#84 Wall Street Socialism

Who would have thought that the collapse of the American housing market would signal the end of an era for the world's most prestigious investment banks? The U.S is in-between a rock and hard place to rescue the financial sector of the world's largest, most important and most competitive economy. At what cost? We are, according to Nassim Taleb, the prolific black swan visionary, socializing losses and privatizing profit. That is the world of capitalism turned on its head.

The crisis goes fundamentally deeper than the interconnected failure of banks and other financial institutions in an increasingly interlinked and globalized world. We need a collective re-examination of leading economic, finance and management theory and practice in order to evaluate where and why it has gone wrong.

It is far too easy to blame greed on Wall Street. Greed is healthy; without it we do not have the Darwinian economic animal spirit of capitalism. Without greed we would not have banks, health insurance or even mortgages for that matter. Greed is a force for innovation, hard work and ambition. The blame lies in the sharing of risk and reward. Institutions have become too big to fail. Without economic Darwinism, the rotten survive, and with it bad practices and empty suit risk/reward models.

The problem is that greed and risk management do not mix well with current investment banking models. They are in fact creatures whose interests, even though they pretend to speak the same language, are juxtaposed. Risk management in itself is almost an impossible venture because:

a) Risk is too complex and interconnected in a globalized world for any human being to comprehend accurately and effectively, b) Unknown and unexpected events with previously unrecognized connectivity spring up from places where we never saw them coming (black swans), c) Risk managers are rarely appreciated or understood, and d) Assessing the correct value, impact and occurrence is almost pseudo-science.

Some so-called gurus claim that risk management (in hindsight) should have given investment banks the knowledge (foresight) to steer away from the iceberg of doom. Risk Management is always a science that relies on (biased/faulty) hindsight in order to attain foresight that we can never accurately interpret or understand. Furthermore, us mortal humans lack the objective internal stochastic instruments to judge the real-life world in terms of potential/real events/impacts.

Banking in the future will inevitably be increasingly socialized and/or nationalized at a higher cost, with potentially the same risks and (moral) hazards if we fail to learn from the past. I think it's time we start teaching students and practitioners the history of finance and financial economics. Let's start with Financial Meltdown Economics 101.

#77 The Perils of 'Risk Free' Debt

The recent (ongoing) crisis in the so-called subprime market has highlighted the immense difficulties of managing an economy that relies heavily on borrowing in order to create spending. The US and, perhaps even more so, the global economy is seemingly in fine shape. In the States, however, this is in great part due to increased spending made possible through the use of debt. People have had easy access to borrowed money thanks to the historically low interest rate of the past few years.

As the interest rate gradually began to rise, however, paying back these loans has become increasingly difficult. The subprime mortgage crisis is not a sub - as the name might suggest - but rather a prime example of this. Since a subprime loan is a loan that is given to people with a bad credit record, who therefore don't qualify for market interest rates and must pay a much higher rate, it is naturally mostly the poorer people who make use of it. The large number of people with subprime mortgages suddenly found that with the decreasing value of their houses, they were unable to pay the mortgage. And if you can't even pay your mortgage, you surely won't be able to spend on much else, which would cause a problem for the economy.

This poses a dilemma, as the economy must continue to be boosted through spending, but not at all costs. People need to understand that borrowed money needs to be paid back; it is not free money. This should serve as a wake up call to American consumers that relying too heavily on debt is too great of a risk. Sadly, there are always - including now - strong voices advocating debt forgiveness. Surely it cannot be so that consumers are taught that accumulating debt to the point of being unable to repay it comes without consequences? The message that big trouble will arise with too much debt must be hit home hard, once and for all. Better now, while the economy is reasonably stable, than later, when debt will only accumulate further, causing a potentially cataclysmic economic downfall of unknown proportions if China's possible bubble were to collapse.

There is some good news on the horizon, however, in the Fed's failure to take serious steps (i.e. have the central bank lower its benchmark federal funds rate from 5.25 percent) to help those affected by the crisis. It appears that Federal Reserve Chairman Ben Bernanke is trying to "teach investors a lesson," namely that the Fed will not bail out their poor decisions. This is not to say that there is no help whatsoever. The Fed has already injected tens of billions of dollars into the banking system and lowered its discount rate (the charge on its loans to commercial banks). Furthermore, President George Bush announced a plan to help struggling subprime mortgage borrowers to keep their homes via changes to the tax code.

Let's hope that a fair balance is found between the honest need to help those hardest hit and teaching a very wrong and dangerous lesson. Sometimes it is best to set an example to future potential defaulters by acting very harshly (though some would say justly as well) towards those involved now.

#76 The Hypocrisy and Short Sightedness of the American Immigration System

This coming September, driven by an ambition to increase the bloc's economic competitiveness and facing a foreseeable aging of the population and labor shortages in the next decades (expected to peak by 2050), the European Commission legislators are prepared to present for approval a proposal for an implementation of a new system of temporary resident permits to be selectively allocated to highly-qualified non-EU residents. Since this proposal would necessitate an infamously difficult to attain unanimity between the 27 member states, it is reasonable to expect a significant phase of debate. Nevertheless, it is understandable that the adoption of such a system is merely a matter of time. The legislators behind the initiative relate the recommended system to the US Green Card scheme, even dubbing it “Blue Card,” for some peculiar reason disregarding a conceptual and substantial difference between the contemplated European system and the American one - a difference that, at a closer look and comparison, divulges the relative irrationality and farce of the current US general immigration system.

The paradox of the world’s most symbolically representative immigration country - a country which even George Bush declared is “a nation of immigrants” and that thrives on its entrepreneurial newcomers - is that it is presently the one missing an open-door qualified immigration system. Legally immigrating to the United States is not easier. In fact, it is unexpectedly harder than in many other, even historically non-immigrant, developed countries; i.e. a potentially economically productive and professionally qualified or entrepreneurial immigrant candidate would find virtually no open options to immigrate by self-initiative.

The aforementioned US Green Card is either available to somebody previously resident in the country and legally permitted to stay for a longer time, or is distributed on a lottery (!), i.e. random numbers basis to unrestricted applicants over 18 from around the world. Once one is aware of this fact, it makes sense that European legislators, despite their claims, ironically, can only be color context-wise inspired by the Green Card.

Other immigration-dependent countries such as Canada, Australia, New Zealand (and recently the U.K.) have a long time ago adopted points-based open-door qualified and business immigration systems - with slight variations - without first having potential immigrants find an offer of employment or without an employer required to fund the visa, classifying migrants on their skills, personal qualities, suitable age, work experience, achievements in the field, past earnings, even achievements of the applicant's partner, and potential contribution to the countries' economies and societies in general; supported by ongoing emphasis on the economic returns of such migration, and are considering ways to expand the associated quotas even further.

Contradictorily in the US, the only initially temporary immigration option open to qualified non-residents is the H1-B visa, allowing American companies to hire, albeit with notoriously burdensome legal and financial difficulties, highly-skilled foreign workers, the limited yearly number of which has in October 2003 been groundlessly cut by US Congress from the even then insufficient 195,000 to 65,000, despite grave concerns of and active lobbying by the information technology companies.

The further deterioration of the currently inadequately cumbersome and bureaucratically thorny immigration system, inclusively for the already legally-residing aliens such as skilled employees and potentially socially valuable graduating students, and the lack of an open-door, even if competition based, legal system for qualified immigration simply leads to the only possible immigration most likely to prevail – illegal, and naturally unqualified. As opposed to the duplicity of the US state of affairs, EU justice spokesman behind the “Blue Card” proposal Friso Ascam Abbing admits that "We had better manage immigration properly as it is going to happen anyway."

