Saturday, November 17, 2007

India US Relations: A "Rough Patch" Ahead

It does not look good.

The Americans want us to move faster in India but they can't pay for the speed up.

In order for this to happen, they have to pay off both the Left and the BJP. That is simply too much of a down payment. Only Americans living abroad who have to pay for services are in a position to immediately understand the real downside of currency instability.

American dealings with India are heavily leveraged to preserve their market access. There is no payoff they can make to get this nuclear deal through without losing out elsewhere. In fact there is no understanding of the sheer waste the US had laid of its NRI based leverage in dealings with India. As the dollar drops, the social status of the NRI who bargains for the US, will drop precipitously. The consequences of this are obvious.

Most people in the US do not get that the escalation in oil prices is seen as an inflation in the rest of the world.

Some people are talking about this "international law" v/s "domestic law" change that the US can make in the deal. The idea being that this would give India - an equal status to China.

This idea misses the fact that India cannot have the same deal as China, because the Chinese will pay enough people in the US to make sure that is not the case.

The US expects the Chinese to reinvest their reserves into the US and somehow rescue the failed US credit system. This transition is going to be hard on the US, and that is why the Federal Reserve leadership is talking about a "rough path". The Chinese leverage with the US exceeds what India can presently manage.

I also suspect that a majority of those talking do not understand the reality of the uranium market today. The prices in the market are ballasted by that weapons grade downmixing racket that the charming gentleman from Atlanta put together with some Russians. There is pressure that we join that initiative and buy from there because of percieved non-proliferation gains.

This is good in theory, complicated in practice, the problem is that a small limited fuel stock with a rising demand is a recipe for rapid inflation. If you do it this way, the nuclear renaissance will die in a few years. The only way we can ensure that this reniassance continues and nuclear fuel actually reduces pressure on the carbon fuels market (critical for India's fuel security) is if the US agrees to downblend fissile material from its own weapons and add to the international fuel pool.

Unfortunately one does not see any credible moves towards this in the US. If the tone of public debate in the US is anything to go by, the US public seems completely oblivious to the fact that American consumption of oil has go down by 80% rapidly over the next five years. Anything less than this will result in unbearable inflationary pressures on the dollar.

The difference between the Americans and the Russians is that the Russians have had over a decade to realise that the large number of their nuclear arsenals are an economic liability. It is a lesson they have learnt through blood toil and tears through a decade of high domestic instablity.

The Americans are now where the Russians were in the mid-80s - perestroika period - when the need to change is slowly becoming undeniable. It could be at least a decade before the desire to change finds reflection in intelligent actions. For a decade we will most likely see Americans make bad judgements and then compound the errors of judgement with incompetent implementation.

It was difficult to watch Russia do this in the late 80s and 90s. It will be difficult to watch the US do this now.

10 Comments:

At 1:01 AM, Anonymous kg said...

Hi Faizi:

In a generic, or more accurately de facto sense, that's true. But an open declaration of an Emirate is a different kettle of fish I think.

A declaration of an Emirate puts the fight beyond military and non-military, beyond even RAPE (Ruling Anglophone Pakistani Elite) and non-RAPE - it creates an internal conflict between those who "own" the rights to speak on behalf of Islam in Pakistan.

To a large extent, the Pak Armies legitimacy isn't just derived from their "defence" of Pak against India - it's derived from the fact that they're defending the "fort of Islam" from a non-Islamic threat.

That right, to speak solely on behalf of the Defenders of Pak Islam, (and with the nukes, as Defenders of Islam, full stop!), is what's at stake here.

Recall one point, since 911, Mush has, through natural attrition appointed EVERY single flag officer in the Pak Army and Military.

Note *SINCE* 911 . . .

Therefore, EVERY single Pak flag officer has made his career during the time when the PA was fighting the US' war. i.e EVERY general of the Pak Army was promoted because of how good he was in killing muslims and the Jihadis fighting Amreeka Bahadur . . .

How does the Pak Army explain that the entire hierarchy of their Army, of the self-procliamed Defenders of Islam, is populated by people who are there because they killed Muslims on behalf of the US . . .

The slogan "Pakistan First" is hardly gonna be enough to explain that.

It simply can't be done.

The declaration of an Emirate brings the question of who are the True Defenders of Islam in Pakland out into the open as never before.

It can't be both of them . . .

