November 16, 2011 10:13 pm

Disillusioned with DC

By Richard McGregor and Anna Fifield

Barack Obama has a mountain to climb to win re-election, write Richard McGregor and Anna Fifield

President Barack Obama
Barack Obama battles to create jobs to boost his flagging presidency

In the motorcade whisking him from Philadelphia airport to a school on the city’s edge earlier this month, Barack Obama might have been watching his re-election flash before his eyes. The US president skirted the inner city where some of his most loyal supporters are being tested by record unemployment levels; sped past leafy suburbs where white voters are spurning him in droves; and glided into a mixed middle class area struggling with the downturn.

Three years after being hailed as a political messiah, Mr Obama has a mountain to climb to win re-election. With confidence in politics, leaders and the nation’s direction at all-time lows, he is combating perilously poor levels of support, similar to those he faces in Pennsylvania, in the battleground states across the country that he must win in a year’s time to keep the White House.

“This administration has scored the worst readings on confidence and economic policies since the Nixon days,” says Richard Curtin, director of the University of Michigan’s Institute of Social Research. “The pessimism is longer and deeper than we’ve recorded before.”

The escalating economic crisis in Europe has overshadowed the fact that US political and budget reforms remain ensnared in partisan tangles. The creaky foundations of the economy, and the gridlock in Washington over how to tackle it, are being felt around the world, entrenching America’s retreat from leadership in everything from the Libyan war to the eurozone’s debt problems.

The instability extends to the Republicans, where the race to find a candidate to take on Mr Obama has lapsed into farce. Herman Cain, the former pizza company executive who is among the most popular of the party’s aspirants, this week struggled to answer a simple question about Libya, explaining he hadall this stuff twirling around in my head”.

The country’s political woes reflect more than frustration with the prolonged jobless recovery under Mr Obama, as the unemployment rate remains stubbornly above 9 per cent. Voters have swung wildly between Democrats and Republicans in the past three elections, institutionalising in politics a volatility to match the crisis of confidence in the economy.
The latest average of polls asking whether the US is on the right track, collated by RealClearPolitics, found an overwhelming 73 per cent say it is not. Such questions tend to produce negative answers but Karlyn Bowman of the American Enterprise Institute says the duration of the negativity is entering uncharted waters. “Pollsters are beginning to see this seep into views about how their children will fare and it is calling into question the whole American dream,” she says.

Such is the anger in the electorate that it is a dangerous time for politicians of any stripe to put themselves in the hands of voters. That could work in Mr Obama’s favour, as it means the Republicans will be in the line of fire in 2012 as well. Benefiting from anti-government sentiment, the Democrats won huge victories in the 2006 and 2008 congressional and presidential elections respectively, riding a wave of disillusionment with George W. Bush. In 2010 the Republicans took control of the House of Representatives in the November midterms.
The two parties acknowledge that the pendulum could easily swing both ways next year – against Mr Obama in the White House and the Republicans in Congress at the same time.

Mr Obama inherited the financial crisis and the bank bail-outs; and, his opponents say, made the situation worse with a $787bn stimulus that failed to return the economy to solid growth. But a host of factors, ranging from the Iraq war to entrenched partisanship in Congress and the steady decline of middle-class income relative to the wealthy, has been eating away at the body politic for a decade.
“There is volatility and it reflects both long-term and short-term political and economic trends,” says David Axelrod, Mr Obama’s chief campaign strategist. “The hollowing out of the middle class and the flattening of wages has been going on for 30 to 40 years. Go back and look at some of Bill Clinton’s speeches from 1991 – he was talking about the viability of the middle classes back then.”

Americans are starting to reduce long-term economic expectations in ways policymakers are struggling to get a grip on. They no longer ex­pect their homes to rise in value for at least five years.