Tightening and restricting legal immigration in traditionally migrant-reliant countries - the single one practically accessible for restriction - leads to it being automatically substituted by illegal, chaotic immigration. The previous statement is neither intended to denigrate the significant economical importance of illegal immigrants widely employed in agriculture, construction, hospitality and other industries, benefiting both businesses and consumers, and the Americans' dependence on them in a multitude of diverse sought-after menial and unskilled jobs, nor to advocate a need for severe curbing of unqualified immigration, since it eventually instigates continuous illegal immigration, as the need for immigrant labor has a natural tendency to be convened by supply.

The American immigration system, with its insufficient legal immigration provisions, regularly tacitly expected general pardon and consequential naturalization of illegal migrants in itself implies an initial breach of law – can it get any more hypocritical than that?

A governmental bipartisan group's recent months' attempts to manage the illegal immigration phenomenon by a - even though still strategically flawed - bill comprising of clauses for the strengthening of the south border security, encouragement of currently illegally residing immigrants to return to their home country and reapply for working permits through a system which also integrates a points-based format, where education and skills, including English ability, could contribute to an applicant’s case, and a stipulation of issuing of 400,000 further amended to 200,000 visas a year to the future temporary workers permitted to stay for two years at a time and renewed up to three times, periodically separated by a year's break between each visit, have disappointingly failed, even in spite of initial public opinion support.

The constant debate about immigration in America has an irrational inclination to pitch all issues into one large jumble, intermixing causes and consequences, revolving around all types of suspected problems caused by illegal residents, which include border issues, pressure on public services and criminal allegations, further fuelled by economically unreasonable fears that immigrants weaken the wages of the native-born citizens. Hence, public concerns about - as some economists and politicians argue - the falsely assumed negative consequences of illegal immigration and the allegedly threatened national security, exaggerated by the government's failure to satisfactorily deal with it, leads to an ignorant absence of differentiation of and antagonism towards immigrants, and consequential psychological and bureaucratic aggravation of the already ill-reputed naturalization process for the legally residing temporary and aspiring workers, making the US a decreasingly attractive destination for talented people from all over the world.

Considering current tech companies' widespread outsourcing, combined with the recently emerged phenomenon of inverse brain-drain and other developed and promising markets' ever -increasing competitiveness for talent acquisition, what kind of potential immigrants and most importantly - how is the US naively, or even better put – overly self-confidently hoping to lure in the future?

In the end, the United States, with its notoriously weak social support and welfare system can only attract generally self-reliant and motivated people who want nothing but to work industriously, be it a farm worker from Mexico or a qualified doctor from India; therefore not offering sufficient people an administratively accessible opportunity to do so will inexorably lead to the negatively perceived effects caused by the vicious circle of illegal, irrepressible immigration or alternatively, and even concurrently – economical underperformance provoked by competent personnel scarcity.

- This article was written for and provided to the Weekend Economist by Julia Socolov

#70 A Three State Solution?

It has become customary to hear bad news emanating from the Palestinian Territories (mainly from Gaza) and the saying "it can't possibly get any worse than this" is frequently applied to the situation on the ground there. Sadly, it has now really gotten a worse. A lot worse, believe it or not. We now find ourselves in a situation where a week of factional fighting has left at least 100 people dead and Gaza is effectively under Hamas control. To make this point clear, Hamas militants took over a number of key Fatah positions and security headquarters, including one of President Mahmoud Abbas' offices, went through his personal belongings in his bedroom and spray painted "This was the house of the murderer Dahlan that was cleansed by the holy warriors" on the home of Fatah strongman Mohammed Dahlan, thereafter allowing his property to be looted. Hamas supporters even went so far as to loot the home of deceased leader Yasser Arafat, taking his furniture, wall tiles and personal belongings.

In his first serious response to the tumult in Gaza, Palestinian President Mahmood Abbas (a leading Fatah politician) dissolved the Hamas-led unity government and fired Prime Minister Ismail Haniyeh (a prominent Hamas figure), appointing former Finance Minister Salam Fayyad in his place. There is also word of revenge attacks on Hamas loyalists in the West Bank by Fatah members in the wake of some brutal executions of their members in Gaza. While Hamas has cemented its control in Gaza, Palestinian Authority security forces, accompanied by Fatah members, have continued the wave of arrests of Hamas members in the West Bank, where Fatah clearly has the upper hand. In the most significant counter-action, Fatah gunmen stormed the Hamas-controlled Palestinian parliament building in Ramallah. An - at least temporary - split between Gaza and the West Bank now appears to have become irreversible.

It is highly likely that Western governments and donors, as well as a number of Arab nations such as Egypt, Jordan and Saudi Arabia will respond by doing all they can to shore up the influence of Abbas, including the resumption of financial aid. Officials in the Israeli government have already suggested Israel will work with President Abbas and a Fatah government in the West Bank, possibly handing over hundreds of millions of dollars in tax revenues to Fatah which it collects on behalf of the Palestinian Authority (these had been withheld since Hamas came into power early 2006). Meanwhile, senior Bush administration officials pledged to work quickly to convince the Quartet to remove the restrictions on the Palestinian government now that the unity government had been dissolved and allow a direct transfer of emergency aid to the West Bank. They further stated that the US will continue humanitarian aid to Gaza, but in terms of diplomacy, there is a complete separation between Gaza and the West Bank.

Hamas' dream of establishing an Islamic state in the territories and what is now Israel has taken root with their takeover of Gaza; a very worrying prospect indeed. Israel, which completely withdrew from Gaza last year, now finds itself bordering a re-arming Hezbollah in the North and a free-reigning Hamas in the south. A result of increasing Iranian influence? Perhaps. On the other hand, the good news is that, given a separation between the more radical Gaza and more liberal West Bank, the latter territory will stand a much better chance of prospering. Similarly, if the lives of Gaza residents fail to advance under Hamas rule while their compatriots in the West Bank prosper, a backlash against Hamas is likely. Whether all this means an end to the Palestinian dream of statehood (with Gaza and the West Bank united), nothing more than a delay, or perhaps even the beginning of a three state solution, only time will tell.

#68 China Playing in America's Backyard

China has managed to use its increasing economic muscle - and thereby global clout - to persuade yet another country to recognize it over Taiwan. Costa Rican President Oscar Arias announced on June 6 that his country has broken diplomatic ties with Taiwan and established relations with China, pointing out that Costa Rica needed to strengthen ties with China in order to attract foreign investment. This follows a string of successes for China, who refuse to have diplomatic ties with nations that recognize Taiwan, regarding it as a breakaway republic. During the late 1960s, Taiwan had full relations with 67 countries, but Chinese pressure has led to this figure dropping almost threefold to just 24 states today.

China's success does not really come as a huge surprise, given the fact that China is now the Central American nation's top trading partner, buying more than $1 billion worth of Costa Rican exports in 2006. The fear is that after Costa Rica's decision, other nations such as Nicaragua, Panama and Paraguay will follow suit, leaving Taiwan practically abandoned in Latin America. After the Dominican Republic, Haiti, St. Kitts and Nevis and St. Vincent and the Grenadines switched diplomatic recognition from Taiwan to China in 2004 and Costa Rica did the same on Wednesday, today only Paraguay, Panama, Nicaragua, El Salvador, Honduras and Guatemala officially recognize Taiwan.

