Jon Taplin's Blog

Game Changer

If this article from the U.K. Independent is true, the world financial center of gravity just moved.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

Robert Fisk, who wrote the story is a good reporter with a lot of experience. One could argue that a good bit of the American competitive advantage over the last 30 years has been the dollars role as the world reserve currency. It has kept our interest rates abnormally low as foreign debt-holders buy U.S. treasuries. If that changes, everything changes.

Graveyard of Empires

I have been arguing since right after the election that the one campaign promise Obama should not keep is to send 30,000 more troops into Afghanistan. Already the New York Times is labeling it “Obama’s War” in a smart reappraisal this morning by Helene Cooper. 

“It seems there’s a rush to send in more reinforcements absent the careful analysis that’s most needed here,” said Andrew Bacevich, author of The Limits of Power: The End of American Exceptionalism (American Empire Project)

“There’s clearly a consensus that things are heading in the wrong direction,” Mr. Bacevich said. “What’s not clear to me is why sending 30,000 more troops is the essential step to changing that. My understanding of the larger objective of the allied enterprise in Afghanistan is to bring into existence something that looks like a modern cohesive Afghan state. Well, it could be that that’s an unrealistic objective. It could be that sending 30,000 more troops is throwing money and lives down a rat hole. 

Our President needs to make clear what the objective is in Afghanistan. There is a huge gap between denying Al Qaeda safe havens to launch attacks against the West and the much more intractable task of creating a “cohesive state” in a 16th Century tribal culture. The former task is an intelligence and special forces driven effort which we are quite capable of managing with far fewer troops than we have there now. The latter task is one that brought both the British and the Soviet empires to their knees and there is no reason to believe we will be any more successful. As the Times notes, the $300 million a year pouring into the warlords’ coffers from Opium production makes it impossible for the government of Karzai to rule. Continue reading ‘Graveyard of Empires’

Georgia's Smooth Talker

George Bush always bought Mikheil Saakashvili’s act. Barack Obama should not. The Georgian President is an accident waiting to happen. Getting closer to him will only draw us in to more pain and sacrifice.

As winter bears down on Georgia, Mr. Saakashvili has found himself on the defensive. In August, he ordered an attack on separatists in South Ossetia, one of two territories — Abkhazia is the other — where Georgia and Russia had been locked in a 15-year standoff. Georgian forces were quickly routed, and Russia seized both territories.

Mr. Saakashvili has cast the attack as a necessary response to a Russian invasion, but no evidence has emerged to verify the claim, and political opponents have said he acted rashly.

Having lost the war with Russia and wrecked most of his military equipment, guess who he wants to pay for the replacement?

The change in American administrations injects further uncertainty for Mr. Saakashvili, who enjoys warm personal friendships with President Bush and Senator McCain. Mr. Saakashvili said he had no worries about continued support from the United States, which has pledged $1 billion in aid and will sign a strategic cooperation treaty with Georgia this week.

But key questions remain, among them: Will the United States re-equip Georgia’s battered military, at a cost its defense minister estimated at $8 billion to $9 billion?

Obama should take a pass on that bailout.

Contrarian Notions

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.-Charles Dickens

I am approaching the first anniversary of this blog, and like Dickens, this year has felt like the dialectic personified. Chronicling the rise of Barack Obama and the fall of the economy, I have felt a bit bipolar. A little less than a year ago, I wrote a post called Recession Coming. That turned out to be fairly close to the official start of the recession according to the National Bureau of Economic Research. I’m now going to go out on a limb and make some predictions for what the world might look like in December of 2009.

I start with a remarkable chart, courtesy of our correspondent Doug Newhouse.

What this chart says is the price of BBB debt has not been so cheap since 1933, in the depths of the depression (yields move in the opposite direction of price). I would make no predictions about equities in the coming year, but it seems screamingly obvious that buying credit will be the smart move in the next twelve months. Managers like Bill Gross at PIMCO and Daniel Fuss at Loomis Sayles will be the places to park your funds in the debt market. Continue reading ‘Contrarian Notions’

America 3.0 on You Tube

USC/Annenberg School has put a new version of my America 3.0:Rebooting After the Crash up on their You Tube Site. Watch it in the High Quality Setting. It will be up on I Tunes U next week as a free download.

[youtube=http://www.youtube.com/watch?v=pdQrIHjbVPw]

Rock The Casbah

Mos Def

The article in this morning’s Times on an all girl rock band in Saudi Arabia called Accolade is a window into a major public diplomacy advantage the U.S. could employ in the Obama administration.

“In Saudi, yes, it’s a challenge,” said the group’s lead singer, Lamia, who has piercings on her left eyebrow and beneath her bottom lip. (Like other band members, she gave only her first name.) “Maybe we’re crazy. But we wanted to do something different.”

In a country where women are not allowed to drive and rarely appear in public without their faces covered, the band is very different. The prospect of female rockers clutching guitars and belting out angry lyrics about a failed relationship — the theme of “Pinocchio” — would once have been unimaginable here.

But this country’s harsh code of public morals has slowly thawed, especially in Jidda, by far the kingdom’s most cosmopolitan city.

