When Platitudes Undermine Real Change: US President Obama at the U.N.

U.S. President Obama’s 2010 speech at the UN’s annual opening lacked tangible proposals.  For example, he urged progress on the Middle East peace talks, but proffered no proposal.  He said Africa could be prosperous agriculturally, but gave no proposal for how.  He claimed that corruption in governments of developing countries is a problem, but offered no solution.  Pointing to corruption in general diffuses responsibility so talking about it does not shame anyone into making hard choices. Such platitudes belied the president's claim to being an advocate of real change. 
The substance of the platitudes rested on the then-current paradigm of international political economy rather than moved over onto an alternative. For example, he could have proposed a Middle East Federation or trading agreement. He could also have announced that the U.S. would no longer give any foreign aid to A.U. states that are riveted with corruption. He could have urged African leaders to cede more governmental sovereignty to the African Union, which in turn could have been given the power to act as a check on government corruption at the state level.
Additionally, Obama could have gone beyond citing his efforts to reduce the risk of nuclear proliferation to announce that the U.S. would join the ten countries that have created a movement with the goal of eliminating nuclear weapons completely. Meeting on the sidelines of the UN General Assembly in New York, the ten countries launched the new initiative to work towards a world without nuclear weapons. Foreign ministers, led by Japan and Australia, hoped to bring new life to efforts for nonproliferation and disarmament. Their mission statement said: “The only guarantee against the use and threat of nuclear weapons is their total elimination.”[1] This would indeed be real change.  In contrast, Obama said only that his goal was securing loose nuclear material around the world in four years. 

In short, real change goes beyond politics as usual and platitudes. It goes beyond incrementalism to proffer systemic change. Refusing to challenge the status quo intellectually or take on its power not only restricts a leader's ability to lead, but also eliminates real change as even an option. 

See: The Essence of Leadership: A Cross-Cultural Comparison, by Skip Worden, Ph.D. Available at Amazon.

1. Catherine Bolsover, “Germany Joins New International Initiative for Nuclear Disarmament,” Deutsche Welle, September 23, 2010.

Speculators and Price Volatility: The Case of Gasoline

According to The Huffington Post, “Oil prices took a nosedive [on May 5, 2011] in a historic selloff, erasing weeks of gains and indicating that the months-long climb in energy prices may have hit a ceiling. Crude oil plunged 10 percent as startled investors unloaded their positions and a weeklong decline accelerated into an outright freefall. The price of U.S. crude went from triple digits to double digits, falling below $100 after opening at close to $110. Brent crude, a European benchmark, lost $12 at one point in a sell-off that exceeded the one following Lehman Brothers' collapse.”  The question, for course, is why, the answer of which can lead us to consider some public policy recommendations. Understanding the previous price rise is a first step both to answering this question and for evaluating public policy solutions.

The price of oil had been increasing, according to the Huffington Post, “as fighting escalated in the Middle East and investors feared a supply shortage.” Even as the Organization of Petroleum Exporting Countries was pledging to correct any oil supply disruption, the price of a barrel of crude continued to rise. Before the drop, Brent was up 50 percent compared to the same time the year before. Indeed, the rise could not be explained in terms of actual supply being threatened, as Libya represented only 2 percent of world supply at the time.

The fear was likely of a domino-effect that could potentially compromise even Saudi crude—as if Sunni protesters in Bahrain would spill over into Saudi Arabia (rather than tanks from the latter “spilling over” into Bahrain).  The fear, in other words, may have been exaggerated—even facilitated by speculators taking advantage of the general sense of instability in the Middle East. "Clearly these markets were overblown," said Nariman Behravesh, chief economist of IHS Global Insight. "We've been saying all along the fear factor has probably added 10 to 15 dollars to the price of a barrel." The ensuing “freefall” might have been a correction for this “fear factor.”

However, that the oil-price drop was accompanied by other commodities and even stocks could suggest that larger forces were involved. According to Reuters, “World stocks fell and the 19-commodity Reuters-Jefferies CRB index dropped more than 4.9 percent, heading for its biggest weekly decline since December 2008.” An oil-centered drop alone could be expected to result in higher stock prices as expected lower gas prices would be expected to have a stimulating effect on the U.S. economy. So it would appear that broader factors were at play—things that could have triggered the fear-correction.

