Pay any price, bear any burden

There is so much to say about the tragedy currently unfolding in Tigray, so much propaganda, so many paranoid conspiracy theories on all sides in the conflict, and this being Africa, such low quality media coverage...  If you don't know much about it, don't get Gell-Man amnesia and start with a random news article. Instead, the best place to start is probably the Wikipedia pages on the war, the timeline, and the start (check the citations if anything seems biased!) But my assumption is that you have already done all of that.  

My focus here is just the US foreign policy aspect.  What is going on in Washington, how do we explain US government  actions vis-à-vis Ethiopia?  Is it  "responsibility to protect" or is it  "neocolonialism"? Is it all part of a broader strategy related to China or is it related to Egypt? I have not seen anyone answer this adequately, so this is my humble attempt to make sense of it.

Throughout this post I try to remember three principles.  Occam's razor: The simplest explanation is usually the best one. Hanlon's razor: never attribute to malice what can be explained by stupidity. Third, every complex problem has a simple neat explanation which is wrong, so we won't oversimplify. 

Let me explain where the question arises. First let's take a snapshot -- the very eventful week of May 23, 2021:

• May 23:  the US State Dept imposed imposed visa restrictions  on Ethiopian government officials, which had been rumoured a couple of days earlier.
• May 24 Blinken spoke to the UAE foreign minister. The same day, the UAE pulled out of Ethiopia-Sudan dispute mediation.
• May 26 Blinken met with Al-Sisi 
• May 26 USAID said in a press release and in a US Senate hearing on May 27, that a "USAID partner" had been killed by "Ethiopian and Eritrean" and that the killing was " clearly intentional".  A few things stood out: 
• I've tried but can't find the name of the partner organization.  It's not mentioned in the press release, or in the statements to congress the next day, or in any press interview. Why would it be secret? 
• In congress, USAID's Sarah Charles said it happened in April. But for some reason, USAID did not speak bout the murder for a month.   Here's a CNN story where "a top USAID official working on the ground in Tigray" talks about the situation with partners on April 30, and does not mention the murder.
• the press release says the killing was by Ethiopian and Eritrean troops. As described by Ms Charles, it was not in the heat of the battle. And she also says "and".  It would be understandable if they said "or". The "and" means they know it's both. It seems strange that both armies would simultaneously shoot one unarmed person, especially given that most reports have them in different territories, and there was no battle going on. 
• May 27 In Senate testimony, Sarah Charles said that it was critical the US be allowed to bring in  "right kind of people" and "right kind of equipment" to Ethiopia, but that some people were denied visas.  Which raises the question, why would the Ethiopian government deny some visas but not all? WFP, World Vision and CARE don't seem to have visa problems. The government says it not only grants access but also provides security to aid workers when they go in areas where fighting is still going on. And adds that it has intercepted weapons and ammunition in food aid trucks,  so checking the trucks is necessary.  The subtext here is obvious.  It is not a  secret that USAID sometimes has secret programs  and after all, as it's current head Samantha Powers said in her confirmation hearing, USAID is a national security agency.  So a bit of disagreement on the "right kind of people" should be expected and the USAID reaction seems a little disingenuous.

Then there's the election. Despite all the flaws, the Ethiopian federal elections on June 21st are objectively an improvement over the previous ones. The flaws of course include the fact that two major parties OFC and OLF boycotted. And that the election has been delayed in some regions, including Tigray, which together represent almost 20% of the seats. On the positive side,  the independence of the judiciary, independence of the  election board, number of parties participating nationwide, number of voters are all better than ever  (admittedly a very low bar). Yet over the last few weeks, the US statements started sounding very negative about it. It started with "deeply concerned" on May 27,  to being "gravely concerned" on June 11.   They also keep talking about "post-election dialogue" before the election,  which sounds a lot like encouraging people in advance to not respect the outcome.  All we hear from the US state department  is glass half-empty rhetoric, and almost constant predictions of violence. Wouldn't it be strange if, while doctors are working hard to deliver a baby, a "friend" just kept repeating over and over that they are deeply concerned about the complications, and that the family should be prepared for a funeral? 

