Dizzy Dean

This whole business of Howard Dean firing his campaign manager, Joe Trippi, and replacing him with Al Gore's chief of staff -- a former telecom lobbyist, no less -- is so bizarre I'm pretty much at a loss for words. (And if you've been reading my recent posts, you know that's saying something.)

I'll just leave it at this: When I look at what Joe Trippi has achieved, particularly in using the Internet to organize and finance a grassroots presidential campaign, and then look at Howard Dean's performance as a presidential candidate, I think it's Trippi who should be firing Dean -- not the other way around.

Update 1/29 9:30 PM ET: I'll just let The Nation's David Corn do the venting on this one:

It's Dean's right to boot Trippi. What warrants criticism is his decision to put his campaign in the mitts of a Washington insider. Neel, a former Al Gore aide, was head of the U.S. Telecom Association in Washington in the late 1990s until he left to join Gore's 2000 campaign. The USTA lobbies on behalf of the telecommunications industry. As its lead lobbyist, Neel was the embodiment of the "special interests" that Dean has assailed on the campaign trail.

For much of the past week, I listened to Dean repeatedly bemoan the influence of corporate lobbyists as he crisscrossed New Hampshire. A sampling:

• "All the things that happen in Washington happen for the benefit of corporations and special interests."

• "This government is run by a president who cares more about corporations than he does about ordinary Americans, and that is why I'm running."

• "The ordinary people in this country are supposed to be running it."

• "There are no special interests in Washington who can buy us."

No, we only let them oversee our campaigns.

Ouch.

You Can't Please Everyone

The Federal Reserve's Federal Open Market Committee changed exactly nine little words yesterday -- and managed to wipe out about $120 billion in stock market capitalization in the process.

Not too bad for government work.

The nine words are the bolded ones in the following sentence, which was included in every previous statement issued by the FOMC for the past five months:

With inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period.

But in yesterday's statement that same sentence was changed to read:

With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation.

That's it -- that was the only change. The Fed didn't raise rates. It didn't even hint that it would raise rates. But it became infinitesimally less willing to guarantee that rates will stay low for the indefinite future. And Wall Street didn't like that one little bit.

Of course, Wall Street never likes the prospect of higher interest rates. Even the bond market, that supposed paragon of anti-inflationary virtue, rarely welcomes a Fed tightening. In our modern age of casino capitalism, few investors actually intend to hold their 5-year or 10-year or 20-year bonds to maturity. Many are simply playing the spread between short and long rates -- borrowing at overnight rates in the repurchase or "repo" market, and using the money to buy longer-dated (and higher-yielding) securities.

This "carry trade" can be extremely lucrative, in large part because of the leverage that can brought to bear. Bond speculators routinely borrow on terms that would have made old-fashioned stock market operators like Jesse Livermore or Sell 'Em Ben Smith faint dead away. Margin requirements can be as low as 5% or even 2% -- meaning a major speculator, like a hedge fund or a trader for one of the big Wall Street investment banks, can put down $10 million, borrow another $490 million (with the purchased bonds as collateral) and end up controlling a $500 million portfolio.

With short-term rates currently at 1%, and longer-term rates (say, for example, the yield on the 5-year Treasury note) at about 3.2%, profits from the carry trade can be rich indeed -- as long as short-term rates don't rise, and longer-term bond prices (which move in the opposite direction of yields) don't fall.

But, given the leverage involved, even modest movements in the wrong direction can inflict huge losses. The proliferation of so-called derivative instruments -- such as interest-rate swaps and structured notes -- hasn't changed the fundamental equation: leverage kills. But it has created an almost limitless number of new ways for bond speculators to do themselves in. And when the Fed switches from a major easing cycle to a major tightening cycle -- as it did in 1987 and 1994 -- the suicide rate often soars.

For all these reasons, Wall Street tends to be a hell of a lot more jittery about the overnight rate than it is about the inflation rate. So ever since the Fed started putting its thoughts down in writing after each policy meeting, those statements have been parsed by the markets with the same nitpicking thoroughness that Kreminologists used to apply to the lead editorial in Pravda.

It's easy to understand why the markets would be particularly upset by the Fed's latest linguistic shift. Rock-bottom interest rates -- and the expectation that they would stay there for a long time to come -- have been a critical factor in pushing stock market valuations back towards the lofty levels they reached in the late '90s bubble. And reflating equity values has been a key factor in fighting the deflationary forces pushing down on the U.S. and global economies.

What's not clear, though, is why the Fed chose this particular moment to send up a cautionary smoke signal. Minutes of the December FOMC meeting show the gang considered, but rejected, dropping the nine little words ("policy accommodation can be maintained for a considerable period") from its post-meeting statement.

So what changed between then and now? There are several possibilities.

Perhaps the data has finally convinced Greenspan and Co. that the expansion is healthy enough to justify dropping the low-rate guarantee. This is the conventional interpretation, and it may even be correct. But few of the economic reports released since the Fed's December meeting point to a stronger expansion -- indeed, just the opposite. Job creation has continued to disappoint, capital goods orders were flat in December, and the housing market has finally started to feel the effects of the rise in mortgage rates since last summer. If the Fed had wanted to stand pat, it certainly could have found justification in the numbers. Indeed, it's because the recent data has been so ambiguous that the markets were caught off guard by the Fed's new wording. This suggests that other factors may have tipped the balance.

Which is where the story may get interesting. As I mentioned in this post, my eavesdropping on the global economic elite in Davos didn't discern a clear consensus on the seriousness of the dollar's decline over the past year. But there's no question the deflationary pain is being felt acutely in some quarters of the global economy -- the Middle East, for example.

The CEO of the Emirates National Oil Company, the UAE's version of Aramco, was particularly vocal, and bitterly so, about the soft dollar policy, which he (repeatedly) called a "disaster" for the oil-exporting countries. He insinuated -- well, actually he pretty much said it flat out -- that the dollar's decline was the product of a "political conspiracy" to weaken OPEC. Who could be behind such a conspiracy, and what its ultimate aim might be, were left unsaid. But, given current events in the region, it isn't too hard to guess.

The fact that the dollar's decline can easily be explained by the economic fundementals -- and that to extent anybody is trying to rig global exchange rates they're trying to push the dollar higher -- is irrelevent. The point is that this guy believed there is a conspiracy, and that he and his fellow oil sheihks are on the losing end of it.

