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Adapting to the state’s growing role in global equity markets

by Brad Setser
April 24, 2008

Central bank purchases of traditional reserve assets still dwarf sovereign wealth fund purchases of riskier assets — as well as central bank purchases of equities. But over time, it is reasonable to expect that many over-reserved sovereigns will diversify their portfolios. The recent decision to increase the share of the CIC’s initial $205-210 billion in capital that it can invest abroad and SAFE’s increased willingness to purchase equities as well as bonds are examples.

I didn’t agree with everything that Knut Kjaer (the former director of Norway’s Government Fund) wrote last Monday in the Financial Times. But I thought he framed the core issue raised by sovereign wealth funds, central bank purchases of equities and state-backed firms expanding abroad quite well. The basic issue is how institutions in both the “investing” and “receiving” countries need to adopt to a world increasingly defined by state rather than private flows.

Kjaer doesn’t dance around the fact that the rising presence of the state in the market is a real change:

A far more challenging issue is how the huge increase in financial assets managed by potentially non-economic agents will affect the efficiency of the global capital market and the allocation of risk and resources. ….

Parts of Kjaer’s framing – notably the risk that non-economic actors will distort the allocation of resources — differ the framing favored by many of those looking to earn fees managing sovereign funds. They tend to argue that sovereign funds have been around for a long time, so there is nothing “new” about sovereigns investing in equities.

It is true that many (though not all) sovereign funds have been around for a long time. But that doesn’t mean that nothing has changed.

The existing oil funds — who have long been active in the equity market — have a lot more money with oil at $115 than with oil at $20-25 – or with oil at $50.

And then there is China. China enormous foreign asset growth in the first quarter implies that it might be able to add more to its reserves and sovereign fund in 2008 than all the oil-exporters combined even if oil stays at its current levels. Even if China falls a bit short of the oil-exporters, it still looks to be close race.

China consequently has an enormous latent capacity to alter the composition of global capital flows by changing the composition of its portfolio: right now it could put another $200b in the CIC and still have $500b left over for other state institutions to play with. Those kinds of sums are new – as is possibility that China might soon be a big buyer of equities.

The potentially dramatic increase in sovereign investment in equities over the next few years raises a host of issues. (More follows)

Kjaer highlights one risk – namely the risk that concerns about state control will mean that the formal owners of an asset won’t be able to exercise their ownership rights.

The offsetting risk is that state owners of assets will in some sense abuse their ownership rights, and use their rights to promote “state” objectives. One state objective – making money – overlaps well with the core objective of most private investors. Other state objectives may not. Many sovereign funds seem keen to use their ownership stakes of foreign companies to promote their own economic development. Such “development” policy objectives are part of many funds mandates. Qatar’s advertising in Forbes says as much: the QIA’s evaluation criteria include “added value to the State of Qatar” such as “economic synergies or benefits for Qatar and its people.”  Mubadala has made a string of investments (Ferrari, the “National”) designed to elevate the profile of Abu Dhabi.

Gerald Lyons of Standard Chartered recognizes that China is likely to face pressure to do the same. Stephen Foley reports:

Gerard Lyons, chief economist at Standard Chartered bank and a leading expert on SWFs, said in a recent panel discussion in Washington that funds’ behavior is likely to be a mixture of commercial consideration and “state capitalism”, where investments are likely to reinforce particular government goals, such as spurring the development of natural resources in Africa – already a key area of Chinese government investment. The limits of what is acceptable, he predicted, will be tested in the UK – and sooner rather than later.

Kjaer puts more emphasis on the first risk, arguing that the solution to the second is more professional management of state assets.

Particular regulations for SWFs would be a step in the wrong direction. Instead, we should discuss what conditions are needed for the professional management of publicly owned financial assets. The free flow of capital contributes to efficient allocation of risk and resources. Regulation of SWFs risks creating inefficiency by curbing market forces at a time when we need to strengthen both the power and the professionalism of capital owners.

However Kjaer’s description of the institutions that Norway has in place to assure that the professional management of its state resources also highlighted how different Norway’s practices are from the practices of other funds.  That gap almost certainly reflects the gap between Norway’s political institutions and the political institutions of the sponsors of the other big funds.

