I was surprised to see Honduras, the small and not important country I once lived in, appear on the front pages of both the Washington Post and the Wall Street Journal. It seems there was a bit of a political ruckus.
My first trip to Honduras was in 1984. A consulting associate of mine had helped the Chamber New Orleans and the River Region get a grant from the U.S Agency for International Development (USAID) to promote investment between Honduras and Belize and the Mississippi Valley of the US. He got a sub-contract from the Chamber and I was chosen to do the leg work. I traveled to cities in Tennessee, Indiana and Texas, as well as New Orleans, to promote the idea. In addition to my first, exploratory trip,I escorted a small trade mission to Honduras later in the year. I don’t think there were any results.
Later, in late 1986 when business was really slow,I went to Tegucigalpa to meet with the USAID Mission and negotiate a contract, which I completed in December. In January 1987 I began my assignment there as Project Director of the Investment and Export Development Project, an effort to promote investment into the country and exports out.
My personal services contract carried a decent salary, a housing allowance and some benefits like sick leave and vacation time. Nydia remained in Potomac working for Garfinckel’s but traveled to Honduras about every three months for a month’s stay. I had bought a 1987 Jeep Cherokee which the Government shipped for me so Nydia and I were able to travel around a bit. During her March 1987 trip I took her with me to a meeting held in Guatemala and she found Sambol, the famous Guatemalan handicrafts store. By April I had found a nice apartment and the Government shipped some furniture for me. (Keeping expats overseas is expensive.) During Nydia’s July visit, her dad and step-mother came for a visit as well and thoroughly enjoyed their couple of weeks in Honduras. In the fall we drove to the northeast coast of Honduras to Puerto Trujillo over roads mostly unpaved and some that resembled goat tracks. In the spring of 1988 we drove through along the Honduran side of the border with El Salvador through the Mayan ruins of Copan and on to Guatemala where we traveled around a bit. Honduras is quite pretty, the people pleasant but it is poor.
My contract expired in January 1988 and having had enough of USAID internal paper shuffling I chose not to renew. I caught on with a consultancy tasked with trying to salvage a series of bad loans issued by the Central American Bank for Economic Integration which had its offices in Tegucigalpa. That came to an end and I returned to Potomac in July 1988. Incidentally all of the failed loans shared in varying degrees three characteristics: the negative impact of the 1981-2 recession, incompetent management and outright fraud. Examples of the latter include a Bank inspector discovering that the loan made to build an 80 room motel south of Tegucigalpa was only going to result in 40 rooms. A loan made to an Argentine group to develop a cacao processing plant in Costa Rica resulted in new equipment being bought, but shipped to Argentina, and old, used equipment sent to Costa Rica.
Progress was made. Honduras diversified agricultural exports through development of cultivated shrimp and the production of melons on the Pacific coast. These goods were trucked in refrigerated containers to the north coast – Puerto Cortes – for export to the US. There was substantial development of industrial parks set up as export processing zones, that is areas into which goods could be shipped duty free, advanced in value, and exported to the US paying duty only on the value added in Honduras. These parks were primarily along the north coast, near San Pedro Sula – Honduras’ commercial center , and at their peak in the early 90’s employed as many as 100,000 workers. The principal activity was apparel assembly, an activity that was hurt when the international apparel import quota system ended and the Chinese took over world markets. Honduras is still a major exporter of bananas, sugar and wood products.
The Honduran military ended their rule of the country at the end of 1981. Honduras has had seven consecutive reasonably well conducted democratic elections of presidents, none of whom has been permitted to run for reelection. During my continued consulting assignments there starting in 1989 and ending in 2004 I saw new luxury hotels and nice urban shopping malls built and the small middle and upper classes do well. Honduras’ seven million people today are individually probably better off than the five million or so in the 1980’s, but most Hondurans remain relatively poor and the country’s human resource base and capital stock are inadequate to generate strong economic growth.
Much of this problem is cultural. The country has natural resources but the population is ill equipped to exploit them properly. There exists a psychology of dependency. Rather than work hard, get an education and get ahead, most seem to believe that their fate is fixed and that because they are poor they are entitled to help from outside sources. They are always ready to join up with the man on the white horse who promises them a better life. The current gang of four demagogues that bedevil the US now, Hugo Chavez of Venezuela, Evo Morales of Bolivia, Rafael Correa of Ecuador and Daniel Ortega of Nicaragua, were all elected to office on just this type of approach. Their election proves the failure of their respective societies to meet the perceived needs of a majority of the inhabitants, but demagoguery and state socialism will only in time make matters much worse.
And so we come to Honduras’ seventh president of the series, Manuel Zelaya. A rancher from Honduras’ version of Texas, the Department of Olancho, sparsely populated and mostly dedicated to cattle ranching and logging, he started as a populist without much of an ideology, but appears to have come under the influence of a cabinet minister who is a dedicated Marxist. “Mel” as he is known decided that he didn’t want to go away at the end of his term this December but, emulating the gang of four mentioned above, he would rig things so as to stay in office. He would hold a referendum that would allow the voters to change the Constitution permitting reelection. His referendum was held to be unconstitutional and the ballots impounded. Zelaya and a band of followers physically invaded an Air Force installation and retrieved the ballots. By this time both the Church and the establishment had had enough and he was removed from his home and shipped to Costa Rica. Had the Hondurans kept him in country and put him on trial there would have been far less concern. But their understandable fear was that his followers would form a mob and attempt to free him by force.
The economic situation in Honduras has been weakened by the global recession. The country is wholly dependent on imported refined petroleum products and the spike of prices last year was quite damaging. The recession has reduced export earnings and lowered remittances from the couple of hundred thousand Hondurans in the US so there is popular unrest that played into the hands of Zelaya’s demagoguery.
So now for the crime of removing a man who clearly violated constitutional process in Honduras and who wanted to clone himself as a Hugo Chavez, Honduras has come under assault by the Organization of American States with the support of President Obama and Secretary of State Clinton. The crime is undertaking a “Golpe de Estado”, unlawfully removing a President. To their credit the Hondurans remain firm in their rejection of any return by Zelaya and I think in time the issue will die down in their favor.
It boggles the mind why the US would side so quickly with a group of feckless Latin American diplomats on a formalistic approach when the defined objective is clearly neither in the interest of Honduras nor the US. My guess is that there is sufficient US domestic opposition to people like Hugo Chavez and a Marxist approach to economic management that the Obama administration will be constrained in supporting the OAS position too strongly.
