THE US ELECTIONS

Only several days are left till the final verdict is passed on the relative merits of two finalists in America’s most expensive ever electoral circus. It has been so much fun this time: we have enjoyed a parade including a liberal shrew, a token preacher, a plastic equity guru, a dallying populist, a septuagenarian grouch, a half-black upstart and finally a puck-loving but animal-hating diva.

THE CIRCUS COMES TO TOWN (AND THEN DISBANDS)
The onset of the financial crisis messed up the strategies which, amidst fear mongering, would have perkily punted the same “values” message that had brought George W. Bush to power. But the slump in measurable values of homes and pensions has since shifted the rules of the game considerably. So much so that most of the intellectual elite of the country has now embraced a candidate whose official stance on trade would, in other circumstances, make any economically literate voter squeamish.

Will Obama win? The common view is now that the result will hinge on the voting decisions of the independents. Sarah Palin was supposed to rally Hillary’s troops, and she aptly appealed to them in her first public appearance as a vice-presidential nominee. As we now know, the thrust proved short-lived and she instead galvanized the numerically important, yet ideologically isolated minority whose voting record had helped to run the country aground. The independents may be displeased with Obama’s ‘otherness’ as much as with Palin’s increasingly Fascist, ‘shrill, baby, shrill’ wailing tones. Palin’s rallying calls point to an ‘enemy within’, whereby she utilizes sliding signifiers and exploits connotations of fear and alienation. These speeches would make a poor reading as a propaganda piece. But chopped up into an engrossing “call and response” ritual, they confirm the troops in their conviction that someone, somehow must prevent the inevitable.

But is Obama’s win really inevitable? He is close to victory, even though a well-timed video tape from Osama bin Laden could, yet again, help the Republicans and mire the US troops for years to come. Barring such a catastrophic development, the odds against Palin and her presidential running mate are high. Many independents may have now fallen under Obama’s unquestionable personal charm, his calm demeanor, and smooth-as-silk delivery in the otherwise inconclusive debates. Obama’s supporters stress the professionalism of the faultless campaign as a proof of his considerable managerial skills. Yet there are still many others who need another ‘ticking point’ to mark the Obama-Biden slot at the top of the ballot. Will the fear of Obama’s “past associations” trump the genuine fascination with this ambitious young man? Will the scare mongering of a “socialist” tax policy really frighten the middle class?

To be true, the red flag of “socialism” in America is an argument that is just inane and vacuous as Western Europeans’ congenital rejection of “religion” in politics.
Just as Europe’s political ethics is rich in references drawing on religious traditions, so did the US government, on occasion, assume a larger role in the country’s economy than it has been the case since Ronald Reagan’s presidency. As the turbulent Paulson era is now drawing to a close, the battle against “socialism” appears to have been lost without a single shot, regardless of Republican distaste for the ‘Swedish’ solution. Indeed, despite triumphant anti-Americanism on the European left, we may now all be in the same, centrist, boat, whether in America, Sweden or elsewhere. In the third quarter of 2007, the Swedish automaker Volvo received 41000 orders for its trucks. This year, in the corresponding quarter, the same company received barely 115 orders. The collapse of transaction flows in the ‘real economy’ - in America, in Asia and in Europe - should serve as a timely wake-up call against any exploitation of the allegedly contrasting interests of the Wall St and the Main St, la rue, la calle, dajie and die Strasse.



A BIG RISK OF A SMALL GOVERNMENT
It is the market circumstances, still not fully recognized by the proverbial Joe in the street, that have radically altered the plausibility and feasibility of the grand fiscal plans touted by either party with relation to health care, education and other policies. In an effort to save its financial market, the US government has so far only injected an equivalent of about 6% of GDP. When Japan hit the curb in the early 1990s, the country spent closer to 25% of its GDP to finally put the economy back on track. But Japan’s asset values have never recovered to pre-bubble levels and it might, just as well, take a lot longer than commonly assumed for America to return to the 2007 level of asset wealth.

The comparisons with Japan’s balance sheet recession are ubiquitous, but misinformed. For one, unlike Japan, the US is not a net saver, which will make all the talk of ultimate rescue of its economy reliant on external sources. Japan’s stagnant demography made its growth highly dependent on its trade account and on income from overseas investments. The United States, even at dollar’s low last summer, still had nothing much to export. It will not be able to solve its current conundrum through the turnaround in the current account.

Equally importantly, America does not benefit from the social cohesion that characterizes the racially united and monolingual Japan. Over centuries the Japanese society has perfected a team spirit that only island nations can aspire to (shimaguni konjo). I still recall the shock of the sudden confrontation with homeless people around Shinjuku station and in Ueno Park in Tokyo. Yet at the depth of the economic slump and labor market losses, local shops organized distribution of foodstuffs within 48 hours of expiration. In a country ravaged by periodic natural disasters, a sense of common destiny was just too strong for anyone to remain indifferent.



