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A draft of a new US immigration law likely to be announced this week, holds mixed fortunes for international IT services companies and American businesses.

Globally competitive firms with offices in America, often send a number of foreign skilled workers on H-1B Visas to service American clients.  This helps boost operating margins and reduces costs on to American consumers.  The number of these Visas are currently capped  at 65,000 per year.

The legislation is seeking to increase the cap on H-1B Visas to 110,000, with an extra 25,000 for those who have earned advanced STEM degrees in the US.  This part of the bill has been warmly received by businesses and America’s friends and partners overseas.

However as part of a deal to create a pathway to citizenship for over 11 million people living in the U.S. illegally, other proposals in the bill will dictate to employers that they must pay workers on the highly skilled program on par with onshore workers and require businesses to advertise open jobs for 30 days on a U.S. Department of Labor website before they could bring in a foreign workers.

The result is that many U.S. business who have a significant contingent of overseas employees would be forced to pay significantly higher fees and endure larger operating costs.  For service based businesses like IT management, most of the operating costs are purely from labor.  Changing the pay rules may in effect drive many onshore companies out of business entirely, lowering tax revenues and in effect driving operations offshore completely.  In a growing migration to cloud based IT management, that possibility is ever more likely.

Concern is also being voiced that these provisions have been made for the specific purpose of targeting Asian individuals in the United States and overseas, and that campaigns for comprehensive immigration reform will merely descend into a vote-bank exercise for future elections.

Indian-Americans and U.S. Politics Blog

Iran Sanctions – Cut Off the World’s Nose to Spite Iran’s Face?

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Last time, we saw the U.S. Congress so impassioned, so emotional was in the aftermath of 9/11.  With an office within a couple of blocks of the World Trade Center, we witnessed that event firsthand. We walked through the smoke and the soot to return home late that morning. A man working on our floor, the CEO of his small business, had a breakfast meeting at the World Trade Center that morning. He did not return from that breakfast. We are still emotional about that event. That day, all Americans were willing to support carpet bombing of any country that helped that attack in any way. That emotion in America was justified. The American people were unanimously with the U.S. Congress and the Bush Administration in that emotional period.

Today, the U.S. Congress is again emotional, almost hysterically emotional. But today, the American people are not even exercised, forget being emotional. The emotion of 2001 was cold, determined anger, the sort of anger that allows us to take our time and then strike a decisive blow like we did in November 2001. In contrast, today’s anger is hot anger, the sort of anger that bubbles over the edge and makes people go nuts in a violent spree that causes serious collateral damage without achieving any real results.

The hot emotional anger we see today is a willingness in the U.S. Congress to hit out at the entire world in an effort to coerce the world to inflict severe economic damage on Iran. This hit on the world is a threat to cut off countries from the U.S. financial system for continuing trade with Iran, regardless of whether the countries are a parties to  the Iran-Israel fight or whether the countries are even in Iran’s neighborhood. This threat applies to every country in the world, except those that are specifically exempted by the Obama Administration.

Below we examine the consequences of this action on America’s long term interests.

1. Is Iran the greatest threat to America?

There is no question Iran is America’s foe. There is no question that Iran has acted against America’s interests on many occasions. But does Iran pose the biggest threat to America? Has Iran ever attacked America or American forces? Did elements inside Iran help in the 9/11 attacks? Is Iran the principal backer of the Taleban? Does Iran provide terrorist sanctuaries for the Taleban from which they attack American forces in Afghanistan? Was the shoe-bomber trained inside Iran? Was the unsuccessful attack in Times Square planned and helped by elements inside Iran? Is Iran the epicenter of global Islamic terrorism that attacked London, Madrid and Mumbai?

No. That dubious honor goes to Pakistan and specifically to the military regime in Pakistan. So how have the U.S. Congress and the Obama Administration handled Pakistan? By providing billions of dollars in aid, by providing F-16 fighters and P3-Orion antisubmarine planes even though Afghanistan is land-locked and the Taleban don’t have any boats, let alone deep diving submarines.  The Obama Administration has turned a blind eye to the massive drive by the Pakistani military to build a huge nuclear arsenal, reportedly the fourth largest in the world. In contrast, the U.S. Congress seems absolutely determined to wage war on Iran with every weapon at its disposal, on an Iran which might not have a nuclear weapon for next 2-3 years.

The last time we saw such hysteria was in 2003 when the Bush Administration painted Iraq as a imminent nuclear threat while ignoring the greater threat from Iran. What did the Iraq war achieve? It made the bigger enemy Iran far more powerful while saddling America with a long horrible expensive conflict.

Today, the Obama Administration and the U.S. Congress are moving towards a conflict with Iran in a similar emotionally charged campaign while ignoring the greater threat from Pakistan. Could an American war with Iran result in Pakistan becoming more powerful and more dangerous for America and the world?

The bottom line of this paragraph is simple:

  • Iran is likely to eventually put a bomb in Tel Aviv while Pakistan is likely to eventually put a bomb in New York City.

We understand the need for a targeted, tactical campaign against Iran. But why make Iran the emotional  focus of all of America’s attention? The short and simple answer is Israel.

2. Israel & Britain – Case of Two Close Allies

From Israel’s point of view, Iran is a grave danger while Pakistan is nearly irrelevant. Pakistan has not demonstrated any aggressive intent towards Israel while Iran has verbally threatened to wipe Israel from the face of the earth. Israel views Iran as an existential danger and rightly so. So Israel has every reason and every right to defend itself by any means it deems necessary. And Israel is a close ally of America, the closest ally with one possible exception.

