That Was The Year That Was: People

IPE Journal looks back at the people who, behind the scenes and often without great fanfare, shaped the events that defined 2008.

-Nicolas Sarkozy: Super Sarko got things done in 2008. His leadership (national, European, and international) exceeded that of any other world leader. His hyperactivity, once the subject of ridicule and criticism, drove European action and coordination in response to the financial crisis. His performance as EU president is universally praised, and let us not forget that it was his insistence that pushed Bush to call the G20 meeting in November (although Bush outflanked Sarko by calling a G20, not G8, meeting). Case in point: a critical EU summit, with Lisbon's revival top of the agenda, began on Thursday December 11th with heads of state and ministers hunkering down for marathon, weekend-long negotiations. A "three shirt" summit? Not with Sarko in charge. They were headed home the next night with compromises on everything from Lisbon to climate change to the financial crisis. The French president was big in 2008.

-David Plouffe and Howard Dean: Plouffe, Barack Obama's campaign manager, and Dean, the Democratic National Committee Chairman, orchestrated a 50 state strategy in the 2008 US Election (which Dean laid the groundwork for in 2006) that brought historically Republican states into the Democrat's column. Virginia, North Carolina, Indiana, etc. More importantly, Western states with growing, young and Hispanic populations have swung decidedly democratic. The national political map is now deep blue, and if history is any indication, it will be a generation before Republicans get it back. This strategy is as responsible as any factor for Obama's victory (just look to Iowa, where it all began).

-Lord Peter Mandelson: Mandy returned to Whitehall in 2008, drafted by his old friend turned enemy Gordon Brown (now frenemy?) to join the House of Lords and assume the business portfolio in Brown's cabinet. Mandy's impact on British politics and the government's response to the financial crisis has been substantial: he sits on 31 of 39 Parliamentary committees, has been Brown's point man for negotiations with the banking sector and auto firms and reportedly holds private meetings with the Prime Minister more than once a day. Also, Labour's internal revolt against Brown disappeared at exactly the moment Mandy returned. Coincidence?

-Kamal Nath: The Indian commerce minister/trade negotiator's "destructive intransigence" is blamed by many for Doha's collapse. He is praised by others for defending the interests of Indian farmers. Whatever your opinion of him, he made an inarguable impact on the DDA in 2008.

-Zhang Yimou: The Chinese filmmaker left an indelible impression on the world as choreographer of the Olympic opening ceremonies. The spectacular display marked China's "return" to the global stage and instantly made Yimou a hero in his homeland.

Here we go again...Gazprom to cut gas deliveries to Ukraine

Natural gas negotiations between Russia and Ukraine collapsed Wednesday, with Russia preparing to cut gas deliveries tomorrow. This would be the second time in 3 years that Gazprom has cut deliveries to Ukraine over a price dispute, in turn threatening supplies to the EU. Ukraine is the EU's major transit route for gas deliveries, with over 80% of the bloc's external gas supply traveling over its territory.

The latest Russo-Ukrainian gas row is a reminder that despite the current (low) price levels, energy security remains a major issue, particularly to countries with heavy reliance on external supplies. It may also presage a more aggressive Kremlin in 2009, one that seeks to renegotiate gas contracts (particularly with former Soviet republics paying below market prices) with more frequency and adopts a less compromising position.

As Russia's budget comes under greater pressure, the rouble is devalued further (by as much as 10%, as many economists believe is necessary to account for the loss of petro/gas revenues, a cut the Kremlin has resisted with all of its will) and political unrest rises, the Kremlin will struggle to prop up the Russian economy. It will almost certainly turn to its energy leverage to plug the shortfall and boost spending.

Putin's authoritarian consolidation and economic nationalism have relied on a middle class complacency derived from petro/gas riches. The boom years were financed by the commodity bubble. Over this period the Russian government failed to adequately diversify, liberalize and modernize its economy. This made the Kremlin overly reliant on companies like Gazprom for tax revenues (and spending). Due to excessive state intervention and legal uncertainty, particularly when dealing with foreign investors, Russian industry became overly reliant on the Kremlin for finance and favor. What developed was an economy fundamentally underpined by high commodity prices. This house of cards was always vulnerable to a price collapse. Now that its here, the tight societal weave of Putin's Russia is starting to fray. It is unclear whether Putin/Medvedev are prepared to mend it.

Russia's resurgence has as much to do with oil and gas as it does with Putin. The major question for Russia in 2009 is: how does Putin respond?

A Reminder

In my eyes, 2008 has provided a harsh reminder of a fundamental lesson of political economy: the economy drives politics.

It may seem like an obvious point, but it is often a neglected one. Throughout the year, we've seen fascinating discussions about the rise of authoritarian states as an alternative to Western liberal democracy, the success of political party X or candidate Y, the further integration of global trade, the possibility of more comprehensive environmental treaties, and much more. But the outcome of each of these debates has been changed in important ways by the roller coaster ride that has been the economy in 2008.

Just ask some of the losers: Putin/Medvedev in Russia, government officials in China, Mr. McCain, Mr. Cameron, Mr. Chavez, the governments of Iceland, Belgium, Iran, Greece, and anyone hoping for more stringent carbon emission rules.

Or some of the winners: Messrs. Brown, Obama, Sarkozy and Keynes.

And if the economy driving politics was the big lesson of 2008, the interesting question for 2009 will be: how hard will politics push back?

