Archive for September, 2011

by Stewart M. Patrick- Posted on Tuesday, September 27, 2011- CFR Internationalist Blog

It’s rare that the head of a lumbering international organization delivers a visionary speech about a new world order. But when that person is a polymath and strategic thinker like Robert Zoellick, it pays to sit up and take notice. In a sweeping address at George Washington University earlier this month, the World Bank president identified a “critical inflection point” in world history. Global affairs have been so transformed, he suggested, that we need new paradigms for global governance and global development. Since the speech attracted little media attention, The Internationalist thought it opportune to take a closer look.

When confronted with contemporary dilemmas, Zoellick noted, policymakers are tempted to look to supposed “lessons of the past.” In the current economic and political crisis, many have invoked the post-World War II settlement—including the Dumbarton Oaks and Bretton Woods conferences that created the United Nations, World Bank, and IMF—for guidance. But such nostalgia is misplaced, Zoellick suggests, for the global conditions and problems we confront today are vastly different, both qualitatively and quantitatively. The real relevance of history is to give people a better understanding of how their circumstances have changed from the past.

And change they have. Zoellick makes clear just how much the world has transformed since the days of FDR and Truman—and why the world needs a new multilateralism for a new age:

-The ground is shifting under our feet. Economic and political power is flowing to developing countries at an unprecedented speed. In the 1990s, developing countries collectively accounted for a fifth of global growth. By 2025, six of the biggest emerging economies—China, India, Brazil, South Korea, Russia and Indonesia­­—will account for half. Based on its current trajectory, China may quadruple its per capita income to $16,000 by 2030—“equivalent to adding sixteen South Koreas each year.” For the world to absorb such dramatic changes, China and other rapid ascenders must shift from export-led to more balanced growth. Simultaneously, mature economies like the United States, the European Union, and Japan need to overcome political gridlock and make difficult fiscal choices—or face inevitable decline.

-The time has come to retire old labels and habits. Five decades after decolonization (and two after the Cold War), the shopworn labels “First World” and “Third World” and “North” and “South,” make no sense. It is time to stop treating developing nations as mere aid “supplicants”—wards of the wealthy nations—and start treating them as full partners in the pursuit of shared global growth. Nor can the rich world continue to pretend that it has all the answers, patronizing developing nations with aid conditions and policy guidance when its own recent performance has been so dismal. Increasingly, developing countries are looking to one another for innovative economic ideas and development models—whether it is Brazil’s successful program of conditional cash transfers or Colombia’s mass transit system—and as sources of investment and even foreign aid.

-Tomorrow’s multilateral order will be fluid and volatile. In the twenty-first century, global governance will be more flexible, but also more subject to shocks. Old hierarchies will be pushed aside, as emerging economies join “new networks—of countries, international institutions, civil society, and the private sector—in diverse combinations and changing patterns.” Long-established patterns of Western privilege will fade: “The New Normal will be about countries continually earning their place in world economic affairs, not presuming it because of past standing or official prerogatives.”

-Responsibility applies to everyone. Western officials and analysts tirelessly call for emerging nations to become “responsible stakeholders”—that is, assume the global obligations inherent in their burgeoning power. But Zoellick, who pioneered the phrase in a speech about China in 2005, makes it clear that “This is not just about China. Europe, Japan, and the United States must be responsible stakeholders, too.” This means an end to procrastination in dealing with internal problems like sovereign debt crises, deferred structural reforms, and runaway deficits.

-Development cooperation must move beyond aid. The past quarter century has seen the greatest reduction of poverty in world history, with the number of poor in developing countries being cut in half. Africa, so long an economic backwater, actually grew 5-6 percent in the decade before the global financial crisis—and it is booming again, attracting record trade and foreign investment. To be sure, the “bottom billion” of humanity living in fragile and conflict-affected states will continue to require foreign assistance. But the time has come to envision “a world beyond aid,” Zoellick contends. Such a world would shift from the paradigm of charity to one of mutual economic benefit. It would provide poor countries better access to rich world markets, while allowing them to hedge against fluctuating commodity prices, spiking fuel costs, and natural disasters. It would facilitate foreign direct investment, innovative financing, and technological transfer so that developing countries can modernize industry, agriculture, and services. It would also support good governance and transparency, so that private sector initiative is rewarded, basic services are delivered, and prosperity is broadly shared.