That exception is Britain. Britain has been America’s oldest and most steadfast ally. Britain does not ask America for financial aid.  Wherever America needs support., Britain has provided it. British troops fought alongside America’s troops in Iraq. British troops are fighting alongside American forces in Afghanistan.

So what did America do when Britain found itself at war with Argentina a few years ago. America did not get involved in that war to help America’s closest ally. America did not break relations with Argentina. America did not sanction other Latin American countries for maintaining their relations with Argentina. America provided Britain with intelligence and helped in other quiet ways. This was sensible because America is a global power with global interests and America cannot sacrifice those interests in a regional conflict.

This common sense, this necessary focus on America’s global interests has been jettisoned today by the Obama Administration and the U.S. Congress. Instead, they are putting every other American interest in every other part of the world at grave risk in their emotional charge to proclaim their solidarity with Israel.

Why this difference between two close allies? Why does the U.S. Congress behave rationally in the case of Britain but act with wanton emotional fervor when it comes to Israel? They do so even when, according to a survey by Bill O’Reilly’s Factor, 61% of Americans surveyed said America should not get directly involved.

3. Does Israel even want this Sanctions Plan?

The straight answer is No. We don’t see Israel applauding the U.S. Congress for its desire to punish the rest of the world to support Israel. Israel is a smart, clear-headed, calculating country. Israel knows that it will face substantial backlash from all over the world for financial damage resulting from U.S. sanctions. And these sanctions don’t do Israel any good.

Israel wants America to participate in an attack on Iranian nuclear installations. If America is unwilling to do so, Israel would like America to provide it with bunker-busting bombs and refueling tankers. That will enable Israel to mount a large enough air attack to destroy a large part of Iranian nuclear capability.  Such an attack would not damage Iran’s conventional military capabilities, it would not cause severe financial damage to the Iranian people.  It would be a limited attack.

If successful, Israel will be privately applauded and even thanked by every country in Iran’s neighborhood, even by China and Russia.  If it fails, it will suffer the blame alone. Now if Iran is stupid enough to attack America in response, the Obama Administration should retaliate with all of America’s might to destroy Iran’s conventional military capacity as well as Iranian regime. The Iranian regime is smart, rational and they will not risk their survival if they believe the Obama Administration will retaliate with all its might.

We understand that a limited attack by Israel on Iran would create regional risks to America and we don’t recommend it. But it would be a regional issue and it would not damage America’s global interests. So it would be far better than the utterly asinine plan to impose sanctions on the rest of the world to bring pressure on Iran.

4. The Utter Insanity of the Sanctions Plan – 1

Several informed and sensible analysts have argued that the sanctions on Iran could actually backfire on America. Ian Bremmer, President of the Eurasia Group, wrote the following in his article in the Financial Times titled: Iran oil sanctions threaten global economic recovery:

  • While the strategy of squeezing Iran financially is logical, it comes with serious economic risks that are not often recognized. We’ve entered a new era in which the distinction between the financial and security spheres no longer holds: geopolitics drive markets even as markets drive geopolitics.
  • Enforcing oil sanctions against Iran could threaten the global economy. In the context of improving global growth, removing too much Iranian oil from the world’s energy supply could cause an oil price spike that that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time sanctions have the potential to be “too successful”, hurting the sanctioners as much as the sanctioned.

A detailed description of how the Iran sanctions could backfire on America was provided by Kenneth Pollack, Director of the Saban Center of Middle East policy at the Brookings Institution. Mr. Pollack argues:

  • The problem is that these sanctions are potentially so damaging that they could backfire, creating at least three sets of consequences that would leave the United States in a worse position, whatever the impact on Iran.
  • To the extent that Iranian oil is truly off the market for the U.S. and Europe, it will increase the price for what remains. In case you missed the past 40 years of American economic history, there is no commodity on earth that affects the American economy faster or more profoundly than oil.
  • Another potentially fatal flaw in these sanctions is that they turn up the heat on Iran so much that they may well be unsustainable diplomatically, and that is very problematic because sanctions rarely work quickly. And over time, there is a high likelihood that other countries will come to see the misery of the Iranian people as being the fault of the United States, not of the Iranian leadership, exactly as happened with Saddam.

This may be why Ian Bremmer made a very interesting suggestion in his FT article:

  • The U.S. can pressure Iran without sabotaging the economic recovery. What he must do is maintain his tough public rhetoric on sanctions, no matter how harsh it appears, while privately signaling China and India – and only China and India – that it is fine for them to purchase Iranian crude, but at a significant discount from market price. Forcing Tehran to sell discounted barrels would provide the desired result: a substantial reduction in Iranian revenue with less impact on global energy prices and less harm to the U.S. and world economies.

5. The Utter Insanity of the Sanctions Plan – II

The above issues have been well discussed and are well understood in America. They are serious issues indeed, but they are essentially short term in their scope and impact. We are far more concerned about the long term strategic impact on America and its relationship with the rest of the world. And when we say “world”, we mean the real world; we mean Africa, China, India, Asia, Latin America, the world in which 3/4th of the world’s population lives, the part of the world which will show the strongest growth in the next three decades.

With its emotional plan accompanied by strident, sometimes hysterical rhetoric, the U.S. Congress has threatened to declare financial war on virtually the entire world if they don’t break off financial and trading relations with Iran.  The U.S. Congress does not seem to care about the serious impact that might have on the countries, their economies and their people. And these countries have nothing to do with the Israeli-Iran conflict. In fact, as Ian Bremmer pointed out in his interview with Reuters, “[Iran] doesn’t exactly look deplorable to large parts of the global community — like Russia, China, nearly all of Africa and even much of the Middle East.”

