Ruminations, February 21, 2010

Will Republicans emulate Democrats?

Over the past five years,Americans have been remarkably consistent in their political orientation.That’s what a poll reported, according to Gerald Seib, writing a month ago inthe Wall Street Journal. Had theDemocrats read and understood the poll, they might have avoided the tacticalerror that has been a strong contributor to their current apparent decline inpopularity. Are the Republicans about to make the same error? It could be.

The Wall Street Journal/NBC poll showed that over the past five years,23 percent (give or take a percent or two) describe themselves as politicallyliberal and 35 percent describe themselves as conservatives. Self-describedmoderates make up 37 percent of the cohort. If these figures have been soconsistent, why did the electorate vote liberal/Democratic in 2006 and 2008?

That’s easy. According toSeib: “That shift in preference toward the Democrats can be attributed to, amongother things, the declining popularity of President George W. Bush; acombination of ethical problems, drift and over-spending by Republicans inCongress; war fatigue; and the genuine and widespread popularity of Mr. Obama.”It did not mean that the electorate had become more liberal.

Why have the Democrats become sounpopular lately? They read the results of the election as a mandate for moreliberal programs, bigger government and more spending. And they’re wrong. Infact, according to a Rasmussen poll, 75 percent of Americans view theDemocratic leadership as liberal –more than three times the number of Americans that view themselves as liberal.

Should current polls prevail in Novemberand the Republicans sweep into power, how will they read the numbers? Judgingby the statements many on the right are making, they could be the mirror imageof the Democrats; that is, they will read the results as a mandate for moreconservative programs. It is truethat voters want a more conservative program and smaller government than theDemocrats have proposed but, the question is, how much more conservative? Ifthe Republicans go too far to the right, the positions might be reversed for2012 – a distinct possibility since, according to the same Rasmussen pollmentioned above, 61 percent of Americans see Republican leadership as conservative as compared with 35 percent of Americanpublic who see themselves as conservative.

However, there are some signs thatRepublicans will not veer to the far right. John McCain (R, AZ), the bête noirof the far right, has been endorsed by two leading conservatives: Senator ScottBrown (R, MA) and Sarah Palin.

The problem that bothparties face is that once in power, they find that it is against human natureto deny your political predilections.

China’s in apickle

The expression “in a pickle”has been around for 600 years or so and describes a difficult situation. Whybeing “in a pickle” is a less critical situation than being “in the soup” – areally bad situation — I don’t know. But let’s accept the wisdom of the ages.

Chinais in a pickle. They have been funding the UnitedStates’ deficit for some time. Until recently,it has been a good deal (relatively speaking) for both sides: having a readycustomer (China) for U.S. Treasury bonds keeps interest payments lower andkeeps gives the dollar some strength; for China, it gives them a safe place toinvest their trade surplus while keeping the U.S. economy strong enough tocontinue to buy Chinese products.

Butthen the Great Recession hit and the UnitedStates’ deficit spending went into overdrive. Chinawas concerned about the deficit and expressed that concern to the incomingObama Administration. But the Obama Administration continued deficit spending,to which China’sPremier Wen Jiabao said, in effect, “That’s my money you’re messing with.” 

Wen’sconcern is that continued deficits weaken the U.S. dollar vis-à-vis the Chineseyuan. If that happens to a significant degree, the U.S. Treasury bonds(actually, bonds, bills and notes) that Chinapurchased with yuans will be paid back with dollars that are worth less than China’sinitial investment. Wen’s concern impressed President Barack Obama so much thatObama sent Treasury Secretary Timothy Geithner to Beijing to expressly assureChina that the U.S. had everything under control. It seemed to work – for awhile.

ButChinawas still in a pickle. Obama’s deficits were outpacing Bush’s and if Chinadumped U.S. treasuries(almost $800 billion), that would precipitate a run on the treasuries andexacerbate the exact situation that Chinawants to avoid: a falling price on treasuries and a weaker dollar. And,naturally, a weaker dollar means that the UnitedStates will purchase fewer Chinese exports,which will weaken the Chinese economy. What to do, what to do?

Severalweeks ago, Chinatook the first step; it started selling bonds. It sold so many (net, over $34billion) that it is no longer the chief foreign holder of U.S.debt (Japanis). Add that to the $12 billion in treasuries that Chinasold in November and they have a cool $46 billion on hand.

Timing,it is said, is everything. The dollar didn’t weaken but that was due, to adegree, on the debt problems in Greeceand potential problems in Spain,Portugal and Italy(in what passes for humor among economists, the four countries are commonlyreferred to as Club Med). If the European Union comes to their rescue, and theymost probably will, then the market will move away from the euro toward a safercurrency – the U.S. dollar. If the EU fails to rescue Club Med, then the dollarwill undoubtedly get stronger vis-à-vis the euro.

NowChina’sin another pickle. What does it do with $46 billion? It doesn’t want to buyeuros, for obvious reasons. It might buy gold, which is already at recordlevels. But buying gold does nothing for the Chinese economy. It might investit with agents in the Britain,who were buying U.S.treasuries. (Wait a minute! Didn’t Chinajust sell U.S.treasuries?)

ButChina’sin another pickle. Its economy may not be as strong as has been reported.

• There has been a dramatic increase in its money supply, which will threaten inflation. One way to hold down inflation is to increase interest rates, which will slow expansion.
• According to the National Bureau of Statistics of China, there are 20 million new entrants to China’s labor market each year. That means that to avoid a dramatic increase in unemployment, China must create 20 million new jobs each year.
• There appears to have been a big real estate bubble in China. We know what happens when real estate bubbles burst.
• There is some suspicion that the economic numbers that China has been reporting are not all that they have said. Twenty years ago there were millions of knowledgeable people who accepted the financial figures that the Soviet Union published, and we now know how fanciful those numbers were. China has a more open society than the Soviet Union but nonetheless there are fewer independent economic statistics produced in China than we would like.
• The pre-Great Recession model, where China financed our debt and we bought Chinese exports, no longer works. Given that China has a planned economy, it needs to develop a new plan.
• According to Reuters, "Senior Chinese military officers have proposed that their country boost defense spending.” Well, they do have $46 billion and need to create millions of jobs annually. But, can you really have a big powerful military sit around without deploying them somewhere?

China’sin a pickle. But we said that. And lest you begin to indulge in a bit ofschadenfreude, remember this: President Obama’s in a pickle, too. In some waysit’s the same pickle. We don’t know who China’seconomic advisors are but we know that Obama has a good solid team. The problemboth Wen and Obama have is that good economic strategies can conflict with goodpolitical strategies and, in the short term, politics often wins out.

As we said, we’re in a pickle. But at leastwe’re not in the soup – not yet, anyway.

Number 2 Taliban killed

Last week, the U.S announcedthat it had captured the number two in the Taliban’s hierarchy, Mullah Abdul Ghani Baradar. It seems that since the Bush Administration, wehave killed or captured a lot of number 2 guys in the Taliban or in al Qaeda inIraq.

It may be impolitic to sayit but, if you ask me, they’re all number 2 – if you know what I mean.

Quote without comment

1965 Nobel Prize inphysics winner Richard Feynman: “Science is the organized skepticism in thereliability of expert opinion.”