-Women remain the untapped wealth of nations. The evidence is irrefutable. Countries that value women as much as men and girls as much as boys are not only more just, they are also more successful economically. And yet globally, Zoellick notes, women own just one percent of the world’s wealth. Within developing world, girls experience higher child mortality than boys, and women die in childhood in appalling numbers. Women are routinely denied the right to own property, participate in business, gain an education, control family resources, and inherit family wealth. Societies that fail to provide girls and women with their fundamental rights not only commit gross injustices, they also fail to unleash half of their countries’ productive potential.   

Zoellick’s take-home message? This is not your grandfather’s multilateralism. Modernizing global governance for the twenty-first century will require a new compact between rising and emerging powers, retiring tired labels like “North” and “South,” accepting the common responsibilities of power, shifting to a world beyond aid, and empowering women to take their rightful place beside men as the prime movers—and beneficiaries—of global interdependence.


The Telegraph

Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.

German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.

“I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.

Mr Schauble told Washington to mind its own businesss after President Barack Obama rebuked EU leaders for failing to recapitalise banks and allowing the debt crisis to escalate to the point where it is “scaring the world”.

“It’s always much easier to give advice to others than to decide for yourself. I am well prepared to give advice to the US government,” he said.

The comments risk irritating the White House. US Treasury Secretary Tim Geithner has been a key driver of plans to give the EFSF enough firepower to shore up Italy and Spain, fearing a drift into “cascading default, bank runs and catastrophic risk” without dramatic action.

The danger for Germany is that America will lose patience, with unpredictable consequences. The US Federal Reserve is currently propping up the European banking system in a variety of ways, including dollar swaps.

Markets across the world ignored the mixed signals about the true scope of EU rescue measures, convinced that EU leaders have a “grand plan” up their sleeves and will unveil the details after the Bundestag has voted on Thursday on the earlier July deal to revamp the fund.

France’s CAC-40 surged by 5.7pc, led by a 17pc rise for Societe Generale. Germany’s Dax was up 5.3pc. The FTSE 100 jumped 4pc in London, the biggest one-day rise this year. Oil jumped almost $4 in New York to $88 a barrel.

In Berlin, Chancellor Angela Merkel was fighting for her political life as the rump of lawmakers from her coalition vowed to reject the EFSF package, though the latest tally suggests she may squeeze by with her own majority. Angry dissidents suspect that secret plans are being withheld until after the vote.

Greek premier George Papandreou told German business leaders that his country would honour its austerity pledges, but also issued a veiled warning. “The persistent criticisms levelled against Greece are deeply frustrating, not only at the political level, where a superhuman effort is being made to meet stringent targets in a deepening recession, but frustrating also for the Greeks, who are making these painful sacrifices.”

“Drastic measures have had a dramatic impact on the living standards of our citizens. Many Greeks feel they have little left to give. If people feel only punishment and scorn, this crisis will become a lost cause,” he said.  Mr Papandreou’s Pasok party passed a crucial vote on Tuesday to raise property taxes, but at a high political price. The party’s approval rating has fallen to 15pc in the latest Mega poll.

However, Greece was confronted with a new threat as it emerged that several eurozone members are demanding the private sector absorb bigger losses than originally agreed as part of a second bail-out.

A deal struck in July would see creditors taking 21pc losses on their Greek debt holdings, adding around €45bn to the €109bn proposed second rescue. However, more than a third of the 17-member single currency bloc are now said to be demanding bigger haircuts for the private sector. Talk of revisions to the second bail-out may renew default fears as the IMF has yet to re-engage with Greece over the latest €8bn tranche of its initial €110bn rescue. Greece is at risk of running out of money by October 8, though analysts say the payment is almost certain to be made whether or not Greece has complied fully with the terms.

