Jon Taplin's Blog

Must Read on The Surge

Tom Englehardt has been consistently writing good dispatches on the post 9/11 world. You need to read his alternative narrative to the current MSM, “Iraq is Stabilizing” story.

Given the situation of Iraq more than five years after the invasion, to speak of this urge to surge and its results as “success” or as “good news” is essentially obscene. Think of Iraq instead as a cocked gun. It’s loaded, it’s held to your head, and things are improving only to the extent that, recently, it hasn’t gone off.

Iraq itself is wreckage beyond anything that could have been imagined back in March 2003; liberation is, by now, a black joke; the Bush administration’s “benchmarks” for Iraqi success remain largely unmet, and still we keep “liberating” that land, still we keep killing Iraqis in prodigious numbers. A Vietnam-style body count, once banished by an administration that wanted no reminders of the last disastrous American counterinsurgency war, is now back with a vengeance, even if violence is down. These days, in its statements, the U.S. military is counting scalps almost everywhere there’s fighting in Iraq.

ADHD on Al Qaeda

It’s getting close to the Fourth of July and you can bet Vice President Cheney will be enjoying his secure undisclosed location in Jackson Hole, Wyoming. You can also bet that he will be monitoring a bizarre secret dance with Al Qaeda that is currently going on. This morning’s New York Times reports the frustration CIA officers have in not being able to pursue Al Qaeda into the Tribal Areas of Pakistan.

A (new plan) was meant to pave a smoother path into the tribal areas for American commandos, who for years have bristled at what they see as Washington’s risk-averse attitude toward Special Operations missions inside Pakistan. They also argue that catching Mr. bin Laden will come only by capturing some of his senior lieutenants alive. But more than six months later, the Special Operations forces are still waiting for the green light.

This did not make much sense until I read Sy Hersh’s new piece in The New Yorker about Vice President Cheney’s secret war inside Iran. Here, Cheney is using Al Quaeda linked Sunni groups inside Iran to violently harrass the majority Shiite’s into over-reacting, thereby giving the US a “cassus belli” to attack Iran.

The Administration may have been willing to rely on dissident organizations in Iran even when there was reason to believe that the groups had operated against American interests in the past. The use of Baluchi elements, for example, is problematic, Robert Baer, a former C.I.A. clandestine officer who worked for nearly two decades in South Asia and the Middle East, told me. “The Baluchis are Sunni fundamentalists who hate the regime in Tehran, but you can also describe them as Al Qaeda,” Baertold me. “These are guys who cut off the heads of nonbelievers—in this case, it’s Shiite Iranians. The irony is that we’re once again working with Sunni fundamentalists, just as we did in Afghanistan in the nineteen-eighties.” Ramzi Yousef, who was convicted for his role in the 1993 bombing of the World Trade Center, and Khalid Sheikh Mohammed, who is considered one of the leading planners of the September 11th attacks, are Baluchi Sunni fundamentalists.

While Cheney uses the Baluchi’s , supplied from their home base in Baluchistan in Southwest Pakistan, and the even more Al Qaeda trained, Jundallah, to kill Revolutionary Guards inside Iran, the normal military chain of command is kept completely out of the loop. Two months ago, Admiral William Fallon, head of Centcom, resigned over differences with Cheney on Iran policy.

Fallon’s early retirement, however, appears to have been provoked not only by his negative comments about bombing Iran but also by his strong belief in the chain of command and his insistence on being informed about Special Operations in his area of responsibility.

It’s bad enough that  the commander of all forces in the Mid-East is kept out of the loop, but what’s worse is that congress is totally AWOL on this whole operation.

Late last year, Congress agreed to a request from President Bush to fund a major escalation of covert operations against Iran, according to current and former military, intelligence, and congressional sources. These operations, for which the President sought up to four hundred million dollars, were described in a Presidential Finding signed by Bush, and are designed to destabilize the country’s religious leadership.

My conclusion on this is that Cheney’s seeming Attention Deficit to capturing Bin Laden may have a darker side. His desire to provoke a war with the Shiite regime in Tehran, means he is willing to quietly ally with the perpetrators of 9/11 operating out of the Tribal Areas of Pakistan to achieve his larger goal.  According to Hersh, four Democrats, in the so called Gang of Eight that signs off on top secret operations–Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi, Senate Intelligence Committee chairman John D. Rockefeller IV, and House Intelligence Committee chairman Silvestre Reyes–have gone along with Cheney and provided the $400 million for this operation. It’s time for Congress to make a decision whether we are going to war with Iran.

It is not for Dick Cheney and the Gang of Eight to decide.

Day of Reckoning

This is the way the world ends/Not with a bang but a whimper.

T.S.Eliot, The Hollow Men

Merrill Lynch published this chart last night of the U.S. Short term Treasury obligations of $742 Billion. Note that 2/3rds of this debt is held by the central banks of about 8 countries including China, Russia, Saudia Arabia, and Japan. Let’s assume the dollar keeps falling because the Fed is afraid to raise interest rates in an election year. At what point do we encounter a “buyers strike” from these Central Banks at a Treasury Bill auction, which forces rates much higher in order to keep paying for the War In Iraq? What happens then? According to Merrill, this is what happens.

