Category Archives: United States

United States

A few quick thoughts on Obama’s NSA reform speech

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US president Barack Obama outlined several reform proposals for the National Security Administration’s intelligence-gathering earlier today at a speech at the Justice Department.USflag

The reforms aren’t exactly breathtaking, but Brian Fong at Wonkblog has a great primer on what they entail:

  • The secret Foreign Intelligence Surveillance Court will have to sign off to NSA requests to ‘query’ the phone metadata database.
  • When the NSA is authorized to query the database, they can only examine data for the express number and any number connected to the express number — ‘two hops,’ as opposed to the ‘three-hops’ approach that is currently the NSA standard.
  • The actually database may be entrusted in the hands of a third-party, non-governmental watchdog, though the details are far from clear.
  • The US government will stop spying on ‘dozens’ of foreign leaders.
  • John Podesta, a longtime figure in Democratic administrations, will lead a comprehensive review of big data and privacy.

It’s fairly easy to poke holes in these reforms — to the extent that they are even fully carried out.  As of June 2013, the FISC has rejected just 11 out of 33,900 surveillance requests since its creation in 1979.  That’s a 99.97% success rate for the government, which hardly constitutes a meaningful check.  Moreover, as this interactive feature from The Guardian shows, cutting back from the ‘three-hop’ approach to the ‘two-hop’ approach is meaningful, but with such a compliant judicial check, there’s nothing stopping an NSA employee from going back to the FISC for further authority. (By the way, when did US intelligence policy start taking its cues from a marginal 1990s Kevin Bacon film?)

It’s even more skeptical whether the NSA database will be transferred to a truly independent third party.  Of course, the US government will certainly continue to spy on world leaders, even if it backs away from spying on the leaders of its top allies.  Podesta, a former Clinton chief of staff, co-chair of the Obama transition team and chair of the Center for American Progress, a top progressive think tank in Washington DC, seems unlikely to rock the boat.

Moreover, the Obama administration has a relatively small well of goodwill on the issue.  It’s been eight months since Obama, in another major speech on drone strikes, promised to limit drone strikes and to minimize casualties, pledging also greater transparency.  But the drone strikes policy remains shrouded in mystery today, and it’s unclear where the ‘covert’ operations of the Central Intelligence Agency end and the ‘clandestine’ operations of the US military, especially the Joint Special Operations Command begin.  Just before Christmas, the US government killed 15 civilians in an attack on what turned out to be a Yemeni wedding party, drawing massive rebuke both inside Yemen and beyond.  There’s not a whole lot of evidence that the Obama administration has seriously reformed its drone strikes policies. 

So while a fancy speech on NSA reform is great, there’s absolutely no evidence that the Obama administration really takes intelligence reform seriously.  Though Obama’s speech was couched in the same constitutional-professor-in-chief tone as the drone speech, he blamed virtually everyone except his own administration for having to address the NSA mission creep that’s occurred on his watch: Continue reading A few quick thoughts on Obama’s NSA reform speech →

Iran, United States

Ten reasons why the Iran sanctions Senate bill is policy malpractice

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Iran nuclear talks: Kerry and Zarif meet at the UN

Iran is quickly moving to the front of the ever-shifting foreign policy agenda in Washington at the end of this week, with 59 members of the US Senate, including 15 Democratic senators and the Democratic chairman of the Senate Foreign Relations Committee, senator Bob Menendez of New Jersey, supporting the Nuclear Weapon Free Iran Act of 2013.Iran Flag IconUSflag

The bill would impose additional sanctions on the Islamic Republic of Iran in the event that the current round of talks fail between Iran and the ‘P5+1,’ the permanent five members of the United Nations Security Council (the United States, the United Kingdom, France, China and Russia), plus Germany.  US president Barack Obama met with the entire Democratic caucus in the US Senate Wednesday night to implore his party’s senators not to support the bill.  Senate majority leader Harry Reid opposes the bill, and he hasn’t scheduled a vote for the new Iran sanctions — and even some of its supporters may be backing off as the temporary six-month deal proceeds.

But with 59 co-sponsors, the bill is just one vote shy of passing the Senate, and it would almost certainly pass in the US House of Representatives, where the Republican Party holds a majority.  In the event that the Congress passes a bill, Obama could veto it, but the Senate is already precariously close to the two-thirds majority it would need to override Obama’s veto.

The Obama administration argues that the bill is nothing short of warmongering, while the bill’s supporters argue that the sanctions will reinforce the Obama administration’s hand in negotiations.  Javad Zarif, Iran’s foreign minister (pictured above with US secretary of state John Kerry), has warned that the bill would destroy any chances of reaching a permanent deal, and it’s hard to blame him.  Under the current deal, reached in November, the P5+1 agreed to lift up to $8 billion in economic sanctions in exchange for Iran’s decision to freeze its nuclear program for six months while the parties work through a longer-term deal.  The deal further provides that Iran will dilute its 20% enriched uranium down to just 5% enriched uranium, and the P5+1 have agreed to release a portion of Iran’s frozen assets abroad and partially unblock Iran’s oil exports.

So what should you make of the decision of 59 US senators to hold up a negotiation process that not only the Obama administration supports, but counts the support of its British, German and French allies?

Not much.

And here are ten reasons why the bill represents nothing short of policy malpractice.   Continue reading Ten reasons why the Iran sanctions Senate bill is policy malpractice →

14 in 14, Australia, CAR (Centrafrique), Catalonia, DRC / Congo, Eritrea, European Union, France, Germany, Iran, Italy, Japan, Kenya, Mali, Mauritania, Saudi Arabia, South Sudan, Spain, United States, Venezuela, Vietnam

14 potential game-changers for world politics in 2014

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Though I rang in the new year with a list of 14 world elections to watch in the coming year (and 14 more honorable mentions to keep an eye on), I wanted to showcase a few more thoughts about what to watch for in world politics and foreign affairs in 2014.

Accordingly, here are 14 possible game-changers — they’re not predictions per se, but neither are they as far-fetched as they might seem.  No one can say with certainty that they will come to pass in 2014.  Instead, consider these something between rote predictions (e.g., that violence in Iraq is getting worse) and outrageous fat-tail risks (e.g., the impending breakup of the United States).

There’s an old album of small pieces conducted by the late English conductor Sir Thomas Beecham, a delightfully playful album entitled Lollipops that contains some of the old master’s favorite, most lively short pieces.

Think of these as Suffragio‘s 14 world politics lollipops to watch in 2014.

We start in France… Continue reading 14 potential game-changers for world politics in 2014 →

United States

Brian Schweitzer, Montana’s foremost foreign policy expert

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In the United States, it’s never too soon to start thinking about the next presidential race, even though the 2016 primary season won’t kick off for another 24 months, and voters have to get through the 2014 midterm elections in November before fully turning to 2016.USflagmontana

But this fairly engaging snippet comes from David Weigel’s Slate interview with former Montana governor Brian Schweitzer:

The Iranian deal makes sense. We linked up with the Saudis before and after World War II. Look, unlike virtually every member of Congress, I have a pretty good firsthand knowledge of the Middle East. The day after I got out of graduate school, after I defended my thesis, I went straight to Libya. I was there for a year; I was in Saudi Arabia for seven. I learned to speak Arabic. I can explain to you, in a way that almost no one else in the country can, the difference between a Sunni and a Shia. I can explain to you who and what the Wahhabis are in Saudi Arabia. I can talk to you about why we, the United States, initially got involved with the Saudi royal family, what we got out of the deal. I can explain to you why we knew Saddam Hussein had weapons of mass destruction. We knew, because we supplied chemical weapons to him so he could poison the Iranians. The Iranians are Persian, not Arab; they haven’t got along for several thousand years.So we’ve had a bad history with Iran because of what we did in 1953, replacing an elected official with a dictator. If we can build a relationship that’s a little more even-handed, if we can get them to back away from their nuclear ambition—let’s face it, their neighbors don’t even like that—if we were to step up and said we’re no longer just going to take the Saudis’ position all the time, you don’t have to worry about us attacking you from Afghanistan or Iraq, if you agree to back away from your nuclear ambitions, we’ll be neutral.

