Our blog's intention is to request the US government to grant us a chance to defend our mother country Japan at the American court of law regarding the resolution "Comfort Women" passed July 30, 07.


Manufacturing in U.S. Probably Increased at Faster Pace to Lead Expansion

By Bob Willis - Feb 25, 2012 11:01 PM CT

Manufacturing probably accelerated for a fourth straight month in February, consumer confidence improved and Americans picked up the pace of spending a month earlier, economists said reports this week will show.

The Institute for Supply Management’s factory index rose to an eight-month high of 54.5 from 54.1 in January, according to the median estimate of 62 economists surveyed by Bloomberg News. Readings above 50 signal growth. Consumer purchases in January rose 0.4 percent, the most in four months, another report may show.

Manufacturers remain at the forefront of the more than two- year-old expansion, aided by corporate investment in equipment, inventory rebuilding and a pickup in the auto industry. Risks to the industry that accounts for about 12 percent of the economy include higher fuel costs and a slowdown in Europe linked to its debt crisis.

“The manufacturing outlook has been relatively bright,” Jeremy Lawson, a senior U.S. economist at BNP Paribas in New York, said before the report. “Domestic demand seems to be contributing to the strength in manufacturing. A wild card is whether the rise in gas prices will start to affect spending.”

The price of a gallon of regular unleaded gasoline climbed to $3.65 as of Feb. 23 from a 10-month low of $3.21 on Dec. 20, according to AAA, the nation’s largest automobile association.

Monetary Policy

Federal Reserve Chairman Ben S. Bernanke will give his semiannual monetary policy report to Congress this week and he may repeat that the central bank is likely to keep low interest rates in place through late 2014 to ensure the economy keeps growing. He testifies before House lawmakers on Feb. 29 and the following day to the Senate Banking Committee.
The Tempe, Arizona-based ISM is due to report its manufacturing index on March 1. Estimates ranged from 53.7 to 55.8.

Personal spending probably rose in January after little change in December and 0.1 percent gains in each of the previous two months, according to the survey median before the Commerce Department report the same day. Incomes (PITLCHNG) probably climbed 0.5 percent for a second month, the biggest back-to-back gains since February-March 2011.

Faster job growth is boosting the outlook for spending and production. Payrolls grew by 243,000 workers in January, and the jobless rate fell to 8.3 percent, the lowest since February 2009, the Labor Department said Feb. 3.

Job and income gains helped boost confidence. The Conference Board’s 10 a.m. release on Feb. 28 may show its index climbed to 63 this month from 61.1.

Factory Jobs

Factory payrolls jumped by 50,000, the most in a year, and the industry’s workers put in the longest workweek on average since January 1998, the Labor Department monthly data showed.

Manufacturing, which sparked the early stages of the recovery as growing overseas economies propelled exports, has recovered after a lull brought on by Japan’s March 2011 earthquake.

Another report from the Commerce Department on Feb. 28 may show orders for durable goods fell 1 percent in January after a 3 percent gain, which may reflect a decrease in demand for Boeing Co. aircraft. Orders excluding transportation equipment probably were unchanged after a 2.2 percent gain, economists forecast.

Business investment remains a bright spot. Corporate spending on equipment and software rose at a 5.2 percent annual rate from October through December. While slower than the prior period’s 16 percent gain, a surge in orders in December indicates capital spending will strengthen in the current quarter.

Caterpillar Production

“For many products demand has been above our ability to produce,” Mike DeWalt, director of investor relations at Caterpillar Inc. (CAT), said on a Jan. 26 conference call with analysts. “We have invested in Caterpillar factories in the United States and around the world to increase production.”

Even with planned increases in capital expenditures this year, “we’re still very tight on many products and are currently quoting extended delivery times for them,” he said.
Machinery and equipment makers have outperformed the broader stock market. The Standard & Poor’s Supercomposite Machinery Index (S15MACH) has gained 20 percent so far this year, compared with an 8.6 percent increase for the S&P 500 Index. (SPX)

Vehicle demand should also drive production. Cars and light trucks sold at a 14.1 million annual rate last month, according to industry data. Excluding a surge in August 2009 tied to the government’s “cash-for-clunkers” program, it was the strongest month since May 2008.

Housing remains the economy’s weakest link. The S&P/Case- Shiller (SPCS20) index of home prices in 20 cities may have fallen in December by 3.6 percent from a year earlier after a 3.7 percent drop in the 12 months through November, economists forecast the Feb. 28 data to show.


Apple's China iPad battle spreads to US

Proview files lawsuit against Apple in California as trademark battle hits home

By Edwin Chan and Lee Chyen Yee

updated 2/24/2012 8:56:50 AM ET

LOS ANGELES/HONG KONG ― A Chinese firm trying to stop Apple Inc from using the iPad name in China has launched an attack on the consumer electronics giant's home turf, filing a lawsuit in California that accuses it of employing deception when it bought the trademark.

A unit of Proview International Holdings Ltd, a major computer monitor maker that fell on hard times during the global financial crisis, is already suing Apple in multiple Chinese jurisdictions and requesting that sales of iPads be suspended across the country.

Last week, Proview Electronics Co Ltd and Proview Technology Co filed a lawsuit in Santa Clara County that brings their legal dispute to Silicon Valley.

Some legal experts said there could be different outcomes from the U.S. and Chinese cases, but a spreading of the lawsuit and delay in coming to settlement terms could hurt Apple more.

"In relation to the U.S., Apple is going to somewhat have a homeground advantage," said Elliot Papageorgiou, a Shanghai-based partner and executive at law firm Rouse Legal (China).

At stake for Apple is its sales and shipments in China, where its CEO Tim Cook said it was merely scratching the surface. Debt-laden Proview International, meanwhile, needs to come up with a viable rescue plan before mid-2012 or else it faces delisting from the Hong Kong stock exchange.

"Given the current timeline, Apple would have the greater impetus to come to settlement simply because the ability to disrupt shipments is more immediate than the pressure faced by Proview and its potential delisting," said Papageorgiou.