Geographical mobility, once a pathway to higher paying jobs, has dried up, with many households unable to sell their homes. The generational shift of manufacturing to Asia, especially China, means there are fewer jobs to move to anyway.
.People are more negative about economic changes than they have been since our records began in 1946,” Mr Curtin says. “The labour market is not just about the availability of jobs but about wage growth and being able to get a new job at a higher pay rate to further your career.”

Perennial optimists contend the country has always bounced back. The China threat? That’s what they said about Japan in the late 1980s. Recessions? The country has recovered from one after another to return to a position of strength.
-. . .

.But in a country whose global pre-eminence is part of the national character, the stream of gloomy fin de siècle stories that fills the media (“Is America Over” and “The End of the American Era”, to name two this month) sounds increasingly credible.

-People don’t have a sense of control,” says John Feehery, a Republican strategist. “They don’t know how to fix anything. They don’t know why the Greek financial crisis is having an impact on the 401Ks [pension funds].”
Stan Greenberg, a Democratic pollster, says people have been breaking down and crying during focus groups when talking about the economy. Unlike Mr Feehery, he senses many have developed their own strategies for managing the slump – and are furious Washington cannot do the same. “There’s a belief that it’s not permanent, that we will figure out a way to get to a better place or the country will come back. This is one of the reasons for the tremendous anger at our political leaders,” he says.


A report from Democracy Corps, the polling group of which Mr Greenberg is chairman and chief executive, points out that sentiment on the economy is the strongest predictor of voting habits.
.Republicans get a serious audience with voters when they talk about spending, deficits, small government and letting small business prosper,” it says. Democrats are losing the economic argument because right now voters do not see how increased spending helps the economy and they fear increased debt will prevent the economy from growing.”

Mr Obama took a battering in August in the standoff with Republicans over increasing the US’s borrowing limits that brought the country to the brink of default. It was a battle, over debt and deficits, fought firmly on the Republicans’ turf.

Freed from the imminent threat of default, Mr Obama is finally refining a response, delivered in person to voters in Pennsylvania earlier in November in the same way he has been barnstorming the country for the past two months. This time, he is trying to shape the battleground in his favour.
In the former church hall in a largely African-American district in Delaware County, Pennsylvania, Mr Obama spoke of his initiatives in education to help children. In similar forays all over the country, he has pushed programmes to hire teachers, build new bridges and extend a cut in payroll taxes, part of a $477bn stimulus package designed to kick-start the economy in 2012, and contrast him with “do-nothingRepublicans.
.“In order to get the budget under control, we have to make some hard choicesdo we keep the Bush tax cuts for the wealthy rather than continuing to educate our kids, rebuilding the country’s infrastructure and investing in science and technology,” Mr Axelrod says.
Mr Obama’s campaign aims to make the election a choice between two candidates, not a referendum on his first term. In the words of Republican strategist Dan Schnur, who advised former presidential hopeful John McCain, the Democrats want to “disfigure the Republican nominee beyond recognition”.
The problem for the Republicans, he says, is that “their own popularity is even lower than Obama’s. It’s one thing to say you’re not very tall, but it’s all relative. If you’re the tallest jockey on the racetrack, you’ve got a problem.”
.. . .
In addition to parties with rival visions for the country, the US also has competing grassroots movements – the Tea Party, which energised the Republicans after Mr Obama’s victory, and now the anti-capitalist Occupy movement, which the Democrats have cautiously embraced and which has even influenced Republican rhetoric.

The former remains a bedrock of Republican support, even as some of its elements resist being subsumed in- to the party. All the issues that motivated the Tea Party into existence are the same issues that are making independent voters swing against Obama now: the economy, government spending, job creation,” says Matt Kibbe, president of FreedomWorks, a Tea Party-aligned group.
But the radicalism of the Republican revolution is sparking its own backlash. Voters in Ohio last week voted down a plan by the state’s Republican governor to end collective bargaining rights for public sector unions. Unions plan campaigns in states undertaking similar measures.
Then there is Mr Obama himself. As he reminds people, his chances of being re-elected are probably much better than his chances of being elected in the first place.

