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.

How the world looks at Obama after midterms

By George Friedman
The following is an excerpt from Friedman’s weekly column. The opinions expressed are his own.

The results of the 2010 U.S. midterm elections were as expected: The Republicans took the House but did not take the Senate. The Democrats have such a small margin in the Senate, however, that Republicans can block the Obama administration initiatives in both houses of Congress. The public has thus taken away Obama’s ability to legislate on domestic affairs.

That leaves foreign policy though. So let’s consider how foreign governments view Obama after this defeat. There are several major elements to Obama’s foreign policy. He campaigned intensely against George W. Bush’s policy in Iraq. He argued that the important war was in Afghanistan. And he argued against Bush administration policy on detention, military tribunals and torture. He also argued that Bush had alienated the world by his unilateralism, by which he meant lack of consultation with allies.

Misreading the midterm tea leaves

By Cliff Young and Julia Clark

Yes, this was a Republican Year. From lowly dogcatcher to the venerable Senate and House, the GOP made significant gains. But how should the results of this electoral cycle be interpreted? Are we seeing the emergence of a “new Republican mandate” which will sweep away the Obama project because of his policy oversteps? Or is this merely the short-term expression of voter angst, precipitated by a dismal economy?

Pundits and politicos alike would have us believe that the Obama era is over, with the general elections in 2012 being a mere formality to an imminent Republican resurgence. Obama went too far left, or so the argument goes, and the Republican gains this year are a leading indicator of a re-adjustment.

In our view, this perspective is fundamentally wrong: the results of the present mid-term elections have little to do with the probable outcome of the general election in 2012. Obama, contrary to the expert opinion, is still very much in the driver’s seat. Here’s why.

Why Pelosi will be the next minority leader


By Joshua Spivak
The opinions expressed are his own.

Even after the Democrats crushing defeat on Election Day, Speaker Nancy Pelosi has announced that she wants to keep leading the Democrats as the minority leader. Despite some grumbling and complaints, the odds are very good that she has the job locked up. It may seem unusual, but Pelosi’s behavior is normal for the House. Moreover, the history and current membership of the House may make her reelection a certainty.

In the 20th century, the Democrats lost control of the House four times. The last time, in 1994, Speaker Tom Foley lost his reelection campaign. However, Majority Leader Dick Gephardt, the number two ranked Democrat, followed the traditional path up the ladder, and was immediately chosen as minority leader. When they lost the House in 1952 and 1946 Speaker Sam Rayburn took over as the minority leader, a pattern was started by Speaker Champ Clark when the Democrats were swept out in 1916.

This is not surprising. Democrats had control of the House for nearly two-thirds of the 20th century. The party maintained strong internal control of the leadership ranks — members rose up from whip to leader to speaker. Every Democratic speaker previously served as either majority or minority leader.

The big winner: Marco Rubio

Coming into tonight, the Tea Party’s big success has been knocking off a wide range of Republican incumbents or elected officials aiming for the Senate or the Governor’s mansion. This was nearly all to the benefit of candidates with minimal to no political experience. Even the Tea Partiers who held office, like Sharon Angle, were marginal figures in the legislatures in which they served. Whether a Mike Lee, Rand Paul or Joe Miller can actually translate their ideas into action in the Senate—whether they can be anything but marginal players—is an open question that will be resolved over the next six years.

But among the Tea Party-powered candidates, there is one exception, and he is the real big winner of the night: Marco Rubio. A former Speaker of the Florida House, Rubio was not carried by the Tea Party wave, he rode it. He challenged a popular sitting Governor in the primary and did not blink when faced with calls to pull out for the good of the party. Instead, he marshaled his forces, saw which way the political wind was blowing and destroyed Charlie Crist, not once, but twice.

It is not his ideas or his personal story or his hoped-for ability to appeal to Latino voters that makes Rubio garner the respect of the party elite, and have some dreaming that he is the Republican’s answer to Obama. It is instead political savvy that enabled him to tap into the Tea Party movement from the beginning. Unlike many of the other Tea Party officials, he had something to lose by running. Whether this, plus his previous high-level political experience, translates into a successful legislative career is unknown. But it is a good start.

John McCain, maverick survivor

In 2009, if you had asked the Tea Party movement regulars who their most hated Republican was the answer would have been John McCain in a landslide. For years, McCain has been the man much of the Republican conservative base loved to hate, thanks to his 2000 presidential run and his apostasy on campaign finance and other issues. Movement conservatives discussed a primary campaign in 2004. McCain’s losing the presidential race to Obama didn’t help his popularity one bit.

And yet, in this anti-incumbent tidal wave, where Republican incumbents and party regular front-runners (such as in Delaware, Nevada, Colorado) were taken down in record number, John McCain survived. Why?

Maybe because he knew he would be a target, or perhaps because he is more attuned to the danger, McCain acted differently than the other officials. He tacked hard to the right, ignoring a torrent of criticisms from his what he use to call his “base” – the media. He immediately took the fight to his opponent, going very negative, very fast. He called in chits – including an endorsement from Sarah Palin. The result was a crushing victory over a very well-known conservative. What’s surprising is not that McCain succeeded, it’s that others like Murkowski and Castle didn’t take notes.

Senate Democrats choose losers to lead

[Updated to correct date of Daschle defeat.] For the second time in less than a decade, the Senate Democrats are finding themselves with a leader facing political extinction. Tom Daschle, Harry Reid’s predecessor as the leader of the Senate Democrats, lost his own reelection race in 2002 in 2004, having become minority leader after the 2002 elections. For Democrats, this is not an unprecedented experience.  In the 1950s, back-to-back Democratic leaders also lost their seats.

Checking out the relatively short history of the Senate Leader position shows that the Democrats have been more willing to choose vulnerable members. There have been only 11 Senate Democratic leaders (the position officially came into existence in 1920), and four have lost reelection campaigns.

Republicans have, in some ways, a happier success rate. The first Republican leader, though unofficial, was Senator Henry Cabot Lodge, who died in office in 1924. Including both of those men, of the Republicans’ 17 leaders (one was only acting), only one lost his reelection campaign, James Watson of Indiana in the FDR tidal wave of 1932. In other ways, not so happy. Five of their leaders have died in office (as opposed to only one for the Democrats).