In the last couple of years, China has been particularly active in Latin America, not only to shore up its political influence, but also to secure natural resources that are crucial to sustain the country's red hot economy. Venezuela is particularly keen to court the Chinese with oil, seeing the country as the perfect escape from the grip of the "evil American empire." Brazil, Ecuador, Bolivia, Argentina, Chile, Peru and even Mexico are also seeing large increases in trade and deals (particularly in oil and gas exploration) with China. According to the Inter-American Dialogue, Chinese imports from Latin America have grown more than sixfold, at a pace of some 60% per year, to an estimated $50 billion in 2005. What's more, Chinese investment in Latin America represents half of the country's foreign investment overseas, promising to increase it from $6.5 billion in 2004 to $100 billion by 2014.

US trade with Latin America is still almost 10 times larger, but given the growth of Chinese trade with the region and the severe hostility the Americans encounter in a number of Latin American countries, this is certainly an issue that the need to monitor closely. China is rapidly encroaching upon America's backyard. China's dealings in the region are not limited to securing energy needs, other natural resources and isolating Taiwan. The business of selling of arms and technology to the region (with Venezuela being a key buyer) is also flourishing, while cooperative aerospace deals are being forged with Brazil and possibly key intelligence-gathering facilities in Cuba are being used by the Chinese to intercept U.S. communications.

#67 The Higher Standard

With a slip and a fall the American representative of the 2007 Miss Universe Pageant, taking place in Mexico City, unknowingly revealed the true colors of her Mexican audience. Fighting boos and cat calls during the question and answer session, Rachel Smith absorbed the full torrent of abuse hurled at her. Her appearance further conveyed the malice held by the majority of Mexicans toward the United States. While 12 million of their compatriots were getting a free pass to American citizenship, the underlying animosities of their misguided political beliefs were exposed.

Imagine for the briefest moment that the pageant had been held in the United States and the victim of those four inch heels was a young Mexican woman. Would the International community, never mind the Mexicans, stand for an American audience that jeered the contestant? The mechanisms of “political correctness” would come out in full swing and this would be yet another example of an America the world can hate. Are the same standards held for the Mexicans? Is the International Community insisting on an apology? Nope.

Flashback to the 2004/2005 World Cup qualifiers; Mexican nationals booed the American team and some even chanted “Osama.” Was there an International outcry? Most certainly there was not. When millions of illegal Mexicans took to the streets in defiance of American law, demanding recognition, did the International community come to the defense of America? Quite the contrary; they sided with the Mexicans. You would be hard-pressed to find another country in the world that faces an International Community that argues for the rights of those who are knowingly breaking the law everyday they spend on American soil.

To briefly compare the mass hypocrisy facing America today, one only has to look as far as the Mexicans themselves. Specifically the Mexican laws concerning non-Mexican immigrants seeking residence in Mexico. To begin with, you must speak the native language and you must be a professional worker. Sorry, no unskilled workers allowed. There are no bilingual government programs and as a foreigner you will not have the right to vote or hold office. You are not eligible to receive any government sponsored welfare and if you want to take to the streets and protest unfair treatment, that too is illegal. You are not allowed to wave the flag of a foreign nation, form a political party, or criticize the government. And I almost forgot, if you come to Mexico illegally you will be arrested and jailed.

The true question concerning Mexican-American relations is why there is so much anti-Americanism in Mexico? Are Mexicans upset at their inability to sustain their economy without the massive remittances provided by their compatriots working in the United States? Or is it a deeper national character flaw that prohibits them from accepting that their neighbor to the North has simply managed to be more successful in most every sense of the word? The livelihood of the Mexican economy depends heavily on the engine of the American economy and the rampant anti-Americanism contaminating the Mexican political and social environment can only lead to a negative outcome.

Does America abide by a higher standard? Well, if current polls are any indication of the anti-Americanism sweeping Mexico, then America is indeed abiding by a higher standard. The majority of Mexicans have an unfavorable view of both Americans and the United States government. Furthermore, a recent Zogby poll showed that 75% of Mexicans think Americans are racist and only 17% think that Americans are tolerant. Yet aside from merely talking about building a wall, the United States has done nothing to warrant this animosity. Thousands of illegal immigrants continue to flood the border and the United States continues to accommodate them. The gap between Mexico and the United States continues to expand and the increase in the hatred felt by the Mexicans will almost inevitably rise as well.

- This article was written for and provided to the Weekend Economist by Westbrook Sullivan

#65 Political Tectonics: The Slow Drift

The recent souring of EU-Russia relations and U.S.-Russia relations is a greater cause for concern for the post Cold War status quo than most people realize. Gone are the Yeltsin years of warm rapprochement between nuclear super powers Russia and America. The realities of multipolarity are beginning to dawn on the recently predictable Pangaea world of diplomacy. The post 911 world has shaken the "stable" world order on its foundations. What we are in fact witnessing is the start of a slow drift to a truly multipolar world. A world of divided power and divided interests.

This divided world comes at a rather bad time in world history. Humanity needs to make a series of concerted, fundamental global changes in an array of areas ranging from energy security to climate change and poverty. Instead of focusing on these critical issues that are beneficial to the well being of all mankind, we are increasingly distracted by the deplorable and volatile political situation in Iraq and the Palestinian territories.

The gradual but steady shift in Latin American political attitudes vis a vis the United States should also not be underestimated. In the case of Venezuela, Chavez is not only talking the talk, but clearly walking it as well. The recent moves to nationalize the oil industry and pull out of multilateral institutions such as the World Bank is a vivid example of how the combination of self interest and anti-Americanism is shaping a new diplomatic paradigm in world politics. The trend of resource nationalization is a trend that should be followed with absolute caution, be it in Russia, Myanmar, Bolivia, or Venezuela.

In fact, we are only at the beginning of a long energy squeeze that is bound to exacerbate, in great part due to the current climate of global political fragmentation. The up and coming leadership change in the White House comes at a critical moment in time: can a new President repair the years of void respect for American political leadership and lack of Democratic enlightenment?

In any case the new presidency faces a number of tough challenges. A new administration and President in the United States is going to face a much harsher international diplomatic climate for reaching consensus. Unilateralism is surely a no go area now, something which even current President George Bush Jr. has understood given the precarious international political climate that has arisen in large part due to this unilateralism. The imminent talks with Iran are a good example of this. They are by no means a stroke of enlightened political leadership, but rather a measure of acute desperation.

#59 Divisive Ethanol

Ethanol has become the new "it" thing in terms of energy fashion. Whether you are a proponent of expanding ethanol production for energy use, believe it would be a disaster to do so, or if you could not care less about the topic, one thing is for sure: you have something to say about it. The scope of discussion on the topic extends far beyond merely energy, encompassing a wide array of sectors such as food, agriculture, energy, trade and the environment. No matter in what context ethanol is debated, it has become a particularly divisive topic.

The environmental field is one such area. High profile politicians, scientists and lobby groups such as the Renewable Fuels Association - the largest Washington ethanol lobby group - are touting it as a 'green' alternative to the heavy pollutant, gasoline. Others, such as Stanford University civil and environmental engineering professor Mark Jacobson, loudly dispute this claim. Jacobson conducted a study analyzing the environmental effects of switching to ethanol and concluded "It's not green in terms of air pollution...If you want to use ethanol, fine, but don't do it based on health grounds. It's no better than gasoline, apparently slightly worse." Green or not, ethanol has set the stage for a tough debate worthy of competing with the ever contentious notion of Global Warming.

