Pappu?

In India, “pappu” is a condescending term meaning “nice, if not naïve and not-too-bright, boy.” Occasionally, it can be used as a term of endearment between very good friends. And it is what some senior and entrenched incumbents in one of that nation’s two largest political parties – the once monolithic National Congress Party (Rahul’s party) – call Rahul Gandhi, great-grandson of India’s first prime minister, Jawaharlal Nehru, the grandson of the fourth prime minister, Indira Gandhi, and the son of the seventh prime minister, Rajiv Gandhi. And these incumbents aren’t his very good friends. Others call this younger man – just turning forty – “the Prince of India.” His family history is blessed with accomplishment and scarred by tragedy – both Indira and Rajiv Gandhi were assassinated. Some felt that his younger sister, Priyanka, was the heir apparent, but she has focused more on her family than politics. So it must be with great interest that we in America must watch young Gandhi’s possible ascension to the top of India’s leadership – if he lives long enough.

India is currently the second most populous nation on earth and is eventually destined to pass China to rise to first place. The problems in this South Asian land are gargantuan. From the open hostilities – particularly over the Indian state of Kashmir – with neighboring Muslim Pakistan as well as sporadic and murderous attacks by Maoists hell-bent on toppling the government to the vast dichotomy between India’s 400 million middle and upper classes – productive and educated – to the sprawling poverty of her remaining lower classes, 800 million people who seem to be living in a long-lost century. With over 35% of her population illiterate, India is a long way from economic and political stability. This poverty drives India’s per capita down to around $3100 per annum, making her one of the poorest nations on earth.

If you spend time in the chi chi shops in Delhi or Mumbai, start counting Mercedes as they pass, particularly if you stay in one of the walled chrome and glass industrial/residential areas in India’s technology corridors, you might tell yourself how modern and bright everything is in India… but step outside the walls, and truth will slam you in the face. Battles for power must, of necessity, embrace the seemingly disenfranchised masses – who do cast votes – as well as the well-heeled middle and upper classes who are the engine that drives India to international greatness and economic power (she is currently the 11^th largest economy on earth); there are literally two nations layered on top of each other, each eyeing the other with fear and suspicion.

And therein lies the relevance of Rahul Gandhi’s position in the future of India. Is he a uniter? Can he bring hope to the masses while still allowing the middle class economic engine to push India to ever-increasing prosperity? Can he find peaceful solutions to the hatred of neighboring Pakistan? Who is he? What does he stand for? Will he be the “voice,” remain a “pappu” as some believe or will he succumb to his family’s legacy, falling to an assassin’s bullet before his time?

Rahul Gandhi’s persona resonates with particular power among the nation’s youth, who follow him with unparalleled zeal, particularly as he tries to mold large youth organizations into Congress Party stalwarts. The June 5^th New York Times: “Most Indian political parties are internally undemocratic and often dominated by political dynasties, none more famous the Gandhi clan. But Mr. Gandhi has also insisted that the party’s youth organizations hold internal elections for posts and operate as meritocracies… He also has succeeded far more than other Indian politicians in tapping into the hunger for generational change in India, analysts say, and has positioned himself as a change agent for the future, despite his obvious debts to India’s political past. He is trying to bypass the identity politics of caste and appeal to young people of all backgrounds. ‘We youth are with Rahul!’ said Manonit Garharabari, 23, at [a recent] rally. ‘The whole youth is with Rahul. We see an internal strength in him.’

“Mr. Gandhi is omnipresent in the media, and his face is plastered on untold numbers of billboards and political posters. His public image is as a humble, serious man, if somewhat shy, even as his name invariably tops polls ranking the country’s ‘hottest’ or ‘most eligible’ bachelors. Yet he almost never grants interviews, including for this article, and only occasionally conducts news conferences. Reporters are often tipped to his appearances at one village or another but often all they get is a photograph — which inevitably appears in newspapers around India.”

Even though Gandhi is a member of Parliament (Congress Party, of course, from Utter Pradesh), what we really don’t know is specifically what he stands for. Security around this young legislator is tight of necessity, and he plays his politics close to the vest, preferring to ride on his cult of personality instead of passionate campaigns on the issues. What we do know is his family and his educational and work history. His undergraduate education was in the United States, starting at Harvard but transferring to Florida’s Rollins College for security reasons. He followed up with a masters degree (development) from England’s Cambridge University, worked for a while as a management consultant in London before returning to India after his mother, Italian-born Sonja Gandhi, took over leadership of the Congress Party. Oh, in 2004, he did confirm – at the time – that he was dating a Spanish woman.

Sooner or later, young Gandhi is going to have to make his positions clear, alienating some who currently support him and perhaps making friends he didn’t expect… making tough decisions and probably more than a few mistakes. We call that leadership.

I’m Peter Dekom, and Rahul is just one piece of the global puzzle that will determine the future of our world.

Insurgency, Corruption, A War with Rules

Un-uniformed insurgents who know the terrain like the back of their hands, who can withdraw to safe havens, who have intelligence networks at the village level and who face an enemy far from home, stretched thin by economic and impatient political reality, have a massive advantage, especially as time passes, year by year. Add a nation that has never really functioned at a national level, is defined by tribalism, and where those in power immediately and completely soak their corrupt hands into public coffers and give themselves the juiciest plums of economic development. Spin plays a factor too: when the big bully uses technology with a killing radius that always inflicts civilian collateral damage, make sure the people – hell, the world – knows about it. And without that technology, the badly outnumbered foreigners don’t stand a chance of prevailing. But shame them into curtailing using the only tools they have… let them cut off technology under the guise of “winning the hearts and minds” of the locals, and sit back and wait. This land is yours.

Generals hate announcing time lines for withdrawal for obvious strategic reasons, but that was official Obama policy. General Stanley McChrystal was dumb enough to criticize the civilian leadership openly, most recently in a June 25^th Rolling Stone article, where McChystal’s past statements were followed up by words which his Commander-in-Chief found to be insubordinate. Bye-bye General McC – relieved of command. Try these excerpts on for size:

Last fall, during the question-and-answer session following a speech he gave in London, McChrystal dismissed the counterterrorism strategy being advocated by Vice President Joe Biden as "shortsighted," saying it would lead to a state of "Chaos-istan."…

Now, flipping through printout cards of his speech in Paris, McChrystal wonders aloud what Biden question he might get today, and how he should respond. "I never know what's going to pop out until I'm up there, that's the problem," he says. Then, unable to help themselves, he and his staff imagine the general dismissing the vice president with a good one-liner.