Thursday, August 27, 2009
Tuesday, August 25, 2009
Mea Culpa
I must confess to being remiss in supplying new blog material. Starting May -2009 - I began having serious back problems, making sitting in front of a computer uncomfortable. Compounding matters it turned out in June that I suffered from serious osteoporosis and that two of my lumbar vertebrae had compression fractures. On July 23 I underwent a procedure in which a radiologist stuck needles into my spine and filled the affected vertebrae with fast hardening bone cement. While it appears that the procedure solidified the vertebrae I still have considerable discomfort. It's been a bit over a month now, but progress in healing is very slow.
On top of all this, the Pebble Creek construction people informed us that our new house was ready and that we should travel to Goodyear, Arizona before the end of July to take possession. So on July 28 - 5 days after the procedure that was supposed to make everything well quickly - we flew to Phoenix, closed on the house and took possession of our modern, 2 bedroom and den residence. It was of course barren of furniture but the air conditioning worked, always useful in 112 degree weather. During the rest of the week we arranged for the utilities, received the furniture shipped from Maryland and bought a new refrigerator. We were able to spend four nights in our rather sparsely furnished digs before flying back to Maryland to participate in the family gatherings attendant on cousin Richard Boles' August 6 wedding in Washington, DC.
Our son, Paul, and grandson, Justice, loaded up our Ford Fusion and left Potomac the morning of August 11. We flew to Phoenix August 14 and met up with the boys at the house late that afternoon. They helped unload and add to the house arrangements before flying to San Francisco on Sunday. Since then we've added a washer and dryer, ceiling fans, a few odds and ends and have window blinds and a new bedroom suite on order. Also a computer desk and chair to go along with the new HP desktop computer which has given us access again to the internet.
And so I intend to take up blogging again, assuming the back holds out. There are many topics of interest I want to address and so you may be treated to new blog pieces over the coming weeks,whether .
On top of all this, the Pebble Creek construction people informed us that our new house was ready and that we should travel to Goodyear, Arizona before the end of July to take possession. So on July 28 - 5 days after the procedure that was supposed to make everything well quickly - we flew to Phoenix, closed on the house and took possession of our modern, 2 bedroom and den residence. It was of course barren of furniture but the air conditioning worked, always useful in 112 degree weather. During the rest of the week we arranged for the utilities, received the furniture shipped from Maryland and bought a new refrigerator. We were able to spend four nights in our rather sparsely furnished digs before flying back to Maryland to participate in the family gatherings attendant on cousin Richard Boles' August 6 wedding in Washington, DC.
Our son, Paul, and grandson, Justice, loaded up our Ford Fusion and left Potomac the morning of August 11. We flew to Phoenix August 14 and met up with the boys at the house late that afternoon. They helped unload and add to the house arrangements before flying to San Francisco on Sunday. Since then we've added a washer and dryer, ceiling fans, a few odds and ends and have window blinds and a new bedroom suite on order. Also a computer desk and chair to go along with the new HP desktop computer which has given us access again to the internet.
And so I intend to take up blogging again, assuming the back holds out. There are many topics of interest I want to address and so you may be treated to new blog pieces over the coming weeks,whether .
Wednesday, June 17, 2009
The Obama Administration - Military Policy
The Obama Administration - Military Policy
Barack Obama was supposed to bring an outstandingly new approach to American politics and to address ably all the problems affecting the country. A major advantage was that he was not George W. Bush. After about five months in office, perhaps it’s time to ruminate a bit on what seems to be happening. I will be posting comments on the Obama military policy, its diplomatic policy and key aspects of it domestic policies, including industrial, health, environmental and financial.
In military policy, the topic that most outraged Democratic liberals, it is difficult to discern much difference between the Obama and Bush approaches. Troops are being withdrawn from Iraq, but slowly and as many as 50,000 may remain for some time. There is also a real chance that should things deteriorate more than feared, US policy may reverse and troop withdrawals cease.
In Afghanistan, the Obama administration has moved to deepen US involvement, adding more troops and acknowledging the tight connection between Pashtun radicals in Afghanistan and their cousins in Pakistan. Neither Afghanistan nor Pakistan has ever been a true nation state. Afghanistan has been the collection of disparate ethnic groups put offside by the British, who having been badly beaten there in the 1840’s, drew a line (the Durand Line) down the middle of the mountains and chose only to administer, albeit lightly, those on the east side of the line. Those west of the line were cobbled together by a series of strong men into a kingdom in which central authority and modernization were both quite limited. Pakistan was created artificially by the British in 1946 to provide a home for India’s muslims after independence. Bengal in the east, the Punjab and Sindh in the west formed the heartland with Baluchistan, the north-west territories and Kashmir as the appendages. India favored the Hindu ruler of Kashmir and the partition of that territory left most of its muslim inhabitants under Indian rule. The east Bengalis resented control from the Punjabis and in 1977, with a bit of help from India, achieved independence as Bangla Desh, noted for poverty and flooding. Pakistan itself has not been overly successful in alleviating poverty or in modernization.
So now we have a weak and corrupt central government in Afghanistan and up to now too few American and other foreign troops engaged to subdue the radical Islamic resistance. The major export appears to be opium, the trade in which we know is quite profitable and funds all sorts of mischief. President Obama has taken over the Afghan campaign as his own, moving many of the key people who served Bush in Iraq into this theatre. Afghanistan’s terrain is far more difficult than that of Iraq and much of the equipment developed for the Iraqi desert works poorly in the Afghan mountains. There is now a debate under way within the US Army as to the proper strategy. Do we concentrate on protecting civilian population centers, abandoning as it were the scattered guerrillas in the remote crags and valleys, or do we attack all the resisters in the hope that this will prevent attacks on towns and villages. I believe it is acknowledged that to win will require gaining the support of a large majority of the people.
Pakistan is beginning to confront the reality that it’s mortal enemy is not, as has been believed since 1946, India, but the intransigent Islamic radicals within its midst, concentrated at present in the north-west territories. Pakistan’s army appears to have the capacity to push the Taliban out of relatively accessible places like the Swat Valley, but the truly rugged terrain of Waziristan in which the radicals have been entrenched for decades, may prove far more difficult. There is a real question as to whether Pakistan has sufficient national will to endure a long and difficult campaign and whether it can survive its dysfunctional political system.