When was the last time that you heard a candidate for US president — on either the Republican or Democratic side — who has such an immediately strong command of foreign policy, especially the historical cause-and-effect that so few US policymakers seem to understand?  When was the last time that a governor with such a command of foreign policy? And it’s not California or New York or Texas, but Montana, a landlocked Western state with a population of just over one million people.

Here’s a checklist:

  • Schweitzer speaks Arabic. (who knew?)
  • Schweitzer opposed the war on Iraq, which now seems like a no-brainer. (But in any event…)
  • He opposes the continued US occupation in Afghanistan, given that US forces essentially the nullified the Taliban’s reach in 2001-02.
  • He thinks Edward Snowden, the consultant that leaked the extent of the National Security Agency’s global and internet surveillance efforts, should be pardoned.
  • France and the United Kingdom have more capitalist health care systems because their governments negotiate hard over prices (that’s an argument that takes some brass, I’ll note).
  • The drug war ‘appears’ to have been lost, though Schweitzer didn’t mention the ongoing (and ridiculous) paramilitary US anti-drug efforts in Latin America today.
  • In mentioning the 1953 coup against Iranian president Mohammad Mossadegh, he demonstrates that he knows Iran’s history — and US-Iranian relations — predates 1979.
  • He knows that the United States supplied chemical weapons to Iraq in the 1980s, which Saddam Hussein used against Iranians.  (If you’re keeping score, that was the last time chemical weapons had been used in the Middle East prior to the Syrian attack outside Damascus in August 2013).

I wish Weigel had asked Schweitzer more about the US drone program, the difference between covert and clandestine operations, the use of both special forces and the Central Intelligence Agency, targeted killings of both foreign nationals and US citizens, the destabilization of Yemen and Somalia by US forces in the 2000s and 2010s, and the controversial US killing of Pakistani Taliban leader Hakimullah Mehsud, whose death virtually meant the end of any peace talks with the Pakistani government and its new prime minister Nawaz Sharif.

Oh, and don’t forget this gem: ‘If you ask generals whether we should stay in a war a little longer, that’s like asking a barber whether you need a haircut.’

Keep your eyes on this one — I knew Schweitzer was an impressive two-term governor who won election as a Democrat in a very Republican state (Mitt Romney won Montana in the 2012 presidential election by a margin of 55.3% to just 41.8% for US president Barack Obama).  But I had no idea the depth of his foreign policy knowledge.  Impressive, even though the Democratic presidential nomination seems today like it’s almost certain to be Hillary Clinton’s for the taking.

14 in 14, United States

14 in 2014: US midterm elections

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14. United States midterm elections, November 4.USflag

Though US president Barack Obama and his administration’s top officials — secretary of state John Kerry, national security adviser Susan Rice and defense secretary Chuck Hagel — will continue to set the tone for US foreign policy through January 2017, US voters will elect all 435 members of the House of Representatives and one-third of the Senate, the upper house of the US Congress.

In particular, the Republican Party hopes to finish what it started with the 2010 midterm elections by winning control of both the House, where it currently enjoys a 232-to-200 majority, and the Senate, where the Democratic Party (and two independent allies) holds a 55-45 lead.  A bevy of gubernatorial elections (in 36 out of 50 states) will also decide who controls 12 out of the 15 most populous US states, including California, Florida, New York, Texas.

Midterm elections — and control of Congress — can effect huge results on American foreign policy.  Just recall the way that the 2006 midterm elections forced the nearly immediate resignation of former president George W. Bush’s defense secretary, Donald Rumsfeld, and signaled a new era in the US occupation in Iraq.

If the Republicans succeed, it would make Congress a much more muscular voice of opposition to Obama’s signature foreign policy initiatives — most notably with regard to Iran, with which the administration hopes to reach a deal on Iran’s nuclear energy program.  But the enhanced scrutiny from the US Senate Foreign Relations Committee and other committees to hold hearings on everything from Iran to the 2011 Benghazi consulate attack in Libya to the Obama administration’s ongoing global efforts to stop terror from Pakistan to Somalia to Yemen, could complicate Obama’s final two years in office.  The Republicans would also be able to pass legislation designed to embarrass the Obama administration or attempt to rein in executive power.

 Next: 14 more to watch in 2014

Libya, United States

Neither Republicans nor Democrats learned the real lesson of Benghazi

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In the United States, ‘Benghazi’ has become a code word for conservative Republicans hinting at a dark cover-up within the administration of US president Barack Obama about who actually perpetrated the attack on September 11, 2012 against the US consulate in Benghazi, Libya’s second-most populous city.Libya_Flag_IconUSflag

The furor stems largely from comments by Susan Rice, then the US ambassador to the United  Nations and a candidate to succeed Hillary Clinton as US secretary of state, that indicated the attack was entirely spontaneous, caused by protests to a purported film trailer, ‘Innocence of Muslims,’ that ridiculed Islam and the prophet Mohammed.  Republicans immediately seized on the comments, arguing that al-Qaeda was responsible for the attack, which left four US officials dead, including Christopher Stevens, the US ambassador to Libya at the time, a volatile period following the US-backed NATO efforts to assist rebels in their effort to end the 42-year rule of Libyan leader Muammar Gaddafi.

An amazingly detailed report in The New York Times by David Kirkpatrick on Saturday reveals that there’s no evidence that al-Qaeda was responsible for the attack.  While it was more planned than the spontaneous anti-film riots that rocked the US embassy in Cairo the same day, the Benghazi incident was carried out by local extremist militias.  Kirkpatrick singles out, in particular, Abu Khattala, a local construction worker and militia leader, but he also identifies other radical militias within Benghazi, such as Ansar al-Sharia, which may not have been responsible, but still seem relatively sympathetic to anti-American sentiment:

Mohammed Ali al-Zahawi, the leader of Ansar al-Shariah, told The Washington Post that he disapproved of attacking Western diplomats, but he added, “If it had been our attack on the U.S. Consulate, we would have flattened it.”

Similarly named groups have emerged throughout north Africa and the Arabian peninsula over the past few years — a group calling itself Ansar al-Sharia, not ‘al-Qaeda in the Arabian Peninsula’ (AQAP), took control of portions of southern Yemen after the battle of Zinjibar in 2011.  The United States ultimately listed ‘Ansar al-Sharia’ as an alias for AQAP, but it’s unclear the degree to which the two are (or were) separate.  It also underscores the degree to which local Islamist groups like AQAP are necessarily fueled by local interests and concerns .  Most Yemenis fighting alongside AQAP are doing so for local reasons in a country that remains split on tribal and geographic lines — South Yemen could claim to be an independent state as recently as 1990.  Groups also named Ansar al-Sharia also operate  in Mali, Tunisia, Mauritania, Morocco and Egypt, and some of them have links to al-Qaeda affiliates and personnel.  Others do not.

If Khattala, as The New York Times reports, is the culprit behind the consulate attack (and the US government continues to seek him in response to the attack), he fits the profile less of a notorious international terror mastermind and more of a local, off-kilter eccentric:

Sheikh Mohamed Abu Sidra, a member of Parliament from Benghazi close to many hard-line Islamists, who spent 22 years in Abu Salim, said, “Even in prison, he was always alone.”  He added: “He is sincere, but he is very ignorant, and I don’t think he is 100 percent mentally fit. I always ask myself, how did he become a leader?”

