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February 2021

Biden's Debt

    On behalf of the Baby Boomers, I would like to issue a hearty "Thank You" to our parents' generation who saved the world from Hitler and Tojo, and to our kids and grandkids who will pay for our profligacy over the past few decades. We've been in the sweet spot.

    Democratic leadership has chosen to make huge further debt increases a hallmark of the Biden administration with the $1.9 trillion Covid bill, which has little to do with fighting the disease,  and a subsequent $2.0 trillion Infrastructure Bill. Their political gamble: independents and Democrats who claim to be "fiscal conservatives" don't mean it; voters are addicted to "free stuff". 

    How bad is it? 

        - For those who love numbers, the National Debt Clock shows a concise summary of federal, state, and local income, spending, and debt. Currently Federal debt is 129% of the value of all of the goods and services produced and sold in the United States annually (up from 104% in 2016). Official Federal spending is 193 % of revenue (up from 115% in 2016.)  For every dollar that the Federal government takes in, it spends two.  

        -  As a baseline pre-Covid, the Federal Fiscal Year 2021 budget of $4.829 trillion projected a deficit of $966 billion. Spending was 60% mandatory (Social Security; Medicare; Medicaid; food aid), 20 % military; 1 % interest on debt, and 20 % all other (Health and Human Services; Education; Housing; Transportation; Parks; whatever).  Thus far, Congress (with Pelosi, Trump, and McConnell at the controls) has passed five Covid relief bills costing a total of $3.5 trillion. 

        -  International comparisons are risky, but China reports about $8 trillion of debt, or about 55% of GDP, and the paths are diverging.  

        - Perhaps most disturbingly, Congress has given up on the budget process in place since 1974. Instead of Congress adjusting the President's proposals and negotiating trade-offs, eight of the last ten budgets have resulted from last minute Continuing Resolution Authorities, which just agree to keep on keepin' on with what the government is doing.  

     Let's try to distill the most common debt arguments from the cacaphony of special interests, doomsayers, and political panderers. 

            For the Democratic team who would layer on a few more trillion dollars: 

                1. Debt doesn't matter. Since the US dollar is the international Reserve Currency (generally used for global financial transactions) the Federal Reserve can just print more money.  In a different era the Federal Reserve saw a primary obligation to protect the value of the currency; today's chair emphasizes the "twin mandate" to  maintain full employment, and vows to keep interest rates low for years.  The premise is that the economists will foresee the inflation problem before it arises, and take timely difficult political decisions when they need to.   In essence, the financial world is full of fairies and unicorns. 

                2. We need to invest in infrastructure; it will pay for itself.  This is true in some areas - notably the interstate highway system;  perhaps the airline industry; broadly in education; perhaps in some aspects of "Green Energy".  But some rigor in calculating a Return on Investment is necessary. California's High Speed Rail "train to nowhere" provides a cautionary tale of fraudulent promises and political corruption. Most of the Corona virus spending is designed to mitigate pain rather than to build lasting infrastructure for the future. Beware the lobbyists.  

                3. This is an opportunity to address wealth inequality. Substantial taxes on the super rich would help to close the gap. True, but a couple of cautions: the addition of a tax on existing wealth is problematic, so we are probably talking about income taxes which would produce much less, and the likes of Bezos, Zuckerberg, Bloomberg, Gates, Steyer, and Benioff are not stepping up. Ditto the Wall Street donors who support the non-Elizabeth Warren wing of the Democratic Party.  The days when the rich voted Republican are long gone, so the Democrats would need to gore their own ox.  

        And for the Republican / conservative folks who are concerned for their grandchildren:

                1. Today's interest rates are about 1.3 % on the 10 year Federal bond; over the past 50 years they have been as high as 15%, averaging about 6%. When they return to "normal", there will be a brutal squeeze on funding for the "discretionary" 40 % portion of the Federal budget, particularly the 20% non-military portion.   

                2. Deficits will ultimately be solved by budget constraint with higher taxes (unlikely) or by inflation which targets people living on fixed incomes such as pensions, bonds, or Social Security.  Older citizens vote disproportionately.    

                3. China has aspirations to replace the dollar with the yuan as the global reserve currency. In terms of global influence, it is far better to be a lender than a borrower. 

