Disaster in Afghanistan

The Small Wars Journal describes the growing violence in Afghanistan -- which is now more deadly to American troops than Iraq -- and the seemingly insurmountable problems facing an American military that is fighting two wars. Lost in a flurry of presidential campaign headlines and financial worries, the story of Afghanistan is not inspiring:

The next president of the United States will inherit a foreign policy nightmare: wars on two fronts, an overstretched military, a resurgent Taliban and a reconstituted Al Qaeda based far from America's reach.

“The next president will face a situation where, in the next year or two, he will have to make the decision that faced the Soviets in 1988--either to massively reinforce and to wage a war very aggressively, or to get out,” says Michael Scheuer, the former head of the CIA's Bin Laden unit. “That's the inheritance of the next president.”

But the next president's options in Afghanistan will be limited by a depleted military, with some units already on their fifth deployment. “The next president will be told: 'You need to spend more money on training troops. You need to recapitalize the military in equipment. And you might have to think about increasing the size of the military, especially ground forces,'” says Tom Ricks, author of Fiasco. “As one officer at the Pentagon put it to me: 'We're out of Schlitz. There are no extra troops left on the shelf. We're at our limit.'”

Even with more troops, any progress in Afghanistan will be hostage to developments just across the border. As long as the Taliban and Al Qaeda are able to launch attacks from their sanctuaries in the lawless tribal areas of neighboring Pakistan, any policy is likely to fail. But cracking down on the insurgent safe havens in Pakistan's lawless tribal areas presents enormous challenges of its own.

The "Forgotten War" may well become central to America's foreign policy decisions in the near future, and will present a massive challenge to the incoming president. The stakes of this battle, as described above, are high -- nothing less than the reputation of the United States' military is at stake. A forced withdrawal from Afghanistan at the hands of the same Taliban forces that were defeated in the early stages of the war would be humiliating and encourage extremists all over the world.

"Rebranding" America

The prospect of an Obama presidency, in the words of Colin Powell, is "electrifying" the world. From France to China, it seems Obama's celebrity status is sending a strong message to the world, about America and its role on the world stage. During the past 8 years, America has built an image as the world's bully; as an affluent and controlling overlord. According to recent polls -- and evidenced by Obama's rock star reception during his tour of Europe -- an Obama presidency could restore much of America's image as a land of opportunity and equality.

Nicholas Kristof of the New York Times relates an interesting conversation he had on this issue:

The other day I had a conversation with a Beijing friend and I mentioned that Barack Obama was leading in the presidential race:
She: Obama? But he’s the black man, isn’t he?
Me: Yes, exactly.
She: But surely a black man couldn’t become president of the United States?
Me: It looks as if he’ll be elected.
She: But president? That’s such an important job! In America, I thought blacks were janitors and laborers.
Me: No, blacks have all kinds of jobs.
She: What do white people think about that, about getting a black president? Are they upset? Are they angry?
Me: No, of course not! If Obama is elected, it’ll be because white people voted for him.
(Long pause.)
She: Really? Unbelievable! What an amazing country!

For foreign observers, who need not necessarily be concerned with the particulars of Obama's domestic policies, it is most remarkable that a black man could rise to such a position of prestige and power. Kristof says that this is most remarkable because it contradicts many established preconceptions about American society held abroad:

Steven Kull, director of the Program on International Policy Attitudes, which conducted the BBC poll, said that at a recent international conference he attended in Malaysia, many Muslims voiced astonishment at Mr. Obama’s rise because it was so much at odds with their assumptions about the United States. Remember that the one thing countless millions of people around the world “know” about the United States is that it is controlled by a cabal of white bankers and Jews who use police with fire hoses to repress blacks. To them, Mr. Obama’s rise triggers severe cognitive dissonance.

Kristof grants that "Mr. Obama's skin color is a bad reason to vote for him or against him. Substance should always trump symbolism." In this case, however, symbolism seems much more important on the international stage than substance. Whatever Obama's plans, the world is delighted at the prospect of a new face for America. This is as much a condemnation of Bush's legacy as it is an affirmation of Obama's image.

Thomas Barnett sums it up well in his comments on Kristof's article:

It's a neat trick to instantly rebrand ourselves from distant and harsh global authority figure to something much more in line with the frontier-integrating nature of our age--the self-made man who rises to incredible heights and beats the prevailing odds. The shift taps into a lot of things that the world has always loved about America.