Proview accuses Apple of creating a special purpose entity -- IP Application Development Ltd, or IPAD -- to buy the iPad name from it, concealing Apple's role in the matter.

In its filing, Proview alleged lawyers for IPAD repeatedly said it would not be competing with the Chinese firm, and refused to say why they needed the trademark.

Those representations were made "with the intent to defraud and induce the plaintiffs to enter into the agreement", Proview said in the filing dated Feb. 17, requesting an unspecified amount of damages.

Apple on Friday reiterated its statement saying that it had bought Proview's worldwide rights to the iPad trademark in 10 different countries several years ago. It also said that Proview had refused to honour their agreement and a Hong Kong court had sided with the U.S. technology giant in the matter.

"Our case is still pending in mainland China," Apple said.

Dispute hinges on 2009 deal

The battle between a little-known Asian company and the world's most valuable technology corporation dates back to a disagreement over precisely what was covered in a deal for the transfer of the iPad trademark to Apple in 2009.

Authorities in several Chinese cities, such as Shijiazhuang and Huizhou, have already banned the sale of iPads, citing the legal dispute.

Proview, which maintains it holds the iPad trademark in China, has been suing Apple in various jurisdictions in the country for trademark infringement, while also using the courts to get retailers in some smaller cities to stop selling the tablet PCs.

Major electronics retailer Suning has resumed selling iPads online this week in China after it stopped sales last week due to a supply shortage, rather than because of the lawsuit, company executives said.

China is becoming an increasingly pivotal market for Apple, which sold more than 15 million iPads worldwide in the last quarter alone and is trying to expand its business in the world's No. 2 economy to sustain its rip-roaring pace of growth.

It now has a 76 percent market share in China's tablet PC sector, followed by Lenovo Group Ltd and Samsung Electronics Co Ltd that have a combined share of only 10 percent, data from research firm IDC showed.

The country is also where the majority of its iPhones and iPads are now assembled, in partnership with Taiwan's Foxconn .

A Shanghai court this week threw out Proview's request to halt iPad sales in the city. But the outcome of the broader dispute hinges on a higher court in Guangdong, which earlier ruled in Proview's favour.

The next hearing in that case is set for Feb. 29. Proview lawyers said there might not be a decision immediately and it could take weeks or months before there was an outcome.
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"It is more appropriate for both parties to mediate. I think that is the best outcome," David Chen, senior partner at Allbright Law Offices in Shanghai.

China's trademark system is a minefield of murky rules and opportunistic "trademark squatters" that even the world's biggest companies and their highly-paid lawyers find hard to navigate.

Legal experts say the onus is on companies looking to do business in China to understand how China's trademark law works, as it differs greatly from that of the United States.
Industry executives have said employing special-purpose entities to acquire trademarks is a frequent tactic in China.


Obama Says Rising Pump Prices Reminder of Why U.S. Must Go Beyond Drilling

By Margaret Talev - Feb 23, 2012 4:16 PM CT

President Barack Obama said rising gasoline prices are a “painful reminder” of why the U.S. must develop alternative energy sources, and he criticized Republicans who he said were offering slogans rather than strategy.

Obama, in Miami promoting his administration’s energy and economic policies as the Republican presidential candidates have ramped up attacks on him over prices at the pump, said the U.S. must go beyond focusing on domestic gas and oil exploration.
Without naming any of his Republican critics, Obama mocked “their three-point plans for $2 gas,” which amounts to more drilling for oil on U.S. territory.

“Anyone who tells you we can drill our way out of this problem doesn’t know what they’re talking about -- or isn’t telling you the truth,” Obama said at the University of Miami after touring an industrial machine lab at the school.

The rising cost of gasoline threatens to crimp consumer spending, which accounts for 70 percent of the U.S. economy, at a time the recovery is gaining strength. Economic concerns loom as the top issue in the November election.

The average price for regular gasoline at the pump has risen to the highest ever for this time of year -- $3.61 a gallon, according to AAA data. The average price is nine cents higher in Florida, a swing state targeted by both parties in the presidential election. Today marks Obama’s 14th visit to Florida since his inauguration in 2009.

Mideast Instability

Obama said the recent bump in oil prices is caused by instability in the Middle East, including an increasing tense confrontation with Iran over its nuclear program. That has sparked some “speculative trading on Wall Street” that has added to the cost of oil, he said.

Rapid growth is spurring greater demand from countries such as China, India and Brazil, which will cause prices to rise over the long term, Obama said.

Crude oil for April delivery gained $1.55 cents, or 1.5 percent, to $107.83 a barrel on the New York Mercantile Exchange, the highest settlement since May 4. Crude increased for a sixth day after the Labor Department reported applications for jobless benefits were unchanged last week at 351,000, the fewest since March 2008, and German business confidence surpassed forecasts.

U.S. Production

U.S. production of crude oil is at the highest level in eight years and oil imports as a share of total consumption have declined to 45 percent in 2011 from 57 percent in 2005, according to a White House fact sheet. Both trends were under way before Obama took office, according to data from the U.S. Energy Information Administration.

Brendan Buck, a spokesman for U.S. House Speaker John Boehner, an Ohio Republican, said Obama “would like everyone to forget that gas prices have doubled over the past three years while he consistently blocked and slowed the production of American-made energy.”

Obama said that while he supports increased domestic exploration, his administration also is working to increase vehicle fuel efficiency and bolstering use of alternatives to crude oil, including natural gas.

In conjunction with the speech, the White House said the government will make $30 million available to advance research into fueling more vehicles with natural gas and another $14 million to make fuel out of algae.

No ‘Silver Bullet’

“There is not a silver bullet, there never has been,” Obama said.
Obama didn’t identify the Republicans who he said were offering “bumper sticker” slogans on energy.

Republican presidential candidate Newt Gingrich promised yesterday at a debate in Arizona that he’s developed an energy program “so every American can look forward to $2.50 a gallon gasoline.”