"Are you asking about Vice President Biden?" McChrystal says with a laugh. "Who's that?"

"Biden?" suggests a top adviser. "Did you say: Bite Me?"…

Even though he had voted for Obama, McChrystal and his new commander in chief failed from the outset to connect. The general first encountered Obama a week after he took office, when the president met with a dozen senior military officials in a room at the Pentagon known as the Tank. According to sources familiar with the meeting, McChrystal thought Obama looked "uncomfortable and intimidated" by the roomful of military brass. Their first one-on-one meeting took place in the Oval Office four months later, after McChrystal got the Afghanistan job, and it didn't go much better.

The rules of engagement promulgated by McChrystal in the year he has led the Afghan campaign – an effort to stem the bad publicity that negated the U.S. efforts in that theater of war by curtailing civilian casualties – have also come back to undermine his leadership. The June 22^nd New York Times illustrates: “Riding shotgun in an armored vehicle as it passed through the heat and confusion of southern Afghanistan this month, an Army sergeant spoke into his headset, summarizing a sentiment often heard in the field this year… ‘I wish we had generals who remembered what it was like when they were down in a platoon,’ he said to a reporter in the back. ‘Either they never have been in real fighting, or they forgot what it’s like.’ … The sergeant was speaking of Gen. Stanley A. McChrystal and the circle of counterinsurgents who since last year have been running the Afghan war, and who have, as a matter of both policy and practice, made it much more difficult for troops to use airstrikes and artillery in the fight against the Taliban.”

The fact remains that absent an American willingness to commit to decades of a vastly larger military presence in Afghanistan – while attempting to create a new economy built on the region’s vast mineral resources at the expense of opium farms – the military effort in Afghanistan is doomed to failure, as it has been since the first day President Obama took office and inherited this debacle. The Taliban harbored our enemies, the al Qaeda operatives who took down the Twin Towers and almost destroyed our Pentagon. They ruled in Afghanistan, and our attacks crippled their government and toppled them from office. We could have stayed to clean up the mess and withdrawn, but instead we withdrew most of our troops and sent them to fight the false war in Iraq long before the clean-up was completed. And this gave the Taliban and other insurgents the time they needed to replant the insurgency that we cannot topple with any form of military activity that the American people will tolerate. We blew it, plain and simple.

It’s not about McChrystal – a general who seemed to lack the good judgment not to criticize his bosses in public – it’s about a war that we simply cannot afford to win, that is draining our coffers to the delight of our enemies at a time when that money is desperately needed for domestic issues. Americans have a bad habit in believing in miracles, that people who have behaved in a particular way for centuries will suddenly change and do what we think is best for them. When that doesn’t happen, and when there is truly no hope that our efforts will succeed along the lines we hoped for, Americans just don’t know how to stop and withdraw. The Afghan theater cannot be stabilized along the lines that two administrations have attempted to implement. And since the patience of decades of additional troop deployment is politically unsustainable, Mr. Obama, it’s truly time to leave Afghanistan. If the Taliban mount another offensive against our cities and towns, you will know what to do… and it isn’t occupying a land recent history has shown cannot be subdued by outsiders with short-term goals.

I’m Peter Dekom, and I am trying to keep it real.

Jolly Old England Isn’t

For countries like Greece, austerity is about putting into place structures that really have never existed – like actually taxing rich people – even as the wealthy make sure their assets are well-ensconced far from the Aegean shores. For more entrenched economies, countries struggling with unmanageable debt face profoundly different choices. The litany of alternatives runs the gamut of higher taxes, fewer social benefits, higher retirement ages, deferred maintenance and the elimination or reduction of hitherto “meat and potatoes” government programs and public services… or increasing borrowings and M-1 (money supply – the governmental way of “printing money”) and face accelerating inflation.

England just elected a new government, and it is looking at its own crisis with a conservative approach. The pain that is about to be inflicted on everyday life in the U.K., now and for the foreseeable future, threatens to erode the social safety nets created in better times and impose new levels of taxation that will impact every soul in the country. It is interesting to watch our British friends, since their experiment and the results and consequences of their austerity efforts may well portend how the United States would do if it elected to apply the same measures. Some argue that Britain will kill what little spark of growth may exist by tightening the economic yoke and resulting in a resurgence of unemployment; others maintain that without debt reduction, the ability to achieve real growth over a longer period is not possible.

Let’s see what the new government is proposing, if they get their way. Taxes would be going up. Europe uses a value added tax (a giant sales tax - VAT) assessed at the central governmental level. England’s VAT, already a whopping 17.5%, would be raised to 20%. Capital gains rates would climb, and noting that the financial crisis was born in the financial sector, the new government is proposing a $2.9 billion assessment against the balance sheets of UK banks. While retirees would see increases in their pensions to mirror the cost of living, everyone else would be paying for the change.

The cuts that would run deepest, consistent with the new right-of-center Conservative Party government’s philosophy, are in social programs: “[Chancellor of the Exchequer George Osborne, the equivalent of a finance minister,] said Britain’s welfare costs had risen over the last 10 years to £192 billion from £132 billion (to $284 billion from $195.3 billion), an increase of 45 percent. He announced a three-year freeze on benefits received by parents for raising children, limits on subsidies for public housing and a new way of screening people receiving state benefits for disabilities. Promising accelerated efforts to raise the retirement age to 66, he said the measures would save £11 billion ($16.3 billion) in welfare spending by 2015.” New York Times (June 22^nd)

England hasn’t really faced cuts of this order of magnitude since the Margaret Thatcher government in the early 1980s, but times have changed. Critics have their doubts: “‘I think it will be a very hard sell,’ said David Kynaston, author of a recent social history of Britain in the austere 1940s. ‘It will only work if people see that the pain is equally inflicted. We are a very different society now — more individualistic and less willing to listen to exhortations.’”… ‘This is just right wing orthodoxy,’ said David Blanchflower, an economist at Dartmouth and a former member of the Bank of England’s monetary policy committee. ‘The patient is on life support now and if you take it off now you kill firms off and create a million unemployed workers. It is a classical policy mistake.’” The Times. Certainly, this will be a battle royal in Parliament, but whatever the results, undoubtedly, there are those in the United States ready to follow the same line. Our mid-term elections approach.