    Within the next few weeks the debt question will come to a head. Nancy Pelosi wants to give no quarter, passing the next Corona virus relief bill at $1.9 trillion, with Chuck Schumer relying on the "reconciliation" process in the Senate with 50 Democratic votes.  The Democratic establishment has not allowed Biden to negotiate with 10 moderate Republicans who have a proposal which strips out the extraneous junk. The diversion of including a $15 minimum wage will apparently fall off - either because the Senate Parlimentarian does not think it qualifies for reconciliation, or because Joe Manchin and Kyrsten Sinema have vowed to vote against it. But Democratic leadership wants a fight and the $1.9 trillion boondoggle is it unless Manchin or Sinema signal otherwise. 

    A few decades ago our politicians realized that they could have both guns and butter with lower taxes if they just passed on the bill to future generations.  The virus accelerated the process, but the direction has been clear for awhile. 

 

bill bowen - 2/25/21


In Search of Truth

      George Orwell would have felt confirmed by the Twenties.  Despite all of the power of Siri and Alexi, Google, Firefox, Edge, and Bing, Fact Check and Politifact, Wikipedia, and You Tube, the engaged American citizen lives in a society where history is rewritten and the bulk of the media repeats inaccurate and misleading stories.  As more information is available from more sources, and as more of those sources carry an ideological or political bias, the less confidence the public has in the media and the government.  A sizeable portion of Donald Trump's attractiveness was his brash willingness to call out "fake news";  reporters regularly recited stories which were demonstrably false, like his failure to condemn right wing rioters in Charlottesville , or claims that he was soft on Putin when he was far tougher than President Obama.  He and many reporters had a mutually beneficial relationship, gaining followers as a result of conduct unheard of in a more genteel time.  Truth has suffered. 

    In a broader context, the woke left, inspired by the New York Times, has taken to rewriting history, erasing heroes from Columbus to Lincoln, and ignoring the struggles and victories in bringing the American reality closer to the philosophy of the Declaration of Independence, with the emancipation of slaves, the enfranchisement of women, and a thousand lesser victories. In Orwellian fashion, we are all now racist unless we favor policies based on race.  Striving for greater wokeness, women athletes must compete against biological men. Truth has suffered. 

    But the world moves forward with or without Truth, the coronavirus providing a good example, with Dr. Fauci frequently redefining science to fit what he wanted the public to do, and the Biden administration struggling to show that they are doing a better job than their predecessors.   First, masks were not necessary (at a time when there were not enough to go around, and healthcare workers needed priority); then their use became a political choice, with President Trump on the wrong side; then two masks became better than one.  As part of Operation Warp Speed, remdesivir was shown to speed recovery and reduce mortality, then dropped from discussi0n.  With no scientific data, the Center for Disease Control and Dr. Fauci determined that times between vaccine injections could be greatly expanded.  Teachers unions have frequently been able to block on-site instruction and demand vaccine prioritization, despite no evidence of significant risk. In the most political outburst, Vice President Harris claimed that the Trump administration had no plan for vaccinations, and that the Biden administration was starting from scratch - despite the fact that innoculations were occuring at about Biden's target of 1,000,000 per day, and a third vaccine was in the final stages of approval.  Truth has suffered.  

    The primary assault on Truth, the November 2020 elections and their aftermath, have shaken the foundations of our democracy. A year before the election, 72 % of Republicans, 39 % of Democrats and 55 % of independents thought that the election would be fair. Shortly after the election 30 % of Republicans and 90 % of Democrats thought it was fair.  Subsequently, fanned by Trump's challenge to the election and the the Electoral College, Republican skepticism boiled over.  There is much to understand if we are to heal - what were the impacts of of the coronavirus, mail-in voting, and extended days of in-person voting on the election; where were the points of potential irregularities; what led up to the assault on the capital; what administrative or security procedures should be changed to secure elections and the capital? How to proceed?

        - Nancy Pelosi - continuing her four year crusade against Trump - has notified her Democratic colleagues that there will be a 9/11 Commission - type review of  the January 6 riot at the capital, finding no need to include Republicans in the discussion. For perspective, the 911 Commission included: Al Queda and the organization of the 9/11 attack; US intelligence collection, analysis, and management; international counter terrorism policy; the inner workings of terrorism financing; the security of American borders; law enforcement inside the United States; commercial aviation and transportation safety; and personal interviews with Presidents Clinton and Bush. It was led by Thomas Keane and Lee H. Hamilton who were retired statesmen; it lasted two years; it resulted in thousands of recommendations, from integrating communications for first responders to restructuring the intelligernce community; it was non-partisan; it was serious. 

