MichaelKatcher.com

The Myth of International Stability and Iran

Stability is a good thing, right?  It is certainly a commonly declared goal of government policy.  The main charge of the global institutions established by the United States after the Second World War was to promote and protect international political stability.  But what does this word, so often used and yet so infrequently examined, really mean?   I believe it was a recent Stratfor article that noted stability merely means keeping things the way they are.  While it may appear self-evident to an American that stability is inevitably good, that is because we are the ones at the top of the international order.   Keeping things the way they are in the world means America stays number one.  It is safe to say then that stability is not necessarily in everyone's interests.

Put another way, consider past times in history when stability, from our point of view, was not beneficial.   Certainly America did not promote international political stability when we declared our independence from England, nor did we during the 80s when we funneled money and arms to the mujahideen of Afghanistan.  The two actually share an ironic parallel: France aided our revolution to weaken their rival power of the time, the English, while America aided the Afghani revolution to weaken our rival power of the time, the Soviet Union.  Sometimes, then, a little instability can be a good thing.

It is disingenuous to speak of stability as a fundamental, necessarily positive goal.   Although it keeps Seoul safe, stability in Korea doesn't help a starving North Korean; ditto for all the others peoples oppressed by dictators.  If every single illegitimate ruler was overthrown tomorrow, from Tehran to Pyongyang to Harare, there would be uncontainable chaos across most of the developing world; international political stability would be shattered.  And yet should we wish for the continued oppression of much of the world, in the name of stability?   Of course not.  Inevitably, there is a trade-off that must be made between stability and self-determination in such scenarios; the point is that stability is not de facto the best path, all the time.

The reason stability is on my mind has to do with Iran.  Who doesn't love to play the just-how-crazy-is-Ahmadinejad game?   Nine out of ten people that I talk to about the diminutive leader (did you know he is 5’2”?) think he is nuts.  Yet this is a military man who served for a long time in the Iranian Revolutionary Guard Corps (IRGC).  He has a PhD from Tehran’s University of Science and Technology.  I’m not claiming he is a cute, cuddly guy; his intentions towards our country may well be aggressive.  Nevertheless, it is dangerous to paint the leader of any rival power as crazy.  Crazy means unpredictable and unreasonable, and if a foreign leader cannot be predicted or reasoned with, then how can we ever be expected to deal with him.

When pressure is put on the Bush administration to negotiate with Tehran, many people in this country do not mind when President Bush refuses.  They view Iran as a rogue state and Ahmadinejad as a nut, and who can blame President Bush for not wanting to talk to “those people.”  Instead, allow me to suggest an alternative interpretation of the regime in Tehran.  An isolated state, whose regional influence is a shadow of its former self, wants to raise its regional profile to match its population, might, and potential economic power.  They arm and train terrorist groups to fight a superpower who unlawfully invaded the Middle East.  Didn’t we arm and train the Afghan mujahideen to fight the Soviet Union in Afghanistan?  They seek to prevent foreign powers from colonizing or interfering with the affairs of the nations of the Middle East.  Wasn’t that our goal with the implementation of the Monroe Doctrine, which stated that “European powers should no longer colonize or interfere with the affairs of the nations of the Americas?”  They want to obtain nuclear weapons to preserve their territorial integrity.  What is different about the nukes of France, China, Russia, or America?  For that matter, what is different about the nukes of Israel and India, which, despite being no less illegal than Iran’s potential nuke, we allow to exist, and indeed support through nuclear fuel sales?  A proper historical perspective makes it difficult to find fault with any of the actions of the regime in Tehran that our own country has not done itself.

Over the course of our nation’s history, we have continuously upset international stability.  We did so because it was in the interests of our country and few Americans criticize those aspects of our past.  Now that we run the world, suddenly we worship this notion of a static international environment?  Well not me.  I do not apologize for our past; we did what we had to do in the interests of our nation.  Likewise, I do not demonize Iran or expect them to apologize for anything; if they want greater regional influence, good for them.  Iran and America were once good friends and I look forward to the day I can safely visit Tehran with my girlfriend so she can see where her parents were born.  Right now, it is the arrogance and stubbornness of the West that prevents us from doing so.

