Wednesday Night #1553

See exchange on the Middle East with David Oliver & Joumane Chahine

With great thanks to Margaret Duthie for her copious notes on the evening’s discussion.

Opening what was to be an intensely interesting and wide-ranging evening, Guy Stanley drew attention to President Obama’s speech in Kansas on Tuesday, noting that he finally took a stand on something (Declaring the American middle class in jeopardy, insisting the United States must reclaim its standing as a country in which everyone can prosper if provided “a fair shot and a fair share.”), and that his populist tone echoed Roosevelt. This looks like the centerpiece of the 2012 Obama campaign.

Beyond the Border Agreement
Despite reassuring noises from the Canadian government, there is a certain unease concerning the privacy of the information that will now be shared by the two governments. Anyone going South for more than 6 months (thus losing eligibility for Medicare) can now be tracked, if the US authorities report back to Canada when Canadians left.
Several Wednesday Nighters who travel frequently to the U.S. attest to the usefulness/efficiency of the pre-clearance Nexus card for low-risk individuals, which already has almost 500,000 participants. The technology is based on iris identification. It also works going to and from Europe. Obtaining the card is a quite simple and straightforward process that includes a half hour interview, photograph of the iris, and payment of $50 ; it is then good for 5 years.

The New School of Athens (NSoA) is organizing two conferences next year.
The first will be in November 2012 in Moscow, funded and organized by the Russians, while NSoA will be responsible for intellectual content, speakers, etc.
The theme will be Is there a Russian Model?, focusing on how Russia has fared in the post-crisis world. Will Putin view it positively? He might see it as an occasion to demonstrate that he does encourage discussion.
The content will be 2/3rds Russian and 1/3 English with Russian translation – like the Montreal Conference last year.
The Russian host Sergev Baburin is keen to validate his point of view that globalization has gone too far and Russia needs to be Russia.
In December 2012 or January 2013, NSoA will organize a conference in Paris on Reinventing the European and US socio-economic models: Can we reverse the decline of the West? It is timed to follow 5 important elections in: Greece, Italy, France and Germany AND the US and it is hoped that INSEAD and the Wharton School of Management might cosponsor the event.
Kimon welcomes comments and suggestions from Wednesday Night participants, especially regarding high-level speakers.

The world economy
The following notes summarize the discussion among an impressive front bench of four of those Kimon has dubbed the Wednesday Night Economists Caucus, with a number of interjections from other participants.
– This past week six world central banks and Canada, all had to step up to guarantee US dollar transactions. China had to start easing on monetary policy right away rather than waiting to January, to avoid world-wide repercussions if they didn’t. The crunch time came and Germany had to step up to the plate to deal with fiscal sovereignty.
– the global economy is always in flux (or, depending on your viewpoint,  moving through cycles) and from about 1800 to the beginning of the World War II, Britain was the dominant trading nation and the dominant culture. Then the US took over; and since 1995, we have seen the rise of Asia, led by China and also India. However,  in fact, as recently as  1840, the Asian share of the global GDP was 50% and in Marco Polo’s time (13th-14th centuries), China, under Kublai Khan and the East had most of the world’s GDP [Editor’s note: plus gunpowder and land mines]
– there has been a huge transfer of capital in the last two years with 3 billion frozen global reserves in China. This puts in question both the European and the US economic models, which cannot deliver the goods they proposed in the ’70s, or indeed since the end of the Second World War. Their populations have been tricked into thinking they could have a rising standard of living and lower taxation, along with deficit financing, and all for nothing. Now it is clear in Europe that the system has ‘run out’ and it is becoming increasingly clear in the US as well.
– Kimon believes, however, that the world has never been as rich on a per capita basis as it is today, and the problem lies in the total mismanagement of this abundance; he also joins the growing minority to say that the present remedy of austerity in the West enforced by bond ‘vigilantes,’ is totally counterproductive. They could just change the bond ratings. Others agree that growth must be maintained, or nations will face huge social program bills – e.g. Unemployment Insurance.
– One concern is that so many of our elected representatives are career politicians who are always behind the curve economically. Few  politicians are economists, or have a good grasp of economic principles. For example,  Angela Merkel gets there, but too late and the same is true with US politicians.
– For most of the developed world, a key question is ‘How do societies need to be organized in terms of an aging population’? In a crunch what will happen?
– Technologies change culture; culture is often debased by the mass media; and globally, cultures tend to titillate the electorate, feeding their needs and wants; for example Shopping Channels encourage people to want things they don’t need and can’t afford.
– The West has never worked out the right relationship between equality and economic freedom, resulting in a protracted crisis.
– Both Italy and Greece are now run by a technocratic democracy. What will this mean in the long term?
– The British parliamentary system was held up as being more adaptive and doesn’t spend a lot of time on a leader it wants to get rid of; it terminates, and moves on.
– In the 19th Century in order to vote, you had to be able to read and understand. While deploring that women did not then have the vote, there is merit in requiring certain qualifications to vote. [Remember Nevil Shute’s proposal for the 7-vote system?]