The US consumer is ultimately forced to violently adjust its impaired balance sheet. An insatiable appetite for debt comes against the constraint of reduced global credit availability.

There are only two ways to “violently adjust” a balance sheet: forced asset sales or bankruptcy. Either one leads to financial panic. Someday when the history of the decline of the American Empire is told, we will look at this chart on the left, and see that it was when Ronald Reagan came to office that we started going into debt to the rest of the world. And we will know that the idealogical stupidity of the conservative revolution lead us to this Day of Reckoning.

The task of rebuilding America as a producing/saving economy as opposed to a consumption/debt economy will be left to the Democrats. It will be painful and the supply side economist idealogues that brought this plague upon our nation will retreat to their think tanks like Heritage and AEI and pretend it wasn’t their fault.

Our Puritan forefathers would have locked them in the Pillory stocks for public shaming.

Wall-E–A Hollywood Miracle

About once every ten years Hollywood makes a movie that is so “outside the box” that you wonder how it ever got a greenlight. “Citizen Kane” and “The Godfather” clearly come to mind. Pixar’s new movie, “Wall-E”is so wonderfully subversive that it is a miracle it ever got made. I think it is clearly the best movie Pixar has ever made and beyond that it is a planetary lesson of grace and beauty. That the Walt Disney Company paid for this parable about excess consumption and the corporatization of the planet is extraordinary, but they are to be commended for it and come Oscar time they will be rewarded.

Wall-E depicts a world of the future that WalMart (called Buy N Large in the film) made. A world of Superstores selling super amounts of junk to a country drowning in trash. Eventually, in order to keep selling, BNL ships all of the humans off the planet into space colonies, where the human race evolves backwards into fat lazy entertainment addicts serviced by a colony of robots. But the film is no ecology lecture. First off, it is as close to a silent film as we have had in 75 years. It has echoes of Modern Times, Metropolis, 2001, Bladerunner and yet it is a love story with a decidedly optimistic ending (stay through the end credits). I have written before about the dystopian artist and the age of anxiety. But Wall-E is something far more ambitious. When the history of the first 100 years of animation is written, I’m pretty sure Wall-E will be right up there with the earliest Disney classics in the pantheon.

Sick

Grover Norquist, who heads Americans for Tax Reform, was head of the College Republicans in 1976. He’s the guy with the pocket protector and the thick glasses who didn’t inhale and couldn’t get a date. He’s been pissed off his whole life and since Reagan has been one of the big 5 Radical right wingers in Washington. He’s also a corrupt little crook.

According to an investigative report on Abramoff’s lobbying released in June 2006 by the Senate Indian Affairs Committee, Americans for Tax Reform(ATR) served as a “conduit” for funds that flowed from Abramoff’s clients to surreptitiously finance grass-roots lobbying campaigns. A second group Norquist was involved with, the Council of Republicans for Environmental Advocacy, received about $500,000 in Abramoff client funds.

So yesterday, he wanders into the LA Times Washington bureau to launch his line of attack on Barack Obama, hoping to get some attention on the day Hillary and Barack were dominating the news cycle with their Unity speeches.

Norquist dropped by The Times’ Washington bureau today and, as part of his negative critique of Obama’s liberal stances on economic issues and other matters, he termed the presumptive Democratic presidential nominee “John Kerry with a tan.”

I know this kind of racist talk was standard operating procedure for College Republicans in the 70′s, but someone on the McCain staff should tell this little runt to shut up.

As Tom Frank pointed out in the Wall Street Journal, Norquist’s notions that the government should embark on a radical privatisation program has led to nothing but grief. His days on the K Street Republican gravy train are numbered.

Deny This

For the first time in human history you will be able to sail to the North Pole this summer. All of you global warming deniers ought to find something else to deny. Maybe evolution? Since the North Pole basically serves as an air conditioner for the Northern Hemisphere, we can assume the snow pack in future years will be smaller, leading to more water shortages.

Warning From Across the Pond

 I know I’ve been writing a lot on the economy lately. I think we are at a very scary moment, and I’m not sure it’s really being addressed by either political campaign. Barclays Bank in London put out a report this morning, calling out Bernanke and the Fed.

Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5% by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. “This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that’s possible. It has lost all credibility,” said Mr Bond.

When they say the bond markets will “take matters into their own hands”, we should realize that to some extent they already have. Even though the Fed Funds rate has held steady for three months, the ten year Treasury Bill has move up almost 100 basis points. The real problem, as I tried to point out in March, is that inflation in food is going to cause global political instability. Our faithful correspondent Rachel sends on a post from a Zimbabwean blogger, Bev Clark. This is what real inflation is like.

The last time I went shopping it took me longer to pay for my few purchases than to shop for them. The swipe machines have a limit of Z$9 billion. So go figure if you want to buy a small packet of meat,which at today’s price is, Z$151billion. Yesterday I bought a chicken for $26 billion. It looked rather strange. All bent and buckled but I bravely bought the bird needing a change from my usual beans and rice.I left it out last night to defrost and I must say that in the cold light of day it’s a bit of a sight. I threw it in the pot anyway.

