By Kumar David –
The political scene in the United States of America and knock-on effects among allies and in foreign policy have changed considerably in the last six months. Some of this has been brewing for years while others such as the Silicon Valley Bank’s (SVB) overnight collapse have been sudden. A few days after that a group of 11 giant banks got together to raise $30 billion to forestall San Francisco’s First Republic Bank going belly up. Commentators are worried sick that a big bank crunch is possible. Much of what has happened has turned out to be a headache for President Joe Biden. I will discuss them under six headings.
* Bank and financial drama following the SVB catastrophe and First Republic bailout.
* Economic problems of inflation and employment.
* Climate change, back-tracking on “green” promises and capitulating to energy companies.
* A complicated foreign policy scene: The China game, (fate of the dollar, Ukraine, Israel).
* (Race and social instability in US domestic politics. Not discussed today).
* “To be or not to be”, that is whether tis noble to seek re-election in Nov. 2024
The immediate cause of the SVC debacle was a gradual increase in interest rates by the Federal Reserve or FED, America’s central bank. First a simple explanation for layman, like you and me. If interest rates increase the value of existing bonds (A) decline. Why? A bond is like a fixed deposit; you buy a bond from the Treasury, a company, or a Bank/Mutual/Investment outfit at a fixed interest rate (coupon rate) for a fixed number of years (e.g. 5, 10, 30). If the outfit raises the interest rate, then new bonds (B) issued from that date onward by the outfit will offer the new, higher, interest rate. Therefore, owning B is better than owning A, and the value of A in the open market will fall. For example, in an extreme case, if the interest rate were doubled, the market price of A will decline to half that of B to earn the same income. [If you hold $100 of A at 3%, you earn $3 a year. If the interest rate rise to 6%, then those investing in new B bonds will start earning $6 year. So, you will have to flog your (old) A bonds at $50 in the (open) bond market or nobody will buy them]
SVC Bank grew fast as Silicon Valley flourished and money poured in, thanks to the explosion of activities in the tech sector. When the crisis hit, Investors in SVC, that is people who bought SVC bonds as an investment (not to be confused with ordinary bank Depositors), found that their return on investment fell overnight, literally possible in this age of electronic finance. As with all financial crises even though the problem had been brewing for a long time, panic came suddenly. SVC bonds crashed overnight, literally, and the Bank was unable to meet obligation to Investors who turned up at its doorstep (not literally, it happened in the bond market) seeking to sell their Investments. This in turn panicked bank Depositors who turned up (literally) at the bank’s doorstep demanding to withdraw all their deposits. This is what is called a ‘bank run’, this one is the largest in the US since the Great Depression. Unlike 2009 there are other concealed dimensions to the current banking crisis. Panic spread to the European banking sector which at this time of writing is in copy-cat turmoil. Please bear the distinction between Investor and Depositor in mind.
Enter Joe Biden. He stood in the White House rose garden and guaranteed two things: (a) that deposits of bank Depositors (individuals and companies) would be protected 100%, and (b) the cost of recouping losses to refund Depositors would not be passed on to taxpayers. The money needed (about $9 billion) would be taken out of an insurance fund that all banks are required by law to contribute to as a safeguard for an emergency. It seems Biden shot himself in the foot. The money in the said insurance fund is inadequate to cover the losses especially if panic spreads to other banks as seems likely. That is why the FED, the Treasury and the Federal Deposit Insurance Corporation, the three must have advised Biden, are being blamed. The shit has hit the ceiling; bank and financial turmoil is feared. Investors of course would be allowed to go the wall; “this is how capitalism works” Biden reasonably said.
That was a fairy long harangue on the banking crisis because it’s a new ball-game. Next on my list is inflation and employment. Annual price inflation in the US is about 6%, way above the FED’s target of 2% (there are two things, core inflation and headline inflation; I cannot stop here to discuss the difference). Inflation in the Eurozone is about 8.5%. The FED and the European Central Bank are both caught by the balls! They dare not increase interest rates further for fear of exacerbating the banking crisis, but if they do not, their long-term objectives of fighting inflation gang-aft a-flies.
