Great Devil! Take me away!

ARTICLE: "A Nigeria 'Taliban' leader tells of a desire to fight the U.S.: The rebel group in Nigeria's Muslim north engaged in deadly clashes with security forces last year. It has gone underground and wants to shift its focus away from domestic targets, one of its leaders says," by Robyn Dixon, Los Angeles Times, 1 April 2010.

The dynamic of desperation: Frustrated with the internal battle, you reach for the larger, more glamorous target as part of your effort to rationalize continued repression over those you currently control. By appealing to the distant enemy, you invite his reply and hope it will energize your struggle--"internationalizing" as it were.

How important is this to the US? As important as we wish to make it.

[thanks to WPR Media Roundup]

Can you push that broom grandma? You're hired!

The Spanish pavilion at the World Expo site in Shanghai. Many construction projects for the fair appear to be behind schedule because of a lack of laborers. (Eugene Hoshiko / Associated Press / March 25, 2010)

ARTICLE: "People, people everywhere in China, and not enough to work: How can China be facing a labor shortage? In the big manufacturing hubs, employers are scrambling," by Barbara Demick and David Pierson, Los Angeles Times, 28 March 2010.

Story has everything you need to know about China right now: struggling to get World Expo construction done on time in Shanghai; construction firm takes 60-year-old grandma for laborer; and woman earns 35% above average Shanghai wage.

China's labor advantage--as a macro internal trend--ends now.

[thanks to Pat Pasadena]

WPR's The New Rules: Nuclear Posture Review Fixes What Ain't Broke

For those wondering how President Barack Obama planned to justify his Nobel Peace Prize, two developments last week strongly suggest that it will be by way of his dream of a "world without nuclear weapons." The first was his successful conclusion of a new Strategic Arms Reduction Treaty with Russia, which takes almost a third off the top of both sides' massive nuclear arsenals. The second was Obama's new Nuclear Posture Review (NPR), which declared that "preventing nuclear proliferation and nuclear terrorism" was the nation's No. 1 strategic priority. At the same time, the review offers a striking new pledge not to use nuclear weapons to retaliate against states in compliance with the Non-Proliferation Treaty (NPT) -- even if they attack America with chemical or biological weapons.

Read the rest here at World Politics Review.

The Blackwater that actually arises from the police community

IN DEPTH: "Bill Bratton, Globocop: He tamed crime in New York and Los Angeles. Next stop . . . Kabul?" by Susan Berfield, Bloomberg BusinessWeek, 12 April 2010.

Bratton's start-up, called Altegrity (too cute), will bid on State contracts to train police around the world.

Bratton is the Larry Brown of major metro PDs--the turnaround specialist who, once he succeeds, gets bored and must move on.

Luckily for America, at age 62, the man still wants to make something of himself.

I think this is a very good sign: police-training is what is most needed in failed states, less so the mil-to-mil stuff our military is gearing up nicely for. For a while now, the so-called private security corps that have dominated this niche have come from the national security realm when, logically, they should naturally arise from the law enforcement community.

The big contracts from State will involve police training in 14 post-conflict states (the usual suspects).

Bratton did some of this security exporting earlier in his own eponymous shop within the well-know Kroll. He worked Brazil and Venezuela major metros (naturally Chavez tossed him after a while).

Bratton's big thing is to play modern-day J. Edgar and emphasis data analysis of crime and build the force around such responsiveness to trends (classic broken-window philosophy that he pioneered in NYC under Rudy G.).

The enduring reality that much of our trade deficit with China consists of American firms renting Chinese labor

OPINION: "China Trade and American Jobs," by Daniel Ikenson, Wall Street Journal, 2 April 2010.

Ikenson says the notion that the Chinese trade deficit costs US jobs is mistaken. Like many economists, he says that appreciating the yuan will not reduce our bilateral trade deficit, at least not according to recent history: the yuan appreciated by roughly a fifth in the middle of the last decade and our imports just kept rising.

So getting China to let the yuan rise will only reduce Americans' real incomes, says Ikenson, hitting everybody who can least afford it at places like Wal-Mart and Target.