I’m Peter Dekom, and whatever the plan, in the U.K. or the U.S., there will be changes in governmental fiscal policies… big, big changes.

Who Wants to be a Millionairrrrrrre?!

Don't ya just love lists? And piles of facts that can make you feel really small? Well sit back and enjoy these loving results from the Boston Consulting Group in a June report entitled Global Wealth 2010: Regaining Lost Ground: Resurgent Markets and New Opportunities. Basically, it tells you where all the rich folks live and what they own. Here are some of the results:

· Global wealth staged a remarkable comeback in 2009 after its steep decline in 2008. [Assets under management] increased by 11.5% to $111.5 trillion, just shy of the year end peak in 2007.

· North America posted its greatest absolute gain in wealth at $4.6 trillion, but the largest percentage increase occurred in Asia-Pacific (ex-Japan), where wealth increased by 22%, or $3.1 trillion.

· Millionaire households represented less than 1 percent of all households but owned about 38% of the worlds wealth, up from about 36% in 2008. In North America, Africa and the Middle East, millionaire households represented more than half of the wealth in those regions.

· The United States had by far the most millionaire households (4.7 million), followed by Japan,
China, Switzerland and the Middle East.

· Switzerland remained the largest off-shore center; it accounted for $2.0 trillion, or about 27 percent, of all off-shore wealth.

· Women control about 27 percent of global wealth, meaning that they decide where it is invested. North America had the highest proportion at 33 percent.

· Latin American household asset growth rose by 16% to $3.4 billion, and Europe, despite the massive debt problems it now faces, was the wealthiest region with more than $37 trillion in assets under management, an increase of 8.8% from 2008.

Feeling all warm and fuzzy inside? I want it; I want it; I want it….. Oh well… Level playing field anyone?

I'm Peter Dekom, and sometimes I'll admit to being a tad jealous.

Baby Steps

For the last several years, the U.S. has been pressuring the Peoples Republic of China to allow her currency to appreciate against the dollar. The plea has been delivered personally and repeatedly by the President, our Secretary of State and the Treasury Secretary. It has been rejected by every Chinese leader – out of hand – at every level, sometimes with responses that countries whose economies are in turmoil shouldn’t be telling countries with longer term sustainable growth what to do (and I’m being polite in my paraphrase). China’s renminbi (also called the yuan) has floated in lockstep with the dollar, assuring local Chinese manufacturers that dollar devaluation wouldn’t reduce the level of exports to the United States; the balance of payments – although slightly moderated in the meltdown – still tilt very heavily towards China ($227 billion in 2009 but accelerated in the first half of this year; we also have a huge imbalance with Germany, Japan and Saudi Arabia). Foreign leaders have also pushed China to allow its currency to appreciate, requests that have fallen on deaf ears.

The dollar has been appreciating against the battered “Greece is collapsing and Spain is right behind” euro, which has trimmed the margins America exporters were expecting from selling their products overseas. But please do not mistake that appreciation for a positive sign on the stability of the dollar. It’s like two drunks at a bar, an American who is clearly soused but a European who cannot even stand up, and the American thinking he is sober by comparison! The giant BRIC countries (Brazil, Russia, India and China) are the real economic powerhouses in the world today; two, Brazil and Russia, have massive natural resources (particularly oil) with relatively educated populations, and the other two have built up massive currency reserves from cheap manufactures or massive service outsourcing.

The massive debt created in both Europe and the United States – both public and private – combined with the staggering fall in the value of the assets supporting that debt, has crippled those economies. And sooner or later, inflation is going to hit, even as the governments of the debtor nations struggle to maintain lower interest rates in order not to trigger a further economic collapse in the marginal signs of recovery that have surfaced of late. It will not take much to plunge our economies back down the slope of additional severe contraction. At some point, governments with humongous debt are going to have to attract lenders by raising interest rates or fall into the old world Latin American habit of increasing money supply (so-called “M-1”… most folks call that “printing money”). While inflation at that level may create a false appreciation of assets (like homes) that could push markets from being deep underwater and generate unjustified taxable appreciation for the government, people on fixed incomes and companies trying to raise capital for growth will really be slammed.

But the U.S. government has a vested interest in stemming the flow of money outside of the U.S. to pay for imports. We’ve already seen how just the price of oil is impairing growth – and we are going to be drilling in fragile ecosystems because most of the easy oil has already been tapped (the catastrophe in the Gulf isn’t the first such tragedy nor will it be the last) – but reducing imports in general is a priority, just as making U.S. exports more attractive to international buyers is a vital part of any hope of near-term recovery. The Los Angeles Times (June 20^th): “If U.S. consumers can abstain from a "shop till you drop" lifestyle, their savings rate will grow and their debt loads will shrink. Those trends could strengthen the country's long-term economic health but also could cause more short-term pain in the form of slower job and wage growth.”

At the heart of reform has been the refusal of the Peoples Republic to allow its currency to float. But that position has always been viewed as unsustainable for the Chinese, making them completely reliant on overseas markets for growth. The PRC has had its share of economic woes – primarily in the oversold real estate market (see my Breaking China blog) – but what is developing within its borders – a growing middle class with a rising standard of living and rapidly expanding consumer buying power – offers a market to continue China’s growth while creating a more stable and satisfied constituency; Chinese consumers are the new hot market for Chinese goods.

Back 2005, China allowed its currency to appreciate over three years against the dollar (21%), and as world leaders prepared to gather at the end of June in Canada (for the Group of 8 and the Group of 20 summit meetings) to consider economic issues, China has finally signaled a willingness to allow the renminbi to appreciate: “China’s central bank announced on [June 19^th] that it would allow greater flexibility in the value of the country’s currency, in the clearest sign yet that China will allow the renminbi to appreciate gradually against the dollar… The central bank, the People’s Bank of China, said that the Chinese economy was strengthening after the global financial crisis and that it was ‘desirable to proceed further with reform’ of the currency...” New York Times (June 19^th).

