe as in the U.S. We did not educate them, so we have no claims on their brains or loyalties as we have in decades past. More broadly, America controls legacy institutions few seem to want -- like the IMF -- while Europe excels at building new and sophisticated ones modeled on itself. ...
The East Asian Community is but one example of how China is also too busy restoring its place as the world's "Middle Kingdom" to be distracted by the Middle Eastern disturbances that so preoccupy the U.S. In America's own hemisphere, from Canada to Cuba to Venezuela, China is cutting massive resource and investment deals. Across the globe, it is deploying tens of thousands of its own engineers, aid workers, dam-builders and covert military personnel. In Africa, China is not only securing energy supplies; it is also making major strategic investments in the financial sector. The whole world is abetting China's spectacular rise as evidenced by the ballooning share of trade in its gross domestic product -- and China is exporting weapons at a rate reminiscent of the Soviet Union during the cold war, pinning America down while filling whatever power vacuums it can find. Every country in the world currently considered a rogue state by the U.S. now enjoys a diplomatic, economic or strategic lifeline from China, Iran being the most prominent example.
Without firing a shot, China is doing on its southern and western peripheries what Europe is achieving to its east and south. Aided by a 35 million-strong ethnic Chinese diaspora well placed around East Asia's rising economies, a Greater Chinese Co-Prosperity Sphere has emerged. Like Europeans, Asians are insulating themselves from America's economic uncertainties. Under Japanese sponsorship, they plan to launch their own regional monetary fund, while China has slashed tariffs and increased loans to its Southeast Asian neighbors. Trade within the India-Japan-Australia triangle -- of which China sits at the center -- has surpassed trade across the Pacific.
At the same time, a set of Asian security and diplomatic institutions is being built from the inside out, resulting in America's grip on the Pacific Rim being loosened one finger at a time. From Thailand to Indonesia to Korea, no country -- friend of America's or not -- wants political tension to upset economic growth. To the Western eye, it is a bizarre phenomenon: small Asian nation-states should be balancing against the rising China, but increasingly they rally toward it out of Asian cultural pride and an understanding of the historical-cultural reality of Chinese dominance. And in the former Soviet Central Asian countries -- the so-called Stans -- China is the new heavyweight player, its manifest destiny pushing its Han pioneers westward while pulling defunct microstates like Kyrgyzstan and Tajikistan, as well as oil-rich Kazakhstan, into its orbit. ...
Oceania, Eurasia and Eastasia revisited
The Big Three are the ultimate "Frenemies." 21st-century geopolitics will resemble nothing more than Orwell's 1984, but instead of three world powers (Oceania, Eurasia and Eastasia), we have three hemispheric pan-regions, longitudinal zones dominated by America, Europe and China. As the early 20th-century European scholars of geopolitics realized, because a vertically organized region contains all climatic zones year-round, each pan-region can be self-sufficient and build a power base from which to intrude in others' terrain. But in a globalized and shrinking world, no geography is sacrosanct. So in various ways, both overtly and under the radar, China and Europe will meddle in America's backyard, America and China will compete for African resources in Europe's southern periphery and America and Europe will seek to profit from the rapid economic growth of countries within China's growing sphere of influence. Globalization is the weapon of choice. The main battlefield is what I call "the second world."
The Rise of the "Second World"
There are plenty of statistics that will still tell the story of America's global dominance: our military spending, our share of the global economy and the like. But there are statistics, and there are trends. To really understand how quickly American power is in decline around the world, I have spent the past two years traveling in some 40 countries in the five most strategic regions of the planet -- the countries of the second world. They are not in the first-world core of the global economy, nor in its third-world periphery. Lying alongside and between the Big Three, second-world countries are the swing states that will determine which of the superpowers has the upper hand for the next generation of geopolitics. From Venezuela to Vietnam and Morocco to Malaysia, the new reality of global affairs is that there is not one way to win allies and influence countries but three: America's coalition (as in "coalition of the willing"), Europe's consensus and China's consultative styles. The geopolitical marketplace will decide which will lead the 21st century.
The key second-world countries in Eastern Europe, Central Asia, South America, the Middle East and Southeast Asia are more than just "emerging markets." If you include China, they hold a majority of the world's foreign-exchange reserves and savings, and their spending power is making them the global economy's most important new consumer markets and thus engines of global growth -- not replacing the United States but not dependent on it either. ...
Second-world countries are distinguished from the third world by their potential: the likelihood that they will capitalize on a valuable commodity, a charismatic leader or a generous patron. Each and every second-world country matters in its own right, for its economic, strategic or diplomatic weight, and its decision to tilt toward the U.S., the E.U. or China has a strong influence on what others in its region decide to do. ...
What about Russia?
In exploring just a small sample of the second world, we should start perhaps with the hardest case: Russia. Apparently stabilized and resurgent under the Kremlin-Gazprom oligarchy, why is Russia not a superpower but rather the ultimate second-world swing state? For all its muscle flexing, Russia is also disappearing. Its population decline is a staggering half million citizens per year or more, meaning it will be not much larger than Turkey by 2025 or so -- spread across a land so vast that it no longer even makes sense as a country. Travel across Russia today, and you will find, as during Soviet times, city after city of crumbling, heatless apartment blocks and neglected elderly citizens whose value to the state diminishes with distance from Moscow. The forced Siberian migrations of the Soviet era are being voluntarily reversed as children move west to more tolerable and modern climes. Filling the vacuum they have left behind are hundreds of thousands of Chinese, literally gobbling up, plundering, outright buying and more or less annexing Russia's Far East for its timber and other natural resources. Already during the cold war it was joked that there were "no disturbances on the Sino-Finnish border," a prophecy that seems ever closer to fulfillment.
Russia lost its western satellites almost two decades ago, and Europe, while appearing to be bullied by Russia's oil-dependent diplomacy, is staging a long-term buyout of Russia, whose economy remains roughly the size of France's. The more Europe gets its gas from North Africa and oil from Azerbaijan, the less it will rely on Russia, all the while holding the lever of being by far Russia's largest investor. The European Bank for Reconstruction and Development provides the kinds of loans that help build an alternative, less corrupt private sector from below, while London and Berlin welcome Russia's billionaires, allowing the likes of Boris Berezovsky to openly campaign against Putin. The E.U. and U.S. also finance and train a pugnacious second-world block of Baltic and Balkan nations, whose activists agitate from Belarus to Uzbekistan. Privately, some E.U. officials say that annexing Russia is perfectly doable; it is just a matter of time. In the coming decades, far from restoring its Soviet-era might, Russia will have to decide whether it wishes to exist peacefully as an asset to Europe or the alternative -- becoming a petro-vassal of China.
Turkey, too, is a totemic second-world prize advancing through crucial moments of geopolitical truth. During the cold war, NATO was the principal vehicle for relations with Turkey, the West's listening post on the southwestern Soviet border. But with Turkey's bending over backward to avoid outright E.U. rejection, its refusal in 2003 to let the U.S. use Turkish territory as a staging point for invading Iraq marked a turning point -- away from the U.S. ...
To be sure, Turkish pride contains elements of an aggressive neo-Ottomanism that is in tension with some E.U. standards, but this could ultimately serve as Europe's weapon to project stability into Syria, Iraq and Iran -- all of which Europe effectively borders through Turkey itself. Roads are the pathways to power, as I learned driving across Turkey in a beat-up Volkswagen a couple of summers ago. Turkey's master engineers have been boring tunnels, erecting bridges and flattening roads across the country's massive eastern realm, allowing it to assert itself over the Arab and Persian worlds both militarily and economically as Turkish merchants look as much East as West. ...
It takes only one glance at Istanbul's shimmering skyline to realize that even if Turkey never becomes an actual E.U. member, it is becoming ever more Europeanized. Turkey receives more than $20 billion in foreign investment and more than 20 million tourists every year, the vast majority of both from E.U. countries. 90% of the Turkish diaspora lives in Western Europe and sends home another $1 billion per year in remittances and investments. This remitted capital is spreading growth and development eastward in the form of new construction ventures, kilim factories and schools. With the accession of Romania and Bulgaria to the E.U. a year ago, Turkey now physically borders the E.U. (beyond its narrow frontier with Greece), symbolizing how Turkey is becoming a part of the European superpower.