Remember Iraq? That was strictly a regional conflict between America and Iraq. America did not involve any other region of the world in that conflict. Still America suffered a massive downgrade of respect and support in the entire world. Not only is America now getting involved in another regional conflict with Israel and Iran, the U.S. Congress is threatening to sacrifice the economic interests of virtually every country in Africa, Asia and Latin America. Can we imagine the backlash from the rest of the world and can we fathom the extent of long term damage America could suffer?

There is one long term damage that worries us the most – the damage to America’s financial system, the foundation of America’s prosperity.

5. The Utter Insanity of the Sanctions Plan – III

The foundation of U.S. financial dominance is the reserve currency status of the U.S. Dollar. This is why the world’s financial system goes through the American financial system. The American financial system is open, flexible, transparent and trusted.

The Sanctions Plan of the U.S. Congress & the Obama Administration is based on using the U.S. Financial System as a weapon to browbeat the world. There are grave dangers in threatening the use of your most powerful weapon. If the threat of using it fails to coerce, then it has to be used. If it is used but fails to deliver a victory, then there is nothing else left in the quiver. And just the threat prompts serious efforts to build countermeasures.

That is what we are afraid of.  The world has been using the U.S. Dollar and the U.S. financial system both out of convenience and inertia. That inertia was shaken up a bit in the aftermath of the 2008 financial crisis in America. That crisis prompted China to intensify its efforts to make its currency,  the Renminbi, an international currency. The crisis also prompted Russia to seek alternatives to the U.S. Dollar at the IMF, the International Monetary Fund.

These efforts have gone nowhere because Latin America, Africa and the rest of Asia preferred the convenience of the current Dollar-based financial system. Now the U.S. Congress is threatening to shut these countries out of the U.S. Financial system if they don’t obey U.S. rules about Iran. If the U.S. Congress can do this once, they can do it again. No country, no country dedicated to the well being of its people can tolerate such an economic stranglehold.

Perhaps they had no choice in the last century. But this is not our father’s world, as Jim O’Neill*, Chairman of Goldman Sachs Asset Management, made clear to CNBC recently:

  • “We are only three years off maximum, maybe two years before the 4 BRIC (Brazil, Russia, India, China) countries become bigger than the United States….a few of the countries that are also becoming more important such as Indonesia, Turkey, Korea, Mexico. If you put those 4 together with the BRICs, this decade, those eight will create double the amount of global GDP that Europe and the U.S. will do put together.”

The primary American goal ought to be to ensure these countries do not act in unison against U.S. interests.  Instead, by threatening to impose sanctions on all the BRICS (S for South Africa) and on the other countries, the Obama Administration and the U.S. Congress are virtually forcing all these countries to come together to build an alternative financial architecture. This is not just insane, but suicidal.

This is not idle or fanciful speculation. This past week, the five BRICS countries met in New Delhi and agreed to support intra-BRICS trade in local currencies. If successful, this could pose a long term threat to the primacy of the U.S. Dollar.

The BRICS also discussed the establishment of a new multilateral financial institution, a new BRICS bank that will help the BRICS countries with their financial development. Such a Bank will be outside the realm of the World Bank which the U.S. dominates. It is not hard to see such a bank eventually issue a special currency  (SDR or Special Drawing Right units in the financial lingo) for use in intra-BRICS trade. Each one of these countries is a regional leader. So we could see such BRICS SDR used by smaller countries in Asia, Africa and Latin America to trade with the 5 BRICS and with each other.

This will not doom the United States. It will simply make the U.S. Financial system more regional and less global. It will also help the rest of the world move away from the U.S. Dollar over time. This is negative for America’s future prosperity.

None of the above is easy. But it is doable if the impetus is strong enough. Unfortunately, the U.S. Congress and the Obama Administration are the ones delivering the impetus to BRICS and other emerging economies to plan to move away from the U.S. Dollar. As we said before, this is not just insane but suicidal.

The Bush Administration was excoriated for being arrogant with the world and for damaging America’s standing. Frankly, the Bush Administration was a sissy compared to what the Obama Administration and the U.S. Congress are doing to the world with their Iran Sanctions plan. In doing so, they are gambling with the future of the U.S. Dollar and American prosperity. For what goal? To proclaim their commitment to Israel. And Israel doesn’t even want this plan. Isn’t Insanity the right word for this?

Last time, we saw the U.S. Congress so impassioned, so emotional was in the aftermath of 9/11.  With an office within a couple of blocks of the World Trade Center, we witnessed that event firsthand. We walked through the smoke and the soot to return home late that morning. A man working on our floor, the CEO of his small business, had a breakfast meeting at the World Trade Center that morning. He did not return from that breakfast. We are still emotional about that event. That day, all Americans were willing to support carpet bombing of any country that helped that attack in any way. That emotion in America was justified. The American people were unanimously with the U.S. Congress and the Bush Administration in that emotional period.

Today, the U.S. Congress is again emotional, almost hysterically emotional. But today, the American people are not even exercised, forget being emotional. The emotion of 2001 was cold, determined anger, the sort of anger that allows us to take our time and then strike a decisive blow like we did in November 2001. In contrast, today’s anger is hot anger, the sort of anger that bubbles over the edge and makes people go nuts in a violent spree that causes serious collateral damage without achieving any real results.

The hot emotional anger we see today is a willingness in the U.S. Congress to hit out at the entire world in an effort to coerce the world to inflict severe economic damage on Iran. This hit on the world is a threat to cut off countries from the U.S. financial system for continuing trade with Iran, regardless of whether the countries are a parties to  the Iran-Israel fight or whether the countries are even in Iran’s neighborhood. This threat applies to every country in the world, except those that are specifically exempted by the Obama Administration.