Now zoom out and consider the think tanks and media figures that form the bench of the foreign policy establishment. We have ex-CIA people like Cameron Hudson at the Atlantic Council and Judd Devermont at the Center for Strategic & International studies, consistently pushing the most pessimistic narratives about the election. We have Michael Rubin from the American Enterprise Institute, ex-Pentagon neocon who worked on the invasion and occupation of Iraq, writing extremely negative articles about Ethiopia predicting trouble with Kenya and Somalia, and even predicting the break up of the country.  If we look at the NY Times, the chief Africa guy Declan Walsh  seems to be on a campaign to rewrite the history of how the war started: he wrote 4 long articles on it, without once mentioning the actual event that started the war,  namely the Nov 4 attacks, and each time stating the opposite of what happened -- that the first attack was by the government rather than TPLF.  (His most recent article seems to deliberately change the date of a conversation between Abiy and Coons to support that reversal).  This is really bizarre and reminds me of the scandal of the WMD stories  leading up to the Iraq war. 

If you know anything about US-Ethiopia relations, regardless of your views, it should be obvious that something is going on. It almost feels like a new product launch. The Biden administration and the broader foreign policy establishment in the US seem to be executing a policy which views the current Ethiopian government as an adversary. Most importantly, there is a clear push for "intervention".  What is the thinking behind it? Let's consider some hypotheses:

1. R2P: Our null hypothesis is to take it at face value.  The US actions simply reflect "the international community's responsibility to protect" and should be welcomed. No doubt that this motivation is true  for many of the individuals involved, so I will give this some weight, but overall, the pattern of actions listed above refutes this as the only explanation. Why would they go to such lengths to not acknowledge the cause of the war for instance?

2. Scorpion:  the opposite hypothesis is that the US and Ethiopia are like the scorpion and the frog in the fable, that "they" just want to harm Ethiopia period, because it is in their nature as an evil empire.  We can simply dismiss this hypothesis. And throw pure racism in this bucket too. Yes of course racism is a factor at various levels, especially the subtle racism of condescending "experts", but it is just silly to think that is the main force driving the policy.

3. Puppets: This hypothesis is that the TPLF is successfully manipulating "the west" using money and propaganda.   It's true that many journalists, crisis experts and activists on social media probably serve TPLF. Some may be paid agents, and  some may be "useful idiots".  But the idea that people at the highest levels of power in Washington are unwitting puppets of TPLF seems implausible. How about the idea that they are consciously doing it? Indeed much has been made of Susan Rice's history with TPLF, or Tedros Adhanom's connections etc.  Relationships matter a great deal of course, like Chalabi for Iraq, but  it seems like a stretch to say these personal relationships are the main reason for the overall policy.

4. China peril:  maybe it is just part of the geopolitical chess game with China. Ok that seems plausible on the surface, China has been very investing in Ethiopia, way more than the US. And containing a "surging China in Africa" definitely fits the bill as something big enough to drive policy in Washington.  But on deeper analysis... It doesn't explain our situation. Over the last 3 years with the current government, the trend in Ethiopia is slightly leaning more towards the West than before, including famously in the telecom sector.  So "growing fear of China" does not make sense as an explanation for US interventionism in Ethiopia at this time. Ditto for "fear of Russia".  

5. Neocolonialist resource grab:  this hypothesis is that "The West" has a strategy to exploit resources in the region in the long run, which requires a pliant government, which it had until three years ago with TPLF, but the current government is not, so they want to destabilize and ultimately replace it. Given the last 150  years of African history, this definitely deserves consideration. But in this case that doesn't really make sense as a root cause. Ethiopia is not a very good place for pure extractive exploitation... Not much oil and gas etc.  What there is is a lot of water, which is indeed very valuable. But even if you think of water converted to electricity, or water converted to food through irrigation, so what? It's not like the US or Europe need to take food or electricity from Ethiopia, so that doesn't explain it. 