At the top of the world's political echelons, ethanol has garnered a prominent and cosy space for itself as well. Venezuelan President Hugo Chavez, following the words of Cuban President Fidel Castro, has issued a stark warning against the use of ethanol as a main source of energy, warning there is a lack of arable land and arguing it will lead to food prices skyrocketing, subsequently causing mass starvation among the world's poor. Bush, on the other hand, has hailed ethanol as a fitting alternative to the American addiction to foreign oil, sealing a bilateral deal with the world's largest ethanol producer, Brazil. The fact that these two leaders disagree on something is far from surprising, of course. What is noteworthy, however, is the effect that ethanol is having on Chavez's relationship with Brazilian President Luiz Inacio Lula da Silva (Lula), who Chavez considers to be a close ally.

At a Venezuelan hosted energy summit involving eight Latin American nations, Lula responded to Chavez's comments regarding massive production of ethanol in an unprecedentedly stark manner, saying “The truth is that biofuel is a way out for the poor countries of the world...Obviously there is no possibility of competition between food production and biofuel production...No one is going to stop planting rice to plant biofuels. The problem of food in the world now is not lack of production of food. It's a lack of income for people to buy food.” Chavez was seemingly taken aback by these statements, softening his position afterwards by insisting that his real objection is to the U.S. corn-based variety of the biofuel – not Brazilian ethanol produced with sugar cane. Nevertheless, ethanol has managed to become the first topic to create public disagreement between the two leaders.

Let's just hope that either the proponents of ethanol as a substitute or additive for oil are correct, or that other, cheaper, cleaner and less divisive methods will be found in the meanwhile. Divisive ethanol must not become a distraction for the real reasons - which are a plenty - that we are seeking alternatives to oil.

#57 REPLY to Article #50 Is Afghanistan the Right War?

As the Iraq War’s broad unpopularity causes a number of governments—including at least one branch in the United States—to consider the political consequences of continued participation, it's important to keep some perspective about the relative importance of the conflicts in which the West is now engaged. While a principled case must be made for continued American involvement in Iraq, it need not be done at the expense of the vital mission being carried out by NATO forces in Afghanistan.

In his March 14 piece for the Weekend Economist (#50 Is Afghanistan the Right War?), Westbrook Sullivan argues that the focus of the international community on the war in Afghanistan is disproportionate to that nascent democracy's impact on world affairs. Sullivan tells us that Afghanistan is “impoverished and isolated,” largely irrelevant to America's strategic interests, essentially no more than an inconvenient central Asian backwater. A failed state at the heart of Central Asia, Sullivan contends, “would be an annoyance to America and its allies, [but] would have little more effect than that on the international community.” This assessment could scarcely be more flawed.

There is little doubt that Iraq is the most significant conflict zone in which the U.S. is presently involved, if only as a consequence of the sheer numbers of American troops involved. A successful—or at least not-disastrous—resolution to the sectarian strife and anti-coalition insurgency there is absolutely vital to the maintenance of American security. While arguments abound about the legitimacy or necessity of the initial intervention in Iraq, the fact remains that the total collapse of the American-led enterprise there would have disastrous consequences for regional and global security.

Just the same, those reservations have helped to ensure that the war in Iraq is an American operation. One would be remiss not to mention the contribution of both combat forces and service-support troops from a number of coalition forces, but the fact remains that the invasion and occupation of Iraq would not have taken place without the specifically American rationale presented by the Bush Administration. The time to make he case for multilateral involvement and burden-sharing in Iraq was four years ago, not the spring of 2007. Most governments have long since reached the decision that further contributions to Multi-National Forces Iraq (MNFI) will needlessly erode their popularity without many of the attendant benefits associated with participation in the initial war effort. Americans should not be surprised that the Blair government would draw similar conclusions.

Sullivan dismisses this sort of calculation as nothing more than a form of political self-preservation, dismissing the redeployment of assets from Iraq to Afghanistan is merely a “relatively safe alternative” for politicians “not wanting to look weak on security issues.” How can we criticize the political leadership of another state when a politically expedient course of action also happens to help secure that nation's vital interests? Iraq is a sinking ship, and the UK is one of the last on the lifeboats. Few should be shocked that the Blair government is unwilling to go to the bottom of the sea.

Leaving aside the politically-charged question of whether or not preemptive war in Iraq was justified, one must concede that a great deal of international goodwill and moral force was squandered through the unnecessary and inaccurate conflation of the war in Iraq with the so-called Global War on Terror (GWOT). Few nations opposed the bombardment and subsequent occupation of Afghanistan, as such action was viewed as a necessary and natural response to the atrocities visited upon the U.S. on September 11, 2001. Operation Iraqi Freedom (OIF) was considerably less well-received. Even those allies who were convinced to make contributions to the war effort had little reason to suspect that they’d be involved in a multi-year occupation. So why now should those faithful members of the coalition be slandered for re-assessing their priorities? Have the preceding four years not convinced Mr. Sullivan that the U.S. should accept and encourage what contributions other nations choose to make to missions deemed important to American interests?

British patience for the mission in Iraq has waned, but the UK’s contributions in Afghanistan can still be vital. The International Security and Assistance Force (ISAF) in that country, composed of troops from 37 nations, not only makes an important contribution to mission accomplishment but also to the prospects of future security burden-sharing. As NATO allies and other states are compelled to develop broader capacity in support of ISAF’s mission, U.S. policymakers can be more confident in the capabilities of partner states when called upon in future conflicts. With a territorial defense mission seemingly obsolescent in the 21st century, NATO’s future utility to its member states will be defined by the ability of multinational, mission-focused task forces to conduct out-of-area operations. Further expansion of the alliance (and the attendant effect on U.S.-Russia relations) is an open question at present. As such, the future of NATO is in the balance; if ISAF fails in Afghanistan, so too does the institution that has formed the bedrock of European security and transatlantic cooperation for the last six decades.

All this considered, the critical question addressed by Sullivan is whether or not a stable and well-governed Afghanistan is vital to international security. We shouldn’t be surprised to find that those who answer the question in the negative do so in the face of a staggeringly broad consensus to the contrary. Documentary filmmaker Sam Kiley, who recently spent time with NATO forces in Afghanistan, puts their mission in stark terms: “NATO and the Afghan government want to win this war to prevent Afghanistan returning to Taliban rule and becoming a base once again used by international terrorists.” There seems very little doubt that ISAF’s failure would result in exactly such a scenario.

American—and global—security is increasingly wedded to the maintenance of state control over territory; the future must be one of less failed states, not more. Sullivan’s dismissive reference to Afghanistan as “almost entirely impoverished and rural” is puzzling; do these two factors somehow render instability in the country less threatening? The geopolitical significance of Afghanistan is very real. Porous borders with Pakistan and the former Soviet republics of Central Asia destabilize important allies in the region, as well as making the task of tracking terrorists’ movement exponentially more difficult. Kidnapping raids launched into Iran by Baloch separatists (like Jundullah, which American intelligence community sources have recently alleged is financially and materially supported by the U.S. government) complicate the already-delicate relationship between Washington and Tehran. Ungoverned territory in Afghanistan provides further opportunity for these groups to take dangerous and destabilizing actions against Iranian targets, increasing tensions and the likelihood of a destructive and unintended war.