Year In Pictures

In keeping with our year-end extravaganza:
Maclean's, a Canadian newsweekly, has compiled an excellent gallery of photographs from the past year. Some of the most powerful:

• Beijing Olympics opening ceremony
• Close call in Afghanistan
• Volcano erupts in Chile
• The true cost in Georgia

That Was The Year That Was: The Rest

IPE Journal looks back at the cultural, sporting and down right random things that diverted our attention from economic Armageddon in 2008. In other words, The Rest...

-The 2008 Olympic Games were much more than China's coming out party. The world stood in awe at the Opening Ceremonies, Michael Phelps became the greatest Olympian of modern times and China's athletes topped the gold medal table. 2008 was a year of stark contrasts for China: the tragedy of the Sichuan earthquake, tainted milk, and exposure of the shortcomings of China's economic miracle v. the scale, triumph and symbolism of the games, land reform and progress with Taiwan. 2009 promises to be an interesting year.

-In the Prem, Arsenal collapsed following a very bad day in Birmingham, throwing away the 07-08 title. They began the 08-09 season in disarray, and placed their future on the young shoulders of Cesc Fabregas, who, naturally, was immediately lost for four months with ruptured knee ligaments. ManU and Chelsea provided a cardiac finish to both the Prem and Champions League final in Moscow, with SAF's men taking the double.

-Rafael Nadal, Roger Federer and an epic Wimbledon final, considered by many the greatest tennis match of all time.

-The Year in Japanese innovation: robots that feed you, bionic legs and a trumpet playing robot joins the Cincinnati Pops. According to the International Federation of Robotics, robot use will increase substantially over the next few years, for combat, labour and personal uses. The Guardian identifies Japan as the world leader in robotic labour density (25 per 10,000 workers).

-In what will surely go down as man's historic victory over the animal kingdom, monkey waiters hit Japan.

-Contemporary art market boom/bust: The contemporary art market is an interesting barometer for investor sentiment (the Mayfair, not main street, investor) and Banksy provides a perfect case study. In October 2007, 10 prints by the London-based street artist sold at auction for a whopping ₤546,000. Fast forward to September 2008, and the five Banksy pieces at auction in London went unsold. In fact, two thirds of the items in the Loyd and Turnbull contemporary art auction were withdrawn. (Editor's note- my two Banksy prints were purchased in Covent Garden for 30 quid. Beat that.)

-Finally, in a year of great You Tube moments (Bush shoe thrower, Brown's messiah slip), this one takes the cake, both for humour and IPE symbolism:

What Barack Obama did, and did not, say today

Illinois Governor Rod Blagojevich defied everyone today in announcing his intention to appoint Roland Burris to the Senate seat vacated by the President-elect. Obama quickly released a statement condemning the Governor's move, and reiterated his position that the US Senate leadership should not seat the appointee. The drama over Blagojevich is good television, and his Senate appointment may have very real constitutional questions, but in the end the episode matters little beyond the Land of Lincoln.

Thus, the real significance lies in what Obama did not say today. The fourth day of Israel's bombing of Gaza passed without a single statement by the future US president. The quartet, UN, EU and much of the rest of the world have called for a ceasefire, truce or general humanitarian consideration. As Jonathan Wright reports for Reuters, Obama's silence is disheartening for many, especially in the Arab world, who thought his presidency would bring a renewed American commitment to the peace process. His foreign policy team is stacked with strong supporters of Israel (Rahm Emanuel, Hillary Clinton), and it is unlikely that he will expend the political capital that a serious push towards a Palestinian state would require in his first term. Remember, it's the economy stupid, now more than ever.

I have heard a cynical viewpoint that I find quite interesting. It goes like this: Obama has placed people like Hillary Clinton in key foreign policy positions as cover for a peace settlement, one that would inevitably require large Israeli concessions (1967 borders, Palestinian state capital in East Jerusalem). With big Israel boosters leading the negotiations, Obama would be partially shielded from the Israeli lobby backlash.

Whatever his intentions, Obama should say something. Bush has checked out, and the world can't wait another month for American leadership, especially on Gaza.

That Was The Year That Was: Economia

IPE Journal looks at the economic events that defined our socio-political landscape in 2008, the year of the subprime.

- In The Beginning there was Northern Rock - nationalized in February by the UK government following a good old fashioned bank run. Following heavy losses in the subprime mortgage market, Bear Stearns was next to go: in March, the once-proud investment bank was sold to JP Morgan for pittance. In July, IndyMac Bank went into receivership.

- September Madness. Over the course of a few short weeks, the magnitude of the crisis hit home (so to speak) as financial giants fell like so many martini-and-oyster fuelled dominos. The highlights:

• Freddie and Fannie are taken over by the US federal government
• Merrill Lynch is sold to Bank of America
• The Federal Reserve offered loans to AIG and took an 80% share in the company
• Washington Mutual is seized by the FDIC
• Morgan Stanley and Goldman Sachs become traditional bank holding companies, bringing the era of independent investment banks to a temporary close.
• And Lehman Brothers - in what now appears to have been a hugely significant decision, Lehman Brothers was allowed to fall into bankruptcy and the credit crunch prompty shifted into a higher gear.

- Keynes returns from the wilderness. The collapse in consumer demand has led governments across the globe to initiate fiscal stimulus programs. The sheer rapidity of this about-face in policymaking is breathtaking. We've come to expect such measures from the likes of France and Sweden, but from the UK, US and (gasp!) Germany? Keynes was wrong on many counts and his proclaimed followers even more so, but Keynes' insights on the role of government during economic downturns have gained a new lease on life. For better or worse, the impact of government spending programs and fiscal guarantees will be a defining feature of 2009.