The Terrible Effects of a Cease-Fire

The downside of not working is, while I have more time to blog, I have less idle time to read every research report out there.  I just finished with most of them, and although there are many, many worthy topics to discuss, I'd like to take this time to discuss Israel.

Stratfor has highlighted an interesting conundrum, and I hope I don't overstep any boundaries by repeating it here:

Israel has reserved the right to take defensive action against Hezbollah while its troops are in Lebanon. At the same time, Hezbollah has voiced its right to respond militarily to any provocations by Israel. The Lebanese army thus far has refused to deploy to the south until Hezbollah voluntarily disarms. Hezbollah has vowed not to leave southern Lebanon until Israel withdraws, and Israel has refused to withdraw until international troops enter southern Lebanon.

Look at the situation Israel has landed in!  I think this is a weak, compromising move by Israel, to fight this war so slow and accept this cease-fire.  I think Israelis have lost their stomach for war and its necessary casualties.  I think the lesson the Arab world will draw from this is Israel is not invincible.  That changes the political calculus of the whole region.  Hostile Arab leaders, as well as the so-called Arab street, will view this as a victory for Hezbollah.  They launched an attack on Israel and they survived.  They fought strongly, protected their main stronghold (Bekaa Valley), and will live to fight another day.  I wonder what message that will send to Israel's enemies?

It has certainly been awhile since my last post.  Close to two months.  Well, my hiatus is at an end.  Friday was the last day of my summer internship.  I spent twelve weeks working for a Greenwich hedge fund (how cliche, I know).  Now in resuming blogging, I realize that I must walk a fine line between what is and is not appropriate to talk about.  The guideline I plan to use is, my personal views on any specific industry, or any specific company that I didn't recieve information about while at work, is safe to talk about.  I will not discuss the views, opinions, or strategies of the company I worked for, nor will I say the name of the company.  Hopefully, this is appropriate.  Again, I would like to stress that anything I write from here on out, in this post or any future post, is my personal view, and it no way reflects the opinions of my former employer.

Now that the legal stuff is out of the way, I can tell you that I had a very interesting summer.  Plenty of things have happened in the world.  In geopolitics, there is obviously the Israeli-Hezbollah War (or the Israeli-Iranian War, or the American-Iranian War, etc., etc.), which has certainly given us plenty to read and think about.  In economics, there is the Fed pause (inflation, deflation, boom, bust, where are we?).  In commodities, oil is in the mid-seventies thanks to geopolitical turmoil across OPEC, 400,000bpd shutdown in Prudehoe Bay, no excess capacity, and a car industry and infrastructure boom in China that could potentially rival America in the 50's one day.  In domestic politics, Lamont defeated Liberman (or as Jeff Jarvis commented, "Connecticut did not support Lamont, it opposed Lieberman").  And then there is the foiled attempt to bomb planes over the Atlantic.

We will have plenty to discuss in the coming months.  I'm happy to be back.

In Honor of Dan

Dan Marques, future serial entrepreneur, likes to post inspirational quotes on his blog.  I tip my hat to you, with this post, Dan.

"An ‘anti-something’ movement displays a purely negative attitude. It has no chance whatever to succeed. Its passionate diatribes virtually advertise the program that they attack. People must fight for something that they want to achieve, not simply reject an evil, however bad it may be." - Ludwig Von Mises.

Perhaps Democrats, in preparing for the midterm election, may want to take a look at this quote when formulating their election strategy.  They certainly proved the above quote in 2004.

Students Held Hostage Through Creative Self-Expression

Okay, I’ve stayed silent on this issue long enough.

I read this article in today’s NY Times, about employers viewing student’s social networking pages (MySpace and Facebook obviously being the most common) and rejecting applicants based on what they found there, and I’ve been reminded the kind of anger this sort of thing stirs in me.

The most important debate should (but hasn’t) center around the issue that every single newspaper seems to take at face value (they certainly don’t question it in their articles): are these sites public or private?  Now, with MySpace, everyone can see your profile, so assume that I’m only talking about Facebook profiles unless otherwise mentioned.