Abandoning Afghanistan to the Taliban and al-Qaeda, however attractive it may seem in light of the attention and effort commanded by the steady dissolution of the nascent free Iraq, would be a perfect public diplomacy storm of military failure, sacrificed international goodwill, and eroded American credibility. It seems absurd to suggest that the most appropriate way to secure the most robust future contribution of allied support for American interests is to abandon the war widely viewed as just and necessary in favor of the one most reject as an illegitimate flight of neoconservative fancy. The loss of moral force associated with such an abdication of a just and necessary mission is one from which the United States would not soon recover.

- This article was written in response to Westbrook Sullivan's #50 Is Afghanistan the Right War?. It was first published on CJMEWETT and provided to the Weekend Economist by the author, Christopher Mewett.

#50 Is Afghanistan the Right War?

With the recent announcement by Prime Minister Tony Blair that the English involvement in the American-led Iraq War was entering its final stages, the question of American involvement in an increasingly unpopular war has once again been brought to the front burner. The fact that the English withdrawal coincides with an increase in the troop deployment in Afghanistan highlights the differences between these two theaters of war. With the exception of the United States, the coalition in relation to the Iraq War is fading. Simultaneously, however, the idea that the war in Afghanistan is a ‘just cause’ and one (in the eyes of the rest of the world) worth fighting for has raised some interesting contradictions.

While the obvious links to the September 11th terrorist attacks in New York and Washington D.C. should not be understated, I am questioning the relevancy of Afghanistan and its role in relation to American strategic interests. Of course Afghanistan is a hot-bed for terrorist activity and has played host to some of the most infamous international terrorists. But so has Pakistan. I contend that even although a failed Afghanistan would be an annoyance to America and its allies, it would have little more effect than that on the international community. In fact, the overall economic and strategic position of Afghanistan is extremely limited. With the exception of Kabul, the country is almost entirely impoverished and rural. Two-thirds of the Afghan population lives on less than two dollars a day and it is estimated that one-third of its economy is based on the production of poppy seeds.

What exactly are we going to accomplish in this impoverished and isolated country of 30 million? The Soviets found that they were unable to accomplish their mission even without the watchful eyes of the international community. Afghanistan’s limited role in Middle East affairs and its virtually non-existent role in international relations, means that even a successful mission by the international community bears no real fruit.

Conversely, the situation in Iraq necessitates the presence of the international community. As a central figure in the Middle East and a major oil producer, the importance of Iraq far exceeds that of Afghanistan. A failure in Iraq would open the door to a new level of anti-American extremism which would in turn threaten the international community at large. Failure would further strengthen the tyrannical regimes of Iran and Syria and lead to an increased likelihood of a prolonged civil war. The consequences to the international community are profound. By removing themselves from Iraq and increasing their presence in Afghanistan, the English have revealed their true colors. The English and the European Community as a whole are once again in the position of transferring the real responsibility to the Americans.

With the international community fleeing Iraq, but not wanting to look weak on security issues, the conflict in Afghanistan is a relatively safe alternative. Dozens of nations continue to support the American-led Afghanistan war and the overthrow of the Taliban regime. Where are the supporters of the Iraq war? While the international community can clean its hands of the Iraq war and not feel the guilt associated with its failure, the long term consequences are severe. The rise of anti-American, anti-war rhetoric concerning the Iraq war may appease some in the international community, but in the end not only fails to solve the problem, but could potentially reinforce it.

- This article was written for and provided to the Weekend Economist by Westbrook Sullivan

#47 Chavez vs Bush

It is nearly impossible these days to escape the continuous taunting of US President Bush by Venezuelan President Chavez. A large portion (in any case a very loud portion) of the world seems to be squarely on the side of the Venezuelan leader, either because they truly agree with his Socialist policies or simply out of blind disgust for anything Bush-related. Both leaders are currently on a tour of Latin America, with the not all too subtle aim of beating out the other in the eyes of the local populace. While Bush is in Brazil and Uruguay, Chavez is in Argentina; Bush in Colombia, Chavez in Bolivia; Bush in Guatemala, Chavez in Haiti. Again, whether justified or not, it seems Chavez has a clear advantage, though Bush certainly wins the award for most dignified demeanor.

Indeed, by repeating calls like "Gringo go home!" and "Yankee go home!" Chavez is using highly irresponsible terminology that creates hate for an entire nation, rather than only for the man Chavez claims to be taking aim at. "Gringo" and "Yankee" have evolved into highly derogative slurs, which, coupled with the use of terms such as "devil," are nutrients for widespread incitement. Accusatory calls that the CIA is plotting to assassinate him will also do little good for US sentiment in Venezuela and beyond. Chavez recently repeated this allegation, saying "Who did they swear in at the White House as deputy secretary of state? A professional killer: John Negroponte...They have assigned special units of the CIA, true assassins, who go around not only here in Venezuela, but in Central America, in South America."

Chavez's calls resonate in the region, however, with anti-US sentiment quite possibly at an all-time high. Wherever Bush visits, he is welcomed by major protests and often violent demonstrations. Mayan priests in Guatemala have even promised to purify a sacred archaeological site to eliminate "bad spirits" after President Bush visits. Chavez easily garners tens of thousands of supporters at "anti-imperialist" rallies in any given Latin American nation.

Rather than yelling back with slogans of his own and organizing rallies (granted, it seems highly unlikely that Bush would be able to attract enough supporters to his rally), Bush remains cool, proclaiming "I bring the goodwill of the United States to South America and Central America. That's why I'm here." He rightfully notes that bilateral aid has doubled under his presidency from 800 billion to 1.6 billion and stressed "I don't think America gets enough credit for trying to help improve people's lives. And so my trip is to explain, as clearly as I can, that our nation is generous and compassionate." In this respect Bush is wise to ignore Chavez's provocations and not stooping to his level. This might count for something in time to come.

Besides the ethanol deal, Bush has pledged medical aid in the form of a new project that dispatches a Navy medical ship to 13 countries in the area in order to treat the poor. Millions have also been made available for affordable housing for the poor, while a new initiative was also presented in which $75 million is to be made available to help Latin American youth learn English and study in the United States.

Chavez, in turn, is offering free goodies such as sending doctors and teachers to allies such as Bolivia, providing an oil refinery and a highway free of charge to Nicaragua, and paying off billions of Argentina's debt. Chavez has also pledged $15 million in aid for flood victims in Bolivia, including a squadron of helicopters to deliver food to remote villages, making the $1.5 million sent by the US pale in insignificance.

In terms of direct aid, Chavez has a slight upper hand overall in Latin America today, but the years of US aid added together dwarf anything Venezuela or Chavez can dream of offering. When it comes to public opinion and image, Bush doesn't stand a chance next to Chavez. However, Bush has managed to retain his dignity in the face of ridiculous taunts and accusations. For example, the world praises Brazil for their advanced use of alternative fuels and urges the world's greatest polluter to follow suit. With the newly signed ethanol (a bio-fuel made from sugar cane or corn) deal between Brazil and the US, Bush is doing precisely this. Unsurprisingly, Chavez found a way to turn this around, saying "the US is taking food from the poor and giving it to vehicles instead." With this kind of logic, you can criticize everything and anything, of course.

The Bush vs. Chavez rivalry is far from over and is sure to provide enough interesting material for future reference.