Moreover, if there’s a scandal involving the Obama administration, it’s the way in which the United States came to enter the Libyan conflict in 2011.  The Obama administration refused to seek authorization from the US Congress when it ordered military action in Libya in support of the NATO mission and to establish a no-fly zone, pushing a potentially unconstitutional interpretation of the 1973 War Powers Resolution, which requires Congressional authorization for open-ended conflicts that last for more than 60 days.  Ironically, Obama’s case for ignoring Congress was actually stronger with respect to potential airstrikes on Syria earlier this year, though Obama’ ultimately decided to seek Congressional support for a potential military strike in August in response to the use of chemical weapons by Syria’s military. 

Republicans, who control the US House of Representatives but not the US Senate, the upper house of the US Congress, just as they did in 2011, could have (and should have) held Obama more accountable for his decision vis-à-vis the War Powers Resolution.  Instead, they’ve colluded with a conservative echo chamber that mutters ‘Benghazi’ like some unhinged conspiracy theory, suggesting that somehow the Obama administration purposefully lied about what happened that day.  The reality is that the Obama administration was as caught off guard as anyone by the attack.  Democrats that would have howled with disgust over Benghazi if it had happened under the previous administration of Republican George W. Bush have remained incredibly docile during the Obama administration — to say nothing of the Obama administration’s encroaching internet surveillance, ongoing war in Afghanistan, frequent use of drone attacks and pioneering use of ‘targeted killings’ (including assassination of US citizens).

Kirkpatrick’s report showed that while US intelligence agencies were tracing an individual with tangential ties to al-Qaeda and Osama Bin Laden, they largely missed the more local threats like Khattala and Ansar al-Sharia:

The C.I.A. kept its closest watch on people who had known ties to terrorist networks abroad, especially those connected to Al Qaeda. Intelligence briefings for diplomats often mentioned Sufian bin Qumu, a former driver for a company run by Bin Laden.  Mr. Qumu had been apprehended in Pakistan in 2001 and detained for six years at Guantánamo Bay before returning home to Derna, a coastal city near Benghazi that was known for a high concentration of Islamist extremists.

But neither Mr. Qumu nor anyone else in Derna appears to have played a significant role in the attack on the American Mission, officials briefed on the investigation and the intelligence said.  “We heard a lot about Sufian bin Qumu,” said one American diplomat in Libya at the time. “I don’t know if we ever heard anything about Ansar al-Shariah.”

That, in turn, highlights the real lesson of Benghazi — both the Obama administration and the national security apparatus that it has empowered, and the conservative opposition to the Obama administration are missing the larger problem with the way that the United States engages the world.  It’s a point that rings most clearly in the words of Khattala himself:

“The enmity between the American government and the peoples of the world is an old case,” he said. “Why is the United States always trying to use force to implement its agendas?”….

“It is always the same two teams, but all that changes is the ball,” he said in an interview. “They are just laughing at their own people.” Continue reading Neither Republicans nor Democrats learned the real lesson of Benghazi →

United States, Yemen

Will the US respect Yemeni parliament’s vote on drone attacks?

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In a speech just four years ago, US admiral Mike Mullen, then chair of the joint chiefs of staff, outlined the US government’s approach to Yemen in an address to the US Naval War College.  By 2010, Yemen, which lies on the southwestern edge of the Arabian peninsula, had become an increasingly worrying front in US global efforts to confront Islamic terrorism:USflagyemen flag

Mullen said people ask him often if the United States is going to send troops to the nation. “The answer is we have no plans to do that, and we shouldn’t forget this is a sovereign country,” he said. “Sovereign countries get to vote on who comes in their country and who doesn’t.”

In what is the first vote of its kind, Yemen’s parliament voted on Sunday for a halt to US-initiated drone strikes that locals say killed more than a dozen civilians in a wedding party on December 11 — the attack, which took place in the central Yemeni province of al-Baydaa, is just one of many strikes in 2013, and it’s not the first one to have resulted in civilians deaths.  But the attack attracted widespread condemnation from both inside Yemen and internationally, leading to Sunday’s unanimous parliamentary vote.

In light of the ‘Mullen doctrine,’ you might expect the United States to pause its drone strikes on the country, right?

Wrong. The parliamentary vote wasn’t binding on the Yemeni government, and Yemen’s parliamentary powers pale in comparison to those of the president, Abd Rabbuh Mansur Hadi, vice president between 1994 and 2012 and the hand-picked successor to Yemen’s longtime ruler Ali Abdullah Saleh and the Yemeni ruling party, the General People’s Congress (المؤتمر الشعبي العام‎, Al-Mo’tamar Ash-Sha’abiy Al-‘Aam), which itself controls 238 of the 301 seats in Yemen’s Majlis al-Nuwaab (House of Representatives).

Yemen, alongside Tunisia and Egypt, was among the vanguard of countries where the so-called Arab Spring peaked — though Saleh held on through mass protests in January and February 2011 against corruption and economic mismanagement, an assassination attempt in July 2011 left him severely injured and burned.  But the stage-managed transition from Saleh to Hadi has barely addressed the long-standing complaints of the Arab Spring protestors, let alone the more fundamental regional divides that have long plagued Yemen, which emerged as two quasi-independent states in 1918 out of the collapse of the Ottoman empire.

Meanwhile, the US government denies that the December 11 drone strike killed anyone but ‘militants,’ despite evidence to the contrary and a deluge of protest across the Arab world.  Even the United Nations is now calling on the United States to provide answers about the error. 

As Adam Baron, a reporter based in the Yemeni capital of Sana’a wrote last week in Foreign Policy,

The exact nature of the error is still a matter of speculation. It was hard not to wonder if the wedding convoy was mistaken for something more sinister — that someone in the bowels of the U.S. intelligence community concluded that vehicles carrying heavily armed wedding guests were actually an al Qaeda convoy. Some tribal contacts said that there were high-ranking militants near the site of the strike, and a Yemeni official briefed on security matters told me a vehicle hit in the attack had been linked to a prominent local al Qaeda leader. Either way, any “suspected militants” present were surrounded by civilian bystanders.

Nonetheless, the United States seems unlikely to swerve from its low-grade war against Al-Qaeda in the Arabian Peninsula (AQAP).  The drones will continue — and they will, in all likelihood, continue to kill innocent civilians, each of which has the potential to drive everyday Yemenis closer to AQAP and away from the United States.  Just last week, when AQAP attacked Yemen’s defense ministry, it also accidentally struck people in a hospital inside the ministry — and its leaders were fast to apologize for the error in targeting the hospital and agreed to pay ‘blood money’ to the relatives of those killed in the attack.

How did we get to the point where al-Qaeda seems more accountable than the Obama administration for civilian deaths in Yemen?

yemen

Jeremy Scahill’s tour de force about the covert and clandestine operations of both the Obama administration and the administration of George W. Bush, Dirty Wars: The World is a Battlefield, calls into question the legality of much of the basis for the notion that the executive branch can claim the entire world is essentially the ‘battlefield’ for the global war on terror.  In particular, the Obama administration’s record in Yemen alone remains troubling.