The Monroe Doctrine is rapidly eroding
The Big Three dynamic is not just some distant contest by which America ensures its ability to dictate affairs on the other side of the globe. Globalization has brought the geopolitical marketplace straight to America's backyard, rapidly eroding the two-centuries-old Monroe Doctrine in the process. In truth, America called the shots in Latin America only when its southern neighbors lacked any vision of their own. Now they have at least two non-American challengers: China and Chavez. It was Simon Bolivar who fought ferociously for South America's independence from Spanish rule, and today it is the newly renamed Bolivarian Republic of Venezuela that has inspired an entire continent to bootstrap its way into the global balance of power on its own terms.
Hugo Chavez, the country's clownish colonel, may last for decades to come or may die by the gun, but either way, he has called America's bluff and won, changing the rules of North-South relations in the Western hemisphere. He has emboldened and bankrolled leftist leaders across the continent, helped Argentina and others pay back and boot out the I.M.F. and sponsored a continentwide bartering scheme of oil, cattle, wheat and civil servants, reminding even those who despise him that they can stand up to the great Northern power. Chavez stands not only on the ladder of high oil prices. He relies on tacit support from Europe and hardheaded intrusion from China, the former still the country's largest investor and the latter feverishly repairing Venezuela's dilapidated oil rigs while building its own refineries.
But Chavez's challenge to the U.S. is, in inspiration, ideological, whereas the second-world shift is really structural. Even with Chavez still in power, it is Brazil that is reappearing as South America's natural leader. Alongside India and South Africa, Brazil has led the charge in global trade negotiations, sticking it to the U.S. on its steel tariffs and to Europe on its agricultural subsidies. Geographically, Brazil is nearly as close to Europe as to America and is as keen to build cars and airplanes for Europe as it is to export soy to the U.S. Furthermore, Brazil, although a loyal American ally in the cold war, wasted little time before declaring a "strategic alliance" with China. Their economies are remarkably complementary ... Latin America has mostly been a geopolitical afterthought over the centuries, but in the 21st century, all resources will be competed for, and none are too far away.
The Middle East
The Middle East -- spanning from Morocco to Iran -- lies between the hubs of influence of the Big Three and has the largest number of second-world swing states. No doubt the thaw with Libya, brokered by America and Britain after Muammar el-Qaddafi declared he would abandon his country's nuclear pursuits in 2003, was partly motivated by growing demand for energy from a close Mediterranean neighbor. But Qaddafi is not selling out. He and his advisers have astutely parceled out production sharing agreements to a balanced assortment of American, European, Chinese and other Asian oil giants. ... What I find in virtually every Arab country is not such nationalism, however, but rather a new Arabism aimed at spreading oil wealth within the Arab world rather than depositing it in the U.S. as in past oil booms. And as Egypt, Syria and other Arab states receive greater investment from the Persian Gulf and start spending more on their own, they, too, become increasingly important second-world players who can thwart the U.S.
Saudi Arabia, for quite some years to come still the planet's leading oil producer, is a second-world prize on par with Russia and equally up for grabs. For the past several decades, America's share of the foreign direct investment into the kingdom decisively shaped the country's foreign policy, but today the monarchy is far wiser, luring Europe and Asia to bring their investment shares toward a third each. ... Make no mistake: America was never all powerful only because of its military dominance; strategic leverage must have an economic basis. A major common denominator among key second-world countries is the need for each of the Big Three to put its money where its mouth is.
For all its historical antagonism with Saudi Arabia, Iran is playing the same swing-state game. Its diplomacy has not only managed to create discord among the U.S. and E.U. on sanctions; it has also courted China, nurturing a relationship that goes back to the Silk Road. Today Iran represents the final square in China's hopscotch maneuvering to reach the Persian Gulf overland without relying on the narrow Straits of Malacca. ... The longer International Atomic Energy Agency negotiations drag on, the more likely it becomes that Iran will indeed be able to stay afloat without Western investment because of backing from China and from its second-world friends -- without giving any ground to the West.
Interestingly, it is precisely Muslim oil-producing states -- Libya, Saudi Arabia, Iran, (mostly Muslim) Kazakhstan, Malaysia -- that seem the best at spreading their alignments across some combination of the Big Three simultaneously: getting what they want while fending off encroachment from others. America may seek Muslim allies for its image and the "war on terror," but these same countries seem also to be part of what Samuel Huntington called the "Confucian-Islamic connection." What is more, China is pulling off the most difficult of superpower feats: simultaneously maintaining positive ties with the world's crucial pairs of regional rivals: Venezuela and Brazil, Saudi Arabia and Iran, Kazakhstan and Uzbekistan, India and Pakistan. At this stage, Western diplomats have only mustered the wherewithal to quietly denounce Chinese aid policies and value-neutral alliances, but they are far from being able to do much of anything about them.
This applies most profoundly in China's own backyard, Southeast Asia. Some of the most dynamic countries in the region Malaysia, Thailand and Vietnam are playing the superpower suitor game with admirable savvy. Chinese migrants have long pulled the strings in the region's economies even while governments sealed defense agreements with the U.S. Today, Malaysia and Thailand still perform joint military exercises with America but also buy weapons from, and have defense treaties with, China ... As one senior Malaysian diplomat put it to me, without a hint of jest, "Creating a community is easy among the yellow and the brown but not the white." Tellingly, it is Vietnam, because of its violent histories with the U.S. and China, which is most eager to accept American defense contracts (and a new Intel microchip plant) to maintain its strategic balance. Vietnam, like most of the second world, does not want to fall into any one superpower's sphere of influence.
The Anti-Imperial Belt
The new multicolor map of influence -- a Venn diagram of overlapping American, Chinese and European influence -- is a very fuzzy read. No more "They are with us" or "He's our S.O.B." Mubarak, Musharraf, Malaysia's Mahathir and a host of other second-world leaders have set a new standard for manipulative prowess: All tell the U.S. they are its friend while busily courting all sides.
What is more, many second-world countries are confident enough to form anti-imperial belts of their own, building trade, technology and diplomatic axes across the (second) world from Brazil to Libya to Iran to Russia. ... Second-world countries also increasingly use sovereign-wealth funds (often financed by oil) worth trillions of dollars to throw their weight around, even bullying first-world corporations and markets. The United Arab Emirates, Saudi Arabia and Russia are rapidly climbing the ranks of foreign-exchange holders and are hardly holding back in trying to buy up large shares of Western banks (which have suddenly become bargains) and oil companies. Singapore's sovereign-wealth fund has taken a similar path. ... From Switzerland to Citigroup, a reaction is forming to limit the shares such nontransparent sovereign-wealth funds can control, showing just how quickly the second world is rising in the global power game.
To understand the second world, you have to start to think like a second-world country. What I have seen in these and dozens of other countries is that globalization is not synonymous with Americanization; in fact, nothing has brought about the erosion of American primacy faster than globalization. While European nations redistribute wealth to secure or maintain first-world living standards, on the battlefield of globalization second-world countries' state-backed firms either outhustle or snap up American companies, leaving their workers to fend for themselves. The second world's first priority is not to become America but to succeed by any means necessary.
The Non-American World
Karl Marx and Max Weber both chastised Far Eastern cultures for being despotic, agrarian and feudal, lacking the ingredients for organizational success. Oswald Spengler saw it differently, arguing that mankind both lives and thinks in unique cultural systems, with Western ideals neither transferable nor relevant. Today the Asian landscape still features ancient civilizations but also by far the most people and, by certain measures, the most money of any region in the world. With or without America, Asia is shaping the world's destiny -- and exposing the flaws of the grand narrative of Western civilization in the process.
The rise of China in the East and of the E.U. within the West has fundamentally altered a globe that recently appeared to have only an American gravity -- pro or anti. As Europe's and China's spirits rise with every move into new domains of influence, America's spirit is weakened. ... [W]hy should China or other Asian countries become "responsible stakeholders," in former Deputy Secretary of State Robert Zoellick's words, in an American-led international order when they had no seat at the table when the rules were drafted? Even as America stumbles back toward multilateralism, others are walking away from the American game and playing by their own rules.
The self-deluding universalism of the American imperium -- that the world inherently needs a single leader and that American liberal ideology must be accepted as the basis of global order -- has paradoxically resulted in America quickly becoming an ever-lonelier superpower. Just as there is a geopolitical marketplace, there is a marketplace of models of success for the second world to emulate, not least the Chinese model of economic growth without political liberalization (itself an affront to Western modernization theory). ... Despite the "mirage of immortality" that afflicts global empires, the only reliable rule of history is its cycles of imperial rise and decline, and as [historian Arnold] Toynbee also pithily noted, the only direction to go from the apogee of power is down.