Greece has a trump card in rescue talks with the IMF-EU “Troika”. If it opts for a “hard default”, it could set off a chain reaction. Lorenzo Bini-Smaghi, an ECB board member, said those arguing that Europe’s banks could withstand a Greek default are misguided. “Similar views were held before Lehman. Those who say this have no idea how contagion works,” he said.

Analysts say the Troika will have to approve the next €8bn tranche of aid for Athens in October whether or not Greece has complied fully with the terms. It cannot risk a showdown before Europe’s banks have beefed up their capital base, or before the EFSF is fully equipped to defend the rest of the system.

Like a forced marriage, Europe and Greece must kiss and pretend.

The Economic Collapse

How in the world does the average American family survive in this economy?  The median household income is a little bit less than $50,000 a year right now.  So let’s call that about $4000 a month.  But before any of that money gets spent, you have to take out at least $1000 in taxes.  That leaves about $3000 a month to pay all the bills with.  With that $3000 you have to pay the mortgage (or rent), make the car payments, make the student loan payments, pay for power and water, pay for health insurance, pay for home insurance, pay for car insurance, pay the phone bill, pay the Internet bill and pay the cable bill.  On top of all that, every member of the family needs three meals a day and the cars need to be filled up with gasoline or they won’t go anywhere.  Of course I haven’t even mentioned expenses that don’t happen every month such as car repairs or new shoes.  No wonder so many families are feeling so financially stressed!

The truth is that American families are getting squeezed harder than they have been in ages.  The number of good jobs is declining, incomes are going down, and the cost of living just keeps going up.

The following are 17 facts that prove that the average American family is getting absolutely pulverized by this economy….

#1 The cost of a health insurance policy for the average American family rose by a whopping 9% last year.  According to a report put out by the Kaiser Family Foundation and the Health Research and Educational Trust, the average family health insurance policy now costs over $15,000 a year.  How in the world can most families afford that?  Yes, in many cases employers are paying for at least a portion of that, but still that seems absolutely outrageous.

#2 Due to rising costs, a lot of employers are completely getting rid of health plans for their employees.  In fact, the percentage of Americans covered by employer-based health plans has fallen for 11 years in a row.

#3 The number of uninsured Americans continues to rise.  Things have gotten so bad that an all-time record 49.9 million Americans do not have any health insurance at all.

#4 At this point, most American families are tapped out financially.  According to the U.S. Labor Department, incomes and spending were both down for the second straight year in 2010.

#5 At the same time, the employment picture continues to look worse with each passing month.  According to the U.S. Bureau of Labor Statistics, the number of layoffs in the United States was up 14% in August.

#6 Even if you do have a job that doesn’t mean that you are doing much more than surviving.  According to Paul Osterman, a professor of economics at MIT, approximately 20 percent of all employed Americans are making $10.65 an hour or less.

#7 The amount of debt that the average American family has piled up is absolutely staggering.  The median yearly wage in the United States is just $26,261, but the average American household is carrying $75,600 in debt.

#8 Consumer confidence is extremely low right now.  If the U.S. economy was in good shape, the Consumer Confidence Index would be up around 90.  Instead, it is sitting at 45.4.

#9 Nearly every recent survey shows that the American people are feeling really depressed about the economy right now.  In fact, one poll found that 80% of them believe that we are actually in a recession right now.

#10 Many consumers are seriously starting to cut back on spending again, and that is not a good sign for the U.S. economy.  According to one recent study, 40% of all Americans have cut back on their spending within the last 60 days.

#11 It certainly does not help that millions of good jobs have been shipped out of the country.  Sadly, the trend of offshoring our jobs is going to continue to accelerate if something is not done.  According to Professor Alan Blinder of Princeton University, 40 million more U.S. jobs could be sent offshore over the next two decades.

#12 There is a lot of fear in the workforce right now.  According to Gallup, 30% of all employed Americans are worried that they will be laid off soon.

#13 Today, there are 5.9 million Americans between the ages of 25 and 34 that are living with their parents.  That is putting an even greater strain on the budgets of many families.