The big Gulf funds effectively report to a single family – and presumably do what that family wants. Kuwait’s fund – which reports to Kuwait’s parliament as well – is something of an exception. So far, those families primarily have wanted to get even richer than they currently are.

China’s fund, like Singapore’s fund, reports directly to the top levels of China’s state. It has yet to build up enough of a track record to show how it will be used. However, China’s management of its state stakes in domestic industries suggests the need for some caution. One example: Three of China’s four large state commercial banks have been listed, but they still aren’t managed in a fully commercial manner. Just think of the various ways they have been used to support China’s exchange rate policy. I still don’t quite understand why it makes sense for the same institution that manages China’s strategic states in the state banks to also manage China’s investments abroad.

The second issue is how “transparent” sovereign funds should be, particularly in a world where some classes of private funds aren’t all that transparent. Transparency is obviously related to the question of how sovereign’s exercise their ownership rights. One aspect of Norway’s institutional structure is that it transparently discloses how it exercises its vote – and which outside institutions manage its money. Other sovereign wealth funds don’t disclose what they own or who is managing their money.

Transparency goes beyond voting. Most European and American public-sector pension funds disclose the size of a fund, how fast their fund is growing and how the fund has allocated its money.

The Peterson Institute’s Ted Truman recently updated his “sovereign wealth fund scorecard.” His impressive and detailed work is worth reading carefully.

Truman’s latest scorecard illustrates how the practices of many large existing sovereign funds – particularly those originating in non-democratic countries – differ from the practices of US state pension funds as well as Norway’s government fund. The institutions for managing the Gulf’s public money right now seem to have a lot more in common with the institutions (think “private banking”) for managing private money than the institutions for managing public money. That leads me to a simple observation, but one that many sovereign funds who do not want to change will find deeply discomforting: the more their institutions for managing sovereign money diverge from the domestic institutions for managing “state” funds in the “recipient” countries, the more restrictions they likely will face.

That clearly hasn’t been the case up until now. But the sheer scale of the increase in sovereign government’s cross-border equity investment will drive changes. Changes in the way some sovereign funds invest will also drive changes: if ADIA wants to be one of the biggest equity owners of one of the largest US banks, it will attract more attention than if it invests in ways that keep it out of the headlines. Banks are – as Martin Wolf noted – regulated public utilities, albeit ones that pay better than most other utilities. Changes in the set of countries investing in equities will drive change: large countries like China and Russia raise different concerns that Norway and the small Gulf states.

Some bankers – like Lyons — recognize this:

… sovereign funds “reflect a shift in the balance of power, so the rules need to shift on both sides,” Standard Chartered Plc Chief Economist Gerard Lyons said at the Luxembourg conference. “The rules of the game do imply increased transparency.”

Kjaer’s framing implicitly raises a third issue, one that I don’t think has gotten enough attention. The surge in sovereign investment in safe government bonds that accompanied the surge in global reserve growth likely contributed to a “bond market bubble” – one that pushed down the real yields on government bonds in both the US. That contributed to a host of additional market distortions, as private investors scrambled to find higher returns. The flat or inverted yield curve pushed intermediaries issuing short-term debt to buy longer-term debt to take on a lot more credit risk, with results that we all know. A surge in sovereign investment in equities could introduce similar distortions.

The most obvious risk – it seems to me – is that transforming a big share of the likely $1 trillion annual flow from central banks into the US and European bond market into the equity market (whether by more central bank investment in equities or the creation of new and bigger sovereign wealth funds) will generate a bubble in the US and European equity markets. P/E ratios would rise on the back of a surge in sovereign demand – and rising equity market wealth would provide a new source of support for consumption growth.

That prospect excites many. It scares me.

The distortions sovereign demand introduced into the bond market – and some of the knock-on effects those distortions had on the credit and housing markets – weren’t healthy. A surge in equity market prices that allows American and increasingly European households to continue (to paraphrase former Chairman Volcker)” to be addicted to spending and consuming beyond [their] capacity to produce” also implies that necessary adjustments in the global economy would continue to be delayed.

34 Comments

  • Posted by don

    "A surge in equity market prices that allows American and increasingly European households to continue (to paraphrase former Chairman Volcker)’ to be addicted to spending and consuming beyond [their] capacity to produce’ also implies that necessary adjustments in the global economy would continue to be delayed."