Maverick:

Did you notice that a retired Lt Gen called Hamid Nawaz was named Minister for Interior and Narcotics in the Pak provisional govt? Do you know which one this is? I think he was Corps Commander Quetta until April this year. But there's another Lt Gen hamid Nawaz Khan who was Sec Def for the Paks and was invlolved in Siachen negotiations etc.

I'm betting this is the Quetta guy though - narcotics, US fuel convoy protection, interior (Bugti) - is there another one? Or are they the same person?

kg.

 
At 7:08 AM, Blogger maverick said...

Hi Kg,

I think the Quetta corps commander is current IG T&E. He is due to retire soon, but he has not yet retired.

I think it this is Lt. Gen. Hamid Nawaz Khan, the former defence secretary.

 
At 7:10 AM, Blogger maverick said...

Hi,

Here is a photo

http://www.tribuneindia.com/2004/20040805/nat4.jpg

 
At 9:59 PM, Anonymous Anonymous said...

hi guys,
Some of us are more concerned about the Nuclear deal than the Logistical supply agreement! LSA is a far more serious issue though it is a innocuous looking document. What happens if USA launches a strike on Iran from bases/ports located in India? The consequences of such an action will be disastrous for India.No one including the authof this blog has analysed the consequences of India signing LSA.

 
At 8:53 AM, Blogger maverick said...

Hi,

Firstly, what the US and Iran do is between them. If both sides want to indulge in brinkmanship, there is nothing we can do about it. I do not think India will allow its bases to be used by Iran to stage attacks against the US nor will it allow the US to use its bases while it stages attacks on Iran.

The US may use any bases covered by LSA to service its ships regardless of what operations they are involved in and Iran will obviously use its leverage within the *LARGE* Indian Shia population to oppose the US presence at these bases should the US decide to use them to attack Iran. It is ridiculous to expect India to stop the Indian Shia from expressing their displeasure at such actions by the US.

The reason I have not analysed the LSA too deeply is because the US will not need to use Indian bases to launch an attack on Iran. Most of the logistical chain is already well developed in the Gulf, the Middle East and the Central Asian region. A number of states will fall over backwards to support the US with basing rights, cheap prostitutes, good quality heroin etc.. and whatever else is needed by US troops. I imagine that Iraq will be more than willing, Afghanistan has no choice and KSA will probably let the American commander who attacks the "misbelievers" of Iran sleep with any number of the pious saudi women. Who knows the American commander will probably recieve Saudi Arabia's highest honour, and be regarded as the next prophet of the Wahabbi church!

If for some reason that is not possible there are always Pakistani bases which I am sure that the Pakistanis will be willing to give for a few extra bucks.

India will simply have to demonstrate a willingness to cooperate with the Americans. There is no need for them to actually cooperate with them.

They will want things like ATF etc... all that is part of existing contracts and as long as we get paid, there is no reason to discontinue that barring ofcourse instabilities in the price of POL and derivates in India *CAUSED BY* to the US invasion of Iran.

Pacification of Iran after the US gets in there - that is a separate issue. I can't see any need to get ahead of ourselves in that regard.

The price of the bride will be paid only when the bride makes it to the groom house. Until then only the groom will have to put up with a mixture of anxiety and lust.

I am simply too old to get into that.

 
At 9:04 AM, Blogger maverick said...

Hi Kg,

I talked to an old friend.

He said that the crisis in the *private* lending chain was localised and would most likely not impinge US financial security too much.

He argued that a sizable portion of the US debt was a soverign debt held in government treasury bonds. The bonds were guarenteed by the USG's ability to collect taxes and return a value to the owner.

The crisis in the credit chain would affect flows like petrodollars, and it is possible that some of that would spill over into reduction in the taxable base of the US. However tax evasion would remain uncorrelated to the credit crisis as one cannot declare bankruptcy from IRS burdens and the IRS gets first dibs on all recoveries.

While this seems true at present, I am not entirely convinced that the soverign debt will remain untouched by this crisis for very long. I feel eventually the rising deficit will force the government's hand at the taxation end. If the credit crisis continues for too long, the taxable base will effectively shrink by large amounts as the value of the taxes recovered by confiscation of property will fall.

What do you feel about this?

 
At 10:14 AM, Blogger maverick said...

Hi,

I open this question to all my regular readers:

At what point does the poor performance of private debt markets begin to affect perceptions of the ability to service soverign debts?

 
At 6:15 PM, Anonymous kg said...

Hi Maverick:

I have a different take on the current situation:

I think we need to understand clearly the difference between the "liquidity wave" and the "credit crunch". I think folk get mislead by the dual "there's a lot of money (liquidity), but no money (credit)", simultaneity.

