Samuelson on China

Robert Samuelson has a great op-ed out today on what we should really worry about when it comes to China. He argues that concerns that the Chinese economy will surpass ours are silly - there is no possible way they can't surpass us, and they'll probably do it by the 2020's. That doesn't mean that Chinese per capita income will exceed that of the U.S. - we will probably lead there indefinitely.

More importantly, though, China risks destabilizing the global economy, rather than dominating it. Samuelson parades the usual suspects: trade, oil, and exchange rates. For the most part, I think he's dead on. He's a little timid when it comes to trade - pointing out that the ones China hurts most with its trade policies are other low-cost labor economies that can't compete with the Chinese. I'm not so sure they're the only victims, but OK.

He also highlights the risk posed by Chinese energy consumption - and that's the important thing to consider. The rise in oil prices in the last couple years hasn't really been a symptom of decreased supply (although my understanding is that we're flat-lining) - its that demand has been propelled by developing countries - particularly China. Now I agree with those who are calling for safe offshore drilling - there's no reason we shouldn't benefit from higher oil prices by producing more ourselves. But that alone is not the solution to the problem. If China's demand for energy shows no sign of quitting, we can't just beat them at their own game - we need to get into other energy markets that are not threatened by this increase in demand. I'm personally intrigued by the prospects of wind farming in the U.S., and the so-called Pickens Plan.

Samuelson also brings up China's currency reserves which have developed over years of aggressive exporting. He only really raises the issue of the Chinese buying up U.S. companies and a nationalistic U.S. response... I find it odd that he doesn't highlight the possibility of currency instability in general caused by China's massive reserves and our massive debt. Samuelson raises the prospect of a "resource war" (to which I'm forced to respond "sure - what's new?"), but he doesn't even consider the possibility of a "debt war". Could that ever happen? Let's say McCain is elected and we dig in deeper in Iraq and Afghanistan while cutting taxes and not doing much of anything about Social Security or Medicare - and lets say this current slump lasts a little longer than we expected. Suppose we start to have trouble paying off our debt - and some coalition of lending nations demands our compliance with a strict payment plan... and we refuse. The value of the dollar drops even farther than it has over the last couple months, and the Chinese reserves begin to evaporate. If the U.S. is sufficiently weakened, could there be a debt war, where the Chinese insist on a part in the management of the most valuable asset they own - a sizable chunk of the U.S. government? Probably unlikely. China is more likely to implode than explode on the world scene. But the risks involved in the U.S. national debt can't be stressed enough. And I'm a fan of both Hamilton and Keynes - I think there are very valuable uses for a government debt... but even then, you can go too far.

Finally - I was absolutely shocked by a statistic that Samuelson cited. Apparently, 17 million people a year move from the country to the cities in China. Urbanization is progressing at break-neck pace. 17 million! That's like a new New York City popping up in China every single year. That is absolutely unbelievable!

A real oil crisis...

Not to imply that what we're currently experiencing isn't an oil crisis... but the recent bellicosity of Iran got me worried about a real oil crisis that could hit us. If military conflict starts with Iran, they will in all likelihood seal off the Strait of Hormuz from all traffic - particularly oil tankers. Granted, Iran survives based on it's oil exports, but I'm sure they could manage to sell some to China, and my understanding is they already have a pipeline going north to Tehran, and that winds around the Caspian Sea, west to Europe. So the point is, Iran could seal off the Strait of Hormuz from Iraqi and Saudi oil, and as much oil as they could afford to withhold - and then sell what they need to to the West to keep themselves afloat. The Washington Post Express reported today that 40% of the world's oil passes through the Strait of Hormuz... 40%!!!!! If 40% of the world's oil were taken off the market immediately, it would set off a global depression. Granted, our military would probably be well-fueled from refineries in Iraq that don't have to pass through the Strait.


That would also mean that we would be at war in the territory stretching from Iraq, through the Iraqi border with western Iran, into central Iran and the Tehran region, to the eastern border between Iran and Afghanistan, and into Afghanistan and the Pakistani border region. That span of the globe is around 2000 miles across... roughly the distance from Washington, D.C. to Salt Lake City, Utah would be a war zone.

People - this is how empires fall. We cannot go to war with Iran - I'm more and more worried that we absolutely would not recover from it. And maybe we'd by mired in a dogfight for a decade or two before China or the EU reestablished global stability, but the more I think about this, the more terrible of an idea it sounds like. And honestly, it's not just John McCain's off color jokes that I'm worried about. Who cares about those? I'm more worried that Israel is going to fire off a few rockets at Iranian nuclear facilities like they did to Iraq a couple years back.

The startling thing about this scenario that I've laid out is that nuclear weapons don't feature in it at all. Granted, nuclear weapons would make this hypothetical conflict significantly worse (although if we were to use ours, it might bring it all to a swifter conclusion), but even if there were no nukes, or if ther were nukes and we eliminated the program it doesn't matter -the cost we would pay would be enormous.