6. Oak:  But of course water is the key and it brings us to our final hypothesis, which is the Egyptian angle. It is no coincidence that all of this strange stuff is overlapping with GERD.  Fundamentally, GERD itself is actually not harmful to Egypt,  and there is a reasonable way to share the Nile long term - the Cooperative Framework Agreement. But politically, GERD is a threat to the Al Sisi regime right now.  The military government in Egypt lives in constant fear of the  Muslim brotherhood, fear of a new iteration of the Arab Spring of 2011, etc. The exaggerated almost caricatural "strongman" image Al Sisi cultivates is because he needs to project strength. 

That's how he got there in 2013, it is in the nature of his power. The moment he shows weakness, he's toast.  Like the oak tree in the fable, if he bends he breaks. And nothing makes him look weaker than Ethiopia going ahead with GERD despite his intransigence. Egypt will be fine but the current Egyptian government is at risk, and the best way to minimize that risk is to destabilize Ethiopia enough that GERD is stopped or at least  delayed until it can be done in a "pliant" way that makes Al Sisi look "strong" domestically in Egypt. 

But why does the US care about this oak tree regime more than peace in the horn of Africa? Well the oak is a necessary part of the regional axis with Saudi Arabia, and UAE. If Egypt is run by the Muslim brotherhood or a secular civilian government, or anything other than a military dictator,  it may no longer be a reliable ally of Saudi Arabia and opponent of Iran.  And this is definitely the type of thing that could cause neo-cons, and the liberal hawks and all the other interventionists to coalesce.  So it seems plausible that there is a faction within the Biden administration and the broader "establishment" that believes in trying to weaken Ethiopia to help Al Sisi as part of the the overall strategy in the Middle East.  It explains the "launch" events of the week of May 23, it fits Feltman going to Saudi Arabia, the  UAE and Qatar to discuss GERD. It fits with the US policy in Yemen. And it is similar to the convoluted logic on Syria that you see from all the "serious people".  It is of course not wise to attach yourself to a doomed oak and it's not like they don't know it. Listen to this interview with Ben Rhodes  who was in the white house during the Egyptian coup of 2013. But a policy in an organization as complex as this is not like a logical thought in a single brain, it's the outcome of many competing interests.  If enough factions want something, it can happen even if their reasons are contradictory.  A great explanation of this is in an interview of Al Gore in 2006 which really struck me at the time.  Skip ahead to 27:20 where he says  "the decision to invade Iraq was the worst strategic mistake in American history" and goes on to very clearly explain the "perfect storm" of four policy forces that led to it.  It is really one of the most remarkably clear segments I've ever heard on recent US foreign policy.

And as in the case of Iraq in 2001-2003, here in 2021 with Ethiopia, it's not one thing, I would say US interventionism is driven by 

• 60% stability of the Al-Sisi regime,
• 20% fear of China,
• 15% R2P
• 5%  pro-TPLF feelings

For now this seems like a powerful mix, and the interventionists  have the upper hand in the Biden administration. They will "pay any price, bear any burden" to pursue these deeply flawed goals. As long as the price is paid and the burden is born by others of course.  That's the big picture. Not very glorious. Just the same type of mess that in the past has led to the US supporting military coups overthrowing democracy when the "wrong" party wins elections like in Egypt, talking about humanitarianism while favoring war like in Yemen, "accidentally" arming Al Nusra Front (aka Al.Qaeda) in Syria, lying about motives and bringing perpetual war like in Iraq etc.  I'm sure Samantha Powers and Susan Rice try to rationalize that they are the good guys, the ends justify the means, mistakes are made etc. But they have been staring into the abyss for too long, the abyss stared back at them and sucked them in. 