Abdulrazaq Al-Jamal, an expert specializing in Al-Qaeda affairs, summarized the Yemeni argument against the US strikes in an interview earlier this week with the Yemen Times, arguing that the US drone strikes are illegal, that they encourage  AQAP and they expose Yemen’s own government as a failure:

I think there is no difference between the raid that targeted the wedding convoy in Ra’ada and the previous raids that targeted Al-Qaeda and any Yemeni [citizens]. American [spying] and shelling, in principle, is wrong because it kills illegally and without trial. I cannot differentiate between strikes that target Al-Qaeda members and strikes that [might] target citizens because these strikes are [made outside of the legal system]. I disagree with those who differentiate between them because it is a violation of Yemeni sovereignty to kill [any Yemeni citizens, be they Al-Qaeda members or not]….

I don’t think that American drones are [stopping tribes from] protecting Al-Qaeda members as [drones] may cause several tribes to [actually] join Al-Qaeda. I think that if American drones continue to violate Yemen’s sovereignty and kill civilians, the tribes will not only protect Al-Qaeda affiliates but will join Al-Qaeda themselves.  Seeking help from American drones [instead of handling Al-Qaeda itself] proves that the Yemeni government is a failed one.

Saleh, and now Hadi, have played a wily game of rope-a-dope with the United States in the post-9/11 era, seeking ever more funding and training for forces to fight ‘terrorism,’ while routinely deploying those forces in furtherance of pushing back against internal regionalists.  Most recently, that means the Shiite Houthi rebellion that began in the mid-2000s in northeastern Yemen, but it also includes forces to maintain tentative control over south Yemen, a wide swatch of country that includes not only the southern shore and the key port of Aden, but also the eastern half of Yemen that borders Oman.  Saleh, who came to power in north Yemen in 1978, only managed to unify the two parts of Yemen in 1990, and even then, fought a civil war in 1994 and continual unrest thereafter.  As AQAP grew in Yemen, south Yemen has become a territorial stronghold in a country where local power still runs on largely tribal lines, and the line between tribal leader and militant leader is often dazzlingly blurred.  While Yemen is also split on religious lines (around 45% to 50% of the country belongs to the Zaydi Shi’a sect and around 50% to 55% of the country is Sunni) Yemen’s Shiites are clustered in the northwestern corner of the country.

US meddling comes at a delicate time for Yemen, whose leaders are working on a new agreement to grant self-rule powers to the autonomous south in a move toward a more federal Yemen.  The powerful Yemeni Socialist Party (الحزب الاشتراكي اليمني, Al-Hizb Al-Ishtiraki Al-Yamani), which controlled south Yemen during its period of independence through 1990, opposes the latest effort, and it continues to support a two-region state, not the six-region state that Hadi and the current Yemen government supports.  If an agreement can be reached, Yemenis will vote in a constitutional referendum in February 2014.   Continue reading Will the US respect Yemeni parliament’s vote on drone attacks? →

United States

Why Menendez is such an awful Senate Foreign Relations Committee chair

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Was Jesse Helms a better chair of the Senate Foreign Relations Committee than Bob Menendez?  USflag

Menendez, who took over the committee earlier this year when former senator John Kerry was appointed as US secretary of state, is making headlines this week for a bill that would largely derail a still delicate US-Iranian rapprochement.  He introduced a Senate bill yesterday that, if enacted, would mark a serious setback in the nuclear negotiations between the United States (and the other members of the ‘P5 + 1’ team that includes the five permanent members of the United Nations Security Council, plus Germany) and Iran.  The bill would institute a new round of punitive economic sanctions on Iran on the heels of a six-month deal between negotiators and the administration of Iran’s new moderate president Hassan Rowhani that all parties hope could lead to a more permanent accord.  On Thursday, ten Democratic committee chairs sent a letter to Senate majority leader Harry Reid in opposition to Menendez’s bill, and the White House has warned Menendez that his legislative efforts aren’t helping negotiations.

Though Menendez’s bill, co-sponsored with Republican senator Mark Kirk of Illinois, is called the ‘Nuclear Weapon Free Iran Act,’ there’s no firm evidence that Iran even wants to build a nuclear weapon, though plenty of US policymakers suspect that Iran has secret designs on building one.  Rowhani and his foreign minister Javad Zarif have disclaimed interest in nuclear weapons, and Iran’s supreme leader Ali Khamenei has argued that nuclear weapons are a violation of Islamic law.

The bill would introduce new sanctions if Iran violates the terms of the current agreement or fails to come to a permanent agreement with the ‘P5 + 1’ team.  In essence, it would put an economic sanctions gun to Iran’s head — the bill demonstrates no respect for a process of negotiation between two sovereign states.  It seems more designed to score low-hanging political points for conservative Democrats than to engage seriously on finding a mutually acceptable path for Iran’s energy program that also makes the Middle East more stable.  Menendez, a longtime ally of the American Israel Public Affairs Committee (AIPAC), is siding with Israeli prime minister Benjamin Netanyahu, who has attempted to derail the Iran deal at every turn.

As James Traub wrote in Foreign Policy earlier this week:

 The reason why Menendez and others really are marching on a path to war is that they are demanding an outcome which Iran manifestly will not accept: zero enrichment. As Daryl Kimball, director of the Arms Control Association, puts it, “This is a strategy based upon hope that is not supported by the evidence of Iranian actions over the past decade, its past statements, or common sense.”….

I have no idea why Menendez and other Democrats believe that more pressure will make Iran abandon a core tenet of the revolution and thus undermine their claim to rule. (I asked for an interview, but the New Jersey senator was not available.) Maybe they believe it because [Netanyahu] has made zero enrichment his own bottom line.

So who is Menendez, and how did he rise to become the preeminent foreign policy official in the legislative branch of US government?

Menendez is the son of Cuban immigrants who came to the United States in 1953 for economic opportunity (not, as you might believe, to flee Fidel Castro, who was in 1953 still six years away from overthrowing the US-supported dictatorship of Fulgencio Batista).  Menendez spent his childhood in New Jersey and rose to political prominence in the Democratic machine politics of Union City, which was once known as ’10 Percent City,’ and not because its residents were tithing Christians.  Initially a protégé of Union City mayor and New Jersey political powerbroker William Musto, Menendez broke with his mentor only after Musto’s indictment for skimming.  Though Musto was ultimately convicted and served five years in prison, he still managed to defeat Menendez when the future senator challenged him for the mayorship in 1982.  But Menendez eventually won the office in 1986, then became a member of the New Jersey State Assembly, the New Jersey State Senate and in 1993, a member of the US House of Representatives.

For nearly as long as he’s chaired the Senate Foreign Relations Committee, Menendez has been under investigation by a Florida grand jury in connection with potential misconduct with respect to one of Menendez’s top donors, Salomen Melgen, a Miami eye surgeon who moved to Florida from the Dominican Republic in 1980.  Though the nastiest rumors about Melgen and Menendez cavorting with underage prostitutes were probably false, Menendez admitted to violating Senate ethics rules when he forgot to reimburse Melgen for two private jet flights to the Dominican Republic in 2010.  Other accusations are less salacious but potentially illegal — Menendez is accused of intervening on Melgen’s behalf in respect of a billing dispute between Melgen and the federal government’s Medicare offices and in favor of a port security contract in the Dominican Republic that would have benefitted Melgen financially.  

The grand jury hasn’t issued any charges against Menendez, and prosecutors may ultimately choose to drop the matter, but it’s not best practices for the Senate’s top foreign policy voice to be implicated in an abuse of power scandal that involves, in part, international contracts.