      - With varying motives, Kevin McCarthy, Mitch McConnell, Liz Cheney, and other Republicans looking to explain their behavior after the election have suggested an interest. The scope would need to include the election, events after the election, and events of January 6. It would have to be led by senior statesment from both parties. Politicians, such as Pelosi's usual prosecutors, would be excluded. 

    -  Perhaps Jack Nicholson's Colonel Nathan Jessup in "A Few Brave Men" was right when he screamed in court at Tom Cruise's Lieutenant Daniel Kaffee, "You can't handle the truth!"  But if he was, and we choose to carry on without understanding how close we came to disaster, we are screwed as a democracy.  

                                                                                                                    -----

   A special note on Rush Limbaugh is in order.  Over a 30 year career with some 20 million listeners, he preceeded Fox News, and internet sites such as the Drudge Report, Red State, Breitbart, and Townhall  in giving voice to the thoughts of a broad swath of conservatives.  He is given credit for Republican victories in the House in the 90s, and for legitimizing Donald Trump as a presidential candidate in 2016.  He identified and activated Trump's base before there was a Trump. His absence will leave a big hole in the developing battle between the Establishment and Trump's most avid supporters. 

bill bowen - 2/18/21


Engaging China: Biden-Style

    First, the good news: it appears that the Trump administration's pivot from President Obama's unsuccessful focus on the Middle East to a focus on a rivalry with China will have some legs with the Biden administration. At least there are some indicators:

        - Biden's first week in office began with a minor test by the Chinese - an unusually agressive incursion by nuclear-capable bombers into Taiwan's Air Defense Identification Zone.  We responded with the deployment of two carrier strike groups to the South China Sea, a destroyer transit of the Taiwan Straights, and the deployment of four B-52 bombers to Guam.  Message received. 

        - Days before leaving office, Secretary Pompeo's State Department formally designated Chinese actions against the Uighurs as "genocide" - "the forced assimilation and eventual erasure of a vulnerable ethnic and religious minority group.” Biden's Secretary of State, Anthony Blinken supported the designation during his confirmation hearings. 

        -  Long-time Biden staffer Ely Ratner has been designated to lead a four month Defense Department study of strategy and operations in Asia, including techology, force posture, intelligence, and the role of allies. No major changes are anticipated, except perhaps some impacts of climate change which are popular in Biden-think, but were largely ignored by Trump. 

        -  Biden administration nominees have echoed Trump criticisms of China's trade practices, with Treasury Secretary Janet Yellen telling the Senate Finance Committee "China is undercutting American companies by dumping products, erecting trade barriers, and giving away subsidies to corporations."  Tariffs will be kept in place as details of the economic policy are redfined. 

        - Biden's February 9 phone call with Xi Jinping at least addressed  the Uighurs, Hong Kong, and Taiwan which are considered off limits by Xi as matters of Chinese sovereignty and territorial integrity. They agreee to work together on health security, climate change, and weapons proliferation. 

    The second piece of good news is that our fate relative to China is in our hands. While the Chinese GDP could match that of the United states in a few years, and  they hold over $1 trillion of the $7 trillion of our debt held by foreign governments, we are self sufficient in agriculture and energy, and lead the world in military force and technological innovation.  This could change with continuing trillion dollar deficits, and neither the Treasury Secretary nor the Federal Reserve Chair are concerned, but a substantial majority of voters are significantly concerned about the national debt, and an optimist would believe that eventually the politicians will reflect that. (At least the Senate Republicans would like to slow down the Covid give-aways.) 

    We - with a little help from our Post-WWII friends - invented the current world order - the United Nations; the World Bank; the International Monetary Fund; the World Trade Organization; the World Health Organization; the International Civil Aviation Organization; The Internet Corporation for Assigned Names and Numbers (ICANN);  the International Standards Organization; and on and on. The Chinese would like to play a leading role in telecommunications standards with Huawei's 5G architecture, but Trump raised the alarm, and they face a steep hill.  