OK - this post started as a musing on what an Iranian war would do to the price of oil - but its grown a little beyond that. The American people think they are invincible, but they're not. We can fall just like anyone else. People need to understand how starting a military conflict with Iran would tear this nation apart - the economic crisis would probably rival the great depression, we would be fighting a war against both Sunnis and Shias, inflation would sky-rocket, and the food crisis would only grow worse because of fuel shortages, and you can bet that terrorism would be stepped up as a result. Not to mention what it would do to global confidence that the U.S. could pay off it's debts - and if that confidence slips, countries like China and Russia will want us to make good on our Treasury bonds (which we won't be able to afford). Granted - I'm very much setting out a worst-case scenario, but if we get engaged in this there is no way we'll get out with the same power and prestige that we've enjoyed for the last fifty years. I don't mind sitting in Iraq for a little while longer until things cool down... but we need to move out of the region and show some basic respect for state sovereignty there - even if we don't like the sovereign. If this Iran thing gets pushed any further the risk will be too great, and there cannot be a compromise any more - we would need an Obama administration. As much as I respect McCain, it would be too big of a risk.

Energy: The Good, The Bad, and The Ugly

The Good: T. Boone Pickens - oil man, financier, and the guy who brought down my Dad's former employer, has a simple but interesting plan for reducing our dependence on foreign oil. He essentially suggests taking the natural gas that we currently use for power generation, and replacing it with wind power (22% of electricity production from wind, specifically). As he points out, wind is more plentiful in the U.S. than it is anywhere on Earth. You can think of us as the "Saudi Arabia of wind". The natural gas savings from this move could then be diverted to fueling cars powered by natural gas rather than gasoline. Pickens estimates that this could reduce oil imports by 38%, which would come to $300 billion a year. Even better - both natural gas and wind are cleaner than gasoline, and both are produced domestically. This isn't exactly rocket science here - lots of people have suggested that we move on wind energy - but Pickens has the personal wealth to push this plan (he's airing self-funded commercials promoting it), and he's already made some investments in wind energy in Texas. He may also have the clout to push the next administration in this direction as well. When it comes to major changes like this, the trick isn't just to have the good idea. Usually these "good ideas" are deceptively simple and more or less abundantly available. The trick is to provide the motivation to make it happen. Pickens could help with this. Very encouraging.

The Bad: OK, so it's not really bad - ridiculous is probably a better word. As most have probably already heard, the G8 is meeting in Hokkaido, Japan, and they have agreed to reduce greenhouse gases by 50% by 2050... well... sort of. My understanding (culled from NPR), is that the agreement is not enforceable and conditional on other countries agreeing to the cuts as well. To add to the craziness, I'll remind my readers that 2050 is still 42 years out. The G8 says nothing about a "bridge policy", like the Pikens proposal, that might get us there. OK, so this isn't really "bad", but it is a little discouraging that this is what the G8 came up with. I would have preferred a less declaratory, more modest, but more immediately actionable policy.

Oh - and Mexico, India, Brazil, China, and South Africa threw in their two cents too... they challenged the G8 to reduce emissions by 80%. Thanks guys... you're a real help here.

The Ugly: Crude oil prices have fallen for the last two days! So why is this in my "ugly" column? Market analysts suggest that oil prices have fallen in response to recent reports that experts are worried the recession will be deeper and longer than expected. Softening demand due to a prolonged recession means that prices go down. So there you go! Prices are lower because the economy is tanking!

Here's an idea - lets kill two birds with one stone. Lets actually rebuild our public transportation infrastructure in places like... oh... I don't know - Virginia maybe? That would put people to work (addressing the recession), and help cut our demand for oil (addressing oil prices).

Military Action in Iran

Dan Froomkin suggests that Dick Cheney may be trying to pick a fight with Iran before the Bush administration leaves office. I hope not, but it wouldn't surprise me either. I'm very happy to hear Defense Secretary Gates's reaction to this (at least his reaction communicated through a Democratic senator, off the record). Gates is quoted describing the consequences of military action in Iran during a luncheon with Democratic members of Congress:

'We'll create generations of jihadists, and our grandchildren will be battling our enemies here in America.'

How terrifying is that? I'm glad Gates seems to have his head screwed on straight - and apparently there are a lot of people over at the Pentagon that are adamantly opposed to the kind of covert provocation that Cheney is apparently encouraging. It got me thinking - if Obama won it would be great for him to hold onto Gates for a little while. I really like the guy - he's probably more supportive of the Iraq war than Obama or the electorate is, but since he's been in office he's probably the right person to manage any kind of withdraw - and that sort of consistency with the previous administration will probably help reassure people. It would be an affirmation of a non-"cut and run", non "Bush" defense policy. Not that Gates would have to stay on that long - clearly Obama should put his own man (or woman) in. But I really have a lot of respect for Gates.

Anyways - I didn't read Froomkin's whole article, but this one statement by Gates made me shiver.