This, of course, raises the often-talked about possibility that OPEC might switch from pricing oil in dollars to pricing it in a more reliable currency, like the euro, or perhaps in a basket of currencies, including both the dollar and the euro. Obviously, this would deal at least a symbolic blow to the dollar's reserve currency franchise. But you'd probably need an energy expert to tell you whether de-dollarizing oil prices actually would be feasible under current market conditions. I can't.

The other remark that got my attention in Davos, however, came from the head of an investment firm in Hong Kong, who suggested a further steep decline in the dollar might force China to stop pegging its currency, the renminbi, to the greenback. If Beijing decides to float the renminbi, he added, Hong Kong authorities might break their own peg to the dollar. This, in turn, would put enormous pressure on Taiwan to do likewise.

Of course, the Bush administration -- and the National Association of Manufacturers -- would like nothing better than to see Asian currencies float higher against the dollar, making U.S. industries more competitive in world markets and Bush more competitive in this year's election. But my Hong Kong banker pointed out that a further big decline in the dollar could also force the three Chinese central banks (in Beijing, Hong Kong and Taipei) to rebalance their existing currency holdings, away from the dollar and towards the euro, the yen and, in a big way, the renminbi.

These three banks currently hold over $1 trillion in dollar reserves -- the overwhelming bulk of it parked in U.S. Treasury securities. A major rebalancing, the Hong Kong banker noted, would raise some "fundamental questions" about how the United States is going to finance its enormous current account deficit.

This, to put it mildly, is something of an understatement. If the Chinese begin to liquidate their dollar/Treasury holdings in a big way, the downward pressure on the greenback, and the upward pressure on U.S. interest rates, would probably overwhelm whatever other capital flows (such as foreign direct investment in "cheap" U.S. companies) might be attracted to the United States by a currency depreciation. The dollar wouldn't decline, it would crash -- with consequences for the global economy which can't easily be predicted, but which would almost certainly not be pleasant.

The Fed may be able to ignore the Europeans. It may be able to shrug its shoulders at OPEC. But it can't blow off the Asians. So I wonder: Did Chairman Greenspan receive a subtle message from his Chinese central bank colleagues, suggesting that they expect him to be a little more balanced in his policymaking approach? Or did Greenspan just read the writing on the wall -- the same Chinese characters translated by my Hong Kong banker -- and realize that a policy of complete malign neglect towards the dollar isn't tenable any more?

If so, you can be sure the Chairman will never admit it. Signaling that the Fed is nervous about the dollar -- nervous enough to alter its guidance to the markets on the future course of interest rates -- would create a whole new set of questions for investors to ponder, turning the expectations game into an even bigger headache for the Fed than it is already.

For that same reason, the idea of defending the dollar by raising interest rates -- to attract more short-term "hot" capital flows into the United States -- almost certainly remains a nonstarter for the Fed, especially in an election year. But a modest exercise in jawboning might have seemed like an acceptable compromise, particularly since it could be sold as a response to domestic economic conditions. If so, the gambit seems to have worked, at least temporarily -- the dollar has firmed against the euro, although less so against the yen.

Whether the Bush administration will see this as an acceptable trade off is another story. It's clear that the Mayberry Machiavellis regard Greenspan as a potentially hostile force, despite his willingness to throw fiscal caution (and his old friend Paul O'Neill) to the wolves and endorse the 2003 tax cuts. Bushes never forget, and the memory of 1992 (in which Greenspan's reluctance to cut rates was held responsible for George I's defeat) apparently still rankles.

It's an uncomfortable position, but one Chairman Greenpan and his successors probably will find themselves stuck in as the U.S. fiscal situation deteriorates and the choices facing the world's largest debtor nation gradually grow more stark. With the Treasury Department now little more than an annex of the White House political affairs office, the Fed by default is going to have to take the lead in dealing with the creditors' committee -- the foreign central banks who now finance the lion's share of the U.S. current account deficit.

Of course, I don't know for a fact that the Fed's latest manuever was driven by the need to make at least a token effort to defend the dollar -- although I'd be willing to bet it was a contributing factor. But I do think the dollar, and the need to manage its decline, is going to become an increasingly important element in U.S. monetary policy, especially if fiscal policy remains in the hands of the Mayberry crowd. And the Fed is going to have an increasingly hard time pretending it is focusing solely on domestic economic variables.

This means the Fed is going to have to balance the demands of some politically powerful domestic interest groups against the demands of financially powerful foreign constituencies. And as central bankers in any number of developing countries can attest, this is never an easy, or pleasant, job.

Crow a la Billmon

Ordinarily, I prefer mine without the feathers -- and I could do without the spinach, too. But I'm not really in a position to be picky about it:

Kerry Wins New Hampshire As Dean's Rebound Falls Short

Sen. John F. Kerry (D-Mass.) scored a decisive victory in the New Hampshire presidential primary Tuesday night, easily defeating former Vermont governor Howard Dean in a state where the Massachusetts senator was virtually written off barely a month ago...

Dean tried to mount a furious comeback in the final 72 hours here, scrambling to regroup after a disappointing third place in Iowa sent him spiraling downward in the Granite State. But his effort fell short in the end, leaving the Vermont Democrat still looking for a victory in a race in which he once was considered the front-runner as the race turns to less hospitable territory.

Compare to:

Iowa may be Kerry's Hail Mary pass, but for Dean, it looks like it's going to be the opening drive in a very high-scoring offensive game.

Whiskey Bar
Iowa or Bust
January 5, 2004

The thing is, all the liberal blood transfusions in the world can't change the fact that the rise of Howard Dean has essentially rendered Kerry superfluous.

Whiskey Bar
Terminal Case
November 10, 2003

I probably shouldn't be so hard on Kerry, but it does look as if his campaign is turning into the political equivalent of the sinking of the Lusitania.

Whiskey Bar
Dead Man Talking
August 31, 2003

I should have remembered that trying to call political elections is even more pointless than trying to call the stock market. In the market, you can at least make some money if you're right. But in politics, even if you're correct, nobody will remember -- while the winner's supporters will never let you forget it if you're wrong.