The web of globalization now has three spiders. What makes America unique in this seemingly value-free contest is not its liberal democratic ideals -- which Europe may now represent better than America does -- but rather its geography. America is isolated, while Europe and China occupy two ends of the great Eurasian landmass that is the perennial center of gravity of geopolitics. ... "Accidental empire" or not, America must quickly accept and adjust to this reality. Maintaining America's empire can only get costlier in both blood and treasure. It is not worth it, and history promises the effort will fail. It already has.
Would the world not be more stable if America could be reaccepted as its organizing principle and leader? It is very much too late to be asking, because the answer is unfolding before our eyes. Neither China nor the E.U. will replace the U.S. as the world's sole leader; rather all three will constantly struggle to gain influence on their own and balance one another. Europe will promote its supranational integration model as a path to resolving Mideast disputes and organizing Africa, while China will push a Beijing consensus based on respect for sovereignty and mutual economic benefit. America must make itself irresistible to stay in the game.
I believe that a complex, multicultural landscape filled with transnational challenges from terrorism to global warming is completely unmanageable by a single authority, whether the U.S. or the U.N. Globalization resists centralization of almost any kind. Instead, what we see gradually happening in climate-change negotiations (as in Bali in December) -- and need to see more of in the areas of preventing nuclear proliferation and rebuilding failed states -- is a far greater sense of a division of labor among the Big Three, a concrete burden-sharing among them by which they are judged not by their rhetoric but the responsibilities they fulfill. The arbitrarily composed Security Council is not the place to hash out such a division of labor. Neither are any of the other multilateral bodies bogged down with weighted voting and cacophonously irrelevant voices. The big issues are for the Big Three to sort out among themselves.
Suggestions for America
So let's play strategy czar. You are a 21st-century Kissinger. Your task is to guide the next American president (and the one after that) from the demise of American hegemony into a world of much more diffuse governance. What do you advise, concretely, to mitigate the effects of the past decade's policies -- those that inspired defiance rather than cooperation -- and to set in motion a virtuous circle of policies that lead to global equilibrium rather than a balance of power against the U.S.? ...
[A]s the dollar falls, our manufacturing base declines and Americans lose control of assets to wealthier foreign funds, our scientific education, broadband access, health-care, safety and a host of other standards are all slipping down the global rankings. Given our deficits and political gridlock, the only solution is to channel global, particularly Asian, liquidity into our own public infrastructure, creating jobs and technology platforms that can keep American innovation ahead of the pack. Globalization apologizes to no one; we must stay on top of it or become its victim. ...
Taken together, all these moves could renew American competitiveness in the geopolitical marketplace -- and maybe even prove our exceptionalism. We need pragmatic incremental steps like the above to deliver tangible gains to people beyond our shores, repair our reputation, maintain harmony among the Big Three, keep the second world stable and neutral and protect our common planet. Let's hope whoever is sworn in as the next American president understands this.
The author's other suggestions were largely variations on the theme of being more diplomatic and humble, and less arrogant and dictatorial. In short, more honey and less vinegar.
The multi-polar world has been arriving for a long time. Like a formerly dominant market leader that has been fat and happy for too long, the U.S. has been willfully blind to the reality that the world has changed and the old rules do not apply anymore. Now the wolf is at the door, and a "Plan B" is desperately needed. "Plan A" -- business as usual -- is not an option.
LATIN AMERICA BANKS ON INDEPENDENCE
Latin America is beyond question the victim of many self-inflicted wounds. But the people of that hemisphere have received more than their fair share of unwanted attention from their overbearing nothern neighbor. Now with the U.S.'s financial and military predominance on the wane, and with their economies fueled by revenues from the commodities boom, Latin Americans are taking concrete steps to achieve more financial independence.
In the closing weeks of 2007, a region in revolt against the economics of corporate globalization issued its most unified declaration of independence to date. On December 9, standing before the flags of their countries, the presidents of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela, along with a representative from Uruguay, gathered in Buenos Aires and signed the founding charter of the Banco del Sur, or the Bank of the South.
The Bank of the South will allow participating governments to use a percentage of their collective currency reserves to strengthen Latin America's economy and promote cooperative development. It plans to begin lending as early as 2008 with around $7 billion in capital.
By itself, the bank represents a serious challenge to U.S.-dominated institutions, such as the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB). As part of a larger trend, it signals a major break from the policies of "free trade" neoliberalism that dominated in the region throughout the '80s and '90s.
We would not hold out high hopes for the average return this new bank will earn on its "economy strengthening" investments, although it would not take much to beat the performance of the IMF and World Bank. But that is a lesser point. As explained in John Perkins's Confessions of an Economic Hit Man, the IMF and World Bank play major roles in making U.S. financial domination of developing countries happen. And when you have someone's wallet, their hearts and minds -- and political support -- tend to follow.
The Bank of the South's creators are keenly aware of the significance of this break. In the words of Venezuelan President Hugo Chavez, the bank is "aimed at freeing us from the chains of dependence and underdevelopment." Ecuadorian President Rafael Correa concurred, arguing that with the bank, "South American nations will be able to put an end to their political and financial dependence that they have had with the neoliberal model."
Officially, the international financial institutions are keeping their tone upbeat. On December 11, IMF Director General Dominique Strauss-Kahn told Agence France-Presse that the new bank is "not a problem; it's maybe an opportunity." Similarly, Augusto de la Torre, World Bank chief economist for Latin America, said, "As far as the World Bank is concerned, this new initiative is not perceived as a competitor."
But in March 2007, as Latin American leaders were first discussing the creation of a new body, one anonymous insider at the neoliberal IDB told the Financial Times that the Bank of the South represented the largest threat to his institution in decades. "With the money of Venezuela and political will of Argentina and Brazil, this is a bank that could have lots of money and a different political approach," he explained. "No one will say this publicly, but we don't like it."
So the multinationals and the international agencies that do their bidding feel threatened. This is the best indication yet that the Bank of the South actually has some substance. Imagine the big companies having to pay fair value for all the resources they buy (so to speak). Imagine the U.S. having to respectfully relate to its neighbors, rather than weaklings to be bullied. And imagine all the lower level functionaries of the various government-backed organizations not being able to do all the good they had planned without checking things out with the would-be beneficaries first. That "different political approach" sure could be a bad thing. (Shudder.)
There is good reason for those invested in the Washington Consensus to dislike the Bank of the South. In recent decades, the IMF, the World Bank and the multilateral regional banks have largely controlled poorer countries' access to credit and development financing. These institutions allowed developing countries to avoid defaulting on their debt, provided funds in some difficult times and gave a nod of approval to private creditors. But the price the countries paid in return was steep.
In order to stay in their good graces, developing nations have had to privatize industries, open markets to foreign businesses, liberalize capital flows, keep monetary policy tight and implement fiscal austerity (that is, cut needed social services for their people). In the end, such policies proved disastrous in Latin America.
Per capita GDP, which had been growing at a steady rate throughout the '60s and '70s, grew hardly at all in the subsequent two decades of neoliberalism. During the latter period, the region also developed some of the highest levels of inequality in the world.
The Bank of the South would work to remedy this situation. Unlike the preexisting financial institutions, the new bank will be run by Latin American countries themselves, will not be dominated by any single nation and will be free to support development approaches that are much more sensitive to the needs of the poor.
It is hard to see how the Latin-run bank could do much worse than the U.S. and allies dominated institutions. And as a stepping stone towards independence it makes good sense. But if it is run for the benefit of the participating governments and the Bank's employees, all good intentions notwithstanding, it will end up being another money sink. The article concludes:
Chavez [has] announced that Venezuela would withdraw from membership in the IMF and World Bank altogether. While the country is still working out the details of this move, the prospect is unprecedented in the era of corporate globalization.
The ability of oil-rich Venezuela to provide its neighbors with financing they previously might have needed to beg for from Washington is a significant factor in their willingness to break with the IMF and World Bank. Venezuela has offered billions in support to countries -- including Argentina, Bolivia and Ecuador -- and those backup funds make many countries less susceptible to threats of capital flight than in the past. Along with investments from China and India, it dramatically reduces Washington's ability to starve dissident leaders of financial resources when governments grow, in its view, disobedient. The Bank of the South will help to formalize a source of alternative finance and place it under regional control.
The U.S. has persistently abused the dollar's reserve currency status by dumping more and more dollars onto the rest of the world -- in short, inflating. This fueled a raging bull market in commodities and drove the price of oil up to historic highs. This led to unprecedented strengthen in Venezuela's finances, and enabled the country to finance the Bank of the South. What goes around, comes around.