Allow me to provide some in-text examples.  When discussing questionable photos depicting alcohol and drug use, one employer said that “I was just shocked by the amount of stuff that she was willing to publicly display.”  Another employer commented that “it has its place, but it's moving from a fraternity or sorority living room. It's now in a public arena.”  One Microsoft employee noted that “for the first time ever, you suddenly have very public information about almost any candidate.”  Each of these people makes the assumption that my Facebook profile is in the public domain.  I contend that it is not.

First, unlike MySpace, companies must use subversive and shady tactics in order to obtain this data.  The article reports that “Employees who are recent graduates often retain their college e-mail addresses, which enables them to see pages. Sometimes, too, companies ask college students working as interns to perform online background checks.”  I’m sure that companies will have many defenses for this tactic.  Allow me to offer an analogy that puts this despicable action in some context. 

When at work, an employee is an agent for his or her company, who happens to have a Facebook account.  However, when on Facebook, that employee is a current/former college student with a Facebook account, who happens to work for his or her company.  What’s the difference?  Should a restaurant manager use their restaurant supply discount card for personal purchases?  Should a hedge fund analyst accept an invitation for dinner from a banker who operates in a different industry because he’s hungry and wants a nice glass of wine?  My point is, when using that discount card or accepting that dinner, you are implying that you are an agent of your company, even though, in that instance, you’re actually just someone who is hungry and either wants high-quality kitchenware, or a free meal.  Likewise, when using Facebook, there is an implicit assumption that you are an agent of yourself.  It is a personal site, and it is assumed that college students/alumni use it to connect with other college students/alumni.  While there exists no legal line that these companies are crossing, I argue that these companies cross a moral line.

I think that the worst part of all this is the hypocrisy and self-righteousness of these companies.  According to Forbes.com, “about a quarter of all chief executives on the Forbes Super 500 list of America's largest corporations were members of college fraternities.”  So you’re telling me that none of these CEOs ever had a beer in college?  They never smoked a joint during the late 60’s?  They never had promiscuous sex?  Really?  You’re trying to tell me that?  I think we all know that this is an obvious and blatant lie.  One of the greatest benefits of these sites is the ability to unleash the trapped creativity and self-expression of the nation’s teenagers.  We use these sites to express who we are, to learn about our friends, and to interact with our peers.  Don’t abuse our newfound ability to engage in creative self-expression by holding us hostage with it.  It is not yours.  It is ours.

As a side note, who are these traitors, spies, rats, scoundrels, double-agents, and scally-wags who willingly turn on their fellow classmates?  Don’t hide behind the I-don’t-want-to-lose-my-job excuse, because I think its quite obvious that you can’t be fired for not logging onto a site that only you personally have access to, to gain information that your employer otherwise could not see.  You are just as responsible as these employers are, and frankly you should be ashamed of what you’re willing to do and who you’re willing to sell it to kiss up to your boss.

If anyone has any idea for some kind of grassroots campaign or boycott, I’m all ears.  This is the kind of thing the blogosphere loves to pick up on, and I know we could gain momentum quickly with a proper strategy.  Thoughts?

al-Zarqawi's Death - Sacrificial Offering by Iraqi Sunnis

Abu Musab al-Zarqawi has been killed following a U.S. airstrike Wednesday evening.  The effects of his death will hopefully prove an inflection point for progress within Iraq.  While any attempt to hypothesize who provided the intelligence for the attack would be highly speculative, I'd like to suggest one possible reading of last evening's events.

The government in Iraq currently stands at a crossroads.  The biggest concerns right now are money and power, and how to guarentee each for all three ethnic groups (the Shia, the Sunnis, and the Kurds).  For a variety of reasons, the Sunnis are structurally in the weakest position.  First of all, they are the only group without oil in their region of Iraq, while both the Kurds in the North and the Shia in the South have oil in their respective terrorities.  Second, the Sunnis have a relatively small population compared to the Shia, thus threatening their security.  Finally, the Shi'ite/Sunni conflict extends beyond Iraq across the entire Persian Gulf, encompassing Iranian sponsorship of Iraqi Shia as well as Sunni jihadist support of Iraqi Sunni; Iran has certainly gone to greater lengths in their aid to their respective Iraqi faction.