The confusion disappears if we simply differentiate between the financial sector (more accurately, the FIRE sector which is the Financial, Insurance and Real Estate sector) and the rest of the physical economy, the "real" economy that actually produces goods.

The physical economy is rolling in money. Most companies have healthy cash balances which would tide them over the hard times - or so it's thought. And for most of them costs are manageable.

There's only a few "physical economy companies in trouble *now* because of the FIRE collapse - most prominent among them being GM. GM's major profits for the last sector came not from their cars/SUV/vehicle division but from their financial division. That division is in as bad as Citi and Merril. GM is the new Enron. If it trips, it'll set of a panic that not even the Plunge Protection Team could contain.

But say they can contain GM and keep the physical economy firewalled from the mess. They can't do that entirely of course, but by-and-large IMO I think they can keep the core of the US' physical economy and their concomitant technology safe, as the Japanese did during the last decade and a half.

But the FIRE sector is in such deep sh!te that nothings going to help here. This is why the soverign debt held by the Chinese or us etc, is irrelevant. The crisis is internal to the main US financial sector, whose margins are in total freefall at the moment, and flows outwards to others. Because it's internal there's not much anyone outside can do about it

Other govts have no choice but to hold on for dear life with both hands to their rapidly falling dollar hordes. They act as an international plunge protection team for the dollar. Otherwise the problem will burn everyone.

It's like a stock market fall. Large institutional holders like pension funds etc, may not be selling because they're in it for the long haul. The fall in stock prices occurs in the *margins*, but the net value loss effets *everyone* including the holders of large number of shares in the pension funds etc.

So the Soverign funds are *not* relevant to the value drop. That's being decided elsewhere. All the Chinese, the Russian, the Arabs, us, etc. get to do is watch as the value of their dollar holdings drop.

IMO, the only question they get to answer is this: If they intervene to help the US financial sector, will they import the problem into their own systems? They're allready getting burned just by standing around. Do they risk plunging into the mess themselves or stand at a safe distance, take their pain, but avoid risking their necks?

That's a *political* decision for these folks to make.

>> guarenteed by the USG's ability to collect taxes and return a value to the owner.

But that's another problem. Does anyone seriously believe the US govt (either Republican or Democrat) is going to raise taxes, with all that that implies in the US political system, to give to *foreigners*? Or do they think the US will do what it's done for the last 20 years and more - simply print more dollars?

Again, its vital to realise that the US physical economy and their technology base is doing just fine. The US will, if they can get away with it, happily "socialise" their financial losses to the rest of the world and simply jetison their problems onto everyone else.

kg.

 
At 6:55 AM, Blogger maverick said...

Hi Kg,

It appears that OPEC has just concluded a summit where they have said that the price fluctuation of oil has more to do with the falling dollar than anything that can be fixed by releasing more oil on to the market.

I can't help but feel that perceptions of the ability to service the soverign debt are linked to the value of the dollar but I can't seem to flesh out exactly how this will work.

To me the sub-prime crisis is more than simply a crisis in internal lending practices in the US. It represents a reflection of a poor culture of debt management in the US and this has implications for foreign investors.

I have no doubt that the US can do the "put a gun to the head" routine and get the rest of the world to act like a plunge protectin team, but this is not an infinetely sustainable game.

A crude scenario that comes to mind is the following - as long as the US continues to print more dollars, the value of the dollar will drop. It won't be long before people holding US treasury instruments will realise that the return on these investments is lower than what they need to sustain themselves and begin distancing themselves from these instruments and those that sell them. In this case irrespective of the impact on the tax base, a massive global decline in confidence in the US will set in.

 
At 6:35 AM, Blogger maverick said...

Hi Kg and Sparsh,

To me it seems at least domestically the priorities in the US appear to be to keep the balance books for those companies full, i.e. there have to be consumers inside the US - otherwise the game ends.

Internally they will have to use every trick in the book to keep inflation down and to project a high internal demand.

However in order to make sure that the number of extra dollars printed is minimal, they will have to ensure that overall consumption of things like oil etc... falls.

This to me seems like a very difficult game, keeping the consumerism culture up while simultaneously bringing down consumption of things like oil etc...

Under such circumstances, I admit I am a bit bewildered by a recent response allegedly made by Bill Richardson to a question regarding what to do with nuclear waste. He refused to say the word "reprocessing" and not only him even Barak Obama refused to bring that word into the conversation.

 

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