#44 How Democracy and Diplomacy Can Solve the Iranian Nuclear Issue

The idea I will put forth in this article may raise a couple of eyebrows around the world. Iran’s record in the field of human rights and democracy is terrible; certainly when compared to Western countries. However, in the Islamic world, it is actually one of the democratic front-runners. The 2006 local elections demonstrated that Iran is not as totalitarian as we all like to believe. Furthermore, it demonstrated that the Iranian people do not wish for a collision course, nor do they want any further humiliation of their country. Therefore, it is imperative that the United States re-starts diplomatic relations with Iran and that it returns to the negotiating table. It is the only option left to solve the current nuclear crisis.

The sore wounds left by the 1979 Islamic Revolution and the ensuing hostage crisis still guide American response to Iran’s actions. The United States has always relied on its unmatched military might to influence relations with Teheran. However, with Iraq sliding more and more into outright chaos and the United States’ military still tied down there, the Pentagon’s plans to use force against Iran could be of better use in Hollywood as an interesting movie script. This leaves diplomacy as the only feasible measure to provide a solution to the urgent problem, because every day that inaction dominates Western policy, Iran is coming closer to a nuclear weapon.

The argument for diplomacy actually lies in the reasons why Iran wants to obtain a nuclear weapon. It is not for offensive purposes that Iran wants a nuke, because offensive use of the weapon would be suicidal. It is simply not possible for Iran to obtain enough nuclear weapons to conduct an offensive doctrine. However, the weapon would be very useful in diplomatic relations, as a nuclear weapon would demand instant international respect.

It is exactly the aforementioned respect that Iran is after. Ever since the Teheran hostage crisis, the US has not conducted any diplomatic relations with Iran. It has also imposed a strict sanctions regime on Iran, which lays a heavy burden on Iran’s unstable economy. Therefore, the UN-imposed sanctions of December 2006 will have little effect; they will only strengthen the feeling amongst Iranians that the whole world is against them. And the Iranian people are actually the key to success in diplomacy.

The power of the Iranian people is not to be underestimated. In 2006, president Ahmadinejad suffered a remarkable defeat in the local elections. The Iranian people clearly spoke out against his hard-line anti-Israel and nuclear stances. With the 2008 parliamentary elections in mind, Ahmadinejad will have to moderate his position on the nuclear issue. Key here is a respectful and decent offer at the negotiations table. The Iranian people will not tolerate a rejection of such an offer and they will punish the president once again in the 2008 parliamentary election. However, continuation of the current policy against Iran and the threat of force will unify the Iranians once again behind their leaders and it will empower them to continue their enrichment program.

Therefore, the time for diplomacy is now. If the United States accepts that it cannot resolve this issue with force and actually makes a sincere attempt at the negotiating table, the Iranian government will have to come forward as well, making a speedy and desirable solution of the issue a more feasible outcome. It may seem like a paradox, but it will be internal democratic accountability, and not sanctions, that will force the Iranian leaders to concede.

- This article was written for and provided to the Weekend Economist by Jorik Reijmer

#36 Average Joe and the New World Order

With the storybook ending of the Cold War that led to the disintegration of the U.S.S.R., the United States has thus far not fulfilled its potential as a unipolar world leader. Unwilling at first to be the world's policeman, it has failed to take heed of the complexity of the world beyond its borders. President Bush is more akin to a swashbuckling cowboy from a John Wayne Western movie than an eloquent, sage-like statesmen. Then again, it is these very average Joe-like qualities that made him such a likable character in the first place.

Fortunately, the current sentiment is that a growing majority of Americans have finally discovered that it takes more than an average Joe to steer America through complex domestic issues and the intricacies of international diplomacy and geopolitics. Unilateralism will most likely officially die when president Bush leaves the office, not only because it is ineffective and damaging to America, but also because America lacks the strength to pursue such an aggressive strategy.

Iraq has become America's 21st Century Vietnam and, instead of Communism, the presidency has branded terrorism as the enemy. Terrorism is not an enemy in itself; it is merely a means of aggressive, destructive diplomacy employed by those factions who lack conventional means to get what they want. What Bush really means, but dares not say in those words, is that his real enemies are various Nationalistic and Islamic fundamentalist groupings. Groups that oppose any Western (American) influence whatsoever.

The Iraq war seems more like a failed crusade, spearheaded by a political brigade of neo-cons who are politically just as backward as the enemy they are fighting. What the Holy land was for the crusaders in medieval times, is what Iraq today has become for America: a draining confrontation between East and West. Even worse is that American troops now find themselves in the crossfire of a civil war, with Iran in a perfect position to damage and pressure America without breaking a sweat.

Hopefully America will be wise enough not to elect another "average Joe," but a president with the qualities of a great statesman. In all likelihood this will be either the first female or the first African-American President of the nation, which in itself provides an interesting new development.

#35 Cold War Resurgence?

While action from Russia such as helping Tehran build a nuclear reactor in Bushehr and selling them anti-missile systems is commonplace, recent talk from Moscow has become increasingly anti-American as well.　

Of all people, Russian President Vladimir Putin blasted the United States recently for the "almost uncontained" use of force in the world, and for encouraging other countries to acquire nuclear weapons. He went on to say that, "One state, the United States has overstepped its borders in all spheres - economic, political and humanitarian, and has imposed itself on other states...this is very dangerous; nobody feels secure anymore because nobody can hide behind international law." Whether he has a point or not, the old saying "get your own house in order before preaching to others" should really carry more weight.　

U.S. reaction has been quite diplomatic, with Secretary of Defence Robert Gates commenting, "Like your second speaker (Putin) yesterday, I have a career not in Diplomacy, but in the spy business. And I guess old spies have a habit of blunt speaking…But I have been to re-education camp." U.S. Republican senator and presidential hopeful, John McCain, was a little more stern, saying "In today's multi-polar world, there is no place for needless confrontation, and I would hope that Russian leaders understand this truth."

Whether today's world is uni-polar or not is a different matter, but McCain certainly has a point when mentioning Russian confrontation. Sure, global U.S. action garners so much attention that it seems they are the instigators of countless conflicts, but other large players such as Russia and China are no angels. Where do you think the bulk of the weapons found in countries like Sudan, Zimbabwe, Uganda, Ethiopia, Eritrea, Algeria, Syria, Myanmar and Iran come from?　

As for Putin's call for honouring "international law," lest us not forget Russia's spats with countries such as Ukraine and Georgia, or even their recent gas dispute with arch ally Belarus. NATO's expansion eastward has been a major point of contention in Russia's relationship with the West, as it cannot accept the loss of any more influence in former Soviet territory. Within her own borders, the handling of the Chechen issue certainly does not pale compared to U.S. policy in the War on Terror.　

The speech brought out into the open a major Russian grievance: that the country no longer enjoys the international clout it once did. Putin touted Russia's resurgence as a major player on the international stage capable of standing up to the United States and/or being a worthy alternative to the American giant. Such talk is clear provocation, as it calls for division rather than collaboration. This is especially so since a more likely candidate for global superpower, China, is pursuing a more measured foreign policy.　

Backing up his calls for a multi-polar world, Putin, who is soon to step down as President, has become the first Russian head of state to visit Saudi Arabia, Qatar and Jordan; all traditional U.S. allies. Given the long history of warm Russia-Middle East relations, the need to visit these three states in particular is not exactly pressing. It is therefore no coincidence that these visits coincide with his increasingly vocal anti-US rhetoric.　

Putin's speech comes on the backdrop of a recent U.S-Russia space row, when deputy head of the Russian space agency Roskosmos, Vitaly Davydov, sharply criticized what he said were U.S. plans to deploy weapons in space. While the White House has stated the policy does not call for the development or deployment of weapons in space, Russian Defense Minister Sergei Ivanov threatened retaliatory steps if any country put weapons in space.　