Western domination
In a recent interview on NPR,  Niall Ferguson  stated that in the thirteen hundreds it could never have been predicted that the West would predominate. Reiterating the topics to which he devotes six chapters of his recent book Civilization: The West and The Rest, he listed the keys to western domination:
1) competition, both among and within the European states; 2) science, beginning with the scientific revolution of the 16th and 17th centuries; 3) the rule of law and representative government, based on the rights of private property and representation in elected legislatures; 4) modern medicine; 5) the consumer society that resulted from the Industrial Revolution; and 6) the work ethic.
– More thoughts prompted by Niall Ferguson
1) Asia is becoming more Western to be where they are now
2) All changes are related to climate change and Asia benefits from having been behind.

Defense expenditures a cause of financial woes?
There is a perceptible ‘red’ thread back to World War, when nations anticipated a war run by cavalry and not tanks. The U.S. appears to have never adjusted to the revolution in small arms and still feels the need for enormous battle ships, are very expensive to maintain, that can be easily destroyed by a missile. Military services compete and appropriations continue to flow to those at the top e.g. Admirals.

Unemployment
– With the increasing rate of technological change inevitably people can’t get jobs and we are developing an underclass of unemployables. This will happen in India and China as well, but they will ignore it and will not take care of them. But the West has a tradition of taking care of the unemployed, and politicians remember that these people vote.
– We need to learn how to pay people off, or live with the consequences.
– The biggest risk in Europe today and the real issue for Europe, is the fall out in Youth Employment. However, the euro will likely survive.
– Is the decline in manufacturing in factories in the West (in favor of contracting out) not a significant factor? Manufacturing in Britain is coming back and Britain is now producing more cars than ever, but for non-British-owned firms, e.g. the Indian company Tata is now the biggest employer in Britain.