But China is also pressuring the world to get off of the dollar as the global reserve currency, substituting instead a “special drawing right” currency blended bundle (reflecting the major currencies of the world including the dollar, euro and renminbi). This would naturally place further downward pressures on the value of the dollar as it would no longer be the sole reference currency in global pricing. China holds over two trillion dollars of U.S. national debt; this puts us in the role of supplicants and China in the driver’s seat. Our main bargaining power over China is how we impact the value of their dollar holdings (but think what would happen to the dollar if China decided to dump its dollar holdings!), the dependence of China on American consumer demand and the level of China’s investments and holdings in American assets and corporations. Being on your knees for longer periods of time is painful.

Don’t forget, however, to many, especially those in Europe where the falling currency value makes their products appear cheaper to us, Americans are the consumers of last resort. They’re looking to our bad spending habits to get them on the road to recovery, just as we are looking to global consumers to help us. And if we put up trade barriers to stem this trade imbalance (or use taxes to incentivize consumption of local manufactures), the resulting trade wars and retaliations will decimate our export business – present and future. The LA Times: “Mark Weisbrot, co-director of the Center for Economic and Policy Research, sees an overvalued dollar as a central cause of America's economic woes…In theory, he said, the administration can take aggressive steps to drive down the value of the dollar. But Weisbrot doesn't expect that to happen, because of resistance from Wall Street, U.S.-based multinational companies and White House economic advisors.” Whether we adjust now or simply allow the markets to correct over time as the U.S. standard of living plummets for most Americans, time will re-balance it all; I’d rather take the more obvious and easier road, but… there are a whole lot of special interests who will fight that tooth and nail.

I’m Peter Dekom, and while all this stuff is complicated, it has a profound impact on the way we live.

Stealth Takes Wealth

The military has lots of cool toys. Drones with remotely located pilots flying deadly missions like video games. Or submarines that no one can find but that can unleash a deadly barrage of cruise missiles (or nuclear-tipped big boys) at a moment’s notice. Ships that don’t show up on ocean-focused radar and of course, my fave, stealth aircraft. ‘Course all this stuff costs a lot of money, but when you are a superpower, you gotta have dem “superpower” threads. Some stuff is pretty cheap, hey, like the new Sea Wolf class subs (we have only three) run just under a billion each. Forgetting about the thousands of sailors and flyers needed to man the boat, new super-carriers are running around $6.2 billion (like the George H.W. Bush). Reminds me of a quote – decades ago – attributed to former Illinois Senator Everett Dirksen: “A billion here, a billion there, and pretty soon you're talking about real money.”

We’ve got a failed effort in Iraq – unless your sole measure of success is the removal of Saddam Hussein – winding down, and a war that is failing in Afghanistan but sucking down cash like a heroin addict (oh, and Afghanistan still is the world’s major supplier of the raw ingredient for that substance – opium) at a Vegas craps table playing for his next fix. And we have lots of toys that, well, seem to tip the balance in favor of the U.S. military against any other major power on earth, but for obvious reasons, such technology appears to be total bust on the violence that threatens us the most: small pockets of un-uniformed terrorists striking clandestinely with suicide bombs, IEDs and trying to smuggle WMDs to blow us sky high. But back to my fave toys – stealth aircraft.

It isn’t even the cost of building these super-technologically-based military systems; you’ve got to figure the down time… the new F-22 Raptor jet fighter (average cost is about $361 million to build one) requires 30 hours of maintenance for every hour it flies. Each flight hour costs about $44,000. Wow! Got deficit?! The June 10^th Los Angeles Times did a terrific analysis of the cost of refurbishing a B-2 stealth (heavy) bomber, a process which, in additional to general maintenance (each hour of flying time requires 50-60 hours of work on the ground), must be performed every seven years and that takes vender Northrop Grumman a full year – and $60 million per aircraft – to accomplish. Guess that’s cheaper than ordering the latest incarnation of that aircraf t at $2.1 billion a pop.

Trust me, a “stealth paint job” ain’t an Earl Scheib special! The Times: “The cost may be staggering, but the B-2 is no flying bus. Considered the world's most technologically advanced aircraft, it can evade radar to slip behind enemy lines and knock out air defense systems and anti-aircraft missiles… The 20 B-2s in service were built at a cost of $2.1 billion each, with many parts one-of-a-kind. Contributing to the high cost of an overhaul is the meticulous care that must be taken in restoring the bomber's dar k gray coating, known as ‘advanced high-frequency material,’ which is the key to keeping it nearly invisible to radar… Even so, the overhaul costs are a sore point with some military industry critics who have long called the B-2 a gold-plated boondoggle… ‘It's the ultimate hangar queen,’ said Winslow T. Wheeler, an analyst at the Center for Defense Information, a Pentagon watchdog group… The bomber, he said, is not useful for waging the kind of warfare being fought today against low-tech enemies. ‘It's irrelevant in the wars in Iraq and Afghanistan,’ he said.”

I really like these toys, but I guess I could enjoy the same experience by letting Jim Cameron design a large-format sci-fi adventure film around the technology without breaking the taxpayers’ back. Sure we need some of this technology, and China and Russia clear have their own war chests with technology in their cross-hairs, and yeah, our capacity to deliver destruction to some global miscreant’s doorstep has to serve as a deterrent, but when is enough enough? When do we really shift our focus from toys that can blast only the biggest nations… to functionality that truly takes “little deadly terrorists” out of action? And when, exactly, does the reality of our never-ending “recession” actually sink in to our military leadership… and more importantly, to the administration that is supposed to be in charge of them?

I’m Peter Dekom, and I thought the Commander in Chief of our armed forces was the President of the United States?