Be nice to people on your way up, because you never know who you are going to meet on the way down. Don't burn your bridges behind you. Pride goeth before the fall. Wantonly ignoring all this timeless wisdom has been part of the U.S.'s M.O. with the rest of the world for a long time. There is more backlash to come. Count on it.
SUHARTO, THE MODEL KILLER, AND HIS FRIENDS IN HIGH PLACES
"To understand the significance of Suharto, who died on Sunday," writes John Pilger, director of Death of a Nation, in LewRockwell.com, "is to look beneath the surface of the current world order: the so-called global economy and the ruthless cynicism of those who run it." For those who wonder why America, particularly American multi-national corporations, are so despised among those who end up on the wrong side of the bug/windshield interaction, here is another example.
In my film Death of a Nation, there is a sequence filmed on board an Australian aircraft flying over the island of Timor. A party is in progress, and two men in suits are toasting each other in champagne. "This is an historically unique moment," says one of them, "that is truly uniquely historical." This is Gareth Evans, Australia's foreign minister. The other man is Ali Alatas, principal mouthpiece of the Indonesian dictator, General Suharto. It is 1989, and the two are making a grotesquely symbolic flight to celebrate the signing of a treaty that allowed Australia and the international oil and gas companies to exploit the seabed off East Timor, then illegally and viciously occupied by Suharto. The prize, according to Evans, was "zillions of dollars."
Beneath them lay a land of crosses: great black crosses etched against the sky, crosses on peaks, crosses in tiers on the hillsides. Filming clandestinely in East Timor, I would walk into the scrub and there were the crosses. They littered the earth and crowded the eye. In 1993, the Foreign Affairs Committee of the Australian Parliament reported that "at least 200,000" had died under Indonesia's occupation: almost a third of the population. And yet East Timor's horror, which was foretold and nurtured by the US, Britain and Australia, was actually a sequel. "No single American action in the period after 1945," wrote the historian Gabriel Kolko, "was as bloodthirsty as its role in Indonesia, for it tried to initiate the massacre." He was referring to Suharto's seizure of power in 1965–6, which caused the violent deaths of up to a million people. ...
Suharto was our model mass murderer -- "our" is used here advisedly. "One of our very best and most valuable friends," Thatcher called him, speaking for the West. For three decades, the Australian, U.S. and British governments worked tirelessly to minimize the crimes of Suharto's Gestapo, known as Kopassus, who were trained by the Australian SAS and the British army and who gunned down people with British-supplied Heckler and Koch machine guns from British-supplied Tactica "riot control" vehicles. Prevented by Congress from supplying arms direct, U.S. administrations from Gerald Ford to Bill Clinton, provided logistic support through the back door and commercial preferences. In one year, the British Department of Trade provided almost a billion pounds worth of so-called soft loans, which allowed Suharto buy Hawk fighter-bombers. The British taxpayer paid the bill for aircraft that dive-bombed East Timorese villages, and the arms industry reaped the profits.
However, the Australians distinguished themselves as the most obsequious. In an infamous cable to Canberra, Richard Woolcott, Australia's ambassador to Jakarta, who had been forewarned about Suharto's invasion of East Timor, wrote: "What Indonesia now looks to from Australia ... is some understanding of their attitude and possible action to assist public understanding in Australia ..." Covering up Suharto's crimes became a career for those like Woolcott, while "understanding" the mass murderer came in buckets. This left an indelible stain on the reformist government of Gough Whitlam following the cold-blooded killing of two Australian TV crews by Suharto's troops during the invasion of East Timor. "We know your people love you," Bob Hawke told the dictator. His successor, Paul Keating, famously regarded the tyrant as a father figure. When Indonesian troops slaughtered at least 200 people in the Santa Cruz cemetery in Dili, East Timor, and Australian mourners planted crosses outside the Indonesian embassy in Canberra, foreign minister Gareth Evans ordered them destroyed. To Evans, ever-effusive in his support for the regime, the massacre was merely an "aberration." This was the view of much of the Australian press, especially that controlled by Rupert Murdoch, whose local retainer, Paul Kelly, led a group of leading newspaper editors to Jakarta, fawn before the dictator.
Here lies a clue as to why Suharto, unlike Saddam Hussein, died not on the gallows but surrounded by the finest medical team his secret billions could buy. Ralph McGehee, a senior CIA operations officer in the 1960s, describes the terror of Suharto's takeover of Indonesia in 1965–6 as "the model operation" for the American-backed coup that got rid of Salvador Allende in Chile seven years later. ... The U.S. embassy in Jakarta supplied Suharto with a "zap list" of Indonesian Communist Party (PKI) members and crossed off the names when they were killed or captured. Roland Challis, the BBC's south east Asia correspondent at the time, told me how the British government was secretly involved in this slaughter. "British warships escorted a ship full of Indonesian troops down the Malacca Straits so they could take part in the terrible holocaust," he said. "I and other correspondents were unaware of this at the time ... There was a deal, you see."
The deal was that Indonesia under Suharto would offer up what Richard Nixon had called "the richest hoard of natural resources, the greatest prize in southeast Asia." In November 1967, the greatest prize was handed out at a remarkable three-day conference sponsored by the Time-Life Corporation in Geneva. Led by David Rockefeller, all the corporate giants were represented: the major oil companies and banks, General Motors, Imperial Chemical Industries, British American Tobacco, Siemens and U.S. Steel and many others. Across the table sat Suharto's U.S.-trained economists who agreed to the corporate takeover of their country, sector by sector. The Freeport company got a mountain of copper in West Papua. A U.S./European consortium got the nickel. The giant Alcoa company got the biggest slice of Indonesia's bauxite. America, Japanese and French companies got the tropical forests of Sumatra. When the plunder was complete, President Lyndon Johnson sent his congratulations on "a magnificent story of opportunity seen and promise awakened." Thirty years later, with the genocide in East Timor also complete, the World Bank described the Suharto dictatorship as a "model pupil."
Shortly before he died, I interviewed Alan Clark, who under Thatcher was Britain's minister responsible for supplying Suharto with most of his weapons. I asked him, "Did it bother you personally that you were causing such mayhem and human suffering?"
"No, not in the slightest," he replied. "It never entered my head."
"I ask the question because I read you are a vegetarian and are seriously concerned with the way animals are killed."
"Doesn't that concern extend to humans?"
In Confessions of an Economic Hit Man, John Perkins covers in detail how the large multinationals arrange to acquire control of -- in particular -- natural resources, on favorable terms at the expense of the tradition inhabitants of the affected lands. If bribery and other financial means did not do the trick, then more violent means were employed. Indonesia serves as a particularly conspicuous example of when things came to this.
Time for another round of Bill Bonner, always a good idea when you want to laugh while you cry:
Bill Clinton should have gone to the Alps. Instead, the poor man went to the Piedmont ... to the aid of his wife in South Carolina. At the annual Davos, Switzerland, conference of celebs, power-brokers, and do-gooders, Clinton was always a hit. In Carolina, he was a flop.
Bonner reserves particular scorn for "do-gooders", as exemplified in Mobs, Messiahs and Markets.
If he had been in Davos, he might have given the meeting some of the magic of the old days. Every year, the movers and shakers gather to tell each other how to make a better world. Most just blather in a way that began naively, early in their careers, soured into cynicism in middle age, and finally becomes merely stupid. Some probably still think they can improve things. A few probably succeed.
But this year's meeting seems to have had a defeatist tone to it. Probably because the news was bad. Last Sunday, it was discovered that a young man at an old bank had managed to get himself into $50 billion worth of positions -- most of them losing positions. This was more than half of the value of all of France's gold and currency reserves. It was more than the entire value that had been built up by the bank over decades. How could it happen? What was wrong? How could banks be so fragile ... and what could you think of the whole world's financial system when it was built with bricks that cracked up so readily?
When his bosses at Societe Generale found out what he was up to, they quickly tried to close his trades -- on the worst trading day in recent memory. And when it was over, he had set a new record for this kind of thing, at more than two times the losses of Nick Leeson, who brought down the 200-year-old Barings Bank. Asked his opinion, Leeson responded: "Haven't they learned anything?"
Learning comes at a price. When markets are rising, nobody learns anything. It is when they go wrong that people put on their thinking caps and take instruction.