#14 American families have gotten very accustomed to using plastic to pay for things.  Today, the average U.S. household has 13 different credit cards.

#15 Many American families are not making it at all in this economy.  Last year, 2.6 million more Americans dropped into poverty.  That was the largest increase that we have seen since the U.S. government began keeping statistics on this back in 1959.

#16 For many American families, living on food stamps has become a way of life.  Today, there are more than 45 million Americans on food stamps and we keep setting a brand new record almost every single month.

#17 Things have gotten so bad that many American families are selling off whatever they can in order to survive.  For example, down in Florida hundreds of people have been selling off their burial plots in an attempt to raise cash.  The following is an excerpt from a local news report about this new trend….

Sellers are posting online, using burial plot brokers, and also funeral homes to market the real estate. Some of those advertisements show single plots starting at about $1,000, while family plots can go for up to $50,000.

Most American families are living in a state of almost constant financial stress.  Way too many parents are spending way too many sleepless nights wondering how in the world they will be able to keep their heads above water for another month.

Very few families seem to have “extra money” for stuff these days.  Yeah, there are the “privileged few”, but most people are really struggling to get by.

In America today, if you are able to keep your home from being foreclosed and you are able to put food on the table and clothes on the backs of your family then you are doing pretty good.

Sadly, as our current economic crisis deepens, the average American family is going to have an even more difficult time trying to survive financially.

So do you have any tips to share for how the average American family can survive in this very tough economy?  Please feel free to share your ideas and thoughts below….

The American Dream

Millions upon millions of young Americans have completely lost faith in the U.S. economy and are mad as hell that their economic futures have been destroyed. The recent economic downturn has hit those under the age of 30 the hardest. Today, there are hordes of young people that should be entering their most productive years that are sitting home with nothing to do. Many of them have worked incredibly hard throughout high school and college. Many of them have stayed out of trouble and have done everything that “the system” asked them to do. But once they got finished with school, the promised “rewards” simply were not there. Instead, millions of young Americans are faced with crushing student loan debt loads in an economy where they can’t find good jobs. When you are in your twenties, it can be absolutely soul-crushing to send out hundreds (or even thousands) of resumes and not get a single interview. Most of us grew up believing that we would “be something” when we got older, and millions of young Americans are having those dreams brutally crushed right now. Americans under the age of 30 voted for Barack Obama in droves back in 2008 because they believed that he would make things better. Instead, Barack Obama has made things even worse. Significant numbers of young Americans are starting to wake up and realize that neither political party is providing any real answers, and they are starting to get mad as hell about it.

Americans under the age of 30 don’t want to hear that they are not going to be able to do better than their parents. They don’t want to hear that they are going to have to “pay the price” because of the mistakes of previous generations. They don’t want to hear that the “good jobs” that have been held out as a “carrot” for them all these years have disappeared and are not coming back.

Millions of young Americans want what was promised to them. They want good jobs that will enable them to enjoy the “American Dream”. They want things to go back to the way that things used to work in America.

If you spend much time around those in their twenties, you know that many of them have a look of hopelessness in their eyes. Large numbers of them have moved back in with their parents. Large numbers of them are flipping burgers or working retail jobs part-time because that is all they can find. There are even a growing number of them that have given up entirely and have completely checked out.

So are we in the process of creating a “lost generation”?

The following are 20 reasons why millions of Americans under the age of 30 are giving up on the U.S. economy….

#1 Only 55.3% of Americans between the ages of 18 and 29 were employed last year. That was the lowest level that we have seen since World War II.

#2 Today, there are 5.9 million Americans between the ages of 25 and 34 that are living with their parents.

#3 The economic downturn has been particularly tough on men. According to Census data, men are twice as likely to live with their parents as women are.

#4 Amazingly, less than 30% of all U.S. teens had a job this summer.

#5 Approximately one out of every five Americans under the age of 30 is currently living in poverty.

#6 According to one recent survey, only 14% of all Americans that are 28 or 29 years old are optimistic about their financial futures.

#7 Since the year 2000, incomes for U.S. households led by someone between the ages of 25 and 34 have fallen by about 12% after you adjust for inflation.