Hamas is that Doggie in the Window

But this is hardly a waggling tale. The very word, “Hamas,” is an Arabic language acronym (for حركة المقاومة الاسلامية Ḥarakat al-Muqāwamat al-Islāmiyyah) meaning “Islamic Resistance Movement.” Not a nice group of fellers, and their mandate is profoundly anti-Israel. Although this wasn’t mentioned in their 2006 election campaign where they displaced old world – and mega-corrupt – Fatah as the ruling party in Palestine, their 1988 Charter (the party was founded in 1987) demands the destruction of the State of Israel to be replaced by an Islamic government – taking over the land that is Israel today (and including the West Bank and Gaza). In 1992, they added a very nasty military component, Izz ad-Din al-Qassam Brigades, which sometimes goes well beyond the civilian party leadership in militancy. The Brigades are best remembered for the spate of suicide bombings and attacks on innocent Israeli citizens earlier this decade.

It’s true that some major factions of Hamas have backed off this extremist policy of obliterating Israel, but let’s face it, if you are prone to want to survive in Israel, do you really want to trust Hamas to accept a compromise? Wikipedia notes the “softening position”: “[I]n July 2009, Khaled Meshal, Hamas's Damascus-based political bureau chief, stated Hamas's willingness to cooperate with "a resolution to the Arab-Israeli conflict which included a Palestinian state based on 1967 borders," provided that Palestinian refugees be given the right to return to Israel and that East Jerusalem be recognized as the new state's capital.”

The world – and Fatah – didn’t accept the Hamas victory in the 2006 elections, and after a brief and violent struggle, Palestine broke into the Fatah-controlled West Bank and the Hamas-controlled Gaza region between Israel and Egypt. Israel began an economic blockade of Gaza, and in 2008 Hamas responded by launching major rocket attacks into Israel from Gaza, random shots that often killed innocent Israeli civilians. Egypt brokered a ceasefire, but it was an uneasy peace, often shattered as factions within Gaza continued to mount attacks. Israeli troops made a minor border crossing in November, killing four Hamas militants. Hamas resumed the rocket fire. In December of 2008, Israeli forces stormed across the border, seeking revenge, pulling out in January of 2009, but intensifying their Gaza blockade by a ir, land and sea.

Add a hard-line Likud government – hell-bent on literally drawing lines in the sand – to a volatile mix of global condemnation of perceived Israeli “excesses” in responding to Palestinian movement for autonomy with an ever-expanding and provocative construction of new Jewish settlements deep into the Palestinian West Bank to a new form of purportedly peaceful challenge to the Israeli naval blockade of Gaza – the recent “flotilla” attempting to deliver relief supplies directly to Gaza – where nine people have been killed on a Turkish vessel… and you have a perfect storm. The world press did not focus on the violent excesses of Hamas in the very recent past – the suicide bombings, the random rocket fire into civilian areas, etc. – but on the loss of life on this peaceful mission. And the world press linked the United States to Israel’s violent attack on this flotilla. Israel’s underlying motivation – to allow the West Bank to prosper as an example to an impoverished and blockaded Gaza – has backfired.

Using medical cases (especially involving children) to evoke lots of international sympathy, Hamas has been highly effective in turning the public relations vectors strongly against Israel, while Israeli Prime Minister Benjamin Netanyahu steadfastly maintains that, “There is no humanitarian crisis in Gaza.” Even the U.N. and other international humanitarian organizations are joining in the rising chorus against the Israeli blockade: “‘Look, it’s not like sub-Saharan Africa,’ said Chris Gunness, spokesman for the United Nations Relief and Works Agency, which assists Palestinian refugees. ‘We are not talking about a natural disaster or famine caused by failed rains. But Gaza is a political c risis with grave human consequences.’… So although some can argue that Gaza's mortality rates are steadily improving, others could note that more Gazans died during Israel’s 22-day military assault 18 months ago than civilians were killed in Darfur during all of 2009… Acute malnutrition in Gaza is well below the ‘emergency’ threshold. But at the same time, a higher percentage of Gazans are dependent on food aid than is true of Somalis…Health officials report no serious problems with cholera, measles or diarrhea, yet 90% of Gaza's water is so polluted that it's undrinkable, and on average two patients die every month waiting for Israeli permits to leave Gaza for treatment, according to the World Health Organization.” Los Angeles Times (June 13^th).

Bottom line: the Israeli economic blockade is a bust. It is a public relations nightmare, further isolating both Israel and the United States from the rest of the world, and Hamas is using this anti-Israeli frenzy to maximum advantage – creating a “legitimacy” to their cause, generating financial and other economic support from unexpected sources (like NATO member Turkey), aiding militants in recruiting anti-Israeli/anti-U.S. extremists into Islamist causes everywhere and generally trouncing Israel with nations that were really more neutral before the recent attacks. Hamas is firmly entrenched in Gaza: “In its three years in power, Hamas has taken control of not only security, education and the justice system but also the economy, by regulating and taxing an extensive smuggling tunnel system from Egypt. In the process, the traditional and largely pro-Western business community has been sidelined… Businesspeople in Gaza say that by closing down legitimate commerce, Israel has helped Hamas tighten its domination. And by allowing in food for shops but not goods needed for industry, Israel is helping keep Gaza a welfare society, the sort of place where extremism can flourish.” New York Times (June 11^th)

But Israel is in an exceptionally difficult position because of its past hard line: while it has a very legitimate security fear concerning the importation of weapons (notably from Iran) into Gaza, its blockade has played into the hands of local militants. What’s worse, Hamas’ political stranglehold on Gaza is even more difficult to reverse, even if somehow the traditional business community were able to restore normal commercial activities. One way or another, Israel is going to have to figure out how to restore Gaza to being a functional economic reality without allowing Hamas to rearm and resume her attacks on Israel. It’s going to take supreme patience, strong global diplomatic efforts and an understanding that there are militant factions in Gaza that will never let go of their ambitions. But for Israel to avoid a continuing and devastating global isolation – one that very much rubs off on America – this balancing process is going to have to begin… sooner rather than later.

I’m Peter Dekom, and Palestinian prosperity is probably the only genuine solution for Middle East peace on the horizon.

Been in a Bad Moody’s Recently?

One of the arenas that seems to be slipping out of regulators’ radar is the rather low level of viability that appears to attach to credit ratings given by companies like Moody’s and Standard and Poor’s. For example, as a precursor to the mega-economic collapse, creative players on Wall Street took advantage of the misnamed “free and competitive marketplace” by pitting rating agencies against each other – each vying for the lucrative contract from the issuing institution on Wall Street to rate any form of new debt including the derivatives (like subprime mortgage bundles) – by, “wink wink,” being gentle (e.g., giving a rating way above what made common sense) to the new debt.