The Iran bill follows Menendez’s push earlier this autumn to goad US president Barack Obama into a more hawkish position on Syria that would have seen US military attack on Bashar al-Assad.  Menendez actually made the following analogy in his push to win support for an attack earlier this year: Continue reading Why Menendez is such an awful Senate Foreign Relations Committee chair →

Israel, United States

Why Stanley Fischer is such an inspired choice as US Fed vice chair

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It’s really quite incredible that there’s been more ink spilled over the decision of the American Studies Association, a US-based academic group, to boycott Israel than the potential nomination of Stanley Fischer, the former governor of the Bank of Israel, to become the next vice chair of the US Federal Reserve.ISrel Flag IconUSflag

It’s somewhat ironic that at a time when many critics are attacking the ASA’s decision (is it morally right to boycott the exchange of ideas, academic debate and discussion?), Fischer’s transition from Israeli central banker to US central banker would be a spectacular opportunity — for Fischer, for the Fed, for Israel, for the United States and, if the initial reaction holds, world markets, too.  Reuters reported late last week that Fischer was offered the spot, though there’s not been an official announcement.

Janet Yellen, the current Fed vice chair, is US president Barack Obama’s nominee to chair the Fed after Ben Bernanke completes his second term on January 31, 2014, and she is expected to be confirmed as the new Fed chair by the US Senate in a vote later this week.

Fischer, as the number-two official at the Fed, would bring with him eight years of experience setting monetary policy for Israel and the rock-star status of one of the world’s most accomplished economists.  As a longtime professor at the Massachusetts Institute of Technology, he not only served as thesis supervisor to Bernanke, the current Fed chair, but also Mario Draghi, the chair of the European Central Bank.

As The Financial Times reported last week, Fischer has a ‘dream resumé’ for the position, topped off by an eight-year stint as Israel’s central bank governor that is universally acclaimed:

Some clues to how Mr Fischer thinks about monetary policy come from his tenure as governor of the Bank of Israel. He was one of the country’s most respected public figures; when he announced he would be stepping down earlier this year, one commentator said the country was losing its last ”responsible adult”.

His eight years as governor coincided with fast economic growth, low unemployment – currently 6 per cent – and low inflation. Israel survived the financial crisis in 2008-9 without seeing a single bank collapse.  Unlike his predecessor Jacob Frenkel, who had a tight focus on fighting inflation, Mr Fischer is credited with broadening the Bank of Israel’s remit to influence growth and employment. His decisions were marked by pragmatism: he slashed interest rates in the wake of the financial crisis, then abandoned economic dogma to try to hold down Israel’s currency, before raising rates as the economy recovered.

Fischer was so successful in stabilizing Israel’s economy that the Bank of Israel was already raising interest rates by September 2009 — if it hadn’t been for his age (he’s 70 today), he would have been a strong candidate to succeed Dominique Strauss-Kahn as managing director of the International Monetary Fund in 2011.

Born in what is today Zambia, Fischer spent his childhood there and in what is today Zimbabwe (and what was then the colonial apartheid state of southern Rhodesia).  Fischer first came to the United States in 1966 for his Ph.D in economics at MIT, and he remained there as a professor through 1988, when he took a position as the World Bank’s chief economist for two years.  From 1994 to 2001, he served as the first deputy managing director of the IMF during the Asian currency crisis of the late 1990s and other financial crises from Mexico to Argentina to Russia.  After a brief stint in the private sector with Citigroup, he was appointed governor of the Bank of Israel in 2005 by then-prime minister Ariel Sharon — and recommended by the finance minister at the time, Benjamin Netanyahu.  He holds dual Israeli and US citizenship, and he would have been as credible a candidate to lead the Fed as either Yellen or former treasury secretary Lawrence Summers.

As Dylan Matthews wrote earlier this year for The Washington Post, Netanyahu and Sharon took a big chance on Fischer, who wasn’t an Israeli citizen at the time of his nomination:

No matter — Fischer’s results were more than enough to assuage any doubts. No Western country weathered the 2008-09 financial crisis better. For only one quarter — the second of 2009 — did the Israeli economy shrink, by a puny annual rate of 0.2 percent. That same period, the U.S. economy shrank by an annual rate of 4.6 percent. Many countries, including Britain and Germany, fared even worse.

So what would his appointment mean for the Fed?  Continue reading Why Stanley Fischer is such an inspired choice as US Fed vice chair →

United States

Love him or hate him, MITT is going to be an epic documentary

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It seems like in every US presidential election since Theodore H. White’s The Making of the President 1960, there’s one ‘definitive’ piece of journalism that captures the essence of the election — and that demonstrates to the rest of the world the inner workings of politics in the world’s oldest constitutional democracy. USflag

In 1972, it could have been Hunter S. Thompson’s Fear and Loathing on the Campaign Trail, an acid trip that revealed the emptiness of Republicans like Richard Nixon and Democrats like Hubert Humphrey.

In 1988, it was Richard Ben Cramer’s What It Takes, a 1072-page sextuple biography of the leading presidential contenders, including the winner George H.W. Bush and future vice president Joe Biden.

In 1992, it was the documentary, The War Room, about the campaign team that propelled Arkansas governor Bill Clinton to the presidency.

In 2008, it was Game Change, the book by John Heilemann and Mark Halperin that transformed Barack Obama’s legendary presidential victory into a thrilling page-turner.

But despite at least two major blockbuster books on the 2012 presidential race, including a second volume from Heilemann and Halperin, I haven’t seen anything that really captures the race in an extraordinarily compelling way.  Enter MITT, a documentary that Netflix will debut in January 2014.  If the trailer (embedded above) is any indication, it could become the definite media chronicle of 2012.  In the trailer alone, you can see Romney’s real-time reaction to the news that he’d lost the presidency.

Greg Whiteley followed Romney for six years in order to shoot the documentary — starting just after Romney left office as Massachusetts governor, through his unsuccessful primary campaign to become the 2008 Republican nominee and the grueling 2012 campaign.  Romney ultimately lost that race to Obama, the incumbent, by a margin of 51.1% to 47.2% (an electoral vote loss of 332 to 206).

Cuba, United States

Photo of the day: The Obama-Castro handshake

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The Official Memorial Service For Nelson Mandela Is Held In Johannesburg

It’s just the time of year for Cold War legacies — east-west tension in Ukraine, French intervention in Central Africa and now a reminder of the frigid half-century of US-Cuban relations.USflagcuba

The photo of US president Barack Obama shaking hands with Cuban president Raúl Castro may come to be the defining image from Nelson Mandela’s funeral in South Africa earlier today.  It’s fitting that Mandela, even in death, can bring together the leaders of two countries that have had such a tortured bilateral relationship.  If Mandela and the ruling apartheid regime of the 1980s could set aside differences to forge a new South Africa, Obama and Castro can share a moment of basic human civility.

Perhaps more instructive are the words of Obama’s speech at the Mandela funeral, which might apply just as well to the US-Cuban relationship:

It took a man like Madiba to free not just the prisoner, but the jailer as well, to show that you must trust others so that they may trust you; to teach that reconciliation is not a matter of ignoring a cruel past, but a means of confronting it with inclusion and generosity and truth. He changed laws, but he also changed hearts.

It’s not unprecedented — though we don’t have a photo, former US president Bill Clinton shared a handshake with former Cuban leader Fidel Castro in 2000.

While it’s encouraging to see some minor thaw in the US-Cuban rupture, it’s unlikely to herald any truly rapprochement in a world where Florida still has 29 electoral votes and the truly awful Bob Menendez, the US senator from New Jersey, continues to chair the Senate Foreign Relations Committee.  Menendez, a Cuban-American, is among the most anti-Castro members of the US Senate, so don’t expect any broad-based effort to lift the half-century embargo against Cuba — US citizens are generally prohibited from traveling to the Caribbean island of 11 million people, where Raúl’s brother Fidel took power in a popular revolution in 1959.  I’ll leave aside in this post the valid points of both the anti-embargo position and the anti-Castro position — though Castro replaced in Fulgencio Batista a corrupt and bloody strongman, the Castro record on human rights, democratic participation and economic freedom isn’t incredibly strong.

