Policy Tensor

Obama’s Foreign Policy Report Card

In Geopolitics on July 19, 2015 at 3:10 am

President Obama

The Policy Tensor has at times been a harsh critic of the Obama White House’s foreign policy. While this page supported Obama’s decision to withdraw American army divisions from Iraq, it was not a fan of the President’s policy with respect to either Assad or ISIS.

Iraq: A

The worst foreign policy mistake of this administration was to outsource the arming of the Syrian rebellion to the oil monarchies; with predictable results. The window of opportunity, before the jihadists crushed the moderate rebels, was missed with nonsensical talk of rebalancing to Asia. Eventually, of course, this meant that the White House would come around to covertly backing Assad. To the President’s credit, the policy reversal was effected with quiet dignity.

Syria: C

Obama’s military strategy to defeat ISIS is not going to work. And containment of a Salafist-Jihadist state in the heart of the Middle East is unlikely to satisfy the American foreign policy establishment’s quest for security. What this means is that Obama has effectively kicked the can down to the next President.


US intelligence convinced pro-Western oligarchs to move against a Ukrainian government dominated by pro-Russian oligarchs. As Russia predictably moved to secure its near abroad, the Obama White House created a lot of brouhaha even as it was clear that the United States did not have significant interests at stake in Ukraine to counter a Russian military intervention. Had Russia been the US’ principal adversary, American meddling in Ukraine would have been understandable. But Russia was a potential ally against China. American shenanigans pushed Russia prematurely into Chinese arms. It was self-goal.

Ukraine: C

The problem with US’ Afghan strategy is that a US withdrawal is inconsistent with a commitment to prevent a resurgence of the Taliban: The United States must either reach an accommodation with the Taliban or commit to propping up an anti-Taliban regime on a semi-permanent basis. However, the solution to the Afghan conundrum is not to be found in Kabul but in Islamabad. For unless the United States can prevail on the ISI to stop patronizing the Taliban, it would be constantly swimming against the current in its efforts to prop up an anti-Taliban regime in Kabul.

To be fair, given the dangers of instability in a nuclear-armed Pakistan, the United States cannot afford a breakdown of intelligence and military ties to the Pakistani deep state that would follow from a more aggressive policy against Islamabad that an anti-Taliban solution demands. Still, Obama could have done far more to put pressure on the duplicitous ISI generals; especially after it became clear that they had been sheltering bin Laden.

Af-Pak: B

Moving southeast on the subcontinent, President Obama failed to capitalize on the Bush opening to India. If the United States is serious about signing up Asia’s second rising giant for a balancing alliance against China, it must do more to shore up India’s military power which is falling sharply behind its far more powerful neighbour. Specifically, the United States should be easing India’s access to advanced weapons systems.

Advanced weapons production is dominated by prime contracting firms (Lockheed Martin, Raytheon, Northrop Grumman, Boeing, General Dynamics, DynCorp, BAE Systems et cetera) who remain largely in thrall of US market power. The United States uses access to its market as leverage to finely regulate other countries’ access to the advanced weapons technologies embedded in these prime contracting firms. There have been no moves in the direction of easing India’s access to advanced weapons systems. And relations between the world’s largest and the world’s oldest democracy remain cool.

India: B

To the east, the US opening to Myanmar was prompted by growing Chinese influence in the hitherto pariah state run by a brutal military junta. The trigger was the proposed $20 billion railway link connecting China’s Yunnan province to Myanmar which would’ve allowed China to circumvent the US’ stranglehold on the Strait of Malacca and gain access to the Bay of Bengal. The opening to Myanmar had the intended effect: In July 2014, the junta torpedoed the proposed rail connection. Myanmar’s nascent civilian democracy remains a façade behind which the military junta continues to rule. But the failed state is now securely in America’s geopolitical orbit.

Myanmar: A

Further east, Obama’s pivot to Asia has to be judged a dud. The problem is the following: While countries in the region are worried sick about China’s growing military capabilities and are keen to see the United States lean forward, it does not make much sense for the United States to forward-deploy military assets in the region. This is because China’s increasingly sophisticated reconnaissance-strike complex allows it to hold any and all US surface assets in the Western Pacific at risk in the event of a military confrontation.

The correct force-posture for the United States is therefore to forward-deploy only a fraction of its strength, holding the rest in reserve outside the range of Chinese cruise missiles. This, of course, doesn’t make for good optics. US allies on the Pacific rim continue to fret about US abandonment. Japan, the only state in the region that can stand up to China on its own, is trying hard to shore up its military capabilities.