The best hope is for the interventionists to be slowed by the weight of their past disasters and blocked by other factions in the US. American interventionism has been failing a lot for a long time. The Iraq invasion gave birth to Al Qaeda in Iraq, then ISIS. They made Iran, which they want above all to contain, stronger than ever in Iraq. Assad won in Syria. Even Libya,  despite Egypt the supposed big force of the Arab world being right next door, is a dismal failure.  In Yemen $100B and five years of bombing, the Houthis are still there.   In Afghanistan, after 20 years and $2T US intervention, Al Qaeda moved and the Taliban won.  More important than the failure to achieve US goals, the incalculable damage to the people in Iraq, Syria, Libya and Yemen is impossible to ignore and the strategic blow-back keeps getting worse.  So despite the strong interventionist cabal in the Biden administration, it's not clear they can beat the "isolationists", some evangelical Christians like Inhofe that are pro-Ethiopia, maybe even some "anti-imperialists" from the left,  and other factions in the administration and congress.

An additional weakness of the interventionists, which may seem paradoxical, is that they don't pay the price of their mistakes personally. No matter how wrong their predictions and disastrous their policies,  the same people keep shuffling in and out of think tanks and  the Pentagon and the state department, progressing their careers, with no evolutionary pressure, no natural selection.  So in effect, neo-cons and liberal hawks and Clintonites and Cheneyites in the foreign policy establishment have been in-breeding for so long their ideas are getting weaker, and their failures are getting more expensive.  Samantha Powers and Susan Rice are like inbred descendants of Henry Kissinger. Michael Rubin is like Paul Wolfowitz's mini-me.  So one possibility is that it all just fizzles out in incompetence and they end up doing nothing significant in Ethiopia.

There are also forces outside the US at play. GERD is kind of a pan-African rallying point. Practically six Nile Basin countries are already aligned with Ethiopia on this issue. Another key variable appears to be the UAE. They are usually aligned with Saudi Arabia and Egypt. But, they have had a good relationship with Eritrea and Ethiopia,  helped with the peace treaty between the two governments, offered to mediate with Sudan (until suddenly backing off mentioned above). Qatar is famously not aligned with Saudis so a possible balancing force. Turkey is a other big source of investment in Ethiopia and is a potential stabilizing force and of course China is as usual against US interventionism.  Finally, there's the fact that no matter how many times they pooh-pooh Abiy's Nobel peace prize,  whatever his flaws, they can't make him look like a Saddam, Gaddafi or Assad because he isn't.  And the election will make that even clearer.

Defending America?

Here are three facts every American should know:

1. Americans pay $1 Trillion a year for War and ‘Security’.   In fact, that understates it a bit, for 2012 the US is spending over a trillion dollars on national security. 
2. The US spends more than the next 10 biggest military spending countries... combined! Taking #2 China and #3 Russia together, the US still spends 3 times more. 
3. Military spending doubled in the last decade. The US spends more today than it ever did during the "arms race" of the cold war against the Soviet Union, and that's adjusted for inflation.  More than at the peak of the cold war!

Now regardless of your opinion, if you live in the US, simply test a few friends on any one of these facts. I bet most of them are not even close. In the mainstream debate on military spending, reducing it is considered the crazy thing!  The above facts rarely get mentioned, neither by the politicians nor the reporters. 

Defending America? From what or whom? Military-industrial complex anyone? If you're feeling courageous, here's a fascinating piece entitled Stormtroopin' USA. 

Political bugs: six fixes to the US budget deficit

A couple of months ago, in the midst of the hype around the US government debt crisis, someone on a mailing list posed the following question: what are some of the "real" things that can be done to solve the problem?

The premise of the question is that the politicians were not proposing rational solutions but rather, were speaking tactically, with ulterior motives, in other words being craven, pandering, demagoguing, etc. Indeed, the US deficit is one of those things where there are a few clear "right things" that the majority of rational informed people would agree with, and yet, wrong things keep happening over and over again. Much like the "design bugs" I like to occasionally rant about, these are political bugs. I don't mean the fundamentally difficult issues where reasonable people can sincerely disagree: a carbon tax, medicare for all, a flat-tax, consumption tax, etc. etc. Those aren't bugs, rather they are unsolved problems, or new "features" to be designed. But for this post, I'm only taking about no-brainers, the bugs.