Larger point: studies show consistently that China only adds somewhere between one-third to half of the value to the goods that it ultimately exports to the U.S., meaning it's primarily an assembler and manufacturer of last resort, so a strong yuan allows China to buy its raw materials at cheaper prices. But that also means that China's exports reflect a lot of hidden effort by workers around the world, including in the U.S.--thus the trade deficit is a poor proxy for measuring job loss, especially when you consider how many American jobs depend on Chinese imports.

Good example, a widely cited 2007 study said that each iPod costs $150 to produce, but that China adds only $4 to the effort, meaning they're snapped together in China but rely on high-tech parts from all over, including the US.

Bottom line: the integration of global production renders bilateral trade stats less than useful when it comes to capturing economic reality.

The demand-center tipping point reached by GM in China

CORPORATE NEWS: "GM's March Auto Sales in China Exceed U.S.: Record-Setting Month Highlights the Fast-Growing Country's Position as Key Market for Global Vehicle Manufacturers," by Patricia Jiayi Ho, Wall Street Journal, 3-4 April 2010.

GM sells 230k units in China in March, compared to 188k here.

The same is becoming true for every major Old Core automaker. As the somewhat dated chart below makes clear, the BRICs are where the action is at:

The chart's title couldn't be more untrue: the BRICs will add an entire U.S.-equivalent car market in the next half-dozen years, and then do it again over the following six years.

Shrinking, my ass!

Shanghai market: getting into the big leagues means adopting big league rules

WORLD NEWS: "Beijing gears up for key reforms on equity trades: The latest steps to transform China into a global financial centre," by Robert Cookson, Financial Times, 30 March 2010.

All good stuff (introducing stock index futures, short selling and margin trading) that should make the market less bubble prone because "investors will be able to short stocks they view as excessively valued"--meaning, bet against them.

This is a huge corrective capability that makes China's financial markets less aspirational and more responsive to real-world activity. It's crucial stuff if Shanghai is going to become a global financial center.

Still, as one Morgan Stanley local puts it, Chinese investors are notoriously flighty: "They all talk like Warren Buffet and act like George Soros."

So it may be some time before behavior changes--as in, a generational learning curve.

The Sino-Indian rivarly: how manageable?

A Chinese soldier stands with an Indian soldier at the ancient Nathu La border between India and China
Diptendu Dutta / AFP / Getty Images

INTERVIEW: "The Coming China-India Conflict: Is War Inevitable?" by Ishaan Tharoor, Time, 23 March 2010.

Seems like a very solid analyst--this Holslag, and no hyperbolist.

Solid bit of interview:

Hypothetically, how could some sort of military clash come about?

It wouldn't first be open war. China and India are building up their interests in conflict-prone and unstable states on their borders like Nepal and Burma -- important sources of natural resources. If something goes wrong in these countries -- if the politics implode -- you could see the emergence of proxy wars in Asia. Distrust between India and China will grow and so too security concerns in a number of arenas. It's an important scenario that strategic planners in both Beijing and Delhi are looking at.

What role is there for the U.S. to play in this context?

Since the U.S. has prioritized stabilizing Afghanistan over everything else in Asia, it has lost a lot of credit in both Delhi and Beijing. It is increasingly reliant on China, but has also undertaken security exercises [under the Bush Administration] that tried to work together with democratic countries like Japan, India and Australia at the exclusion of China. This fed into the traditional political claustrophobia many in China have -- a sense that, in the end, Asia will be a very hostile environment for their development and geopolitical rise.

At the same time, India won't let itself be drowned in America's orbit. It's important for India to have its strategic independence. It has a very long and historically close relationship with Russia, which in turn is close to China. So it's a little more complicated. I don't think the Americans have thought very strategically about all of this.

Agree on all counts: no direct clashes but perhaps proxy struggles that go kinetic; and most definitely, the U.S. is out of the strategic loop in its thinking on the region.

But this seems the fatal flaw of the Obama crowd: tactical fears drive out all strategic considerations. We don't have a foreign policy; we have Af-Pak and Iran's "bomb" and that's it.

[Thanks to Terry Collier]

At Amazon

The amazing story that is U.S. military combat medicine

FRONT PAGE: "On Distant Battlefields, Survival Odds Rise Sharply," by Alan Cullison, Wall Street Journal, 3-4 April 2010.