And then, at Davos this weekend, up to the podium stepped Stephen Roach, acting like an old professor with an "I told you so" tone in his voice. "If we had been running our economies the old-fashioned way, for example, where saving and consumption were funded by income, maybe we would not be in this mess we are in now." Roach went on to say that this mess "will dwarf the dotcom slump."
As we have hinted, too, it is one thing to punish a few speculators with skin in the dotcom game. It is quite another to deliver a stern lesson to America's entire middle class. The latter never liked school.
Spending on information technology was barely 1/6 the spending on house building. But that is only the beginning -- because the dotcom bubble did not cause millions of householders to think they were a lot richer than they really were. It did not lead millions of families to borrow and spend far more than they could afford. And it did not entice bankers and investors into billions of dollars worth of losing positions.
Naturally, Mr. Roach's words did not seem to lift the mood at Davos. And the news coming out of the U.S. economy does little to lift American consumers' moods either.
A word to the wise: You cannot really make people wealthy by resorting to "Zimbabwe economics." A society grows rich by producing things ... and saving money. There is no other way. Cheaper credit will not do it. More consumption will no help. Printing money -- and dumping it from helicopters -- is a losing proposition.
But we hope our financial authorities continue. At least it is fun to watch.
• A trillion here ... a trillion there ... pretty soon you are talking real money.
U.S. stocks are down about 10% so far this year. That is about $1.5 trillion lost. U.S. housing stock is said to be down about $2 trillion. And losses from subprime, credit cards, home equity lines, rogue traders ... and hanky panky ... probably add up to another trillion or so. And let us not forget the cost of the War Against Nobody in Particular -- the war on terror ... which costs a couple hundred billion.
And now, along comes ... what is this ... a bi-partisan giveaway of tax rebates! ... The Dems and the Reps have agreed to give taxpayers back some of their money. And Treasury secretary Paulson appeared in Congress telling them to get a move on. If they do not get those checks out soon, it will be too late.
The pols are going to spend as much or more than ever. They were already running a $200 billion deficit, so they could not possibly give money back. And many of these "rebates" are said to be going to people who never paid anything in the first place. Still, they are going to send out 117 million checks at a cost of some $150 billion. This is Zimbabwe economics -- if you don't have money, just print it. "Economic stimulus" they call it. But if they are hoping to counteract the effect of trillions of dollars of lost wealth, they are going to have to come up with more than $150 billion.
No, no, say the politicians. This stimulus is "targeted". It will go to people who are most likely to spend it. Yes, they will spend it at Wal-Mart ... and at the gasoline pumps. The $150 billion will thus end up where the trillions that went before it ended up -- in the pockets of Asians and Arabs. And yes, it will probably stimulate their economies.
And it might stimulate dollar holders all over the world to look for something else to put in their vaults.
GERMANY’S STABLE ECONOMY
Many perceive Germany as a stodgy welfare state. How justified is this unflattering reputation? Antony Mueller, writing in Whiskey & Gunpowder, explains a thing or two about Germany.
Maybe you have heard about Germany as the sick man of Europe. You may also have heard that the German economy is paralyzed by a web of strict labor laws. In contrast, you may have heard less or nothing at all in the news that Germany has been the world's export champion for the third time in a row -- exporting more goods than China, or Japan, or the U.S. Private financial wealth in Germany rose to a new high in 2007. Employment is on the rise. No wonder the German stock market has been a top performer in recent years.
I lived in Germany for much of my life and I can assure you that the Germans are very self-critical. Unless it is the very best, it cannot be good. As long as there is room for improvement things deserve to be criticized. I recommend that in order to get a correct picture of Germany, do not listen to what Germans say about their economy; they are consistently negative. Also, do not read German newspapers to learn about the German economy; they are always pessimistic. To get a more accurate picture, check the economic stats and compare them with stats from other countries.
It is true that after the end of the European unification boom in the late 1990s, the German economy experienced malaise until 2003. The high cost of unification put a huge burden on the people. Domestic demand was weak. Yet in these years of slow growth, German companies did their homework. Today, the German industrial sector is at the top of the world when it comes to modern capital equipment. Infrastructure in East Germany has been has been brought up to Western standards.
That is a credible accomplishment. At the time some characterized the reunification as the West doing an LBO of the whole East. The difference is that instead having to pay down debt as quickly as possible as in a normal LBO, the West had to hastily modernize the capital stock of the East.
German carmakers are household names. So are chemical and electronics multinationals like BASF and Siemens. But these large companies represent only a part of the German economy; mid-sized companies are its backbone. These companies possess very specialized technological know-how. They are extremely competitive and industrial companies all over the world seek their products. ...
Many of these so-called "Mittelstand" companies produce tangible capital equipment. Linked together by a well-established network of cooperation, they are capable of executing large-scale projects -- including the planning and construction of whole factories.
The competitive position of "Mittelstand" companies helps them cope with cost increases. Currency appreciation does not hurt them as much as it hurts most other export-oriented companies. The recent strength of the euro has barely affected demand for the products of these companies. This was also the case in the past when the German mark was in a decade-long uptrend.
The German economy will continue to profit from the investment boom in emerging economies. Demand from Asia is only part of the story. German companies are in a leading position when it comes to infrastructure projects in Eastern Europe, Russia, and the Former Soviet Union. Oil rich countries are showing little price sensitivity in their capital equipment orders from Germany. Demand from the Middle East and elsewhere is so high that the order books of many German capital equipment producers are full for years to come.
For these German mid-size companies, a quick hire and fire system is out of the ordinary. Intensive in-house employee training provides the specialization these companies need. Company loyalty is relatively high. Performance hinges on a culture of trust that runs from the top to the bottom.
Nevertheless, structural problems plague the German economy. The welfare state is overextended and the population is ageing. There is a shortage of young engineers. Social contributions and taxes are high. The steep cost of labor has driven German companies to invest in technology and equipment that enhance worker productivity. Like the U.S., the market for specialized German labor is tight. German unemployment may be relatively high, but it mainly affects less skilled workers.
An ageing population limits the chance that Germany will experience a new "economic miracle." Domestic demand should remain relatively soft. And most economists think Germany is too dependent on exports. Yet they seem to ignore the worldwide appeal of German exports. ... In the eyes of foreign multinational companies, Germany has even regained its position as an attractive place to build manufacturing plants. ...
Unlike the U.S. and a few other European countries, a housing bust does not plague Germany. In fact, it had a short housing boom immediately after unification. Since the late 1990s, German real estate has been flat. Some observers criticize Germany for its stagnant domestic consumption. But this was actually a blessing in disguise. Resisting the temptation to artificially stimulate the economy, the government opted for structural reforms instead. ...
Economics pointy-heads are prone to advising high savings rate countries that they really should consume more. Such countries -- China, e.g. -- are further advised to engage in "financial innovation", such as vehicles for making loans that will not be paid back, in order to fill in that consumption gap. Germany no doubt has a rich assortment of public policies that are unnecessarily hindering of the citizenry's welfare, but the idea that high savings -- which provided the source funding for the country's world-leading capital goods industry -- and "stagnant" consumption is a "problem" is preposterous. And now that all the economies that artificially stimulated consumption are on the verge of reaping the whirlwind, Germany's stodginess suddenly looks attractive.
Bank credit and the stock market are not as important to the German economy as they are to the U.S. The fallout from the current credit squeeze should not have much effect on German industrial companies. The same holds for a stock market decline. Among the major industrialized countries, Germany's economy may be the best equipped to weather the coming storms.
Even if the U.S. officially enters recession, the global economy will not stop in its tracks. The BRICs (Brazil, Russia, India, and China) in particular have a lot of cash to spend. These countries have clear plans to modernize their infrastructure and make their factories more efficient. One major area of investment in these countries will be in environmental protection. German companies are world leaders in the area of environmental technology ...
The German stock market, measured by the DAX index, performed well in 2007. This index rose more than 20% even as the euro gained 10% against the U.S. dollar. ... So while things may seem bad here, do not believe that they are all going wrong for everyone. The Germans might not be the most chipper people in the world, but don't let their pessimism fool you, things in Germany are all right.
The chart of the German DAX Composite stock market index accompanying this article showed the index rose from about 4400 at the beginning of 2005 to a little over 7800 at the time of the writing -- a 75%+ rise in 3 years.