Responding to Obama today, Gingrich said the U.S. could add 2.4 million new barrels of oil per day to supplies by approving TransCanada Corp. (TRP)’s Keystone XL oil pipeline, re-opening areas of the Gulf of Mexico to drilling and permitting exploration and production in certain regions of Alaska.

“Blaming instability in the Middle East for high gas prices is not leadership,” Gingrich said in an e-mailed statement.

The two leading Republicans in the race, former Senator Rick Santorum and former Massachusetts Governor Mitt Romney also have criticized Obama’s policies, particularly his administration’s denial of a permit to build the Keystone pipeline from Canada’s oil sands to refineries on the Gulf of Mexico.

Tax Plan

Obama’s remarks followed the administration’s release yesterday of a plan to revamp the tax code that would reduce the corporate tax rate to 28 percent from 35 percent and keep incentives for renewable energy while eliminating some tax breaks for the oil and gas industries.

An oil industry executive said that while the industry supports a reduction in tax rates, Obama’s plan increases taxes on the oil and gas industry by $86 billion and his energy policies

“The actions don’t match the words,” Jack Gerard, the president of the American Petroleum Institute, said today in a phone interview from Washington after Obama spoke. “They’re not taking actions to put downward pressure on prices, instead of making public statements trying to suggest they are.”

Florida Fundraisers

Obama also is using his Florida visit to attend three fundraisers, two in the Miami area and one in the Orlando area at the home of Dallas Mavericks basketball player Vince Carter, according to a Democratic National Committee official who wasn’t authorized to discuss the events on the record.

The Miami-area events include a reception for 450 people at the Biltmore Hotel in Coral Gables, with tickets ranging from $1,000 to $5,000, as well as some $500 tickets for younger voters.

“Your country needs your help,” Obama told donors at the Biltmore. He said they should follow the Republican presidential contest “in case you need an incentive.”

A fundraiser at the home of lawyer and real estate developer Chris Korge, with tickets ranging from $15,000 to $30,000, was expected to draw 100 supporters, the DNC official said.
The event at Carter’s home in Windermere is expected to draw 70 supporters, with tickets at $30,000.

Florida is a major prize in the presidential election, with 29 of the 270 electoral votes needed to win the White House and a recent history of swinging between the Democratic and Republican candidates. Obama won the state in 2008 while Republican George W. Bush won in 2000 and 2004.

To contact the reporter on this story: Margaret Talev in Washington at
To contact the editor responsible for this story: Steven Komarow at


Digging a Hole in China's Black Gold


China's love affair with coal is set to last, but for investors the romance has come out of the relationship.

For the last few years, investors in China's coal sector have been mining a rich seam. From the beginning of 2005 to the end of 2011, the benchmark Qinhuangdao thermal coal price rose 81%, supporting strong growth in profitability and enviable margins at mining majors like China Shenhua Energy.

But as any miner will tell you, the longer you work a seam, the more difficult it is to extract value. China's thermal coal prices have fallen nearly 10% in the last three months. A seasonal fall from the winter peak, and a cyclical slowdown brought about by China's slowing construction and monetary tightening, is only part of the picture. Those effects will fade, but coal miners will still have to battle against structural pressure for lower prices.

In 2008, China's 60 biggest miners―the efficient elite from a sector with 9,000-plus firms―accounted for just over half of domestic production. Since then, the big have gotten bigger and the small are getting edged out. Michael Parker, coal mining analyst at Sanford Bernstein, estimates in 2012 the top 60 miners will account for 80% of output.

The assumption has always been that it's the very low-cost guerilla mining operations that will go to the wall, pushing prices up. In fact, Mr. Parker argues that it's small industrial operations―working difficult seams, and with poor access to transport―that will be the first to go. The exit of these high-cost outfits means that spot prices will increasingly be set by bigger more efficient producers―and that means pressure for prices to stay low.

With structural forces aligned against a return to rising coal prices, investors in China's black gold should be wary of digging themselves into a hole.


Obama Returns to Florida for Campaign Cash, Energy Speech

By Margaret Talev - Feb 23, 2012 7:01 AM CT

Feb. 23 (Bloomberg) -- Jack Gerard, chief executive officer of the American Petroleum Institute, talks about the potential impact of President Barack Obama’s proposed corporate tax changes on the oil industry. Gerard speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

President Barack Obama is promoting his administration’s energy and economic policies in response to Republican criticism over rising gasoline prices in the battleground state of Florida today.