Quite possibly what has held the U.S. and Russia together is the friendship of Bush and Putin. With both men gone in just over a year, relations might begin to sour at the top level as well. It seems the stage has been set.

#27 A not so Imperial USA

The issue of global US hegemony and/or imperialism is one that instantly generates heated debates when addressed. The divide generally lies between pro-US and anti-US "debaters," with discussion between them usually going along the following lines:

Moe: "The US sucks!"

Joe: "No, the world sucks!"

Moe: "You think you are so much better than everyone else, but you don't even know the difference between Malawi and Kazakhstan! You just force your ways on the world through force!"

Joe: "Well, we bring the world Democracy! If it weren't for us you'd be kissing Nazi ass or getting raped by the Japanese imperial army!"

Moe: "You suck, you ignorant asshole American"!

Joe: "You suck, you dimwitted hippie"!

If we get past the name calling and take a closer look at the situation on the ground today and compare it to recent superpowers, a relatively benign picture of the USA prevails. Take Britain at its imperial peak for example. Wherever they were present, be it in Kenya or in India, every aspect of public life - ranging from taxes and laws to external relations - were controlled by the British. Other great powers of afore such as France and Russia also exhibited what renowned Political Scientist Joseph Nye considers to be "the core feature of imperialism," namely political control. Certainly unequal relationships between the US and most of the rest of the world exist and, yes, the US does exert her influence when she feels it is necessary, but this does not equate to political control.

The 'occupation' of Western Europe and Japan provide two perfect examples where US influence is clearly visible on the one hand, but it is equally obvious that these areas are entirely sovereign. The US rebuilt Western Europe and Japan, leaving a clear American footprint, but when it comes to making any decision of significance, the US has no role to play. This is especially the case now that the EU has solidified itself as a powerful unit. Granted, militarily the US is the world's sole superpower and, if they choose to do so, they could bring down any government in the world. But, as the case of Iraq has shown, even the world's sole superpower cannot succeed alone, as a military victory is only one of many steps needed to attain true victory.

Indeed, the USA has shown itself to be a severely poor occupier in the aftermath of the Iraq War. Bringing down the Baathist government and Saddam Hussein was a cinch, but managing the occupation has thus far been a total disaster. Up until the two World Wars devastated the power of the British and the French to subdue any form of revolt in their colonies through force, these two countries had been masters at occupation. The reason the US succeeded in Europe was because they had been welcomed as liberators. In Japan I believe they had both grown tired of war and the sheer devastation allowed for an environment in which the victors could leave their mark without much opposition. In areas where the US has not been welcomed (e.g. Vietnam and Iraq), they have been unable to deal even a fraction as efficiently with occupation as the British, French and Russians managed.

Furthermore, while the US might be the world's military hegemon, in terms of issues such as economics it is nothing more than an equal power. If the EU, Japan, or even China or India are engaged with the US in trade talks, they generally have to meet halfway. Imperial Britain would have accepted no such thing. They would have simply forced their way. In today's world, however, this is not the case and would probably not be possible or at least not sustainable either. The world order is defined by more than just military might and, with this in mind, the US has positioned itself as the world's primal player, but not an imperial one.

#26 Food for Oil: The Greening of America

There was a time when, if you would talk about reducing oil consumption, you would be branded a leftist, tree-hugging liberal. These days, reducing energy consumption is slowly coming to be seen as the patriotic duty of every American. Even President Bush seems to have awakened from his comatose anti-environmentalism when, in his recent State of the Union Address, he said

"We must continue changing the way America generates electric power, by even greater use of clean coal technology, solar and wind energy, and clean, safe nuclear power. We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean diesel vehicles and biodiesel fuel. We must continue investing in new methods of producing ethanol, using everything from wood chips to grasses, to agricultural wastes...let us build on the work we've done and reduce gasoline usage in the United States by 20 percent in the next 10 years...America is on the verge of technological breakthroughs that will enable us to live our lives less dependent on oil. And these technologies will help us be better stewards of the environment, and they will help us to confront the serious challenge of global climate change."

The drive for oil independence is not a new one; those who are old enough may remember the oil crises of the 1970's. Back then President Nixon was singing the same tune as Bush when he called for drastic measures to curb America's addiction to foreign oil. Sadly for the Unites States, Nixon's big words never amounted to anything. The same story risks unfolding once again, unless the US undergoes a fundamental political and cultural shift.

America consumes upwards of 50 million barrels of oil per day. Reducing this number does not only require fundamental technological innovation and implementation, but also a whole new cultural mindset. Bioethanol is heralded as the new miracle drug capable of curbing America's addition to foreign oil. Bioethanol is a fuel that can be derived from corn, sugar and other various crops. It is also a significantly cleaner fuel, and in that respect bioethanol can help in the greening of America's oil economy and give a viable boost to the American heartland.

However, as crops become part of a fuel economy, commodity food prices are destined to become evermore interlinked. Besides food prices going up as food crops are turned into bio-fuels, the volatility of the energy market as a whole is going to rub off on the commodity market. This is bad news for consumers and industry alike, not to mention the poor. This in turn will, and already has, affected the self sufficiency of crop production: the USA used to be one of the largest exporters of soy, but has now become of the largest importers thereof. There is a very real threat that ‘fuelification’ of food crops could inherently exacerbate that trend to other crops such as grain, sugar and corn.

As mentioned before, America needs to undergo a cultural revolution in order to change its ways. More specifically, she requires an urban revolution based on the de-suburbanization of the country. The expansion of public transport: metros, buses, trams, and yes, trains. In a nutshell; a European, if not Dutch approach towards tackling transport, the environment and oil dependency. Only then can America begin to curb its addiction to foreign oil.

#22 The new "Silk Road"

The historical Silk Road is probably somewhere around 2000 years old. From its inception, the Silk Road was the coronary artery for the Roman Empire’s hunger for luxury goods from the East, such as silk, jade and gems. This demand was in fact so large that it drained hefty sums of gold out of Rome, contributing to the bankruptcy of the Roman economy and eventually the downfall of the empire itself.

The heavy trading along the Silk Road fueled an intense cultural and economic boom. Although over time the silk road would disappear (and reappear only to disappear once more) due to the ever changing geo-political and economic landscape, today we are seeing a revival of the silk road, albeit in a different form. According to George Magnus, Senior Economic Advisor to UBS Investment Bank, a new silk road has emerged through the trade of hydrocarbons, petrodollars and consumer goods.

At the heart of this petrodollar economic system lies China; a net consumer of half of the world’s oil. The capital flows along the road are immense and by no means constitute a one way flow towards the dollar surplus oil economies of the Middle East. These very intense petrodollar fueled trade relationships are at the core of the rebirth of a new silk road. In fact, the new Silk Road is nothing more than a catch phrase for the growing and intensifying economic chains between the Middle East and Asia.

In this emerging trade paradigm, Islamic finance is becoming an increasingly important facet of the new Silk Road. Western and Asian companies, as well as governments, are increasingly using Islamic bonds (Sukuk) to tap the deep well of petrodollars in the Middle East. China also seems to be soaking up ever larger amounts of Islamic finance and investment products. It is a convenient way to recycle the petrodollars of the Middle East and ease some of the massive U.S. trade imbalance. Equally important is that China’s large public works is a good match for the requirements of Islamic asset backed financing products.