The Bush administration got rid of the Taliban in Afghanistan, at least initially, but devoted insufficient resources to keep everything under control. It also provided substantial aid to Musharraf's Pakistani government, but with modest results. There is now a "democratic" government in Pakistan but how secure is unclear. Into this situation the Obama administration appears willing to add resources but positive results are anything but assured. And if things don’t go well, how long will the American public put up with an apparently never ending war for a country far away?
Beyond Central Asia, US military power appears to be challenged only in East Asia. As China continues to grow economically and to assert its interests, the relationship between the US and its allies, such as Japan, and China becomes trickier. What are China’s objectives and do they conflict with ours? How do these two major powers develop a working relationship that doesn’t threaten to result in military conflict?
North Korea in its current very belligerent mode would appear to be a military threat. South Korea looks to the US to be its nuclear shield and to protect it against any aggression from the north. The US has 28,000 troops in country and they could be at risk. Japan’s national interest is also threatened and that country may well become more militant if it perceives a need to defend itself under circumstances where the US doesn’t seem sufficiently firm or committed. What does seem to be the driving force within North Korea is instability in the hold of the ruling family and close associates on what is clearly a failed state. Instability and fear can lead to unfortunate accidents, but on balance North Korea is not a major military force. But its aggression if not checked could bring on a very messy and destructive conflict.
On the home front, Defense Secretary Gates is developing what I think is an intelligent reshaping of the US military force. We need to look at real potential enemies, mostly lightly armed forces that engage in asymmetrical warfare and for which huge nuclear powered destroyers and very expensive jet fighters are of modest use.
Whether these changes can be brought about is a true challenge to the Obama Administration. The enemies are the 535 defense micro-managers on Capitol Hill who have clearly shown that their interest is not nearlys as much the national interest but rather how much money and how many jobs can be squeezed out of the DOD budget for each district. They are joined in this by the career military officers who are emotionally tied to big and better airplanes, bigger and better ships and more and more complex weaponry. Behind them come the large - and many small - corporations that live off defense procurement as it now is. Cutting production of F-22’s and building something else portends wrenching realignments of the players, a situation they would like to avoid if at all possible. I don’t see much of an Obama commitment to military reorganization, certainly not enough to alienate Congress people who hold Obama’s plans for health and environmental reform in their hands. And so I don’t see Mr. Gates’ programs going very far.
Friday, May 1, 2009
Energy Policy Revisited
In July 2008 I blogged about US energy policy and followed up with a shorter piece on compressed natural gas as an automotive fuel. Since then two major events took place. One, the global economy crashed and Barack Obama was elected President of the US.
The global economic collapse has led to a reduction in mileage driven in the US and a collapse of the US automotive market from a rate of 17 million light trucks and cars sold per year to about 9 million. Chrysler is in bankruptcy, GM is on the verge of same, and no one in the industry is happy. Gasoline prices are now around $2 a gallon, a development than in and of itself nearly solved the foreign exchange imbalance,reducing the outflow of dollars to import petroleum from a projected $750 billion to perhaps less than $250 billion.
The energy policy discussion continues but the Obama Administration and the Democratic Congress seem now focused on the negative environmental effect of burning fossil fuels. So now we're talking less about diversifying the source of petroleum and more about reducing consumption of petroleum and coal. None of the alternative energy sources has grown any more promising. Corn ethanol is still not close to being competitive in cost per BTU with petroleum derived fuels and survives only through tax payer subsidies and, as well, is suffering from criticism of how much land must be diverted from food production or other uses just to grow corn. Solar power is growing in use but is still expensive while wind power is expanding but not in the areas where the power is needed. Nuclear power is costly, time consuming to develop and carries a stigma. It should be remembered that solar power doesn't work at night nor does the wind always blow so use of these sources implies access to stored energy of some sort to fill in the production gaps.
For transportation the "flavor of the month" is electric power. Batteries are still very expensive and have limited output capacity which means rather small, expensive cars that travel less than 100 miles between charges. As a practical matter the internal combustion engine appears here to stay. The good news is that the US has in recent years uncovered vast reserves of natural gas, enough by some accounts to supply national needs for the next hundred years. So we have at hand a fuel source that burns cleaner than petroleum fuels and does not have to be imported. A sound reason to follow Boone Pickens' call for conversion even if it benefits him financially.
The real problem confronting the political class is how to impose its views of global warming and the need to reduce CO2 emissions to ameliorate or halt such warming. A tax on carbon usage seems one approach and we hear talk of "cap and trade" programs. Where the risk for these policy proposals lies is in the cost and impact on the public. Over 50% of US electricity is produced by coal powered plants. Literally hundreds of millions of Americans drive vehicles and the nation's goods are almost universally carried at some point by truck. There is no way in my view to diminish fossil fuel use and the generation of carbon dioxide without cost, a high cost in fact. This implies increased taxes on somebody, which means all of us in some form. Increasing taxes is not good for political incumbency unless it can be posed as a necessary sacrifice to save the nation.
There are problems in gaining widespread public acceptance of this need. First, can we be certain that global warming is, in fact, largely the result of human activity. The earth's climate has fluctuated substantially through the centuries and so one can question whether the current situation is truly unique. Second, the US is not an island and I doubt public acceptance of policies that take into account the burning of coal in China, India and elsewhere in the developing world only by sending them money to improve technology while we undergo harsh measures to reduce CO2 emissions domestically. That nasty air blows from China across North America as well. And, finally, measures to reduce carbon emissions centered on coal and industry will impact the industrial midwestern US far more severely than either coastline. To ask hard working midwesterners to sacrifice for the benefit of the "glitterati" of California, New York or Washington, DC will be at best difficult, if not political divisive.
And so in the 10 months since my earlier blogs we have seen sharp economic changes but no real changes in terms of the country's energy policy. The realities on the ground make unlikely either rapid or fundamental changes.
The global economic collapse has led to a reduction in mileage driven in the US and a collapse of the US automotive market from a rate of 17 million light trucks and cars sold per year to about 9 million. Chrysler is in bankruptcy, GM is on the verge of same, and no one in the industry is happy. Gasoline prices are now around $2 a gallon, a development than in and of itself nearly solved the foreign exchange imbalance,reducing the outflow of dollars to import petroleum from a projected $750 billion to perhaps less than $250 billion.