The value of that shift, which would not occur with McCain whatsoever (and could possibly even backslide given his strong identification with punitive warfare) should not be underestimated.

Is that what Obama represents for America -- a "neat trick" that could gain us some measure of prestige and respect after the alienation of the Bush years? If so, we must seriously consider everything else that comes packaged with this "neat trick".

A McCain presidency would be inestimably harmful to America's image abroad -- no serious political observer denies this. It is just as sure that an Obama presidency would force the world to reconsider and reshape its idea of America. If an Obama presidency is truly inevitable -- as much of the media would have us believe -- we must begin considering the geopolitical and diplomatic ramifications of his ascent, both good and bad.

Fabius Maximus on the Economy

Fabius Maximus, in a post titled "New recommendations to solve our financial crisis (and I admit that I was wrong)" reassesses the financial situation in light of recent developments. Fabius' thoughts on the economy are always valuable and thought-provoking, and his newest predictions (showing his willingness to admit he was wrong and reassess things) are the best analysis of the global economic situation I've seen so far. I definitely recommend the whole thing, but here are some excerpts:

For deep theoretical reasons our financial system is collapsing. I have discussed some of the reasons in other posts (see below for links), but the causes are irrelevant now. Whatever the cause of a cardiac arrest, the paramedics’ job is not to advise dieting and exercise — but to restart the heart.

The US economy is sliding into deflation. Deflation trashed Japan’s high-savings economy for a decade; two decades after the crash it remains weak. Deflation is potentially lethal to a high-debt economy like America’s.

The evidence of the early stages of a deflationary contraction is all around us. Just to mention a few: collapsing commodity prices, the price of gold falling, the US dollar rising almost 20% since mid-July, and the collapse of yields on one-year Treasury Inflation Protected Securities (TIPS). All are extraordinary. TIPS were priced for inflation a month ago.

Perhaps the global economy as well, in the downturn of the first global (or most global, ever) business cycle. The center is cracking (the US, the EU, and Japan). So are some nations on the fringes (e.g., Eastern Europe, Argentina, Pakistan). And points in between, also (e.g, Iceland, South Korea). This is a tear in the fabric of the global economy, which accelerates as it grows.

So far only the financial markets have felt its full force, but soon we will see the real world impacts on trade, employment, incomes, etc. Some leading indicators suggest the magnitude of the coming storm, such as the Baltic Freight Index down 90% from its peak on 20 May (to learn about it see Wikipedia, or this Slate article).

[...]

The result: By default the government becomes the primary economic actor. Its spending and investment decisions drive the economy. Not just immediately, but — as a result of the investments it makes — for many years after normal processes are restored. We saw this in Japan during the 1990’s. It borrowed and borrowed, but frittered the money away on largely unnecessary projects (e.g., bridges to nowhere, train stations in the middle of nowhere). This kept their economy rolling, but the debt remains and they have little to show for it.

Now we in a situation like Japan circa 1990. Interest rates must go to near-zero. Government spending programs must be rapidly initiated on a scale not seen since WWII. Government decisions will determine what America looks like for the next two decades (at least). Who gets loans, what kinds of infrastructure to build, what kind of training programs for young people and the older unemployed … it is a long list.

Slow Motion Crash

Analysts are declaring a "slow crash" (MSNBC video) on Wall Street. Today, one year from the Dow Jones' record high of 14,164, the index dropped to 8,579 -- a drop of 5,000 points in a year. This decline represents an $8.3 trillion drop in value.

Many are wondering just how low markets can go at this point, as daily declines of over 5 percent steadily degrade market value. Some are calling this a buying point, hoping that prices can only go up, however many experts say that things could get substantially worse before they get better.

World Markets Hit by Crisis

A very good comparison of how markets throughout the world are faring during the financial crisis can be found here. The Americas are the hardest hit, with Europe also suffering greatly. Although China and Japan are seeing notable declines, stocks in Hong Kong have actually been increasing substantially.

Hardest hit is the Russian MICEX, which has lost over 61 percent in the past year and 40 percent in the past month. Markets in Scandinavia and Belgium are also suffering, having lost more than 50 percent in the past year and around 25 percent in the past month. The Peruvian Lima General Index has also lost 57 percent on the year.

Iceland Going Bankrupt

Of all the countries hard-hit by the financial crisis, Iceland is faring the worst. For those not following the fate of the small Atlantic nation (that is to say, most Americans), the Icelandic government yesterday shut down its stock market as the nation faced almost certain bankruptcy. The government also seized control of the last independent bank in the nation, while the Icelandic currency -- the krona -- was completely devalued.