THE “R” ISSUE
As I visited poor black neighborhoods in the American South last weekend, the memories of Japan’s deflationary decade loomed again. Persuaded by committed friends, I participated in a last ditch pre-electoral “canvassing” effort. Our role consisted in knocking on doors that we would have otherwise never knocked on. And these were ‘doors’ that barely knew the fruits of America’s economic boom of the last 16 years.

Granted, these are not slums. Many of these modest houses are ‘owned’, which, as we now know means little more than a call option of ownership of the mortgaged property. Many others have been foreclosed. Yet something else struck us when we tried to elicit the response from behind those rickety doors. Many pre-electoral statistics rely on a somewhat automated arithmetic and plug in the numbers of African American population as ‘natural’ Obama’s supporters. They could yet prove mistaken.

Race is a big factor in this election – for better or worse. Many so-called ‘liberals’ (a term curiously referring to left-wingers in the US, but denoting free market apostles in continental Europe) would probably care much less for a Democratic candidate, were it not for the racial symbolic of his rise and a potentially cathartic impact of the election on the depressed black population. Similarly, most, if certainly not all African Americans would rather vote for a black candidate if given a choice. A numerically more important, though less vocal group of white voters may have an issue with a candidate representing a racial or a linguistic minority.

The racial divide remains one of the defining factors of the Democratic Party’s predicament in the Southern United States. Jimmy Carter’s parenthesis notwithstanding, the conservative vote swung away from the Democrats since Lyndon Johnson signed the Anti-Segregation Act in 1964. And whereas before African Americans were not allowed to board the bus through the same door as the whites, today they do not share public buses with white folks at all. The Civil Rights movement may have triumphed. The not so civil economic wrongs could not be so easily unwound.



DON’T MOPE COZ THERE IS THE HOPE
Walking from door to door and listening to the deeply accented lingo transported directly from the pages of ‘Huckleberry Finn’, I could not escape the feeling that, for many of my accidental interlocutors, an act of voting for an abstract, Washington DC-based position will require an extraordinary personal effort. An effort to switch on the ubiquitous TV blare. An effort to lurch out of the dark bedroom. An effort to leave the familiar neighborhood. An effort to profess a view.

This is not a population accustomed to, or indeed required to make an effort in the first place. We are far, very far from Emersonian self-reliance. As we tried to explain to these half-illiterate people how to mark the ballot, it dawned on me that an act of INDIVIDUAL effort in an abstract (as opposed to physical) task is without precedent in their personal experience. The vote will take place only if and when the organized groups, the local churches, the campaigners or the community organizers provide the necessary assistance to the people who do not, in usual circumstances, take the extraordinary initiative to leave the ghetto.

And then there was hope. A 7-year-old girl opened the door and dragged her mom to the porch. While we were trying to make sure that her mother could understand the intricacies of the arguably confusing presidential, senatorial and gubernatorial ballot, the little girl flourished, flaunting with pride her experience of the ‘vote’ she had already exercised at school. The school game was supposed to prepare the young Americans for their future rights. Flushed, but proud, the little lady confirmed to us that she had ‘voted’ for O-ba-ma. There was no sense of otherness in her scintillating voice. But there was more hope in this statement than in the raucous mass rallies.

WHO WILL SAVE UNCLE SAM?

I promised to focus on China's property bubble this week, but other important events are approaching fast and the planned feature will be delayed by several days

BARACK - OH, BUMMER!
When fear and uncertainty spread their repulsive tentacles, many humans react by displacing and even personalizing the elusive object of such emotions. A similar phenomenon of projective blaming is now underway among sections of the American electorate. At a time of unprecedented wealth destruction, many Americans are obsessed with a myth of dark, menacing Otherness. According to the myth’s organizing principle an Indonesian Muslim Communist from a Radical Black Church could actually be a Kenyan Weatherman Arab Terrorist. And yes, the real danger is that this person, with his un-American name, is getting perilously close to be the next President of a country which, until two months ago, was still a beacon of free market capitalism.

The despair runs deep. So deep that these frustrated groups of the American voters have placed their hopes with an occasionally electrifying, though often syntax-challenged personality of an admittedly handsome woman who prides herself with her utter disdain for the intricacies of the global economy and the world affairs. Supreme in her fiery harangues, the Republican VP candidate has been unable to properly construct subordinate clauses when speaking of that country we are in of which one state she is the executive of where Putin rears his head and we send them out to keep an eye on. Ok?

PALIN’S ELECTION IS AMERICA’S ERECTION
Palin was handpicked by McCain’s entourage to ‘shore up’ his credentials among the powerful Evangelical voters. Although many foreign observers see the Evangelicals’ influence through the prism of their support for Bush’s failed foreign policies or their biblically sealed alliance with Israel’s right wingers, the group’s impact on the quality of American political debate has been much more pervasive and wide-ranging. On talk radio shows earlier this year, John McCain came under assault from Evangelicals who castigated him for opposing torture in Guantanamo. “He is anti-torture”, yelped with high-pitched indignation an obviously deeply religious woman, “but I am pro-torture!” It was not until McCain’s campaign organizers increased the frequency of his interaction with the Evangelical “base” that the sectarian reaction became less strident (“he is one of us”). But some have remained reserved, noting that McCain never quite captured the wisdom of George W. Bush, the wisdom of finding all the right answers in the Scriptures. Astonishing as it might seem, the hapless Mr Bush will be sorely missed by that orphaned 30% of the US electorate and by their allies from one small country in the Middle East.