    I certainly agree. It is too bad that all of our institutions are bent on short-term (and short-sighted) solutions. Hence the federal reserve, Congress and the President are all intent on keeping up U.S. spending to retard the current downturn. I fear Ben’s legacy will be so disastrous that Greenspan’s won’t merit more than a footnote in the future histories.

  • Posted by MMcC

    BSetser: "I still don’t quite understand why it makes sense for the same institution that manages China’s strategic states in the state banks to also manage China’s investments abroad."

    It doesn’t, in principle. In practice, the best collection of guys capable of cleaning house and putting a company on the market in China now happen to reside at CIC. They’re also the ones best capable of ensuring international institutions (who can be useful to China in other ways) take the right strategic stakes in those banks pre-IPO. My belief is that CIC were willing to take these banks on primarily to guarantee CIC would collect the gains post-listing, post-lockup. (The securities companies through Jianyin are a slightly different story.) I think CIC already gets the idea that it won’t be welcome in many countries if it’s the agent of more than one government policy. That said, there were few reasons to believe the domestic bank stakes would worry anyone internationally 6-9 months ago…

  • Posted by Twofish

    There is also internal politics. If you created CIC from just one agency then that agency would control it. If CIC was formed from Huijin, it would be run by MOF. If it was just responsible for external investments, pretty soon SAFE would control it. If it handled pension funds, then it would just be NSSF under another name.

    By combining different functions, it insures that CIC wouldn’t be controlled by one agency. It also insures some degree of diversification, and CIC invests in radically different things for the exact same reason that you shouldn’t invest your 401(k) in one thing.

  • Posted by Twofish

    I should point out that I find it a curious and extremely questionable assumption that multiple private entities free from state intervention will somehow make investment choices that involve more efficient capital allocations than multiple state controlled entities in a market.

    Sure we don’t know that much about what the Kuwaiti Royal Family is putting their money, but it’s questionable whether they are putting their money in things that are worse than what major investment banks are putting their money into. Sure governments might have some "non-financial motives" for their investments, but so do the boards of Fortune 500 companies, and I don’t see any reason to trust the al-Sabah family more or less than the Ford family, the heirs of Sam Walton, or the board of directors of Citigroup.

    Also the US is moving to a form of state capitalism. In exchange for getting bailed out, the major investment banks are going to have to submit themselves a lot of regulation, which means that a lot of the fundamental decisions about capital allocation are likely to be made by the Fed in five to ten years time.

  • Posted by Twofish

    I find a lot of this talk about how it is such a horrible thing that we have these non-democratic, non-transparent institutions running loose in global markets to be odd. I’d get instantly fired if I starting talking publicly about who I am, where I work, and what I do, and that true for just about any that works for a large corporation.

    As far as democracy goes, none of my managers were selected by anything remotely resembling an election, except for the board, and the process they were chosen by is essentially the same one that the Communist Party uses (lots of internal politicking followed by a show election whose results are predetermined).

    So I just don’t understand why CIC is more dangerous to world markets than Berkshire Hathaway which is about the same size (and which invests in everything from encyclopedias to insurance to ice cream stores).

  • Posted by bsetser

    My concerns are less about the internal processes by which the CIC selects its managers — though those matter — and more a variant of the hillary clinton quip (from bill originally) that you cannot enforce your trade law against your bankers (or the owners of your banks). There are circumstances where I am quite sure China would no longer finance the US — no country would finance a policy that undermines its own stability. W’s push for democratization by force went way too far, but I personally think a global situation where non-democratic governments are close to obtaining the financial leverage (in my view) to start influenceing US policies swings too far the other way.

    that is a very normative judgment i know.

  • Posted by bsetser

    2fish — another, perhaps simpler, explanation for my concerns. I have a bit of a jeffersonian side; i don’t particularly feel comfortable with great concentrations of economic and political power not subject to any constitutional constraints.