- Price of oil $140 -> $40. A May 5th Goldman Sachs report predicted oil would break $200 within 24 months. Ok, still possible, but six months later the commodity bubble had burst in spectacular fashion and oil was trading under $40 a barrel. The explanations for the remarkable run up in commodity prices of recent years are manifold: historic emerging market growth, global demand, dollar weakness, financial speculation, etc. The price apex was as much about psychology as it was fundamentals, what Donald Rumsfeld would eloquently call the realization of "known unknowns". The "peak oil" moment came in the minds of consumers, politicians and traders across the world, only to be swiftly disregarded as global demand collapsed. Even repeated OPEC production cuts couldn't halt the slide into 2009. Commodity countries from Russia to Mexico are feeling the pressure, with devaluations and political instability on the way.

- Dollar down, up...down? It is awkward to speak of benificiaries of the financial crisis, but the US dollar was exactly that in 2008. By the end of 2007, there was a growing debate over whether the dollar had entered into a sustained relative decline vis-a-vis the Euro, with many concluding the common currency would soon eclipse the greenback's status as primary global reserve currency. The credit crunch had undermined confidence in the US financial system, and hot money ran wild through commodity currencies and emerging markets. But then financial crisis accelerated, and the commodity bubble burst, and investors sprinted to the safety of US dollar. It hit multiyear highs against sterling, the Euro, and a slew of emerging market currencies. Looking ahead, the outlook for dollar appears decidely weaker in 2009. The massive spending plans of Barack Obama and easy money Fed will weigh on the gains of the past year, especially vis-a-vis the Euro and Yen. But the dollar will likely retain its strenght v. emerging market currencies and sterling, as investors continue to find security in the greenback and the UK falls into the abyss.

Notable economic events which could have shaped the course of our year [Update: for the better], but failed: WTO talks & the G20 meeting in November.

***Co-written by Rory Doyle

That Was The Year That Was: Politique

IPE Journal looks back at the political events, people and trends that defined our world in 2008.

- The worst financial crisis since the Great Depression sets in motion a paradigm shift in global power and authority. The state reoccupied the commanding heights of the global economy through stimulus packages, banking nationalizations and automotive bailouts. The IMF regained relevance, and political fortunes were turned in response to the crisis. The G20 replaced the G8 (but for how long?), and the WTO sadly threw in the towel for 2008.

- Barack Obama was elected the 44th President of the United States in one of the largest electoral landslides in decades. He is the first African-American elected to the highest office. He quickly established a "team of rivals" cabinet, bringing together the best, brightest and (slightly) bipartisan to implement his foreign policy and economic agenda. This agenda will likely be defined by what has been called a "21st century New Deal".

- Russia invaded and briefly occupied much of Georgia. The conflict reasserted Russian influence in its "near abroad", exposed EU divisions over Russian relations and raised tensions over NATO expansion and US missile defense in Eastern Europe. It also exposed the real power dynamics in Russia, with Putin effectively orchestrating, commanding and negotiating throughout the conflict. However, by the end of 2008, the financial crisis would for the first time raise questions over Putin's rule as the country was forced to devalue the rouble and ripples of unrest began to sprout up.

- Parts of Africa continue their descent into hell. Kenya erupts, Somalia struggles, and Darfur is a humanitarian disaster. Fighting has resumed in the DRC with Rwandan support, and Mugabe has maintained his iron grip on power, squeezing Zimbabwe dry in the process. Mbeki left office in South Africa, paving the way for Zuma in 2009. The world now looks to Ghana in the final days of 2008, and hopes for a victory for African democracy.

- The Treaty of Lisbon, an attempt to streamline and bolster the EU, is rejected by Irish voters, temporarily killing the process. While certainly a setback for further European integration, Europhiles promise to continue holding referendums until the voters get it "right." A December summit laid out the blueprint/compromise for Lisbon's revival in 2009, and, for possibly the first time in EU history, ended with universal praise of a French president.

- Attacks in Mumbai: as of yet, not a defining geopolitical event since Pakistan and India worked hard to prevent the situation from escalating. Nevertheless, this is a potential touching-off point for the nuclear rivals in 2009. It also might (by design??) divert Pakistani attention away from fighting terrorism in the northwest tribal areas, and reignite violence in Kashmir. The implications of Mumbai are vast, and potentially destabilizing for the entire world.

- Israel, in response to repeated rocket attacks, and in advance of national elections, pounds Hamas and infrastructure in Gaza. The year's final week produced one its most explosive events, as the fighting in Gaza risks wider political instability and a humanitarian crisis in the territory. Many analysts believe that Israel's overwhelming aerial assault is an attempt to dictate a new truce with Hamas, but its military establishment is signalling that the shock and awe may be only the first phase in a wider operation aimed at removing Hamas from power.

***Co-written by Dave Hart

Fed Goes All In: Addendum

First off, read Rory's piece on Fed policy then check out the new Federal Reserve No-Limit Credit Card. We laugh because it's good satire, but how is this really different from what American consumers have been doing for a decade?

Except of course that the interest will be paid, not by the Fed, but by anyone and everyone who holds dollar-denominated assets.

The Christmas Consumer Price Index

I've escaped from the children's Christmas party in my office to report on an important statistical indicator:

This year, the traditional Christmas CPI runs about $21,080.10. Or so says PNC Wealth Management, which measures the change in cost of living by indexing the gifts from the seasonal song "The Twelve Days of Christmas." It appears as though, despite bearish commodity markets, trumpeter swans a-swimming and turtledoves would have been excellent investments. The NYT has the rest here.

Happy Christmas!