So coming to the US budget deficit specifically, here was my list of bugs (originally written on July 1, 2011):

1. Eliminate mortgage interest deductions. Why should renters subsidize owners? No good reason.
2. Eliminate corporate healthcare deduction i.e. count employer provided benefits as income. Why should employees of larger companies that provide health benefits be subsidized by people who get their health insurance in other ways? Why would society want to encourage linking health insurance to employment, as opposed to say children's education? No good reason. 
3. Abolish payroll taxes and shift that all into income tax. Payroll taxes ostensibly pay for social security and medicare but really are just a regressive extra income tax, why not roll it into the overall progressive income tax? 
4. Reduce social security by making it means tested. Why should anyone above the median income get any additional income from the government? If the purpose of a social safety net is to have the fortunate help the less fortunate, what's the point of helping the rich? 
5. Reduce social security by raising the threshold age. The retirement ages were set a long time ago, when people aged earlier. Sixty five years old in 1930 was like being 75 or 80 today. If the population distribution shifts older, retirement age should rise. The ratio of retired people to working people has to be kept more or less constant otherwise a) it obviously won't work, and b) it will be clearly unfair. 
6. Reduce military spending to a level where it can be called a "defense budget" as opposed to an "offense budget": 50% would still leave it twice as big as the next biggest military budget, and still greater than the next 5 countries combined. 

The combination of the above would easily eliminate the structural deficit. Not only that, none of these points fundamentally challenging any principles or stated societal goals, nor are they suggesting qualitative change These are straight quantitative adjustments that, in principle, libertarians, leftists, fiscal conservatives, and most mainstream economists would probably agree with. They should be no-brainers.

And yet, they can't happen. The reality is that regulatory capture makes these things almost impossible. So the debate goes on and on about tiny meaningless slices of spending that are easy to demonize, but have no impact on the real problem. Maybe something will bump the political economic system out of this miserable Pareto optimum. Unfortunately it looks like for now, the main lesson of the last three years of economic crises remains that the first casualty is causality.

La cigale et la fourmi: CNY/USD revisited

Time to revisit the "Yin and yang of the greenback" theory.  The theory, regarding the relative value of Chinese and US currencies, is basically "La cigale et la fourmi", not as a moral story but as basic economics. China, the ant  in our parable, has spent the last 25 years working hard and, thanks to government policies that amount to forced savings, not consuming that much.  Meanwhile, the US, the cricket, has spent the last 25 years living off  its charm and beauty as the most advanced economy in the world. Its currency's status as world reserve currency gives it a free lunch in terms of being able to borrow.

At some point, the ant will be tempted  to start "cashing in", converting all that past hard work into a higher standard of living.  How? Well there are several ways the government can convert those savings it has accumulated in USD into benefits for consumers. It could subsidize imported goods like fuel for example. Or more generally, it could let the exchange rate of CNY/USD rise, which would make all foreign goods cheaper in China.  So that's the fundamental thesis, which is not at all an original point of view.  The question was (and still is) when will this play out?

The financial crisis of 2008 looked to me like it was going to be the perfect opportunity for them.  Because it added a couple of other factors (increased US deficit, and the rich world's reduced ability to import from China due to a recession) that added more pressure for the Chinese currency to rise. As it turned out,  rather than shift gears into the next phase of development, one with less reliance on exports and  increased domestic consumption, they decided to stay in the same gear and press on the accelerator instead: they maintained the exchange rate quasi-frozen and stimulated exports even more.  So the big jump in CNY/USD has been postponed.

But will it occur? I still think so. The reserves are still accumulating. Here's the picture I cited last time, Foreign Holdings of U.S. Securities

	Country or category	Total	Equities	Long-term debt		Short-term
				ABS	Other	debt
1	Japan	1,197	220	133	768	76
2	China (Mainland)1	922	29	217	653	23
3	United Kingdom	921	421	160	316	24
4	Cayman Islands	740	279	236	186	38
5	Luxembourg	703	235	104	320	44

And here is what we have two years later, in the latest report just released last month:

	Country or category	Total	Equities	Long-term debt		Short-term
				ABS	Other	debt
1	China (Mainland)1	1,464	78	360	866	160
2	Japan	1,269	182	136	883	69
3	United Kingdom	788	279	64	422	23
4	Cayman Islands	650	227	140	210	73
5	Luxembourg	578	137	49	312	80

Even more of the same! The pressure keeps building....