    MMcC — there are plenty of good domestic political reasons for the CIC to have the banks, not the least a desire on the part of the MoF to undo the shift in ownership what resulted the use of PBoC reserves to fund the initial recap. But I don’t think it would be all that difficult to anticipate that having the same institution own the state banks (clearly used as an instrument for policy, including an instrument to support an exchange rate policy that is creating global friction) also take minority ownership stakes in other countries financial institutions would raise a lot of questions. I still am not quite sure whether we should think of the state banks in part as foreign portfolio managers for the cic … and whether certain decisions — say the use of the CDB to fund chinalco’s investment in australia — reflect some level of high level coordination or not.

  • Posted by JB

    Brad,

    I think a SWF portfolio shift to equities would initiate some impressive valuations. However, I don’t completely agree that this inflation would be negative for the U.S. economy. To be rather blunt, America’s perpetual motive to live beyond its means is one of a number of reasons that our Gross Domestic Product is enormous. When Wall Street is criticized for their issuance of toxic debt and bubble causing behavior, I say applaud them. It is financial engineering, valuations above fundamentals, and speculation (whether it be by state managed funds or not) that ultimately provide more economic value to our lives. I’m not saying that people aren’t facing hard ships in the current decline, but I am saying that our creative leveraging has expanded our economic capital. More homes are built, more steak dinners bought, more range rovers are on the streets. On a separate note, I think Ayn Rand and Alan Greenspan would have some pointed comments about your concern of self serving state ran funds. I’m an advocate of Milton Friedman’s libertarian perspective that state should be out of our competitive markets to the greatest degree possible. But, we know that utopia is only a dream.

  • Posted by JB

    Brad,

    I’d thoroughly enjoy any comments on some of my perspectives as well.

    http://www.econdynamism.blogspot.com/

  • Posted by a

    Thought foreign funds were paranoid about equity risk these days. Now they’re going to create an equity bubble? And bond yields will skyrocket when this happens?

  • Posted by don

    JB:

    I agree that if some people can be brought to spend beyond their means, this can expand output in the economy. And, if demand is deficient, it can result in greater income for the economy as a whole, even if the spendthrifts are unable to repay all their loans. The problem is, if everyone in the economy spends beyond their means, the extra output does not occur within the economy, but in other economies abroad.

    Mercantilism (the view that it is good to run a trade surplus) came from two different experiences. The old version (in which kings hoarded gold to buy large armies and power) was shown bankrupt by the American Revolution and Napoleon, as well as that noted scribbler Adam Smith. The new version came from the experience of England in the industrial revolution, and has been reinforced by the experiences of Asian economies (beginning with Japan, extending to the ‘little dragons’ and continuing with China today.

    The individual who spends beyond his means eventually comes to grief. The same thing happens to a whole country when its residents collectively do the same thing.

  • Posted by MMcC

    BSetser: "I still am not quite sure whether we should think of the state banks in part as foreign portfolio managers for the cic … and whether certain decisions — say the use of the CDB to fund chinalco’s investment in australia — reflect some level of high level coordination or not."

    I don’t know whether my response will make people less or more uneasy, but… The most appropriate way to think of this situation may be to view it as the result of experimental policy, compromise, regulatory opportunism and happy accident. I’m not of those suggesting that SAFE/CIC/PBoC will emerge as masterpieces of structural design; rather, I would suggest that what we are currently seeing more closely resembles a palette on which a committee of first-time painters is mixing oils. It’s reasonable to expect several more rounds of regulatory guidance in the next two years governing the behaviour of the players as China’s pols clean up their own work and respond to challenges elsewhere. Such an approach is perhaps more common in China than truly foresightful design.

  • Posted by HZ

    Boomers will soon be selling financial assets to fund retirement. Who will they sell to?

  • Posted by Guest

    …."bubble in the US and European equity markets."

    Brad,

    Would this be such a bad thing? Unlike the current housing bubble, I don’t think most US citizens will play a new equity bubble game–many were too burned from the dot com bust. You wont see real US savings buying the market–only foreign flows. When this equity bubble pops only the foreigners will suffer. And unlike the current dollar depreciation, foreign sources wont be able to blame the US for bad investment decisions.

  • Posted by moldbug

    W’s push for democratization by force went way too far, but I personally think a global situation where non-democratic governments are close to obtaining the financial leverage (in my view) to start influenceing US policies swings too far the other way.

