Obama, Bernanke, Stimulus & American Brattiness

The New Yorker has an interesting new take on one of my favourite research genres, the search for the behavioural pathologies which account for terminal American decline, be it in health, income, wealth, life satisfaction or what else have you. Why should a clearly regressive society influence so much of what goes on in the rest of the world? It is not exactly news to the rest of the world that American parenting is as crappy as it gets, hence the search for solutions from more parentally enlightened societies [1, 2]. Nor is it news that American stewardship of the world economy is nearly as bad. Ultimately, these two are likely interrelated: While Bart Simpson and that Yanqui brat they caned in Singapore were all the rage in the nineties, let's just say things have gone downhill since then Stateside. In time, individual pathologies snowball into something unfathomably huge alike $1,000,000,000,000+ annual deficits whose momentum can hardly be arrested.

Recent anthropological research suggests these pathologies have their roots in households throughout the Land of the Free Loader:

Often, the [L.A.] kids had to be begged to attempt the simplest tasks; often, they still refused. In one fairly typical encounter, a father asked his eight-year-old son five times to please go take a bath or a shower. After the fifth plea went unheeded, the father picked the boy up and carried him into the bathroom. A few minutes later, the kid, still unwashed, wandered into another room to play a video game.

In another representative encounter, an eight-year-old girl sat down at the dining table. Finding that no silverware had been laid out for her, she demanded, “How am I supposed to eat?” Although the girl clearly knew where the silverware was kept, her father got up to get it for her.

In a third episode captured on tape, a boy named Ben was supposed to leave the house with his parents. But he couldn’t get his feet into his sneakers, because the laces were tied. He handed one of the shoes to his father: “Untie it!” His father suggested that he ask nicely. “Can you untie it?” Ben replied. After more back-and-forth, his father untied Ben’s sneakers. Ben put them on, then asked his father to retie them. “You tie your shoes and let’s go,’’ his father finally exploded. Ben was unfazed. “I’m just asking,’’ he said.

These vignettes are awfully similar to what you get in modern America. With the economy tanking again despite untold trillions spent to--erm...I'm not sure if these guys have achieved anything in the way of sustained progress--the proposed solutions once more involve spending massive debt-fuelled sums to silence this society of whingers. "As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate" says the fawning brat appeaser Ben Bernanke. Meanwhile, Obama largely ignores somewhat better parenting suggestions from the Budget Supercommittee he himself convened in fear of offending the juvenile sensibilities of the American electorate.

Obama and Bernanke are perfect examples of really poor American parenting as they indulge bratty behaviour time and again. Instead of being leaders, they are led by those who don't know any better who demand instant gratification. Just throw more money at the problem and hope it goes away, nevermind that these exercises in fiscal and monetary irresponsibility are becoming increasingly unaffordable and ineffective besides. As the bankers at the height of the subprime era understood, the likes of Obama and Bernanke innately reason that they'll be gone anyway as things sink into further oblivion. In other words, they fit right into contemporary America. It's alright, son, deficits don't really matter because there's a global savings glut. It's not really my fault that deficits have ballooned during my term, they're all Dubya's fault. And so on and so forth.

As before, my suggestion for these folks and their innate preference for appeasers is to just grow up and deal with it. Stop running massive deficits you expect others to fund. The rest of the world does not have infinite patience dealing with your tantrums as you suck up the world's capital and throw it out the pram. In the end, perpetual childhood being programmed into American youth is symptomatic of wider pathologies indicative of all-too-evident societal decline:

Or adultesence might be just the opposite: not evidence of progress but another sign of a generalized regression. Letting things slide is always the easiest thing to do, in parenting no less than in banking, public education, and environmental protection. A lack of discipline is apparent these days in just about every aspect of American society. Why this should be is a much larger question, one to ponder as we take out the garbage and tie our kids’ shoes. 