The energy policy discussion continues but the Obama Administration and the Democratic Congress seem now focused on the negative environmental effect of burning fossil fuels. So now we're talking less about diversifying the source of petroleum and more about reducing consumption of petroleum and coal. None of the alternative energy sources has grown any more promising. Corn ethanol is still not close to being competitive in cost per BTU with petroleum derived fuels and survives only through tax payer subsidies and, as well, is suffering from criticism of how much land must be diverted from food production or other uses just to grow corn. Solar power is growing in use but is still expensive while wind power is expanding but not in the areas where the power is needed. Nuclear power is costly, time consuming to develop and carries a stigma. It should be remembered that solar power doesn't work at night nor does the wind always blow so use of these sources implies access to stored energy of some sort to fill in the production gaps.
For transportation the "flavor of the month" is electric power. Batteries are still very expensive and have limited output capacity which means rather small, expensive cars that travel less than 100 miles between charges. As a practical matter the internal combustion engine appears here to stay. The good news is that the US has in recent years uncovered vast reserves of natural gas, enough by some accounts to supply national needs for the next hundred years. So we have at hand a fuel source that burns cleaner than petroleum fuels and does not have to be imported. A sound reason to follow Boone Pickens' call for conversion even if it benefits him financially.
The real problem confronting the political class is how to impose its views of global warming and the need to reduce CO2 emissions to ameliorate or halt such warming. A tax on carbon usage seems one approach and we hear talk of "cap and trade" programs. Where the risk for these policy proposals lies is in the cost and impact on the public. Over 50% of US electricity is produced by coal powered plants. Literally hundreds of millions of Americans drive vehicles and the nation's goods are almost universally carried at some point by truck. There is no way in my view to diminish fossil fuel use and the generation of carbon dioxide without cost, a high cost in fact. This implies increased taxes on somebody, which means all of us in some form. Increasing taxes is not good for political incumbency unless it can be posed as a necessary sacrifice to save the nation.
There are problems in gaining widespread public acceptance of this need. First, can we be certain that global warming is, in fact, largely the result of human activity. The earth's climate has fluctuated substantially through the centuries and so one can question whether the current situation is truly unique. Second, the US is not an island and I doubt public acceptance of policies that take into account the burning of coal in China, India and elsewhere in the developing world only by sending them money to improve technology while we undergo harsh measures to reduce CO2 emissions domestically. That nasty air blows from China across North America as well. And, finally, measures to reduce carbon emissions centered on coal and industry will impact the industrial midwestern US far more severely than either coastline. To ask hard working midwesterners to sacrifice for the benefit of the "glitterati" of California, New York or Washington, DC will be at best difficult, if not political divisive.
And so in the 10 months since my earlier blogs we have seen sharp economic changes but no real changes in terms of the country's energy policy. The realities on the ground make unlikely either rapid or fundamental changes.
Friday, February 27, 2009
Paradigm Shift?
I first heard the word "paradigm" about 15 years ago. It has certainly come into wide usage. One definition is "pattern", but the connotation is that of a complex pattern with many different elements closely linked. I suppose one would look at the global economic set-up and consider it a paradigm. It is also suggested, given the severity and breadth of the current economic downturn that perhaps the paradigm confronts a change.
For the past decades the world's economy seems to have been divided into rich, consuming countries of which the US is a leader, and countries that have grown their economies primarily through exporting goods to the first group. Japan was probably the first and most successful practicianer developing very large and sophisticated industries producing mostly consumer goods like automobiles and electronic entertainment products but also substantial intermediate goods like machine tools, construction equipment and mechanical components. Japan was so successful that various pundits spoke of the 21st Century as being Japan's century. The decade of the 90's did Japan in as its version of the "bubble" economy burst, a downturn that Japan has yet to recover from. Nevertheless Japan's economy remained dependant on exports and its balance of payments surpluses covered its domestic deficits and generated reserves of hundreds of billions of dollars. As export king, Japan in the last 20 years has given way to China where everything including the balance of payments surplus has been bigger. China now has about a trillion dollars of US debt instruments in reserve. China's emergence as the world's prime exporter had ramifications world wide inasmuch as the prime and intermediate components it needed to support finished goods manufacture were largely imported. So China's exports to the US and western Europe were fueled by exports from Japan, Korea, and Taiwan as well as raw materials shpped from Australia, Indonesia, Brazil, Russia, the US and others.
The very large American economy has been driven by consumption, representing some 70% of its gross national product. The country, probably unconsciously, moved into a regime where much of the consumables were imported and the large imbalance in trade in goods covered by investments of the exporters in US debt. A similar system developed in Europe in recent years as the once poor economies of the former Soviet bloc attracted investment into export industries owing to their comparative cost advantage compared to the developed European markets. While the Chinese and other Asians tended to save their trade surpluses, generating huge national reserves, the eastern Europeans went on a consumption binge aimed at producing parity in life style with the west. Western Europe has also served as a prime market for Asian exporters.
The housing and financial system bubbles in the US and western Europe have come crashing down. Housing markets are paralyzed, banks are insolvent, workers - white, blue and pink collared -are being layed off and nobody except governments are spending. There are other bubble spots affected also, places like Dubai, for example. To the extent that the US and other developed economies reduce imports, the exporters can only suffer sharp declines in their economies as well. Japan's exports have declined 18 to 20% throwing thousands of Japanese out of work, reducing domestic consumption and aggravating government finance. China's export declines have had similar effects, with thousands of newly urbanized workers being forced back into the countryside. Commodity markets that made producers giddily profitable have collapsed. The impact of the price of oil falling from $140 to $42 a barrel has shocked the economies of Russia, Iran and Venezuela not to speak of the budgets of other oil producers. A year ago there were complaints that rice was priced too high for the poor of the world: now Thaland and Vietnam are working together in an attempt to put a floor under the much diminished price. Soybeans, wheat, corn, iron and other minineral ores are all in the dumps. Depressed employment in developed economies badly affects economies in the developing world from the loss of billions of dollars in remittances and the return home of thousands of workers from employment abroad.