The chart lays out what a revolutionary change Iraq and Afghanistan represent. Counting up all the major conflicts (Revolutionary, 1812, Mexican, Civil War, Spanish, WWI, WWII, Korea, Vietnam, PG), you get an average death rate from combat wounds of 28% (high of 42% for Revy War and low of 19% for Spanish, with Vietnam and PG both coming in at 24%).

Iraq and Afghanistan both ring in at 11%.

Biggest breakthroughs: speed of getting soldiers to more advanced care and increased ability to control initial bleeding with clotting agents.

How much less narcotics matter in Colombia's economy

WORLD NEWS: "Drugs Fade in Colombian Economy," by Matthew Bristow, Wall Street Journal, 3-4 April 2010.

Where I totally missed it in Pentagon's New Map: way too much pessimism on Colombia.

Illegal drugs were over 6% of Colombia's economy during the heyday of the Medellin cartel. The narcotics industry now accounts for less than 1%, in part because the smuggling aspect (where the biggest mark-up is) has shifted to Mexico.

But Alvaro Uribe gets a lot of credit for cracking down on the cartels and encouraging foreign direct investment. Now coal and oil dwarf the drug industry.

Mexico's smuggling industry is estimated to account for as much as 2.5% of the nation's GDP.

The water wars option as an excuse for poor management of resources

WORLD NEWS: "India and Pakistan Feud Over Indus Waters: Fight Threatens Peace Talks as Islamabad Requests Arbitration Over New Delhi's Plans for a Hydroelectric Plant," by Amol Sharma and Tom Wright, Wall Street Journal< 31 March 2010.

The usual hyperbolic terms applied: in truth, Pakistan is simply beginning formal arbitration within an existing 50-year-old treaty that has done an amazing job on the subject and is often held up as a prime example of how to do it. This will, however, be the first time the treaty's arbitration process is used.

In short, bit short for the hand-wringing, and yet Pakistan is clearly worried about an hydroelectric plant planned by India upstream leading to a reduced flow, especially since Pakistan wants to plop down its own station downstream.

Larger issue, though, is very real: global warming is likely to create greater drought conditions for both states over the long haul, so as good a time as any to practice the arbitration route.

India's complaint, though, speaks to the usual Bjorn Lomborg explanation: bad water management.

Skeptics in India say Pakistan is simply looking for a scapegoat as it struggles to manage its internal water politics.

Then there's the usual Kashmir angle:

The Indian projects that Pakistan says are draining its water resources are primarily on Indus tributaries in Kashmir. Some experts say the water issue is a back-door way for Islamic militants to push their political agenda regarding Kashmir.

I think that about covers it.

How America is already whacking its dependence on foreign energy--and thus its trade deficit

A SPECIAL REPORT ON AMERICA'S ECONOMY: "Energetic progress: There is every chance that in the future energy will contribute less to America's trade deficit," by Greg Ip, The Economist, 3 April 2010.

Gist: the downturn helps feed a trend begun back in the middle of the last decade (thanks to high prices then) to cut oil consumption.

As you see on the chart, EIA from Energy has downshifted its trend line for net imports through 2025 from 16mbd to under 9mbd! That is an amazing little shift, especially since it comes from conservation (look at how domestic production barely rises).

So what's up?

While Barack may declare this or that new government measure . . .

The marketplace has, quietly, accomplished a lot more. After a generation of decline, America's domestic production of oil and gas is rising again and oil consumption is dropping. If sustained, these trends could play a big role in rebalancing the American economy. In 2008 America's net imports of oil and gas came to $416 billion, or 60% of the deficit.

Not the first time we managed this, as the world did the same across basically the bulk of the 1980s. In 1979, the world used 65 mbd, but when the price shot up (the second great oil price shock), consumption fell immediately and stayed below 65mbd until finally surpassing it in 1989.

Adventures in Daddydumb

I managed to strain my lower back, which, now that I've gone six months with no sinus infections, is my only day-to-day ailment. My own fault: too much elliptical and bowflex and too little yoga, thus I must rebalance.

But, naturally, after I wake up feeling unduly stiff this ayem, my four kids talk me into roller blading at the local rink this afternoon.

Makes sense to me.

Then again, any time you can get two high-schoolers, a grade-schooler, and a kindergartener to agree on an activity, you just do it while you can.