Americans who believe that Cuban policy remains about 30 years behind the times will be mildly heartened by the handshake, and the truly nutty will attack Obama for ‘comforting America’s enemies’ or some other outrageous criticism.

But sometimes a handshake is just a handshake.

Photo credit to Chip Somodevilla / Getty Images.

Honduras, United States

How the Obama administration is failing Honduras — and Central America

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TEGUCIGALPA, Honduras – The June 2009 coup that ousted Manuel ‘Mel’ Zelaya from office was the first 3 a.m. call of U.S. president Barack Obama’s administration. USflaghonduras flag icon

While Obama and Hillary Clinton, then the U.S. secretary of state, condemned the coup and the interim government’s refusal to reinstate Zelaya, the United States returned to business as usual with the election of Porfirio Lobo Sosa later that year, and U.S.-Honduran cooperation, especially militarily, has been on the rise during the Lobo Sosa administration.  As Juan Orlando Hernández prepares to assume the Honduran presidency — like Lobo Sosa, he comes from the conservative Partido Nacional (PN, National Party), it also likely means continuity in US policy toward Honduras, specifically, and Central America, generally.

But should it?

Though the votes aren’t even fully counted, and there are real questions about the November 24 election’s fairness, it’s hard to believe that U.S. policymakers are too upset about the apparent defeat of Xiomara Castro de Zelaya, the wife of the former president, and the leader of the newly formed LIBRE, which would have pulled Honduras in a more leftist direction – and toward closer contact with Venezuela, Ecuador and Bolivia, each of whom have challenged U.S. influence in Latin America.

There’s another risk that the Obama administration’s Central American policy could be causing more harm than good by ‘feeding the beast’ of corruption among police officers and impunity among drug traffickers, the very things that U.S. aid to Honduras is ostensibly designed to combat.

With three more upcoming elections in Central America over the next six months, it’s a particularly relevant opportunity for the Obama administration to review its policy in the region.  Guatemala’s conservative president Otto Pérez Molina came to power early last year, promptly declared the ‘war on drugs’ a failure, and issued a powerful call to legalize drug use.  Even Felipe Calderón, who militarized the Mexican fight against drug traffickers in the late 2000s, has argued that legalization might be the most effective policy weapon in combatting drug-related violence in Latin America.

Even as some libertarian Republicans in the United States increasingly believe that the four-decade ‘war on drugs’ is a failure at home, it’s easy to underestimate the damage that war has wrought in Latin America, with North American demand fueling an illicit drug supply, together with subsequent US-sponsored military efforts throughout the region, that have destabilized entire countries – Colombia in the 1990s, Mexico in the 2000s and Honduras today.  Research from Horace Bartilow and Kihong Eom, professors of political science at the University of Kentucky, finds that U.S. drug policies have caused greater levels of drug violence in Latin America.  Even when countries are ‘successful’ in their supply-side fights against drug traffickers, demand dictates that the suppliers find new countries, establishing a vicious ‘bubble problem’ – success in one country means that a new chapter opens elsewhere as traffickers search out new bases for drug operations, a tragic game of ‘whack-a-mole’ on a hemispheric level.

It’s Central America’s turn, which now sources the vast majority of known cocaine shipments to the United States.  In particular, traffickers found Honduras a particularly attractive target, in part due to the breakdown in the rule of law that resulted from the 2009 coup.  Sadly, Honduras now boasts the world’s highest homicide rate, and has a thriving arms trafficking trade to match the drug trade. Continue reading How the Obama administration is failing Honduras — and Central America →

Honduras, United States

So what’s the big deal about Honduras’s election?

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TEGUCIGALPA — It’s not a controversial argument that the November 24 general election is the most important Central American election of the year, if not the most important since 2009, for the region.  But it’s certainly of vital importance for US foreign policy — and much more than the three additional upcoming elections next spring in Central America (Costa Rica, El Salvador and Panamá).USflaghonduras flag icon

The coup that overthrew former president Manuel Zelaya in June 2009 was in many ways the first important foreign policy crisis for the administration of US president Barack Obama.  Views differ incredibly as to whether Obama and US secretary of state Hillary Clinton succeeded in handling the crisis.  Though the US government joined virtually the entire international community in condemning the coup and voicing support for Zelaya’s return to office, the United States ultimately backed down on threats to refuse to recognize the November 2009 election, despite threatening not to recognize those elections in talks with Honduras’s interim president between June 2009 and January 2010, Roberto Micheletti.

It was clear that top US policymakers weren’t happy with Zelaya’s increasing turn toward stridently anti-American leftist regimes, including Venezuela, which was then under the leadership of Hugo Chávez, and Zelaya’s decision to join the Alianza Bolivariana para los Pueblos de Nuestra América (ALBA, Bolivarian Alliance of the Americas) was a turn away from the United States and toward Venezuela, Bolivia, Cuba and others in the region.  While Zelaya would be a fool to turn away the favorable terms of Chávez’s Petrocaribe scheme that subsidizes fuel (50% down, 50% to be paid far off in the future), and even his conservative successor continued to accept Petrocaribe fuel, he pulled Honduras far closer to the hardcore left than it had ever been in its history.

As the subsequent post-Zelaya elections approached, however, it was clear that the United States was more comfortable with the impending victory of Porfirio Lobo Sosa, the candidate of the Partido Nacional (PN, National Party).  When Lobo Sosa (pictured above with Obama) won that election, US-Honduran relations went back to business as usual — and then some.

Honduras is, in many ways, the key to US policy in Central America.  Its Soto Cano air force base is a key military transport point between the United States and the rest of Latin America — the air base itself came into modern existence in 1981, when the US government used Honduras as a staging point for Contra incursions against the Soviet-backed Sandinista forces in Nicaragua.  Don’t let its relatively small size fool you, either.  If you think a country with a population of just eight million people can’t be relevant to US foreign policy, just look at Israel — it’s a country with just six million.

Four years after the mixed US response to the coup, Hondurans are preparing to elect a new president and all 128 members of the Congreso Nacional (National Congress), and the consequences couldn’t be greater for US-Honduran relations.

Current polls show that it’s a three person-race, with the National Party’s Juan Orlando Hernández, the president of the National Congress, essentially tied with Xiomara Castro de Zelaya, the wife of the former president.  Castro de Zelaya is running as the candidate of a broad leftist movement, the Frente Nacional de Resistencia Popular (FNRP, National Popular Resistance Front), which is now organized as a full political party, the Partido Libertad y Refundación (LIBRE, Liberty and Refoundation Party).  Lagging behind is attorney Mauricio Villeda, the candidate of Zelaya’s former party, the Partido Liberal (PL, Liberal Party) and the son of a former social democratic Liberal president in the late 1950s and early 1960s.

Though Castro de Zelaya isn’t going out of her way to disparage the United States, and the United States hasn’t endorsed Hernández directly, US-Honduran relations will be much trickier if Castro de Zelaya wins the election.

But that doesn’t mean relations will necessarily be worse for the Honduran people.   Continue reading So what’s the big deal about Honduras’s election? →

Puerto Rico, United States

The next debt crisis in the United States may require a Puerto Rico bailout

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Washington may be enjoying some well-deserved rest from the brinksmanship of the dual crises over the US federal government shutdown and the possibility that the US Congress might not raise the debt ceiling.USflagPR

Though both crises ended last week, a new crisis may have been gathering steam while the world focused on the global implications of a seemingly dysfunctional American political system.

It’s Puerto Rico, where both finances and the economy seem to be spiraling out of control.