    The primary goal of Xi Jinping and his Communist Party allies - the consolidation of power - will have adverse effects.  The forced integration of Hong Kong will constrict China's largest point of interaction with global financial markets. The forced assimilation of the Uighurs will play poorly in the neighboring Muslim countries of Indonesia, Pakistan, and central Asia. Measures to bring Jack Ma's social media empire to heel through regulation, jailings, and intimidation will result in less creativity and reduced ability to compete with Western internet companies. 

    While the Belt and Road largesse is attractive to third world countries seeking infrastructure development, there is plenty of reason for China's neighbors to be wary of China's heavy hand, with border skirmishes within the memory of leaders from India, Vietnam, the Philippines, and Russia.  

    So, how could a Biden administration build on what they inherited? 

    1. They should rejoin the renovated Trans Pacific Partnership with New Zealand, Australia, Brunei, Malaysia, Singapore, Vietnam, Japan, Canada, Mexico, Peru, and Chile. (Britain, free of the European Union, applied for membership last week.)  Biden would have to negotiate domestic labor and environmental objections as well as Trump's aversion to multinational dispute adjudication procedures, but an extensive alliance of countries seeking an alternative to Chinese domination is waiting for us. China's alternative proposition - the Regional Comprehensive Economic Partnership -  will grow if we do not move. 

    2. Biden's team should build on the recently activated Quadrilateral Security Dialogue with the navies of Japan, Australia, and India to manage ocean transit among the countries of the Indian Ocean and the southwest Pacific. This is a step out for Australia, whose largest trading partner is China, but a multi-national approach is called for as China expands their ambitions in international coastal waters. 

     3. At a minimum, Biden's team should require closer monitoring of the Chinese Communist government relationships on US campuses. During his term, Trump eliminated half of the 100  Confucius Institutes - Chinese government funded cultural centers on US college campuses. Of the FBIs 5000 active intellectual property theft cases, half involve China, including prominent professors at Harvard and MIT who were paid by China while receiving grant money from the National Institute of Health or the Defense Department.  With 300,000 Chinese students in the United States, the task may be impossible.  

    4.  Chinese pressure on North Korea is a must. There should also be pressure for Xi to join nuclear non-proliferation agreements with Russia, and to support measures to prevent Iran from becoming a nuclear power. While the most important, this is probably the least likely. 

    5. A few bargaining chips will be used on global warming, where China accounts for 28% of global CO2 emissions compared to our 15%, and they espouse goals without plans to stop increasing in a decade and become "carbon neutral" by 2060. For the zealots who would destroy our economy, where emissions are decreasing, a bit of intellectual rigor is needed. 

    And then there is the Hunter Biden factor: appointed to the Burisma board in the Ukraine; Joe brags about getting the Burisma investigator fired; Chinese agents notice; Hunter and Joe fly off together to Beijing on Air Force 2; Hunter returns with lucrative investment banking connections and a gift of a large diamond, discussing allocation of shares to, among others, "the big guy";   Hunter publishes his memoirs to the gushing praise of the New York Times. Maybe it is best if Joe is just a figurehead. 

bill bowen - 2/11/21


Engaging China - Background

    The history, culture, and world view of China are very different from that of Europe and North America. Some background refreshment is needed before assessing current events and suggesting policy positions. 

    Important guidance is contained in Sun Tzu's Taoist classic, The Art of War. Written some 2500 years ago during a period of warfare between competing Chinese kingdoms, the short book is a staple of Chinese education and American business schools.  Two themes recur throughout the short 13 chapters: the importance of profound knowledge about yourself, your adversary, and the terrain in which you are engaged; and the goal of winning through maneuver, with conflict a last resort.  Consider the advantage of having over 300,000 Chinese students in the United States, up from 100,000 a decade ago.  Consider the advantage of broad  English language proficiency on the one hand, and the lack of Westerners' ability to read Chinese newspapers on the other.  Consider the 2014 Chinese hacking of the the US Office of Personnel Management's records of some 22 million Americans, including sensitive background check information - who can be blackmailed?; who can be recruited? Consider Chinese government-connected telecommunications manufacturer Huawei which has been banned by the US and  intelligence-sharing allies.  We start with a major disadvantage in the "profound knowledge" dimension. 

    A brief Chinese history is also enlightening: 

        - 1839-1860: The Opium Wars with England and France which resulted in ceding territory (Hong Kong), legal rights over foreign nationals, commercial concessions, freedom of navigation on Chinese waterways, and unfettered prosteletyzing by foreign missionaries. 