Moreover, the rumours are that China might have stimulated itself into a bubble of it's own. How does that affect our theory? You face a bubble, and you had a pile of foreign reserves.... Well that's like being in the kitchen with toast almost burning and a huge reserve of nutella. Pop the toaster and enjoy the sandwich, China!

Update: Note that in the above tables, the amount of Chinese holdings of US securities increased a lot both in absolute and relative terms. Also, I should point out one more argument in the same direction: that western policy makers are increasingly calling on China to strengthen CNY.

$135B: pros and cons

Last week, a friend pointed me to the following story:

"Italy’s financial police (Guardia italiana di Finanza) has seized US bonds worth US 134.5 billion from two Japanese nationals ...."

My first thought .... well not my first, the first was of course: "WTF?!!", but the second or third thought was "this could be terrorism!" A deliberate attack on the ability of the US govt to finance itself, by shaking confidence in the debt instruments.

And of course I expected it to be huge news. The biggest case of counterfeiting in history and a new kind of terrorism etc, etc. Yet, I searched and searched, and there was barely any mention of it anywhere else that day and the next day! No follow-ups, no debunking, nothing. In fact even the initial story is completely absent from mainstream news. Why the silence, what's going on? Where are all the experts and the pros? Then when you think about it... it makes sense. If it really is an attack, an attack on the very essence of money -- confidence, that's exactly how you would want to respond isn't it? Is it possible that say all the reporters who called the US Federal Reserve for comment got a quiet very high level response saying: "please bury this story", and did so? After all it is well known that major US news organizations have in the recent past complied when the US government asked them not to reveal national security secrets that they knew.

Today a week later, there are still very few stories about it on the web, and zero from the major US news organizations, nothing from the New York Times, Washington Post, CNN et al.

Here's a good blog post theorizing that the bonds must be counterfeit, and likely designed to be caught.

Florida 2000

I was reading Super Crunchers a little while ago. I got to this passage which is one of those things that are deceptively low-key but then make you go WTF? A big WTF?!! Such a big one in fact that I am quoting it here. At the end of a section about data mashing the author adds the following cautionary tale (pp. 138-139):

Yet the art of indirect matching can also be prone to error. Database Technologies (DBT), a company that was ultimately purchased by ChoicePoint, got in a lot of trouble for indirectly identifying felons before the 2000 Florida elections. The state of Florida hired DBT to create a list of potential people to remove from the list of registered voters. DBT matched the database of registered voters to lists of convicted felons not just from Florida but from every state in the union. The most direct and conservative means to match would have been to use the voter's name and date of birth as necessary identifiers. But DBT, possibly under direction from Florida's Division of Elections, cast a much broader net [...] Its matching algorithm required only a 90 percent match between the name of the registered voter and the name of the convict. In practice this meant that there were lots of false positives [....] For example the Rev. Willie D. Whiting, Jr., a registered voter was initially told that he could not vote because someone named Willie J. Whiting, born two days later, had a felony conviction. The Division of Elections also required DBT to perform "nickname matches" for first names and to match on first and last names regardless of their order -- so that the name Deborah Ann would also match the name Ann Deborah, for example.

The combination of these low matching requirements together with the broad universe of all state felonies produced a staggeringly large list of 57,746 registered Floridians who were identified as convicted felons. The concern was not just with the likely large number of false positives, but also with the likelihood that a disproportionate number of the so-called purged registrations would be for African-American voters. This is especially true because the algorithm was not relaxed when it came to race. Only registered voters who exactly matched the race of the convict were subject to exclusion from the voting rolls.

[...] What makes the DBT story so troubling is that the convict/voter data seemed so poorly matched relative to the standards of modern-day merging and mashing.