Palinism is arguably more than a daily fodder for late night comedy show chuckle. The real risk for America’s value system lies in the fact that as many as three Supreme Court judges could be confirmed by the new President. The country’s direction could thus be durably affected by these choices and the fears about the very sustainability of the ‘value crusade’ contribute to the hysterical anti-Obama atmosphere at many of Palin’s rallies. The reactions have become so hostile that some opponents likened Palin to segregationist George Wallace. Suddenly it is the Democrats who had to apologize for the comparison; the organizers of the anti-Obama rallies did not have to. And yet, the emotions among the ignorant mob run high. Calls to “kill him” reflect the fear displacement of small town America. It is bemusing to relive it during interviews with white youngsters from the Deep South, who threaten to “relocate to a Communist country” if Obama wins. I concur that North Korea could actually be good for their eating habits.

Meanwhile, the American media remain puzzled. Accused of uncritical approach to the excesses of Bush’s first term, most mainstream networks find it hard not to betray their pro-Obama sympathies. It leaves the Fox TV as a lone conduit of rather farcical right-wing propaganda. But the spin feels tired and worn out. When four years ago John Kerry won another TV debate against the incumbent, the Fox TV proclaimed that although Kerry was “glib” and probably a better debater, Bush was “a better President”. Four more years of war and trillions of dollars of lost wealth later, that argument is markedly less airborne. Besides, arguing that Palin would make a “better” President could prove risqué outside the avidly sectarian circles.



IGNORANCE AS VIRTUE
The spin doctors are, therefore, at pains to turn ignorance into virtue and mediocrity into value. Instead, they have tried to undermine the opponent’s appeal by further stressing his Otherness. After Obama’s triumphal tour of the Middle East and Europe, I received emails with some astonishing accusations of the Democratic candidate’s betrayal of America. According to the slur, Obama proved that he was not truly American because he…. “spoke to 200’000 screaming Germans”. This sticks. After all, Kerry was accused of being fluent in French. Palin’s oversize flag pin, and her sub-Bush distaste for anything foreign plays well with this audience. And, unfortunately for Obama, his daughters are still too young to “proudly serve the nation” in Iraq.

The race card and the anti-Muslim innuendos are a frequent motif in these mailings. In one such email, sporting the picture of Obama’s poor, wrinkled Kenyan grandma, the outraged caption read: “do you want the First Family of the United States of America to look like THAT?” Obama’s absent father’s ethnic roots are also dragged out as a proof of Barack’s own radical leanings

IT’S 401k, STUPID
With the economic situation dire and the real life consequences of the financial meltdown too complex for even well informed people to grasp, the “it’s economy, stupid” argument can only drive home the message through anecdotal or better yet first person experience. The 401k checks, which most Americans receive monthly are a home run “free mailing” for the candidate who has crafted a message of ‘change’, even if his program, as much as his opponent’s, will be at pains to incorporate the fiscal and financial constraints within which the future administration will have to operate.

The new inhabitant of the White House will inherit a country diminished abroad after 8 years of shameful unilateralism, and severely hobbled economically after the last 16 years of bubbly hubris. Cleaning up the mess left over by the Clinton/Bush era will be a task of Herculean proportions. The new administration will have to deal with mounting public debts, bad assets and corporate failures. In such circumstances, it will not be easy to re-ignite the nation’s energy without the (tempting) handout of easy credit. Instead, America will have to enter the unpleasant era of deleveraging. And with half a trillion dollar of annual deficits - something will have to give. The unenviable choice will fall somewhere between reflation, tax increases and spending cuts.



Reflation makes one shudder at the thought about the potentially disastrous, long term consequences for the savers. It is difficult to believe that the application of openly reflationary measures would signify a full circle in the economic orthodoxy. Still, your best protection against the potential ravages of debt reflation would be… gold. Purchase of gold should be facilitated by its subpar performance during the initial deflation and aided further by the artificially strong US dollar which depresses the value of the dollar-denominated gold price. Dollar’s strength is ‘artificial’ because it is supported by three, temporary events: European banks’ unwinding of their short dollar positions in the wake of the CDO breakdown, US-based hedge funds’ closing out their dollar-denominated debt after selling their large positions overseas, and US corporations benefiting from IRS tax breaks for repatriation of profit from overseas. The relative weakness of the yellow metal (in dollar terms) could, therefore, provide an excellent entry point to secure future insurance against reflation.