The Evolving Discourse

On the Origin of Species will celebrate its 150th anniversary in 2009. In honour of this, The Economist has devoted part of its Christmas special to reviving the discussion about the relevance of Darwin's insightful thesis in understanding number of fields, including music, shopping, and crime and punishment.

I look forward to these Christmas specials every year, and this one didn't disappoint. The article on murder, justice and wealth is the best one: it is controversial, thought-provoking and even somewhat related to IPE - it cuts to the very core of how we organize our social contract and welfare state.

You may not agree with the deterministic tone of the articles, but it is definitely worth a read.

One-upmanship

Not to be outdone by Canada, Belgium goes even further by layering a government collapse onto an economic crisis.

A supposed attempt by members of the government to influence a court decision over the break-up of Fortis, a financial services operator, is the cause of Belgium's latest woes. Given the amount of government tampering in non-traditional areas of influence recently, it is nice to see that at least the Belgians consider the judicial system to be out of bounds.

The Fed goes all in, and I become a dollar bear

I have been bullish on the dollar for some time (here and here and here).

As of 3:15pm, I am a dollar bear.

The Fed goes all in, fighting the liquidity trap, and Bernanke gets a new nickname

In a unanimous vote, the US Federal Reserve slashed the Fed funds rate from 1% to a range of 0.00-0.25% (apparently they can set a range, something I was admittedly unfamiliar with). This is the lowest range in Fed history, and the statement made it clear that rates would remain near zero for "some time" to come (a "commitment" until the economy reverses). The Fed also indicated that it will take unorthodox measures to combat the deepening recession, throwing out convention and undertaking broad quantitative easing through increasing reserves and expanding its balance sheet. I also believe it signaled a fear that we have entered a liquidity trap (as Krugman explains it, "that awkward condition in which monetary policy loses its grip because the nominal interest rate is essentially zero, in which the quantity of money becomes irrelevant because money and bonds are essentially perfect substitutes"). The Fed will likely purchase mortgage debt to influence their yields (as opposed to directly setting target rates) and T-bills.

If you believe the likes of Keynes, Friedman and Bernanke, the Fed has just prevented a depression.

How you ask? One perspective would argue that the great depression was deepened by the reluctance of monetary policymakers to bring rates to zero. An official attachment to the prevailing gold standard orthodoxy is a common explanation in IPE for this hesitation (see Eichengreen). Bernanke and co. have just squashed that fear (but an argument might be made that it is too much too late, that Bernanke went against his own instinct and balked). A second perspective thinks the effect of the interest rate tool is overstated. It instead focuses on the lack of liquidity provision as the determinant factor in plunging the world into depression. The argument is that by directly expanding the money base the value attached to cash and other short term securities falls to a level at which investors will move into higher yielding assets and consumers/banks will spend again. Well, Bernanke and co. has that base covered as well. Start priming the printing presses, cause we're about to see a whole lot of dollars. What, then, if we are in a liquidity trap, and neither policy option is sufficient alone or in combo? That's where the creativity comes in. It won't be easy, but the Fed is finally saying to the world, "We will do anything it takes to turn this thing around".

In my humble opinion, we should all be thankful that the real Benjamin Shalom Bernanke has finally shown up.

A funny side note- the folks at Fast Money on CNBC (a show I personally find obnoxious, but am sick in bed and dealing with it) recognized that Ben Bernanke's nickname is no longer appropriate. Bernanke is known as "Helicopter Ben". This stems from his scholarship on the depression, and his argument that monetary policymakers should figuratively dump money from a helicopter if necessary to fight deflation (derived from Milton Friedman's 'helicopter money' concept). The Fast Money crew noted that the Fed's actions have gone well beyond a "dump", and that a "Carpet bombing Ben" moniker would be more fitting.

Posting-Lite

I will be traveling all this week - be good.

The Macroeconomic Rebalancing Act

The rapid US dollar resurgence of the past couple of months is being felt in a number of very specific ways. Rory has been following this trend closely (see posts on USD resurgence, other currency stuff and the, er, "GreenPack.") so I won't spend too much time on the specifics. What I have been meaning to discuss is the significance of this shift in a broader context.

I'm referring to the issue of "global macroeconomic imbalances." What are these imbalances, you ask? The expression refers to situation that has arisen because A) countries in East Asia and the Middle East have a lot of money they wish to lend somewhere safe and B) the United States has until recently been very willing to borrow.

Japan, China and others have so many funds to lend because they have exceptionally high national savings rates, relatively low levels of spending (esp. China) and foreign currency reserves generated from trade surpluses. Since the US is the largest, safest, most open economy in the world, these excess foreign reserves have been pouring into their economy as low-yield investments. For instance, Japan holds about $1 trillion in US assets; China about $1.9 trillion. That means the US is indebted to these countries to the tune of several trillion dollars.

Fed Chairman Ben Bernanke has argued that this "savings glut" in developing countries is the main source of the imbalances. These precautionary savings have two problems. First, they provide low-yield return. For instance, China could take a portion of those nearly $2 trillion and invest it in their own country's education and infrastructure - this is in fact less of a savings glut than an "investment drought." Second, developing countries that rely on export surpluses are essentially relying on the United States to buy those exports. In short, the US must act as "consumer of last resort."

On the other side of the equation, the American economy has been saving almost nothing and accumulating debt like it's going out of style (this applies to other rich developed economies, but less so). This is partly because there was no need: cheap credit from abroad helped fuel equity bubbles in the late 1990s and the recent housing bubble - people were getting rich. But this system was only sustainable so long as American deficits continued to grow and American consumption continued to hold up the world economy.