Observers are saying that the only possible way for the Icelandic government to survive is through an IMF bailout. As quoted in the New York Times:

“Iceland is bankrupt,” said Arsaell Valfells, a professor at the University of Iceland. “The Icelandic krona is history. The I.M.F. has to come and rescue us.”

Dow Jones Slips Further

The Dow Jones Industrial Average dropped another 7.33 percent today, losing just under 680 points during the trading day. The S&P 500 and Nasdaq saw similar declines, marking one of the worst days on Wall Street in history. Today's decline brought the Dow's 52-week loss to 39 percent, and the monthly loss to just under 24 percent.

These declines have occurred despite more than 10 major government bailouts and unprecedented moves by the Fed and Treasury Department to stabilize the economy. At this point, it is safe to say that the U.S. government is powerless to stop the global financial crisis. White House spokeswoman Dana Perino said today, "Americans should be confident that every effort is being taken to stabilize our markets." However, the fact that the government is doing everything it can, and failing utterly, should not inspire confidence. The federal government has employed every means available to it to stop the crisis, and has even invented new, questionable methods of shoring up credit markets. All of this has failed. We cannot know what will come next, but we can be sure that it won't be pretty.

More to come.

U.S. Markets Plunge, International Markets Mixed

The Dow Jones Industrial Average, S&P 500, and Nasdaq all dropped more than 5 percent today, reports the New York Times in a piece titled "Markets Plunge Despite Hint of Rate Cut". Clearly, the much-discussed bailout plan is still failing to halt the downward spiral in world markets. The Federal Reserve is still desperately trying to think of new schemes to bring markets under control, including interest rate cuts and more unconventional expansions of Fed authority to lend directly to financial institutions.

Excerpts:
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“Nobody trusts anybody right now,” said Ryan Detrick, an analyst at Schaeffer’s Investment Research. “No one’s lending to each other.”

In London, the FTSE 100 ended up 0.4 percent. The CAC-40 in Paris rose 0.6 percent, a day after losing more than 9 percent for its worst decline ever. The DAX in Frankfurt fell 1.1 percent on continuing concerns about the European economy.

Asian shares ended mixed, with the Nikkei stock average in Tokyo declining 3 percent. The benchmark index fell Tuesday below 10,000 points for the first time in five years, hit by worries about global growth prospects and the rapid surge in the yen. It recovered some of its losses after the move by the Australian central bank, but its closing level of 10,155.90 was the lowest since December 2003.

The Shanghai composite index slipped 0.7 percent, and stocks fell more sharply in Bangkok, Indonesia and Manila. But the S.& P./ASX 200 in Sydney posted a 1.7 percent gain after the Reserve Bank of Australia cut its main rate to 6 percent.

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More to come...

Oil Price Decline -- What it Means

Amidst the continuing economic slowdown, the New York Times reports that oil has dropped from its July 11 peak of $147 a barrel to under $90 today. This decline in price can be understood as a natural market correction, reacting against soaring energy prices which forced both a slowdown in economic growth and a new emphasis on conservation and efficiency.

It is likely that oil prices will continue to decline in the short term, as world economies sink further into recession and depression, diminishing global demand. For nations dependent on oil revenues like Russia, Saudi Arabia, and Iran, this decrease in oil prices will compound the problems of the financial collapse by further shrinking government revenues.

We can expect oil prices to follow overall economic performance for the most part, since energy demand is dependent on the ability of companies to grow and use ever-larger amounts of oil. If companies are not expanding and individuals are cutting their use of expensive oil, a continuing decline in price is inevitable.

At this point, one of two things can happen. Either globally-shrinking economies will demand less and less oil, forcing a lasting decrease in the price of oil, or an economic rebound could cause a spike in demand that sends oil prices well over $100 a barrel once again. At this point, the sad state of the U.S. economy indicates that the former is more likely. (Although further discoveries regarding peak oil could also cause a spike in the value of oil.)

Unfortunately, oil prices will tend to limit economic growth, since any growth would necessitate greater energy demand, meaning higher oil prices. Until we can secure alternative sources of energy, the price of oil will remain a virtually insurmountable obstacle to sustainable economic growth. Do not be fooled by this decline in price -- it is the reflection of the world's dire situation, and it could very well signal an impending collapse that would dwarf those we have seen.