The question that remains to be answered is whether this economic downturn, that bodes to be the worst since the Great Depression, is temporary or will the recovery - assuming there will be one - reflect changed circumstances, a "paradigm shift" as it were. It appears likely that the emerging financial systems, world wide, will be subject to greater regulation and that the role of some of the wilder financial products will be much curtailed if not eliminated. One can foresee a move to break up megabanks into more manageable pieces as well as a basically more risk averse financial climate. What will the impact be on venture capital, mergers and acquisitions and private equity buyouts? Those that have, even in these times, are already "bottom fishing" by buying companies in distressed situations and low valuations. Does this imply a more rational system of asset valuation? Fewer retailers? Fewer restaurants? Perhaps even fewer lawyers?
Some have suggested that the US needs to reduce consumption and save more. Conversely China needs to save less and spend more. Whether this can happen and to what degree may be determined by trends that we can only glimpse at present.
A big factor has to be the value of currency and the interrelation between national currencies. Should the US generate the huge budget deficits now contemplated by President Obama there obviously will be a risk that the resultant US debt will overload the market, and diminished demand will drive up interest rates and drive down the relative value of the dollar. A significant devaluation of the dollar relative to Euros, Yen and other currencies can only serve to drive up the cost of imports, like oil, while driving down the cost of US manufactures and commodities. What happens to the world economy if the US no longer generates a balance of payments deficit? Can China, for example, really achieve the rapid economic growth it believes it needs through increased domestic consumption? And without the stimulus of foreign exchange earning exports?
A second trend that may well be in process is a general discrediting of the "free enterprise" market driven economy and its replacement by a far more intrusive public sector. This has been the model in Europe for some time and one can interpret Mr. Obama's budget proposals as moving the US in that direction. But what if the belief that government is the problem, not the solution, and that small government is to be preferred turns out to be right. If we should find ourselves in an economy heavily regulated by a government, motivated by social and political goals, and that plays a large economic role, what may we expect in terms of innovation, new investment and entrepreneurs willing to take risks. Will the new paradigm be one of a stodgy, but safe economy, in which nothing much happens. Ah to live in interesting times.
For the past decades the world's economy seems to have been divided into rich, consuming countries of which the US is a leader, and countries that have grown their economies primarily through exporting goods to the first group. Japan was probably the first and most successful practicianer developing very large and sophisticated industries producing mostly consumer goods like automobiles and electronic entertainment products but also substantial intermediate goods like machine tools, construction equipment and mechanical components. Japan was so successful that various pundits spoke of the 21st Century as being Japan's century. The decade of the 90's did Japan in as its version of the "bubble" economy burst, a downturn that Japan has yet to recover from. Nevertheless Japan's economy remained dependant on exports and its balance of payments surpluses covered its domestic deficits and generated reserves of hundreds of billions of dollars. As export king, Japan in the last 20 years has given way to China where everything including the balance of payments surplus has been bigger. China now has about a trillion dollars of US debt instruments in reserve. China's emergence as the world's prime exporter had ramifications world wide inasmuch as the prime and intermediate components it needed to support finished goods manufacture were largely imported. So China's exports to the US and western Europe were fueled by exports from Japan, Korea, and Taiwan as well as raw materials shpped from Australia, Indonesia, Brazil, Russia, the US and others.
The very large American economy has been driven by consumption, representing some 70% of its gross national product. The country, probably unconsciously, moved into a regime where much of the consumables were imported and the large imbalance in trade in goods covered by investments of the exporters in US debt. A similar system developed in Europe in recent years as the once poor economies of the former Soviet bloc attracted investment into export industries owing to their comparative cost advantage compared to the developed European markets. While the Chinese and other Asians tended to save their trade surpluses, generating huge national reserves, the eastern Europeans went on a consumption binge aimed at producing parity in life style with the west. Western Europe has also served as a prime market for Asian exporters.
The housing and financial system bubbles in the US and western Europe have come crashing down. Housing markets are paralyzed, banks are insolvent, workers - white, blue and pink collared -are being layed off and nobody except governments are spending. There are other bubble spots affected also, places like Dubai, for example. To the extent that the US and other developed economies reduce imports, the exporters can only suffer sharp declines in their economies as well. Japan's exports have declined 18 to 20% throwing thousands of Japanese out of work, reducing domestic consumption and aggravating government finance. China's export declines have had similar effects, with thousands of newly urbanized workers being forced back into the countryside. Commodity markets that made producers giddily profitable have collapsed. The impact of the price of oil falling from $140 to $42 a barrel has shocked the economies of Russia, Iran and Venezuela not to speak of the budgets of other oil producers. A year ago there were complaints that rice was priced too high for the poor of the world: now Thaland and Vietnam are working together in an attempt to put a floor under the much diminished price. Soybeans, wheat, corn, iron and other minineral ores are all in the dumps. Depressed employment in developed economies badly affects economies in the developing world from the loss of billions of dollars in remittances and the return home of thousands of workers from employment abroad.
The question that remains to be answered is whether this economic downturn, that bodes to be the worst since the Great Depression, is temporary or will the recovery - assuming there will be one - reflect changed circumstances, a "paradigm shift" as it were. It appears likely that the emerging financial systems, world wide, will be subject to greater regulation and that the role of some of the wilder financial products will be much curtailed if not eliminated. One can foresee a move to break up megabanks into more manageable pieces as well as a basically more risk averse financial climate. What will the impact be on venture capital, mergers and acquisitions and private equity buyouts? Those that have, even in these times, are already "bottom fishing" by buying companies in distressed situations and low valuations. Does this imply a more rational system of asset valuation? Fewer retailers? Fewer restaurants? Perhaps even fewer lawyers?
Some have suggested that the US needs to reduce consumption and save more. Conversely China needs to save less and spend more. Whether this can happen and to what degree may be determined by trends that we can only glimpse at present.
A big factor has to be the value of currency and the interrelation between national currencies. Should the US generate the huge budget deficits now contemplated by President Obama there obviously will be a risk that the resultant US debt will overload the market, and diminished demand will drive up interest rates and drive down the relative value of the dollar. A significant devaluation of the dollar relative to Euros, Yen and other currencies can only serve to drive up the cost of imports, like oil, while driving down the cost of US manufactures and commodities. What happens to the world economy if the US no longer generates a balance of payments deficit? Can China, for example, really achieve the rapid economic growth it believes it needs through increased domestic consumption? And without the stimulus of foreign exchange earning exports?