With countries all over Southeast Asia blowing up from inflation, it is only a matter of time before this gets really ugly from a geopolitical point of view. When I say I don’t think either campaign is addressing the issue, I mean this. The combination of high interest rates, high unemployment, falling stock and house prices is as mean a season as you can imagine. We could quite possibly see a good number of small banks in the U.S. fail over the summer. Imagine the months just before FDR gave his first inaugural address as banks were failing–”We have nothing to fear, but fear itself”. That’s what President Obama might have to deal with.

That is the real legacy of Bush-Cheney incompetence.

Bill Gates Retires

In 1978 Bill Gates and Paul Allen (bottom row, extreme left and right respectively) started Microsoft. Paul Allen left the company many years ago to pursue his own passions, but today is Gates’ last day as a Microsoft full time employee. He will still be Chairman of the Board, but his time will be dedicated to the Gates Foundation, the world’s largest. Many pundits are saying that the world Bill Gates created is over and that a new era of Google dominated “cloud computing” is the shape of the future. I’m not so sure.

The theory behind cloud computing is that I leave everything on a central server and run my life off a thin client (I-phone or Blackberry). In this vision, Google’s massive worldwide data infrastructure gives them competitive advantage over other players. But in the last few months the race for flash memory between Intel and Samsung might have changed this vision. Samsung announced a 256 GB flash memory card. Given that the basic laptop computer comes with 80 GB hard drives, one can see that the cost of memory is entering a Moore’s Law inflection. That would say that a 512 GB card for your cell phone would be available in 18 months and 1 terabyte of storage the size of a thumbnail is not far off.

What does this mean for the ICT industry? It means that small handheld devices would have so much storage that you could run your life on line or offline and the role of the central server would become less important. Moreover, the wireless infrastructure needed to run real time high def video, streaming at 6 MBps, would not be quite as critical as is now assumed. Whenever my device was on, it could be trickle charging with all the video, data and music that are set in my “preference cache” from the cloud, but then could run the video from flash memory with none of the stutter we all see on wireless web streaming. In this world, the question becomes, who has their software in the most devices connected to the cloud? Today, Microsoft is far ahead of Google in that battle. They have software in million of phones, billions of PC’s, millions of X-Boxes and a few million TV set top boxes.

I wouldn’t be writing the obituary for Microsoft just yet.

Survival Strategies

Goldman Sachs is not sure General Motors will survive. Think about that. The icon of American business might burn through all of its cash in the next few months while it tries to unload cars that no one wants. This recession has got the Bush Administration freaked out. Politicians all over Washington are trying to push through housing rescue bills to try to keep the economy from a depression. My friend Vince Farrell has some words about the latest housing bailout.

The thing that troubles me the most is that Fed agencies like the Federal Housing Administration, and quasi-government agencies Freddie and Fannie are to be involved. The FHA just reported a $4.6 billion loss. That’s $4.6 billion. It came about by a “down payment assistance” program where a homeowner got a third party to make a down payment so the loan could qualify for FHA insurance. No money in, no skin in the game, walk away if tough times come. To potentially take over supervision of troubled loans to the projected tune of $300 billion might be a tad risky for the taxpayer. The FHA’s record is not confidence inspiring.

Fannie and Freddie are being looked upon as saviors of the troubled housing market as well. They will be allowed to buy bigger loans and otherwise extend their reach into the housing market further. What bothers me here is Fannie has a debt-to-equity ratio (a measure of how leveraged they are) of 27 to 1, and Freddie 20 to 1 (thanks to David Wessel of the WSJ for those stats.) Bank of America and JP Morgan are both about a 4 to1 debt to equity ratio. So let me be sure I have this right. Two quasi-government agencies, with scandalous accounting issues in their recent past, leveraged to the gills far beyond what the private banking system would allow (and haven’t those banks suffered as well?) are going to lead us to the promised land and away from the housing debacle. Right !

I know there is generalized panic in Washington, being fed by big Bankers who want the Government to bail them out of all the bad loans they made over the last 7 years. But why should all American taxpayers suffer for their stupidity and greed?

Wall Street in Pain

Back in February, I warned that this economic slump was like a slow motion car crash. Today, as the Dow fell 358 points, it is dawning on investors that we are in for a long recovery. One of the big problems is that the Fed is very sensitive to the politics of an election year–the conventional wisdom being that an interest rate hike might make life for Republicans even more miserable than it already is. George Bush Sr. never forgave Greenspan for raising the Fed Funds rate in an election year. Doug Kass said in his morning note “the consumer would be more helped by reining in food and energy costs than he would be penalized by higher short term interest rates.”

The Republicans are in a pickle (to quote one of our correspondents). They represent the investor class, who probably make up 85% of the 16% of the voters who say the country is on the right track. When they look at their brokerage statements in early July, they are going to be just as pissed off as the rest of us.