Note that this book is all about number crunching, not politics, and overall very optimistic, gung-ho even. But this brief passage, specifically the things that I have highlighted in bold above, gave me pause... It's been bothering me for a couple of weeks.

Clearly, technically, DBT made a blatant mistake as the author concludes. But how come? Why did the government of Florida give directions that led directly and predictably to the "mistakes"?First of all, why allow any false positives at all? It's perfectly possible to get to almost zero false positives if you tolerate more false negatives, i.e. err on the safe side. In fact, in legal terms, that's the rule: "innocent until proven guilty" -- not 90 percent, but beyond a reasonable doubt. How could they accidentally forget this principle when it came to denying basic rights like voting? Second, in addition to the bias mentioned in the passage, it seems obvious to me that African Americans have a higher frequency of occurence of the same names. So not only did they err on the unsafe side, but the way in which the error expanded happened to be doubly targeted at a particular demographic group -- how come? Oh and who ran the state government of Florida at the time, and who benefited from those errors? Those are rhetorical questions by the way. But it's still surprising. Anyway it's history now...

Speaking of history, the title of this post comes from the name of a disco in Nairobi way back in the day. The first time I ever heard about the concept of a nightclub was when we drove by Florida 2000 one day, and I asked what's that place? I was too young to even think about going in but it was a fascinating thing -- it actually looked like a flying saucer.

And speaking of flying saucers, I wonder what it must be like for kids to not have the "Year 2000" in the future... Which reminds of a song by Fela and Roy Ayers.

Stealth bailout

A few days ago, I was shocked to find out that there's another bailout of a trillion dollars in loans by the Fed:

"The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds."

While we were debating the $700B bailout, there was a stealth bailout that was three times bigger!

Yin and yang of the greenback

China has a huge trade surplus with the US which has been growing since 1985. Normally, or in theory, exporters repatriate the money earned abroad, which makes their own currency rise and the importer's currency fall.

But in this case, for over 20 years, China has been keeping that money in dollars. Compare "Foreign Portfolio Holdings of U.S. Securities". Two countries stand out. Japan and China both hold huge amounts of US securities. (Actually the ones that really stand out are Cayman Islands and Luxembourg but that's another story!). Further down on the same page, see "U.S. Portfolio Holdings of Foreign Securities" which shows the US has a similar amount of Japanese securities. But that's not the case with China. There it's completely one-sided with China holding huge amounts of US debt. At some point they will need to sell those dollars right? That's the 1.4 Trillion dollar question. Basically China has been delaying its currency's rise in order to continue growing exports.

The current economic crisis changes things.

1. As US and Europe imports slow down, China might shift away from exports and more towards infrastructure and internal consumption. This means their reserve strategy might change to bringing money back home. 
2. A loss of confidence in the US financial system. 
3. A huge increase in US public debt from the bailout and the stealth bailout.

All three things imply China will want to sell dollars and dollar assets.

What else can we imagine? Weakening dollar will help American exports. Which may be critical for new energy technology products (in solar, wind, hydrogen  and who knows what else) to develop and succeed.

So here 4 bold predictions for this different world:

• USD vs CNY will go down,
• the US dollar will no longer be the world's primary reserve currency, but 
• America will do what it has historically done best -- create a new industry for the world,  meanwhile
• China's billion people will get an accelerated rise in standard of living. 

... the first casualty is causality

This week, like everyone, I had some thoughts about the $700B financial industry bailout. I put them in an email to some friends a few ago... Here they are (with some edits):

This bailout is looking more and more like a scam.   The fear-mongering about jobs sounds a lot like when the same folks were saying Saddam was about to nuke the USA in alliance with Al Qaeda. Just because it's scary, it's not automatically true, and it's not automatically the case that the proposed solution will avoid it. 

$25B for Detroit automakers slipped into the bailout? WTF? They would surely have been turned out if they had asked for it alone, but piggy-backed into the $700B... Recall how after Sept 11 all the airlines were begging for bailouts, and many of them got turned down. Imagine how many companies will try to jump onto this bailout like hungry vultures on fresh kill. 