#8 The cost of “getting an education” has become increasingly burdensome in recent years. Average yearly tuition at U.S. private universities is now up to $27,293. That figure has increased by 29% in just the past five years.

#9 In America today, approximately two-thirds of all college students graduate with student loans.

#10 Millions of young Americans are absolutely being financially strangled by horrific student loan debt loads. Sadly, the total amount of student loan debt in the United States now exceeds the total amount of credit card debt in the United States.

#11 In 2010, the average college graduate had accumulated approximately $25,000 in student loan debt by graduation day.

#12 One-third of all college graduates end up taking jobs that don’t even require college degrees.

#13 In the United States today, there are more than 100,000 janitors that have college degrees.

#14 In the United States today, 317,000 waiters and waitresses have college degrees.

#15 In the United States today, approximately 365,000 cashiers have college degrees.

#16 In the United States today, 24.5% of all retail salespersons have a college degree.

#17 As the economy has crumbled, fewer young Americans have been getting married. Today, an all-time low 44.2% of Americans between the ages of 25 and 34 are married.

#18 Young Americans are becoming increasingly frustrated as our politicians stand by and do nothing while our economy is being hollowed out. The sad truth is that United States has lost an average of 50,000 manufacturing jobs a month since China joined the World Trade Organization in 2001, and top politicians in both major political parties keep pushing for even more job-killing “free trade” agreements.

#19 Young Americans are becoming increasingly frustrated that pretty much the only jobs that seem to be available are low paying jobs. Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.

#20 Young Americans are becoming increasingly frustrated that previous generations have saddled them with a 14 trillion dollar national debt that they are expected to make payments on for the rest of their lives.

A lot of young Americans swing back and forth between anger and despair. Many of them worked like crazy for years because of the promise of a better life, and now they are being bitterly disappointed. Just consider the following testimonial that was recently posted on The Atlantic….

“I am in my mid-20s. I have a university education. I started working when I was 14. I have chemical burns and scars over my hands from dealing with caustic cleaning chemicals. I did not want that to be my life like my uncles. I had to get out. I worked very hard in high school and volunteered and was the member of clubs and all of that great stuff. I got into a good university and worked hard. I took a language course, took things that I loved. I worked through my degree – I was even a janitor in a building that I lived in, because I needed the cut in rent. I did that for no pay.

After these months of unemployment I have fallen into a pretty major depression. I live at home, I do chores, I look for work. As much as I want to get my life together, I have some great mental health issues to deal with – but have neither the money to purchase medication that may help me, nor the ability to pay for psychological or psychiatric help.”

So what can be done?

Well, someone could wave a magic wand and fix the U.S. economy, but we all know that is not going to happen.

In fact, there is all kinds of evidence that the U.S. economy is about to get even worse.

So should we just tell our young people that they might as well just give up and start making rap videos about using food stamp cards like this one? (*Warning* The video contains some very strong language.)

The number of Americans on food stamps has increased by 74 percent since 2007. Millions of young people are learning that the only way to survive is to be dependent on the government.

It certainly does not help that our entire education system is deeply broken. For example, did you know that the verbal scores on the SAT for the class of 2011 were the lowest ever recorded?

Our students have become so “dumbed down” that large numbers of them can barely even function in society once they graduate.

That is not their fault. That is our fault. We have failed young Americans in so many ways that it would take a series of books to detail them all. We can say that we are sorry, but that just isn’t going to cut it.

Millions of young Americans want what was promised to them, but we no longer have it to give to them.

Anger in this nation is already starting to boil over in strange and unpredictable ways. If the economy gets even worse, we are going to have tens of millions of young Americans that are mad as hell and that are ready to riot in the streets.

What are we going to do then? According to a recent Gallup poll, 81% of Americans are “dissatisfied with the way the nation is being governed”. That is not a sign of a healthy nation. The sad truth is that the foundations of America are crumbling and we have millions upon millions of young people that are incredibly angry and incredibly frustrated.

It does not take a genius to figure out that is a recipe for disaster. So please pray for America. We are going to need it.