During electoral campaigns, no one’s lips will read “more taxes”. But the unpleasant reality for either candidate is that the deficit will force such increases in some form, as soon as the immediate recession has passed. The proper timing of such fiscal rebalancing will be tricky and, if implemented prematurely, it could suffer from the so-called Hashimoto Effect. Ten years ago, the Japanese Premier managed to smother a recovering economy by showing that low interest rates are a necessary, but insufficient condition to offset the weakness in growth indicators. Regrettably, I have little advice for Americans who are bound to face a heavier tax burden. But one obvious choice would be to swap your US passports for the passports of Burundi, Bhutan or Barbados.

Finally, the most appealing solution of all, i.e. spending cuts. In the last televised debate, both presidential candidates were patently vague as to which public program should be trimmed – health? Education? Social security? Tough to build new America without them. The wars in the Middle East and Central Asia could be one target, but this is not instantly achievable. Should such a pull-out, if implemented for fiscal, rather than strategic reasons, could lead to seriously destabilizing consequences. But you could still make money on it, for example by investing in burqa stocks.



HOPE WE CAN BELIEVE IN SURMISING
One thing is certain. After the unilateral (and misguided) decision to go into Iraq and the equally unilateral (and misguided) decision to let Lehman Brothers fall, the costs of Washington’s solitary adventures are now more obvious than ever. These expensive blunders have led not only to multibillion losses but also to an extraordinary loss of America’s geopolitical and financial power. This is because much of that power was predicated on counterparties’ and rivals’ critically important perception of power.

All those valuations – from net present value to earnings multiples to cash burn rate to liquidation value - are in fact highly dependent on the thin layer of trust in what constitutes “fundamental value”. Only now do we realize how much of America’s power lied in its addictive optimism. And without optimism, Uncle Sam is worth a lot less.

Yet for as long as America continues to attract talent from around the world and continues to create favorable conditions for hard-working people, the promise of this land of opportunity will tower high above many others. The next four years will be crucial. The challenge to wean the economy of its addiction to credit supported by property values should not be underestimated by even the most skilled motivational speaker of his generation.

USA or Unequal Socialism of America

I recall a moment after climbing Kilimanjaro. Three days after the conquest of the snowy peak, we were at a local airport. The sizable parking lot was entirely filled with white Toyotas – mostly vans or 4WDs. When I pointed out this extraordinary market saturation, my friend, from Charlottesville, VA replied dismissively – “better to be a small operator in a large market than a large player in a small market”. We disagreed because our assumptions of what that ‘small market’ was differed. For him, it was Tanzania. For me, it was the non-American “rest of the world”. And in the rest of the world, American cars, and indeed, American products are hard to come by these days.

Last Friday, the market capitalization of General Motors fell below $6bn. Meanwhile, Toyota’s market cap is $147bn, thank you very much.

It has been a year since the then oddly dubbed “subprime” crisis broke out. And just as the dotcom bubble at the beginning of the century spread fast beyond the dotcoms’ arithmetical share of 6% of total market capitalization, the “subprime” credit – originally only 14% of total securitized mortgage debt – has proved contagious enough to drag the entire US credit system (and beyond) down the bottomless pit.

For the readers living in net-creditor economies, this last paragraph could elicit little more than a shrug. Credit? Unless you launch your own business, why would that matter, you may ask?

In the US, your credit record counts more than your criminal record or your blood type. If you ever immigrate here, by default you end up with a presumptively “negative” credit record, because you have none to start with. In other words, you are presumed guilty until proven trustworthy. It won’t matter that you have stored your wealth in a Swiss bank or in a loco London gold account. You won’t be able to get a credit card, or lease a car. That is particulary painful if you originate from a wealthy country, say, Australia or Norway. On the other hand, should you arrive from a poor, immigrant-sending country, your own local ghetto will already have a support network, with enough Salvadorian, Pakistani or Filipino bank clerks in your community to facilitate access to credit lines. In larger Chinatowns or Little Indias, banks with familiar names from your home country will do it for you. And somehow, in an economy in which “credit history” is a defining feature of your probity, righteousness and trustworthiness, you will muddle through. It does help a marginal immigrant with no initial income, as it helps a low income, US-born family. Unfortunately, the system also creates a set of expectations that affect economic behavior of people who, in light of their actual income, should not be able to live beyond their means. And yet, access to credit will, with time, make the American Dream possible…



Now this whole system, based on consumption generated from credit, rather than saved income is on its last legs. Not long ago, my American friends were laughing at some European statistics which indicated a falling housing stock in Germany. Such a “contraction” was beyond comprehension for Americans whose entire banking system was anchored in perpetual expansion of the housing market. A veritable ipse-dixitism has ruled here for years: “home ownership is good for you just because we say so”. It certainly is true for those who can afford it. But preaching the gospel of universal home ownership to the entire population created an unsustainable paradigm of anticipatory and eventually dysfunctional economic behavior. This unsustainability was revealed in aggregate data – for several years, growth in consumer demand outpaced growth in incomes. Ever larger houses, ever further away from workplaces, attracted oversize cars to humongous parking lots surrounding monumental shopping centers: Home Depots, Costcos and Wal-Marts. America grew, enriching export-oriented economies in Asia and elsewhere and helping boost their central bank reserves to $5.4 trillion. But this growth was financed with debt and asset sales, not with productive income generation. Spend today, worry tomorrow.