As an ex-journalist -- who spent enough time interacting with political reporters to learn what contemptible idiots they are -- I suppose I should have seen the pre-Iowa assault on Howard Dean coming. I mean, it was like a replay of Sink the Bismark, with every ship in the media fleet frantically trying to score a hit on the enemy before he could reach safe harbor.

You could spend weeks debating what triggered the journalistic frenzy, trying to figure out what drop of blood in the water rang the dinner bell in those tiny, shark-like brains. Personally, I think it was the Gore endorsement, which not only cemented Dean's front-runner status, but also created an irresistible incentive for the Gore-haters to take a hack at Dean -- and take two scalps for the price of one, so to speak.

Or maybe (to switch movie metaphors) it was the familar case of the media first creating, and then destroying, a pop culture fad -- like the beserk newscaster, Howard Beale, in Network. As the new "mad prophet of the airwaves" last summer, Dean was fresh, different -- good ratings material. But the novelty wore off after Dean rose from gadfly to frontrunner and the other candidates -- not least Kerry -- began stealing some of his angry, base-pleasing thunder. By Iowa, the press was getting bored with Dean, and probably sick of his noisy, angry supporters. So they went after him, just as the programming executives in Network eventually decided to murder Howard Beale, making him "the only TV anchorman in history to be killed because he got lousy ratings."

I suppose it all depends on what degree of paranoia you want to have about the mainstream press. But having wounded Dean, the media apparently has decided it hasn't quite finished him off. His second place showing in New Hampshire is being widely, although not entirely, seen as enough of a comeback to keep him in the race, at least through the next round of primaries and caucuses on Feb. 3.

Now I'm through making predictions -- lest crow become one of my basic food groups. But it does seem to me that Dean and Kerry have a kind of seesaw thing going -- to use the financial jargon, they have a high negative correlation of returns. When one is way up the other is way down. This isn't very surprising, since they're both competing for the same general group of voters: liberal (although more so on social than economic issues), relatively affluent, and intensely Bush-adverse.

The conventional wisdom up until now has been that the Democratic primary race will eventually evolve into a contest between the candidate supported by this upscale liberal voting block -- either Dean or Kerry -- and a more conservative, or at least, more hawkish alternative candidate, who would look to blue-collar and/or Southern Democrats for support.

But the results of the first two contests at least suggest that the Democratic primary electorate may no longer contain enough of the latter species of voter (economically liberal, socially conservative) to support a viable candidacy. Those who have tried to build their campaigns on such a base are either dead (Gephardt) or dying (Lieberman).

I don't think it's a coincidence that the two survivors -- Clark and Edwards -- are also trying to become the less-liberal alternative to KerryDean, but have tried to avoid being locked into the "conservative" Democratic mold: Clark by ferociously criticizing Bush's record in Iraq, and Edwards by stressing a populist, anti-corporate message on domestic economic policy.

Neither candidate, however, is exactly flourishing. Clark failed to get the breakthrough he was seeking in New Hampshire. Edwards needs to win -- and win big -- in South Carolina to emerge as the anti-DeanKerry. But if he does, then he, too, may be labeled the "conservative" Democrat in the race, which could hurt him in the contests that follow.

My point, I guess, is that the competition between Kerry and Dean may have become the central contest that will decide who gets the nomination -- not just who will face off against the "New Democrat" candidate. Democratic voters don't seem to be buying that brand this year. They want to beat Bush, but they want someone who can do it by articulating a more forceful Democratic message, both at home and abroad.

I don't actually think Kerry is that candidate -- but then, I don't think Dean is either, at least on most issues. Both men, however, have shown a willingness to appeal to the "Democratic wing of the Democratic Party" for support. And for many progressive voters, that seems to be enough.

As a confirmed "anybody but Bush" partisan, I'm not going to quarrel with that sentiment. The perfect, they say, is the enemy of the good, and Dean and Kerry are both good enough to deserve support from the left. Dean has done a better job of building a grassroots movement and exploiting the potential of the Internet; Kerry has more foreign policy experience, war hero credentials and appears to be more competitive against Bush (although I wouldn't put much stock in the recent polling numbers, which have been largely driven by the saturation media coverage of Kerry's surge.)

Would I prefer a Paul Wellstone to either of them? Sure I would. But, since a Wellstone isn't on the menu, I can live with Dean or Kerry. Of course, I could also live with Edwards or Clark -- with an edge to Clark on electability and a (tiny) edge to Edwards on progressiveness. Any of these guys is infinitely better than the Republican alternative.

Just don't ask me which one is going to win, because while I can resign myself to any of the remaining candidates (once Lieberman is safely out the way, I mean) I don't think I could stand eating any more crow.

I won't tell you what it tastes like, but it sure the hell isn't chicken.

Crepes a la Baghdad?

Or how about some Sauerkraut mit Basra?

One item that came to my attention in Davos that's probably worth mentioning before I move on to other things is the possibility that France and/or Germany may soon agree to participate in an official NATO peacekeeping force in Iraq.

I have no details to offer on this, but I did hear it from several semi-official sources -- including the ubiquitous Joe Biden, who said he had discussed the idea with President Chirac of France, and had been told, "flat out," that France was interested in participating.

Thierry de Montbrial, the president of the Institut Francais des Relations International, which is, as you have probably already guessed, a French think tank on foreign affairs, said much the same thing, suggesting that France and Germany would go into Iraq together, "in some capacity," and would do so regardless of what role the United Nations might be granted in the mission.

I mention this only because of today's story out of Paris, reporting that UN Secretary General Kofi Annan has agreed to send a UN team to Iraq to mediate the dispute between the Americans and the Ayatollah Sistani over the need for direct elections of a transitional Iraqi government.

Annan made his announcement after his meeting with Chirac, which suggests that something indeed may be up. Annan explicitly ruled out a "blue hat" peacekeeping operation -- one directly under UN supervision and control. So it may be that the outlines of a deal, one that would bring France and Germany into the mix while keeping military control firmly in Donald Rumsfeld's hot little hands, is beginning to take shape.

On the other hand, Biden seemed to think the administration was less than serious about negotiating such a deal. When he mentioned to Bush that Chirac had sent out a feeler, Biden said, the reaction was along the lines of "maybe we'll sit down and talk about it -- some day." But, of course, Biden is probably one of the last guys the administration would tell if it was serious about talking Chirac up on his offer.