While the final factor has proved to complicate the negotiations immensly - by bringing Iranian interests firmly onto the Iraqi bargaining table - it has also provided the Sunnis with their one source of strength and their trump card: the insurgency.  As long as the insurgency raged, the negotiations could not ignore Sunni interests, because of the implied threat that the insurgency could strengthen or weaken based on the actions of Sunni leaders.  This threat, however, requires the assumption that these Sunni leaders can control the insurgency.  This is not necessarily a correct assumption, and cannot be taken for granted.  If the assumption is incorrect, and the insurgency will rage on regardless of concessions made to the Sunnis, then it makes no sense to give them any concessiosns at all, and Iraq would likely fall into civil war.

Negotiations can proceed for some time while making the above assumption.  However, they cannot proceed indefinitely.  Stratfor specifically predicted that "by July 4 there either will be clear signs that the Sunnis are controlling the insurgency -- or there won't."  In other words, either the Sunnis prove their worth, by decreasing the intensity of the insurgency, or they prove that they are, in fact, worthless.

It is in this context that the death of al-Zarqawi should be viewed.  While I have no evidence to back this up, I would like to suggest that al-Zarqawi was a gesture, made by Sunni leadership, to prove their worth to the negotiations, and to guarentee their position in the new government.  Stratfor has repeatedly pointed out the big difference between nationalist insurgents and foreign jihadists.  The jihadists require the support of the local population, where "they are provided with food and shelter, and the village and neighborhood network warns them of enemy approaches."  The ability to withdraw that support is the key to the current and future stability and power of the Sunnis. 

If the Sunnis wanted to make a gesture of goodwill and a display of strength, they could not have chosen much better of a peace offering than the head of al-Zarqawi.  The timing - so close to the fall of Somalia's capital city, Mogadishu, to Islamic fundamentalists - would certainly support the assertion that al-Zarqawi was a present, asked for by the United States, and given by the Sunnis of Iraq.

Update: Stratfor posted a new article on their website an hour and a half after I posted this one.  "It appears that Iraq's Sunni political leadership has demonstrated the willingness to deliver on a U.S.-brokered deal to solidify the political arrangement in Iraq."  I got worried when the first article didn't mention the Sunnis at all that Stratfor was slipping.  Glad to see I was wrong.

Response to WSJ Article on UGC and the Future of the Book

I'm so sorry I've been MIA for over a month.  I'm working 10-12 hours a day at my internship, and I just don't have time to post.  I've still be reading all the stuff I used to read, however, and after reading this article in the journal I felt I had to respond.  Below is the e-mail I sent to the author of this awful article.

Lee,

I think that you, like many other old media commentators, miss the entire point of UGC or the book-is-dead argument (I'll use BiD to save me typing, although I've never heard that acronym used).

I'll start with the BiD argument first.  Every single person coming out against this argument makes immediately clear that they don't understand it.  Let's assume 50 years from now, the book - as in printed pages bound between hard/soft cover - is gone.  That doesn't mean the only way to consume Shakespeare is to read every single comment made my every single idiot who has an opinion.  There will still exist the discrete text of Hamlet, untouched by other's words.  Now while it is ridiculous to contend that the only copies that will exist on the Internet will be hyper-linked, tagged, and commented, even if that were true, you're still free to ignore the links, tags, and comments.  Links merely turn words blue and underline them.  Comments and tags always appear after a text, not in the middle of it.  Nothing will stop you from just reading Shakespeare and tuning out every other opinion on the planet.

So, I think it's clear that the so-called "downside" of BiD, that "comments from friends and others would be just as important as the original material being commented on," is ridiculous, unfounded, and ignores the fact that the Internet does not force complexity, it merely offers it as an alternative.  Thus, for those too civilized for the opinions of others, BiD does not have to change what they read one iota.