Below we examine the consequences of this action on America’s long term interests.

1. Is Iran the greatest threat to America?

There is no question Iran is America’s foe. There is no question that Iran has acted against America’s interests on many occasions. But does Iran pose the biggest threat to America? Has Iran ever attacked America or American forces? Did elements inside Iran help in the 9/11 attacks? Is Iran the principal backer of the Taleban? Does Iran provide terrorist sanctuaries for the Taleban from which they attack American forces in Afghanistan? Was the shoe-bomber trained inside Iran? Was the unsuccessful attack in Times Square planned and helped by elements inside Iran? Is Iran the epicenter of global Islamic terrorism that attacked London, Madrid and Mumbai?

No. That dubious honor goes to Pakistan and specifically to the military regime in Pakistan. So how have the U.S. Congress and the Obama Administration handled Pakistan? By providing billions of dollars in aid, by providing F-16 fighters and P3-Orion antisubmarine planes even though Afghanistan is land-locked and the Taleban don’t have any boats, let alone deep diving submarines.  The Obama Administration has turned a blind eye to the massive drive by the Pakistani military to build a huge nuclear arsenal, reportedly the fourth largest in the world. In contrast, the U.S. Congress seems absolutely determined to wage war on Iran with every weapon at its disposal, on an Iran which might not have a nuclear weapon for next 2-3 years.

The last time we saw such hysteria was in 2003 when the Bush Administration painted Iraq as a imminent nuclear threat while ignoring the greater threat from Iran. What did the Iraq war achieve? It made the bigger enemy Iran far more powerful while saddling America with a long horrible expensive conflict.

Today, the Obama Administration and the U.S. Congress are moving towards a conflict with Iran in a similar emotionally charged campaign while ignoring the greater threat from Pakistan. Could an American war with Iran result in Pakistan becoming more powerful and more dangerous for America and the world?

The bottom line of this paragraph is simple:

    Iran is likely to eventually put a bomb in Tel Aviv while Pakistan is likely to eventually put a bomb in New York City.

We understand the need for a targeted, tactical campaign against Iran. But why make Iran the emotional  focus of all of America’s attention? The short and simple answer is Israel.

2. Israel & Britain – Case of Two Close Allies

From Israel’s point of view, Iran is a grave danger while Pakistan is nearly irrelevant. Pakistan has not demonstrated any aggressive intent towards Israel while Iran has verbally threatened to wipe Israel from the face of the earth. Israel views Iran as an existential danger and rightly so. So Israel has every reason and every right to defend itself by any means it deems necessary. And Israel is a close ally of America, the closest ally with one possible exception.

That exception is Britain. Britain has been America’s oldest and most steadfast ally. Britain does not ask America for financial aid.  Wherever America needs support., Britain has provided it. British troops fought alongside America’s troops in Iraq. British troops are fighting alongside American forces in Afghanistan.

So what did America do when Britain found itself at war with Argentina a few years ago. America did not get involved in that war to help America’s closest ally. America did not break relations with Argentina. America did not sanction other Latin American countries for maintaining their relations with Argentina. America provided Britain with intelligence and helped in other quiet ways. This was sensible because America is a global power with global interests and America cannot sacrifice those interests in a regional conflict.

This common sense, this necessary focus on America’s global interests has been jettisoned today by the Obama Administration and the U.S. Congress. Instead, they are putting every other American interest in every other part of the world at grave risk in their emotional charge to proclaim their solidarity with Israel.

Why this difference between two close allies? Why does the U.S. Congress behave rationally in the case of Britain but act with wanton emotional fervor when it comes to Israel? They do so even when, according to a survey by Bill O’Reilly’s Factor, 61% of Americans surveyed said America should not get directly involved.

3. Does Israel even want this Sanctions Plan?

The straight answer is No. We don’t see Israel applauding the U.S. Congress for its desire to punish the rest of the world to support Israel. Israel is a smart, clear-headed, calculating country. Israel knows that it will face substantial backlash from all over the world for financial damage resulting from U.S. sanctions. And these sanctions don’t do Israel any good.

Israel wants America to participate in an attack on Iranian nuclear installations. If America is unwilling to do so, Israel would like America to provide it with bunker-busting bombs and refueling tankers. That will enable Israel to mount a large enough air attack to destroy a large part of Iranian nuclear capability.  Such an attack would not damage Iran’s conventional military capabilities, it would not cause severe financial damage to the Iranian people.  It would be a limited attack.

If successful, Israel will be privately applauded and even thanked by every country in Iran’s neighborhood, even by China and Russia.  If it fails, it will suffer the blame alone. Now if Iran is stupid enough to attack America in response, the Obama Administration should retaliate with all of America’s might to destroy Iran’s conventional military capacity as well as Iranian regime. The Iranian regime is smart, rational and they will not risk their survival if they believe the Obama Administration will retaliate with all its might.

We understand that a limited attack by Israel on Iran would create regional risks to America and we don’t recommend it. But it would be a regional issue and it would not damage America’s global interests. So it would be far better than the utterly asinine plan to impose sanctions on the rest of the world to bring pressure on Iran.

4. The Utter Insanity of the Sanctions Plan – 1

 

Several informed and sensible analysts have argued that the sanctions on Iran could actually backfire on America. Ian Bremmer, President of the Eurasia Group, wrote the following in his article in the Financial Times titled: Iran oil sanctions threaten global economic recovery:

    While the strategy of squeezing Iran financially is logical, it comes with serious economic risks that are not often recognised. We’ve entered a new era in which the distinction between the financial and security spheres no longer holds: geopolitics drive markets even as markets drive geopolitics.