The Paris story -- by New York Times reporters Elaine Sciolino and Warren Hoge -- claims to see signs of yet course correction in administration policy:

The urgent requests for the help of the United Nations reflected a clear shift by the Bush administration, which had kept the world organization out of current planning in Iraq and not even mentioned a UN role in an agreement last November under which the procedures for transferring power were drawn up.

And it alludes to the possibility that France might be interested in a deal:

Clearly Chirac would be willing for France to play a larger role in Iraq under the cover of the United Nations. When a reporter asked if Annan's team would include a French representative and Annan appeared not the understand the question, Chirac himself rephrased it, saying, "Is there a French member in the mission to Iraq?"

This raises a number of interesting -- and depressing -- possibilities, assuming there is substance behind all this speculation. Can Chirac and Germany's Chancellor Schroeder simply ignore domestic opposition to the war, and put troops in Iraq without a clear UN mandate -- the mandate they have insisted on? Is Franco-German policy really that cynical?

Having French and/or German troops on the ground might not be enough to stabilize Iraq, but it could pay nice political dividends for Bush in the coming election campaign -- undercutting Democratic complaints about the administration's reckless unilateralism. It would also mark another victory for the the realists, and another humiliating defeat for the neoconservatives -- who would have to grit their teeth and accept the hated chocolate makers and surrender monkeys as full-fledged members of the coalition of the willing.

I'll be curious to see how anti-war Europeans react if France and Germany do sign up for supporting roles in Uncle Sam's Iraq fiasco. How will they feel if Messrs. Chirac and Schroeder, who last year could and did pose as the voices of sanity, now switch sides -- and help improve Bush's reelection prospects in the bargain?

Speaking for myself, I think it would confirm something I've long suspected about the Franco-Germans -- that as much as they claim to fear and oppose American hegemony, what they really fear is a hegemony that does not cut them in for a suitable piece of the action.

Davos Notebook

I'm in Zurich, heading home. It's a gray, solemn European city -- looking like what I imagine Munich or Frankfurt or Hamburg would look like if they hadn't been bombed to cinders in World War II. Lots of formal old buildings with heavy Teutonic facades, intermingled with newer, modernist office blocks that wouldn't have looked out of place behind the Iron Curtain.

Perhaps because of that -- and the old-fashioned trolley cars that run down virtually every main street -- the city reminds me vaguely of Moscow: but a clean, well-maintained Moscow, filled with well-dressed, well-fed people. This, of course, is a complete oxymoron. But Zurich does have the same feeling of being a city that is both dowdy and powerful, like an elderly matron with a large family to manage.

Did Lenin feel at home during his frustrated exile here? Actually, from what I've read, he hated the place: hated the civilized Swiss and their comfortably bourgeois ways. It must have brought out the Tartar in him.

But I'm going off on a tangent here. This post isn't supposed to be a Swiss travelogue. What I actually want to do is write up a few short items from this year's World Economic Forum -- bits and pieces that I couldn't get to while I was there, and which I will no doubt forget if I wait until I get back home. And so, without further ado:

Friedman

Seeing Tom Friedman at Davos this year was to see the Peter Principle in its late stages -- when the inadequacy and egotistical overreaching have become obvious to all but the victim. Even several people I know who generally share his world view told me they found his strutting pomposity almost unbearable this year.

I was only exposed to a small dose of it, at a session on U.S. foreign policy I ducked into on Saturday. Friedman was up to his usual tricks -- lecturing European diplomatic leaders on their moral failings and expounding on the differences between how the Bush administration took America to war in Iraq and the much superior way that he, Tom Friedman, would have done it.

Someone told me he was even worse at a dinner session he moderated earlier in the week -- holding forth at length on the view from Planet Friedman in the same pseudo-folksy tone he uses in his columns.

It's sad, really. Friedman was a great beat reporter, once, and then a pretty good columnist on Middle Eastern affairs. But at some point along the way he seems to have convinced himself he's a foreign affairs guru -- a deep thinker in the Foreign Affairs tradition. It's been all down hill ever since, producing drivel such as the Lexus and the Olive Tree and a steady increase in the number of columns that revolve around Tom Friedman's thinking on the great issues of our time, instead of the news of the day.

Given time, I'm sure Friedman will reach the same level as the Washington Post's Jim Hoagland or Knight Ridder's Trudy Rubin -- both of whom have become little more than journalistic name droppers of "the Prime Minister personally assured me" variety.

And of course, since he works at the New York Times, Friedman can probably continue to rise beyond the level of his own incompetence for a long, long time -- who knows? maybe to the very top.

Like most self-important people, Friedman now tends to speak in aphorisms -- as if his adoring biographer was already by his side, jotting down every word. At the session I was in, his big bon mot was to chide the Democrats for not understanding that "something may be true even though George Bush believes it."

After listening that gem, I jotted in my notebook: "Friedman is the textbook definition of the 'useful idiot.' But useful to whom?"

Ashcroft

I couldn't make it to Ashcroft's address, not even on the tube. But a British friend of mine -- a committed lefty with a caustic wit -- did, and was still steaming about it several days later.

It seems Preacher John used the occasion to lecture the audience on corruption -- bad corruption, that is, the kind that foreigners indulge in. But irony of it certainly wasn't lost on my friend, even if it was on Ashcroft. Some choice excerpts from his sermon:

Corruption provides sanctuary to the forces of terror (and) saps the legitimacy of democratic governments. In it's extreme forms, corruption even threatens democracy itself, because democracy lives on trust, and corruption destroys trust."

Indeed.

When governments play favorites, when they award contracts and make decisions based on corruption that favors the connected, rather than competition that favors the citizenry, freedom is stymied."

I'm sure the guys at Haliburton and Bechtel would agree.

Heads of State

Never say anything newsworthy at Davos, which is why the press releases the Forum puts out afterwards always sound so lame. "They're our way of telling the press there's no story there," one insider told me.

This year was no different. The President of Iran told us that "dialogue" was the key to avoiding a clash of civilizations. The President of Nigeria gave favorable reviews to prosperity, security and partnering -- the theme of this year's meeting. The King of Jordan said whatever he said, which must not have been much, because I didn't hear a word about it from anyone. And the President of Pakistan told us that Islam stands for "peace, justice, moderation and equality." Also brotherhood.

