The Great Debate UK

U.S. debt downgrade: Who cares?

By Laurence Copeland. The opinions expressed are his own.

As I write this blog, it looks as though the U.S. Congress is going to pass a bill raising the debt ceiling and making modest cuts in Federal Government spending over the coming years. Although it is, quite rightly, being presented as a somewhat hollow victory for the forces of reason, there is one extremely puzzling aspect of the crisis.

It is being reported on all sides that the credit rating agencies may well downgrade U.S. sovereign debt in spite of this “happy ending” – indeed, Egan-Jones, one of the smaller agencies, cut its rating of U.S. debt some weeks ago, and there is much talk of Moody’s and S&P following suit in the very near future.

This is all rather puzzling. After all, a credit rating is an assessment of how reliably lenders can count on the borrowers repaying their dollar loans (principal plus interest) in full and on time.  Now the only scenario I can imagine in which the U.S. Treasury fails to meet its legal obligations to its creditors is one in which the Congress blocks a rise in the debt ceiling explicitly so as to bring about a default – and even then it would presumably require the collaboration of the executive because, as many people have pointed out in the current cliffhanger, even if further borrowing is impossible, U.S. tax revenues are far greater than the cost of servicing the debt.

In other words, the Administration can always pay its legal debts – it is only about to run out of money on August 2nd, in the sense that tax revenues are insufficient to cover legally required payments to Uncle Sam’s creditors plus hundreds of billions of dollars of other commitments which the federal Government is politically (and no doubt to a great extent morally), but not legally bound to pay, such as: social security payments, purchases (unless already ordered), wages to civil servants without contract, and so on and so forth. It can delay most of those payments without contravening criminal or civil law, and in most cases can walk away from its commitments altogether with no legal penalty, though of course the outcome might be politically or socially explosive.

In short, whichever way you tell the story, as far as I can tell, default by the USA (or indeed by Britain) could only occur as a result of a conscious political decision to do just that. By contrast, all the forecasts are that Greece will have no choice in the matter. The distinction, as I have pointed out before, is that while Greece’s debts are in a “foreign” currency – it has no right to print euros – the Fed or Bank of England can print as many dollars or pounds as it takes to repay their debts. In the process, of course, the domestic and foreign purchasing power of their currencies will be devastated, but they will have discharged their legal debts. As far as America is concerned, with the exception of a relatively small quantity of so-called TIPS (Treasury Inflation Protected Securities), U.S. bondholders have what economists call a purely nominal claim i.e. one that is denominated in current dollars, not dollars of constant purchasing power. By lending to the USA, they have given a hostage to fortune, a risk which, if they were wise, ought to have been reflected in the yield they demanded before buying the bonds in the first place.

All of which does nothing to resolve the original puzzle, because however dishonest, disreputable or unethical one may think is this scenario, “backdoor default”, as Mark Calabria of the Cato Institute has called it, does not qualify as a default in the sense relevant to the a country’s credit rating, nor (I assume) does it count as a credit event for the purposes of credit default swaps, the main instrument for insuring investors against default by bond issuers.

from The Great Debate:

Why is Obama giving Libya to the Russians?

By John Bolton The opinions expressed are his own.

With President Obama’s Libya policy staggering from one embarrassment to another, last week he and Secretary of State Clinton outdid themselves. They publicly welcomed Russia’s effort to insert itself as a mediator, an act of such strategic myopia that it must leave even Moscow’s leadership speechless.

Permanent Security Council members Russia and China abstained on the initial resolution authorizing force to create a Libya no-fly zone and to protect innocent civilians. By not casting a veto, Russia thereby tacitly allowed military action to proceed. As they did, Russia repeatedly second-guessed and harshly criticized NATO’s operations. Now, as a mediator, Russia will, in effect, have the chance to rewrite the Council’s resolution according to its own lights.

Given the uncertain trumpet sounded by both Obama and NATO, and the still-inconclusive outcome of the “kinetic military action,” the reputation and credibility of U.S. and NATO, militarily and politically, have been gravely impaired. The President likely doesn't appreciate these wounds as he leans over backwards not to be seen as the regime-changing unilateralist he imagined his predecessor to be.

We should hope that Russia fails. Mediation was never the correct answer here. NATO, once committed, must prevail by force of arms, as it still could with a modest demonstration of American leadership. Make no mistake: Welcoming Russian intercession between NATO and a military opponent like Libya is nothing less than a massive humiliation for the Western alliance. If the Obama Administration’s misguided worldview favors mediation, whatever happened to the likes of Sweden and Switzerland?