The employment scene is a completely new experience. There are a huge number of vacancies in the service sector (shop assistants, bank clerks, telephone answering services, kindergarten and primary school teachers) but no applicants and no takers when offers are made. Unemployment in the midst of a plethora of job offers! How on earth can such a thing happen? The explanation is two-fold; the US has released a huge amount of money into employment support and subsidy schemes and if one earns too much or works too many hours subsidies are truncated. Secondly the modern trend is work-from-home, save on office rental and transport, and if you are the mother of an ankle-biter or toddler stay home and take care of the infant. There is a remarkable change in the pattern of work taking place in societies that can afford it. The flexibility secreted in the bosom of productive powers of advanced locales makes this possible. Advances in the productive power of collective human labour led some chap to mutter:
“Today a man is a hunter, fisherman, herdsman, or critical critic and must remain so or loses his livelihood. In abundance however nobody has to have one exclusive sphere. Society regulates production in general and thus makes it possible for anyone to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner”
Let’s look at the third item on my list; Joe Biden’s disloyalty to the flamboyant promises he made about climate change, global warming, reducing pollution and greening the planet. Now, he has not betrayed everything but there is disappointment about his approving the $8 billion Alaska Willow Project. The US Bureau of Land Management estimates that it will generate 300 million metric tonnes of carbon dioxide over its 30-year lifetime – the equivalent of adding two million cars to US roads every year. Joe approved three drill sites instead of the five that were proposed – a compromise of sorts with anti-Willow activists. His dilemma is obvious; at best old Joe scores D, a weak pass, on climate change.
Item 4 is foreign policy and America’s external relations which have deep historical roots and a giant size new dimension, China. Elephant in the room China is no longer willing to be incarcerated in the prison of colonial times; it is asserting its place as a global power side by side with America, but the devil is in the details. Nobody is happy with the inner and outer dashed lines purporting to lay down the outreach of Chinese power. Crunching the toes of Vietnam, the Philippines, Indonesia, Malaysia, Indonesia and Japan is Chinese great power politics at its worst. Xi Jing Pin has become an Asian neo-imperialist.
Let us not pretend that all countries are equal. For about two and a half centuries from say 1750 Britannia ruled the waves and the world. Next it was pax Americana from say 1900; even earlier if you recall the Monroe Doctrine that in 1823 declared that the Americas (North and South) belonged to America’s sphere of influence. You can quite rightly call the Monroe Doctrine America’s nine-dash line.
Time has moved on and now its China’s turn to muscle in. It has unabashedly asserted that the nine-dash line defines its Monroe-like sphere of influence. Yes, indeed, all countries are not equal and China has asserted that it intends to sit at the great-power table whether America, Europe or Japan like it or not. As with British and US imperialism in the past it is a modern imperialist muscling in on the off-shore welfares of small countries, Vietnam, the Philippines, Malaysia and Indonesia.
Add Ukraine, Russia, a more assertive India, a Saudi ally who murdered, chopped up a critic of the regime in its Istanbul Embassy and flew the remains back home, an Israeli government determined to subvert the independence of its Supreme Court. The the foreign policy scene facing Joe Biden is gloomy. On other matters such as the AUKUS decision to build three nuclear propelled submarines (with options for two more), this is escalation of great power rivalry. The US is finding that when you are Numero Uno all the world’s problems lie on your platter – “Uneasy lies the head that wears a crown”. I do not intend to say anything about the race issue (Blacks, Hispanics, race theory etc) in the USA today because it’s a big topic that has to be dealt with in a separate essay devoted to itself. The same goes for the future of the dollar, threatened by China’s intention to create an alternative global payment system.
There is one final point; will Joe will stand for re-election? He has not made up his mind (he will be 82 in November 2024; Trump 78). A geriatric sprint is no fun. If someone trips near the end, will the one whose false teeth flies ahead and cross the finish-line first be declared the winner? If Joe does not enter the race there is no credible Democratic candidate visible. The Republicans are better placed with Ron DeSantis, Nicky Haley, Mike Pence and Ted Cruz all kicking their heels in the starter’s box. Nevertheless, my hunch is that old Joe will choose not to run.