The whole fan-fare surrounding the rebalancing was unnecessary and counter-productive. Instead of making a big fuss about rebalancing and pivots, the United States ought to have worked to quietly reassure regional allies and deter China from premature adventures.

Pivot to Asia: B-

The Obama White House trumpeted the Trans-Pacific Partnership as a key component of the pivot to Asia. While benefiting American holders of capital, the TPP will yield meagre geopolitical gains in terms of balancing China. Still, the TPP creates diplomatic momentum behind a unified stand against Chinese revisionism.


US opposition to China’s international development bank, the AIIB, must be judged an outright debacle. It made the US look petty and made a mockery of US claims that it wants China to emerge as a responsible stakeholder in the international order. Worse still, as US’ closest allies, including Britain, Germany, France, and Italy, joined the club, it made the United States look isolated and ineffective.


Across the Pacific, Obama’s opening to Cuba was welcome and long-overdue. For more than a half century, the United States followed a policy of unabashed economic warfare against Cuba. The harsh and vindictive policy of containment was meant to make an example of Cuba: This is what will happen to those who challenge the dominant state of the Western Hemisphere. It did not, of course, prevent the rise of confrontation states in Latin America. To the contrary, it may have exacerbated opposition to the United States and strengthened the hands of those advocating resistance to US domination.

In contemplating the policy reversal, the Obama White House would not have been wrong to imagine pockets of determined opposition, especially from Congressional foreign policy hawks. In the final analysis, they turned out to be minor and easily overcome; laying bare the thin basis on which the policy of containment had rested. Still, it took courage to challenge the policy of every president since JFK.

Cuba: A+

The real game changer, of course, is Obama’s opening to Iran. The Policy Tensor has advocated a realignment in the gulf for years. Iran is the natural regional hegemon of the gulf. It is considerably easier to secure US interests in the gulf in partnership with the strongest regional power than in opposition to it. The only reason for a world power to confront a pivotal state in a strategically-important region is if there is an insurmountable conflict of interest. American and Iranian interests have become increasingly congruent in the past decade; setting the state for a strategic realignment. The election of a moderate government in the Islamic Republic provided an unprecedented opportunity for a reset; an opportunity that was not wasted by a far-seeing President.

The nuclear accord is nothing short of a diplomatic work of art. It makes it extremely difficult for Iran to obtain a nuclear deterrent by cheating. More importantly, the safeguards are stringent enough to push the deal through Congress. But the importance of the deal has almost nothing to do with nuclear weapons.

The only thing Iran would buy with a nuclear deterrent is insurance against a US invasion aimed at regime change. The Saudis would immediately obtain a deterrent of their own from Pakistan; thus neutralizing whatever strategic advantage the Iranians imagine they would obtain in the regional balance. On the other hand, an Iranian breakout would almost certainly reinforce Iran’s pariah status and guarantee relentless confrontation with the unipole. Iran could very well find itself even more diplomatically isolated and economically strangulated that is has been in the recent past; thus likely slipping further in the regional balance.

The nuclear deal allows Iran to reemerge on the international arena. It can now look forward to a lifting of international sanctions that would bring prosperity to the country and strengthen its position in the regional balance. Iran’s oil capacity is likely to expand significantly in the coming years as Western oil firms bring in capital and technology. This cannot fail to undermine the Saudis’ dominant position in OPEC. Indeed, unless the Saudis and the Iranians can learn to cooperate again, OPEC itself is likely to become defunct for all practical purposes. Since a thaw in the gulf is such a distant prospect in the medium term, the price of crude is likely to be depressed for the foreseeable future.

Unlike the oil monarchies, Iran is not just a petro-state. While its GDP is only 70% of Belgium’s, the Iranian economy is quite diversified. While foreign firms may be surprised to find slim pickings and tough competition from domestic firms, Iran is likely to be one of the fastest growing countries in the world for the next few years. Rouzbeh Pirouz, a CEO of an Iranian investment firm, makes the acute observation that Khamenei is trying to engineer a Deng Xiaoping moment, not a Gorbachev one. That is, Khamenei reckons that an economic opening can be accomplished and growth secured without undermining the stability of the theocracy.