As ghastly as it is, observing the US self-destruct is not only useful but necessary for two reasons. First, the rest of us need to figure out how to refashion global governance in a way that is less dependent on these people who haven't the slightest idea of how to run a nation, let alone the world. We can make it without these infantile American whingers and should be better of without them. Second, their bad example is precisely that which we should seek to avoid--unless you want to as progress-free as they are, that is.

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No Jobs? Come to Germany, Young PIGS Citizens

From station to station
Back to Dusseldorf City
Meet Iggy Pop and David Bowie
Trans-Europe Express 

Whew! We haven't had a video feature in a while, so here's a classic, Kraftwerk's Trans-Europe Express. Economic migration is often driven by differentials in economic opportunities, whether they be more job openings or higher pay. Whereas in the past the Poland to UK route used to be popular in Europe along with other Eastern to Western European migration corridors, times have changed. Poland for instance is faring rather better than the UK economically and so on.

The WSJ sifts through recent OECD data to find, unsurprisingly, that emigration is increasing from the likes of Portugal, Ireland, Greece and Spain. As a migration advocate, I see the positive side in being able to defray (hopefully temporary rather than structural) unemployment within the Eurozone through migration within it--just as the United States does with no real limits to movement across state boundaries. Not only does it help lessen unemployment benefits the troubled states pay out, but it also [shhh] helps rid them of angry young persons in the meantime. As Europe's troubles continue, these countries are returning to their former status as migrant-sending rather than migrant-receiving ones:

The OECD report shows how the contrast in economic fortunes between countries undergoing harsh austerity measures and those still showing robust growth may be starting to turn emigration trends on their head. Following the end of World War II, Greece, Ireland, Portugal, Spain and Italy all experienced "significant emigration," but in the years running up to the financial crisis they had become countries of immigration "hosting significant numbers of labor migrants," the OECD said. The economic and fiscal crisis appears to have turned them back into countries of emigration, although the OECD cautioned that reliable data aren't readily available for some.

Reuters, however, illustrates certain barriers to the free flow of migrants in Europe. Unlike say the United States where they all speak English (and share a national fondness for debts 'n' fats, but let me not get into that right now), linguistic and cultural differences are far more pronounced in Europe despite also having free movement of labour--at least in theory. That said, the Germans are like everyone else in trying to pick off other nations' best and brightest if they are to welcome migrants--no surprises there. Consider the plight of Spanish health care workers as an illustration:

After more than a decade working as doctors, Spaniards Elena Casillas and Esther Perea are back in the classroom, and it's not easy. Some of their classmates need dictionaries to compose basic sentences. Others need help with word order. For everyone, the biggest challenge is pronunciation. "When I first heard German, I thought, ‘My God, it's horrible,'" says 40-year old Casillas, one of a dozen medics recruited by a private German hospital group which is giving the pair free classes in Madrid with the promise of work at a German hospital if they come up to scratch.

Casillas' class is part of a German campaign to attract people who have skills in medicine and engineering. Germany can use up to 200,000 immigrant workers per year to maintain its economic potential, according to the Bundesbank, while Spain currently has the highest unemployment in Europe, more than 24 percent or around 5.6 million people.

Given that free movement of labor is one of the foundation stones of the European Union, you might think job-seekers from Spain would be filling Germany's gaps. A few are making the shift: in 2011, Spanish arrivals jumped 52 percent according to German data. But the overall numbers are still tiny. Between 16,000 and 21,000 came to Germany from Spain last year, compared with more than 100,000 immigrants from Poland. "Looking at the economic situation one might have expected a bit more outflows," said Thomas Liebig, an expert in international migration at the OECD.

Europe's relative lack of labor mobility can be pinned on cultural obstacles, as well as increasingly choosy employers and stiff competition from established migrants. For Spaniards, in particular, Europe is not working, and this highlights a structural trend just at the time the region needs to make the most of its single market for workers. "Where governments are able to manage the inflow they are becoming more selective," says John Salt, a professor at University College London who specializes in international European migration. "What they want are workers with high-level skills who can initiate new ideas or developments, or fill certain skill gaps."