I think Musharref was just happy to be there -- in a place where he could be relatively sure that no one would try to blow up his motorcaid. If you're Pervez Musharraf, any day nobody tries to kill you is a good day.

Economics

That's what the forum is supposedto be about, although over the years the agenda has broadened to include sessions like this year's "Artists as Forecasters of the Future," "Me Inc.," and "Once Upon a Faith." Not surprisingly, the big economic topic this year was the sustainability of the U.S. expansion. Suprisingly, there was a tremendous amount of attention to the enormous U.S. current account deficit, and the downward pressure it is putting on the dollar.

Regulars at Whiskey Bar know these last two topics are, if not dear to my heart, then at least central to my views on the U.S. economy. And yet, I think it's fair to say they hardly ever break the surface of mainstream economic commentary here in the United States, where it's generally taken for granted that Asian central banks will continue to buy enormous quantities of dollars and U.S. Treasury securities ad infinitum, allowing America to simultaneously finance a huge federal budget deficit, a capital spending boom and a steadily rising standard of living, despite having the lowest savings rate of any advanced industrial nation.

This complacency most definitely is not shared by the Europeans, who are watching the rising euro with the same sinking feeling that King Midas must have felt when he realized that everything he touched, including his food, was turning to gold.

Steven Roach, the economist for Morgan Stanley, has written a piece that contends the Davos crowd was largely dismissive of the "twin deficits" (current account and budget) problem, but that wasn't my impression at all.

Granted, I didn't have the time or opportunity to drill down as deeply into this year's debates as Roach did. But the issue seemed to come up everywhere. Brad DeLong brought this interesting bit of gossip from Roach to my attention:

I was totally unprepared for what hit me immediately after the conclusion of this opening session. Two of America’s leading academics rushed the stage — one a renowned economics professor and the other the president of a top university — and loudly proclaimed that the traditional macro of saving shortages and current-account deficits is a scam. America was not in any danger whatsoever, they argued vociferously. The imbalances that I worried about are simply the logical and entirely rational manifestations of a New Economy.

Professor DeLong asked me if I knew who Roach might have been talking about. Unfortunately, I wasn't in that session -- and while I was able to talk to a couple of people who were, they didn't see, or didn't remember, the incident. But I only know of one "president of a top university" present in Davos who also happened to be a prominent economist -- Larry Summers. The "renowed economics professor" might have been Martin Feldstein, the head of the National Bureau of Economic Research and a big economic wheel in the Reagan Administration. I heard him poo-poo the deficit-dollar problem in a panel session I did attend.

But, as I said, that was just the American side talking. The problem in trying to get a read on what's really going on -- and what kind of consensus is likely to emerge among the global power elite about the USA's vulnerability on the dollar-deficit question -- is the same as at every conference of this sort: The Americans say the sky is the limit, the Europeans say the sky is falling, and the Asians, whose views are in many ways the most important, say as little as possible.

Home Again, Home Again

They're closing the cafe now, so I've got to go. I'd hoped to squeeze a few more items in, but I suspect by the time I get back to the States, the results of the looming New Hampshire primary will be Topic A, and nobody will care what the economic jet set was talking about in Davos.

Davos Discovers the Blogs

I can't say I was surprised to find that this year's World Economic Forum included a session on blogs. If, as Ben Franklin says, (via Dick Cheney's Christmas cards) a sparrow can't fall to the ground without God noticing, then certainly a hot media trend like blogging can't go on too long without showing up on the agenda in Davos.

The session -- "Will Mainstream Media Co-opt Blogs and the Internet?" -- was actually better than I expected, despite the lame title. Looking at the list of panelists before hand, I got the impression it would be a collection of media sharks and clueless journalism professors. But three of the five speakers have their own blogs:

Jay Rosen, the chair of the department of journalism at NYU.

Joi Ito, CEO of a company called Neoteny, a Japanese venture capital firm and "consulting practice focused on corporate venture development."

Loic Le Meur, founder and CEO of a French company called ublog, which I suppose does something touchy feely involving blogs. Just a guess.

The non-blogging panelists were Orville Schell, the dean of the Berkeley Journalism school (and author of a number of terrific books about China) and a German media consultant I'd never heard of before.

For the most part, I'd say these guys got it -- particularly Rosen, who drew some interesting comparisons between blogs and the original newspapers that appeared in the London coffee houses of the early 18th century. Those early broadsheets, he noted, were largely the work of individual writers, who commented on political or economic or foreign events they learned about through their private correspondence with other writers.

Rosen's point, I think, is that communications technology may be moving in a great historical cycle. The invention of the printing press -- followed by radio and then television -- created a progressively more capital-intensive media industry, with an increasing division of labor among reporters, editors, printers, advertising whores, um, I mean, salesmen, etc. The invention of the Internet, however, has shifted the balance back towards the individual writer/publisher, doing his/her own thing, reporting or commenting on events they find through their own research, either on the web or off.

The difference, of course, is that what was once limited to a small literate elite in the 18th century is available to millions of people the world over in the 21st. This is a revolution by anybody's definition, and could even, in time, spell the end of the mainstream media as we know it. Or, as Rosen put it: "The age of the mass media is just that -- an age. It doesn't have to last forever."

Ito -- the Japanese venture capitalist -- described himself as a "technologist," which is the kind of technobabble that usually makes me tune the babbler out. But he actually suggested an interesting schematic for the blog ecosystem, in which memes start at the bottom, among the hundreds of thousands of small, obscure blogs, then get "amplified" by "social network" blogs that keep an eye on certain topics or regions, and finally get picked up by the "power blogs" -- the Atrioses and Instapundits and Talkingpointmemos of the blogging universe. From there they may even enter the mainstream media.

I've seen theories of "thought contagion" in the financial markets that work somewhat the same way. Transferred to the blogging culture, it's an appealling democratic vision. But I don't think it's quite correct.

My sense is that most, though not all, blogging memes start at the top -- with an event or a piece of information that is absorbed by many people at once, usually from the mainstream media. Howard Dean's Iowa "I have a scream" speech is a classic example. Once an event like that happens, the bloggers closest to it in media space (to indulge in some technobabble of my own) start to do their thing.