Now how about the "upside" of BiD?  You're absolutely right when you say that "reading some stray person's comment on the text" is pretty useless.  I agree.  But one common, and rapidly expanding tool of tags, comments, UGC, etc. is rating content, and showing users only the most relevant information.  While I don't care what my fraternity brother thinks of Hamlet, wouldn't you agree that having the ten greatest critical works written by academics about Hamlet immediately accessible before, during, or after reading the play might be useful?  Maybe?  Does it hurt to have the option?

I have to get to work, so I'm going to make my point about UGC very quickly.  While there is plenty of error in your article that I could argue with, I'll stick to the main point that you're missing with both UGC and BiD: the function of the Internet to provide options.

The point of YouTube isn't to produce the next Oscar winner.  No one claims that their ninja imitation video is an acclaimed production.  The point is that ever since man begat entertainment and media production and consumption, production was expensive, distribution was expensive, and marketing was expensive.  To make a creative work (whether good or bad is both subjective and beside the point) cost money in equipment.  To make copies of that work to give to people cost too much money, and had to be paid for prior to each sale.  To tell millions of people about that work, and get a buzz about it going cost a lot of money.  Thus, with all these expensive barriers to entry, control over what people watched was decided by others.  In 1950, you could watch whatever the National Broadcasting Company, or the American Broadcasting Company, or the Public Broadcasting Company decided everyone should watch.  Since then, cable television, DVDs, OnDemand services, and TiVo have allowed us to at least be able to choose which media conglomerate product to watch, and when.  However, the who never changed.  We still had big media companies to make entertainment, which we were happy to consume.  But production, distribution, and marketing were all still too expensive.

With the growing adoption of the Internet and the proliferation of sites like YouTube, the costs of production, distribution and marketing have plummeted.  You can make a video with a home camera for a couple hundred dollars (granted this is not that new of a phenomenon), thus cutting production costs.  An additional digital copy can be served up for no incremental cost, thus cutting distribution costs.  Finally, all it takes to make it to the front of YouTube (where the top ten videos each have been seen over 5 million times) is to make a video that people want to watch.

YouTube isn't meant to replace HBO or Dreamworks.  I still watched the Sopranos finale last Sunday, and I saw The Break-Up with my girlfriend last Saturday (which, by the way, was much less entertaining than the boatloads of free stuff I can find on the Internet).  The difference is that I'm not forced to anymore.  I can go over to archive.org and find Destination Earth, a 50's propaganda movie made by Big Oil, and a classic piece of Americana if I ever saw one.  Or I can go to YouTube and watch someone express themselves creatively in a way that they never could before.  Or I can go to iTunes and download the latest episode of Lost and watch it on the subway on my iPod (or on my TV at home, which is connected to my computer).

The great distruption of the Internet is that it creates options.  It destroys the monopoly that big media had over eyeballs, because it destroys the economies of scale involved with creating entertainment, and it removes the barriers that big media tried to place on when and where we could watch their entertainment.

If you don't see more choice, more options as a good thing, I have no idea why.

-Michael

Again, I'm sorry I haven't been posting.  I'll do my best to change that.  Among the questions I'm currently exploring:

A revolution is brewing in Latin America.  Can it gain legs and once and for all free those countries from 400 years of foreign domination, either de jure or de facto?

Microsoft Live Products is Firefox Friendly, Sort Of

Microsoft has just launched Live Products, a competitor to Google's Froogle.  TechCrunch reviewed Live Products this afternoon.  Although the site is FireFox friendly, it loads ten times quicker in Internet Explorer (although no other sites do this).  Live Products itself is actually very nice to use. I'd say that the site design is better than Froogle.  A quick search for a projector and I easily found what I was looking for. It suggested related terms I might be looked for, and offered multiple sort options.  Finally, the site is all done in AJAX, which I always love.  Another good Live release for Microsoft.

Also, when you go to the main Live Products page, notice the horizontal list of services offered: Web, News, Images, Local, Feeds, Academics, Products.  Sounds a lot like someone else's list of search offerings.  My question is, what's next to fill up that horizontal bar? 