Not only does Russia now have the possibility of reshaping the Libyan morass to its own ends, it is also well-positioned for a dominant role in post-conflict Libya. From the outset, U.S. critics of the intervention raised legitimate questions about the bona fides of the Libyan opposition, embodied in the Transitional National Council (“TNC”), now recognized by over three dozen countries. Last Friday, the United States joined the crowd, while also unfreezing Libyan assets to make them available to the TNC.

from Reuters Investigates:

Bin Laden “wanted to be a martyr.” U.S. obliged.

Today's special report "The bin Laden kill plan" is based on interviews with two dozen current and former senior intelligence, White House and State Department officials. It explores the policies and actions of the United States in its 13-year hunt for Osama bin Laden. 

Richard Armitage, who was deputy secretary of state in Bush's first term, voiced the view that prevailed through two presidencies. "I think we took Osama bin Laden at his word, that he wanted to be a martyr," Armitage told Reuters.  

The U.S. government, he said, would do all it could to help bin Laden realize that goal.

The real breakthrough that led to al Qaeda leader Osama bin Laden came from a mysterious CIA detainee, Hassan Ghul, according to our sources.

Multiple U.S. intelligence officials told Reuters the real breakthrough that led to bin Laden came from a mysterious CIA detainee named Hassan Ghul. Ghul, who was not captured until 2004 at the earliest, was not subjected to waterboarding, the CIA's roughest and most controversial interrogation technique. It had already been phased out by the time he was captured. But two U.S. officials acknowledged he may well have been subjected to other coercive CIA tactics, possibly including stress positions, sleep deprivation and being slammed into a wall. 

It was Ghul, the officials said, who after years of tantalizing hints from other detainees finally provided the information that prompted the CIA to focus intensely on finding Abu Ahmed al Kuwaiti, pseudonym for the courier who would lead them to bin Laden.

Much about Ghul remains obscure, including his nationality. Two U.S. officials told Reuters, however, that at some point the CIA turned him over to authorities in Pakistan. The officials said their understanding is that in 2007, Pakistani authorities released him from custody. The officials said the U.S. government now believes Ghul has once again become a frontline militant fighter.

from FaithWorld:

Bin Laden ‘eased’ into sea in contentious burial

(Aircraft carrier USS Carl Vinson, from which Osama bin Laden was buried at sea somewhere in the north Arabian Sea/U.S. Navy)

He may have been America's enemy number one, but after U.S. forces killed him, Osama bin Laden was afforded Islamic religious rites by the U.S. military as part of his surprise at-sea burial on Monday.

The U.S. military said preparations for the al-Qaida leader's burial lasted nearly an hour. His body was washed before being covered in a white sheet and religious remarks translated into Arabic by a native speaker were read over bin Laden's corpse.

"The burial of bin Laden's remains was done in strict conformance with Islamist precepts and practices," said John Brennan, U.S. President Barack Obama's top counter-terrorism adviser.

Washington said bin Laden was buried at sea after U.S. forces killed him at a compound near the Pakistani capital Islamabad because it was the best option, given tight time constraints.

Under Islamic tradition Muslims need to be buried within 24 hours. Transferring the body to another country for interment could have taken too long, officials said.

from The Great Debate:

Digital media and the Arab spring

By Philip N. Howard, author of "The Digital Origins of Dictatorship and Democracy: Information Technology and Political Islam," and director of the Project on Information Technology and Political Islam at the University of Washington. The opinions expressed are his own.

President Obama identified technology as one of the key variables that enabled and encouraged average Egyptians to protest. Digital media didn’t oust Mubarak, but it did provide the medium by which soulful calls for freedom have cascaded across North Africa and the Middle East. It is difficult to know when the Arab Spring will end, but we can already say something about the political casualties, long-term regional consequences and the modern recipe for democratization.

It all started with a desperate Tunisian shopkeeper who set himself on fire, which activated a transnational network of citizens exhausted by authoritarian rule. Within weeks, digitally-enabled protesters in Tunisia tossed out their dictator. It was social media that spread both the discontent and inspiring stories of success from Tunisia across North Africa and into the Middle East.

The protests in Egypt drew the largest crowds in 50 years, and a second dictator fell from power. The discontent spread through networks of family and friends to Algeria, Jordan, Lebanon and Yemen. Autocrats have had to dismiss their cabinets, sometimes several times, to placate frustrated citizens. Algerians had to lift a 19-year “state of emergency” and are gearing for demonstrations over the weekend. Even Libyan dictator Muammar Gaddafi has had to make concessions to activists brave enough to raise street protests against government housing policy.