A second trend that may well be in process is a general discrediting of the "free enterprise" market driven economy and its replacement by a far more intrusive public sector. This has been the model in Europe for some time and one can interpret Mr. Obama's budget proposals as moving the US in that direction. But what if the belief that government is the problem, not the solution, and that small government is to be preferred turns out to be right. If we should find ourselves in an economy heavily regulated by a government, motivated by social and political goals, and that plays a large economic role, what may we expect in terms of innovation, new investment and entrepreneurs willing to take risks. Will the new paradigm be one of a stodgy, but safe economy, in which nothing much happens. Ah to live in interesting times.
Sunday, February 22, 2009
Institutionalized Hysteria
It’s nice to note when political luminaries reach the same conclusion that I had reached some years ago: that the US policy on illicit drugs has been a failure. The Wall Street Journal on February 12 reported that a commission headed by former President of Brazil (Hernando Henrique Cardoso), of Colombia (C�sar Gaviria) and of Mexico (Ernesto Zedillo) concluded that the US –led drug war was a failure, one that is pushing Latin American societies to the breaking point. The turmoil now affecting Mexico, a development that discourages Americans from visiting that country or even crossing the border, with its headlines detailing violent gun battles, assassinations and kidnappings as the narcotraficantes battle police and army, is possibly the clearest example for Americans of the impact of this war on neighboring societies. Details of the struggle also make clear the degree to which the narcotics traffic has corrupted government institutions. As Mary Anastasia O’Grady, the Journal’s correspondent for Latin America, points out frequently, the corruption and social ills resulting from the war on drugs has badly affected many Latin American societies, not just Mexico’s but those of Colombia, Peru, Bolivia, and the Central American and Caribbean republics.
The tragedy of this effort is that it has failed in its stated objective to eliminate or at least sharply reduce the consumption of illicit drugs within the United States. A recent Brookings Institution study found that despite interdiction and eradication efforts, governments around the world have failed to decrease appreciably the supply of such drugs nor have punitive measures succeeded in lowering drug use. Washington Post columnist Edward Schumacher-Matos in an article that appeared on February 21 alleges that the present US street price for cocaine is only one-fourth of what it was in 1981. Confronted with this evident failure, a failure that has been clearly visible for many years, one searches for reasons that governments, especially that of the US, remain in denial.
My choice for the prime reason is social, a form of institutionalized hysteria, an hysteria so firmly entrenched that few dare to challenge the political viewpoint that we need not only to continue the “war” but to expand the effort. The popular viewpoint from my experience seems to flow from a belief that a single puff of marijuana leads to experimentation with cocaine and then to heroin addiction. This viewpoint was deliberately promulgated in the late 1930’s by people actively campaigning to organize an official counter-narcotics program. That it is believed shouldn’t be surprising: a substantial number of Americans also reject the theory of evolution.
Drug addiction is a serious social problem in many societies but this official viewpoint of the inevitability of addiction is simplistic and its consequences very damaging. But with an entrenched bureaucracy, the Drug Enforcement Agency (DEA), spending several billions of dollars concentrated on punitive efforts, changing official policy is not easy. An example is the assertion of John Walters, former director of the White House Office of National Drug Control Policy that:” It is not true that we’ve lost or can’t do anything about the drug problem”. His example was improved security in Colombia, but without mentioning the more than five billion dollars provided that country in mostly military assistance in its war against drug-financed guerrilla groups. As to Mexico he asserts that it is success in the drug war that has driven desperate traffickers to violence, assuming that they’re fighting over dwindling areas of influence.
Demand, not supply, drives illicit drug use. The US has focused, unsuccessfully as has been evident for some time, mostly on the supply side of the equation. Demand for substances that alter human behavior has existed since the emergence of modern man, some 60,000 years ago. Early on the results of fermenting fruit and grain became noted and used. Some millennia back came the production of mead, beer and wine. A safe statement is that ethyl alcohol is the most costly “drug” now in use in America. Prohibition was logically correct, but failed utterly as society refused to give up a drug to which it had adapted over the centuries.
Probably the second most damaging drug, albeit in declining use, is nicotine. Nicotine is the addictive element of its carrier, tobacco, the mainstay of America’s colonial economy, a crop on which the nation was largely built. A third, caffeine, as found in coffee, has gone from European 18th century coffee shops to today’s billion dollar coffee shop chains. Millions of dollars are spent by consumers on coffeemakers and exotic coffee beans. And that doesn’t even cover another caffeine carrier in wide use, especially by youth, cola drinks.
So why the “war”. Cannabis, opium poppies and coca plants are not typically grown inAmerica. Their use, however, has only come under attack in this country about 80 to 90 years ago. One factor I believe is ethnocentrism. The effects of these chemicals can be devastating, and they are often addictive. But, importantly, their source has traditionally been among “brown-skinned” foreigners, and thus “un-American”. The answer then to the problem has been interdiction. Stop the trade!
Driven by American consumer demand these drugs have continued to flow into the country. Proscription has only served to support sales prices that in turn have resulted in shifting billions of dollars from users to producers and traffickers. This flow of great, if illicit, wealth has brought immense social damage to producing countries.
Relatively few people who experiment with illicit drugs fall into addiction. But some do and the reason would appear to be in the makeup of the individual. Perhaps nature, that is a tendency towards addiction, is worsened by nurture, dysfunctional families or traumatic childhoods, but this doesn’t explain many cases of addiction. We don’t really know. We speak of “addictive personalities” to describe those who seem unable to avoid alcoholism or other forms of drug addiction. We also know that a vast majority of people can enjoy alcoholic beverages with few perverse effects. Some have been know to smoke marijuana or use cocaine with out falling into addition. So society’s problem is more with the few than with the many.
We know that social interactive groups like Alcoholics Anonymous have been able to alter addictive behavior, but not easily and not always permanently. Other individuals have been able to kick addition on their own, going “cold turkey”. Research suggests that drugs alter the chemistry of the brain and that some individuals are more susceptible than others. Perhaps a better understanding of brain function would permit the development of “addiction blockers”. But this is speculation.