The Middle East
A Wednesday Nighter who has spent the last few months in Lebanon noted that Lebanon was the ‘Ground Zero’ of the Arab Spring in 1995, but today, the country is worse off than before it began. Hezbollah is now stronger than before. It is to be hoped that the Lebanese experience can be considered a ‘trial run’ and that other Arab Springs will fare better. However, it is unlikely there will be any rapid successes (in western terms) in Middle East politics or governance, but some of the Arab Spring uprisings may be successful eventually.
Many Christians in Syria support Assad in Syria, but out of fear of what might happen were he to  lose power, due to years of propaganda – and recent threats – that have convinced the Christian minority that only the régime would protect them and guarantee stability.
In the recent Egyptian elections, the Salafists gained 20% of the vote and the Muslim Brotherhood 40%. While the rise of political Islam is not new (Algeria 20 years ago), it is also true that the longer a dictatorship is in power, the more dissatisfaction festers, with the backlash as an inevitable result.
Some believe that the rise of Islam is less worrisome than the move to more tribal ascendancy, as in different parts of Africa, as one group gets power and other groups suffer the consequences, rather that electing based to seek the common good. Tribal ascendancy, which to some observers (noting its application to sports fans) appears to be a basic instinct, does not apply to Lebanon – a country whose importance is largely as  a microcosm of  the whole Middle East region, but has no oil or other resources of its own.
What about the role of women in Egypt, and more generally in the evolution of the Middle East? Arab women try to stand up for their rights – while Nobel Peace laureate Tawakkul Karman from Yemen is the most public icon, there are many others – but in Egypt much will depend on how the election results play out and whether they continue to be  limited by the contradictions within the religious/national culture, e.g. higher education limited to small minorities, traditional submission to paternal authority in all things, women may be very active and others may still be stoned to death for adultery.
Thomas Friedman argues that the Egyptian government has no oil and so “Its only hope for growth is still free-market capitalism — spawning companies and workers who can compete on the global market. Therefore, whoever inherits power in Egypt will have to deliver a less corrupt form of capitalism, with more competition, more privatization and fewer government jobs, at a time when the Egyptian economy is sinking.”
Egypt is a very populous country and the military acts as a counterpoint to Islamists and may have subsidies from the international community. There are certainly more developments to watch for.
Can we live with an Iranian (Shiite) bomb? Would one not balance the Pakistani (Sunni) nuclear power? Will there be a military confrontation soon over Iran?
Kyle Matthews notes that In Under a Mushroom Cloud: Europe, Iran and the Bomb, Italian author Emanuele Ottolenghi argues that Europe cannot afford to be sanguine. Iran’s bomb will not be for self defense, but for the export of Islam, a particularly dangerous situation because of the theocratic government. [Editor’s note: one reviewer, Professor Sir Lawrence Freedman, Professor of War Studies and Vice-Principal, King’s College London, states “For almost three decades, conventional wisdom has presented Iran as a problem for the United States. In this seminal study, Dr Ottolenghi shows that a nuclear-armed Islamic Republic could be more of a threat to Europe, which, in one of those bitter ironies of history, has helped the Khomeinist regime not only to survive but also to build its arsenal of deadly weapons. A work of impeccable scholarship, this book is also a political wake-up call to European democracies.”]
Pakistan cannot be considered a friend of the West any more (most of the I.E.Ds that have killed US and Canadian troops in Afghanistan came from two Pakistani manufacturing factories). The military is powerful and the civilian leadership largely weak.

Europe
Electorates are up in arms, but politicians can still make treaties and they drafted one this week. However, Britain will not do a treaty change and is distancing itself, but 60% of its trade is with Europe and they will want to keep this.
It is predicted that France and Germany will make a 17-member treaty if they have to and not a 27-member treaty that would include Britain, but Cameron now says he will go with a brand new treaty!
Will the recent agreement result in giving up sovereignty? They can make a new treaty with 17 nations and not with 27. It seems there is a good chance of this happening with the acceptance of 3% deficit targets and penalties that can be enforced by Brussels and the Central bank if this Golden Rule is broken, but budgets will remain under the control of sovereign governments. Members of the treaty will just have to pass the ‘Golden Rule’ and keep their deficits within 3%.
It is likely that everyone will go along with the new agreement out of fear of Europe collapsing, but that it won’t really settle the issues.
There will be very strict fiscal discipline. Penalties will result in an inability to borrow, as borrowing will now be more centralized, with the Central bank as lender of last resort The danger is that fiscal discipline will prevent growth.
Angela Merkel can accept this as, all new bond issues – (private bond holders don’t take ‘hair cuts’) – will be from sovereign governments. So one can have a rollover going forward and sell to have movement in the right direction. In other words, the right structure and architecture is to be put in place and Europe will be closer to where it needs to be.
Rating agencies can now make no more money in Europe and so will focus on the US.
– In looking at the speed of the decline of Western Europe and the U.S. versus China and India, one must distinguish between de facto welfare states living on borrowed money and those like Norway which benefits from huge North Sea natural gas reserves, and Sweden that raises enough taxes to support the country’s lifestyle. Northern and Southern Europe will have different ways to survive. A recent visitor to Bavaria noted that sentiment there is against leading a United States of Europe.

The markets
Flight of capital to countries that have liquidity in times of uncertainty explains why this past week, the Dow was able to surpass the TSX for the first time in a long time. It also explains why the U.S. out-performed Chinese commodities, owing to at least three factors: recession in Europe; slow-down in the U.S. and slow-down in China.
Longer term, some predict that next year the U.S. may perform relatively better around the world than Canada. However, once the world economy is back on a growth path, the Canadian economy will pick up. If the news is good in Europe, the euro will appreciate and then the US will depreciate again.
Recommendation? Buy growth dividends.
One major concern is that those on fixed income will endure great losses, about halfway through next year, when bonds come back and the U.S. is heading into the November election.