WTO CALLED BACK TO UMPIRE INTERNET GAMING DISPUTE
The ongoing gambling services dispute featuring the U.S. vs. the rest of the world -- in essence concerning whether the U.S. actually has to play by the rules it was instrumental in helping set up -- has taken a new twist. It looked as though the U.S., with significant help from the EU, had successfully evaded its WTO treaty commitments and protected the U.S. domestic gambling interests against big, bad Antigua and its like -- yet another in a long line of "it's proper because we can get away with it" actions by the U.S. But Antigua, and now Costa Rica, had not exhausted their remedies available within the terms of the WTO treaty:
It has emerged that Costa Rica and Antigua separately filed for World Trade Organization arbitration on 28th January, seeking compensation from the U.S. as a result of the U.S. withdrawal of its commitment on cross-border gambling services. ... The arbitration filing makes it possible for the EU to reconsider its settlement with the U.S. and join the arbitration proceeding, potentially opening up a new phase in the Internet gambling trade dispute.
"The decision by Antigua and Costa Rica to take the United States to arbitration will test the limits of the WTO process and squarely challenge the U.S. resolve to withdraw its GATS commitments," observed Nao Matsukata, formerly Director of Policy Planning for then USTR Robert Zoellick ... "If the U.S. finds the decision of the WTO arbitrator unacceptable, under procedures outlined in the GATS, it could unilaterally withdraw, creating an unprecedented crisis of confidence in the global trading system. The best solution remains for Congress to pass legislation that would create a legal and regulated framework for online gaming in the United States and for the United States to remain in the GATS schedule to provide all providers legal protection under the WTO."
U.S. withdrawal from GATS following this new arbitration carries the risk of expensive new sanctions levied against U.S. exports and intellectual property. "If the U.S. withdraws following another adverse arbitral decision, the country would face potential retaliation from all WTO Members affected by the arbitration, a pool of countries including the EU, Canada, and Japan," added Matsukata. "Inviting sanctions at a time when both the U.S. Administration and Congress are striving to stimulate an economy on the edge of recession seems foolhardy at best, especially when draft domestic legislation already exists that would create a renewed flow of both business and tax revenues throughout the nation's gaming sectors."
This accurately highlights the nub of the issue, i.e., does the U.S. need the rest of the world more than the rest of the world needs the U.S.? Obviously the answer is yes, Exhibit A being the huge monthly trade deficits. But does the U.S. get that?
Lode Van Den Hende, a WTO expert and trade attorney with Herbert Smith in Brussels added: "There is a real possibility that the arbitration body will find that unless the U.S. provides commercially meaningful compensation to Costa Rica and Antigua, it cannot withdraw its commitment on gambling, without risking trade sanctions from the affected parties. Costa Rica's action raises questions about what India and Macao might do as well as the other nations that have yet to come to terms with the U.S. over the withdrawal of the Article XXI commitment related to cross-border gambling services."
Under the WTO's GATS Article XXI rules, any country withdrawing its market access must provide compensation to affected countries that maintains a general level of mutually advantageous commitments, not less favorable to trade than that provided for in schedules of specific commitments prior to the negotiations. The U.S. negotiated settlements with four of the eight nations seeking compensation -- the EU, Japan, Canada, and Australia, providing compensation, in the form of market access to U.S. domestic postal services, warehousing, R & D, and technical testing sectors.
Costa Rica, Macao, India and Antigua did not reach an agreement with the U.S. over the withdrawal of its gambling commitment, as the above market sectors offered by the U.S. were of no commercial interest to those countries.
After the WTO ruled that the U.S. had violated trade rules in barring Antiguan online gaming operators from the U.S. market, the U.S. withdrew its WTO obligations with regard to free trade in the gambling area. The U.S. decision to withdraw its market commitments, in order to comply with the WTO, is the first instance of such an action by a WTO member. [emphasis added] The action by the U.S. sets a precedent that other WTO members could copy in order to back out of their own commitments once they consider them inconvenient. In turn, the Costa Rican and Antiguan arbitration requests are the first ever in response to a withdrawal of commitments.
Interesting indeed. Is the U.S. willing to set a new precedent to protect favored domestic interests? This is more that just a costs vs. benefits calculation for the U.S. politicians involved. The WTO was set up when U.S. economic power and prestige was much stronger than today. It was undoubtedly skewed to benefit U.S. interests. Its legitimacy is a matter of tradition and precedent as much as anything. It the U.S. starts dissing its own handiwork, will the whole framework go the way of the U.S. Constitution?
It is possible that these arbitration requests will impact the way in which Antigua decides to implement the $21 million per year in trade sanctions it received as compensation for U.S. noncompliance with WTO rulings in the gambling dispute. One available option is for the country to take the compensation in the form of intellectual property waivers.
"It is time for the U.S. to end its hypocritical practices that discriminate against foreign online gambling operators, while allowing U.S. gambling operators to accept bets for certain forms of gambling," announced Jeffrey Sandman, spokesperson for the Safe and Secure Internet Gambling Initiative. "Regulation of Internet gambling should be supported as a means to resolve this trade dispute."
EU Watchdogs Probe German and Swedish Gambling Blockades
The U.S. is not the only one playing at banning gambling in violation of its treaty commitments. And the EU has more enforcement teeth than the WTO.
German and Sweden are to be hauled over the coals by EU competition regulators for stopping online gaming firms entering their markets. New laws that came into force in Germany this month ban online gambling. The EC is investigating whether the legislation contravenes EU law on free access to markets.
EU internal market commissioner Charlie McCreevy has asked Germany to explain why. "Germany has two months in which to respond. The Commission hopes that the answers it receives will lead to an early and satisfactory resolution of the matter," an EU commission statement said. ... The investigations could eventually end up in the European Court of Justice, which has the power to overturn anti-competitive national laws and levy big fines.
IS REAL ESTATE A GOOD HEDGE AGAINST HYPERINFLATION?
A hard asset such as real estate has some surface plausibility as a hedge against an expected increase in inflation. But is housing really the right place to hedge your bets? Dr. Krassimir Petrov of the American University in Bulgaria, writing in Whiskey & Gunpowder, offers his thoughts.
As the markets continue bucking wildly, and the Fed slashing rates with more cuts to come, we can expect more volatility with our currency. The U.S. will likely spin into a long era of high inflation. The coming years will look like the 1970s. There is also a good risk of hyperinflation, which is a particularly severe bout of high inflation. Thus, the vital question for every investor is how to hedge, or protect, your wealth against inflation. Some, especially realtors, urge to hedge this risk with real estate. So should we really hedge with real estate?
To answer this, we need to consider two closely linked topics. First, what is an inflation hedge? Second, what makes a good inflation hedge? The first answer is simple. An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and purchasing power during inflation. This also applies to hyperinflation. An investor expecting inflation will buy this asset to hedge against inflation.
The answer to the second question requires understanding of the two basic types of assets: real assets and financial assets. Real assets have intrinsic value. They have value of their own. People value them for their direct or indirect usefulness. Examples include books, TVs, cars, wheat, gold, real estate, land, etc.
Financial assets, on the other hand, are a claim on the income or wealth of a firm, family or the government. Their typical form is a certificate or a receipt. Examples include paper money, stocks, bonds, mortgages and ETFs. All money market and capital market instruments serve as examples.
In general, real assets hedge better than paper assets. By definition, real assets have a value of their own. Inflation does not erode their value. Thus, any real asset can be an inflation hedge. It follows that real estate is also a hedge -- but it is not the best.
Good hedges have a few key properties. We mention here only four. One key property of a hedge is that it holds its value. It should lose little value over time. Cars and eggs lose value over time. Land, silver and wine do not.
Another key property is marketability. This means that it is easy to sell. Other people will easily take it for payment. Hence, it is good for barter. Chairs and clothes do not sell. Corn and gold do.
A third key property is divisibility. This means that the asset splits into smaller parts without a loss of value. Houses, cars and cows are not divisible. Rice, wine, gas and gold are.
The last key property is financing. It is vital. Experts prefer to fully ignore it. Investors buy assets with either cash or credit. Cash-based hedges are good. Credit-based hedges are bad. History repeatedly shows that assets bought on credit are prone to speculation and bubbles. The hedge might be already overvalued. In this case, investors should avoid it. Credit clearly drives real estate. Moreover, real estate recently went through a wild bubble. It is grossly expensive, so a poor hedge.
The verdict is clear. Real estate is a hedge, but a poor one. It fails all of the above four tests. On the other hand, gold is a far superior hedge. Gold aces all the tests of a good hedge. That is why it is the ultimate inflation hedge. Better yet, now gold is cheap, while real estate is dear. Thus, as a hedge, gold handily beats real estate.
