Advancing a Free Society

Yesterday President Obama once again used the U.S. military as a backdrop to burnish his national security credentials, this time rolling out a campaign speech praising his own achievements at the graduation of the Air Force Academy.  The President said “around the world, the United States is leading once more. From Europe to Asia, our alliances are stronger than ever.”  National Security Advisor Tom Donnelly briefed the press in advance of last week’s G-8 and NATO summits that President Obama has “reinvigorated and revitalized our alliances.”

One problem with this approach is that the data just doesn’t back him up.  My favorite example is Egypt, at 82 million people the Middle East’s largest country, bellweather of the Arab Spring, the place President Obama went to deliver an “historic” speech about repairing America’s relations with the so-called Muslim world.  Egyptians went to the polls today to freely choose their President for the first time ever…and they did so with no encouragement or praise from the Free World’s leader. Hilariously, while President Obama is too busy touting his own foreign policy prowess to pay attention to the Egyptian elections, even amidst their historic transition, Egyptians have time to inform themselves about our President election: according to the Pew Poll on International Public Attitudes, 71% of Egyptians report they would vote for the Republican nominee instead of Barack Obama.  President Obama may be able to be reelected in the United States, but he couldn’t get elected in Egypt.

Alexis Tsipras won the Greek elections.  His Coalition of the Radical Left garnered the most votes, and his insistence that the leaders of Greece’s mainstream parties sign a “letter of repentance” for agreeing to the EU bailout prevented formation of a government, necessitating yet another round of elections June 17th.  Nine hundred billion dollars was withdrawn from Greek banks on Monday alone; its credit has been further downgraded “further into junk territory” (as the Wall Street Journal so nicely termed it) in anticipation of Greece abandoning or being forced out of the European Monetary Union.

His party is committed to abrogating the deal whereby Greece reduces its sovereign debt in return for liquidity to get it through near term spending needs.  Near term, in the case of Greek indebtedness, extends to other European countries underwriting Greek debt for the coming decade, including another $220 billion Greece needs by the end of June.

Greece’s leading politician tried his hand at foreign policy yesterday, threatening his lenders with default unless they relax their conditions for Greece to cut its spending and retire its debt.  Tsipras essentially told the Wall Street Journal that unless the EU continued to give Greece money without strings attached, Greece would bring down the entire European banking system.

Specifically, he said “whatever we do, things will be difficult. But it will also be difficult at the same time for all of Europe because the euro will collapse.”  It merits recalling that Greece got into this mess because the government committed fraud by knowingly masking its debts.  Even if Greece proceeds with the stark program of spending reductions agreed to with the EU, Greece’s debt will only be reduced to 120% of GDP by 2020.

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The government of China has just given yet another reason investors should be wary of operating in the Chinese market.  The Chinese Ministry of Finance has announced regulations, requiring western auditing firms to give control to local partners by the end of 2012, effectively ending the independence of firms operating in the Chinese market.

This comes on the heels of several high-profile cases of accounting fraud in recent years, and the Securities and Exchange Commission charging accounting firm Deloitte for refusing to hand over documents in a fraud case of a Chinese firm listed in the U.S. (Deloitte claims it would violate Chinese law to do so).  The Finance Ministry’s action will be read as validating concerns about the opaque and often corrupt practices of Chinese firms.

Given the collusion of Chinese government and business, both through state-owned firms and politicized decisions on everything from bank lending to police investigations, the regulatory take-over of auditing firms bodes ill for investors getting reliable information on the business practices of companies in which they take an interest.

Academics and politicians often marvel at what French Finance Minister (and later President) Valery Giscard d’Estaing called the “exorbitant privilege” that accrues to the United States by the U.S. dollar being the world’s major holding currency.  And it is a privilege, often undeserved by us, as now, when our government proves unwilling to make sensible choices about economic fundamentals such as debt reduction.  But it merits remembering that American dominance is not alone a function of American choices.  It also results from the choices of others.

For all the talk of a rising China, they are making quite a number of choices that will keep the dollar a safe harbor of value and call into question the reliability of information so important to encourage investment.  China may not rise either so far or so fast as predicted unless they reform the crony authoritarianism that looks to be the hallmark of their economic model.