The Drug Enforcement Agency appears mostly to be involved in interdiction of supply. One could speculate that if the US Government hadn’t created this agency, the drug trade would have created something similar inasmuch as it performs a useful function. The DEA doesn’t really cut off supply but it knocks off those in the trade who are either dumb or unlucky, restricting the supply and helping to maintain prices, which has to aid the more skilled traffickers. Particularly in Afro-American communities, well meaning and concerned groups, churches for examples, have worked hard to combat the pernicious effects of excessive drinking, crack cocaine and other evils. Given their failure despite best efforts to bring these plagues under control, one wonders why they persist in the illusion that the “cowboys” from the DEA or “Washington” in general will succeed where they have failed.
Surely the American public and its elected political leaders should have learned from the failure of Prohibition that government edicts do little to change behavior and that attempts to enforce such edicts against the will of substantial numbers of people are doomed to be costly failures. As to the cost, the Office of National Drug Control Policy estimates the present annual cost at $21 billion. Of this sum, $14 billion is spent on incarceration of offenders. As of 2007 there were 500,000 individuals incarcerated for drug offenses. The social and financial cost of keeping this many people in prison boggles the mind. And that ignores the billons spent ineffectually chasing traffickers.
Surely it is time to abandon hysteria, move away from denial and recognize reality. We not only haven’t been able to halt the flow of illicit drugs from abroad into the country, but we have also to cope with chemists who synthesize drugs such as “ecstasy” and amphetamines and who do not need to be outside the good old US of A.
A first step, as recommended by the Commission of former Presidents, is to decriminalize marihuana. Cannabis may not be good for you, but the potential damage appears modest and not commensurate with the costs of trying to eliminate it. A number of benefits would flow from this measure. One, it would free up a significant amount of enforcement effort, allowing law enforcement agencies to concentrate their limited resources on more serious problems. It should also serve to reduce the prison population a positive benefit for those affected as well as for society at large. It would also free the public arena of countless legal battles over “medical” uses of marijuana and the production of product for such use.
Make it legal, sold only through registered dealers and taxed in the fields and retail. Turn it into an income source for public uses rather than a drain on public resources. Once growing becomes legal, allowing us to get illicit growers out of our National Parks and sundry basements, the laws of economics should result in modest prices removing current incentives for farmers in Mexico’s Sierra Madre Occidental to grow hemp instead of corn. I’m sure there will be those who will want to circumvent the law, but they will be in violation of tax laws, and can be prosecuted as we once did Al Capone.
Once marijuana is legalized, the thrust of new policies with respect to illicit drugs should be to move resources away from interdiction, especially overseas, and to concentrate on the demand side. This could include enhanced enforcement actions against users, but more importantly, much more funding for treatment programs and serious research into addiction and its treatments. The US needs to find means of combating the ills of addictive drug use but without generating the billions of dollars now accruing to the drug producers and traffickers. A rational approach of looking at drug addiction as a medical problem rather than merely criminal together with sharply focused and more limited enforcement would I submit contribute to this goal.
Sunday, December 21, 2008
Eisenhower and Me
In about a month, Barack Obama will be inaugurated as the nation's 44th President. Given that the first nine months of my life took place during the administration of Herbert Hoover, my lifetime has now encompassed 14 of this country's 44 presidents, or nearly one-third of all American Presidents. We're talking Hoover, Franklin Roosevelt, Harry Truman, Dwight Eisenhower, John Kennedy, Lyndon Johnson, Richard Nixon, Gerald Ford, James Carter, Ronald Reagan, George H.M. Bush, William Clinton, George W. Bush and now Obama.
In June 1953 I "commenced" by adult and professional life in the quad before Royce Hall on the Westwood campus of the University of California at Los Angeles, receiving a BA in International Relations. That same week I flew to Washington, D.C. to take the oral examination for the US Foreign Service and I turned 21. By this time Dwight David Eisenhower had been President for five months. He was thus the first President of my now a bit more than 55 years of adult life. Of all the Presidents during this period he probably had more impact on my life than any other.
The first impact was felt that same June just after my oral exam. For a period of over 50 years, politics in America was dominated by two public philosophies: the Democratic Party had Franklin Roosevelt's "New Deal" and the Republican Party had Warren Harding's post World War I slogan a "Return to Normalcy". I was caught in the latter as the first measure of the Eisenhower administration was to reduce the size of the federal government. The Eisenhower "reduction in force" or "RIF" meant that the State Department did not hire any new foreign service officers between 1953 and 1955. After my oral exam I was told by the State Department people that I had been certified "eligible for appointment" but that they weren't hiring. I was told to get my military service out of the way and then let them know when I was available.
I came of age during the Korean War and I was, like all young male Americans, registered for the draft. I had actually been taken to Los Angeles in the summer of 1952 for a pre-induction physical which I passed, but was deferred to continue my college education. In June when I returned from Washington, D.C. I "volunteered" for the draft. Being a Foreign Service Officer did not exempt one from the draft, but had I been appointed in the summer of 1953 I wonder if I could have gotten further deferments. Anyway I was inducted in September 1953. My college classmates who did not volunteer were inducted in October. But at induction I was affected a second time by Eisenhower actions: he had brought to a conclusion the Truman administration mess in Korea with a Truce Agreement signed in August 1953. I was thus joining a "peace-time" Army in the process of imploding, that is, reducing numbers sharply and closing bases.
The third thing President Eisenhower did for me was to refuse to commit American forces to support the French in Indo-China. Despite political pressure from the right after the French loss at Dien Bien Phu in 1954, Eisenhower kept away from major commitment and let that country achieve independence in 1955 as two countries, North and South Viet Nam divided by the 17th parallel. So I went neither to Korea nor to Viet Nam but after a 13 months of largely inactive service I was sent to Germany. By this time, after 10 months in the greater New York metropolitan area, I had met and married Nydia Medina of Brooklyn.
We spent the first year of our married life sharing an apartment with a German couple that spoke no English. The location, however, reflected the fourth thing Eisenhower did that affected me. After World War II Germany had been divided into four zones of occupation. Berlin, the capital, had its own four zones. The Brits had northwest Germany, the French the west central portion and the Americans the south, principally Bavaria. The east stayed with the Russians. When Eisenhower became President, as a successful former Army General, he concluded that having all our troops aligned along the border with the Russians made no strategic sense. His policy change was to have American support forces move into the French zone where they could put distance between them and the combat troops in the front lines. I found myself assigned to the 17th Signal Battalion (allegedly I was a field radio repair specialist, but that's another story) located in Pirmasens, Pfalz. We were a few miles north of the French border between Karlsruhe on the Rhein and Saarbrucken. We were housed in a Wehrmacht five story masonry building. We got virtually nothing of the modern buildings built in the American zone.