    Enforcing oil sanctions against Iran could threaten the global economy. In the context of improving global growth, removing too much Iranian oil from the world’s energy supply could cause an oil price spike that that would halt the recovery even as it does some financial damage to Iran. For perhaps the first time sanctions have the potential to be “too successful”, hurting the sanctioners as much as the sanctioned.

A detailed description of how the Iran sanctions could backfire on America was provided by Kenneth Pollack, Director of the Saban Center of Middle East policy at the Brookings Institution. Mr. Pollack argues:

    The problem is that these sanctions are potentially so damaging that they could backfire, creating at least three sets of consequences that would leave the United States in a worse position, whatever the impact on Iran.

        To the extent that Iranian oil is truly off the market for the U.S. and Europe, it will increase the price for what remains. In case you missed the past 40 years of American economic history, there is no commodity on earth that affects the American economy faster or more profoundly than oil.

         Another potentially fatal flaw in these sanctions is that they turn up the heat on Iran so much that they may well be unsustainable diplomatically, and that is very problematic because sanctions rarely work quickly. And over time, there is a high likelihood that other countries will come to see the misery of the Iranian people as being the fault of the United States, not of the Iranian leadership, exactly as happened with Saddam.

This may be why Ian Bremmer made a very interesting suggestion in his FT article:

    The U.S. can pressure Iran without sabotaging the economic recovery. What he must do is maintain his tough public rhetoric on sanctions, no matter how harsh it appears, while privately signaling China and India – and only China and India – that it is fine for them to purchase Iranian crude, but at a significant discount from market price. Forcing Tehran to sell discounted barrels would provide the desired result: a substantial reduction in Iranian revenue with less impact on global energy prices and less harm to the U.S. and world economies.

5. The Utter Insanity of the Sanctions Plan – II

The above issues have been well discussed and are well understood in America. They are serious issues indeed, but they are essentially short term in their scope and impact. We are far more concerned about the long term strategic impact on America and its relationship with the rest of the world. And when we say “world”, we mean the real world; we mean Africa, China, India, Asia, Latin America, the world in which 3/4th of the world’s population lives, the part of the world which will show the strongest growth in the next three decades.

With its emotional plan accompanied by strident, sometimes hysterical rhetoric, the U.S. Congress has threatened to declare financial war on virtually the entire world if they don’t break off financial and trading relations with Iran.  The U.S. Congress does not seem to care about the serious impact that might have on the countries, their economies and their people. And these countries have nothing to do with the Israeli-Iran conflict. In fact, as Ian Bremmer pointed out in his interview with Reuters, “[Iran] doesn’t exactly look deplorable to large parts of the global community — like Russia, China, nearly all of Africa and even much of the Middle East.”

Remember Iraq? That was strictly a regional conflict between America and Iraq. America did not involve any other region of the world in that conflict. Still America suffered a massive downgrade of respect and support in the entire world. Not only is America now getting involved in another regional conflict with Israel and Iran, the U.S. Congress is threatening to sacrifice the economic interests of virtually every country in Africa, Asia and Latin America. Can we imagine the backlash from the rest of the world and can we fathom the extent of long term damage America could suffer?

There is one long term damage that worries us the most – the damage to America’s financial system, the foundation of America’s prosperity.

5. The Utter Insanity of the Sanctions Plan – III

The foundation of U.S. financial dominance is the reserve currency status of the U.S. Dollar. This is why the world’s financial system goes through the American financial system. The American financial system is open, flexible, transparent and trusted.

The Sanctions Plan of the U.S. Congress & the Obama Administration is based on using the U.S. Financial System as a weapon to browbeat the world. There are grave dangers in threatening the use of your most powerful weapon. If the threat of using it fails to coerce, then it has to be used. If it is used but fails to deliver a victory, then there is nothing else left in the quiver. And just the threat prompts serious efforts to build countermeasures.

That is what we are afraid of.  The world has been using the U.S. Dollar and the U.S. financial system both out of convenience and inertia. That inertia was shaken up a bit in the aftermath of the 2008 financial crisis in America. That crisis prompted China to intensify its efforts to make its currency,  the Renminbi, an international currency. The crisis also prompted Russia to seek alternatives to the U.S. Dollar at the IMF, the International Monetary Fund. 

These efforts have gone nowhere because Latin America, Africa and the rest of Asia preferred the convenience of the current Dollar-based financial system. Now the U.S. Congress is threatening to shut these countries out of the U.S. Financial system if they don’t obey U.S. rules about Iran. If the U.S. Congress can do this once, they can do it again. No country, no country dedicated to the well being of its people can tolerate such an economic stranglehold.

Perhaps they had no choice in the last century. But this is not our father’s world, as Jim O’Neill*, Chairman of Goldman Sachs Asset Management, made clear to CNBC recently:

    “We are only three years off maximum, maybe two years before the 4 BRIC (Brazil, Russia, India, China) countries become bigger than the United States….a few of the countries that are also becoming more important such as Indonesia, Turkey, Korea, Mexico. If you put those 4 together with the BRICs, this decade, those eight will create double the amount of global GDP that Europe and the U.S. will do put together.”

The primary American goal ought to be to ensure these countries do not act in unison against U.S. interests.  Instead, by threatening to impose sanctions on all the BRICS (S for South Africa) and on the other countries, the Obama Administration and the U.S. Congress are virtually forcing all these countries to come together to build an alternative financial architecture. This is not just insane, but suicidal.