Bondholders are pressuring Puerto Rico

Investment vehicles that buy state and municipal bonds have long loved Puerto Rico’s bonds.  Although the bonds are rated BBB+ (by Standard and Poor’s), they are a tax-exempt hat trick.  Not only are Puerto Rican bonds exempt from all federal taxes (like all state and municipal bonds), and not only are they exempt from applicable Puerto Rican commonwealth and other local taxes (which is generally how most state and municipal bonds are treated in the state or territory of their issuance), Puerto Rican bonds are exempt from state taxes in all 50 US states.  So while Virginian bonds may be taxable under New York state tax, or Californian bonds may be taxable under North Carolina state tax, Puerto Rico’s bonds are exempt from state and local taxes everywhere.

Bondholders have typically shrugged away Puerto Rico’s ‘BBB+’ rating because the yields were sufficiently high enough (around 5%) and the tax advantages so pronounced that Puerto Rican debt looked like an easy way to goose returns for the average fund manager.  So Puerto Rican bonds became predictably popular, and many mutual funds and other investment vehicles are widely exposed to Puerto Rican debt.  Morningstar estimates that 77% of all muni funds hold Puerto Rican bonds to some degree, and they’re all now incredibly itchy about their exposure.

But when yields started climbing over the summer and early autumn to above 8% and even 9%, it spread alarm not only in San Juan, but in New York and other global financial capitals, as investors and analysts started thinking more deeply about the weakest geographic link in the US financial system, a ‘commonwealth’ with a much more fragile economic outlook that shares only some elements in common with the mainstream US economy.  Puerto Rico’s governor, Alejandro Garcia Padilla, and a slew of top officials have spent the rest of October in New York, Washington and elsewhere trying to calm markets and policymakers.

No US state has a debt outlook as poor as Puerto Rico’s, and its ‘BBB+’ rating is just one notch above junk debt status.  If any of the three major ratings agencies downgrade Puerto Rican debt further, it could trigger a number of adverse ‘death spiral’ consequences.  Puerto Rican bonds are already selling on the open market well below par, but if Puerto Rican debt hits ‘junk bond’ status, it would suddenly become much, much worse.

Mutual funds could be forced to sell their entire Puerto Rican portfolios, which would flood the market with bonds that would become almost immediately worthless.  Puerto Rico’s government could be forced to post additional collateral against those bonds, leaving its government even more strapped for cash.  That’s not even taking into account the effects of any credit default swaps related to Puerto Rican debt.

All of which means Puerto Rico is now a lot closer to insolvency than it was a month ago.

But unlike the city of Detroit, which filed for Chapter 9 bankruptcy earlier this summer, Puerto Rico is a sovereign (technically an ‘unincorporated territory’) and cannot file for bankruptcy as a matter of law.  To the extent there was any legal doubt about it, a federal court slammed shut the door in 2012 when it ruled that the pension fund of the commonwealth of the Northern Mariana Islands could not file for bankruptcy.

That leaves US president Barack Obama with the unpalatable option of having to consider a bailout of Puerto Rico — an option that some Puerto Rican officials were already discussing openly earlier this month:

In a meeting with bond analysts in New York on Monday, the president of the Puerto Rican Senate, Eduardo Bhatia, said officials in the United States Treasury and White House had been analyzing the situation carefully, “wondering how they can help Puerto Rico send a very strong signal of stability right now.”

Given that the Republicans who control the US House of Representatives are incredibly anti-debt, the fight to raise the debt ceiling would look like a cakewalk compared to the congressional fight over a potential Puerto Rican bailout.  If House Republicans seem unwilling to move forward on immigration reform, they seem even less likely to approve a bailout for a territory that pays no federal income tax, that elects no members to Congress and that has no electoral votes in the US presidential election.

Is Puerto Rico the Greece of North America?

The real horrorshow element to this is that Puerto Rico could wind up being to the United States what Greece was to the European Union — the canary in the coal mine that exposes wider state-level and municipal exposure.

The immediate possibility of a US debt default through political brinksmanship has now passed, at least until February 2014.  Furthermore, no one expects Puerto Rico to fall out of the ‘dollarzone,’ or face the idiosyncratic problems that the European Union faces, where monetary policy is set at the European level and fiscal policy is still set at the national level.

But if yields remain elevated, Puerto Rico won’t be able to borrow enough to finance its government.  Its leaders say that Puerto Rico is prepared to refrain from further borrowing through June 30 of next year and wait out the current debt scare, but that’s hardly a solution to the crisis.  Even if that estimate is correct, what happens in July 2014 if yields spike again?  What happens the next time bondholders start doubting Puerto Rico’s ability to meet its debt obligations?

Like Greece, Puerto Rico spent the 2000s on a debt spree — its debt load as a percentage of what Puerto Rican GNP increased from around 60% in 2000 to over 100% today.

It now seems clear that Greek debt was mispriced following its entry into the eurozone because debt yields converged among all eurozone countries.  That allowed Greece’s government to borrow throughout the 2000s at rates lower than its fundamental economic and financial performance would otherwise warrant.  Essentially, Greece continued to borrow at Greece-level amounts but with the benefit of German-level rates.

In the same way, investors have potentially mispriced Puerto Rican debt — no one actually treated Puerto Rico’s bonds as if they were one downgrade away from junk status.  That’s partly because the tax incentives were so favorable, but it’s also because no one really thought that the debt of a US territory was actually so risky.

But the debt ceiling fight highlighted the attention of world markets on the precariousness of US debt generally.  So while a run on Puerto Rico’s debt could end with Puerto Rico, it could also make mutual funds and global investors think twice about holding US municipal and state debt, especially in the wake of the debt ceiling fight and Detroit’s municipal bankruptcy.  There’s wide variance among the credit ratings of the 50 US states:

debtratings

According to S&P state-level credit ratings (as of January 31), while many US states have stellar credit ratings of ‘AAA’ (bright green in the map above) or ‘AA+’ (spring green), there are plenty of states with ‘AA’ (yellow) or ‘AA-‘ (orange).

Two of the largest states with a combined population of nearly 51 million have even more precarious ratings — California (rated ‘A’), despite the best efforts of California governor Jerry Brown to transform his state’s finances, and Illinois (rated ‘A-‘).  State debt loads vary considerably on a per-capita basis as well — this chart from the Tax Foundation shows that per-capita state-level debt ranges from $925 in Tennessee to over $11,000 in Massachusetts.

But it’s all worse in Puerto Rico, which has issued about $87 billion in outstanding debt, which comes out to over $23,000 on a per-capita basis.

Puerto Rico’s economy has been struggling for a decade

Meanwhile, no US state has an economy that’s in such poor shape as Puerto Rico does.

Puerto Rico’s unemployment rate is 13.9% (as of August), which is higher than the national average (7.3%) and higher than any other US state or territory.

Like Portugal and Italy, Puerto Rico’s economy was stagnant long before the 2008-09 global financial crisis — since the year 2000 (when it achieved 6.3% GDP growth), the Puerto Rican economy has been in contraction more often than it’s been in expansion.  Here’s a chart of the GDP growth of Puerto Rico against that of the United States between 1999 and 2012 — you can see that Puerto Rico entered a recession in 2005 that ended only last year, when it posted 0.5% growth:

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Puerto Rico’s economy outperformed the US economy only once in the past decade — it didn’t take the sharp hit that the United States suffered in 2008 and 2009.  But even that’s bad news for Puerto Rico, because it shows just how disconnected the island’s economy is from the mainstream US and global economy.