It's the same old story heard around the world, although it plays out in interesting ways in Europe given the aforementioned cultural differences and the limited number of promising destinations (sad to say). Make no mistake: intra-EU migration is a buyer's market in this day and age. And do learn German fer cryin' out loud if you plan to take the "Trans-Europe Express" bound for Düsseldorf.

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Geography Flunkies? Pakistan Wants to Join ASEAN

Of the few opinions I share with George W. Bush, I have long argued that Turkey should be allowed to join the European Union. You know all of the counter-arguments: Turkey is a security risk because it shares borders with Iraq and Syria. Turkey is a dominantly Islamic country, whereas most European nations share a Judeo-Christian tradition. Turkey is a populous nation whose EU membership might see a tsunami of migrants heading for European states. And so on and so forth.

While many of these concerns can be legitimately discounted, I never thought that I would face a similar conundrum in our part of the world, Southeast Asia. Of all the darndest things I could possibly read, how about Pakistan wishing to join ASEAN? On the occasion of predominantly Islamic nations Indonesia and Pakistan signing a (rather limited) FTA, the head of Pakistan's largest chamber of commerce suggests his country is very much interested in this possibility:

Pakistan wants to join the Association of South East Asian Nations (Asean) and Indonesia should support it in its endeavour, Karachi Chamber of Commerce and Industry (KCCI) President Mian Abrar Ahmad said in a statement on Monday.

There are many difficulties here. Being a Citizen of the World, I of course have no objections to Muslim nations in ASEAN, for population-wise it is already predominantly composed of citizens of Islamic states. Aside from populous Indonesia, you also have Malaysia and Brunei in ASEAN. That said, consider the following impediments:

1. Geographically speaking, Pakistan is in South Asia, not Southeast Asia. More specifically, it is on the Indian subcontinent. It certainly doesn't share borders with any Southeast Asian nation since it lies west of India;
2. Pakistan is (logically) already involved in regional groupings in its part of the world, notably the South Asian Association for Regional Cooperation (SAARC) and the Economic Cooperation Organization (ECO) with lots of its neighbouring 'Stans and a smattering of Middle Eastern states. Both SAARC and ECO already have their own regional integration efforts, so I don't exactly see why joining ASEAN makes sense. While the latter's integration project may be further along in a number of respects, Pakistan's advantage with SAARC and ECO is that it's no Johnny-come-lately to them and thus has more leeway in determining the form of integration as they proceed.
3. Counting on the support of your co-religionists is hardly a sure-fire thing in ASEAN. Recall that Timor Leste has long relied on the Philippines to get the predominantly Roman Catholic nation into ASEAN, but to no avail as of yet.

So, while I certainly don't have any grudges against our Pakistani friends, I would strongly suggest that they make the most out of the regional groupings they already belong to instead of reinventing geography as we know it.

UPDATE: Before I forget, there is precedent for Pakistan being (mis)classified in a Southeast Asian grouping. Witness the "Southeast Asia Treaty Organization," composed of, erm, the United States, France, Great Britain, New Zealand, Australia, the Philippines, Thailand and Pakistan. Originally intended to be a mutual defence arrangement alike NATO, it never really took off and was disbanded by 1977. Here is the US State Department explaining away the presence of extra-regional participants--including Pakistan:

Most of the SEATO member states were countries located elsewhere but with an interest in the region or the organization. Australia and New Zealand were interested in Asian affairs because of their geographic position in the Pacific. Great Britain and France had long maintained colonies in the region and were interested in developments in the greater Indochina region. For Pakistan, the appeal of the pact was the potential for receiving support in its struggles against India, in spite of the fact that neither country was located in the area under the organization's jurisdiction. Finally, U.S. officials believed Southeast Asia to be a crucial frontier in the fight against communist expansion, so it viewed SEATO as essential to its global Cold War policy of containment.