++++++++++++++

How I can tell the Xyzal/Veramyst combo is crucial to my feel good: We went to a dinner theater last night (Mame) and I forgot to take it as I usually do in the early evening. Man, what a dreadful, crazy dream night, and then I woke up feeling so bad I had to chill for a bit and let the meds work. So I watched two more episodes of "Lost" with child #3 (we started at Season One in January and just kept going).

++++++++++++++

Five episodes into Season 5 of "Lost" and I must confess, I can't understand the griping of fans regarding that season or the major theme of time travel. I find both to be logical extensions of the rather convoluted plot--meaning very organic to the series.

I also don't get the gripe that this season poses more questions than answers. I think that each season has revealed a ton of answers, layering them on with deliberate but tension-filled speed. I think Americans just get bored too easily and like the plot laid out more barely.

But as far as I'm concerned, the ride hasn't depreciated whatsoever.

Then again, I liked "Matrix Reloaded" and "Matrix Revolution" just fine too, so maybe I'm too uncritical. I just like the big story-telling. I like to see the vision unfold.

I do regret not DVRing the 6th season so my younger son and I could watch right through to the end. It would be nice if they reran the whole season (I suspect not), so I guess we'll just have to wait for it on Blu-Ray.

Meanwhile, seasons of "Dexter" and "True Blood" arrive shortly, I do believe.

It amazes me how I no longer watch any TV in real time whatsoever. There still is must-watch TV. We just watch it when and under whatever conditions we want.

Old and new money in China

From the FT

ANALYSIS: "To the money born: China; While the private equity sector could prove pivotal in modernizing the economy, the dominance of senior officials' children risks not only deterring its growth but also stoking public anger," by FT Reporters, Financial Times, 30 March 2010.

Another good exploration of the populists tensions created by the party "princelings" and their charmed economic existence. Then there is the rising competitive tensions generated by those new-money-types who are coming online with a vengeance.

As mentioned elsewhere, this struggle is particularly acute in the financial services industry--especially private equity, where the biggest yuan tend to be made.

Wen Jiabao's son, for example, is with New Horizon Capital, considered one of the most successful and influential players. His presence need not be advertised; it is simply known.

The danger here:

According to those working in the sector, the princelings' ascendance is squeezing out less well connected operators, including foreign firms, which might have important consequences for two reasons. First, private equity could play an important role in modernizing the economy, channeling funds to promising but capital-starved companies--but those benefits will be felt only if the industry is run in a professional and competitive manner.

Second, some in the political establishment fear that princeling dominance of private equity could exacerbate public perception of nepotism and misrule at the top of the Communist party. In an opaque authoritarian system lacking the popular legitimacy of a democracy, such fears are hard to dismiss. A recent online opinion poll by the People's Daily, the party's official mouthpiece, found that 91 percent of respondents believe all rich families have political backgrounds.

Naturally, all there princelings tend to be Western educated.

So the choice inevitably comes: Is it more important to feather the nest of top leadership families or make sure the right financial markets emerge for China's wider economic--and thus political stability?

[I will confess to a great love for socialist realism artwork. I had a giant Chinese poster of Lenin in college that I really treasured.]

The housing issue that drives the West Bank settlements

WORLD NEWS: "Economic settlers eager to head home: Jews ready to leave occupied territory if the government can find the money to rehouse them," by Tobias Buck, Financial Times, 31 March 2010.

An old subplot to those familiar with the story: most of the Israeli settlers in the West Bank are there for economic reasons, not ideological ones.

The problem is the lack of affordable housing inside Israel proper, so big surprise, an obstacle in getting those settlers to return is how little they could get for the current residences in the West Bank and how much more they'd need in money to buy something comparable inside Israel.

The settlement issue remains a housing crisis at its foundation--pun intended.

Anywhere else and this is purely an economic issue, but this is the land of the "olive tree," in Thomas Friedman's vernacular.

The Marshall Plan--sans the soft infrastructure

WORLD NEWS: "Haiti Readies Request for $11.5 Billion: Government Will Present Donors With Plan to Emerge From Decades as Semi-Failed State; a Need to Build Institutions," by Jose de Cordoba and David Luhnow, Wall Street Journal, 31 March 2010.