But perhaps the most important casualty in terms of global politics is the U.S. preference for stability over democracy in North Africa and the Middle East. This preference, expressed in different foreign policies, seems untenable when groundswells of public opinion mobilize for democracy.

What are the lessons for the West? First, Islamic fundamentalists may terrorize parts of the region, but a larger network of citizens now has political clout, largely because of social media. The Muslim Brotherhood is no longer the only way to organize political opposition. In a digital world, older ideologically recalcitrant political parties may not even be the most effective way to organize effective political opposition.

from Global News Journal:

Perilous predictions for 2011

It’s the season to be merry - and to make forecasts about next year. Across the finance industry fine minds spend December crafting outlooks and extrapolations about how the world will fare, in the hope of a decent return over the next 12 months and avoiding the bear traps that will swallow an investment. The banks, strategic advisories and political risk consultants trumpet their analytical prowess, of course, but are also meeting a natural human need to peer into the future. We all want guidance to take the sting out of living in an uncertain world.

Nowhere is prediction more fraught with peril than in politics and world affairs. The success rate is in inverse proportion to the costs that unexpected acts in the real world can impose on the investor. So despite the difficulty of providing a reliable guide to the future there are huge incentives to try to chart the way ahead. Here's  Control Risks, a risk consultancy firm, on its view of 2011, while competitor Eurasia reveals in early January, as does the World Economic Forum. Nomura has a list of 10 political challenges to prosperity that range from the prospect of gridlock in US domestic politics to brinksmanship on the Korean peninsula.

So which voices warning of political perils should one heed? There’s a crowded field of commentators, perhaps because political outcomes are not as reducible to numbers as economic indicators, where the industry of forecasting has statistical validity. If you work for a well-known investment bank or strategic studies institute your thoughts carry  institutional gravitas. However, and this is somewhat a statement of the obvious, only a track record of smart forecasting earns you an audience. That, and saying something worthwhile. Worse than getting a prediction wrong is being so blandly vacuous and broad in scope that your forecasts are both right and uninformative.

Respected voices suggest that beyond pointing to areas of dispute and potential tension, political forecasters are attempting the impossible. “The science of prediction is a contradiction in terms,” says Nigel Inkster, a former British intelligence officer who analyses international political risk at the International Institute for Strategic Studies in London. “There are so  many potential variables that could come together in so many potential configurations that it is really difficult to identify anything about which you can be really confident,” says Inkster.

“You can look at the line up of forces and make some broad predictions, for example on the likelihood of trouble around the referendum in Sudan. But so much there depends on decisions not yet taken,” he says, referring to January’s plebiscite where south Sudan may vote to secede. “And when you get into assigning probabilities (to outcomes), that’s not very helpful.”

Reuters tries to gauge political risks with appropriate cautions in mind. We reckon it is possible to use our expertise to diminish surprise and anticipate both dangers and opportunities. How well do we do? Our 2010 outlook focused on sovereign debt default, a hung parliament in Britain and tension between China and the United States. Those were borne out, unlike our prediction that Kevin Rudd would easily be re-elected in Australia. (He was ousted in a party coup in June and his successor Julia Gillard scraped into power). For comparison's sake look at the 2010 predictions from Eurasia.

from The Great Debate:

Bernanke’s high stakes poker game at the G-20

By Peter Navarro The opinions expressed are his own.

Ben Bernanke is about to play the biggest poker hand in global monetary policy history: The Federal Reserve chairman is trying to force China to fold on its fixed dollar-yuan currency peg. This is high-stakes poker.

Although Bernanke will not be sitting at the table to play his quantitative easing card when all the members of the G-20, including China, meet this week in South Korea. Every G-20 country is suffering from an already grossly under-valued yuan pegged to a dollar now falling rapidly under the weight of Bernanke’s QE2. In fact, breaking the highly corrosive dollar-yuan peg is the most important step the G-20 can take for both robust global economic recovery and financial market stability.

Regrettably, China continues to believe -- mistakenly -- that the costs of a stronger yuan in terms of reduced export-led growth outweigh three major benefits: increased purchasing power to spur domestic-driven growth, significantly lower costs for raw materials and energy, and a dramatic reduction in speculative hot flows rapidly pushing up inflation.

Of course, the biggest victim of the peg is the U.S which can never eliminate its huge trade deficit with China through currency adjustments. The resultant chronic trade imbalance shaves almost 1% from America’s annual GDP growth rate and costs almost 1 million jobs a year.