The United States can now more easily establish a working partnership with Iran to secure common interests. The Americans are unlikely to abandon the Saudis in favour of an alliance with Iran. However, the thaw with Iran frees the United States from a total reliance on the House of Saud. In particular, the United States will now have wiggle room to press the Al Saud to reign in salafist influence in the region and around the world. And the expansion of both American and Iranian capacity will bring to an end the Saudis’ extraordinary influence in the global oil market; and with it the period in which Saudi Arabia punched above its weight. The Al Saud are likely to reconcile themselves to their diminished regional status eventually, perhaps leading to another period of moderation in the gulf. We are, of course, far from that scenario and the path ahead may be quite turbulent. Much will depend on whether the oil monarchies can see off the challenge posed by the Islamic State.

The Obama-Kerry achievement may not be as strategically-significant as that of the Nixon-Kissinger duo. But it goes a long way towards securing US interests in the Middle East.

Iran: A+

If we use Columbia University’s GPA calculator (which both the President and the Policy Tensor attended), the President scores a shocking 3.19; a GPA that is sure to make any Columbia graduate wince. To be fair, some foreign policy issues are much more important than others while the algorithm gives equal importance to all grades. Bringing in Myanmar was a canny move. The openings to Cuba and Iran were nothing short of historic. The latter is likely to prove of enduring strategic value. 

Two the biggest foreign policy mistakes (Syria, ISIS) were mistakes of omission, not debacles arising from hubris (See under Bush). The third, pushing Russia prematurely into Chinese arms, showed a gross misreading of the strategic landscape. It is unlikely that Russia would ever again be interested in a balancing alliance against China. As for the other successes and failures pertaining to the task of balancing China (TPP, AIIB, Pivot), these are strategically insignificant and mostly of optical value.


In Markets on July 13, 2015 at 6:28 pm


The Hollande-Merkel-Tsipras agreement on Monday is being described as a capitulation by many major newspapers [Telegraph, Bloomberg, Times, BBC, MSN, EU Observer].  “Brutal” and “humiliating” is how The Economist choose to describe the terms of the agreement. The Western press seems to be suffering a bad case of sensationalism and hyperbole. The deal is nothing so dramatic.

The Europeans have done what they do best: Kick the can down the road. It has been manifest for a while that the only way to end the Greek tragedy is substantial outright debt relief. The €86 billion deal is the third bailout package for Greece; the first one was for €110 billion in 2010; and the second in 2012 brought Greece’s debt to foreign creditors up to €246 billion. The probability that Greece will be able to pay back the €320 billion it now owes to foreigners, with or without reform and with or without austerity, is for all practical purposes zero. Major sovereign crises do not get resolved without substantial debt write-offs; as Reinhart and Trebesch have demonstrated. In the official statement, there is so far no recognition of this reality: “The Euro Summit stresses that nominal haircuts on the debt cannot be undertaken.”

Around the time of the Greek referendum, German policymakers were converging to the hardline position that Greece should be pushed out of the eurozone; a position championed by the veteran German finance minister Wolfgang Schäuble. The political optics changed after the results of the referendum were announced. Apparently, Luxembourg Foreign Minister Jean Asselborn’s dire warning to Angela Merkel, that pushing Greece out would be a “catastrophe for Europe”, pulled the Germans back from the brink. Merkel agreed to let Hollande play the good cop routine with Tsipras. Hollande arm-twisted Tsipras to concede on far-reaching reforms in exchange for relief on austerity.

Tsipras has agreed to push through a package of reforms through the Greek parliament. It includes an overhaul of VAT and income taxes, pension reform, labor market and financial reforms, and the privatization of utilities. This is certainly a surrender of sovereignty. But consider that Greek institutions were and are highly dysfunctional and in dire need of reform. That the Greek governement has to push through these difficult reforms under EU supervision is not the worst thing in the world. Even the much-feared labor market reforms only aim to bring Greece up to Western European standards. It is reasonable to expect that the Greeks themselves will be strictly better off as a result of these reforms.

As for austerity, the agreement calls for a primary surplus target of 1, 2, 3, and 3.5 percent of GDP in 2015, 2016, 2017 and 2018. This is an improvement over the 2012 bailout agreement which called for 4.5 percent of GDP in 2014, 2015 and 2016. The numerical proximity of these numbers is an optical illusion. The difference is that between catastrophic and mild austerity. The agreement also calls for what amounts to a medium-term stimulus of €35 billion for Greece. This is a substantial concession to macroeconomic reality.

Greece gets to keep the euro as a ward of the European Union. The ECB will now ensure than the Greek banking system does not implode. The government has to undertake substantial and far-reaching reforms under EU supervision. In exchange for a surrender of sovereignty over national policy to the European Union, the Greeks are spared from continuing to endure the equivalent of a Great Depression. The deal is nowhere close to being ideal. But for what it is, it is not catastrophic for the Greek people.