WORLD NEWS: "Donors Pledge Billions in Aid for Haiti: U.N.'s Ban Envisions 'Wholesale National Renewal," but Coordination, Accountability Are Obstacles," by Christopher Rhoads and Joe Lauria, Wall Street Journal, 1 April 2010.

200 experts help the Haiti government prep its bid for a massive international donor infusion, and the resulting UN conference of roughly 100 nations comes up with $5B over the next 18 months with another $5B long term.

Not a bad outcome, given Haiti's record as a sinkhole.

As on development expert (Arvind Subramanian) argues in the first piece:

To me, it's a little naive. In Germany and Japan after the war, the physical infrastructure was devastated, but essentially the soft infrastructure--like institutions and people's talents--was intact. In Haiti, you can reverse the devastation of the [hard] infrastructure, but you're not going to have the support of institutions.

Nothing matters unless Haiti becomes truly business friendly.

The West Bank settlements question in strategic perspective

OPINION: "Lady Gaga Versus Mideast Peace," by Bret Stephens, Wall Street Journal, 30 March 2010.

Pieces like this are why I always read Stephens, even as he often infuriates me.

Great bit:

Pop quiz--What does more to galvanize radical anti-American sentiment in the Muslim world: (a) Israeli settlements on the West Bank; or (b) a Lady Gaga music video?

If you answer is (b) it means you probably have a grasp of the historical roots of modern jihadism. If, however, you answered (a), then congratulations: You are perfectly in synch with the new Beltway conventional wisdom, now jointly defined by Pat Buchanan and his strange bedfellows within the Obama administration.

Anybody who's read me over the years knows how in synch with my logic this notion is.

[Hmm, quite the German sentence that was!]

In the crudest sense, much of this long war consists of bodyguarding globalization as it liberates women the Gap over, killing the angry men who get in the way.

The yuan debate intensified on all sides, but then the natural rationalization/trigger for a solution emerged

WORLD NEWS: "China reprimanded by G20 leaders: Exchange rate cited in economic rebuke; Frustrations vented over slow progress," by Chris Giles and Alan Beattie, Financial Times, 31 March 2010.

COMMENT: "Blaming China will not solve America's problem," by Stephen Roach, Financial Times, 30 March 2010.

WORLD NEWS: "Internal debate fails to alter official view: China shows little sign of softening its stance amid calls to let the renminbi appreciate," by Geoff Dyer, Financial Times, 25 March 2010.

BUSINESS DAY: "Chinese Leaders Divided on Whether to Let Currency Rise," by Keith Bradsher, New York Times, 26 March 2010.

OPINION: "U.S.-China Trade Is Win-Win Game," by Zhong Shan, Wall Street Journal, 26 March 2010.

WORLD NEWS: "Rare China Deficit Could Back Currency Plan," by Andrew Batson and Terence Poon, Wall Street Journal, 24 March 2010.

The correction regarding this recent storm of official anger in the Sino-American strategic relationship proceeds rather smoothly, in my mind.

Hu agreed to attend Obama's proliferation summit, and that timing suggests Treasury's decision to skip (or at least greatly delay) the unproductive step of naming China a currency manipulator was a quid pro quo, signaling that China will allow just that much more sanctioning of Iran to unfold--as meaningless as that effort will prove to be (especially if it's now Russia's turn to hold that line), and that it has already privately indicated to the U.S. that it will de-peg the yuan fairly soon and allow some measure of appreciation.

So clearly, and in its own way, China is responding to the growing friction its recent bout of perceived arrogance and intransigence created, but the real driver is the sense of a tipping point being reached in the domestic economy. In the grand scheme of things, the recent friction--as I said on the BBC last week--was no big whup. China just needed to realize that eventually enough of the G-20 would otherwise start ganging up on it, so Beijing's leadership convinced themselves that the domestic economic situation was providing them with sufficient signals to make the move anyway, so why not relieve the building pressure?

And frankly (Roach's point), it was better for such signaling to come from the G20 than just from the U.S. America's trade deficit issue is global and hardly China-centric (only 39% of our trade deficit sits with China, and let's remember how much of that is final-assembly trade, meaning it just summarizes our larger, wider trade deficit with the world--as in, with over 90 other countries!).