That was back when the US suspected India of having the potential to fall under the Soviet ambit given its then-closer ties to the USSR than the US. Note though how this was a security arrangement, not an economic one. Then again, it demonstrates the US is not exactly a stranger to convoluting geography for its pet projects even today.

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Euro 2012 Beggar's Battle: Spain vs Portugal

There was much made of the earlier Germany versus Greece Euro 2012 match and its symbolism for European integration. To no one's real surprise, Germany, erm, booted Greece out of the Euro by winning 4-2. Sure the Greek fans present at the match had their cheap thrills booing lustily whenever Angela Merkel's image was broadcast on the arena's screens, but still. If it's any consolation, remember that the Greeks scored the fluke of all flukes by winning the tournament in 2004 (and look how that euphoria has translated into economic gain). This year, though, there was no Cinderella story to be had since Greek fans hoped for the best but it turned out like always.

Now, however, we have an overlooked game between Iberian competitors Spain and Portugal. Although either may yet advance and face the financially (and nearly sportingly) indomitable Germans, we have an interesting battle on our hands in the meantime. To be sure, I find the Spanish game more attractive with its standard-setting, passing-and-possession oriented football. Some people think it's boring; I think it's representative of good teamwork and technical brilliance. Their opponents the Portugese, meanwhile, are buoyed by the brilliance of Cristiano Ronaldo in--he hopes, perhaps--the same way Diego Maradona could boost Argentina squads in the days of old.

Instead of underlining German dominance (again), even the Germans understand that perhaps it should let off the others to go easy on the symbolism. At any rate, who should you pull for if you could give the Spanish or Portugese people a psychic boost? In addition to Spain winning Euro 2008, they added icing to the cake by winning the 2010 World Cup. What have those famous victories done for the nation off the pitch? As Spain secures emergency funding from the EU, diddly-squat. I had hoped victory could save them from recession, but my hopes were all for naught and things went even more downhill from there.
 
Which leaves us with Portugal. It has never won the Euro tournament, let alone the World Cup. Portugese clubs Benfica and Porto have been European Cup / Champions League winners, but fans with their club loyalties seldom side with others even from their own country. Given that Spain experienced next to no economic boost from their victories, perhaps it's time to root for Portugal--no matter if Cristiano Ronaldo is not an endearing character. Moreover, Spain's woes are mitigated by certain things going for it alike a low total debt to GDP figure by developed world standards. Meanwhile, I am sorry to say that Portugal has nearly nothing going for it and is only outdone by Greece in the economies woes department.

So, with the home team Poland gone, is it "Vamos a Portugal!" for me?

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So, When Will S&P Downgrade the US Again?

Friends, there are certain certainties in life: Germany will do well in whatever international football (soccer) competition it enters, Lucy will pull the football before Charlie Brown can kick it; and the United States will inevitably get fatter and more indebted. Unless you read too many Paul Krugman op-eds--or Dan Drezner USA#1 cheerleading blog posts for that matter--you probably get the idea that deficits do matter.

Recently, S&P--which famously did the first deed in downgrading the bedraggled US of A among the three major credit rating agencies--issued an updated outlook on its sovereign credit risk. You will be unsurprised to hear that it remains likely to be knocked down a further peg or four in the near future. This also takes into consideration that no fiscal consolidation takes place alike the discontinuance of the infamous Bush tax cuts (as if the country has done so much better with them). From S&P, then:

Instead, our current (and previous) base-case fiscal scenario assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place indefinitely and that the alternative minimum tax is indexed for inflation after 2011. On the expenditure side, our base case assumes Medicare's payment rates for physicians' services stay at their current level, although we also assume that BCA11 remains in force. (This includes both the original caps on discretionary appropriations and the automatic spending reductions applicable in light of the Supercommittee's failure to reach an agreement.) Our base-case fiscal scenario also assumes annual real GDP growth of 2%-3.5% and consumer price inflation near 2% through 2016. Finally, this fiscal scenario presumes near-zero (nominal) short-term Treasury borrowing rates until 2015, at which point the rates climb by just more than 100 basis points, as well as a slower rise of about the same magnitude in long-term Treasury yields from their 2011 level of just less than 3%.