The Greek saga, of course, is very far from over. It will continue until a substantial portion of the debt is written off. Meanwhile considerably more significant market developments are underway half-way around the world. As I predicted, the asset price bubble in China is beginning to unravel. The stock market collapse is likely just the beginning of a major bust that will eventually lead to a lower-growth trajectory for the Asian giant. We are entering a new, perhaps more violent, phase of turbulence in global markets.

Why The Greeks Should Vote No

In World Affairs on July 2, 2015 at 10:57 pm

Paul Krugman has argued that Greek voters should vote to leave the euro. He is right. His argument is macroeconomic: Continued austerity will drive Greece further into the ground whereas exiting the euro, while creating financial turmoil in the short run, would allow Greece to devalue, restore competitiveness, and thereby return to growth. This is a good argument. This is precisely how countries have dug themselves out of the hole since the Gold Standard gave up the ghost.  But I believe that there is an even more compelling reason for the Greeks to vote no in the referendum on Sunday.

We have been told that this is the Greeks’ own fault; that they are a lazy and profligate people who borrowed too much money and don’t want to pay their debts. There is only one problem with this Swabian housewife morality tale: It is absolute poppycock.

First of all, there are structural reasons for systematic differences in debt-to-GDP ratios between nations. For instance, Japan’s debt-to-GDP has ballooned steadily from 80% in 1993 to 186% in 2005 as a result of the combination of a secular slowdown in growth and a rapid aging of the populace. In any case, public debt in Greece was not much out of line with other sovereigns. Prior to the Western financial crisis, Greek government debt was around 100% of GDP; close to present-day US levels and below the average level prevailing in the UK over the course of the past three centuries.

In 2006, before the onset of the banking and financial crises, Greece’s debt-to-GDP ratio was identical to Italy’s. What, then, accounts for the very different fates of the two nations in the decade since?  More generally, if you compared the government debt-to-GDP ratios for Germany and the peripheral European national economies, the so-called P.I.I.G.S. (Portugal, Italy, Ireland, Greece, and Spain), before the Western financial crisis, you may be surprised to find that the Spanish and the Irish were Swabian housewives compared to the profligate Germans.

Germany vs PIIGS

No one could’ve seen this chart [Credit: Google] and predicted that Portugal, Ireland, and Spain would face mounting debt crises, while Germany would lecture them on fiscal discipline. The whole idea that the crisis was the result of fiscal profligacy is, I repeat, poppycock.

The truth is that the crisis in the eurozone had little to do with fiscal deficits and a lot to do with current account deficits. The root of the crisis lay in the balance of payments inside the eurozone. It is on that chart [Credit: Martin Wolf] that we find the systematic difference between the core and the periphery of Europe. 

Current account to GDP

Germany was running an annual surplus to the tune of $250 billion which was necessarily off-set by dramatic current account deficits on the periphery: Due to the monetary union, the international balance of payments have to add up to zero at the level of the eurozone. You can also view this as a loss of competitiveness in the periphery: unit labor costs rose dramatically against Germany.

But I think that the right way to view this is through the capital account: The monetary unification of the eurozone allowed the high-savings countries of the north, most dramatically Germany, to export capital to the European periphery at an unprecedented scale.

current account absolute

Market participants believed, mistakenly as it turned out, that sovereign defaults in the eurozone were effectively impossible. As a result, sovereign credit spreads got impossibly compressed. Bondholders required almost no additional compensation for holding Greek over German government bonds. This was, of course, not the only risk that market participants were mispricing in 2004-2007. 

When the Western financial crisis forced market participants to reprice risk globally, the first response of private investors was to flee to safety. The banking crisis soon became nationalized as the global financial institutions became wards of their respective nation-states. As the sovereigns’ ability to pay became increasingly questionable, the financial crisis morphed into a sovereign debt crisis pitting the capital exporting countries in the north against the capital importing countries of the south. Instead of being punished for their own faulty judgement, bondholders turned to international institutions to negotiate on their behalf. We shall return to the bondholders’ mobilization presently.

IMF bailouts of bankrupt sovereigns have usually been accompanied by structural adjustment measures. The results of these draconian austerity measures are not under much dispute. To mention just two serious studies, Prezewoski and Vreeland (2000) found that “Program participation lowers growth rates for as long as countries remain under a program. Once countries leave the program, they grow faster than if they had remained, but not faster than they would have without participation.” Dreher (2006) also found that IMF-imposed structural adjustment measures unambiguously “reduce growth rates”.