In Dean's case, political bloggers immediately climbed all over the story (except, of course, for me, floating out here in Davos space.) But the people who really made it fly where the guerrilla multimedia artists who began remixing the audio and the video, creating a satirical explosion that guaranteed the incident would metastasize across the Internet (and just about destroy Dean's campaign in the process.)

It's not that memes have to start at the top -- sometimes they do percolate up through the blogosphere, picking up steam as they go. The experience can be astonishing for the blogger who starts the chain reaction -- as I discovered last year when I published my collection of WMD quotes from the Bush administration. Suddenly, you feel like you've been shoved at warp speed into the center of the universe -- until the next meme comes along, and you drift back into the outer darkness.

I guess the metaphor I would use in place of Ito's amplifier would be earthquakes -- which occur by the thousands all over the world every day. Most go unnoticed, unless they happen to hit a densely populated area, in which case they become news. If a really big one hits a remote area, it might become news, if word eventually gets back to the metropolis. But it's less likely to become a big story.

What this means, of course, is that the blogs are not quite as democratic, or decentralized, as some of us would like them to be. The overwhelming majority of readers still seem to cluster around a relatively tiny number of popular blogs, which thus have the greatest power to originate and disseminate memes. And breaking into that charmed circle can be hard, since there are no diminishing returns of scale on the Internet -- no natural limits on the ability of the winners to become even bigger winners.

That same tendency, however, tends to contradict the other big argument I heard in Davos: That the blogs will somehow destroy the public commons -- fracturing the media audience into such small slivers that a coherent debate about broad national or international issues will become impossible.

Schell, the Berkeley J School Dean, was particularly worried about this -- which demonstrates, I guess, that someone can be an unassailable expert about one thing (China, in his case) and know next to nothing about something else (blogs).

The truth, of course, is that blogs are doing more than just about any other modern institution (if institution is the right word for something as anarchistic as the blogosphere) to recreate a common communication space, and encourage maximum public participation.

Just because the web is decentralized doesn't mean it's fractured. Thanks to the miracle of Google (not to mention the even more powerful search tools coming on line) any piece of information or artistic content that exists anywhere on the web is also accessible everywhere on the web. This is why experiences (Dean's yeaaahhh!!!) can shared so widely. And the sharing is two-way. I can sit here in Davos and make fun of the scream, and others can flame me for helping destroy the greatest presidential candidate in American history.

What draws all this yacking together into a common space is the natural human desire for community -- for a place to exchange thoughts with other people who share similiar interests or experiences. But that's where the blogosphere begins, not where it ends. How many of us in the 'sphere have had the experience of following a chain of links to a topic we've never encountered before? How often have we exchanged opinions or information with people who are experts in areas that we know nothing, or next to nothing, about?

That's the fundamental difference between the web and the mainstream mass media, which is strictly top down. By splitting the audience into narrower and narrower fragments, based on interests or demographics, the mass media does destroy the public space, and replaces it with a bunch of pipes, or information "stacks" -- as in a processor chip -- that run from Time-Warner-AOL-Capital-Cities-Disney-ABC-Viacom-Fox (or whatever) down to the target audience. There was a joke a few years back that this trend eventually this would spawn magazines targeted at individual subscribers, with titles like Bruce Illustrated, or Modern Kathy.

Blogs, on the other hand, are the exact opposite: magazines created by individual publishers and aimed outward at the vast universe of the web. And these pipes run horizontally, as well as vertically, creating (to use another lame tech metaphor) a neural net of writers and readers, producers and consumers. The net is capable of deciding -- in a completely democratic way what topics it wants to explore. In effect, the news agenda is put to a continuous vote, with Google counting the ballots. Everyone and anyone is free to contest the results, but if the blogosphere wants to talk about, say, Dean's scream, then that will become the metaphorical equivalent of the lead story on page one -- until something comes along that attracts more votes.

This is what terrifies the mass media: the threat of losing control of the news agenda. There were a number of mainstream journalists in the audience at the
Davos session, and after the speakers had spoken they stood up one after the other to protest the Brave New World they thought the panel was trying to sell.

One guy from Business Week was particularly outraged about the whole thing. He waxed eloquent about the importance of the news "filter" (in my day we called it the gatekeeper function) as mankind's last best defense against the barbarian hordes. I felt like I was listening to a buggy whip manufacturer, circa 1910, talking about the growing threat of the automobile.

Actually, there was a time when I probably would have agreed with the guy -- back when I was on his side of the fence and thought journalists played a valuable watchdog role. But after watching the steady deterioration of the profession over the past ten years or so, I have no patience for such self-serving crap. Yeah, there's a lot of misinformation and just plain nonsense on the web, but a mass media that gives us Bill O'Reilly and Michael Savage on a regular basis, and that devotes more coverage to Michael Jackson's legal problems than the Iraq War, isn't in a position to lecture anyone about standards. The truth is that the blogs are getting better and better, and the mass media is getting worse and worse. If the credibility lines haven't crossed yet they soon will.

The more serious problem, I think, was raised by Le Meur, the French blogger, who argued that blogs have the potential to become for the news media was Napster was for the music industry. Indeed, the impact on existing business models might be even worse -- Napster only allowed consumers to copy content; blogs allow them to create their own. The traditional media might not be able to cope with the competition, particularly at a time when some of its traditional revenue sources, such as classified ads, are already migrating to the Internet.

Now I'd say more power to blogs if they can drive the mainstream media to its knees, if not for the fact that the large news organizations -- for better or worse -- fill some news-gathering functions that blogs are not (yet) capable of handling. I may not like the spin I think the Washington Post puts on its Pentagon stories, and I may have doubts that Reuters is getting the whole story in Iraq. But I can't go out and do the reporting myself -- not without giving up my boring corporate day job, and that's one discussion I don'twant to have with my wife.

Granted, there are sources out there -- transcripts of Rumsfeld press conferences, posts from Salaam Pax and Riverbend, for example. But these only take you so far. The fact remains that much of the content on news-oriented blogs -- like this one -- is lifted from the mainstream press. According to one of the blog tracking services, the sites most frequently linked to by Whiskey Bar are The Washington Postand The New York Times, and that isn't likely to change soon.