This refers to real estate as a general class, as opposed to any specific property. Farm land, e.g., might rise along with food prices during an inflation. This is still a speculation within the real estate asset class -- just as one might bet that certain stocks will rise in the face of a bear market.
These pages often highlight articles extolling the merits of real estate in different countries around the world. Investing in property in those countries may well provide some hedge against inflation. An additional virtue would be the moving of some of your capital out of your home country. You may also have personal reasons for making an investment in offshore real estate, such as that you are planning to eventually expatriate and the opportunity is available now. But the point remains that if the primary goal is to hedge against inflation, there are better ways to accomplish this than real estate.
Real estate bought with cash, free and clear of any debt, might be a poor hedge, but it is nevertheless a hedge. It will protect the value of your money. It is not as good a hedge as gold, but it will do the job. However, we emphasize that real estate bought on credit (with a mortgage) creates substantial new risks to the investor. It is possible to hedge one risk by assuming another, but not recommended.
So what are the risks, or traps, associated with leveraged real estate? We mention here four. First, we could be wrong! What if prices actually fall -- or you have what people commonly call a deflation? Deflation kills those who borrowed to hedge with real estate, because it makes those debts more difficult to pay. Even worse, deflation triggers recession, unemployment and falling income. Similarly to what happened during the Great Depression and to Japan during the 1990s, deflation results in massive foreclosures and business failures.
Another trap for leveraged real estate is that the possibility of another credit crunch might spook the market. We saw this in February; we saw it again in August. Real estate was no place to hide then. The third trap concerns how investors finance real estate. An ARM, or adjustable rate mortgage, can be a risky way to finance. Rising prices drive interest rates higher. Mortgage rates may rise from modest a 3-4% to 12-15%. This actually happened during the 1970s. Thus, monthly payments could easily triple. Obvious, yet millions of Americans fell for it once again in the early 2000s. Sure, they fell driven by greed. Still, many hedgers are oblivious to this.
The last trap is by far the most insidious, for it is the hardest to see. Inflation overwhelms the borrower; it eats him alive. Before long, food prices double, gas doubles, electricity doubles; prices of all the basic needs double in short order. Yet salaries do not; they lag far behind prices. Oftentimes, as in the 1970s, salaries lag many years behind. Similarly, prices of basic goods, such as food and energy, have more than doubled since 2002. Eventually, there comes the time that after paying for your basic needs, there is not enough left to pay the mortgage. ...
Thus, leveraged real estate is not only a poor hedge against inflation, but also a very risky one. However, if you must hedge, then hedge with gold, not with real estate.
U.K. NON-DOM TAX MOVES “WILL DRIVE RICH AWAY”
Warning over effects of “rushed” tax revamp for foreign wealth.
A "dog's dinner" of proposals to hike taxes on non-domiciles outlined by the UK Government will lead to an exodus of wealthy individuals, writes Alex Hawkes of the Telegraph. In exchange for these temporarily envy-sating moves, Hawkes speculates the the economic and charitable contributions of the non-doms will disappear along with them, as well as potentially robbing major art galleries of masterpieces:
Concern is growing that rules designed to hammer wealthy individuals with foreign connections will affect up to 6 million people, and could even see precious artworks on loan to British museums being stashed offshore.
The Government's draft legislation on the new tax regime for residence and domicile ... has dismayed tax advisers. They fear that charitable contributions made by non-doms may disappear abroad. "Charity begins at home," said Chris Sanger, head of tax policy at Ernst & Young, adding that many may decide to move their homes to Monaco, Switzerland or the Channel Islands. The Treasury has estimated up to 3,000 wealthy non-doms could leave the country as a result of the plans.
The warnings come as Alistair Darling also prepares to resist pressure to perform a U-turn on his controversial plan to raise capital gains tax by 80% for entrepreneurs' business assets, which critics say will damage Britain's enterprise economy. The Chancellor is likely to give an update on the tax this week.
Non-doms pay tax on their UK income but not on their foreign income and gains. Under the changes, non-doms will pay a £30,000 annual charge after seven years for living in the UK, and face a welter of new rules preventing them bringing income earned abroad back into the country. The crackdown on the latter -- the "remittance" rules -- is set to cause havoc with non-doms' holdings of jewelery and fine art, said Ernst & Young.
Mr. Sanger gave an example of non-doms having to decide whether antique watches they may have in the UK had been bought with foreign-earned income. "Trying to trace back the history will be a nightmare," he said.
Without question. Classic government trying to monitor and control matters with no regard for costs or (negative, in this case) benefits. One wonders: Do people have to work at being stupid once they become government employees, or does it come naturally? They could not have come up with a more counterproductive proposal if they had tried.
Works of art on loan to British museums could also be moved offshore. "One option would be to export those assets," Mr. Sanger said.
The arrangements for non-doms were described as a "dog's dinner" by Mike Warburton, senior tax partner at Grant Thornton: "[The changes have] been brought through in a rush." Mr. Warburton said U.S. bankers, who are thought to form a large proportion of those who claim non-dom status on their tax returns, will face double tax under the rules, since the charge is unlikely to be "creditable" under U.S. rules taxing worldwide income. Another change means non-doms will pay tax on their first £5,000 of income, unlike domiciled taxpayers.
Half the “Super Rich” to Leave or Sell UK Investments, New Research Indicates
Response to the UK government's plan to whittle away at the tax benefits of the non-domiciles is coming in fast and furious. The entirely predictable outcome will be a loss in tax revenues to and investment in the UK. The question now is whether the Labour government cares about this more than the other items on its agenda served by the new taxes.
The Society of Trust and Estate Practitioners (STEP) published research on Friday which suggested that UK government plans to tax the foreign super-rich will be counter-productive, as tax revenues will fall and UK investments will be sold. The research showed ... that over half of the UK's super wealthy are leaving, making contingency plans to leave or sell their UK investments.
"For the first time we can confirm that wealth generators are preparing to leave the UK in significant numbers. We now know wealthy foreigners invest between £75 and £125 billion in the UK and pay £7.16b in tax. Instead of generating more revenue the Government's proposals will mean jobs, investments and tax revenue going abroad," argued Keith Johnston, STEP’s Director of Policy, who conducted the study.
"The super rich already pay 54 times more tax than the average. We want rich people in the economy, paying tax, and creating jobs but government plans will have the opposite effect," added David Harvey, CEO of STEP. ... Even more strikingly, the resident non-doms surveyed invest over £40 billion in UK businesses, and the UK business investments of all non-doms have been estimated at around £125 billion. The current proposals provide an incentive to invest anywhere else, the Society cautioned.
MAURITIUS’S NEW BUSINESS FACILITATION ACT GOOD FOR INDIAN IMMIGRANTS
There has been a long-running pas de deux between India and Mauritius over the double tax avoidance treaty between them. Tiny Mauritius wants whatever will bring in jobs and revenues. India wants to prevent Indian companies from rerouting otherwise purely domestic profits through Mauritius in order to reduce their taxes. A fairly standard plot line. This news item concerns a related but distinct issue.
Mauritius's dealings with India have evidently given it a taste for the offshore "tax haven" business. They want more. A new 15% flat tax rate for companies is an upshot. Having attracted companies and jobs, just how easy is it for an employee to relocate to Mauritius. Very easy, it turns out:
India's double tax avoidance treaty with Mauritius may be causing sleepless nights for both tax authorities and businesses, but for different reasons. However, the new business facilitation Act that Mauritius has implemented will go a long way in helping individuals and businesses from India in setting up shop or moving to the island nation.
The deputy prime minister and minister of finance and economic development of Mauritius, Mr. Ram Krishnan Sithanen, who was recently in Delhi along with the Mauritius Prime Minister Navinchandra Ramagoolamm's delegation for the Pravasi Bharatiya Divas 2008, made a strong case for investments in the infrastructure sector in Africa from India, which could be routed through joint ventures in Mauritius.
Mr. Sithanen highlighted the business facilitation Act as a step towards making Mauritius a globally competitive nation. ... "Mauritius is becoming one of the lowest tax jurisdictions in the world, with a 15% flat rate which will give our enterprises an important competitive edge," he [said].
Under the new Act, Mauritius has made it much simpler for expatriates to work and live in the country. A new category of occupational permit combines the old work and residence permits into a single document. To apply for occupation permits, investors have to generate an annual turnover of more than $100,000 while professionals need to have jobs with a salary of around $1000 per month.