Closing
Our favorite – and only – Venerable member offered a final note of trivia from a passage from Charles Dickens’ Christmas Carol that mentions ‘glowing like a bad lobster in a cellar,’; it seems that deteriorating seafood can be luminescent. We do not believe that there was any implication that Wednesday Nighters’ brilliance was due to deterioration. To maintain the Dickensian reference, he continued with Tiny Tim’s “God bless us, every one”.

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Prologue
We quite often search “This date in history” sites in quest of interesting and/or off-beat historical facts pertaining to the relevant WN date. What we find curious this week is the absence of reference in mainstream media to the 70th anniversary of [the] “date that will live in Infamy”. Granted that Japan is now a strong ally and friend of the U.S., however the historical significance of the date should not, in our opinion, be ignored.
Selecting the lead item for this week puts us in a quandary.We opt for the passage of the Crime Bill, otherwise known as The Safe Streets and Communities Act in the face of considerable opposition including  the CBA’s 10 reasons to oppose Bill C10. (A date that will live in infamy? Maybe not, but possibly it should.) By now, we should have learned that this government is not interested in the facts when they conflict with ideology.
Now Mr. Harper is off to Washington to sign the Beyond the Border agreement. Given all the other events of the past weeks, this has been a somewhat neglected topic, so we refer you to two good pieces in the Globe & Mail: Colin Robertson’s Beyond the Border: noise and promise and Lawrence Martin’s Don’t expect a border pact backlash.
We doubt that he will be discussing the GOP candidates with president Obama – after all, Mr. Harper shares their ideology (wouldn’t it be interesting to know who he favors?), but for the rest of us, it is better than reality TV. Actually, it is reality TV now that Donald Trump will moderate a December 27 debate – news that is being greeted with a certain amount of skepticism by some candidates. Who would have thought a month ago that the even the BBC would be reporting on Newt Gingrich as front runner in Iowa polls and outstripping Mitch Romney in terms of in terms of “empathy, experience and electability”. The contrasts are mind boggling. Would even Herman Cain’s support slow him down? For a lighter interlude, we refer you to the Washington Post Path to the nomination: Endorsements galore.
The outcome of Russia’s Duma elections is right up there as a candidate for lead item. The election was expected to be predictable, and voters apathetic. Instead, Putin’s United Russia Party won slightly less than half the vote. Mr. Putin must be very unhappy that his political organizers allowed the voters to express their discontent so blatantly.
Those unlikely bedfellows, Merkel and Sarkozy, are determined to save the Eurozone, by whatever means. Going into this week’s EU Summit, they are demanding a tough new eurozone treaty in a push to end the debt crisis. Will everyone go along with the reforms? Do they have a choice? Or will some of them espouse Nouriel Roubini, who thunders Down with the Eurozone? Meantime, Joseph Stiglitz believes that “It is increasingly evident that Europe’s political leaders, for all their commitment to the euro’s survival, do not have a good grasp of what is required to make the single currency work.”
In the wake of Peter Berezin’s focus last week on the root causes of income inequality in the U.S., Wednesday Nighters have forwarded several worthwhile items. Joseph Stiglitz was addressing the question in the May issue of Vanity Fair Of the 1%, by the 1%, for the 1%, while more recently, Kenneth Rogoff wonders Is Modern Capitalism Sustainable? (Thank you, Guy Stanley); and Derek Thompson of The Atlantic debunks both liberal and conservative myths in The Income Inequality Boom: It’s Real and It’s Everywhere, subheading Income inequality is rising in almost every developed country. Don’t go thinking America’s middle class crisis is special. Ken Matziorinis meanwhile takes (cold) comfort from a 1999 address by the late Nobel Laureate Maurice Allais Globalization, unemployment and the imperatives of humanism.
Good news on the local scene: Dr. Arthur Porter’s resignation as CEO of the MUHC, after his questionable activities (his words) “to secure infrastructure funding in his native Sierra Leone” – not really part of the job description.

While there is always much more that we could try to put on the agenda, we also try to conclude with an amusing or quirky item. This week, having found neither, we submit the following it-ain’t-over-til-the fat-lady-sings news that BP alleges that Halliburton … destroyed evidence pertaining to what might have caused the explosion that triggered the Gulf oil spill. They are in court in February, which should provide more entertainment (not to mention schadenfreude) than even the Republican race.