Obama, in an event at the University of Miami, will discuss the pressure rising fuel costs put on household budgets and push his “all-of-the-above approach” to cutting U.S. dependence on foreign oil, White House press secretary Jay Carney said.
“He’s very aware of the impact that it has and fully understands the anxiety it creates,” Carney said yesterday. The administration’s strategy is to increase domestic production of oil and gas, spur development of alternative energy sources and cut consumption by raising vehicle fuel efficiency, he said.
The rising cost of gasoline threatens to crimp consumer spending, which accounts for 70 percent of the U.S. economy, at a time the recovery is gaining strength. Economic concerns are expected to be the top issue in the November election, and the Republican presidential candidates have opened a fresh round of criticism of Obama’s energy policies.
The average price for regular gasoline at the pump has risen to the highest ever for this time of year -- $3.58 a gallon yesterday, according to AAA data. The average price is 10 cents higher in Florida, a swing state targeted by both parties in the presidential election. Today marks Obama’s 14th visit to Florida since his inauguration in 2009.
Obama Tax Plan
Yesterday, the Obama administration released a plan to revamp the tax code that would reduce the corporate tax rate to 28 percent from 35 percent and keep incentives for renewable energy while eliminating some tax breaks for the oil and gas industries.
An oil industry executive said that while the industry supports a reduction in tax rates, Obama’s plan increases taxes on the oil and gas industry by $86 billion.
“It’s once again an effort to pick winners and losers,” Jack Gerard, chief executive officer of the American Petroleum Institute, said in a Bloomberg Television interview. “At a time of need to produce more energy, now is not the time to penalize domestic oil and gas producers.”
Gerard said the trade group opposes Obama’s plan to repeal a manufacturing deduction for oil and gas companies while maintaining it for other manufacturers, calling the proposal “a Swiss cheese approach, where he once again decides who wins and who loses.”
Economic Blueprint
The Florida trip follows Congress’s extension of the payroll-tax cut through year’s end, an annual boost of $1,000 for a typical American family. Obama, who signed the tax cut extension last night, has said that it can help offset energy bills and other costs.
The White House, in a Feb. 20 statement, said Obama would be in Florida to talk about his “blueprint for an economy built to last.” Since then Republicans have focused their attention on energy costs and Obama’s policies.
At a rally yesterday in Tucson, Arizona, Republican presidential candidate Rick Santorum said Obama has contributed to higher energy costs by raising environmental concerns for political purposes.
‘Horror Scenarios’
“Their scary horror scenarios of the past of how they’ve been able to raise money and get votes by scaring the American public about the environment have turned out to be hoaxes,” said Santorum, a former U.S. senator.
Newt Gingrich, a former U.S. House speaker who is also seeking the Republican presidential nomination, yesterday asked the chairman of the House Judiciary Committee to investigate whether the Justice Department “is deliberately abusing its authority to harass” oil and gas companies.
Obama is coming under pressure from some congressional Democrats as well. Representatives Ed Markey of Massachusetts, Peter Welch of Vermont and Rosa DeLauro of Connecticut urged Obama to release crude oil from the Strategic Petroleum Reserve (DOESSPR) to stem rising gasoline prices.
Obama also is using his Florida visit to attend three fundraisers, two in the Miami area and one in the Orlando area at the home of Dallas Mavericks basketball star Vince Carter, according to a Democratic National Committee official who wasn’t authorized to discuss the events on the record.
Holding Fundraisers
The Miami-area events include a reception for 450 people at the Biltmore Hotel in Coral Gables, with tickets ranging from $1,000 to $5,000, as well as some $500 tickets for younger voters.
A fundraiser at the home of lawyer and real estate developer Chris Korge, with tickets ranging from $15,000 to $30,000, was expected to draw 100 supporters, the DNC official said.
The event at Carter’s home in Windermere is expected to draw 70 supporters, with tickets at $30,000.
Obama will tour a center at the University of Miami where students learn about reducing energy costs for small and mid- sized manufacturers, one of 24 such centers that are part of the Department of Energy’s Industrial Assessment Program, according to the White House.
Florida is a major prize in the presidential election, with 29 of the 270 electoral votes needed to win the White House and a recent history of swinging between the Democratic and Republican candidates. Obama won the state in 2008 while Republican George W. Bush won in 2000 and 2004.
Obama last visited Florida on Jan. 19 for an event at Walt Disney World theme park in Orlando, where he promoted tourism and speeding the approval of non-immigrant visas.
To contact the reporter on this story: Margaret Talev in Washington at
To contact the editor responsible for this story: Steven Komarow at


Oil Trades Near Nine-Month High on Iran Tension

By Ayesha Daya and Ann Koh - Feb 21, 2012 6:06 AM CT

Feb. 21 (Bloomberg) -- European Central Bank President Mario Draghi, International Monetary Fund Managing Director Christine Lagarde and European Union Economic and Monetary Affairs Commissioner Olli Rehn talk about the second bailout program for Greece, which received 130 billion euros ($173 billion) in additional aid. This report also contains comments from Luxembourg Prime Minister and Eurogroup Chairman Jean-Claude Juncker, French Finance Minister Francois Baroin and Belgian Finance Minister Steven Vanackere. (Source: Bloomberg/Europe by Satellite)

Play Video
Feb. 21 (Bloomberg) -- European Central Bank President Mario Draghi talks with reporters in Brussels about the agreement reached on a second bailout for Greece. (Source: Bloomberg)
Oil traded near the highest price in nine months in New York after euro-area finance ministers agreed on a second bailout for Greece.
Crude advanced as much as 2.1 percent from its Feb. 17 settlement. There was neither floor trading nor a closing price yesterday in the U.S. because of the Presidents’ Day holiday. Brent, the benchmark for half the world’s oil, was little changed in London after Europe Union finance ministers awarded 130 billion euros ($173 billion) in aid to Greece.
“The Greek bailout was priced into oil because it was expected that a deal would be approved,” said Andrey Kryuchenkov, an analyst at VTB Capital in London. “Brent is overbought. We have some geopolitical issues in Iran and Syria but OPEC is producing at record levels and output from Libya is increasing.”
Oil futures for March delivery on the New York Mercantile Exchange, which expire today, rose as much as 2.2 percent from the Feb. 17 close to $105.44, the highest price since May 5, and were at $104.50 at 11:39 a.m. London time. The more-actively traded April contract was at $104.84, up 1.2 percent. Today’s trades will be booked with yesterday’s electronic transactions for settlement.
Brent oil for April settlement on the ICE Futures Europe exchange in London was down 56 cents, or 0.5 percent, at $119.49 after rising yesterday to as much as $121.15, the highest since June 15. The European benchmark contract’s premium to New York- traded West Texas Intermediate was at $14.65, compared with this year’s widest spread of $19.02 on Feb. 6.
Iran-China Deal
Oil pared gains after China International United Petroleum & Chemical Co., the trading unit of China’s largest refiner, agreed terms of a 2012 crude-supply deal with Iran, according to three people with knowledge of the negotiations.
Data released earlier today by the General Administration of Customs showed China, the biggest buyer of Iranian crude, cut purchases in January to the lowest level in five months after oil companies in the two nations failed to renew contracts. Crude imports were 2.08 million metric tons, or about 493,000 barrels a day, according to Bloomberg calculations from the data. That was down 5 percent from a year ago and 14 percent from December.
Supplies to India
Iran offered India extra crude supplies on revised terms as international sanctions tightened the Middle East producer’s circle of oil customers, according to three people with knowledge of the talks. Indian refiners have yet to decide on whether they will take up Iran’s offer of additional shipments, the people said. The South Asian nation’s government is open to increasing oil imports from the Persian Gulf state, according to two of the people.
The EU said yesterday that member countries are cutting oil purchases from Iran and have sufficient reserves to deal with disruptions. The EU agreed to stop purchases of Iranian crude starting July 1 in a move to punish the Persian Gulf country’s nuclear program.
Iran is unlikely to close the Strait of Hormuz, said Amrita Sen, a commodities analyst at Barclays Plc in London.
“We’ve talked about Hormuz, which we don’t think will happen. That could take it to $150 or even higher,” Sen said in interview with Mark Barton on Bloomberg Television’s “On the Move” program. “An Israeli strike on Iranian production would be much worse.”
UN Investigators
United Nations investigators are starting two days of meetings in Iran, offering Tehran a chance to stem speculation that its nuclear program will spark a military conflict. Iran’s oil-ministry news website Shana reported Feb. 19 that the nation will cut supplies to the U.K. and France.
Iran’s attempt to preempt a European Union import ban will have “no impact on Britain’s energy security or supplies,” U.K. Foreign Secretary William Hague said yesterday in London. The U.K. got 1 percent of its crude from Iran in the first half of 2011 and France got 4 percent, according to the U.S. Energy Administration.
“We imagine this was met by our friends in London with a general shrug,” Stephen Schork, president of the Schork Group in Villanova, Pennsylvania, said in a note today. He estimates that 22 percent of Iranian crude exports are purchased by China, while Japan buys 14 percent. “Until we see one of these buyers affected, Iran will remain mostly bark and little bite.”
Hedge-funds and other money managers raised bullish bets on Brent crude by 6,818 contracts, or 7.5 percent, in the week ended Feb. 14, data yesterday from the ICE Futures Europe exchange showed.
To contact the reporters on this story: Ann Koh in Singapore at; Ayesha Daya in Dubai at