Some people have argued that this balancing act is (was) sustainable, but they are wrong. The real question is when and how will things re-balance themselves. There are two worries. First, that US deficits grow to the point where China & co lose faith in the dollar, dump their assets and cause a recession in the United States. I think that fear has always been overstated. To paraphrase the old banking addage: when you owe the Chinese government $100 million, you have a problem. When you owe the Chinese $1.9 trillion, they have a problem. If the US economy drops 10%, say, these Chinese-held assets will suffer enormous losses. So the fear of a "hard landing" caused by foreign investors was always problematic.

The second worry is that of a Sudden Stop: a slowdown in the US economy prevents them from acting as "consumer of last resort" and emerging markets are forced to readjust internally on short notice. This could also result in a "hard landing" for the economies involved - something to be avoided.

However, last week John Kemp pointed out that we no longer need to worry about which outcome it will be since the decision has been made for us:

The unfolding credit crisis is producing a deep recession, cutting U.S. demand for imports, and forcing the long-overdue adjustment in the trade deficit.

He concludes:

With recession taking care of the current account deficit, financial crisis reducing gross capital outflows, and foreign official buyers continuing to support the Treasury market, the U.S. currency has been a strange beneficiary of the crisis. If the dollar’s earlier decline was a symptom of over-fast growth, its rise is a by-product of recession.

That's all fine and good for the dollar, but what about everyone who was relying on US consumers to fuel growth? A hard landing is still a strong possibility in some parts of the world. Over the next few months we're going to find out just how capable some countries are at redirecting investment inwards and stimulating their own demand.

Further Reading: Patrick and I discuss China's counter-move of devaluing the yuan. Checkitout!

(Photo: Daylife)

Barney Frank's theory of economic evolution

Great quote from Congressman Barney Frank on 60 Minutes this evening. Frank, responding to the argument that an auto bailout is antithetical to America's Darwinian capitalism, said:

"Darwin was a great biologist, but I don't think he was much of an economist".

Fun facts: Frank doesn't own a computer, and composes letters in his office by Dictaphone. Remember the Dictaphone boys and girls? Yeah, me neither.

That Was The Week That Was

Politique
-A cholera outbreak in Zimbabwe worsens as Mugabe stays silent, then denies, then blames the Brits. Meanwhile, Ghana brings some hope to African democracy.
-EU leaders burned the midnight oil to reach consensus on key climate change and fiscal stimulus proposals. Deep divisions remained over the extent of coordinated fiscal measures at the national level. Concessions made to Ireland in return for second Lisbon Treaty referendum, but leaders are careful not to instigate a backlash in the UK.
-US auto bailout dies in the Senate, as Bush is forced to reconsider the dedication of TARP money to the carmakers.
Economia
-Ecuador defaults, as President Correa brands debt "illegitimate" and foreign creditors "monsters".
-How low can Treasuries yields go?
-The WTO admits defeat for 2008.
The Rest
-In the Prem, Arsenal stumble out of the title race, Liverpool and Chelsea underwhelm, and Villa break the top 4.
-Fresh off their hostile takeover of Citi, Somali pirates express interest a certain vacant US Senate seat.
-US film industry awards season kicks off with Golden Globes nominations, New York and L.A. film critics awards.
-Bush gets two "steps" closer to retirement:

The Canadian Political System: Explained

The recent kerfuffle in Canadian politics managed to draw the attention of international spectators just long enough for some awkward questions to be raised about the nature of democracy in some of the United Kingdom's former colonies. Who exactly is the head of state in these places? What is their role? What does it mean to "prorogue" parliament? Is Stephen Harper's hair made of plastic?

Question no further, readers. All is explained through these links:

The Daily Show tackles the tough questions here (or here for Canadian readers).

I also enjoyed Dr. Boli's answer.

Adventures in Economic Stimulus, Part Deux

I have found a solution to the boring old government spending vs. tax cuts stimulus debate: it's QuikCash! Just in time for the holidays.

Part one.

Mugabe takes a page out of the Muhammed Saeed al-Sahaf playbook

Robert Mugabe proclaimed today that "there is no cholera in Zimbabwe."

Mugabe's comment immediately brought to mind another great linguist: Muhammed Saeed al-Sahaf. Mugabe has clearly studied the public relations work of the former Iraqi Information Minister. Don't remember him? Well, he blessed the world with rhetorical treats like, "There are no American infidels in Baghdad. Never!", or his description of the American and British as "tarteers", which is Iraqi slang for "a guy full of farts". My personal favorite: "they are nowhere near the airport ..they are lost in the desert...they can not read a compass...they are retarded." Well said, sir. Well said.

Economic Crisis Felt in East Asia

A Dec 10 report by the World Bank forecasts that real GDP growth in East Asian developing countries will fall by 1.8% from 2008 to 2009, to a rate of 6.7%. When including developed countries, the rates drop by 1.7% to 5.3% over the same period.

This is not too surprising since, as discussed below, the heavily export-oriented economies in the region are seeing the effects of declining demand impact their balance sheets. I wonder, too, about the rapid increase in the relative value of the USD over recent months. Many countries in the region fix their currencies (in varying degrees) to the greenback as a hedge against fluxuations in exchange rates - a resurgent USD means their exports are going to be more expensive just as demand is declining.

The good news from the WB: countries in East Asia are much better prepared for today's turmoil than they were a decade ago. In particular, "the countries which have entered this crisis with low debt burdens, surpluses in their fiscal and external current accounts and large external reserves will have the most room to maneuver as the crisis unfolds."