Misc. Update: PowerPoint, Meebo, ValleySchwag

First, I'm going to change my naming system when it comes to idle thoughts / misc. updates.  Instead of putting the date, I'm going to use the subject of the post to title it.  Although I prefered the dates for style reasons, to emphasize the uniqueness of the post by contrasting it with such a generic title, I think this new system will make it much easier for everyone.  I fly through my Google Reader every day, and star the articles I want to read, and ignore the ones I don't.  I rarely star BuzzMachine articles though, because their titles don't catch my eye, and I don't have time to read each article when I've got 15 minutes to star/non star 128 posts.  Subject-related titles are useful, especially since not a lot of people blog on the combination of subjects I do.  Please feel free to leave feedback in the comments.

I have a couple of small things that I want to touch on, so I thought it'd be easier to put them all in one post.

 

• Presentation.  I just gave a presentation in an economics class.  I noticed afterwards that the teacher had negative comments on my PowerPoint.  I've been taught that a short, concise PowerPoint is best, used to outline the logical progression of your argument.  I believe that each slide should be a chapter, and each bullet a section in that chapter.  Thus, a book would never have a chapter or section devoted to a sentence or fact, but rather an idea. The professor's notes, however, seem to suggest that he prefers a PowerPoint filled with distracting sentences, tons of visual cues, and a poorly designed layout.  Personally, I'd rather have an audience paying attention to me, rather than my slides.  If you have two seconds, tell me what you think?  It's just a one-question survey.

 

• Meebo Features.  I opened up my meebo this afternoon and was welcomed by some new features.  First, meebo now has chat logs, which I am ecstatic about.  I can be very forgetful, and being able to pull up old conversations is something I've greatly missed after switching from DeadAIM to meebo.  Second, you can now view people's profies (as well as access your chat history) through buttons in the actual IM window.  Well, quasi-window.  I guess AJAX stretches the definition of the window concept.

• Pay for Free Stuff.  A new site, ValleySchwag, has started up, which will send you a monthly package of the free promotional material, like t-shirts, pens, or mousepads, given away by Silicon Valley comapnies for marketing.  For $15/month, it's actually not a bad way to get some pretty cool stuff branded by your favorite companies.  Then again, $180 a year for free stuff is a little heavy for a college student.  Shipping can't really cost that much, can it?

Reaction to BCA Report on Trade Deficit

I'm current reading the latest Special Report from BCA Research (subscription required) on the U.S. trade deficit. In the past, I have read reports on the US trade deficit from GaveKal Research, in a 45 page report on the subject, 13D Research, in comments spread throughout his newsletters, and two Harvard professors, in a report on economic 'dark matter'. Up until now, the majority of the 'unsustainable deficit' talk has been from the mainstream pundits and market commentators and newspapers. All of the aforementioned reports, on the other hand, came out against the unsustainable argument and argued, for a variety of reasons, that the deficits were entirely sustainable.

While I am only half way into the BCA report, written by Managing Editor Martin H. Barnes, it was clear from the start that his aim was to discredit each and every claim against the unsustainable view (and by his word choice, he clearly has read the same reports above). He starts by listing each of the reasons people have given for why the deficits are sustainable. His list includes:

• Economic measurements of "nationals trade balances has become increasingly meaningless" thanks to the effects of globalization. This argument has often been made by GaveKal.
• The last argument I want to talk about is the 'dark matter' report that I suggest everyone read. They essentially argue that since American-owned assets abroad earn more income than foreign-owned assets in America, the true value of America's assets actually outweighs its liabilities and the US is actually a net creditor.
• The deficit is essentially sustained by foreign purchase of US assets. This essentially represents foreign ownership of our country. Yet GaveKal has argued that comparing this number to GDP, the annual output of our country, makes less sense than comparing it to the total net wealth of the US. They find that while the current account deficit of 2005 represents 1.4% of US wealth, that wealth has been steadily growing by 6% since 2000. "The conclusion is clear: if America’s wealth keeps growing about as fast as it has in the past decade, the current account will remain sustainable, whether it stays at $700 billion, falls to $500 billion or soars to $1 trillion a year (as we believe it might in the coming years as China exports its over-capacity problems)."
  