    Given the number of non-democratic non-governments that influence US policies, I wouldn’t worry too much. Nobody elected David Rockefeller, either. Or George Soros. Are their issues any more or less scary than Red China’s? I think a little more Russian and Chinese presence in the circles of influence might well prove a beneficial factor. After all, their economies seem to be working better than ours. Maybe they know something we don’t.

    And considering the people that US voters actually have elected, would you want them actually formulating policy? Imagine if W had a policy idea of his own one day in a Cabinet meeting. He’d probably be scheduled for a quick trip to the neurologist. It’s often healthy to remember that "democratic" and "political" are precise synonyms. If you don’t think policymaking should be "politicized," you don’t think it should be democratic. Words matter.

  • Posted by Reddog

    "obtaining the financial leverage (in my view) to start influenceing US policies swings too far the other way."

    Spot on Brad! Money is power and only the naive wouldn’t believe that SWFs won’t use that power for their internal agendas. Look at how the Middle East countries are refusing to increase the production of oil so they can keep cartel prices/profits high. And the US should trust these same people to be major investors in it’s banking system?

  • Posted by Twofish

    bsetser: 2fish — another, perhaps simpler, explanation for my concerns. I have a bit of a jeffersonian side; i don’t particularly feel comfortable with great concentrations of economic and political power not subject to any constitutional constraints.

    Neither do I, but it seems to me that SWF’s *don’t* increase the concentration of economic and political power in the world, but rather decrease it considerably. The point I was making about Citigroup, Berkshire Hathaway, IMF, and WTO is that economic and political power is already quite heavily concentrated in institutions not subject to constitutional constraints.

    One consequence of SWF’s, for example, is that they make the IMF irrelevant, and economic policy for a nation is now more likely to be decided in that nation’s capital than in Washington. The Chinese Communist Party is not a liberal democracy, but they do worry about being on the wrong side of a mob, which is not a constraint with most multinational corporations or the institutions that regulate the global economic system. If nothing else, SWF’s change the distribution of global economic power so that they include Chinese and Middle Eastern actors, which is a good thing.

    Also, one other important point. The control that the PRC exercises over state banks to undertake macroeconomic policy does not come through state ownership. The regulations that the PBC uses to order banks to buy sterilization bills are administrative and would be in place whether the state owned 100% or 5% of the bank. The part of the state that handles macroeconomic policy is (quite intentionally) different from the part of the state that handles profit maximization. When the PBC orders the banks to do something that kills profits, it makes CIC quite upset, and they are going to try to push back if they can. This sort of tension between PBC and CIC is supposed to replicate the tension that happens between shareholders and the Fed in the United States.

    Legally, the authority that the PBC uses to do macroeconomic adjustment are very similar to reserve requirements that the Fed imposes on banks or regulation Q which was operative between 1933 and 1980 in which interest rates were fixed by the government in the US. Politically, the Fed does intervene very heavily in banking operations, and how much power the Fed really has was illustrated about a month ago.

  • Posted by Twofish

    bsetser: I still am not quite sure whether we should think of the state banks in part as foreign portfolio managers for the cic …

    I don’t think so. One other thing to note is that I think that if CIC tried to direct the operations of the banks in detail or did any sort of coordination, that there would be a huge amount of pushback from the bank management.

    bsetser: say the use of the CDB to fund chinalco’s investment in australia — reflect some level of high level coordination or not.

    Probably no more than in similar situations in Western banks. One problem with high level coordination is that coordination requires large numbers of people, and neither CIC or the State Council have the people to do this sort of coordination. The banks themselves do since they can pay salaries directly from their earnings.

    Also the Chinese government does have a piggy bank to use when it wants to make state-directed loans. The China Export-Import Bank was designed specifically for this thing.

    When China wants to finance a railroad in Angola or a mine in Zambia, none of the commercial banks will touch this, and so the money for African development pretty much all comes from the Exim bank.

  • Posted by Guest

    "I personally think a global situation where non-democratic governments are close to obtaining the financial leverage (in my view) to start influenceing US policies swings too far the other way." Says Brad.

    Well, that’s the way things are trending so you might as well get used to it and stop bitching about reality. Money doesn’t much care whether it is in the hands of democratic governments or totalitarian ones.