Sounds like pretty standard WB-fare to me. Part of the point of building up those large external reserves in the first place was to prepare for just such an occassion. I just hope it pays off and the analysts are "more right" than they have been in the past.

Quick hits and pink picks

-The FT bids adieu to the commodity super-cycle.

-In lost in translation news- a German science journal, wanting some pretty Chinese characters for its cover, inadvertently publishes an ad for a Macau brothel.

-The Guardian's Andy Beckett looks at London Mayor Boris Johnson's first 6 months in office. His verdict? Bad for Boris. ("Bad for Boris" would be a great band name, like the incredible "Someone Still Loves You Boris Yeltsin". Has there ever been a better name than that?)

-The NY Times charts the "Hidden Travels of the Atomic Bomb".

-Finally, Gordon Brown's Superman complex:

Baltic Dry Index and International Shipping Costs

"...Shipping is the thermometer of global trade. It allows us to take the broadest view of the health of the worldwide economy." So says transportation economist Oliviero Bacelli, quoted in this interesting Time article on the effect of the credit crunch on shipping.

I am reminded of a conversation I had with a good friend of mine as we sat along the Thames watching tugboats push heavy crates of cargo up and down the river. He mentioned that he really enjoyed watching this happen because it reminded him that this is what trade ultimately comes down to: moving boxes from one place to another. Internationl transactions now involve complex derivatives, currency hedges and whatnot, but at the end of the day 77% of global trade is the result of ships moving boxes from one place to another.

This is why it should be particularly worrying that the credit crunch has moved from threatening the jobs of investment bankers to threatening the jobs of shipping and dock workers. The Baltic Dry Index, which measures freight rates for bulk goods, has dropped 96% since May - an incredible display of volatility. Granted, it appears to be a pretty volatile index to begin with and we're currently not far off from pre-2003 levels. But export-oriented economies are hurting badly, particularly the East Asian tigers that are still licking wounds from their own financial crisis a decade ago.

In addition to the costs felt by workers and firms, new ship-building orders are being cancelled regularly. That will dampen the ability of shipping companies to meet demand when it resumes again - clearly an unhappy prospect.

However, some possible good news yesterday coming from the WSJ blog: a recent bump in the Index. FT Alphaville notes that this could be a side-effect of optimism about Obama's expected stimulus package and speculates about some other industries that may benefit as well. But with the medium-term prospects of shipping being what they are, can we expect this uptick to last?

May You Live In Interest-Free Times

The interest on US T-bills briefly hit the negatives today as investors pushed the yield to -0.01%. A negative interest rate means that you are paying the debtor for the privilege of owing you money. Wow.

A better way to look at the world

I've been meaning to post this since hearing a piece about Worldmapper on NPR a couple of weeks ago. Worldmapper has created a selection of maps, published in the new book The Atlas of the Real World, that proportion countries according to different demographic and economic categories. The maps are intended to challenge common perceptions of space, size and power. A selection below:

Crude Petroleum Exports, 2002

Internet Users, 2002.

Finance and Insurance Services Exports, 2002

10 Worst Predictions of 2008

FP Passport counts down the 10 Worst Predictions for 2008.

Are there any poor predictions FP Passport has overlooked? Let us know what you think deserves to make the list.

Zuma does his best Mbeki impression

Jacob Zuma has shamefully countered global appeals for Mugabe's removal, and the people of Zimbabwe lose again.

Quick hits and pink picks

-John Thain wants his 2008 bonus, reportedly $10m. Two ways to look at this: 1) his social and political thermometers are broken, or 2) he deserves it. Despite all of his misleading statements on the health of Merrill Lynch and role in its eventual acquisition by Bank of America, he did secure the sale of the firm at $28 a share. Remember what Bear went for? My take: I recognize point 2, but agree with point 1. He's insane for asking, and his compensation committee would be crazier to approve. UPDATE: Apparently, someone told him this whole bonus demand was a bad idea, because he no longer wants it.

-The FT has an interesting article on today's elections in Quebec. The economy trumps sovereignty, a good sign for Liberals.

-The Pulitzer Prizes have expanded to cover online only publications. IPE Journal submits itself for consideration.

-Petroleum Intelligence Weekly has released its influential annual rankings of the world's top oil companies. The report highlights the increasingly marginalized position of the traditional private oil majors, and growing global market dominance of majority state-owned companies. This trend towards nationalization and state control of increasingly scarce resources has a number of powerful implications.

Innovation at Afrigadget.com

Check out this cool website "dedicated to showcasing African ingenuity." Definitely makes you think twice about throwing stuff away.

Things I've found over lunch today:

• Togolose inebriation innovation
  
• USAID bags used to insulate homes
  
• Some very cool handmade toys

Bob Gates, US foreign policy and missile defense

"Support for conventional modernization programs is deeply embedded in the Defense Department's budget, in its bureaucracy, in the defense industry, and in Congress. My fundamental concern is that there is not commensurate institutional support -- including in the Pentagon -- for the capabilities needed to win today's wars and some of their likely successors."

In an essay to be published in Foreign Affairs, US Secretary of Defense Robert Gates outlines his vision for American foreign policy. I purposely say foreign policy (as opposed to military/defense policy), because Gates wants to balance the Pentagon's institutional preference for grand, high end (low probability, high impact) projects with a greater capacity to fight unconventional, low-end (high probability, low impact) conflicts. For Gates, this includes a renewed commitment to the soft power America deployed so effectively during the Cold War. He is likely the first defense secretary in history to call for the defense budget to be cut in favor of greater funding for State.