Brian Domitrovic- Forbes

Last week, the Federal Reserve announced that it was going to pull off a weird maneuver. It would “twist” interest rates. Through buying and selling different kinds of bonds on the open market, the Fed would try to lower long-term rates and raise short-term ones.

From the depositor’s perspective, the twist hits a false note. When you buy a 5-year CD, you expect a nice premium on a 90-day one. Here the Fed is nailing real savers by encouraging short-term speculation in lieu of long-term reward.

So what’s up? As all the news stories mentioned last week, in the twist the Fed is reprising its own policy from fifty years ago. In 1961, the Fed did the same thing.

Back then, the reason the Fed twisted was two-fold. First, it thought that loose money on the long end would stimulate the economy. There had been a recession in 1960, the fourth in eleven years. The Fed figured that serious borrowers – the ones who borrow long for substantive things like houses and factory expansion – would get going with activity if prime rates were brought down to around 1%.

The second reason was the kicker. The Fed knew that the markets would interpret the loose money as an inflation signal and in turn plow money into gold. The problem was that the U.S. currency at that point was officially collateralized in gold. Foreign monetary authorities could buy gold on demand from the U.S. at $35 per ounce. If the gold price went above that in the private markets, there would be a beautiful arbitrage opportunity.

The increase in short-term rates was meant to ward off such “speculation” in gold. Since gold by definition does not pay interest, stateside bank accounts would remain competitive against the prospect of gold’s capital appreciation.

None of this worked. Foreigners kept buying gold in the face of the rock-bottom long rates, and the U.S. hoard was pressured. Finally the Fed tightened long and a couple of tax cuts came. Money flowed into currency and the real economy on both counts. Everybody forgot about gold for a while as the economy boomed.

You’ve got to wonder why today, the Fed would repeat a move notable for its ineffectiveness. A good guess is that the Fed has been getting sick of watching gold shoot the moon. One way to interpret the price of gold is to see it as the world’s popular vote on the legitimacy of Fed policy. The higher the price, the worse the grade.

So by bucking up short-term rates, the Fed can tease out money that might be heading gold’s way on account of the rock-bottom long rates and all the quantitative easings. Sure enough, on Friday, gold had its biggest one-day drop.

The problem with all this is that it’s just a game. So people are in short-term accounts as opposed to gold. The inflationary expectations are still there. The refusal to invest long is still there. The capital strike represented by $1800 gold is still there, even if gold is in the $1600s.

With fiscal policy from the Obama administration a bevy of tax increases, regulations, and federal appropriations coming down the pike, it should come as no surprise that the Fed feels the need to regress. What else is it to do if the economy sees in fiscal policy the promise of a dead hand?

The historical precedent is clear. The Fed first tried Operation Twist in the context of serial recessions, as a maneuver to prevent further embarrassment on the gold front. Those recessions finally were slipped, and magnificently, at the hands of not the twist, but a policy reversal, a policy innovation, into higher rates in the context of business tax cuts and reductions in every marginal rate in the income tax. The only way the Fed can regain credibility today is if the fiscal sector commits to getting out of the way of an economy aching to boom.

Submitted by Tyler Durden on 09/27/2011 10:53 -040– As posted by Zero Hedge

For some odd reason, even though it is by now very, very clear that the world is back in a depressionary state, some are still fascinated by the inflection point of the global economy, and wonder: “are we headed for a recession?” (which obviously is the wrong question). Anyway, to help with the answer is this set of 9 interactive charts from Reuters which should remove any last bit of doubt as to what is about to unfold, at least in the perception of conventional wisdom. Furthermore, since most of these data sets are coincident or lagging, it is safe to say that the NBER will shortly announce that the recession started some time in H1.


2. Philly Fed and Chicago PMI

3. Euro-zone & China PMI

4. OECD Leading Indicator

5. ECRI Weekly Indicator

6. Initial Jobless Claims

7. Payrolls and Recessions

8. Velocity of M1 Money Stock

9. Consumer Confidence

No additional color needed but it is perhaps comically notable that, with another short squeeze driving stocks up almost 7.5% from the lows on Friday, long-only equity strategists start re-emerging from their bunkers calling for 10, 20, 30% moves into year-end- does it ever get old?