For his diehard supporters in Pennsylvania, he still casts the same spell he did four years ago. “I thought after I saw him the first time, it would not be exciting any more,” says Shirley Bright, one of his campaign workers. “But it still is.” The president can only hope that enough people agree.
Budget standoff: Quest for a compromise that remains elusive

The end game being played out this week on Capitol Hill over the machinations of the so-called super-committee underlines the most important dividing line in US politics – how to cut the budget deficit, writes Richard McGregor.

The bipartisan congressional panel, which has six members each from the Republican and Democratic parties, was tasked to report by November 23 on how to slice $1,200bn off the deficit over 10 years.

To meet that deadline, the committee needs an outline of an agreement by the end of this week, to prepare legislation which then has to get through Congress by year’s end. So far no deal is in sight, despite glimmers of hope.
The problem is the same one that has dogged the system for a generation – whether the deficit should be paid for by cutting spending or raising new tax revenues.
The Republicans on the super-committee are adamant that they will not support raising tax rates in any form. “It’s just not going to happen,” said the Republican co-chair, Jeb Hensarling, on Wednesday.
Even a compromise put forward by Senator Pat Toomey of Pennsylvania, one of the most conservative Republican committee members, has attracted criticism. He proposed raising new revenues by closing tax loopholes, in return for large spending cuts and an extension in perpetuity of the tax cuts of the George W. Bush era. Mr Toomey’s proposal attracted a stern rebuke, with a letter circulated among Republicans in Congress condemning new revenues in any form.

While raising tax rates is taboo for Republicans, Democrats have their own no-go areas. Many will not countenance touching Social Security in any form, even though the two sides are not far apart on how to reform the pension programme.

Equally, they are reluctant to restructure Medicare, which provides healthcare for the elderly, even though the programme will add more to federal spending than any other programme in coming decades.

The Democrats see short-term electoral advantage in standing up for Social Security and Medicare, and so will not compromise.

The most likely outcome is a plan by Mr Hensarling to agree on a broad outline of cuts and revenues, and give it to another committee to fill in the details. For Congress, it will be chalked up as yet another failure.
Copyright The Financial Times Limited 2011.

Endgame for Evo?

Roberto Laserna


LA PAZ – The populist government of Bolivian President Evo Morales seems to be heading for political failure. Faced with 11% annual price growth and mounting complaints from the country’s worst-affected sectors, Morales promises change, but delays decisions, leaving in place the policies that are stoking the problem.
Of course, economic common sense sometimes prevails, but it is usually short-lived. At the end of 2010, for example, the Morales government decided to eliminate fuel subsidies in order to reduce the fiscal drain of importing market-rate energy and selling it at prices that have not changed in ten years. But the decision was reversed within a week, because the groups that brought Morales to power took to the streets in protest. Morales then promised to “govern by obeying.”

Opinion polls have registered a sharp fall in Morales’s popularity, with social protest of the type he once engineered now raised against him. A long strike by public transport workers was followed by another, just as long, staged by the Central Obrera (Bolivia’s trade union federation) and state employees.

The transport workers wanted a pay increase, following a multi-year wage freeze, while other workers want higher salaries to compensate for inflation, which is higher in Bolivia than the Latin American average, while economic growth is lower. Morales has yielded to the protests by making concessions and short-term promises, which will only fuel further inflation.

Moreover, the lack of effective results from the state’s administration of companies is endangering the popular backing of the nationalizations that brought Morales to power. For example, Morales tried to appease the Central Obrera unions by offering to nationalize three important mines. But the workers, having seen what Morales-style management is like, refused, preferring to remain in the private sector.

The government, however, seems unwilling to recognize public dissatisfaction with its ideologically driven policies or the failure of forced industrialization. None of the new state-owned factories (paper, cardboard, milk, urea, cement, textiles, and citric products) created in recent years is fully up and running, and nationalized companies (particularly the country’s oil refineries) have experienced declines in output and efficiency.