Moreover, Puerto Rico is already starting off far behind the US mainland in just about every economic indicator. Its median income of around $18,000 is far lower than the average income in the United States, and it’s about one-half of the poorest state median income (Mississippi’s median is around $36,000).  Nearly 41% of Puerto Ricans live below the poverty line, compared to just 16% within the United States.  Its regional GDP per capita is around $27,000, about half that of the United States generally.

Also like Portugal and the peripheral economies of Europe, Puerto Rico’s population (around 3.67 million) is in decline.  Its population peaked at just over 3.8 million people in 2004, and it’s dropped more than 4% in the past eight years, partly due to migration to the US mainland and partly due to a declining birthrate.  Just as in the peripheral economies of Europe, population decline means that there are fewer workers to support an increasingly unproductive and aging population.

Continue reading The next debt crisis in the United States may require a Puerto Rico bailout →

China, United States

Amid debt ceiling showdown, China sharply calls for a ‘de-Americanized’ world

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In case you missed it over the weekend, China’s state-run newspaper Xinhua printed an extraordinary editorial calling for a turn to a ‘de-Americanized’ world that appears to have had the support of the top leadership within the world’s most populous country:China Flag IconUSflag

As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world….

The tone only sharpens as the editoral blames the United States for torturing prisoners and killing civilians in drone attacks before fully condemning the era of ‘pax Americana‘:

Moreover, instead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas…

Most recently, the cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.

Elements of the editorial are somewhat biased — a self-serving ding against Washington for ‘instigating regional tensions amid territorial disputes’ is more reminiscent of Chinese bluster and blunder on relations with Taiwan, Hong Kong and Tibet, as well as the recent territorial dispute with Japan over the Senkaku/Diaoyu Islands.  But if, as is almost certainly the case, the editorial has the backing of top Chinese leadership, it will be the strongest call to date for a move to a ‘de-Americanized’ world.

It’s important to keep in mind that, for all the defeatist talk that China has eclipsed the United States, the US economy remains roughly twice the size of the Chinese economy:

GDP

Furthermore, for all of the talk that the United States is becoming ever-more indebted to the Chinese, it’s also important to keep in mind that of the $16.7 trillion or so in outstanding US debt issuance, around $4.7 trillion amounts to intergovernmental holdings (e.g., amounts held by the US Federal Reserve).  Another significant chunk of that debt is held by state and local pension funds, the Social Security Trust Fund.  In fact, as of July 2013, foreign governments held just $5.59 trillion of the debt, and China held just $1.277 trillion of it, while Japan held nearly as much with $1.135 trillion.  Here’s a closer look at the breakdown of the foreign holders of US debt:

foreignholders

In all the loose talk about China’s rise, it’s easy to lose track of those two items — China holds just over 7.6% of all US debt and its economy is just 52.5% the size of the US economy.

So while China isn’t today in a position to issue edicts about the de-Americanization of the world economy, its views are becoming increasingly influential, especially as it takes a greater investment role within the world from Latin America to Africa.  Its call for developing and emerging market economies to play a greater role in international financial institutions like the World Bank and the International Monetary Fund mean that the days of an always-American World Bank president and an always-European IMF managing director are numbered.

Even in the worst-case scenario in which the US Congress’s failure to lift the debt ceiling leads to another Lehman-style panic, China can’t do much immediately to bring about a de-Americanized world.  But, like Humphrey Bogart’s warning to Ingrid Bergman in Casablanca, the threat will come ‘maybe not today, maybe not tomorrow, but soon — and for the rest of your life.’

So when China makes noise about a de-Americanized world, it essentially means two things: a world where US debt is no longer perceived as the world’s safest investment and the US dollar is no longer the world’s reserve currency.  I’ll take a look at each in turn, but first, it’s worth making sure we’re all on the same page as to the basics of the debt ceiling standoff itself.

The debt ceiling crisis

US treasury secretary Jack Lew has pinpointed October 17 as the day that the United States will be truly jeopardized by its failure to raise the debt ceiling (currently at $16.7 trillion).

With about 24 hours to go until the world hits that deadline, the Republican Party, which controls a majority of the votes in the US House of Representatives, are nowhere near approving a bill that, with or without conditions, would raise the debt ceiling for even a short period of time, and the US Senate, which is controlled by the Democratic Party, will spend Wednesday taking the lead on a last-ditch effort at negotiations between Senate majority leader Harry Reid and Senate minority leader Mitch McConnell.

It’s reassuring to know that Moody’s isn’t quite as pessimistic about the October 17 deadline — in a memo from earlier this month, Moody’s experts argued that the US government could quite possibly hobble along, quite possibly until November 1, when a slew of entitlement spending means that the US government will be unlikely to meet its obligations on time.  The US government will certainly prioritize interest payments on US debt and meet its other obligations on the basis of incoming revenues.  But the clock’s ticking, and while Wall Street and global markets seem nonplussed about the shutdown and even about the October 17 debt ceiling deadline, there’s no way to know when that could change.

Market sentiment is a tricky thing to forecast — recall the speed in 2008 with which former US treasury secretary Hank Paulson went from worrying about the moral hazard of bailing out Lehman Brothers on September 14 to, less than 24 hours later, worrying about rescuing the entire financial system from a global panic.  While it seems unlikely that markets will immediately tank at midnight tonight if the US Congress fails to act on the debt ceiling, there are signs that other actors in the global economy are running out of patience.  One of the other top three credit ratings agencies, Fitch, put the United States on warning Tuesday by lowering the outlook on its ‘AAA’ credit rating from ‘stable’ to ‘negative,’ citing the brinksmanship in the US political system that’s so far failed to secure a debt ceiling hike.

For those of you who might have been living on a deserted island for the past three years, the US Congress is generally obligated to raise the total aggregate amount of US debt issued, irrespective of whether the US Congress has approved the spending levels associated with issuing such additional debt.  No other country (except Denmark) has a similar concept, which is why the debt ceiling crisis is such a foreign concept for non-Americans.

Between 1798 and 1917, the US Congress had to approve every single issuance of new debt; the onset of the ‘debt ceiling’ concept was initially a way to streamline debt issuance during World War I.  Since 1917, the US Congress raised the debt ceiling over 100 times, and 14 between 2001 and 2013.  Traditionally, in times of divided US government, though those votes have sometimes been subject to one party’s political posturing.  US president Barack Obama himself cast a vote against raising the debt ceiling in 2006 when he was just a US senator, and he issued some pious, if garden-variety, blather about ‘shifting the burden of bad choices today onto the backs of our children and grandchildren.’  Matt Yglesias at Slate called out Obama for ‘bullshitting’ back in 2006.

But only in 2011 did one party seek to wield the debt ceiling as a weapon of economic destruction — give us what we want on our policy priorities or the world economy gets it!  In 2011, just months after Obama’s party suffered devastating losses in the November 2010 midterm elections, Obama agreed to make budget cuts in exchange for a hike in the debt ceiling.  But now, fresh off reelection, Obama is arguing that he won’t negotiate over the debt ceiling — partly to discourage anyone from trying to use the debt ceiling as an instrument of political blackmail in the future.

In any event, for the best reporting in the United States on the debt ceiling crisis in terms of both politics and policy, go read Ezra Klein (and friends) at Wonkblog at The Washington Post and every word that Robert Costa at National Review reports from within the House and Senate Republican caucuses.

But it’s vitally important to the global economy because US debt — Treasury debt securities (called ‘Treasurys’) and, specifically 10-year Treasurys (called ‘T-notes’) — is generally viewed as the safest investment in the world.

Why US Treasurys are so special 

As Felix Salmon at Reuters memorably explained Tuesday, US-issued debt is the ‘risk-free vaseline which greases the entire financial system’: Continue reading Amid debt ceiling showdown, China sharply calls for a ‘de-Americanized’ world →