  • Posted by bsetser

    guest — money may not care, but american policy makers could, and in my view should.

    a — yes, tis a bit strange to follow a post arguing that most sovereign money is scared with one on the impact of sovereign investment in equities. The reconciliation, to the extent one is possible, would be:

    a) the increase in funds in state hands is so large that sovereigns are investing more in the equity market than ever before, even if it remains a small part of total flows/ most sovereign money seems to be going into the treasury/ agency market.

    b) the current period of risk aversion among sovereign investors will pass, and the right time to think about the right policy response to a surge in the equity markets induced by a surge in sovereign demand is before it happens.

  • Posted by cmc

    @Twofish

    That’s a very good point about SWFs being no more threatening in principle than large corporate investors, but I think the question is whether or not gov’t-owned equity is bound solely by the profit motive. Private investors also practice tax and regulatory arbitrage, which (in a sense) provides gov’ts with an incentive to adopt market-friendly policies (which are presumably good for us citizens). My fear is that gov’ts will eventually create enough exceptions and special conditions domestically to out-compete and manipulate the private sector.

  • Posted by DC

    The decade-long stagnation in Japan and the Asian financial crisis has had a profound impact on many

    Chinese policymakers. As a consequence of the Asian crisis in 1997, many officials remain deeply suspicious of advice from western countries

    to open up the Chinese financial system and float the RMB currency. Some believe it is just a new way of looting developing countries. Wall Street’s manipulation of global finance was directly responsible for the Asian financial crisis, and the destructive socio-economic consequences for millions of Indonesian families.

    It is time that the non-western world starts establishing their own global currency system, an interest free system, that promotes the "real economy" exchange of goods rather than "finance capitalism of money manipulation". Under the existing Neo-liberal economic regime, the US Federal Reserve remains a puppet of 5 private banks, which ultimately owes their allegiance to narrow Wall Street special interests. A New banking system among the developing BRIC nations is required for a new equitable World Economic Order.

  • Posted by don

    I remain surprised that, so far, hardly a peep from government or from politicians about Asian currency manipulations. Maybe this will change if unemloyment grows more and if Europe proves unable to stand the strain of going it alone in helping correct needed U.S. currency and external balance adjustments.

  • Posted by Guest

    "The world’s official reserves have now reached a level of US$6.6 trillion, and have grown by about 25% over the last year. At this rate, they could easily breach the US$8 trillion mark before the end of 2008… we estimate that official reserves of the GCC countries could increase by between 3 and 7-fold between now and 2015, depending on the scenario. This would make the GCC countries the fourth-biggest holder of official reserves…" http://www.morganstanley.com/views/gef/archive/2008/20080425-Fri.html#anchor6278

    "Gulf economies: How to spend it – A region awash with oil money has one or two clouds on the horizon…" http://www.economist.com/finance/displaystory.cfm?story_id=11088559

  • Posted by Twofish

    cmc: My fear is that gov’ts will eventually create enough exceptions and special conditions domestically to out-compete and manipulate the private sector.

    I really don’t think that this has a good chance of happening. In most developed countries, governments and business have a relationship that is more symbotic than adversarial. Booming businesses create tax revenue that keeps the government afloat. Governments have systems of law and regulation that allow businesses to exist.

    DC: Chinese policymakers. As a consequence of the Asian crisis in 1997, many officials remain deeply suspicious of advice from western countries

    Not really. The thing about Western economists is that they strongly disagree with each other about what to do. After all Joseph Stiglitz is a "Western economist" as much as Jeremy Sachs. Economists sometimes give advice that is politically unrealistic, but this isn’t a Western/Chinese dichotomy.

    The thing that makes China different from Zambia is that that China has enough of an indigenous knowledge base to pick and choose ideas.

    DC: It is time that the non-western world starts establishing their own global currency system, an interest free system, that promotes the "real economy" exchange of goods rather than "finance capitalism of money manipulation".

    "Money manipulators" have been the target of scorn and suspicion for thousands of years. The curious thing is that when people get rid of all of the finance people and deal-makers, that tends to destroy an economy. The current global economic system has on the whole worked quite well for China, and I don’t see any large desire to radically overturn it.