Convinced that he can increase production and employment, Morales has forced the central bank to give credit on favorable terms to state-owned companies. In other words, his government remains determined to increase the state’s hold over the economy.

Meanwhile, drug trafficking grows and diversifies, despite more police. Efforts to eradicate coca plantations have achieved the bare minimum, and increasingly frequent seizures of cocaine and coca paste originating in Peru indicate that trafficking activities are relocating to Bolivia, thus bringing more illicit money and more organized – and violentcriminal groups.

Bolivia’s neighbors, Brazil and Chile in particular, have expressed growing concern about this trend. While they have gained new verbal commitments from Morales to contain the narcotics trade, the government’s ineffectiveness was evident when a Bolivian police general was arrested in Chile while transporting a huge shipment of cocaine to the United States. The official, convicted in the US for drug trafficking, was the head of the intelligence agency on whose efficiency the fight against drug trafficking depends.

In the face of his growing problems, Morales has resorted to two tactics that successfully diverted public opinion in the past: conflict with Chile over landlocked Bolivia’s claims to Chilean territory that would give it an outlet to the sea, and a new electoral campaign, this time for judges.

.But the claim against Chile does not seem to have the same attraction that it had in the past, and the election of judges to the Supreme Court and the Constitutional Tribunal backfired. Indeed, Morales endured a resounding defeat, with 60% of voters rejecting the government’s initiative with ballots that were either nullified or blank.

A movement of indigenous people from Bolivia’s lowlands played a crucial role, staging a march on La Paz to demand respect for the Indigenous Territory and National ParkIsiboro-Sécure” (TIPNIS).

After 65 days of overcoming police repression and blockades thrown up by groups allied with Morales, the marchers entered La Paz as heroes. Their efforts forced Evo to ban road construction through the park, part of a project financed by Brazil and backed by that country’s former president, Luiz Ignácio Lula da Silva.

Evo’s political prospects look grim. Government spending is using up a large share of the country’s export revenues. A fiscal deficit has returned. Inflation mainly from higher food prices – is generating discontent, and legal insecurity is discouraging the investment that could increase supply.

Organized groups (unions, neighborhoods, and communities) are increasingly impatient, and management of state institutions is becoming increasingly incompetent.

Changing direction and adjusting policies to the people’s demands should be easy in a regime that concentrates power in the president. A caudillo can make key decisions alone, because popular support is personalized: only he is indispensable. But Morales is persisting in his policies, despite the absence of positive results. As this inclination continues to alienate his electoral base, the formulas that brought him to power may ultimately lead to his downfall.
Roberto Laserna, an economist, is a researcher at CERES, a private research center in Cochabamba, Bolivia, and President of Fundacion Milenio, a think tank in La Paz.

November 17, 2011 7:54 am

Central bank gold buying at 40-year high

By Jack Farchy in London

Gold bars ingots with dollars

Central banks made their largest purchases of gold in decades in the third quarter, as a sharp drop in prices in September accelerated the shift to bullion as a means of diversification.

The scale of the buying, at 148.4 tonnes on a net basis, will come as a surprise to many traders as it is a long way beyond the purchases that had previously been disclosed.

The data were published in a quarterly report by the World Gold Council, a lobby group for the gold industry, on Thursday..

The WGC declined to identify of the central banks behind the majority of the buying citing “confidentiality restrictions”, saying only that “a slew of new entrants emerged wishing to bolster gold holdings”.

Central banks are one of the most important drivers of the gold market but few disclose details about the changes in their bullion reserves.

Central banks became net buyers of gold last year after two decades of heavy selling – a reversal that has helped propel the price of bullion to a high of $1,920.30 a troy ounce, up 600 per cent in a decade.