The historical link is that the USA is starting to find itself in a similar position to the ailing Roman Empire of ancient times. I will mention a number of factors that coincide: slow decline of the American economy as the primal economy (increased economic multi-polarity), high and increasing debt per capita, currency devaluation, addiction to foreign resources and consumer goods. There are also many political similarities: poor leadership on key issues, an over stretched military, new types of enemies, migrant problems, internal political division and polarized religious factions vying for power. In fact, both Rome and the United States attempted to “liberate” Mesopotamia and secure it from Iranian (then Parthian) influence: it was short lived and costly.

Although you could easily write a book about all the similarities between ancient Rome and the United States, one thing is certain; the global economic paradigmatic shift is forcing the old Pax Americana into a slow retreat. And yes indeed, there is a new silk road emerging, based on petrodollars, black gold, and Asian consumer goods. Perhaps it is too simple to blame it all on economics and politics, but I do believe Clinton got it right when he said “It’s the economy, stupid!”

#17 A Spoonful of Sugar Makes the Medicine Go Down

"A Spoonful of Sugar Makes the Medicine Go Down." If Mary Poppins were an economist, this is what she would be saying to the American Economy. She would also have said "do not be fooled by the temporary upswing of the dollar (rebounding back to 1.30 this Friday)." Unfortunately, even fundamentals such as employment cannot change the direction in which the American economy is heading in the long run. The spoonful of sugar is in fact the cheap money supply, which after moderate tightening is still plentiful to sustain investments that reap positive effects to American labor statistics.

Investors were desperate for good news and the results came as a mild surprise. It is even rumored that the fed may not decrease its short term rates. Is this a reason for celebration? No. The market often overreacts to both gloom and positive news. Investors have been warned of a forthcoming recession for many months. The signal by the economic weatherman is hardly a prediction of blue skies for the coming time period. The minute cheap oil is hampered by a cold surge or other disruptions from the world's incurable hot spots; the short honeymoon is surely to end with a migraine.

As economists, we are often trained to treat investor reactions to news with a certain degree of reservation if not pessimism. Economists like to focus on the analysis of indicators such as housing, trade imbalances, GDP, fiscal strength, growth et al. And economists are quite aware of the temporary emotional fickleness of investors who think that a patch of blue sky spells out summer.

I, however, am not afraid to stick out my neck and say that even though the forecasted rain is somewhat postponed, it is definitely not the time to plan a picnic just yet. Furthermore, your best investment right now is an umbrella such that your tasty dollar assets do not get watered down by the rain. The temporary rebound may be the perfect opportunity you need to strategically relocate that picnic basket of yours.

And yes, a spoonful of sugar does make the medicine go down.

#16 Preparation Time

It might be that the recent headlines are just empty rumors, but if they are actually based on true substance, then it seems 2007 might become a year of muscle flexing, it not tangible action. I am talking about two recent headlines: 1. "Israel to nuke Iranian nukes" and 2. "Japan, U.S. upgrading military emergency plan."

The first report comes from the British Sunday Times, who cite "several Israeli military sources" as proclaiming Israel has drawn up secret plans to destroy Iran’s uranium enrichment facilities with tactical nuclear weapons. The strikes concern an enrichment plant in Natanz, a heavy water plant in Arak, and a uranium conversion plant in Isfahan. The first would be targeted using low-yield nuclear bunker busters, while conventional bombs would suffice in destroying the other two.

If true, this is spectacular news. If untrue, it is yet another shoddy attempt by the Sunday Times to grab global headlines. Either way, it is a story that I would rather not have seen published, as it informs the Iranian government of possible action for which they can now prepare themselves. I also personally don't think the Mullahs will be hesitant to continue with their nuclear enrichment plans after hearing this news, thus nullifying any preemptive purpose for leaking it. Despite the fact that the UN Security Council voted unanimously last month to slap sanctions on Iran to try to stop uranium enrichment, the UN has shown itself to be categorically incompetent when dealing with Iran (and a host of other issues for that matter). In that sense it could be the best alternative for Israel to follow through with such a plan; especially if the success of the 1981 air strike against an atomic reactor in Iraq can be emulated. Nevertheless I am vacillating on the matter, as there are so many factors at play when Iran is concerned.

The second headline worth focusing on is the upgrading of the US-Japan joint operation plans for a possible contingency on the Korean Peninsula. In 2002 the two countries signed a conceptual plan code-named "5055" which only mentions basic principles, numbers of necessary facilities and other information in each category of the joint operations. The new joint operational plan calls on Japan to provide logistics support for U.S. troops, including the use of specific ports and hospitals in cases of a military emergency in or around Japan. This will significantly enhance Japan's role in the event of a crisis or war, thereby freeing US resources. This will unconstrain the Americans and provide them with more leeway in dealing with other hotbeds simultaneously (e.g. Iraq and Iran).

If the stories above are all true, then it looks like 2007 is shaping up to be a year of tacit alliances, contingency planning and outright action. I just hope the Iranians will be unable to attain their nuclear ambitions and that the US will attempt direct talks with the North Koreans. Both conflicts should be solved without military intervention, though this seems more plausible in the North Korean case. If action is indeed necessary, then a swift, painless strike as outlined by the Sunday Times is clearly preferable.

#12 About Dollars, Euros and Uncertain Times

With the Dollar at yet another unprecedented low (1.32 Dollars to the Euro on January 2nd, 2006), we are living in uncertain times. This uncertainty is not necessarily a bad development and for economists it is a very interesting time indeed. For one, we are going back to more fundamental aspects of monetary policy, economic strength et al.

It is very possible that we are witnessing the end of an era known as the dollar era. As the American economy stutters, the rest of the world is feeling the pinch. And this pinch is fueling a growing demand for Euros and Euro based assets and derivatives.

The Dollar originates from the German coin the Thaler, or, according to the Dutch, the Daalder. While the US Dollar has a European heritage, it soon became hegemony when in the post-war world the American Economy blossomed, bloomed and spread over the world. In international trade the Dollar had become the main standard of trade across the world. Practically all commodities are today still traded based on dollars. This means that as people trade on the global market, a Dollar surplus or deficit is created based on trade. This dollar is then, if desired, traded back into a local currency or asset. However, when the basic exchange metric (the Dollar in this case) starts to rapidly depreciate, so does that what you are exchanging if the underlying goods do not equally appreciate.

In these circumstances a lot of activity and volatility quite naturally occur in the exchange and commodity markets. Furthermore, it creates a large demand for hedging for those firms, enterprises or countries with considerable exposure. This hedging activity explains the rise of Euro or Gold assets vis a vis the Dollar.

In the future we must consider several scenarios which include a possible change in the Dollar as the exchange metric. This would be very bad news for America and Dollar based economies, as the change could worsen the anticipated American Economic downturn, which in today’s global economy affects nearly everybody. US demand for foreign goods is set to decrease with further Dollar depreciation, which will also dampen global growth elsewhere.

American consumer markets are an essential motor for the global economy. China has long realized this and has been very willing to provide credit for American consumers. However, with so much excess foreign provided credit, the already “maxed” out credit card consumer is expected to dramatically cut consumption. The end of the American Dollar hegemony is going to be bitter pill not only for Americans but for all of us in the global economy.

As the economic axis begins to swing away from America towards a Eurasian (with the emphasis on Asian) powerhouse, we can expect a vastly different economic and political paradigm to unfold. Maybe it is not such a bad idea to learn Mandarin after all.