I am highly distrustful of credit ratings in general, believing that they are no substitute for conducting independent evaluation. For instance, assuming that the country grows in the 2-3.5% range is a stretch--which in turn implies that a credit downgrade is more imminent if it fails to reach this range up to 2016 (which is absolutely certain IMHO). At any rate, we get to the dirty business of assigning probabilities:

The outlook on our 'AA+' long-term rating is negative, reflecting our view that the likelihood that we could lower our long-term rating on the U.S. within two years is at least one-in-three.

Pressure on the rating could build if, in our view, elected officials remain unable to agree on a credible, medium-term fiscal consolidation plan that represents significant (even if gradual) fiscal tightening beyond that envisaged in BCA11 [the deficit reduction supercommittee]. Pressure could also increase if real interest rates rise and result in a projected general government (net) interest expenditure of more than 5% of general government revenue.

On the other hand, the rating could stabilize at the current level with a medium-term fiscal consolidation plan, or if the U.S. government makes faster progress toward reducing the general government deficit than our base case currently presumes.

So here are the takeaway points for you: (1) To maintain its AA+, S&P requires that the US tighten its belt beyond the measures the deficit reduction supercommittee believes is necessary, which in any case are not being implemented due to partisan deadlock. (2) Growth assumptions of 2-3.5% are wildly optimistic IMHO based on recent growth figures Stateside, making debt-to-GDP figures look even worse going forward.

End result? Based on S&P's stated criteria compared to America's economic realities and political limitations, I would think that a credit downgrade in the next two years is an odds-on possibility. Even if the US is remarkably progress-free already, the momentum is on the downward path. And I believe that, given its fundamentals (or more accurately, the lack thereof), the pace of Americarnage should accelerate. Recall that as late as May 2010, Spain--yes, Spain--had a AAA rating.

It should be exciting to watch--as long as you fully divest yourself of Sammy's IOUs.

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Putin's a Smart Guy: Worry About $, Not €

Anglophone economic commentary about the euro usually veers towards the "I told you so" variety, nevermind that no one has actually wanted out of the EMU while many are still lining up to join it--including the most economically progressive economy that's still out of it. British Euroskeptic dyspeptics and their American wannabe counterparts aside, many recognize that the potential fallout from the US dollar is far greater given that it (unfortunately) is of more systemic consequence than the euro. Moreover, whoever said that being in a currency union absolves anyone of responsible economic stewardship? EMU members understood that they could no longer avail of devaluation strategies favoured by certain other countries (even though no one has ever devalued their way to prosperity).

So, it is refreshing to hear Vladimir Putin raise a concern many of us from the developing world have. Earlier on he was spot-on in describing the United States as a parasite on the world economy. Now he provides another good insight along similar lines: As far as we can tell, the Eurozone is getting serious about reining in fiscal deficits and whatnot...

"I am heartened by the approach of the European Commission, with whom we rarely agree, and of the key eurozone countries, to how they plan to resolve the problems they face," Putin said at a press conference at the end of the two-day summit of the Group of 20 powers in Los Cabos, Mexico. "We can expect the situation to change for the better, although institutional reasons of the crisis are still there," he said.

...whereas the United States is not, cannot, and will not...

But the Russian leader lamented the lack of clarity on the future of the US dollar, which makes for a sizeable share of Russia's reserves, after US elections in November. "If we keep (half of reserves) in dollars and US bonds, we would like to know what will happen with the dollar after the US presidential elections," the Russian leader said. "Their debt is 15 trillion!" he added with a bewildered pause. "What will happen with the world's main reserve currency? What should we prepare for? These are the questions that should be at the center of attention of the G20." 