This year, led by emerging market central banks intent on diversifying their growing foreign exchange reserves, they are set to buy more gold than at any time since the collapse of the Bretton Woods system 40 years ago, the last time the value of the dollar was linked to gold.

The purchase of 148.4 tonnes in July-September is the largest since GFMS, the consultancy which produces the data underlying the WGC reports, began compiling quarterly numbers in 2002. Before then, the last time central banks were net buyers of gold was in 1988 when they bought 180 tonnes.

Marcus Grubb, head of investment at the WGC, said of the buyers: “We believe it’s a number of purchasers from different countries.”

The majority of the buying took place in September after prices fell sharply from record levels at $1,900 to a low of $1,534.49, he said. It coincided with growing international tensions over the US dollar after a dispute in Washington about raising the US debt ceiling.

However, Mr Grubb said the buyers were probably pursuing longer-term targets: “Central bank buying tends to follow a different heartbeat than pure investment purchases of gold. It’s often based on targets set earlier in the year on gold as a proportion of foreign exchange reserves.”

He predicted that central bank buying for the full year could be 450 tonnes, implying a further 90 tonnes in the fourth quarter.

GFMS last month said central bank purchases were likely to be in excess of 400 tonnes and could reach 500 tonnes, an upward revision from its forecast in September of 336 tonnes.

Elsewhere, the WGC reported that China overtook India to become the largest consumer of gold jewellery in the third quarter. Chinese jewellery consumption rose 13 per cent from a year earlier to 138.6 tonnes, while buying from Indiatraditionally the world’s top consumerfell 26 per cent.
Copyright The Financial Times Limited 2011.

November 16, 2011

Eyeing China, U.S. Expands Military Ties to Australia

CANBERRA, Australia — President Obama and Prime Minister Julia Gillard of Australia announced plans on Wednesday for a sustained new American military presence in Australia, a deployment of 2,500 troops aimed at signaling that the United States intends to counterbalance a rising China.

The agreement with Australia, though involving a relatively small number of troops, is nonetheless the first long-term expansion of the American military presence in the Pacific since the end of the Vietnam War. It comes despite budget cuts facing the Pentagon and a strong negative reaction from Chinese leaders, who have accused the United States of seeking to raise military tensions in the region.

“With my visit to the region I am making it clear that the United States is stepping up its commitment to the entire Asia-Pacific region,” Mr. Obama said at a joint news conference with Ms. Gillard soon after his arrival here in Australia’s capital.

Mr. Obama said the basing agreementallows us to meet the demands of a lot of partners in the region that want to feel that they’re getting the training, they’re getting the exercises, and that we have the presence that’s necessary to maintain the security architecture in the region.”

“But the second message I’m trying to send is that we are here to stay,” Mr. Obama said. “This is a region of huge strategic importance to us.” He added: “Even as we make a whole host of important fiscal decisions back home, this is right up there at the top of my priority list. And we’re going to make sure that we are able to fulfill our leadership role in the Asia-Pacific region.”

On his two-day visit to Australia, the president will fly north across the continent to Darwin, a frontier port and military outpost across the Timor Sea from Indonesia, which will be the center of operations for the coming deployment. The first 200 to 250 Marines will arrive next year, with forces rotating in and out and eventually building up to 2,500, the two leaders said.

The United States will not build new bases on the continent, but will use Australian facilities instead. Mr. Obama said that Marines will rotate through for joint training and exercises with Australians, and the American Air Force will have increased access to airfields in the nation’s Northern Territory.

“We’re going to be in a position to more effectively strengthen the security of both of our nations and this region,” he said.

The United States has had military bases and large forces in Japan and South Korea, in the north Pacific, since the end of World War II, but its presence in Southeast Asia was greatly diminished in the early 1990’s with the closure of major bases in the Philippines, at Clark Field and Subic Bay. The new arrangement with Australia will restore a substantial American footprint near the South China Sea, a major commercial route — including for American exports — that has been roiled by China’s disputed claims of control.