        - 1850-1864: The Taiping Rebellion, led by Christian millenarian Hong Xiuquan. Millions killed.  

        - 1862 - 1877:  The Dungan "Muslim Rebellion" in western China. Millions killed; survivors moved to Russia.  

        - 1911:  The collapse of the Qing Dynasty, with the eventual emergence of the Koumintang  party under Sun Yat-Sen, and the Chinese Communist Party. 

        - 1927-1949:  Civil war between the Koumintang under Chiang Kai-Shek and the Chinese Communist Party under Mao Zedong, with an interruption for World War II. Communists win; Koumintang retreats to Taiwan. Millions killed. 

        - 1942-1945: World War II. Japanese occupation of northern and coastal China. Millions killed. 

        - 1950 - 1953:  The Korean War. 180,000 Chinese soldiers killed. 

        - 1958-1962:  The Great Leap Forward. Forced collectivization of agriculture. Some 30 million died, largely of starvation. 

        - 1962:  Brief war with India which secured Chinese position along mountainous border. Preceded Chinese support for Pakistan in the India-Pakistan War of 1965.  

        - 1966 - 1976:  The Cultural Revolution. Youthful Red Guard - led effort to exorcise remaining elements of pre-communist thought. Ended in 1976 with the death of Mao and the ascention of Deng Xiaoping. 1.5 million killed. 

        - 1969: Brief clashes with Russia in the Far East and in central Asia. 

        - 1979: China invades Vietnam in response to Vietnam's deposing the Chinese-aligned Khmer Rouge in Cambodia. Small clashed continue for a decade. 

        -  2001: China joins World Trade Organization as an advantaged "developing nation", with the US and Europe hoping to spread Western trading practices, including restrictions on state-owned or sponsored enterprises. By 2020, the global Chinese trade surplus was $535 billion - $317 billion with the United States. 

        - 2009: China issues extensive sovereignty claims to the South China Sea and begins to build military facilities in the Spratley and Paracel Islands. Minor skirmishes with Philippine and Vietnamese fishermen. 

        -  2012:  Xi Jinping (age 59) assumes leadership of Chinese Communist Party. Exempted from term limits in 2018.

        - 2013:  Belt and Road Initiative adopted by Chinese Communist Party to invest some trillion dollars in infrastructure projects in Asia, Africa, and Europe to create trading network, recruit allies, and employ Chinese labor and manufacturers.  

        - 2015:  Made in China 2025 Initiative adopted by the Chinese Communist Party to move manufacturing toward high technology with mostly domestic produced components in information technology, robotics, aerospace, pharmaceuticals, semiconductors, rail, agricultural equipment, new energy vehicles, advanced materials, and ocean shipping. Intellectual property targeted. 

        - 2017: Forced assimilation of Muslim population in western China begins with construction of concentraion camps for some 1,000,000 Uighurs.  

        - 2020:  New Hong Kong security law, which contravenes the 50 year "One Country, Two Systems" agreement which underpinned the turnover of the former British colony in 1997. 

        - 2020:  Amid the coronavirus disruptions, China surpasses the United States as a destination for foreign direct investment from other countries.  Based on current exchange rates, the US Gross Domestic Product is 50% greater than China's, but at projected growth rates, China will catch up by 2028. On a per capita basis we remain well ahead.  

    That is a lot to absorb. A few themes can guide next week's assessment of the Trump administration approach and the early indicators of the Biden administration approach:

        1. After centuries of carnage and humiliation, it is logical for the Chinese people to accept a trade-off between stability and growing prosperity on the one hand, and restrictions on individual liberty on the other. 

        2. The Chinese have a long history of  modest-sized military border disputes.  An American military presence is appreciated by many of China's neighbors.  

        3. A centrally planned, well disciplined industrial and financial system can achieve strong results (at least in the span of decades), particularly if trading partners and competitors are fragmented and undisciplined. The contrast with the decentralized, entrepreneural, capitalist system of the United States is intellectually interesting, and of global importance. 

        4. Up until 2016, American presidents were preoccupied with the Middle East while Chinese leaders laid out clear plans to surpass the United States economically, and to dominate their neighbors militarily.  Trump brought the focus of American foreign policy to China. 

   There is much to ponder in this most important relationship ... and whether ther Biden team will have the skill, interest, and fortutude to take it where it needs to go. 

bill bowen - 2/4/21