The June 10, 2010 DailyFinance.com provides the absurd results of this standard practice: “Recent studies of rating agencies have been quite damning -- showing that they assigned top ratings to scads of securities that either defaulted or performed poorly, and such ratings played a large role in the financial crisis. One recent congressional investigation by Senator Carl Levin (D-Mich.) found 91% of AAA-rated, residential mortgage-backed securities issued in 2007 and 96% of similar securities issued in 2006 have since been downgraded below investment grade to so-called junk status…‘The miss was huge,’ said Phil Angelides, chairman of the Financial Crisis Inquiry Commission at a rece nt hearing. ‘Ninety percent downgrade. Even the dumbest kid gets 10% on the exam.’”

Corporations often borrow money in non-banking lending structures such as corporate IOU’s called commercial paper that are floated in the open marketplace to the general public. Financial institutions typically bought up aggregations of debt – picking up thousands of mortgages and bundling them into one package – selling fractions of those bundles (derivatives) into the market as well. But for stock brokers and fund managers looking at new debt instruments to buy for their own account or sell to customers, they really need to be able to assess the risk to determine both pricing as well as whether or not they really want to buy or recommend such instruments to clients. It would be close to impossible for such a potential buyer or trader of such instruments to do the massive examination of all the underlying loans in the bundle, particularly if they are involved in many such bundles, so instead they rely on the relevant rating agency that is supposed to be neutral and accurate in their assessment.

Unfortunately, under current practices, the company or institution that creates the debt and puts it out into the market gets to pick the credit rating agency. And the credit rating agency makes money by charging such companies/institutions for the service. But let me ask you a question… if you can place debt only if you get the right rating, would you pick an agency that is generally known to overrate debt or one that is known as strict? A little conflict of interest. There are several clear solutions to this problem, but effective lobbies at every level have managed to keep this aspect of financial reform out of pending legislation. One obvious solution is to take the right to choose the rating agency away from the issuing company. A better solution would be to have a federal agency certify the rating agencies to new standards and require issuers to enter a blind pool of potential rating agencies and get stuck with a random choice over which they have no control. It makes absolutely no sense to let the entity placing the debt have the right to shop around for the most lenient rating agency.

But the flaws in the credit rating schema in this country run deeper than what is illustrated above. Clearly, the financial markets no longer believe the ratings themselves. After all, if two companies are rating exactly the same, logic would suggest that their commercial paper would therefore carry the same interest yield. An “A” should have the same meaning for both, but that clearly is not how the market operates – at least when the issuing company is well-known and well-covered by analysts at the big financial institutions… which may not be the case for bundles of massive micro-debt. In these situations, trading banks and big institutional buyers do not rely on the credit rating agencies and assess the risk based on their own analysis.

DailyFinance.com provides a clear example: “Indeed, as investors found out during the financial crisis, they might buy debt from two companies with the same rating and yet be exposed to two completely different risk profiles. It's an expensive imbalance. To wit: McDonald's debt currently yields 2.43%, while [Bank of America]'s debt yields 4.97%-- more than double that of the hamburger company's. On a $1 billion loan, that translates to about $25 million more in annual interest payments for BofA… ‘These spreads are indicative of the fact that the ratings are wrong and that the markets are further ahead of the curve than the rating agencies,’ says James Camp, managing director of fixed income at Eagle Asset Management in St. Petersburg, Fla., with $17 billion in assets under management. ‘While I don't rely on ratings, you can't ignore the fact that the market trades off those ratings, which it shouldn't because the ratings methodologies are proven to be flawed.’”

One of the biggest issues in our recovery is confidence, which includes trust in the accuracy and fairness of the system. “According to the new NBC News/Wall Street Journal poll, just 35 percent now believe that ‘the stock market is a fair and open way to invest one’s money’ compared to 58 percent who do not believe the stock market is now fair and open due to ‘corporate corruption and broker practices.’” AmericanProgress.org (May 17^th) On May 13^th, in my Wall Street’s No Hitter blog, I noted: “‘Despite the running unease in world markets, fo ur giants of American finance managed to make money from trading every single day during the first three months of the year." Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball. [On May 9^th], Dallas Braden of the Oakland Athletics pitched what was only the 19th perfect game in baseball history… But Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day.’ [NY Times, May 11^th] Morgan Stanley missed the cut; it had four net loss days during the same period.”

There’s a good chance that the rating agencies most identified with the subprime debt won’t survive the spate of litigation directed at them; Moody’s and S&P might disappear, but the underlying problem still needs to be addressed now. Congress and the administrative agencies in the Executive Branch have a duty to the American people to try and level the playing field and right the obvious wrongs in our financial system. Lobbyists and special interest groups – ultra-powerful in a world of cash-starved election campaigns – press for their advantage in the near term. They believe that that can do what they have for decades… run this country to their maximum advantage regardless of the consequences for everybody else. But history teaches us invaluable lesson: there comes a point where such special interests are crushed – sometimes violently – and the system that supports them replaced. Nothing is forever, and Wall Street may be hastening an alternative ending which I doubt they really understand. Remember what happened to Marie Antoinette – a member of the imperious French monarchy who responded to the people’s cry for bread, “Let them eat cake”? Yeah, that one.

I’m Peter Dekom, and I guess history is not a prerequisite to getting an MBA.

The American Dream on a High School Diploma

The kind of high-end-job-creating invention that America is famous for appears to be on a boat somewhere headed for Asia. I’ve blogged on China’s purchase of technological expertise – literally hiring a top engineering professor, for example, out of prestigious Princeton University and bribing him with research money beyond his wildest expectations. I’ve written how China is requiring technology transfers and underlying patent information for companies that want to sell in the Peoples Republic. Growth is leaving our shores for the BRIC nations (Brazil, Russia, India and China)… and technological research – not just building Western designs and providing cheap labor to do that – is now leading the way. The impact on American jobs is devastating.