This is not idle or fanciful speculation. This past week, the five BRICS countries met in New Delhi and agreed to support intra-BRICS trade in local currencies. If successful, this could pose a long term threat to the primacy of the U.S. Dollar.

The BRICS also discussed the establishment of a new multilateral financial institution, a new BRICS bank that will help the BRICS countries with their financial development. Such a Bank will be outside the realm of the World Bank which the U.S. dominates. It is not hard to see such a bank eventually issue a special currency  (SDR or Special Drawing Right units in the financial lingo) for use in intra-BRICS trade. Each one of these countries is a regional leader. So we could see such BRICS SDR used by smaller countries in Asia, Africa and Latin America to trade with the 5 BRICS and with each other.

This will not doom the United States. It will simply make the U.S. Financial system more regional and less global. It will also help the rest of the world move away from the U.S. Dollar over time. This is negative for America’s future prosperity.

None of the above is easy. But it is doable if the impetus is strong enough. Unfortunately, the U.S. Congress and the Obama Administration are the ones delivering the impetus to BRICS and other emerging economies to plan to move away from the U.S. Dollar. As we said before, this is not just insane but suicidal.

The Bush Administration was excoriated for being arrogant with the world and for damaging America’s standing. Frankly, the Bush Administration was a sissy compared to what the Obama Administration and the U.S. Congress are doing to the world with their Iran Sanctions plan. In doing so, they are gambling with the future of the U.S. Dollar and American prosperity. For what goal? To proclaim their commitment to Israel. And Israel doesn’t even want this plan. Isn’t Insanity the right word for this? 

India-US Relations Blog

America & India – Political Look Back at 2011 and Ahead to 2012-2020

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This past year has been politically eventful for both and India. Next year promises to be even more so.  While the events might look different, the same macro forces are driving the events in our opinion.

America

As we enter 2012, all eyes are focused on the Iowa Caucus on January 3. This is the first round of the uniquely American game of choosing a nominee to challenge the incumbent for the Presidency of the United States.

Look back to this time last year. The Republican party had won a huge victory in the November 2010 elections and seized political control of the House of Representatives. Their momentum was acknowledged by President Obama who moved to strike a compromise with the Republicans to extend the Bush tax cuts. This mood did not last long.

It was followed by a bruising battle in the summer of 2011 for the extension of the U.S. Debt Ceiling. That process proved so dysfunctional that no one wanted a repeat in the final political battle of 2011, a battle to extend the payroll tax cut for about 160 million Americans.

Unlike a year ago, this time the House Republicans caved in. They had been boxed in by a more confident President who fought and won a tactical battle. The Republican nomination process has been a debacle of sorts, with fatally flawed candidates rising to the top of Republican polls and falling seemingly into political oblivion. With each turn, President Obama looked stronger and more capable.

But all this, we think, is more about optics than reality. The election of 2012 is likely to revolve around the condition of the U.S. economy barring a military conflict between Iran and America. But even the economy and discussion about how to improve it might be more optical and superficial than real. Why?

Because, there is a tectonic shift underway in American society. America used to be a society dominated by taxpayers. Since 1773, taxation and political representation have gone hand in hand in America. American society has been built on the premise of the American Government being responsible and responsive to American citizens about how America’s tax collections are spent. This is the core reason behind the almost uniquely American distrust of big Government.

This America is becoming passe. Today, about 48% of Americans do not pay any income taxes. So about 48% of Americans now take from the American government without contributing to it. Barack Obama is the first American President whose election symbolizes the united efforts of this half of American society. He knows it and that is why his economical policies, right from his inauguration, have been essentially distributive and oriented towards providing government resources to the less advantaged.

The American taxpayers instinctively understood that President Obama was engaged in transferring wealth from taxpayers to non-taxpayers. This realization led to the political explosion we call the Tea Party.  The 1773 Tea Party revolt was against Taxation without Political Representation. The 2010 Tea Party revolt was essentially against Political Representation without Taxation.

The taxpayers won the first battle in November 2010. The next important battle is the Presidential election in November 2012. That may be the last Presidential battle won by taxpayers in this long war. Because, the demographic tide is inexorably moving towards a majority of non-taxpayers in 2020 or perhaps by 2016.

In this setup, we see the Democratic party slowly morphing into a party of the non-taxpayers plus a slice of the very wealthy and the Republican party becoming the voice of the taxpayers who are unwilling to have their earnings taken away from them. The demographic tide, as we said, favors the Democratic party.
So we expect the Republicans, if they win the White House and keep effective control of the Congress, to take steps to build a policy framework for Less Representation for Non-Taxation. These steps might include changing electoral districts, making voting registrations difficult for non-taxpayers and even imposing minimum income tax levels (perhaps like the one already proposed by Congresswoman Michelle Bachman) on all Americans. We might see easier and increased immigration policies for wealthy and highly educated immigrants.

We see this battle shaping up as the central conflict or a civil war within American society during this decade. So any one who pines for a united, ‘can’t- we-all-get-along’ American society may be hoping against hope.

We feel so because we know of a similar battle on the other side of the world, a battle diametrically opposite to the one that will be fought in America. That battle is taking place in India.


India

As 2011 ends, we see Indian society in the grip of its own revolt, a revolt against widespread corruption in the government at all levels. But like in America, this reason is basically optics. The real reason for this revolt is the tectonic shift underway in Indian society, a 180 degree opposite shift to the one occurring in America.

Since its independence in 1947, Indian society has been a society dominated by non-taxpayers. Even today, about 75% of Indians do not pay any income tax at all. As a result, Indian Politics and Indian Government has been dominated by policies that distribute free services and goods, that seek to distribute income and wealth from people who earn to people who need.