Europe, with the notable exception of Germany, suffers a similar problem because of a euro overvalued relative to the yuan. Moreover, as the dollar-yuan pair declines under the weight of QE2, the risk of recession in Europe rises. For its part, Germany largely avoids the peg’s damage through robust exports to China. In addition, Germany's higher savings rate coupled with vaunted cost efficiencies have allowed it to gain at the expense of other more free-spending countries of the euro zone. Politically, this spells trouble because Germany’s separation from the euro zone pack makes it the one country most likely to align with China.

In sharp contrast, Japan has been brought to its knees by China’s fixed peg. Every time the U.S. dollar declines in value and pulls the yuan down with it, Japan (as well as fellow G-20 members South Korea and India) lose more jobs and growth to China. As a further injury, China has aggressively pushed up the yen up through massive interventions in the Japanese market.

from Reuters Investigates:

How to make friends and influence people

White House correspondent Caren Bohan's special report out today examines President Barack Obama's testy relationship with the business community.

After Tuesday's election, Obama was faced with the prospect of legislative gridlock. Republicans pushed Democrats decisively from power in the House of Representatives and strengthened their ranks in the Senate as voters vented frustration over the economy.

Now that the election is over, one idea that could gain traction is a payroll tax holiday to give consumers and businesses some extra cash. Obama had considered proposing it before the election but rejected it because of its cost. There is some openness at the White House to it now but much would depend on whether it seemed likely to gain bipartisan support.

Obama aides say they were frustrated that the economic package the administration offered in September -- including tax breaks for companies and beefed-up infrastructure spending -- received little to no backing from Republicans in Congress. They hope to enlist business support in reviving these ideas.

The question is whether the divided congress can achieve anything. Tell us what you think. Could they at least agree on a payroll tax holiday?

For a multimedia PDF version of the special report, "White House to business: why can't we be friends?" click here.

from Chrystia Freeland:

‘We can’t inflate our way to prosperity’

"There is no other policy tool available [besides quantitative easing],"' Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning's Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:

She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. "We can't inflate our way to prosperity," he said.

Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.

Their conversation then turned to China. Both agree that the increasingly fiery rhetoric Washington directs toward Beijing is counterproductive and that the U.S. is better served by enacting policies to reduce its trade deficit:

HUBBARD: If [the U.S. and China] both keep beating up on each other and try to beggar our neighbor, we'll get into a very bad place. China does have a protectionist policy. It does have a mercantilist policy. And I think focusing on those things quietly rather than from the hilltops, as the administration is doing, would be the right answer.

TYSON: [the rhetoric towards China is] a mistake for them and it's a mistake for us. ... but I honestly think that, just like Glenn does, the exchange rate is not the issue here ... frankly, I think we've seen much more of a sign that the Chinese are rebalancing and restructuring than we've seen in the United States so far. [...]

HUBBARD: [If you focus] on export led growth, you're guaranteeing, at some point, to have a large financial crisis, because you're building up a lot of negative net present value projects in China.

from FaithWorld:

Fears rise over growing anti-Muslim feeling in U.S.

Amid threats of Koran burning and a heated dispute over a planned Muslim cultural center in New York, Muslim leaders and rights activists warn of growing anti-Muslim feeling in America partly provoked for political reasons.  "Many people now treat Muslims as 'the other' -- as something to vilify and to discriminate against," said Daniel Mach of the American Civil Liberties Union. And, he said, some people have exploited that fear in the media, "for political gain or cheap notoriety."

The imam leading the project to build the cultural center, including a prayer room, near the site of the September 11, 2001 attacks said there was a rise of what he called "Islamophobia" and the debate had been radicalized by extremists. "The radicals in the United States and the radicals in the Muslim world feed off each other. And to a certain extent, the attention that they've been able to get by the media has even aggravated the problem," Imam Feisal Abdul Rauf in an interview with ABC news aired on Sunday.

Mistrust of Muslims has grown in recent years. A Pew poll released in August found the number of Americans with a favorable view of Islam was 30 percent, down from 41 percent in 2005. American feelings about Islam are partisan -- 54 percent of Republicans have an unfavorable view of Islam compared to 27 percent of Democrats. In November 2001 there was not the same partisan divide of opinions on Islam.

Some believe Obama could convert minds were he to mount the type of public relations campaign which saw Bush attend mosques and talk with Muslim leaders back in 2001. Alan Cooperman of the Pew Forum on Religion and Public Life said, "Americans' opinions of Muslims became more positive after 9/11 than they were before 9/11."

Pew polls from 2001 found 59 percent of Americans had a favorable opinion of Muslim Americans two months after the attacks compared to 45 percent in March of that year, and that the biggest improvement was among conservative Republicans. Cooperman credited the increase to Bush's outreach to show the Muslim community as a religion of peace.

Read the full story here. Click for a slideshow of photos of the 9/11 commemorations here.