Like Australia, China’s neighbors in Southeast Asia have looked to the United States to increase its military presence as a counterweight to Beijing. Mr. Obama has sought to provide that assurance, but the Asia-Pacific allies are well aware of the intense pressure for budget-cutting in Washington, and fear that squeezed military spending and other factors may inhibit Mr. Obama’s ability to follow through.

The United States and other Pacific Rim nations are also negotiating to create a free-trade bloc that does not include China, the Trans-Pacific Partnership. The tentative trade agreement was a topic over the weekend in Honolulu, where Mr. Obama hosted the annual Asia-Pacific Economic Cooperation forum, and it will be discussed again later this week when he becomes the first American president to participate in the East Asia Summit, on the Indonesian island of Bali.

For China, the week’s developments could suggest both an economic and a military encirclement.

Liu Weimin, a foreign ministry spokesman, issued a measured statement on Wednesday in response to Mr. Obama’s announcement that suggested the United States should focus on promoting development rather than building military alliances.

“It may not be quite appropriate to intensify and expand military alliances and may not be in the interest of countries within this region,” he told a news briefing.

The Global Times, a state-run news organization known for its nationalist and bellicose commentaries, issued a stronger reaction in an editorial, saying Australia should be cautious about allowing the United States to use bases there to “harm China” and that it risked gettingcaught in the crossfire.”
Analysts say that Chinese leaders have been caught off guard by what they view as an American campaign to stir up discontent in the region. China may have miscalculated in recent years by restating longstanding territorial claims that would give it broad sway over development rights in the South China Sea, they say. But they argue that Beijing has not sought to project military power far beyond its shores, and has repeatedly proposed to resolve territorial disputes through negotiations.

The United States portrays its newly aggressive stance in Asia as a response, urged on by regional powers, to China’s own aggressions. Hillary Rodham Clinton wrote a recent article in Foreign Policy laying out an expansive case for American involvement in Asia, and Defense Secretary Leon Panetta characterized China’s military development as lacking transparency and criticized its assertiveness in the regional waters.

The new American focus on Asia, analysts said, threatened to sour relations with Chinese leaders.

“I don’t think they’re going to be very happy,” said Mark Valencia, a Hawaii-based senior researcher at the National Bureau of Asian Affairs, who said the new policy was months in the making. “I’m not optimistic in the long run as to how this is going to wind up.”

Mr. Obama took steps on Wednesday to signal that the new deployment, and the recent push to set up a new trading bloc, are not meant to isolate China.

“The notion that we fear China is mistaken; the notion that we are looking to exclude China is mistaken,” he said.

The president said that China would be welcomed into the tentative trade pact, the Trans-Pacific Partnershipnine nations, including the United States, agreed in Honolulu to finalize a framework in 2012 — if Beijing is willing to meet the free-trade standards for membership. But such standards would require China to let its currency rise in value, to better protect foreign producers’ intellectual property rights and to limit or end subsidies to state-owned companies, all of which would require a major overhaul of China’s economic development strategy.

Mr. Obama canceled two previous planned trips to Australia because of domestic demands; he recalled at a state dinner on Wednesday that he had visited the country twice as a boy, when his mother was working in Indonesia on development programs.

This time, as president, Mr. Obama arrived at Parliament House to a 21-gun salute and, once inside, to the enthusiastic greeting of Australians crowding the galleries of the vast marble entrance hall.

The two countries have been allies for decades, and cooperated closely in World War II, when there were several dozen American air and naval bases and army camps in the country and Australian combat troops served under American command. Another purpose of Mr. Obama’s visit is to celebrate those ties. “The United States has no stronger ally,” Mr. Obama said.

Australians fought alongside the United States in every war of the 20th century, and more recently have served in Iraq and Afghanistan. The war in Afghanistan has become increasingly unpopular here, though, and most Australians want their troops to come home immediately.

Michael Wines contributed reporting from Beijing.