But the austerity imposed on Greece, and to a lesser extent, other peripheral sovereigns, was considerably worse than IMF-style structural adjustment for a very simple reason. IMF-led structural adjustment is usually accompanied by a currency devaluation that allows national economies to regain their competitiveness. For the adjustment to take place sans a devaluation, national unit labor costs would have to fall in nominal terms with dramatic consequences for the populace.

How dramatic? The unemployment rate in Greece rose to an astounding 28 percent in 2014. And between 2008 and 2013, Greek GDP fell from $355 billion to $242 billion, a fall of 32 per cent. In other words, the attendant economic devastation in Greece has been worse than that experienced by the United States during the Great Depression: US GDP fell by no more than 30 per cent and peak unemployment was around 20 per cent. But the comparison is misleading. The Greek catastrophe was an entirely predictable result of the policies imposed from without

Indeed, to find a counterpart to the draconian adjustment imposed on Greece et al. we need to go back to the nineteenth century. In that more honest time, the preferred method of getting sovereigns to pay their obligations was to dispatch a naval squadron. When politicians in Westminster created a furor over Palmerston’s decision to send gunboats to Greece in the infamous Don Pacifico Affair in 1850, Palmerston recalled 33 instances where the Royal Navy had been dispatched to secure the interests of British bondholders between 1830-1850.

PIIGS vs Core

In 1868, British bondholders formed the Corporation of Foreign Bondholders (CFB) to secure their interests against recalcitrant sovereigns by a number of means including, and especially, lobbying Westminster to exercise gunship diplomacy. European powers went considerably beyond dispatching naval squadrons and imposing trade embargoes. Many times they simply took over the running of the government’s finances (Turkey 1881, Egypt 1883, Greece 1898). Venezuela was bombarded by German gunships in 1902 acting to secure repayment of debts, agitating US President Theodore Roosevelt to proclaim what is now known as the Roosevelt Corollary to the Monroe Doctrine: Since the United States would not allow European powers to interfere in the Western Hemisphere, it “cannot ignore the duty” to compel sovereigns in the region to pay their debts to international bondholders. In subsequent decades, the United States landed marines dozens of times in Central America to enforce the Corollary; an intervention spree that peaked under the arch-idealist Woodrow Wilson.

The present-day counterpart of the Corporation of Foreign Bondholders is the Institute of International Finance (IIF), which was the principal negotiating partner on behalf of Greece’s creditors. The IIF is a front for the New York-based hedge funds who hold Greek debt. It is in their private interest that the “troika” has been strong-arming Greece. Now a reasonable creditor could be expected to take a haircut in the interest of securing certain repayment; particularly in light of the fact that unless Greece returns to growth, it will not be able to pay back much at all. However, much more is at stake. For if Greece gets a significant haircut, the other nations undergoing structural-adjustment would demand one too. This is explanation for the hardline taken by Brussels that prompted Tsipras to appeal directly to the Greek people.

It also explains the “telling” decision by the ECB to halt an expansion of its emergency lending to Greek banks, according the Dealbook. “That facility could have allowed the banks to continue operating without as much panic and helped avoid some of the capital controls by providing additional liquidity. No central bank likes lending into a bank run in which it expects it will lose money, so the decision may make sense on the merits. But it also serves another purpose, one that is political. By closing the cash spigot, the E.C.B. managed to instill additional fear and panic into the day-to-day lives of the Greek people, ahead of the vote on the referendum.”

The European Union consists of two grand bargains. First, the EU is the world’s first security community: The rule of force has been banished to the frontier. This is an artifact of the American pacifier. Whether or not it survives will become clear only once the US presence is withdrawn from Europe. Second, and more importantly, the EU is the world’s first international democracy. It is more than a coalition of democracies: European nations have to learn how to reconcile democratic outcomes within nations in the community. 

The second grand bargain of the European experiment has been undermined to a great extent since the onset of the Western financial crises. The issue goes beyond that of the “democratic deficit” at the level of the European Union. The issue at stake is whether nations have the right to resist financial hegemony; whether they may mobilize democratically to secure their economic well-being; or whether they must submit to the private interests of sophisticated bondholders who do not know how to price risk.

Tsipras’ decision to call a referendum was a stroke of genius. By calling a referendum, he has placed front and center the real issue at stake in this dastardly affair: Europe must choose between democracy and financial hegemony.            


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