The Economist

THE fruit-and-vegetable market on Reclamation Street in Hong Kong attracts residents who still prefer to shop at open stalls rather than cloistered malls. Under the awnings that flank the road, traders offer dragon fruit, rose apples and the flowering stems of Chinese cabbage. The prices are scrawled on cardboard tabs, which makes them easy to change.

That is just as well, because prices change quickly in Hong Kong. In the year to July they rose by 7.9%, the fastest rate in almost 16 years. In other economies, the central bank would respond by raising interest rates. But Hong Kong has little control over its monetary policy. For the past 28 years it has pegged its currency at about 7.8 to the American dollar. In so doing, it has placed its monetary fate in the hands of the Federal Reserve, which has floored rates and promised not to raise them any time soon. That has left Hong Kong with a brisk economy, low unemployment, a worrying property boom—and real interest rates of -7.7% (see chart).

That is likely to prove unsustainable, argues Bill Ackman of Pershing Square Capital Management, a hedge fund. In a 140-slide presentation this month, he explained his high-profile bet against Hong Kong’s peg. He has bought call options, which give him the right to buy Hong Kong dollars at a price of, say, 7.5 to the dollar. If the peg persists, such an option is worthless. But if Hong Kong’s currency strengthens significantly before the option expires, Pershing will make a bomb.

By abandoning its peg the Hong Kong Monetary Authority could set interest rates high enough to contain inflation and curb the property market. But in such an open economy, exchange-rate flexibility is no guarantee of economic stability. Hong Kong tried floating the currency between 1974 and 1983, but it was not a happy experience. Inflation ranged between 2.7% and 15.5%; growth lurched between 16.2% and 0.3%. In September 1983, a month before it was pegged, the Hong Kong dollar fell by 13% in two days.

The currency does not have to float for Mr Ackman’s bet to pay off. He will make money even if it is merely repegged at a stronger rate. That would help realign Hong Kong’s exchange rate, which Pershing thinks is too competitive. Yet such a realignment is already taking place, as rising prices help to offset the depreciation of Hong Kong’s dollar and America’s against other currencies.

Although Hong Kong’s exchange rate is fixed, its wages and prices are famously flexible—in both directions. That allows it to adjust to the dollar’s ups and downs without changing its nominal peg. For example, consumer prices fell for 68 months from November 1998 to June 2004, a bout of deflation shorter but deeper than Japan’s. In a 2009 paper, James Yetman, now at the Bank for International Settlements, found that prices in Hong Kong display little of the inertia seen elsewhere. Some goods, like English newspapers, keep the same price for years, but flowering Chinese cabbage can double and then halve in price in months. Hong Kong’s street markets may be dying out, but such flexible pricing may save the link to the dollar.

By Stephan Richter | Friday, September 23, 2011- The Globalist

Much of the criticism of President Obama, be it from the left or right, obscures a pivotal truth about the U.S. political system: The presidency, long considered the pinnacle of political power, is becoming increasingly irrelevant. The Richter Scale explores what this means for the future of the United States.

Amidst all the criticism of Barack Obama, half of it deserved and half not (or vastly exaggerated), a pivotal truth about the evolution of the U.S. political system is being obscured: The U.S. presidency — which until recently was considered the pinnacle of political power not just within the United States itself, but globally — is increasingly becoming irrelevant in domestic politics.

This is due, in part, to special circumstances, such as the neophyte tendency of the sitting president to negotiate with himself, and hence give away valuable negotiating chits long before he had to. Another cause is this president’s focus on “giving a good speech” — i.e., his highly paternalistic way of reminding the unruly children (i.e., all politicians) to please, please behave in a responsible manner.

Yet another factor is that American politicians, to varying degrees, but in both political camps, behave as lone riders whose only sense of loyalty is to themselves and their own personal political fortunes.