I am a big fan of Gates. His vision, pragmatism and action have all helped repair some of the damage inflicted by Donald Rumsfeld. His call for the Pentagon to confront "inescapable tradeoffs and opportunity costs" is a refreshing alternative to defense spending under the Bush administration. As a former intelligence officer and head of the CIA, he seems to posses a higher level understanding of what American power is and how it must adapt to a dynamic and complex world.

Gates doesn't dismiss high end programs and his call for "balance" doesn't imply their scrapping all together. That would be crazy. But if he is serious about developing new US defense priorities and standards, he must extend his metrics universally and tackle the most bloated, strategically questionable and institutionally embedded programs. Unfortunately, he seems to exclude one very big conventional program: the missile defense shield.

His clear desire to temper the Pentagon's institutional preference for conventional modernization programs contrasts with his public support for the US missile defense shield. I believe the location of US missile defense installations in Eastern Europe is a strategic mistake. It is also irrelevant to the "wars of today". I'm sure his robust public support for the program is in part a power play directed at Russia. After the war in Georgia, the US has little direct leverage in the region. With the EU effectively ruling out a further eastward expansion, and the incorporation of Ukraine and Georgia into NATO too explosive an issue, the missile defense shield might be America's only bargaining chip in the region.

The importance of countering Russia in Eastern Europe and the Caucasus is clear. But the US has other tools in its diplomatic arsenal, and a little backbone by the EU would go a long way towards re-balancing the power dynamics. Which brings us back to Gates. The missile defense shield is exactly the kind of program Gates wants to move the Pentagon away from. If he simply applied his own metrics to the program, its utility in fighting "today's wars" would be evident. The question is whether the opportunity costs of the program, and the strategic costs of its location in Europe, justify its position at the top of the US defense/foreign policy agenda. In my opinion, it does not. Bob Gates is a terrific defense secretary. But he is wrong on missile defense.

That Was The Week That Was

Politique
-US President-elect Barack Obama unveils details of his "21st century New Deal". The Economic Recovery Plan is preliminarily based on 5 pillars: energy, roads and bridges, schools, broadband, and electronic medical records. Many, including prominent members of his own party, are becoming increasingly frustrated with his "there is only one president at a time" line, as the sitting President appears to have checked out while Rome burns.
-The terrorist attacks on Mumbai end, the Indian investigation expands, and at least 29 people die from a car bomb in the Pakistani city of Peshwara. Blame for the attacks has focused on Pakistan-based Lashkar-e-Taiba (the likely perpetrators), the Indian government (early warnings, poor response, failure to hold Pakistan accountable), and the Pakistani regime (failure/inability to address sources of terrorism and militancy within its borders).
-A deliciously intriguing affair in the British House of Commons has ignited a fierce debate over Parliamentary independence, opposition politics, and police powers. Meanwhile, Canada has its own legislative controversy to deal with (find Dave's take here).

Economia
-The US learned it has been in recession since December 2007 (something everyone but this guy has been well aware of) and lost 533,000 jobs in November, the largest jobs decline in 34 years.
-Angela Merkel grew increasingly isolated in Europe as French President Sarkozy unveiled a €26bn stimulus package. UK Prime Minister Brown and Sarkozy will meet in London on Monday to renew their call for a coordinated European stimulus.
-An historic week in European central banking: BoE cuts 100 basis points to 2.0% (lowest level since 1951), ECB goes with 75 basis points to 2.5% (its largest single cut ever), and Sweden slashes a record 175 basis points to 2.0%.

The Rest
-In the Prem: Arsenal continue form following famous win at Stamford Bridge, Liverpool stay top, and ManU and Spurs on track for Carling Cup final. In Europe: Cristiano Ronaldo wins Ballon d'Or, reveals he was "an inch away" from being a Gunner in 2003.
-This week in Japanese innovation: omelets with the Motoman SDA10.
-"Experienced bandits" steal €85mn in luxury jewels from Harry Winston store in Paris. According to Reuters, the heist occurred almost a year to the day of a similar $16mn robbery at the store.

Adventures in economic stimulus

Are you a city tired of waiting for an effective national response to the economic recession? In desperate need of economic stimulus, but nowhere to turn? Well, Milwaukee, USA has a solution for you.

Two Milwaukee neighborhoods are considering printing their own money for local exchange.

Before the dollar rally, there was some worry about a run on the greenback. The thought was that the credit crunch, fiscal expansion, and a general collapse in confidence would undermine the dollars reserve currency status, as well as the willingness of countries like China to purchase Treasuries. But as I predicted at the time, the exact opposite has occurred: the dollar has surged to multiyear highs as investors sprint to safety, the bursting of the commodity bubble withdraws hot money from commodity currencies, and emerging markets plummet.

With foreign investors clearly content in low-yielding dollar investments, could the biggest risk to the greenback be Americans themselves? Of course not. But it is pretty amusing to think of local currencies sprouting up all over the US. Apparently, this is not without precedent, and Ron Paul would surely be happy.

My vote for Milwaukee's new currency: the "GreenPack" (Green Bay Packers, for those of you unfamiliar with America's greatest sports franchise and Doyle family obsession).

Special note to 50% of Packers Nation- a Favre bill was all I could find. We have to get over it at some point. Right?

Putin confirms plans for Saakashvili

He'll settle for any number of body parts.