Reuters reports that “(w)eak economic data from Europe and the United States fed concerns that have battered commodities all week. German industrial orders fell unexpectedly in March while U.S. weekly jobless claims hit eight-month highs, sparking a fourth day of profit taking in early trade. . . . Additional pressure came from news OPEC was considering raising formal output limits when it meets in June to convince oil markets it wants to bring prices down and reverse the impact of fuel inflation on economic growth.” However, it is not clear that the market was being so rational.

"This is just a market that rolled over and started feeding on itself," said John Richards, head of North American strategy for the Royal Bank of Scotland, according to the Huffington Post. "There was no triggering single event of news that would account for this. It's just much more the market's own internal dynamics taking prices down here," Richards added. “Internal dynamics” sounds a lot better than “feeding on itself.” The latter implies a growing disjunction between price and the “underlying” supply and demand for the commodity, whereas the former intimates a self-sustained system tending to equilibrium. 

Broadly speaking, the question may be whether a market for X tends internally to a homeostatic state of equilibrium or a schizogenic condition wherein a maximizing variable breaches any equilibrium-enforcing features. In ecological terms, by analogy, the question is whether a species tends to maximize its growth even at the expense of the overall ecosystem. In terms of the oil commodity market, the question is whether people simply betting on the price without any intended future use effectively divorce the market price from the actual and expected supply and demand. Moreover, does the disjuncture increase such that the betting acts as a maximizing variable at the expense of any equilibrium-tending mechanisms of the market itself?

Even if the “freefall” drop in the price of oil evinces a return to equilibrium closer to supply and demand, the disjuncture itself caused people to put off vacations and spend less on even necessities, and generally feel poorer. There is thus an ethical question regarding the legitimacy of betting on a commodity that people need. This includes not only oil, but food as well. Specifically, is the freedom to bet on necessities (even if necessities in the short run) worth the ensuing harm to consumers? Moreover, is trading on a commodities market inherently intended or designed for bets or, more narrowly, to arrive at a price whereby consumption demand meets supply? What, in other words, if economic liberty undoes the purpose of a market?

According to Bart Chilton, a top regulator at the Commodities Futures Trading Commission (CFTC), the number of speculative bets on oil and food were at record levels at the time of the price increases in both oil and food. President Barack Obama created an oil market fraud group in April to provide enhanced regulatory scrutiny of potential fraud and manipulation in the oil futures and derivatives markets, but most speculation was perfectly legal at the time so the reach of the group was rather limited in comparison to the problem.

Eric Holder, the U.S. Attorney General, wrote in a letter to the group, "Of course, there are lawful market forces that lead to price fluctuations and to differences between wholesale and retail price trends in these markets.” He urged the group “to identify whether fraud or manipulation played any role in the wholesale and retail markets as prices increased. If wholesale prices continue to decrease, fraud or manipulation must not be allowed to prevent price decreases from being passed on to consumers at the pump." However, manipulation in the form of betting was legal at the time. Even so, the financial reform bill passed in 2010 requires the CFTC to craft rules reining in excessive speculation. Nevertheless, citing inadequate market data, the agency failed to meet a key deadline on those rules in early 2011.

Accordingly, U.S. Sen. Bernie Sanders (D-VT) sent a letter to President Obama on the day of the “freefall” urging that regulators impose limits on oil speculation. “There is mounting evidence that the skyrocketing price of gas and oil has nothing to do with the fundamentals of supply and demand, and has everything to do with Wall Street firms that are artificially jacking up the price of oil in the energy futures markets,” Sanders wrote. “In other words, the same Wall Street speculators that caused the worst financial crisis since the 1930s through their greed, recklessness, and illegal behavior are ripping off the American people again by gambling that the price of oil and gas will continue to go up.” The question is whether “artificially jacking up” prices of commodities that people need ought to be illegal, and, if so, whether such a law could even be enforced.

