Friday, October 2, 2015

Wednesday, September 30, 2015

Rani Mullen and Cody Poplin on the Battle for Access and Influence in the Indo-Pacific

Good piece in Foreign Affairs titled The New Great Game - A Battle for Access and Influence in the Indo-Pacific by Rani D. Mullen (Associate Professor in the Government Department at the College of William and Mary, Virginia and Director of the Indian Development Cooperation Research (IDCR) at the Centre for Policy Research, New Delhi, India) and Cody Poplin (Research Assistant at the Brookings Institution in Washington, D.C. and an Associated Editor of Lawfare).
Huge stakes are involved. Trade, energy, and geostrategic imperatives are driving both Chinese and Indian ambitions. Between the Indian and Pacific Oceans lies the main choke point of world commerce, the Malacca Strait. Today, more than half of the world’s container traffic and one-third of all maritime traffic crosses the Indian Ocean and passes through this point and into the South China Sea. To understand the scale, consider that roughly two-thirds of South Korea’s energy supplies, nearly 60 percent of Japan’s energy supplies, and 80 percent of China’s crude oil imports arrive over this maritime route. Meanwhile, 75 percent of India’s energy supplies cross the Indian Ocean.
China has long felt trapped by what national strategists have termed the “Malacca Dilemma”—that China’s access to the greater Indo-Pacific is limited to one main pass and that, to reach that pass, its ships have to travel over the South China Sea, which is a mess of overlapping territorial claims from countries in the region. And so over the last decade, China has sought to secure its access to the critical sea lanes, including by creating artificial islands with airfields in the South China Sea [6] and declaring an expansive and novel Exclusive Economic Zone—one that is far larger and includes far more prerogatives than permitted under The United Nations Convention on the Law of the Sea—over the area. From this perspective, Chinese Vice Admiral Yuan Yubai’s recent, and rather incendiary, declaration that the South China Sea “belongs to China” makes strategic sense: It is after all their path to the greater Indo-Pacific.
Plenty of ink has been spilled over the South China Sea, and appropriately so. But the South China Sea is just an example of a larger game that is already underway.
Along with creating routes to and around Malacca, China has provided soft loans to Bangladesh, Pakistan, Myanmar (also called Burma), and Sri Lanka for everything from highways, to power plants, to seaports. All of this has been part of China’s Maritime Silk Road strategy, which is meant to bind countries in the Bay of Bengal and the Indian Ocean closer to the Chinese economy as well as to build trade routes from China through their territory to the Indian Ocean, which would allow China to avoid the Malacca bottleneck. Yet this approach has been hurt by China’s more muscular activities in the South China Sea, which have scared the country’s smaller neighbors into closer alliances with India, Japan, and the United States.
As China has become more assertive, India has focused on its own rapidly growing need for access to critical sea lines and opportunities for trade and investment. In 2011, maritime trade constituted close to 41 percent of India’s overall GDP; the figure reached 45 percent in 2015. India now imports about three-fourths of its oil through the Indian Ocean. India fears that China, relying on its alliance with Pakistan, might encircle India on land and at sea. For Indian strategists, it doesn’t seem far-fetched that China would use its increased maritime capability to create a zone of naval exclusion that stretches from the South China Sea to the Persian Gulf.
To counter such encroachment, India, which was the largest recipient of global foreign aid until the early 1990s, has started to dole money out. The country now has more than $12 billion in open lines of credit and dozens of major development projects in foreign countries. Although Indian aid equals just a fraction of Chinese aid in the region, India hopes to use its funding, increased trade focus, military diplomacy, and cultural ties—its so-called Act East policy—to maintain and expand its leverage over the Indian Ocean Rim states to preclude a more permanent Chinese presence in those waters.
This, in a nutshell, is the New Great Game [7].


My personal view is that Sri Lanka will favour China's influence as the resentment in Colombo towards New Delhi is palpable, the United States will tilt towards India for balance of power reasons in reaction to the Asian hegemon and the fact that it is angry over relentless Chinese cyber-attacks and bluster and India will lever a more assertive and muscular Japan since the Abe government  has renounced the pacifism that it embraced post World War II. Any Indian attempt to increase its profile be it through soft or hard power will be dependent upon who is in power in New Delhi. It is not a coincidence that the Indian state has hit beneath its weight for much of its existence thanks to those who have governed it at the national level.