For years, the American consumer purchased and digested so much that the current account deficit required at some point over $3bn in capital inflows into the country per day. Astonishingly, the economy that had stopped producing anything of value for its trade partners shifted gears up, through exploding domestic consumption that reached an unprecedented 72% of GDP. But this consumption was never predicated on income saving. Indeed, the creditor economies’ addiction to saving first and spending later was ridiculed in the official dogma. The fast growing economies of USA and its loyal disciples (Ireland, UK, Spain) based its expansion on unprecedented level of asset-based “saving”. In the case of the US economy, one should rather point to dis-saving, as net equity extraction from real estate reached 9% of disposable income. Not surprisingly, the level of debt has now soared to unheard-of levels – 350% as a percentage of GDP! This is debt recycled in all exotic, opaque, convoluted ways. No wonder, the infectious ripple hit the alphabet soup of products (ABS, MBS), monoline insurers and fraudulent vehicles (SIVs) saddled with the most toxic of credit products.

At the center of it all were entities enjoying implicit government backing – Freddie Mac and Fannie Mae. As it has now been made evident, both cooked their books for years, waving goodbye to their executives with parting bonuses worth several multiples of tens of millions of dollars. Quite why the executives of a notorious Houston-based energy company were once persecuted is, in this light, unclear. Until you realize how internally corrupt the financial system and their Washington backers really are.

But there is a darker side to Freddie and Fannie shenanigans and the ultimate government bailout announced two weeks ago. Out of nearly $1 trillion of Freddie and Fannie debt held overseas, almost $400 billion remains in the hands of China, which recently opted to purchase more of these “agency” products, rather than US Treasuries. Mr Putin and his Petrorussia hold another $100 billion. This very fact, unsavory as it is, may have precipitated the decision to shift the pain over to the US taxpayer. The US taxpayer not only carries the burden of ultimately saving the corrupt financial system, but is also expected to salvage poor investment strategies of nations that can hardly be labeled Washington’s allies and whose resurging neo-imperialism threatens the sovereignty and prosperity of neighboring countries – Georgia, Ukraine, Taiwan or India’s Arunanchal Pradesh.



Now Fannie and Freddie will be able to borrow from “Feddie”, the central bank. The Treasury will have the authority to purchase equity in these two “companies”. In the process, the risk has been transferred, yet again, from the shareholders to taxpayers, in the form of socialism for the wealthy. All this to keep the lending system going, in a false hope that the rescued skeletons of their former glory will now relax their credit standards and push the overextended American borrower back on the spending binge.

A decade ago, a Korean friend of mine complained about Bretton Woods institutions’ mantra repeated ad nauseam in crisis-stricken Seoul: “liberalize, liberalize, liberalize”. In the midst of a liquidity crisis, unfettered free market dogmatism was supposed to avert the economic plunge in Korea, Indonesia or Thailand. But Washington failed to walk the walk. Yes, we knew it from the way the US administration always protected its airline, banking or farming sectors against foreign competition. But the current apex of hypocrisy will make it all the more difficult to resume any of intellectual stewardship over the global economic affairs, not to mention moral authority.

Optimists hope that the legendary flexibility of the American taxpayer, consumer, investor and citizen will bring the country back from the brink. Probably, but this time it may take a while. The tax receipts are falling, consumer is running out of the handout doled out earlier this year, the investor is bruised after the relentless selling pressure in the property markets and securities (especially the earnings-poor, but still dominant financial sector) and the citizen raises doubts about the very efficiency of the system. The tax rebate offered to American consumers earlier this year simply prolonged the agony of buying on credit. Perversely, the politicians expected the overextended consumer to do just that – spend that money, rather than brace for more difficult times ahead and do the unthinkable – begin to save!

The US consumer is simply too indebted to meaningfully pull the economy as s/he repairs the frayed balance sheet. Those who counted on a quick turnaround in US current deficit have been disappointed. It is not enough to flash a weak dollar to save the trade account, even though the recent collapse in imports has been helpful. A tour around this marvelous country will quickly convince you that there isn’t much left of a manufacturing base here, and what America does have in surplus and for which it could command a premium on the world’s markets – coal, grains, natural gas – cannot be easily boosted for export due to lack of adequate infrastructure. It is, therefore, not surprising that the external deficit has been stubbornly sticky at 5% of GDP. Things could even get worse; the weak dollar may not offer a refuge for much longer because the currencies of most of America’s trade partners are now too strong and should weaken correspondingly.