What to do under those circumstances? Americans, especially in difficult times, are always quick to assert the need for “leadership.” And, of course, no form of leadership has been more sanctified than presidential leadership.

It is thus quite curious that — whether with regard to the big health reform package, which the Obama Administration let Congress craft largely on its own, or on the debt ceiling negotiations, where the Administration once again did not present a detailed package — such leadership has not been forthcoming.

However, before one jumps to conclusions — à la, it’s just Mr. Obama (and the Democrats) who can’t lead, whereas any Republican president and a Republican Congress certainly would — it is worth reflecting on the nature of divided government in the contemporary United States.

The evidence from the Obama years is that, even if one party has the White House and a significant majority in both Houses of Congress, as the Democrats had in 2009 and 2010, this is not enough to exert presidential leadership. As long as there are 41 senators of the opposition party with a strong sense of determination, then much pressing legislation — and even scores of minutiae, such as presidential appointments several levels below cabinet rank — can be held up for good.

Of course, there is always the question about whether the Democrats are as ardently united in their opposition to a Republican president as the Republicans are in theirs to a Democrat serving in the White House. But the more important issue is whether — given the acerbic nature of political dialogue in Washington — any president, by virtue of the nature of the office, will turn into an increasingly futile herder of two gangs of cats who are hell-bent on being at each other’s throats.

What the debt-ceiling negotiations demonstrate is that, at least in an atmosphere of extreme politicization, the only thing that ultimately matters in the power equation is the two political parties in the two houses of Congress. Hence, what is currently (but erroneously) made out to be a personal weakness of Mr. Obama’s will reveal itself as a structural shift in the U.S. body politic.

In a heavily antagonistic political framework, the “presider” is superfluous. In other words, it’s not Mr. Obama, but the office, stupid. Hard to believe though it may be, this shift is ultimately a good thing — for it forces the United States to become more like other countries, a parliamentary democracy not in name and in form, but in political practice.

Over time, the elevated nature with which the office of the U.S. president has been treated in the past, along with its 19th century pomp and decorum, is an illusion, or worse, a quasi-royalist fiction. It creates an expectation of a top-down regime of politics that is long gone.

Politics is a contact sport, especially so in the United States, where — much more than in other developed countries — two fundamentally opposed, even mutually exclusive, visions of the country’s future are in direct combat with each other. Under those circumstances, every participant, almost by necessity, has to act as a hyper-partisan.

This shift, while disorienting for the time being, is to be welcomed. Why? Because it addresses very serious questions about the ability of the United States to adapt to modern times, as well as to the age of globalization and complexity management. The latter two put a premium on the ability of all nations to adjust — and preferably to an immediate response.

In recent decades, however, the U.S. system has proven quite resistant to change, even in moments of crisis. The formal alternative, shifting away from the 1787 constitution and adopting a more modern one, is not realistic in the case of the United States. It is a remarkably tradition-bound country, and is especially so now, as far as the Republicans are concerned.

The idea of mimicking modern France — which had its start as a democratic republic pretty much at the same time as the United States (in the late 1780s) and is now onto its Fifth Republic — may be endearing, but unrealistic in the U.S. case. France uses the founding of a new republic as a solution to move forward whenever it has gotten stuck in its old political ways. Such constitutional flexibility would be unimaginable in the United States of today.

Given that, the silent shift in the constitutional structures — more toward a congressional government as presaged by Woodrow Wilson back in 1885, 28 years before he became president in 1913 — is to be welcomed.

Just don’t blame Obama for this structural shift. The president’s regality may have accelerated the trend, but, in the end, that outcome is to be welcomed.

The bitterness of the current domestic political dealings will hopefully subside in time, as Americans get used to a new political reality where the presidency is a much-diminished entity. Ending the misplaced belief in its quasi-magical powers can only strengthen American democracy for what it is here (and almost everywhere) — an imperfect, highly human endeavor at self-government.

The biggest betrayal of the essence of the United States of America, it turns out, is its ill-placed and outdated belief in the powers of the presidency. Making that abundantly clear is what Mr. Obama’s tenure will ultimately be remembered for.