Friday, September 18, 2015

Towards a Muscular Japan

In July of 2013 I wrote

Shinzō Abe's landslide victory provided him with the mandate he truly craves. No, it isn't about implementing Abenomics and its three arrows for economics has never been Abe's passion, it is about restoring Japan to its glory as a muscular and militarized nation.

(From: Executing China's String of Pearls Strategy)

Now this:

Following boisterous confrontations in the Diet and more than three days of public protest, the Upper House finally enacted two divisive security laws early Saturday that will mark a significant departure from Japan’s postwar pacifism.
Enacting the contentious laws was one of Prime Minister Shinzo Abe’s long-held ambitions. His goal was to find a way to remove some of the key legal restrictions that the war-renouncing Constitution imposes on the Self-Defense Forces during overseas missions in order to strengthen Japan’s all-important military alliance with the United States.
Given the ruling coalition’s strength in both chambers of the Diet, the opposition camp was essentially powerless to stop him. It was thus reduced to obstructing the voting procedures and tapping public frustration with the legislation in hopes of rallying widespread resistance.
Abe’s team submitted the two bills to the Diet in May. Since then, more than 200 hours have been spent deliberating the legislation.
The Upper House’s final plenary session was called late Friday night as the opposition camp, led by the Democratic Party of Japan, delayed Diet procedures in protest by submitting no-confidence and censure motions against Abe’s Cabinet ministers in both chambers.
According to opinion polls, a majority of the public opposes the legislation and many think the government’s efforts to explain it fell short.
A poll by the daily Asahi Shimbun from Sept. 12 to 13 found that 54 percent of the 1,994 respondents oppose the bills and 29 percent support them.
One of them amends 10 existing security-related laws to lift various SDF restrictions, including Article 9’s long-standing ban on collective self-defense.
The other creates a new permanent law that allows Japan to deploy the SDF overseas to provide logistic support for United Nations-authorized military operations involving a foreign or multinational force.
Lifting the ban on collective self-defense, or the right to defend an ally under armed attack even if Japan itself is not, was long considered banned by war-renouncing Article 9 of the Constitution. So instead of formally amending the Constitution, which was considered politically unfeasible, Abe simply had the government’s long-standing interpretation of Article 9 altered to allow collective defense.
Source: Tha Japan Times

Yoshida, Reiji, and Mizuho Aoki. "Diet Enacts Security Laws, Marking Japan’s Departure from Pacifism." The Japan Times, September 19, 2015, Http:// ed., National / Politics sec. Accessed September 18, 2015.

Tuesday, September 15, 2015

"Failure to launch" aka "no rate normalization"

From the Wall Street Journal

The chart illustrates how central banks have retraced their rate hikes. The challenge to those those espousing the exclusivity of monetary policy --conventional or otherwise-- is how much monetary tightening can the an economy take at any given point in its business cycle, particularly in a world where rates are close to the nominal zero lower bound.

Wednesday, August 26, 2015

Lipstick on swine: Restoring Henry Kissinger

Attorney Michael O'Donnell calls out Niall Ferguson's latest whitewashing of history in order to retore Henry Kissinger's image for what it is: "Horseshit"

Kissinger and Nixon bombed Cambodia to pieces in a secret four-year campaign that annihilated some 100,000 civilians. “Anything that flies, on anything that moves,” were the parameters Kissinger gave to Alexander Haig. He countered African liberation movements by embracing the white supremacists of Rhodesia and South Africa, a policy known as the “Tar Baby option.” Kissinger facilitated the overthrow of the governments of Chile and Argentina by right-wing generals, and then worked tirelessly to deflect criticism of the new governments’ torture and murder. A declassified memorandum of his meeting with Augusto Pinochet in 1976 shows Kissinger in a particularly unflattering light: “We welcomed the overthrow of the Communist-inclined government here. We are not out to weaken your position.” In 1975 Kissinger and President Ford met with Indonesian strongman Suharto and authorized him to invade East Timor, which he promptly did the following day; another 100,000 lost their lives. “It is important that whatever you do succeeds quickly,” Kissinger advised.
From Restoring Henry


O'Donnell, M. (2015, August 26). Restoring Henry. Washington Monthly.