This creates a classic free-rider problem. If the blogs eventually steal the mass media's audience (or at least, key parts of it) and the Internet as a whole continues to steal its revenues, there will come a time when those big, expensive news-gathering operations will become economically insupportable. Either the mass media will have to abandon its existing, adverstising-driven, business model, or it will have to scale back its news-gathering functions to a bare minimum. That pressure to do the latter is already extreme, as any journalist can tell you.

I can easily forsee a time when access to information of the quantity and quality of, say, the daily Reuters news feed will cost thousands or even tens of thousands of dollars. Only large corporations and government agencies will be able to afford the price -- just as only a relative handful of financial institutions can now afford access to Bloomberg terminals.

Can the blogs fill the gap? Only if the "neural net" gets a lot more self-organized, and can develop some chops at gathering the news, as opposed to pontificating on it. But that, I suspect, is going to require a revenue stream. (Or, as the cynical reporter puts in the movie The Right Stuff: "No bucks, no Buck Rodgers.")

Where are those bucks going to come from? As commercial propositions, blogs face the same problem every other content provider faces on the web: How the hell do you make money at it? The Internet is gradually destroying the market power that traditionally has allowed media providers to "bundle" content -- forcing their customers to buy the sports news along with the business news, for example. And the web seems to be congenitally inhospitable to advertising forms that rely either on passive absorption (TV) or sensory attraction (retail display.)

So where will the revenues come from, if the blogs go commercial? The German media guy, Burda, seemed to have an almost religious conviction that a viable business model will appear, if the blogs continue to attract an audience -- if they come, someone will build it. But I'm not so sure. Or, more precisely, I'm not certain a business model can be developed that won't completely compromise the independence and integrity that has made the blogs so attractive in the first place.

One of the worst moments at the Davos session was when some twinkie from a New York advertising firm stood up and described how her firm has started turning first to blogs to place ads for certain products. "What I don't understand," she said, "is why the big media companies don't swoop in and buy up some of these blogs while they're still cheap."

I didn't know whether to laugh or scream. On the one hand, this person clearly didn't have the faintest idea what the blogs are all about, or why most bloggers do what the do. She didn't understand how quickly a major media corporation could take a great blog and run it into the ground. Buy up blogs? It would be like trying to catch snow flakes.

But if the thought has occurred to her, it's probably already occurred to others. Just the fact that blogging showed up on the agenda at Davos this year is probably a bad sign. I can't shake the suspicion that the golden age of blogging is almost over -- that the corporate machine is about to swallow it, digest it, and regurgitate it as bland, non-threatening pablum. Our brief Summer of Love may be nearing an end.

I suppose the key question is whether the technology of the Internet will be enough to keep the blogs from going the way of the '60s counterculture. Rock bands and radical writers could be squelched or bought off because the corporations controlled the means of communication -- the record labels and the magazines and the major publishing houses. But while the Man can, if he wants to throw some money around, buy up individual blogs, he can't buy the blogosphere. New voices can always set up shop to replace those that move to the Dark Side.

At least that's what I hope. The potential of blogging is something I've come to believe in passionately -- as passionately as I once believed in the mission of professional journalism. I'd hate to be wrong twice.

Vice Preznit No Give Them Turkee

I almost missed Cheney's speech this morning. Security was even tighter than usual (the Secret Service apparently being under the impression that Davos is a suburb of Beruit) and I never had a prayer of getting inside the hall. I also wasn't allowed in the overflow room where they had Dick up on the big screen. I guess it was full of flow. I couldn't even talk my way into the media room down in the basement where the press jackals -- aside from the creme de creme actually allowed to witness the great occasion in person -- were watching.

Finally, I was able to sneak into the VIP lounge and catch the last half of the Veep's speech. I won't revolt you with the grisly details, which I assume will be posted on the White House web site just as soon as they've finished shoving anything that might possibly contradict it down the electronic memory hole.

It's OK. I wasn't all that interested in the blah blah anyway (although I was curious to see if Cheney would recycle Bush's "weapons of mass destruction-related program activities" clunker. If he did, I missed it.) I gather the U.S. media is playing the speech as an olive branch to the Europeans. If so, it was an olive branch wielded like a tire iron -- and with about as much grace as a man tightening the lug nuts on a wheel. Forget the words, Cheney's body language was the real message, roughly: "Let's get this shit over with."

But what I really wanted to see was what kind of reaction Cheney would get from the audience. Having watched a rowdy crowd (well, as rowdy as a bunch of European business executives ever get) rough up Colin Powell at last year's forum, I wanted to see whether this New York Times story was as out of touch with reality as I thought it was when I read it:

Anti-Americanism May Be Fading, but Forum Is No Love Fest

Compared with one year ago, when the forum became a bitter joust between America and opponents of war in Iraq, some ... skeptics and foes have begun to acquiesce in Washington's exercise of power, or at least to acknowledge that this new world order would not simply be wished away."

The International Herald Tribune, which also ran the story, was less equivocal:

At forum in Davos, anti-U.S. feelings wane

Well, judging from the Veep's reception, the headline writers at the Times are only slightly less clueless than those at the IHT. I mean, I've seen ushers get more applause than Cheney did. I wasn't in the hall, so I couldn't see everything, but when the camera panned the audience at the end of his little apologia, I could see that many were literally sitting on their hands -- or at least, keeping them firmly in their laps.

I was a little surprised when Cheney agreed to take questions after his speech. It's customary at Davos for speakers to field a few -- even if they are the president of the United States in all but name. But I figured Cheney would duck out, lest someone bring up some of the more interesting discrepencies between the Veep's recent pronouncements on WMDs in Iraq and the parting comments of ex-WMD sleuth David Kay.

Unfortunately, nobody did. And the first "question" directed at Cheney immediately made me wonder whether the fix was in. The Mufti of Bosnia, no less, asked the Veep to convey his deepest thanks to the American people for the blessed liberation of his country.

It could have been staged, I suppose -- a propaganda Kodak moment designed to take a few rough edges off the clash of civilizations. But if that's the case, the stage manager obviously lacked any sense of the ironic. Cheney, after all, was one of the tough guys in the Bush I crowd who opposed saving the Bosnians. And his party certainly made it as hard as it could for Clinton to do it. If the Veep saw the joke, his poker face betrayed not a clue.