Interview with Gen. Martin Dempsey

Aired February 19, 2012 - 10:00 ET



FAREED ZAKARIA, HOST: This is GPS, the Global Public Square. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

Today on the show we have the first one-on-one with the president's new top military adviser, General Martin Dempsey. Dempsey is the chairman of the Joint Chiefs of Staff, the highest ranking military officer in the United States. We'll hit all of the hot spots: Syria, Iran, China, Egypt and more.

Later in the show, the U.S. rolled out the red carpet for China's next president, but what is going on behind the scenes between the two rival nations? We have a great panel of China watchers.

Also, believe it or not, the Eurozone crisis is solved. How, what? Stay tuned, we'll explain.

But first, here is my take. We're hearing a new concept these days in discussions about Iran: the zone of immunity. The idea often explained by Ehud Barak, Israel's defense minister, is that soon Iran will have enough nuclear capacity that Israel would not be able to inflict a crippling blow to its program.

Israeli officials explained that we Americans cannot understand their fears that Iran is an existential danger to them. But, in fact, we can understand, because we went through a very similar experience ourselves. After World War II, as the Soviet Union approached a nuclear capability, the United States was seized by a panic that lasted for years.

Everything that Israel says about Iran now, we said then about the Soviet Union. We saw it as a radical, godless, revolutionary regime, opposed to every value we held dear, determined to overthrow the governments of the Western world in order to establish global communism.

We saw Moscow as irrational, aggressive and utterly unconcerned with human life. After all, Stalin had just sacrificed a mind- boggling 26 million Soviet lives in his country's struggle against Nazi Germany.

Just as Israel is openly considering preemptive strikes against Iran, many in the West urged such strikes against Moscow in the late 1940s. The calls came not just from hawks, but even from lifelong pacifists like the public intellectual Bertrand Russell. To get a sense of the mood of the times, consider this entry from the November 29, 1948, diary of Harold Nicholson, one of the coolest and most sober British diplomats of his generation.

Quote, "It is probably true that Russia is preparing for the final battle for world mastery, and that once she has enough bombs, she will destroy Western Europe, occupy Asia, and have a final death struggle with America. If that happens and we are wiped out over here, the survivors in New Zealand may say that we were mad not to have prevented this. There is a chance that the danger may pass and peace can be secured with peace. I admit it is a frail chance, not one in 90."

In a speech at the Boston Navy Yard in August 1950, the Secretary of the Navy, Francis Matthews, argued that the United States needed to become an initiator of war of aggression, and in this sense would become the first aggressor for peace.

In the end, however, the global revolutionaries in Moscow, the mad autocrats in Pyongyang, the terrorists supporting military in Pakistan, all with nukes, have been deterred by mutual fears of destruction. We call it deterrence.

And, remember, Israel has 250 nuclear bombs, many on submarines, to ensure that Tehran realizes it would be mutually assured destruction. And while the Iranian regime is often called crazy, it has done much less to merit that term than did a regime such as Mao's China.

Over the past decade, for example, there have been thousands of suicide bombings around the world by Saudis, Egyptians, Lebanese, Palestinians, Pakistanis, but there has not been a single suicide attack by an Iranian.

Is the Iranian regime really likely to launch the first? The efforts to delay and disrupt Iran's nuclear program are working. But even if one day Tehran manages to build a few crude bombs, a policy of robust containment and deterrence is better to contemplate than a preventive war. Let's get started.


ZAKARIA: General Martin Dempsey has had a storied career in the U.S. Army. He commanded the first armored division, Old Ironsides, in the Iraq War. He ran CENTCOM, overseeing operations in the Middle East, Persian Gulf and central Asia.

He's been the Army Chief of Staff and he's now the nation's highest ranking military officer and the president's top military adviser, the Chairman of the Joint Chiefs of Staff.

General Dempsey, thank you for joining us.


ZAKARIA: What would you say to those who argue that the United States should arm the opposition movement in Syria?

DEMPSEY: I think it's premature to take a decision to arm the opposition movement in Syria, because I would challenge anyone to clearly identify for me the opposition movement in Syria at this point.

And let me -- let me broaden the conversation a bit. Syria is a -- it's an arena right now for all of the various interests to play out. And what I mean by that is you've got great power involvement. Turkey clearly has an interest, a very important interest. Russia has a very important interest. Iran has an interest.