Self-employed individuals need to generate an annual income of $20,000 a year. Applications for occupation permits have to be submitted to the board of investment (BOI) in Mauritius, which will help the qualifying candidates to secure an occupation permit for themselves and residence permits for a spouse and dependents.
Any firm can apply through BOI for an occupation permit for any foreign employee it pays more than $1,000 a month and a residence permit for the spouse and children of that employee. An important feature of the new Act is that a non-citizen retiree, providing evidence that he/she will bring in at least $40,000 annually, can also apply through BOI for a residence permit.
However, he or she will have to provide a bank guarantee of $2,000. The same will apply to self-employed professionals. All foreigners applying for occupation or residence permits have been allowed to provide health certificates issued by any accredited doctor in Mauritius instead of a health clearance only from government hospitals.
Significantly, the occupation permits for investors and professionals and residence permits for their dependents will be issued within three working days. In a fast-track procedure, BOI will forward the applications within one working day to the immigration department, which will provide a document acknowledging the date and time of application.
If after two working days the immigration department has not raised any objection, the document will automatically become an occupation and residence permit valid for three years from the stamped date, in line with the silent agreement principle.
This kind of guarantee from a private sector business is routine, but it is startling to see a government agency provide the same. Anyone for working in or retiring to Mauritius?
TAX CHEATING IS A CRIME, INTONES CANADA REVENUE AGENCY
Gordon O'Connor, Minister of National Revenue, reminds Canadians that not complying with the tax laws will result in serious consequences. "Not paying your taxes is against the law," said Minister O'Connor. "The Canada Revenue Agency works hard to identify and correct non-compliance. This keeps the system fair for the honest Canadians who comply with the tax laws."
In 2006-2007, Canada Revenue Agency (CRA) criminal investigations led to convictions in 245 cases of tax evasion, or 98% of the files prosecuted. Courts imposed fines totaling $13.4 million and sentenced 26 offenders to more than 37 years in prison. Sentences for those who were ordered to serve jail time for tax-related offences ranged from 1 month to 3 years. ...
This numbers for prosecutions, fines, and sentencing time sound small, even adjusting for the much smaller population of Canada compared to the U.S. The conviction rate is high, although this could include people who get off very lightly. In all, just going by the numbers, the CRA sounds like a small time operation when compared to their big brother (Or should that be Big Brother?) south of the border.
Convictions for tax evasion, including not filing tax returns and making false declarations, can result in court imposed fines of up to twice the taxes evaded, plus jail time. In addition, taxpayers still have to pay the taxes owed and all other civil penalties and interest imposed by the CRA.
The CRA's Voluntary Disclosures Program is available to taxpayers who want to correct their tax affairs before the CRA begins any audit action or investigation. If you make a full disclosure before we start any compliance action, you may only have to pay the taxes owing plus interest, but you will not have to pay any penalties nor face prosecution in the courts.
IRS WARNS OF NEW E-MAIL AND TELEPHONE SCAMS
The IRS has warned about the round of scams which inevitably surface with the advent of tax return filing season.
The IRS ... cautioned taxpayers to be on the lookout for scams involving proposed advance payment checks. Although the government has not yet enacted an economic stimulus package in which the IRS would provide advance payments, known informally as rebates to many Americans, a scam which uses the proposed rebates as bait has already cropped up.
The tax authority explained that the goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft. Typically, identity thieves use a victim's personal and financial data to empty their financial accounts, run up charges on the victim's existing credit cards, apply for new loans, credit cards, services or benefits in the victim's name, file fraudulent tax returns or even commit crimes.
CLASS ACTION SUITS ... THEY’RE BACK!
It is inevitable that in a bear market some investors will decide their losses are someone else's fault, and use the courts to seek redress. Now the first subprime loan-related suits are showing up.
The tech bust launched 519 securities class actions in 2001, but then the number filed declined steadily to 131 five years later. Was that because Sarbanes-Oxley turned corporate executives into saints? Or because partners in the leading plaintiff law firm, Milberg Weiss, were too busy dealing with their own legal problems to file suits? For whatever reason, the decline was likely permanent -- so said Joseph Grundfest, a Stanford Law School professor and expert on securities class actions, last year.
He may have spoken too soon. Last year the number of class action filings jumped to 207, according to NERA Economic Consulting. All kinds went up [see chart], but it is no surprise that among the most numerous new cases were those involving subprime lending. Insurer Guy Carpenter, a Marsh company, estimates insurers will eventually pay out $3 billion to settle subprime suits against directors and officers. "It's always something," said Jamie Levitt, who defends against class actions at law firm Morrison & Foerster.
THIS AIN’T NO DIXIE CHICK
Even Merle Haggard turns against the Iraq war.
Those of a certain age will remember legendary country singer Merle Haggard as a de facto major spokesman against those long-haired flag-burning dope-smoking hippy freaks allegedly trying to undermine all that was good and right about America, as expressed in his anthemic Okie from Muskogee. He was a big supporter of the Vietnam war -- "My country, right or wrong." How times change!
"Why don't we liberate these United States.
We're the ones who need it the worst.
Let the rest of the world help us for a change,
And let's rebuild America first."
These strong words come from a new songwriter wishing for peace in Iraq. Well, actually calling him new is untruthful. These words are sung by none other than Merle Haggard in his recent release debuting in 2006. The rest of the song continues with even more inspiring resolute lines:
"Freedom is stuck in reverse.
Let's get out of Iraq and get back on track.
And let's rebuild America first."
For those readers who may not be country enthusiasts or who have not had the rare privilege of living in the Deep South, the significance of this song may elude you. But do not worry; let me give you a quick flashback of Merle Haggard's country classics composed during the late sixties. What better place to start than his hit, Okie from Muskogee:
"We don't smoke marijuana in Muskogee.
We don't take our trips on LSD.
We don't burn our draft cards on Main Street.
Cause we like livin' right and bein' free."
To sum it up, Merle Haggard was the Toby Keith/Darryl Worley country music propagandist of the Vietnam War. Despite my deep-rooted affirmation of libertarian principles, I still love listening to patrio-fascist country songs. ... [A]ll my anti-war articles are written to the background sounds of pro-war country. In a strange sort way, they inspire me to try harder with my opposition to the conflict in Iraq.
While writing my last article and listening to some Merle Haggard, his new song popped up on the YouTube playlist. Deciding to take a listen left me in disbelief. I had just finished hearing his other classic pro-war anthem, The Fighting Side of Me. (It is no surprise that this YouTube video is set to a montage of Neocon pro-war/anti-left images.) ... A few lines are irresistible to anyone that detests the radical left regardless of your view on the war. Here is my favorite:
"They love our milk and honey,
But they preach about some other way of livin'.
When they're runnin' down my country, hoss,
They're walkin' on the fightin' side of me."
When songwriters such as Merle Haggard begin changing their minds on Iraq, then the end signs of the Republican Party are truly amongst us. Mainstream political analysts keep talking about the strong pro-war base. What they do not see or care to admit is the cracks appearing even within the hard-core pro-war base.
Every day the war continues is another day where Republicans lose more party members. War is not something many people change their mind back and forth on easily. A war begins and everyone jumps on board with great fervor. From there, no new people usually join the war effort. However, supporters do begin to abandon the position every day until the point where continuing is no longer politically viable.
Party big wigs think that a few "good" months in Iraq can change the public's mindset. They are very wrong; it does not work like that. Once you are against a certain war, you do not go back. These "good" months are just desperate attempts to slow the rate of loss in the war base. As the war continues down the path of oblivion, so does the future of the GOP.
Merle Haggard is no anomaly. I know plenty of people that started the Iraq War right behind George Bush and ready to stay in the Middle East forever. It is not just the moderates abandoning the Republican Party.
The truth is the GOP is falling apart inside out. Folks are sick of the war, but many also would never support a liberal. Ron Paul is a traditional Robert Taft conservative that can fulfill this role in rebuilding and leading a new direction for the party. ... Unless the party takes a drastic turn, we may find ourselves in the very frightening world of a Democratic Congress and President for a long time, too long for America to survive.
Ron Paul's official slogan is "Hope for America." GOP members need to realize that this does not just mean only "Hope for America" but also "Hope for the Republican Party." Without Ron Paul–style direction, this country is in serious danger. ...
The Ron Paul Revolution has started a political war. As any war goes, victory is not found in a single melee. The Ron Paul Revolution now has fresh frontiers to explore and spread its message. The Merle Haggards of the world are tired of the neocon direction and are desperate for an antiwar true conservative option.
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