Monday, January 26, 2015

A Cost Of War

From Banksy:

Central Banks "control inflation"

...and other tales to help you sleep at night in a complicated world.

welcome to a world of dis-inflation...

The enemy of my enemy will be my enemy one day

Economic policy works with lags that are long and variable. Foreign policy works with lags that are long and unpredictable. Reagan championing 'freedom fighters' opposed to Soviet tyranny in Afghanistan suffered under the truly unforgiving tyranny of Alzheimer's by the time the September 11, 2001 terrorist attacks occurred. Would his belligerently naive and Manichean world view have changed in hindsight of the terrorists his foreign policy spawned?
For the full text of Robert Fisk's article on Osama Bin Laden go here.

Friday, January 23, 2015

Saturday, January 17, 2015

US Equity Returns: Are You Risk Neutral or Risk Averse?

The reality is that we are human; we like the idea of profits and markets gaining to the upside and hate losses and markets losing ground. Our reaction is asymmetrical and once capital is lost do most of us have the stomach to be invested again in the hope that markets will rebound? Recent US equity market history (post 1999) is useful in this regard with losses occurring in 2000, 2001, 2002, and 2008. Any investor would have had a sense of regret after witnessing the depletion of capital. It isn't enough to hear those who state the efficacy of "time in the market", the reality is that many drivers are responsible for such returns --many beyond the realm of fundamental investing-- so a key question becomes: can you sleep at night without worrying about your investments. As the chart below shows, and as we should know, equity returns and returns of financial assets in general, are not normally distributed.
Chart Source: Marketwatch

Friday, January 16, 2015

Wednesday, January 7, 2015

Je suis Charlie...

Qui plume a, guerre a. Ce monde est un vaste temple dédié à la discordeTo hold a pen is to be at war. This world is one vast temple consecrated to discord.
  • Voltaire letter to Jeanne-Grâce Bosc du Bouchet, comtesse d'Argental (4 October 1748)

Cartoon by Ruben L. Oppenheimer
Cartoon by Rob Tornoe

Don't let the religious fanatics silence us.
If satire is gone today then your freedom will be gone tomorrow.

"I'd rather die standing than live on my knees"

Tuesday, January 6, 2015

Oil - how low can you go?

As Ronald W Cotterill has written in his letter to the Financial Times:

Sir, Coverage of the oil price bust is missing a critical insight. Full costs for shale oil are around $50 per barrel, and full cost for the tar sands and most deep water oil are even higher. Yet, as prices drop the supply glut worsens.This is an example of the overproduction trap that commodities with high sunk (fixed) costs face. As long as the price of oil is above a company’s short-run variable cost of production, it can make a contribution to covering its sunk costs. Rather than cut production because price is below full cost, it will increase production to reduce its losses. Prices drop even more.The focus on the reduction in drilling of new wells, which comes when price is forecast to be below full long-run cost, is misguided if one seeks to determine when the oversupply of oil will end. Research on the short-run variable cost of oil production by various producers and countries is needed to identify the price bottom.Ronald W CotterillEmeritus Professor of Agricultural and Resource Economics,University of Connecticut, US
(Bold emphasis added)

Don't bottom feed yet if you are an investor, keep in mind that crude oil still can still lose 50% of its value from today's closing
Breakeven for major projects
Estimated global oil and extraction costs (Source: Joseph Freeman Jones)
Comparing Oil Patch Costs, Canada vs United States
History of crude oil prices

Monday, January 5, 2015

Policy Rates are staying low....

No need to repeat what has been stated on this website for the last few years, we remain in an environment bereft of the need of so-called "rate normalization". Any steps the US Federal Reserve takes in that policy direction will need to be reversed over the short term -- we know policy lags are long and variable but deficient effective demand cannot be easily turned around in an increasingly uneven recovery.

Sunday, January 4, 2015

Will your job be computerized in 20 years?

Read the source report and full list of occupations by clicking on the hyperlink: "The Future of Employment: How Suceptible are Jobs to Computerisation?"
By Carl Benedikt Frey and Michael A. Osborne (September 17, 2013).

Saturday, January 3, 2015

Princes Of The Yen

You can learn more from this documentary than the tripe on Japan in the financial press.
It is based on Richard Werner's book "Princes Of The Yen" and is updated to take account of the Eurozone crisis.