But then Fred Bergsten, the peripatetic head of the Institute for International Economics, had the gumption to bring up Paul O'Neill's description of Cheney as a supply-side Saddam -- spurring the Veep to see how many times he could work the phrase "deficits matter" into his response. O'Neill's old buddy also advised the audience not to believe everything they read in The Price of Loyalty, which struck me as a not-very-subtle way of calling his former friend a liar.

Then Fred Kempe of the Wall Street Journal keyed in on the administration's new "engagement" with Iran, asking the Veep whether this meant the mullahs have been upgraded from the Axis of Evil. For Cheney, the answer was surprisingly conciliatory -- i.e. he didn't threaten to bomb the place. But I also noticed he didn't say anything about the AOE membership list, one way or the other. So the Tehranians might want to keep those black out curtains up just a little longer.

If the Americans were a tough audience, the foreign devils were even tougher -- not counting the Mufti, I mean. A Jordanian guy asked the Veep if he could possibly have a word with the Attorney General about not treating every Arab visitor to the United States like blood-sucking terrorist scum. Cheney said he'd see what he could do. A Brit asked, in effect, whether the United States intends to continue running its own Caribbean version of the Gulag Archipelago. "Yes," Cheney replied, in effect.

Even Klaus Schwab -- the World Economic Forum's founder and maximum leader -- got into the act. Schwab is about as old school as it's possible for a Swiss economist to get. He's as likely to run through the streets of Davos stark naked as openly insult the vice president of the United States. Yet he managed to get in a nasty dig at Cheney's recent faux paux of sending out Christmas cards inscribed with this quote from Ben Franklin:

"And if a sparrow cannot fall to the ground without His notice, is it probable that an empire can rise without His aid?"

This, Schwab gently pointed out, might be a bit alienating to the overwhelming majority of the world's population that does not believe eternal American supremacy has been ordained by a white, Anglo-Saxon, Christian God.

Cheney said it was all Lynn's fault.

Basically, I do think the Times was right when it said the hostility here is not as raw as it was last year -- when many non-Americans were trying to get their minds around the fact that the world's only superpower now claims the right to invade anyone, anywhere, anytime -- without so much as a by-your-leave from anyone. But then I've never gotten the impression that the ill will was directed at Americans per se (except, perhaps, by some of the younger Europeans on the WEF staff, who clearly detest us.)

No, what's blossomed here over the past two years isn't anti-Americanism, but anti-Bushism, which is why Joe Biden was able to get a big round of applause at a session this afternoon simply by observing that Bush, Cheney and the neocons do not represent the views of the vast majority of the American people.

Personally, I'm not sure that's true: If the president and the political party that controls both houses of Congress don't represent America, then who does? But I interpreted the clapping as an expression of solidarity, or at least sympathy, from a group of people who believe America is much better than its current leaders, and who would like to see us once again as friends.

Although if Cheney develops a habit of showing up here, I think they may change their minds.

The Big Picture

I just caught up with this story:

Infiltration of files seen as extensive

Republican staff members of the US Senate Judiciary Commitee infiltrated opposition computer files for a year, monitoring secret strategy memos and periodically passing on copies to the media, Senate officials told The Globe...

The office of Senate Sergeant-at-Arms William Pickle has already launched an investigation into how excerpts from 15 Democratic memos showed up in the pages of the conservative-leaning newspapers and were posted to a website last November.

With the help of forensic computer experts from General Dynamics and the US Secret Service, his office has interviewed about 120 people to date and seized more than half a dozen computers -- including four Judiciary servers, one server from the office of Senate majority leader Bill Frist of Tennessee, and several desktop hard drives."

It's interesting that the Globe pushed forward the Senategate story just a day before Time told us a grand jury has started gnawing on Karl Rove's ankles. There may not be any connection between the two stories, (although just off the top of my head I can't think of any reason to believe copies of those pilfered Senate documents didn't end up on Rove's desk) but I don't think it's entirely coincidental, either.

There's a common denominator at work here -- a kind of symbolic truth that ties both stories together, even if they're not actually the result of single, coordinated conspiracy. They're both reflections of the "nastiness" factor, the sense that the ideological thugs now running the GOP will do anything to intimidate, silence and, if necessary, destroy their opponents.

Josh Marshall calls it "creeping Delayism. No rules -- only power." It's the same quality that Paul O'Neill finally recognized in the inner workings of the Bush II White House:

O'Neill became engaged as we talked about DiIulio. "You know, I thought a lot about this guy, about why he would do something as absurd as say a few thousand words of 'my deepest thoughts' are baseless and groundless, and I thought about how it must look from inside his shoes. He's a young man, that's one thing. And these people are nasty, and they have a very long memory.

The Price of Loyalty

John DiIulio. Valerie Plame. Paul O'Neill. Senate spying. WMD lies. I don't know if the American people will ever connect these dots. It won't be easy: The mainstream media seem determined not to notice the larger pattern, even when it's staring them in the face. But maybe, just maybe, there's a catalyst -- like a grand jury indictment -- that will force people to look at the big picture.

Or maybe not. This kind of scandal may not produce the kind of catalyst -- such as a semen-stained dress -- needed to make an impression on our tabloid-trained national audience.

Fucking the Constitution isn't like oral sex -- it doesn't leave any DNA evidence behind.

Ain't It Grand?

Grand Jury Hears Plame Case

Sources with knowledge of the case tell TIME that behind closed doors at the E. Barrett Prettyman federal courthouse, nearby the Capitol, a grand jury began hearing testimony Wednesday in the investigation of who leaked the identity of CIA operative Valerie Plame to columnist Robert Novak and other journalists...

But true to form, the Bush administration continues to be extremely tight-lipped about the investigation -- even internally. "No one knows what the hell is going on," says someone who could be a witness, "because the administration people are all terrified and the lawyers aren't sharing anything with each other either."

That really is sweet music to the ears: "the administration people are all terrified..." It may not be true -- although the fact that this case has now been brought before an honest-to-God grand jury is extremely encouraging -- but it's still an image worth savoring.

Be afraid, Karl. Be very afraid.

Quote of the Day

From that economic genius, Secretary of Commerce Don Evans, at a panel session here in Davos today:

I don't think Herbert Hoover himself could have put it better.