Out of the population of the United States, some 90m people live on less than $40k a year. Half of them do not have health insurance. These people need income support, not a mirage of their own “home”. Many of them have nothing to even start saving from. But income distribution is a taboo among the so-called “conservatives”. They contest the above figures with another one – average pre-tax earned income (some $49k), which has risen 11% over the last seven and half years (except that hourly wage growth has been slowing down since 2006). But it is income per capita – which includes pensioners and children – that has not moved this year. Meanwhile, energy and food prices have jumped. Indeed, Sara Lee, Kellogg and other producers of packaged food are only now starting to pass on significant price pressures to the consumer. There is more to come.

Income inequality is another favorite statistics of the so-called “liberals”. And indeed, it is difficult to refute that mean incomes have grown faster than median incomes, which surely supports the thesis of rising inequality. Even if politicians are loath to call the spade a space and avoid the dreaded R-word, the losers of this game will find it more onerous to withstand the headwinds. In 2001, during the last Recession (and named by this horrifying term), Americans received a tax cut and were still able refinance their mortgages. Now the tax receipt hole is so cavernous that a significant tinkering would give vertigo to the most profligate of legislators. Meanwhile, the credit standards have skyrocketed. Forget about buying a house. Today you may find it difficult to finance a car lease – even if you enjoy permanent employment and a healthy “credit history”. As a percentage of GDP, new credit creation has fallen to the lowest in 14 years. Lowering the Fed funds rate by 3.25% (and discount rate by another 75%) did nothing to de-bottleneck the credit system. The prevailing level of private sector rates is where it was when the crisis began a year ago. No wonder that consumers’ expectation indexes are their lowest since the records began in 1944.

But this is not a country where pessimism pays back. Just ask Jimmy Carter… Prophets of false dawn are aplenty. Last May, most investment bankers ridiculed the fear of inflation and cheered on the allegedly upcoming relief from fiscal stimulus and bank recapitalization. The Dow was back at 13000 and so the headaches seemed over. Certainly, we have seen some rallies over the last year, but they were all caused by government intervention: lowering interest rates when Bear Stearns hedge funds collapsed, setting up new liquidity facilities when the BS eventually folded, and, finally, promising to buttress the failed Freddie and Fannie, effectively doubling the national debt. With each bailout, “profits are privatized and losses are socialized” to use the formulation of one well-known economist.



In an effort to rescue the banking system, the Fed has covered the banks with the manna of liquidity – mostly Treasuries. Historically, these instruments were deployed against cash or pledges embedded in other government-backed paper. Not so now. This lending is “secured” by banks’ paper of dubious quality. Something that overseas Sovereign Wealth Funds, having now suffered significant losses on their investments in US financial sector, are no longer willing to do.

Yet, for all those Anti-American leftwingers, religious fundamentalists and pet nationalists worldwide, I caution against too much Schadenfreude. The US consumer cannot be easily replaced. As I noted previously, in prime time, s/he is worth over $10 trillion dollar, versus $6.5 trillion in Eurozone and $2.5 trillion in Japan. Those whose strategy bet on “rising Chinese demand” are having a rude awakening. The developed economies still account for 70% of the world’s GDP. Even if China were to maintain its current rate of growth, it will take it a decade or more to catch up with Japan. It will be too late to save General Motors and its abominable Buick limos which somehow still sell in Chongqing.

But don’t give up hope. Having bailed out the corrupt financial institutions, the government may yet bail out General Motors and Ford. Their products may be obsolete, but GM has more pensioners to feed than the entire US Army. If Moroccan university graduates can expect the government to “guarantee their jobs”, if Pakistani investors can expect the regulators to “rescue their investment capital”, and if Parisians can expect the government to perennially protect public sector jobs, then may be Americans should also adjust their expectations to the government’s willingness to “help”. Certainly, you do not have to be a professional anthropologist to understand that Washington has already made its non-market choices.

Lesson 1: Certain assets, like housing, should only go up in price. Others, like oil or commodities, should only move down. It is therefore perfectly acceptable to support the bubble in the former and manipulate the market accordingly. But should the commodity prices, for whatever reason, rise – then call a congressional hearing session or find a scapegoat. Lesson 2: Do nothing when the oil price slumps by $25 within 10 days (surely a move of that magnitude within such a short time frame must be caused by “speculation”, n’est-ce pas?). And thus, such short-term tampering plods on, further distorting what has been left of the ‘free market system’, ostensibly in the name of ‘saving the financial sector. SEC has now banned ‘naked short selling’, but only for 19 best-connected financial stocks. The entire blogosphere is wondering: “why only these 19?”

All this may immerse you in dark, morose bleakness of pitch-black, somber, saturnine gloominess and dreary, depressing doom. But you know what? The hard-working people in this country just don’t see it this way. Just look at these pictures and you will understand why. Brazilians may, in fact, have a cidade mais maravilhosa do mundo. But Unequal Socialism of America still spans over the most wondrous chunks of this planet.

Happy Holidays!