For me, this is the first time I've seen a report from an institutional source coming out in favor of the unsustainable view. I will continue to read it with interest and add to this post as I go.

Meaningless Numbers
The explanation for this argument comes primarily from a report by GaveKal entitled Accountants vs Economists. Essentially, while an economist recording trade numbers would say a $225 net loss results for the US economy on the sale of a $700 Dell PC based on trade flow, an accountant would record $245 in profits for US companies and $40 in profits for foreign companies based on profit margins. In other words, while an economist's method of measuring sales results in trade imbalances, US companies are making all the profits. Viewed in this context, the imbalances are caused by US companies profitably moving their production overseas, and the current arrangement is quite desirable and certainly sustainable.

The report from BCA misinterprets this argument, and attempts to disprove it by showing the steady level of imports/exports between companies and their foreign affiliates. However, this wrongly ignores the fact that most manufacturing is being done by Asian companies, independent of the companies they manufacture for. Asia has become the world's manufacturing plant. Companies have taken the capital-intensive, low-profit part of their three-step design-manufacture-sell process and exported it to Asia, freeing up capital and increasing corporate earnings (this is the definition of a platform company, a company that designs locally, manufactures where its cheapest, and sells everywhere). Indeed, as this happens, companies become better able to finance themselves and as their capital needs decrease less national savings are needed for investment (perhaps a cause of the low U.S. savings rate?). Meanwhile, the capital intensive development of Asia requires high savings rates to support investment.

Dark Matter
The basic idea behind the unsustainable deficit is that as our foreign-held debt continues to rise, eventually the costs of paying interest on that debt will spiral out of control. However, despite an current account deficit accumulation over the past 24 years (1980-2004) of 4.5 trillion dollars, the US actually earned 30 billion dollars on its net financial position. This must mean that the US earns much greater income on its assets abroad than foreigners who own assets in the US. In other words, although an American company might make a $1,000,000 investment in China, and a French company might make a $1,000,000 investment in America, the value of that investment should not be its cost, the $1,000,000, but rather it should be valued properly by its income. Since American investment abroad takes expertise, knowledge, and experience and applies it in a risky environment, the return on their investment is high. However, since the foreign investment in America is often for real estate (Japanese buying Rockefeller Center in the 80s) or other low-risk investment purposes, its return on its investment is lower. The foreigners except this lower return, because the risk is also much lower in America, where property rights are respected. The difference between the U.S. being a net debtor of $2.5 trillion dollars, using cost-based asset values, and the U.S. being a net creditor of $600 billion dollars, using income-based asset values, is $3.1 trillion dollars of unaccounted for US assets that the authors label dark matter .

The BCA report, however, dismisses this theory as probably partially true, but wildly over exaggerated. Furthermore, current trends suggest that the gap between US and foreigners returns on their investments may be narrowing. The author suggests that "any overstatement of the current account deficit is unlikely to exceed $100 billion" dollars.

The US Consumer Bank
A central bank's role can be described as the lender of last resort. In other words, they are the final bank that all banks can turn to in their time of need. The report argues that the US consumer has acted as the "consumer of last resort" for the global economy, while economic impotence has struck Europe and Japan

Asian central banks have supported excessive consumer spending by accumulating massive dollar reserves. Yet this intervention is necessary because without the US consumer, these countries would have no where to export.

Conclusions
Ultimately, the report takes a surprisingly optimistic tone. Although the report was mainly devoted to shooting down the arguments for the long-term sustainability of the deficits, so to does it argue against those pessimists who think it will all "end in tears". They suggest that although the situation is unsustainable in the long-run, it can and will continue in the short run, and will gradually correct without too much pain to the global economy. The report is persuasive and offers an insightful alternative to this previously two-sided debate, as well as a good summary of the other two sides.

Please comment if you have any thoughts on the subject. This was meant to be a reaction to the BCA Special Report, and is far from a comprehensive review of the issue. If there's interest, I'd love to go into it further.