The fifth and last thing President Eisenhower did that affected me was to reorganize the State Department's personnel structure. I did get an honorable discharge from the US Army, return to San Diego and finally secure my appointment to the Foreign Service as of April 1, 1956. Nydia and I took the train from San Diego to Washington and rented an apartment just past the DC line in Prince George's County, Maryland. Traditionally the Foreign Service had filled all the overseas posts while those who worked in the bureacracy in Washington were part of the general Civil Service. The Administration had hired the former President of Brown University, Henry Wriston, to review the personnel structure and his recommendation that foreign and domestic personnel be integrated into a single Foreign Service was adopted.
So my first assignment was in Washington, DC in the Educational Exchange Service (we administered Fulbright and Smith-Mundt scholarships for foreign students) that had been previously all civil service. The philosophy was that people working in Washington should have first hand experience of working abroad and that those abroad needed periods of "reculturalization". In 1956 many of the department chiefs and administrators were women, having come to Washington during World War II, taking jobs as secretaries, and then remaining in place, rising in rank as the years went by. Civil service employees above clerical status were forced to join the Foreign Service with its obligations to take overseas assignments or seek other employment. During my first tour in Tokyo the consular division was staffed with a number of "Wristonized" officers. The overall career impact was that fairly lengthy assignments in Washington, where one did not get a housing allowance, became common.
While subsequent Presidents affected the country and me to varying degrees, especially during the Johnson and Reagan years, I have to think that President Eisenhower had the most direct impact on my life.
In June 1953 I "commenced" by adult and professional life in the quad before Royce Hall on the Westwood campus of the University of California at Los Angeles, receiving a BA in International Relations. That same week I flew to Washington, D.C. to take the oral examination for the US Foreign Service and I turned 21. By this time Dwight David Eisenhower had been President for five months. He was thus the first President of my now a bit more than 55 years of adult life. Of all the Presidents during this period he probably had more impact on my life than any other.
The first impact was felt that same June just after my oral exam. For a period of over 50 years, politics in America was dominated by two public philosophies: the Democratic Party had Franklin Roosevelt's "New Deal" and the Republican Party had Warren Harding's post World War I slogan a "Return to Normalcy". I was caught in the latter as the first measure of the Eisenhower administration was to reduce the size of the federal government. The Eisenhower "reduction in force" or "RIF" meant that the State Department did not hire any new foreign service officers between 1953 and 1955. After my oral exam I was told by the State Department people that I had been certified "eligible for appointment" but that they weren't hiring. I was told to get my military service out of the way and then let them know when I was available.
I came of age during the Korean War and I was, like all young male Americans, registered for the draft. I had actually been taken to Los Angeles in the summer of 1952 for a pre-induction physical which I passed, but was deferred to continue my college education. In June when I returned from Washington, D.C. I "volunteered" for the draft. Being a Foreign Service Officer did not exempt one from the draft, but had I been appointed in the summer of 1953 I wonder if I could have gotten further deferments. Anyway I was inducted in September 1953. My college classmates who did not volunteer were inducted in October. But at induction I was affected a second time by Eisenhower actions: he had brought to a conclusion the Truman administration mess in Korea with a Truce Agreement signed in August 1953. I was thus joining a "peace-time" Army in the process of imploding, that is, reducing numbers sharply and closing bases.
The third thing President Eisenhower did for me was to refuse to commit American forces to support the French in Indo-China. Despite political pressure from the right after the French loss at Dien Bien Phu in 1954, Eisenhower kept away from major commitment and let that country achieve independence in 1955 as two countries, North and South Viet Nam divided by the 17th parallel. So I went neither to Korea nor to Viet Nam but after a 13 months of largely inactive service I was sent to Germany. By this time, after 10 months in the greater New York metropolitan area, I had met and married Nydia Medina of Brooklyn.
We spent the first year of our married life sharing an apartment with a German couple that spoke no English. The location, however, reflected the fourth thing Eisenhower did that affected me. After World War II Germany had been divided into four zones of occupation. Berlin, the capital, had its own four zones. The Brits had northwest Germany, the French the west central portion and the Americans the south, principally Bavaria. The east stayed with the Russians. When Eisenhower became President, as a successful former Army General, he concluded that having all our troops aligned along the border with the Russians made no strategic sense. His policy change was to have American support forces move into the French zone where they could put distance between them and the combat troops in the front lines. I found myself assigned to the 17th Signal Battalion (allegedly I was a field radio repair specialist, but that's another story) located in Pirmasens, Pfalz. We were a few miles north of the French border between Karlsruhe on the Rhein and Saarbrucken. We were housed in a Wehrmacht five story masonry building. We got virtually nothing of the modern buildings built in the American zone.
The fifth and last thing President Eisenhower did that affected me was to reorganize the State Department's personnel structure. I did get an honorable discharge from the US Army, return to San Diego and finally secure my appointment to the Foreign Service as of April 1, 1956. Nydia and I took the train from San Diego to Washington and rented an apartment just past the DC line in Prince George's County, Maryland. Traditionally the Foreign Service had filled all the overseas posts while those who worked in the bureacracy in Washington were part of the general Civil Service. The Administration had hired the former President of Brown University, Henry Wriston, to review the personnel structure and his recommendation that foreign and domestic personnel be integrated into a single Foreign Service was adopted.
So my first assignment was in Washington, DC in the Educational Exchange Service (we administered Fulbright and Smith-Mundt scholarships for foreign students) that had been previously all civil service. The philosophy was that people working in Washington should have first hand experience of working abroad and that those abroad needed periods of "reculturalization". In 1956 many of the department chiefs and administrators were women, having come to Washington during World War II, taking jobs as secretaries, and then remaining in place, rising in rank as the years went by. Civil service employees above clerical status were forced to join the Foreign Service with its obligations to take overseas assignments or seek other employment. During my first tour in Tokyo the consular division was staffed with a number of "Wristonized" officers. The overall career impact was that fairly lengthy assignments in Washington, where one did not get a housing allowance, became common.
While subsequent Presidents affected the country and me to varying degrees, especially during the Johnson and Reagan years, I have to think that President Eisenhower had the most direct impact on my life.
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