A PIVOTAL YEAR FOR AMERICA

40 years since the assassination of Robert F. Kennedy, America is confronted with the most thrilling prospect of political transformation. The unusually named candidate of mixed origin possesses unprecedented oratory skills and uses them to carry the promise of a spiritual renaissance, gaining the hearts and minds of idealistic intellectuals and not-quite-enfranchised black “minority” alike. Yet this remarkably enthusiastic, unlikely alliance labors within a nation sliding fast from its hard earned global pre-eminence. One does not have to espouse a Hegelian eschatology to notice that many of the pillars of America’s material prowess have been undermined - its artificial wealth propped up by successive asset bubbles, its sophisticated military machine capable of power projection around the planet and, last but not least, the dollar.

The creation of the United States was an eminently post-Enlightenment affair and in many ways, unlike its elder transatlantic cousins, the country has never lost its modernist optimism. Despite the dysfunctional character of some 50% of American families, the country’s citizens retain economically beneficial confidence and usually exude unparalleled faith in material progress. The systemic tolerance of business failure, the ethic of enrichment and the entrepreneurship rooted in the combination of frontier spirit and oft-lauded rule of law have all conspired against the prophets of gloom and doom. But the self-perpetuation of the system created on these foundations has been erected on much more dubious scaffolding – the centralization of the media since 1970s (dulling whatever residual curiosity into the exclusive focus on local news), competitively public displays of religiosity (as a ready-made label of “morality”), tacit promotion of recurrent asset bubbles (redirecting productive capital into ever thinner subsectors of the real economy), myopic tolerance of innumerable public taboos (“race”, “recession”, “lobbies”). No wonder conspiracy theories continue to thrive.

The oft-reiterated “hope” seems to assume that the transformation should come from the clean-up of special interests and from closing the gap between the young people’s enthusiasm for change and the well entrenched system of power brokers whose networking practices have durably distorted the work of the legislative and of the last two administrations. And indeed, this derivative political subsystem seems to have gained momentum since the early 1990s, something that the middle-aged (and anti-Bush) intelligentsia, gripped by the nostalgia for the tech-bubble era, often fails to recognize.

Coincidentally, these two decades may have also been the last easy period for a country whose underclass has swelled in numbers and in unhealthy obesity; a country whose public educational system has reinforced sharp divisions in advancement opportunities between various groups; a country whose workers have seen unprecedented wage compression and dug into debt facilitated by illusory home equity and a toxic credit market; a country whose tradition of wasteful resource management has led it to the brink of an energy crisis; a country whose lopsided remuneration system has pushed boardrooms to lobby for policies that shifted global capital flows away from democracies and into rival nations; a country whose current account is unable to recover from negative territory because it barely produces anything competitive that would be of value to its trade partners, and what it can produce in significant surplus, it cannot export for lack of adequate infrastructure; a country whose roads, bridges, power stations and phone networks crumble under years of underinvestment in appropriate physical and intellectual capital; a country whose political elites have for years focused on selected proxy issues of no concrete impact for the lives of most of its citizens; a country whose best educated nationals espoused extremist pet projects overseas and distorted US foreign policy through successful activities of influential and well-financed interest groups…

This astounding litany of woes would have sunken many a nation into a prolonged lethargy and economic depression. But not America, the land of ever diminishing opportunity, but opportunity nonetheless.

Should we, therefore, just “hope” that the US will simply readjust its domestic policies and assume again its dominant role in the world’s economic affairs? Not quite. One critical difference between this election and the last change in the White House lies in the shifts of global power that has occurred since.

There was a time where solipsism served America well. Small commercial travelers would crisscross this vast continent visiting accounts and seeking new clients. Big shot bond traders could always find domestic credit products to trade. Baseball World Series were what “the world” represented for Americans. The foreign, the exotic, the transoceanic were those poor places whose citizens sometimes owed America peace and sometimes owed it hamburgers. Otherwise, many of the unfortunate souls born in less blessed regions could, and did, find solace in immigration to this Promised Land. They brought their intriguing cuisine, worked hard and educated their children into mainstream success. The hosts’ total ignorance of the outside world and lack of interest in differences made these immigrants’ life easier than in other lands that periodically welcomed the shipwrecked. Despite occasional focus on border stalking militias and the probing, anti-terrorist infrastructure at the ports of entry, America remains a much more hospitable destination for new settlers than most of other developed nations.

But the ignorance of the world out there is no longer America’s asset. The tectonic shifts in the distribution of global savings since the beginning of this century and the accompanying changes in the industrial and military capabilities have made America’s deceivingly comfortable insulation a self-defeating proposition. Unlike in the 1980s, the country can no longer count on its allies to re-establish a lasting order in the currency markets. The flow of goods and economic factors is increasingly dominated by nations that do not perceive themselves as America’s allies. And unlike in the 1980s, the economy will struggle to revert the swelling of its trade account deficit, at least unless the unit costs in the inflation-plagued emerging markets meaningfully catch up with the costs of operating new industrial parks in the United States. Finally, as the importance of the financial services has grown exponentially in its contribution to the US economy, its incredible shrinking will not be easily replaced by other forms of economic activity.