Also, note that the relationship between Paulson and Goldman Sachs is eerily similar to the relationship between Cheney and Halliburton. Nothing against Paulson per se, I'm just pointing out the parallel. In any case, even if he's a saint, is any government capable of disbursing a freestanding $700B fund without massive corruption? Visions of scams with this bailout that'd make Halliburton's no-bid contracts for Iraq look like chump change....  In fact, this whole mass psychological phenomenon  looks more than a bit like an accelerated rerun recent history... With Fannie Mae-Freddie Mac-Lehman-AIG, in the role of Sept 11, and the Big Bad $700B as the Iraq Invasion of 2003,  the US congress as itself,  and special appearance by the Great Depression II as Saddam's WMD. I don't mean to compare the events of course, fundamentally different crises. But the the political and business dimensions sides are similar.

I'm also reminded of Russia in the early 1990s. The experts kept screaming that if this or that privatization didn't happen right away, the consequences would be severe, Russia would be come communist again, the 3rd world war would start immediately, etc etc. Guess what? Behind all the deadlines, and crises, rescues, etc., there were some dudes rigging privatization auctions. By the time people woke up to the game, seven gazillionaire oligarchs had ownership of more than 50% of the GDP of the ex Soviet Union, and the standard of living had dropped, life expectancy had dropped, the economy was in ruins... Basically the entire country got jacked by a few dozen people.

Back to USA 2008. The crisis  exists of course,  and ok let's agree something must be done [NOTE: this was written on Wednesday Oct 1, before the Trouble Asset Recovery Program (TARP)  bailout was approved by congress today].  But I'm skeptical about TARP.

So let's go to the root causes - not because I presume to know something more than the experts have been saying, but just to help me understand by summarizing. The crisis exists because:
1) we don't know how many more homes will foreclose, and what they will be worth when they do; which leads to
2) uncertainty in value of mortgage backed securities (MBS) which leads to
3) uncertainty about balance sheet of banks with lots of MBS, which leads to
4) unwillingness to lend i.e. credit crisis, which leads to loss of savings, loss of jobs, homelessness etc.

Now instead of injecting money at #3 which is what TARP (the current proposed bailout) does, why not inject it at #1? I think the government should just say it will buy the houses that are being foreclosed on rather than the securities derived from them. This seems better to me than TARP because:
a) the taxpayer is buying something whose valuation is better understood, and therefore taking less of a risk;
b) by having a buyer of last-resort for the houses and a known worst-case price, you're putting a floor under the value of these MBSes... this clears up the bank balance sheets, everyone will know which banks are solvent and not, and those that are can resume lending and that stops the credit crunch
c) the socio-political side-effects are better -- i.e. any bailout would not be for insolvent banks and poorly managed companies but for defaulting homeowners, by making them tenants instead of homeless, and the opportunities for corruption are greatly reduced
d) worst case in the long term, the government gets stuck with $700B of new public housing that's hard to sell (but has tenants), whereas the current bailout's worst case is just burning $700B on paper that ends up being worth $0.

I'm no expert but the more I read about this, the more I believe that it's better to solve the problem at the source, i.e. #1 and not #3.

I learned later that this is similar to something done in the 1930s called the Home Owners' Loan Corporation (HOLC), and has been advocated in the current context by Roubini. Some politicians have also called for it, but in addition to TARP!  The Washington  Post too  has a column proposing something along those lines.

In any case, TARP was approved today, so we'll see. If it gets implemented, I predict scandals and a blue ribbon inquiry comission circa 2010.  Hopefully it will work in spite of that, because alternatives are probably eliminated. 

Universal health care & AIG

The big problem with providing Canadian-style universal health care in the US is that it would basically nationalize a large part of the insurance industry (while also expanding it). Undeniably a huge disruption to a huge industry that employs many people. But now, the US government has, in effect, nationalised AIG", the biggest insurance company in the world. If the government ends up actually owning 80% of AIG, then why not use AIG to provide health insurance for the uninsured? Bang! Too good to be true, surely...