To Roach, a bilat solution here would have been deckchair-rearranging, plus it gets you unreasonable anger from the Chinese on the loss-of-face issue.

Better to keep the show multilateral, because remember, this allegedly "all-controlling" leadership in Beijing fears its public far more than the West, and with the generation change-over less than two years away, we're in full campaign swing over there, just like we're warming up over here, so posturing of all sorts is inevitable. Everyone must be seen as standing up for "Unhappy China," so the sense of a domestic trigger needed to appear for the appropriate face to be perceptibly maintained (a domestic consumption issue--politically speaking). Thus the crucial nature of China reporting its first monthly trade deficit in six years (to be reported 10 April--i.e., today).

The big change signalled? The rise of Chinese domestic demand.

Wen Jiabao's verdict?

To be honest with you, I am pretty happy about this development.

So you see, just as the issue reaching the apparent boiling point, the natural correcting resolution appeared. Thus the recent signaling from Beijing that the yuan pegging will soon end.

FYI: Zhong's point is that when you add in services and investment to the trading of goods, the balance of resource flows between China and America are far more balanced than realized.

Cash talks, as does pot

FRONT PAGE: "Legal-Marijuana Advocates Focus on New Kind of Green," by Jesse McKinley, New York Times, 28 March 2010.

Simple statement says it all regarding California once again leading the way:

We need the tax money. Second, we need the tax savings on police and law enforcement, and have that law enforcement directed towards real crime.

So sayeth Richard Lee, the head of a trade school for pot growers.

Rio Tinto, Beijing, and the new steel order

OPINION: "China Convicts Itself," by Holman W. Jenkins, Jr., Wall Street Journal, 31 March 2010.

OPINION: "The Rio Tinto Case and China's Rule of Law," by Hugo Restall, Wall Street Journal, 30 March 2010.

IRON ORE | END OF AN ERA: "Annual contract system collapses: Iron ore's move to spot prices mirrors the evolution of the pricing of other commodities," by Javier Blas, Financial Times, 31 March 2010.

FRONT PAGE: "Steel prices set to soar: Historic iron ore deal | Benchmark system ends | Everyday goods will cost more," by Javier Blas and Peter Smith, Financial Times, 31 March 2010.

COMPANIES | INTERNATIONAL: "Gains for US steel after ore price rise: Shift enrages other global producers | Change in wake of pricing shake-up," by Telis Demos and Jonathan Soble, Financial Times, 3-4 April 2010.

Holman is dead-on: "China tactfully reminds the world every once in a while that its speciality is masquerading weakness as strength."

The real problem on the peg is not the peg itself, but that China is afraid to let the full consequences of this choice "to flow through to domestic prices."

Holman then goes on to protest China's lopsided development agenda and loses me a bit there: if America had 700 million rural poor people on its political agenda, our sense of reasonable development strategies would be a bit skewed too.

Plus, as Restall points out, the Rio execs, while being scapegoated, weren't exactly innocent. It was a bad system in transition (the annual price-setting shifting overnight to quarterly-defined spot markets) bumping up against a China trying to hold the line on inflation, so one man's "biz intell" is suddenly another country's industrial espionage.

In the end, Restall argues, the Rio people in Australia left their Chinese counterparts in place for too long with too little supervision.

Clearly, China wanted to send a signal in a year in which the contract price of iron ore is expected to rise 100%. When you account for two-thirds of the purchasing market, you get to do that.

The contract-system shift was inevitable, as now iron ore is going to be dynamically priced like most other commodities. For now, just China, the world's biggest steelmaker, is steaming about this sudden shift.

But just wait, everybody else in the Core will soon enough grow similarly pissed as the price increase gets passed on to manufacturers and then consumers.

Who's to blame?

In the ultimate sense, we are. We encouraged the spread of markets and the resulting rise of the global middle class--arguably America's greatest practical gift to the world. All these people want a better life, and that means higher prices for a lot of raw materials in the meantime.

Short-term good news: US steel gets a whole lot more competitive. Why? We self-supply on iron-ore. So just hold your hat for the non-crisis to come in DC circles!

2010s: dominated by the rise of the global middle class.

2020s: dominated by the revolution in resource utilization forced by the 2010s.