For whatever character flaws you may ascribe to Putin, it makes eminent sense to rely less on the dollar as a reserve and vehicle currency when it is structurally biased towards devaluation (whereas the inflation-averse ECB's euro has always been biased towards revaluation). Hence the legitimacy of the earlier "parasite" claim wherein others are effectively being forced to hold detestable dollar-denominated detritus. The G20 or whomever should come to a sensible move to shift towards other alternatives: a basket of currencies or regional alternatives alike the yuan in the Asia-Pacific. Otherwise, we are all just waiting to go the way of progress-free America and its currency.

After all, the bigger they are, the harder they fall.

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New(er) World Order: LDCs Give IMF Conditionalities

It's a topsy-turvy world when you have poor countries (a) contributing emergency funds to help bail out rich countries and (b) placing loan conditionalities on the IMF instead of having conditionalities being placed on them by the IMF. However, these are not normal times. As Europe lurches from crisis to crisis at the whims of the Greek electorate and market forces among other things, the cost of containing European contagion keeps rising. In the past, LDCs have been understandably unwilling to contribute more to the IMF given that America and Europe have not moved the ball forward on reforming voting shares manifested in quotas in accordance with the new contributions being made by developing countries. In particular, many European nations remain overrepresented given their actual contributions as compared to the pledged contributions of major developing nations.

At the recent G20 summit in Mexico, however, these selfsame developing countries including previous repeat Latin American borrowers alike the host and Brazil have changed hats and are now lenders. The Latin debt crisis was a long, long time ago. That said, unlike the New Arrangements to Borrow (NAB) which were contributed by them but didn't raise their quota shares or voting rights in the institution, they are making these new contributions conditional on voting reform. So yes, it's my favourite metaphor of structurally adjusting the IMF once more--this time at the behest of countries that were previously its (reluctant) borrowers:

"These new contributions are being made in anticipation that all the reforms agreed upon in 2010 will be fully implemented in a timely manner, including a comprehensive reform of voting power and reform of quota shares," the BRICS leaders said in a joint statement. The BRICS sought to tie the loans to long-delayed reforms that would give the developing world more say at the Washington-based Fund by boosting their voting power as shareholders.


"If the quotas are not commensurate with the relative economic weight of the different countries then it has to be changed," said He Jianxiong, director general of the international department of the People's Bank of China. In their public remarks in Los Cabos, Chinese officials declined to discuss sums and stressed the need to implement IMF quota reforms agreed in 2010. Growth of the emerging countries, which has far outstripped that of the rich world in recent years, made it "only natural that the quotas should be shifted from developed economies to developing economies," he told reporters. 

Again it's the issues of fairness: Why should poor countries bail out rich countries? Also, isn't assisting their own people whose standards of living are much lower than those of crisis-hit European nations a better use of their foreign exchange?

The Chinese central bank's He indicated that Beijing still has to win over a skeptical public on the need for China, which still has hundreds of millions of poor people, to help bail out European countries with higher  standards of living. Emerging economies have long demanded more say at institutions like the IMF to reflect their growing clout. Their frustrations have grown with the likely delay in implementing the 2010 deal that would boost their voting power and make China the third-largest voting member of the IMF.

Indeed, the PBOC emphasized in an unusually detailed statement on its website later that such pledges would not necessarily be drawn down. The comments appeared aimed at addressing domestic criticism that China should not be helping out more prosperous countries.For instance, China had promised to buy $50 billion in IMF bills when the fund expanded in 2009, the central bank said, but to date had only actually purchased $5.7 billion worth.

So yes, these new contributors are likely to demand quota reform prior to them making available more emergency funds. They are tired of being shunted off to NAB where quota shares are not adjusted and will require immediate increases to their shares as befits their additional contributions.

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