    DC: Under the existing Neo-liberal economic regime, the US Federal Reserve remains a puppet of 5 private banks, which ultimately owes their allegiance to narrow Wall Street special interests.

    Let me tell you my special interest…..

    people get rich -> rich people need something to do with money -> Wall Street helps rich people do something with money -> I help Wall Street help rich people do something with money -> I get nice fat bonus check…..

    The thing about liberal democracy and capitalism that makes it work better than other forms of government is that it assumes that people will act in their self-interest, and rather than fighting it, it uses it.

    This is what I don’t understand about conspiracy theorists. Let’s say there is this small cabal of people who actually run the world. Why fight them if you can join them? Go up to the cabal that runs the world and just find out what they want from you in order to join the great conspiracy. If it is acceptable, shake hands and do the deal.

    That’s basically what China did, and it’s worked out pretty well….

  • Posted by DC

    Twofish,

    Why is the US in Iraq other than the Oil. I am reminded of a historian who answered the question, ‘Why did the Soviets go into Afghanistan?’. He said that it was a desperate gamble by a crumbling empire. Rather than face the tough choices in the US (cutting benefits, investing in science/technolgy, hard work, better products for the world market, etc), the Washington Elites are desperately playing the war card.

    So, consider the consequences for the Soviet Union…maybe it’s better to get it over with, so we can have some real change in this country.

  • Posted by Twofish

    DC: Why is the US in Iraq other than the Oil.

    Human stupidity. People that were dumb enough to actually think that you can impose democracy via barrel of a gun.

    DC: Rather than face the tough choices in the US (cutting benefits, investing in science/technolgy, hard work, better products for the world market, etc), the Washington Elites are desperately playing the war card.

    Nope. People on Wall Street are self-interested, cynical people whose primary motivation is profit. People in Washington aren’t.

    I’ve looked into the eyes of the people in the US government that are out to overthrow the Chinese government, shaken hands with them, eaten at the same table with them. They scare me, because they *aren’t* scheming, self-interested, cynical people. They believe that they are doing good, and they honestly believe that the Communist Party of China is an evil that must be destroyed, and they really believe their own propaganda about spreading democracy and freedom in the world.

    They scare me because, frankly speaking, they are idiots, and well meaning idiots can do a lot more damage than cynical schemers.

    DC: So, consider the consequences for the Soviet Union…

    One of the reason that the Soviet Union fell is that it had an economic system that required that the people at the center make good decisions. If you have a system of central planning, and the central planners can’t plan, the system crumbles.

    The thing about markets and constitutional systems is that they are more idiot-proof. You can have Washington DC run by complete morons, but the system is strong enough to survive and fight back. If you put a moron in charge of the Communist Party, then China is finished. You put a moron in charge of the US government, things get a little worse, but the nation survives. It’s important to rely on systems rather than people, because sooner or later, an idiot will manage to come to power, and you want to limit the damage that they can do. People make the mistake of pointing to the dozens of things that the US is doing wrong and assuming that the US is finished. They forget that the US cna do dozens of things wrong and still survive.

    The good thing about China is that it didn’t make the same mistake that Japan did which is to assume that the US is much more fragile and weak than it really is. China will have a difficult enough time making the deals that will keep the US from interfering in it’s vital domestic affairs. Challenging the US for global supremacy or coming with an alternative economic system is totally out of the question in my lifetime.

    Which gets to the question that if the US is clever at arranging the world economic system to live far beyond its means and to control the vital centers of finance, and if it has both the means and the ability to destroy nations that dare oppose it, then isn’t it total madness to challenge it?

  • Posted by Guest

    DC: Why is the US in Iraq other than the Oil.

    Hmmm. Well, let’s imagine Uday and Qusay Hussein running Iraq in 2020, with oil at $400 a barrel. They would have plenty of money to build a nuclear weapon and modernize their 1 million man standing army. With Iran and Israel nuclear armed, how could there not be a nuclear exchange on top of the world’s major source of oil? The Iraq occupation is a brilliant long range strategic move to ensure long term stability in the region. You think some ethnic cleansing and roadside bombs represent instability? It doesn’t take much imagination to see the real threats. No need to let loose another propaganda tirade, Chairman Mao. I won’t be back to read your reply.

  • Posted by Roland

    I think Twofish overrates the co-option process.