And what we see playing out is that not just those countries, in fact, potentially not all of them in any case, but we see the various groups who might think that the -- that at issue is a Sunni-Shia competition for, you know, regional control.

ZAKARIA: You mean the Iranians on the one hand --


ZAKARIA: -- and the Saudis --

DEMPSEY: The Saudis on the other hand. I mean, you saw -- you know, there's indications that Al Qaeda is involved and that they're interested in supporting the opposition.

I mean, there's a -- there's a number of players, all of whom are trying to reinforce their particular side of this -- of this issue. And until we're a lot clearer about, you know, who they are and what they are, I think it would be premature to talk about arming them.

ZAKARIA: Militarily, is Syria very different from Libya in the geography? In the case of Libya, you had an eastern half of the country that the rebels had. They had a city, Benghazi. Or do you believe, if you needed to, you could militarily intervene in Syria in the same way you did in Libya?

DEMPSEY: Not the same way we did in Libya. I mean, Syria is a very different challenge. It's a different challenge, as you described it, geographically. It's a different challenge in terms of the capability of the Syrian military.

They are very capable. They have a very sophisticated, integrated air defense system, for example. They have chemical and biological weapons. Now, they haven't demonstrated any interest or any intent to use those, but it is a very different military problem.

That said, of course, we're looking at all of that. We're trying to, you know, gather the best intelligence we can and take a look at what options we might have, should we be asked to provide those to the national command authority in this country. But we haven't been asked to do that yet.

ZAKARIA: Do you think intervening in Syria would be difficult?

DEMPSEY: I think intervening in Syria would be very difficult.

ZAKARIA: So what would you do? You're watching thousands of people get slaughtered. The regime is isolated, but because it seems willing to be brutal it's surviving.

DEMPSEY: Now that's a fact. And I think that the current path of trying to gain some kind of international consensus is the proper path, rather than take a decision to do anything unilaterally.

And I know that those diplomatic efforts are ongoing, but, you know, I wear the uniform I wear to provide options when asked. And we'll be prepared to do that, but this would not be -- it would be a big mistake to think of this as a another Libya.

ZAKARIA: Another difficult military challenge: do you believe that Israel has the capacity to strike Iran in a way that would significantly retard its nuclear -- its nuclear program?

DEMPSEY: I think that Israel has the capability to strike Iran and to delay the production or the capability of Iran to achieve a nuclear weapons status, probably for a couple of years. But some of the targets are probably beyond their reach and, of course, that's what -- that's what concerns them. That's this notion of a zone of immunity that they discuss.

ZAKARIA: And if that were to happen, do you -- do you believe that Iran would engage in retaliatory measures, not just against Israel, but against United States' interests in Iraq and Afghanistan?

DEMPSEY: That's the -- that's the question with which we all wrestle, and the reason that we think that it's not prudent at this point to decide to attack Iran. I mean, that's been our counsel to our allies, the Israelis, well-known, well-documented.

And we also know -- or believe we know -- that the -- that the Iranian regime has not decided that they will embark on the effort to weaponize their nuclear capability.

ZAKARIA: Do you think that is still unclear, that they're moving on a path for nuclear technology, but whether or not they choose to make a nuclear weapon is unclear?

DEMPSEY: It is. I believe it is unclear, and on that basis I think it would be premature to exclusively decide that the time for a military option was upon us. I mean, I think that the economic sanctions and the international cooperation that we've been able to gather around sanctions is beginning to have an effect. I think our diplomacy is having an effect, and our preparedness.

I mean, fundamentally we have to be prepared, and that includes, for the most part at this point, being prepared defensively. But just as I mentioned in the earlier segment about our preparedness to provide options should the nation decide to do something in Syria, we have to have the same options available should the nation decide to do something in Iran. ZAKARIA: When you observe Iranian behavior, does it strike you as highly irrational? Does it strike you as sort of unpredictable, or do they seem to follow their national interests in a fairly calculating way?

DEMPSEY: That is a great question, and I'll tell you that I've been confronting that question since I commanded Central Command in 2008. And we are of the opinion that the Iranian regime is a rational actor. And it's for that reason, I think, that we think the current path we're on is the most prudent path at this point.

ZAKARIA: Do you think that the Israelis understand that the United States is counseling them not to strike, and do you think that they will be deterred from striking in the near future?

DEMPSEY: Well, I'm confident that they understand our concerns, that a strike at this time would be destabilizing and wouldn't achieve their long-term objectives. But, I mean, I also understand that Israel has national interests that are unique to them. And, of course, they consider Iran to be an existential threat in a way that we have not concluded that Iran is an existential threat.

So I don't -- I wouldn't suggest, sitting here today, that we've persuaded them that our view is the correct view and that they are acting in an ill-advised fashion, but we've had a very candid, collaborative conversation. We've shared intelligence. And I was in Israel about three weeks ago and spent two days there with the senior leaders, and so we're -- you know, we are continuing that dialogue.

ZAKARIA: If you were a betting man, would you bet that Israel won't strike?

DEMPSEY: Well, fortunately, I'm not a betting man.

ZAKARIA: When we come back, more with General Dempsey.


ZAKARIA: Is it your best judgment, after meeting with Egyptian officials, Egyptian military, that the Americans who are being held there will be released and will be able to come back home?

DEMPSEY: Well, I can't guarantee that.



ZAKARIA: And we are back with the Chairman of the Joint Chiefs of Staff, General Dempsey.

Let me ask you about the news this week, which is, of course, about China and Xi Jinping, the soon-to-be president of China. The Chinese military budget is going to double within three years of 2015 -- that is the estimate some people have. Does that worry you? DEMPSEY: Well, let me, you know, raise from the tactical to the strategic issues. You know that in our new strategy we've taken a decision to rebalance ourselves toward the Pacific, and in so doing it's not as though we're flipping a switch. We've never left the Pacific really, but we want to -- we want to become more engaged in the Pacific.

I think this is more opportunity than liability to improve our relationship with China, and I am personally committed to having that as the outcome rather than get into an arms race or into some kind of confrontation with China.