Should futures traders be required to take delivery and use the commodity they have purchased? If so, people seeking to hedge risk may not be able to do so. Is not the “too big to fail” story about too much risk? Perhaps other means of hedging could be used. Furthermore, it may be that the government officials were not going far enough structurally. Were they to have incorporated anti-trust law, applying it strictly, perhaps a more competitive oil market would obviate the baleful effects of speculators. Even if there would be some opportunity costs in the reduced economies of scale enjoyed by oil companies (and gas stations), a market mechanism running on more competition would be worth that cost to the particular firms. The common good outweighs that of individual companies.

In going after “excessive” speculation or oligopolies, the devil may be in the details. For example, regulation may be difficult to write—assuming the corporate lobbyists do not obstruct it from even getting to that point (e.g., the failure of the CFTC to issue regulations)—not to mention enforcement. In a system of corporate capitalism, moreover, representative democracy may not be able to provide a homeostatic remedy after the horse has run out of the barn.

Sources:

Matthew Robinson, “Oil Crashes 10 Percent in Record Rout,” Reuters, May 5, 2011.

William Alden, “Oil Prices Plunge in Record Sell-Off,” The Huffington Post, May 5, 2011.

Zack Carter, “Eric Holder to Fraud Squad: Oil Price Plunge Should Benefit Consumers,” The Huffington Post, May 6, 2011.

The Receding Chinese-American Economic Paradigm in 2011: Imbalances within Mutual Benefit

“For decades,” according to The Wall Street Journal, “plentiful Chinese labor kept down costs of a range of goods bought by Americans.” Then, roughly in 2010, the Chinese government began supporting higher wages to reduce labor unrest and boost domestic consumption while reducing reliance on exports. Partially as a result of this, the world saw higher prices for commodities in 2011; oil was another factor as protests in the Middle East increased political risk in the calculations of future supply (amid speculation). A shrinking workforce in China was also putting pressure on the labor cost. Even though relatively cheap labor was still in the interior of the country, higher transportation costs mitigated the cost advantage. The prevailing paradigm was showing cracks. To be sure, it certainly had them.

In that paradigm, inflation was “damped pretty dramatically in the U.S. because it exported work to China and other places at 20% or 30% of the cost,” Hal Sirkin of the Boston Consulting Group said. Imports into the U.S. from China had increased China’s foreign currency reserves to over $3 trillion in the first decade of the twenty-first century; two-thirds of the reserves were U.S. dollars. The Chinese government used some of those dollars to purchase U.S. Treasury bonds; those purchases in turn relieved pressure on U.S. interest rates to increase. The continued cheap credit made it more possible for American consumers to purchase Chinese imports. It was a marriage of Chinese workers and American consumers, with both governments happy to oversee the nuptials.

Although in some ways good for all parties, the positive feedback loop made it difficult for China and the U.S. to have balanced economies. China relied too much on exports—with a supportive yuan currency making them artificially cheap for Americans—while the U.S. was enabled to accumulate trillions in additional federal debt without much self-discipline.  Therefore, from the rising labor costs in China and the related emphasis on domestic consumption (and a slowing appreciating yuan), inflation in both China and U.S. could be expected. It is no coincidence that the price of gold was quite high as the paradigm began to shift.

As the paradigm began to shift, it could be expected that should the Chinese foreign currency reserves be reduced, less foreign demand of U.S. Treasury bonds could eventuate, which in turn would put pressure on U.S. interest rates to increase. The rates could increase anyway to thwart the import-led inflation even if there is not excessive money supply. In other words, it could be expected that the imbalances in the slipping paradigm would give rise to corresponding imbalances afterward.

It is perhaps all too easy for us to tolerate imbalances as long as there is an overall equilibrium. China’s increasing dollar reserves and the U.S. Government’s increasing debt could co-exist with a tacit agreement wherein both Chinese workers and American consumers would benefit. Mutual benefit is not, however, a sufficient justification for tolerating fundamental imbalances either within a country or in the global economy.  For a sustainable economic paradigm, mutual benefit is necessary but not sufficient; they system as well as its parts should be in balance. To insist on this amid mutual benefit requires self-discipline because part of the benefit is spent in the restoration and playing out of balance. It is thus perhaps not an accident that the paradigm of imbalances amid mutual benefit was dominant for decades; the system itself might tell us something about modernity and ourselves.

Source:

Shai Oster, “China’s Rising Wages Propel U.S. Prices,” Wall Street Journal, May 9, 2011, p. A2.