The natural result has been corruption, endemic corruption:

  • corruption in the business class that tries to hide much of its income from tax collectors,
  • corruption in the administrative machinery that distributes government goodies to the poor, and
  • above all in the political class that seeks to build great personal wealth while in office after spending a lot to provide free goodies to gain political office.

The patient, quiet sufferers in this machine were and are the helpless middle class – the people who are unable to hide their income, the people who need services from the government – the middle class, especially the salaried middle class. But this hapless middle class has slowly but surely grown in size and confidence.

Today, this group is anywhere between 150-300 million strong, not strong enough to dominate Indian politics electorally but strong enough to create a revolt that can bring the Indian Government to its proverbial knees.  In 2011, this middle class got a leader that it can rally around – a symbol more than an actual leader, a Gandhian figure who lives a simple life and is above personal corruption.

The Congress Party, the party in power, is the leader of traditional Indian politics – giveaway policies and maintenance of vote banks by rural politicians who today are screaming bloody murder of parliamentary democracy by what they term as non-elected civil society.  The opposition parties, especially ones with a more urban political base, are supporting this revolt because it is their best chance to topple the Congress Party from power.

The political players in this war as not as clear cut as the two parties in the battle for political power in America. But the societal shift is the same and the demographic forces are arrayed similarly. The big difference is the direction and relative ascendancy.

There is an inexorable tide in Indian society towards higher income both in the urban and rural segments. Rise in incomes makes people more independent, more demanding of better conditions and prospects for a better future for their children. This is what they called the American Dream for the past century. People who strive for such a dream are willing to contribute to Government as long as their contributions are managed carefully and for the greater good by their chosen Government.

This inexorable tide is also reducing the societal chasm between various social segments or the Portuguese term “castes” imported by the British into India. Read what Lydia Polgreen of the New York Times wrote this week:

  • A recent analysis of government data by economists at the University of British Columbia found that the wage gap between other castes and Dalits has decreased to 21 percent, down from 36 percent in 1983, less than the gap between white male and black male workers in the United States. The education gap has been halved.

The battle we see in the streets of urban India, the battle seemingly against corruption, is really a battle of the rising middle class for greater control of their own tax payments, of greater say in the policies of the  Government elected by the poor rurals. Slowly rising rural incomes will bring in more rural participation in this revolt. So we expect this revolt to broaden out during this decade.

This long battle is the same battle as the one that will rage in America, but one that will look diametrically opposite.


America & India – How will they look in 2020?

India has always had a large, seemingly permanent underclass that dragged down the entire country. India has always seemed a hopeless cause, a society that would one day become great but never does. The precipitous fall in the Indian Rupee has united all the Indo-pessimists and perhaps rightly so. No country in the world seems so utterly dumb and incompetent as India does from time to time.

But we see clear evidence that, underneath the stupidity, the chaotic surface, the utter failure of all Indian Institutions, there is a major shift towards a stronger, richer, smarter and more confident society. And luck favors the diligent. The current collapse of the Indian Rupee may actually be just the medicine India needs to make Indian labor, Indian products, India’s services more competitive. The collapse of the Indian Rupee might be the medicine that forces Indian importers, including the Government, to become more efficient.

Sometimes, we think Chairman Bernanke & Secretary Tim Geithner might be looking at the fall in the Rupee and asking “why can’t the U.S. Dollar fall by 10%”? Not so precipitously of course, but slowly and inexorably. Because a weaker U.S. Dollar is a consummation they devoutly wish for. Because that is the medicine to make America’s underclass competitive in low level manufacturing.

Over the past 20 years, America has built up its own large and seemingly permanent underclass. This was ignored and glossed over in the technology bubble of the 1990s and during the credit bubble in the last decade. Now it cannot be ignored because it is on the verge of gaining long term political power.

In other words, America will begin to deal with the problem India has dealt with for the past 60 years. This may be a tougher problem for America. It never expected to have this problem. And this is a problem that has come about partly due to the best intentions of the American people.

But America will, after much loud and sometimes vitriolic debate, get around to finding solutions to its financial and societal problems. We feel confident that all segments of American society will take steps to get control of America’s debt, to cut down on wanton government spending. As American society again becomes financially lean by the middle of this decade, America, we believe, will once again welcome highly educated immigrants, the type that will tempt companies to move jobs to America.

So we see both America and India taking different looking steps to become stronger politically and economically in this decade. They can learn a great deal from each other. We think they already are and they will continue to do so.

Therefore, we are willing to bet, here and now, that despite their vividly obvious differences today, America and India will look a lot similar in 2020.

 

(This post originally appeared on Macro Viewpoints and has been republished with the approval of the author).

Immigration Blog

Borderless Economics and the Indian Diaspora

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A new book by Robert Guest, business editor for The Economist, focuses on Indian and Chinese immigrants and their connections to India and China. The book is called Borderless Economics.

Personal Connections

The author begins his discussion of Indian immigrants by relating a conversation with Vish Mishra, a venture capitalist.  Mishra related that personal introductions were “absolutely critical” in his line of work. According to Mishra, “If you cold-call, you start from nowhere, it’s laborious and tedious. If you know someone, you can move faster. The advantage of any network is you get to see things you might not otherwise see.”

Guest points to a Kauffman Foundation study that “returning Indian entrepreneurs maintain at least monthly contact with family and friends in America, and 66 percent are in contact at least that often with former colleagues.” The subjects most discussed are customers, markets, technical information and financing.