ZAKARIA: You're just back from Egypt.


ZAKARIA: Is it your best judgment, after meeting with Egyptian officials, Egyptian military, that the Americans who are being held there will be released and will be able to come back home?

DEMPSEY: Well, I can't guarantee that. What I can tell you is that, in my engagement with them -- and I have known Field Marshal Tantawi and General Annan (ph) and General Malafi (ph), those are three key interlocutors that -- with whom I met.

I can tell you that I -- we came to a very clear understanding of how serious this was, and also a clear understanding that we --our relationship would be somewhat stalled until this particular issue is resolved.

Now, that said, we did -- I did reinforce the importance of our relationship with the Egyptian military, and I do believe that Egypt is in many ways a cornerstone of the future of the region, in that if this Arab Spring is to have a positive outcome, I think we'll see it first in Egypt. And so, you know, the stakes are extraordinarily high, and I made that clear.

ZAKARIA: You know that in Egypt many people, including now the largest political party there, the Muslim Brotherhood, believe that the Egyptian military seems very reluctant to yield power, both in terms of giving up some of its -- some of its political power, but also its economic privileges. Do you sense that this is a problem that is an obstacle to Egypt's democratic development?

DEMPSEY: Well, I think that the various parties in Egypt are kind of circling each other, trying to determine just what they intend to do. My personal observation is I think that the military is actually eager to cede power because they have experienced how challenging it can be to -- you know, to manage, as they describe it, to manage the street, manage the media, manage a judiciary.

You know, although the military has been largely running the country for decades, they haven't been under the -- under the unblinking eye of the people and the media in this new world in which they find themselves. So I think they're actually eager to cede power and go back to barracks, but they also have some vested interest in, you know, protecting their budget and protecting their, you know, their authorities that they've become quite accustomed to, and they're going to have to work that out internally.

ZAKARIA: Are you optimistic about Egypt?

DEMPSEY: Well, you know, I am optimistic, because I do think that the Arab Spring could -- can produce a democracy, and I think that, you know, I'd be eager to see a competition of ideas actually play out. But, I'm, you know, I'm concerned because, in some way, I think the competition of ideas may be somewhat stymied.

ZAKARIA: The budget: are you as a military person completely comfortable that the budget cuts proposed by the Obama administration will leave the United States' military with all the capacities it needs to defend its interests, its values, its global role?

DEMPSEY: Any strategy and any budget that supports any strategy has risks. I think the risks to this -- to our strategy and the -- and the risk that this budget may not deliver what we intend are manageable.

So I am confident that our -- the revised strategy, the process we went through, that did precede the budget and the budget that supports it, I am confident it will -- it will protect our national interests and allow us to provide options to the nation when, by the way, we confront things that we didn't predict.

ZAKARIA: "The New York Times" had a report on the fact that the United States is going to build up its Special Forces, sort of things like the Navy SEALs, commando forces as it were, and that this is going to become a core part of U.S. military capacity. Is that the way of the future?

DEMPSEY: Let me state it a little differently. I think that among the lessons of the last 10 years of war, two capabilities are prominent, and we have to better understand how to utilize them. One is Special Operating Forces, which have quadrupled in size, and which will grow by about another 3,000 or so in this budget just submitted.

And the other one is cyber. I mean, Special Forces have clearly demonstrated their capability. I think it's a matter of integrating all three of these, you know, the conventional, the cyber and the Special Forces in ways we haven't thought of before, and I think -- I think we're going to be fine.

ZAKARIA: Do you worry about the moral-ethical dilemma of sending a drone into some country that we are not technically at war with and eliminating some foreigner?

DEMPSEY: I will tell you, I am very confident that we have the legal basis for those activities in which we're engaged, and I think it's a healthy thing to actually continue to assess the ethical basis. And to this point in time I'm quite comfortable with where we are, but it bears, you know, it bears scrutiny as we go forward.

ZAKARIA: You're an Army general who's been recently elevated into this job. What's the biggest difference in doing this job than your previous long, distinguished career in the Army?

DEMPSEY: Well, the pace is certainly different. You know, I guess it's safe to say that they -- you know, by the time issues come to me, there's no easy issues, you know, to deal with. They're all rather complex problems. So the pace is different.

I think, you know, the responsibility, I mean, it does weigh on me that it's not only the roughly 2.2 million men and women in uniform, but their families, and also the nation's security. You know, and I'm not talking about security today. I'm talking about not only prevailing in our current conflicts and challenges, but also preparing the force and the nation for the future.

And so I think it's some combination of pace and level of responsibility. But I'm honored to do it.

ZAKARIA: In this job you're part soldier, part diplomat, and in the diplomat role, I'm wondering whether you're going to use what has now become, at least on YouTube, a famous singing voice.



ZAKARIA: Are you going to try and unleash that with your Chinese counterparts one of these days?

DEMPSEY: You know, I did actually challenge my Chinese counterpart during that visit of their bands to a sing-off. He hasn't taken me up on it yet, but if I thought it would get us in a better place with China, I'd do it.

ZAKARIA: General Dempsey, pleasure to have you on.

DEMPSEY: Thank you, sir.

ZAKARIA: Lots more ahead of the show. We have a great panel of experts on China. But up next, Europe. Amidst all of the talk of the Eurozone's demise, a quiet bit of magic has actually solved the problem for now. What in the world do I mean? Stay with us.


ZAKARIA: Imagine a region of the world where stocks have had their best January in nearly 15 years. Bank shares are up 20 percent, the rates at which governments borrow money has fallen sharply. Investor sentiment is at its best in months.

You think I'm talking about Asia, maybe the BRIC nations. Nope. The region is actually sclerotic, struggling Europe. What in the world, right? The story is actually quite simple and was pointed out to me by Sebastian Mallaby of the Council on Foreign Relations. After months of endless handwringing, innumerable talks and considerable pain, it seems that the Eurozone has actually been saved, quietly but effectively. The savior is this man, Mario Draghi, the new head of the European Central Bank, an institution that had been seen as powerless and obscure until now.