    I think thesis/antithesis also has to be borne in mind. One way that elites are made to be more inclusive isn’t by meeting their membership requirements, but by scaring the hell out of them–or by taking advantage of their fear of someone else.

    e.g. Japan, S. Korea, Taiwan, and even to some extent China were "free riders" on the armed standoff between the USSR and the West. They obtained favourable membership offers from a Western hegemon looking to make more friends.

    If not for the USSR, they might not have had it so good.

    Iraqis won’t benefit from these painful years of war, when they’ve confronted the world’s leading power single-handed while everyone else looks on.

    But they’ve probably bought some other peoples years of opportunity to pursue their political, economic and cultural destinies with a bit less American interference than may have otherwise been the case.

  • Posted by DC

    Twofish,

    The Pentagon Strangles Our Economy: Why the U.S. Has Gone Broke

    by Chalmers Johnson

    http://www.globalresearch.ca/index.php?context=va&aid=8813

    As a result, going into 2008, the United States finds itself in the anomalous position of being unable to pay for its own elevated living standards or its wasteful, overly large military establishment. Its government no longer even attempts to reduce the ruinous expenses of maintaining huge standing armies, replacing the equipment that seven years of wars have destroyed or worn out, or preparing for a war in outer space against unknown adversaries. Instead, the Bush administration puts off these costs for future generations to pay or repudiate. This fiscal irresponsibility has been disguised through many manipulative financial schemes (causing poorer countries to lend us unprecedented sums of money), but the time of reckoning is fast approaching.

    There are three broad aspects to the U.S. debt crisis. First, in the current fiscal year (2008) we are spending insane amounts of money on "defense" projects that bear no relation to the national security of the U.S. We are also keeping the income tax burdens on the richest segment of the population at strikingly low levels.

    Second, we continue to believe that we can compensate for the accelerating erosion of our base and our loss of jobs to foreign countries through massive military expenditures — "military Keynesianism" (which I discuss in detail in my book Nemesis: The Last Days of the American Republic). By that, I mean the mistaken belief that public policies focused on frequent wars, huge expenditures on weapons and munitions, and large standing armies can indefinitely sustain a wealthy capitalist economy. The opposite is actually true.

  • Posted by bmh

    "Challenging the US for global supremacy or coming with an alternative economic system is totally out of the question in my lifetime."

    Twofish,how old are you?

    BMH

  • Posted by df

    there is no reason to adapt to a non sustainable situation. Foreign exchange should be balanced, and are balanced in the long run.

    The easiest solution is to let all those stupidly lending to the USA and Europe with their agressive mercantilist policies lose that money.

    The best solution in fact would be for europe and USA to start printing lots of money and finance their home deficits.

    The best solution is strong regulation on cross border flows of capital starting with a tobin tax and ending with a ban on moves to tax heavens.

    Globalisation is ending around these days.

  • Posted by Twofish

    To DC: One thing that I find interesting is that you tend to post different articles that contradict each other. Suppose your theory of "dollar hegemony" is true, and the US gets world power based on its military control of Middle Eastern oil fields. Then that article you just posted which argues that the US military is a drain on US society is false. If the US military is used to promote dollar hegemony, then it is quite clearly in the economic interest of the US to have a large military in order to control the world economic system.

    bmh: Twofish,how old are you?

    Pushing 40. The story of the rise of China is a multi-generational historical saga, and I’m amazed at the roles that my parents, their parents, and their parent’s parent’s had in it. My hope is that in my lifetime, I make the situation better, and at least don’t make the situation worse. There is going to be plenty of stuff left for my kids and their kids to do.

  • Posted by Judy Yeo

    2fish, not siding with DC but have you considered the fact that US military strength is a double edged sword, on the one hand, the military presence in the Gulf ensures hegemony and control of oil, on the other hand, the costs of such military strength is paid by the USA not just in terms of deficits but more importantly in human costs; nothing comes without a price.

    Brad, agree with your "scary" conclusion vis-a-vis SWF activity in the equity markets; but there are differences which may make things just that little more complicated, regulatory declarations (upon hitting certain % of shareholdings) and protectionist sentiments are just some of them ; which makes all those stakes in private equity funds so much more sensible.