The Diaspora Helps India

Guest argues against the idea of a “brain drain” hurting home countries. “Nonresident Indians bring ideas and investment back,” writes Guest. “But arguably the biggest favor the diaspora has done for India was to persuade it to open up to the world in the first place. They were not the only force – four decades of stagnation alerted India’s leaders to the possibility that something was wrong with their economic model. But the diaspora was highly influential.”

In the book, Palaniappan Chidambaram, a former finance minister in India, is quoted crediting the emigration of Indians for changing policies inside India: “First, the phenomenal success achieved by Indians abroad by practicing free enterprise meant that if Indians were allowed to function in an open market, they could replicate some of that success here [in India]. Secondly, by 1991 sons and daughters of political leaders and senior civil servants were all going abroad and studying abroad and living and working abroad. I think they played a great part in influencing the thinking of their parents.”

Networks of Innovation

An entire chapter of the book is devoted to how the connections between Indians abroad and those back in India help create innovations. “When ethnic Indians in different countries talk to each other, ideas bounce across borders,” writes Guest. “There is another benefit to the constant nattering that goes on within ethnic networks. As good ideas are passed around, they evolve. Insights are taken apart and recombined in millions of individual brains. Then they are fed back into the network. After a while, new ideas emerge.”

The subtitle of the book is “Chinese Sea Turtles, Indian Fridges and the New Fruits of Global Capitalism.” The “Indian Fridges” referred to in the book comes from the efforts of Indians to build an inexpensive refrigerator that poor people could afford. He describes how Godrej & Boyce Manufacturing, based in Mumbai, developed a refrigerator that costs $69. “The engineering miracle was conceived through a marriage of ideas generated by Indians in India and by Indians overseas,” notes Guest.

Patriotism

While much of the book is devoted to the reality of economics and the benefits of mutual exchange, at one point the author moves away from finance to the patriotism at the core of a naturalization ceremony in America. He describes his initial uneasiness watching a citizenship ceremony in Miami and the boisterous rendition of ‘God Bless the USA” playing at the ceremony’s end. “Where we come from, memories of patriotism warping into something terrible remain vivid,” writes Guest. “But as I look around the hall full of cheering, hugging new Cuban, Venezuelan, Haitian and Russian Americans, I am suddenly swept away by the crowd’s happy frenzy. To my surprise, I feel a tear rolling down my cheek.”

Immigration Blog

Indian Entrepreneurs Fit into an American Tradition

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America is a nation of immigrants. But it is historically has been a nation of entrepreneurs. Because of geography and U.S. immigration laws it was not possible for Indian immigrants to play a large role as entrepreneurs in the U.S. economy. However, the rise of Indian business people in America, especially since 1990, fits into a long tradition in America.

Early History of Immigrant Entrepreneurs in America

American history is fueled by the story of entrepreneurs. “The history of the United States lies in entrepreneurial ambition,” notes the Babson Entrepreneur Experience Lab. “The first colonies established in the New World sought to take advantage of new access to raw materials, agricultural lands and trade routes. More importantly, immigration to America offered the chance to escape class and persecution and to create opportunities for oneself; it was seen as the ‘land of opportunity.’ In particular, economic growth and entrepreneurial opportunities were found in owning land, various mercantile activities and exploration.”

Entrepreneurs Introducing New Methods and Technologies

Individual entrepreneurs, both native-born and foreign-born, have influenced how Americans communicate from the time of the telegraph up to the modern-day advent of mobile phones. In 1844, Samuel Morse won a federal grant to demonstrate the feasibility of the telegraph, though initially it could only transmit about 1,000 feet. When the federal government showed little interest in expanding the capability of the technology, Morse licensed private companies that within 6 years had built a “comprehensive network between major commercial centers.” According to Gerald Gunderson, author of An Entrepreneurial History of the United States, “Merchants extended their operations over a much wider area as the delays and uncertainty of working in distant markets fell. The telegraph took Americans a long way toward creating a national market by eliminating much of the disadvantage of distance.”

Entrepreneurs have also helped introduce new methods of operating businesses that later became common practice. Andrew Carnegie, an immigrant from Scotland, is famous for producing steel. “Carnegie’s challenge in 1870 was to develop an organization that improved efficiency as rapidly as possible,” explained Gunderson. “This turned not so much on inventing technology to produce steel, as on building an organization whose instinctive, primary focus was to reduce costs. Some of Carnegie’s innovations are so widely employed today they have become standard topics in management textbooks. One was the development of profit centers.”

Indian Entrepreneurs Emerge in America Post-1965

Between 1820 and 1959, only 13,363 Indians immigrated to America. This was due to the long distances but also because of immigration legislation passed in 1924 that severely limited immigration from eastern European, Asian, and African countries.

The 1965 Act eliminated the national origins quotas, opening the door to the immigration of Indians, Chinese and many others. The rise of Indian students in the United States helped lead to more family and employment-based immigrants and, as a result, that helped lead to more immigrant entrepreneurs.

A study I did for the National Venture Capital Association in 2006 examined publicly traded companies that had received venture capital. (See study here.) The study found, India, with 32 companies (22 percent), ranked first as the country of origin for immigrant-founded venture-backed public companies, followed by Israel with 17 companies (12 percent), and Taiwan with 16 companies (11 percent). Canada, France, the United Kingdom, Germany, Australia, China, Iran, and two dozen other countries were also among the countries of origin of the immigrant entrepreneurs on the list.

A study just released by the National Foundation for American Policy examining the top privately-held venture-funded companies. It also found India was the leading source country for immigrant entrepreneurs. (See study here.) Today’s Indian entrepreneurs are fitting into an American tradition of influencing society through entrepreneurship that goes back hundreds of years in our country’s history.