Three years ago, Karen Hughes, in her first week in office as Assistant Secretary for Public Diplomacy came to the Annenberg School where our Center for Public Diplomacy trains future diplomats in an art that has almost vanished in the Bush Administration. In my part of the presentation, I showed some of the history of sending Louis Armstrong to Moscow in 1959 at the height of the Civil Rights turmoil in the South and the roll that rock had played in the Velvet Revolution in Czechoslovakia (Havel’s first Presidential guest was Frank Zappa). I then went on to suggest that the State Department sponsor a major tour of Hip Hop artists throughout the Mideast where the genre is very popular. I noted that Jurrasic Five, Mos Def and the Nas were all Muslims and that the tour would have two effects. First the mullahs would tell the kids they could not go to hear this decadent music–and the kids would disobey in their first act of independence from the religious authorities. Second, if the opening acts on the tour were all local bands, they would leave behind an underground scene that would inevitably foster more openness like the Accolade is trying to promote. Continue reading ‘Rock The Casbah’

Listen to the Russians

Russia in Afghanistan

Megan Stack of the LA Times sat down in Moscow with Retired Lt. Gen. Ruslan Aushev who served for five years in Afghanistan during the Soviet occupation. It was seven years into that occupation that the Soviets began to withdraw. We have now been in Afghanistan for seven years and General Aushev sees the parallels.

In its invasion of Afghanistan, do you believe the United States benefited from the Soviet experience? Do you see any evidence of your lessons from the Soviet defeat?   

I can tell you which mistakes you made and which mistakes we made. They are the same mistakes. We set up a very weak leader, Babrak Karmal. He didn’t have prestige with the people. Today the leadership of Afghanistan does not enjoy popularity with the people. They said of Babrak Karmal, he only sits there with the help of Russian bayonets.

We said, “Afghans, you are living according to the Soviet way of life, where religion is separated from the state, mullahs should be expelled, religion is the opiate of the people. You’ll be living in collective farms. You will have pioneer camps, Comsomol [youth] organizations, and so on and so forth.” The Soviet way of life in a country that still lives in the Dark Ages!

And what did you say? You said, “We are giving you democracy.” They cannot even translate the term properly. Under us there was a lot of corruption, and today there’s a lot of corruption. Neither under you nor under us did an ordinary person get anything.   

At the height of the Soviet war, there were more than twice as many Soviet soldiers in Afghanistan as there are U.S. and allied soldiers in the country today. Do you believe the United States should increase the level of troops in Afghanistan?

You can expand your presence, but what will change? I think you need to do three things. First, create statehood. Set up a popular authority that would deal with corruption and social issues. Second, a combat-able armed force should be created in Afghanistan. And an economy should be created to help people. If you deploy 200,000 troops there, daytime is your time, you’re in command. At night, the Taliban comes and they are in command.

The World in 2025

Last week the National Intelligence Council released its Global Trends 2025 report. I am well aware of the knee-jerk reaction among progressives to discount any of the work product of our intelligence agencies, but I have to say that the few times I have interacted in an academic setting with the analytical branches, the men and women have always been incredibly smart and studiously non-ideological. I am hoping that the weekend reading for President Elect Obama and his impressive group of cabinet appointees is this report. The NIC does not sugar-coat the future.

The international system—as constructed following the Second World War—will be almost unrecognizable by 2025 owing to the rise of emerging powers, a globalizing economy, an historic transfer of relative wealth and economic power from West to East, and the growing influence of nonstate actors. By 2025, the international system will be a global multipolar one with gaps in national power continuing to narrow between developed and developing countries.

Historically, emerging multipolarsystems have been more unstable than bipolar or unipolar ones. Despite the recent financial volatility—which could end up accelerating many ongoing trends—we do not believe that we are headed toward a complete breakdown of the international system, as occurred in 1914-1918 when an earlier phase of globalization came to a halt. However, the next 20 years of transition to a new system are fraught with risks. Strategic rivalries are most likely to revolve around trade, investments, and technological innovation and acquisition, but we cannot rule out a 19th century-like scenario of arms races, territorial expansion, and military rivalries. Continue reading ‘The World in 2025′

The BRIC Wall

While the U.S. has been on a credit funded spending spree for 17 years, the countries known as the BRIC’s (Brazil, Russia, India and China) have been saving up for a rainy day. With more than $3 Trillion in government reserves, they could potentially come to the rescue of the overextended developed world. But will they?

As the lessons of the Great Depression have taught us, the greatest threat to come is that of deflation. If the spector of a worldwide fall in prices materializes, the BRIC’s may have no choice but to save themselves, before they deploy their reserves in the West.

From Asia to Latin America, exports are slowing and should continue to do so as the global appetite shrinks. This is spawning fears that major producers like China and India — which vastly expanded production capacity in recent years — will have to dump products on world markets to keep factories running and stave off unemployment, pressing prices lower.

Faced with high unemployment and potential civil unrest, I am guessing that the BRIC’s will spend their money at home rather than buying US Treasury Bills.

The Road Ahead

As Merrill Lynch brokers arrived at their desks this morning they were greeted with an urgent memo as to how to deal with the possibility that the stock exchange might not open this morning. Europe and Asia had crashed over night and the futures were showing a possible 1000 point fall at the open, which would trigger curbs that would keep the market from opening. Talk about panic.

It didn’t happen and now the market is fighting back from a 500 point drop. My guess is the fear is twofold. First to hear Greenspan admit that the current crisis “didn’t fit his model” was not exactly confidence building. As Vince Farrell wrote this morning.

Greenspan was “shocked” that managements of financial institutions didn’t look to their own self-interest to protect the capital of their firms. The “shock” is at best naive. Companies don’t have self interest, people do. Since huge bonuses were paid to reward short-term results, the investment bankers were motivated to put out what would sell and sell today. The devil take tomorrow. Protecting the balance sheet was senior management’s job and there was a collective failure on that score. He also bemoaned the fact that the models that had been so reliable turned so bad. The models he used had been compiled during the good times. They should have been stress-tested for bad times. He as much said so. “Beware of geeks bearing models,” Warren Buffett has said. Models pre-suppose rational behavior.The geeks don’t know how else to proceed. Continue reading ‘The Road Ahead’