(for original Putin threat, see here)

Zim on the brink

Just when things couldn't possibly get worse in Zimbabwe, they tragically do. Zim's health minister has declared a national emergency, as a cholera outbreak has claimed the lives of at least 565 people. The UN estimates that more than 12,500 are infected, and given the water, sanitation, and medical situation in the country, the death toll may rise substantially. The WHO believes these estimates may be significantly lower than the actual figures.

The cholera outbreak not only underlines the collapse of the state under Mugabe, but the danger posed by the current deadlock in powersharing talks between Zanu-PF and the MDC. The country is in desperate need of a new government, and the foreign aid and assistance that will likely coincide with such a transition of power. Aid is essentially frozen in boycott of Mugabe, and a large part of the medical system's failure can be attributed to the brain drain and flight of skilled workers (including doctors and nurses) that Mugabe has instigated.

There is hope. The health minister's announcement coincided with perhaps the strongest condemnation of Mugabe by an African leader to date. Kenyan Prime Minister Raila Odinga has branded the powersharing talks "dead" and called on African governments to "push [Mugabe] out of power". However, as Odinga acknowledged, Mugabe basically serves at the will of the South African government, and only serious action by the ANC to push Mugabe out will succeed.

South Africa's cabinet has called an emergency meeting to discuss the deteriorating situation in Zim. It is time the ANC stood up and assumed the responsibility it has for the crisis to the north. Jacob Zuma and the African Union are confronted with an opportunity to rid Zim of Mugabe forever. It is their duty to turn the human devastation of the cholera outbreak into a new beginning for Zim and its people. They must act now.

Hank Paulson is lost, stupid, probably both

The US Treasury is reportedly considering direct intervention in the mortgage market to stimulate the US housing sector.

Finally!!! Paulson has come to his senses, recognized that our economy is doomed without direct support to subprime mortgage holders, and will stem foreclosures through federal action.

Wait...what? You mean, he wants to respond to the housing crash by re-inflating a housing bubble? He doesn't want to prevent millions of foreclosures? Rather, encourage artificially low rate mortgages and securitization? We don't need to keep people in their homes, but need to get more people to buy more homes they can't afford, in the midst of a recession?

What!?!?!

Double Down: When One Crisis Is Just Not Enough!

The first six articles on the front page of the Financial Times this afternoon read as follows:

• "Record contraction in US services sector: Private sector sheds most jobs in six years"
• "Record number of companies at risk of default"
  
• "More grim data pushes Wall Street lower: job cuts worse than expected"
• "Markets braced for big rate cut: Bad economic data continue to flow from leading economies"
• "Blackberry maker warns on slower growth"
• "Commodities prices at six-year lows"

Not exactly cheerful news. And yet it is in precisely these grim economic times that the politicians of one of the best-performing rich countries have decided to instigate a political crisis. All by themselves. Non-residents will be forgiven for not having heard about Canada's most recent political circus - you will also be forgiven for continuing in that blissful ignorance.

As I alluded to, Canada's economy has so far held up extremely well compared to the rest of the G7. However, the knock-on effect of recessions in the economies of Canada's biggest trading partners is likely only to be delayed and dulled, not avoided. Given that, Prime Minister Harper's decision last Thursday to use his "economic update" in parliament as an excuse to kneecap both opposition parties and public servants was pretty shameful. See Paul Wells for more on that score.

Equally shameful was the response of the various parties that make up the parliamentary opposition. Within weeks of decisively losing a federal election, the three opposition parties have decided, in their collective wisdom, that rather than blocking the PM's maneuver with their combined majority or even (horrors!) suggesting a viable policy alternative, they will form a coalition and take over the government.

The battle lines have been drawn and both sides are working ferociously to brand the other as unpatriotic, irresponsible, power-hungry nutters. Both sides are winning; meanwhile, Canadians everywhere are the losers.

Let me quickly address some of the main issues. First of all, there is nothing in principle wrong with the idea of a separatist party engaging in a government coalition. Moreover, since both sides have relied on said "separatist" party to support their agenda, there is equal parts hypocrisy on all sides. As far as the complaint by the opposition that the economic update did not include appropriate measures for fiscal stimulus... I got yer fiscal stimulus: right here!

I will finish with an open letter to Canada's legislators:

Dear Conservative, Liberal, New Democratic and Bloc Parties,

Grow up.

Russian Demographics: Grandpa Bear

Rory is our resident Russia specialist with excellent articles on geopolitics, energy security and market conditions. But, in addition to these big, sexy topics there's one issue that is a serious concern to Russians and the future of their country: demographics.

Not only has the population been shrinking since about 1992, but a recent study suggests that the population is getting older faster. In addition, high levels of suicide and abortion (not to mention alcoholism, violent crime...) have prompted some to suggest that Russians have lost faith in their system - a finger is pointed at Putin.

Is that the best explanation? I know that I would be thoroughly discouraged if I lived in today's Russia, but there are plenty of places in the world where your future prospects are just as poor as under the Putinocracy that still have high population growth rates.

Russia's population growth is -0.474%. For a country of what is now 140 million people, that's a decline of over 660,000 per year. For comparison, of the G7 countries, only Japan and Germany have negative population growth rates, and even then just barely. Surely we can't still attribute this to the transition from communism - that's a decade and a half ago.

What if it's just the weather? Nearby Estonia, Lithuania and Latvia all share similarly dark & dreary climates; their population growth rates are -0.632%, -0.284%, and -0.629%, respectively. Personally, a dark wintery climate seems ideal for staying inside and making babies, but what do I know? Combine this with lack of political freedoms, and it appears to be a recipe for population disaster.

Maybe these guys just need a little sun.

(estimates courtesy of CIA World Factbook; image from arachnoid.com).