This is a nation in manifold crisis. One day it may be the housing crisis and another day it’s “America’s oil crisis”. On both days, it will be poor people’s health crisis. 1/6 of the population lacks any health coverage but there is no shortage of ideological demagogues, such as Gary S. Becker, a widely respected 1992 Nobel Laureate in economics. During the run-up to 2004 presidential election Prof Becker notified American voters that economic theory does not warrant state’s intervention in the provision of health services. The market would simply govern the forces of supply and demand, dixit the Nobel Laureate. Never mind the efficiency loss, caused by the fact that a large chunk of the 45 million people left behind by the “market forces” cannot even afford eyeglasses.

This is a country, where you keep ahead of the Joneses. That means a house slightly larger than Joneses’, with impressive cubic volume to heat it in winter or cool it in summer (no Gulfstream or Kuroshio here, so the inter-seasonal amplitude is quite extreme). But the Joneses may not even notice that, courtesy a distorted power market, blessed with easily available natural gas and ubiquitous coal deposits. From these massive, oversize family houses, at least five times a week you have to out-drive the Joneses in your gas-guzzler, which runs on not-so-easily available gasoline, mixed with controversial (but available) ethanol. And when you do not, you are probably mowing your oversize and over-Jones-sized lawn, using a diesel-powered mower. The 1950s’ suburbanization of America was once the source of its strength, with ample land for greenfields construction and living standards considered “high”. Tragically, this has since promoted large-scale wastefulness and now caught the eyes of the nouveaux riches in fast developing emerging markets. The Zhangs and the Singhs are falling under the same illusion of unlimited space as perennially regenerative of equity and wealth. Watching the tiptoeing economies of resource-mindful Japan and Switzerland one could almost applaud.

For the most gifted American politician in 40 years, things will get only tougher. Not only because the famed Clinton machine will do its utmost to derail his campaign and reach out again to the matriarchs and Appalachians after another four lost years. Things will get tougher not only because more financial institutions will not be able to cover up their losses. No, things will get tougher because America will not be in a position to catch up with rising interest rates worldwide. As the hikes elsewhere increase the yield differential between various currencies and the dollar, the US energy bill will continue to rise, compounding the supply problems experienced by America’s two of the four largest exporters – Mexico and Venezuela. The constitution of the former slows down productive investment in its exploration and extraction capacity. The regime of the latter has fallen prey to a mirage of a just society, billing for the implementation of (well-intentioned, but lunatic) ideals the country’s oil monopoly. PDVSA’s days as a reliable oil supplier are counted. And then what? Blame the oil majors and the market speculators? These cheap tricks are poor populism and poorer policy yet, unless its proponents want to durably increase the volatility of their own pension fund accounts.

So while the current President will enjoy his 6-week vacation in Crawford, TX, the rest of the country will wonder what to do next, and so will the presidential candidates. In the short term, one could provide a shot in the arm by delivering necessary technology to the struggling oil industry in Venezuela and Iran. Alas, the former has a proven record of nationalizing natural resource assets, the latter is the currently most popular whipping boy in D.C. For as long as American Israel Public Affairs Committee and its messianistically obsessed Evangelical allies run the US foreign policy, any strategist suggesting economic engagement with the Tehran cranks risks Alan Dershowitz’s ire and instant political death.



In the longer term, the stabilization of fuel prices will depend on the demand destruction, but here the signals have been distorted, not least due to widespread domestic price controls imposed in the fast-growing emerging markets. Chinese domestic gasoline prices are between 40% and 70% below international prices, but the subsidies cost Beijing only 0.6% of GDP. As we have seen in Indonesia and India recently, these subsidies are a finite game, but they are unlikely to be removed entirely, at least not in China and the Gulf countries. With double-digit cost-push inflation spreading across Asia and former Soviet Union, the question of the subsidies may morph into a question of survival for the undemocratic regimes that run these economies. Despite the pressure from other Asian economies, China is unlikely to its “perfect” inflationary storm before the end of the Olympic Games.

America’s influence over the world’s affairs and over the world’s economy is at nadir. It is not through the illusion of force, projected by its deep blue navy or the PR appeal of its Hollywood flicks that the US will muster support for sustainable global policies, or bolster the Western, and allegedly universal values. Under the self-destructive excesses of the Clinton administration and the disastrous drift of the Bush-Cheney clique, today’s America commands at best fragmentary and grudging respect in the world. Thousands of miles away from the self-absorbed trailer parks stuck in the perennial wealth gap there is an urgent need for a critical, systemic shift in the perception of the United States. Barack Obama’s first six months in office, should he reach it, could deliver just that by taking out, even temporarily, some of the anti-American venom which has poisoned international relations for much too long and emboldened dictators, imperialists and religious fundamentalists around the globe.