The June 11^th Los Angeles Times: “The Bureau of Labor Statistics projects that seven of the 10 employment sectors that will see the largest gains over the next decade won't require much more than some on-the-job training. These include home healthcare aides, customer service representatives and food preparers and servers. Meanwhile, well-paying white-collar jobs such as computer programming have become vulnerable to outsourcing to foreign countries.” When we are watching any kind of job growth, maybe we need to focus a whole lot more on the quality of those employment opportunities and what they mean for our longer-term expectations. After all, low paid workers don’t buy houses or consume at a level that would make retailers hopeful; this kind of employment actually kills the notion of a “recover y” and plateaus the American lifestyle at a much lower level than we have enjoyed in decades. The resultant polarization of haves and have-nots is a nation-killer as well; can America, the nation we all love and care for, survive in this mix? Add a few environmental disasters – like we have in the Gulf now – and where does that take us?

This job trend also brings into question the value of an American college education, including even advanced degrees in law and business. Is education really worthwhile when the likelihood is that a recent grad is only going to get a relatively unskilled and lower paying job regardless of schooling? Doesn’t that notion make trade school and community colleges (when they teach real blue collar skills) more valuable? The Times continues on this theme: “After spending tens of thousands of dollars on higher education, often taking on huge debts along the way, many face a job market that doesn’t seem to need them. Not only is the American economy producing few new jobs of any kind, but the ones that are being added are overwhelmingly on the lower end of the skill and pay scale.

“In fact, government surveys indicate that the vast majority of job gains this year have gone to workers with only a high school education or less, casting some doubt on one of the nation's most deeply held convictions: that a college education is the ticket to the American Dream… ‘People with bachelor's degrees will increasingly get not very highly satisfactory jobs,’ said W. Norton Grubb, a professor at UC Berkeley's School of Education. ‘In that sense, people are getting more schooling than jobs are available.’” I can tell you that the number of unemployed law school graduates is staggering, and unless you have a degree from a really top business school, there are an awful lot of MBA who have learned to make a great espresso… while stressing out about repaying massive loans to cover past tuition that often crossed the $40-$50,000 a year mark for professional school. This sounds like the Philippines, Latin America and India – where college-educated people work at call centers or as processing clerks in some outsource center – but not the United States of America.

It tough being college bound right now: “According to the National Assn. of Colleges and Employers, increasing numbers of students are reconsidering majors and career choices based on projections of who's hiring, not their interests… It's understandable. They're surrounded by bleak statistics: The unemployment rate for young job-seekers is close to 20%. Only one in four college graduates reached commencement with a job in hand, compared with more than half three years ago. The dearth of jobs and depression in wages may stunt their incomes for a decade to come.” LA Times (June 12^th) Young grads are acutely aware that starting with low pay as the base upon which future raises and promotions are built suggests a massive reduction in expected lifetime earnings. We have a crisis, but American can and must rise to the occasion; we’ve done it before.

When the Russians sent Sputnik into outer space (before we got there) in the late 1950s, the United States kicked into gear, upgrading its scientific and engineering skills, pushing math and science at every level within the educational system, from top to bottom. American productivity and creative output soared; we kicked some series butt! We landed on the moon in 1969! Well folks, it’s that time again. We need to stop taking apart our education system and refocus our priorities to a new and future-relevant curriculum … or we won’t be toasting our future; we will be toast.

I’m Peter Dekom, and we really shouldn’t be going down without a fight!

Breaking China

If you are a city or town in China, you must rely on the central government for the money you need to run things in a centralized economy… unless you find a BIG LOOPHOLE in the way economic value can be generated – on the side. What if you could buy (take actually) land in areas that you think could be valuable for residential and commercial property if developed, bring in some entrepreneur with access to cash and the knowhow to build, and flip that land for a massive profit? The old “buy low, sell high” maxim?

The loophole is precisely existing Chinese law that allows municipalities to confiscate peasant land, compensate or “relocate” the residents at clearly substandard levels, and then develop the “taken” land for profit. Not exactly the eminent domain concept that allows U.S.-based governments to take land at fair market prices for the greater social good. More like letting high profile financial institutions – like Goldman Sachs – borrow money from the Federal Reserve at close to zero interest so that they can speculate on their own account and make bazillions of dollars of profits. Folks in China turned out of their homes sometimes turned to suicide (some pretty nasty self-immolation included), but that made little difference. Municipalities bestowed lucrative development agreements with favored sons – clearly the politically we ll-connected – and built a class of real estate millionaires and more than a few billionaires along the way. The cities too prospered, often building massive architectural wonders into the local city hall. If you are ever in Shanghai, check out the amazing building with a pearl at the top.

For many cities, this build out did in fact generate the wealth that cities and towns expected. Add a transaction fee to the local government when land changes hands, and municipal revenues can soar. The new construction – much of it pretty shoddy since many cities had no real experience with solid building codes – sold like hotcakes. But then, there are the vast housing developments in outlying regions that lie empty; the plan didn’t always work. And with so much development and so many people borrowing to buy these properties – many purely for speculation and not actually to live in – there was this quivering sensation that a housing bubble was about to burst.

China promptly required larger down-payments – 30% for primary residences and 50% for additional homes – to help stem the tide towards bubbling… and to stop a growing populist backlash against such clearly unfair municipal practices in seizing land. Protests were building. The markets reacted: “May home sales in Beijing and Shanghai plunged 70% compared with April, while transactions in the southern boomtown of Shenzhen were down 62% over the same period, according to government statistics.” Los Angeles Times (June 8^th). And China is even thinking about instituting an annual property tax to make it harder for people buying and holding spec homes.

Clearly, the people want to correct the process and compensate people at more economically justified rates. The New York Times (May 26^th): “China is not a good setting for a Frank Capra tale, but people do have influence over their autocratic masters. Top officials are worried that the property rush — which has led to soaring prices for urban real estate and low prices for old homes and farmland seized for development — is enriching local governments and well-connected developers at the expense of ordinary people and social stability… Effective confiscation of land nominally owned by the state, but farmed or lived on by the poor, has been a major source of unrest for the past two decades… In a provisional move… [based on legislation passed two years ago by the National People’s Congress,] China’s cabinet issued an ‘emergency notice’ in recent days demanding that local governments hold officials accountable for ‘vicious incidents’ and, by the end of June, publicize ‘reasonable’ standards of compensation… But the question is whether that and the newly proposed regulations will be tough enough, or come soon enough, to make much of a difference.

“In China’s 70 biggest cities, government land-sale revenues leaped 140 percent in 2009, to $158.1 billion. Land sales provide up to 60 percent of local government revenues, by one semiofficial estimate — and much more by some private ones… The losers have been ordinary citizens, ousted from their homes with cut-rate compensation and scant legal recourse. The existing loophole-ridden land rules, dating from 2001, give developers wide leeway to clear property.” The Times. Local Chinese are skeptical that this reform will actually take place or that the politically connected will be deprived of this now-accepted path to riches.

If the bubble begins to burst, the central planners in Beijing may be faced with having to buy up many of these shoddy and unsold neighborhoods and empty commercial buildings in order to avoid a total real estate market collapse, like that experienced in many nations – the United States included – around the world. To do less would be to admit the error of this clearly egregious policy and show that China is no different from the other nations on earth… except they actually can afford to buy the properties, even if that is a wasteful use of sovereign wealth. “Central planners will be under tremendous pressure from city and provincial officials not to stifle the housing boom, said Andy Xie, an independent economist in Shanghai. Local governments rely heavily on revenue raised from real estate transaction fees. He said many have accumulated significant debt in recent years to finance infrastructure projects and need those property sales to continue.

“‘They don't want the bubble to pop,’ Xie said. ‘The government is leaning against the bubble, not popping it. Nobody believes this policy is sustainable.’” LA Times. Can central authorities afford to let those municipalities suffer the agony of misplaced development or will they finally come to the rescue? Or will they let a few cities and the developers that love them fall as a lesson to many others… before they step in and stabilize the market.

I’m Peter Dekom, and it is strange to watch what a government with too much extra cash will do next.

The Burning of Osh

63.6% percent of Kazakhstan is made up of a Turkic, Islamic people – the Kazakhs – who write in either an Arabic or Cyrillic script; they even have a certain look: “Fair to light-brown skin tends to be the norm. Among physical traits are aquiline noses, epicanthic fold and high cheekbones. Hair colour among Kazakhs varies from prevalent jet black to red and sandy brown. Hazel, green and blue eyes are not uncommon. These nomads roamed in the Altai Mountains (and thus are known as Altaic peoples) in northern Mongolia and on the steppes of Central Asia.” Wikipedia. While the Kazakh language is making resurgence, Russian is still the primary language, particularly in the northern regions. The next largest ethnic group in this sparsely-populated vast country of just over 16 million is Russian (over 23%), and one of the smallest minorities are another Turkic peoples – who write in a Latin script, are more religious, speak a different tongue, dress differently and are more closely related to the Chinese Uyghurs – are the Uzbeks with less than 15% of the population. Uzbekistan borders on the south, and the second largest city in Kazakhstan is Osh (also a southern town), which has a significant Uzbek presence.

There is no love lost between the ethnic Kazakhs and their Uzbek minorities. In 1990, ethnic riots broke out between these factions and then stabilized into an uneasy truce. The government has been playing a dangerous game, trying to cozy up to the West while not completely alienating its former Russian master. They game hasn’t worked. Kazakhstan is the only country in the world that has military bases from both Russia and the United States, but the country’s political future is anything but clear.

Kazakhstan is ostensibly a democracy, but political instability and authoritarian rule have marked most of this nation’s short post-Soviet Union history. When Kazakhstan President Kurminek Bakiyev recently renewed the lease on an American base – a critical support system for the Afghan war – against the wishes of those in Moscow, Russians seemed to lend increasing support to local protests that led to a coup that toppled Bakiyev in April of this year. A fragile interim government, led by the former foreign minister Roza Otunbayeva, has tried to walk the narrow line between those favoring Russia versus those seeking closer ties with the West and has tried to steer this struggling nation into a new governmental structure.

In the second week of June, the country seemed to split apart at the seams as ethnic rioting in Osh – where Kazakh gangs rooted out Uzbeks and engaged in killings and burning of their homes and commercial buildings until vast sections (Uzbek neighborhoods) of the city were set ablaze – shattered any semblance of a functioning government. The death toll was anything but certain, low end three figures were reported; even the stampede that crushed children as Uzbekistan opened their northern border to allow ethnic Uzbeks to find sanctuary against the Kazakh storm added to growing list of fatalities. Tens of thousands have purportedly crossed the border to safety.

The Russians watched as seemingly pro-Russian gangs pushed back against this ethnic minority. On June 12^th, Otunbayeva begged the Russians to send forces to stop the violence: “The situation in the Osh region has spun out of control… Attempts to establish a dialogue have failed, and fighting and rampages are continuing. We need outside forces to quell confrontation,” she said. Ash from the burning city rained down on the entire region. The Russians held back: “A spokeswoman for President Dmitri A. Medvedev of Russia said that no decision on providing military aid would be made until at least [June 14^th], when Russia will consult with other members of the Collective Security Treaty Organization, a regional security alliance of former Soviet republics…. ‘A decision about deploying peacekeeping forces to Kyrgyzstan can only be made collectively with all members of the [Cooperation and Security Treaty Organization – a regional coalition of former Soviet nations] the spokeswoman, Natalya Timakova, said Saturday evening. She also said that Russia was continuing to ship humanitarian assistance, including medicine, to Kyrgyzstan.” New York Times (June 13^th). The rioting and burning continued unabated.

Clearly, the deployment of Russian forces in a country with a significant American military base isn’t exactly a scenario that favors U.S. policy. A strong Russian presence not only makes operating in this theater difficult but also suggests that the new government may reconsider the American lease retroactively. This would give the United States a very difficult choice: leave or insist that the earlier lease was and remains legally binding and stay despite local opposition. But U.S. forces cannot force a peace, the local government has already requested Russian help, and while neighboring Uzbekistan is deeply concerned and embroiled in the diplomacy of it all, it cannot intervene either if this effort might bring Uzbek and Russian forces into a thoroughly unpleasant zone of confrontation. But genocide has once again reared its ugly head, and however this must be accomplished, the lives of innocents must be spared and the violence stopped.

I’m Peter Dekom, and as we read of this distant violence, how many of us actually see how any of this is truly connected to our own choices and political realities?