For much of the last couple of years it had taken a backseat amid the crisis around it. You see, its original mandate was almost solely to keep inflation low and stable, but now under Draghi, it has become Europe's deus ex machina.

Last December the ECB did the equivalent of printing nearly 500 billion euros worth of cash. Essentially the Central Bank lent money to more than 500 European banks at just 1 percent interest.

What was the effect? Look at this chart. It shows what we call bond yields, the rate of interest governments pay to raise money from bonds. Both Italy and Spain's rates have fallen sharply in the last three months, so they pay less to borrow money. That means they can get their financial houses in order without as much pain.

At a more micro level, Barclay's estimates that the cheap source of cash from within the ECB will boost the earnings of Eurozone banks by 4 percent this year. That is going to trickle into the rest of the economy, but most importantly it means that a run on Europe's banks, the great fear, is now highly unlikely.

Remember that moment in "It's a Wonderful Life" when everyone runs to the bank to get their money out and Bailey's Savings & Loan just doesn't have enough cash, as didn't most banks during the Great Depression?


GEORGE BAILEY: Just remember that this thing isn't as black as it appears.


ZAKARIA: Well, thanks to the ECB, Europe's banks now have access to plenty of cash. The ECB is now said to be preparing another auction worth $1 trillion this month. You can expect that to further declog the financial system.

The magic of its work is in the perception of what it does. It doesn't want to directly bail out any one country -- that sets a dangerous precedent -- and yet by demonstrating its ability to inject liquidity into the system, it has convinced investors that it is the ultimate lender of last resort.

Now, this does not fix Europe's longer term or medium-term problems. Greece might well still have to default, but there's unlikely to be a Lehman-like crisis in Europe now. The irony here is that the ECB's activism is not some new theory of what a central bank can do. Here in America the Federal Reserve did exactly that four years ago. The story goes that at the height of the financial crisis in 2008, Congressman Barney Frank asked the Fed Chairman Ben Bernanke if he had $80 billion to help bail out AIG.

Bernanke replied, well, we have $800 billion.

For all the criticism heaped on our central bank here in America by the Tea Party and others, it is instructive to look back and see how the Fed's prompt and massive action prevented our crisis from turning into a great depression. And it's happening once again in Europe, and in an even trickier situation.

The moral of the story, don't bet against a central bank. And we'll be right back. Up next, the man expected to become China's next leader visits Washington. We have a smart panel to examine relations between the world's two biggest economies.


CROWLEY: I'm Candy Crowley in Washington. FAREED ZAKARIA GPS will be back in 90 seconds. But, first, a check of the top stories.

At least 15 people were killed and 21 others injured in a suicide bombing outside a police academy in Baghdad. Today's attack comes as Iraq struggles with a political crisis that's raising fears about a return to the level of violence that nearly tore the country apart in 2005 and 2006.

Finance ministers in the European Union appear set to approve a bailout package for Greece. The deal is expected to be finalized tomorrow after more negotiations. The agreement would make paying down Greece's crippling debt the number one priority.

A manhunt is under way in Greece for two suspects who broke into the country's Archaeological Museum Of Olympia, tied up a guard and stole dozens of small statues. According to Greece's state media, the robbers took as many as 69 statues and a gold ring. It is the second theft of its kind in Greece this year.

Parts of the southern U.S. are bracing for severe weather. Rain and possible tornadoes are expected in southern Georgia and northern Florida. Portions of Appalachia could get snow.

Those are your top stories. "RELIABLE SOURCES" is at the top of the hour, but now back to FAREED ZAKARIA GPS.

ZAKARIA: This past week the man expected to be China's next president paid a visit to the White House. No other meeting of leaders is as important -- the world's two biggest economies, the two biggest defense spenders, the two most powerful foreign policy actors in the world. How will Xi Jinping's visit change relations?

I am joined now by an expert panel. Gordon Chang is a Forbes columnist and the author of "The Coming Collapse of China."

James Fallows is a former speechwriter for President Carter and a journalist for many, many years now for "The Atlantic" magazine. He has a new book on China coming out this May, "China Airborne."

And Roderick MacFarquhar is a professor at Harvard University. He has written more than a dozen books on China.

Jim, you were at the lunch for Xi Jinping. People who meet him say that he strikes you even immediately as a different kind of Chinese leader, warmer, more personable. Did you feel that way?

JAMES FALLOWS, "THE ATLANTIC": It's hard to judge, of course, seeing a person in a ceremonial event like that, but certainly I have seen Hu Jintao in a similar setting, the current president. And he seems -- Hu Jintao seemed a more stolid, expressionless character than Mr. Xi did. And he -- Mr. Xi, at this lunch, was telling about his adventures in Iowa, how much that meant to him.

But what was striking is that just before he spoke, Vice President Biden gave what was a very, very tough toast by the standards of these kind of events, talking about currency valuation, human rights and all the rest. So that was a -- that made it for a different sort of diplomatic encounter than normal.

ZAKARIA: People tell -- who were there tell me that it seemed almost rude, what Biden did, in the context of a ceremonial state occasion. One of the observers said, "We seemed like the yahoos and they seemed like the sophisticated war power," you know, kind of --


FALLOWS: It certainly was startling to me. And we've all seen events like this before, and usually there's a kind of anodyne quality to the greetings. Our two nations are celebrating their 40th anniversary together and things like that.

And Vice President Biden said all those things and then he said, "Turning now to our areas of disagreement," and went through a very, very detailed and very tough laundry list. One doesn't know whether this was purely for domestic U.S. consumption or it was what they'd been saying earlier in the meeting in the White House.

ZAKARIA: When you look at Xi Jinping -- you have studied China's leaders -- does he strike you and does this new generation strike you -- is this anything important or different about these guys? They're coming to power after 30 years of peace and prosperity.

RODERICK MACFARQUHAR, PROFESSOR, HARVARD UNIVERSITY: Hu Jintao -- you mentioned the current president -- has always seemed to any rather opaque in terms of personality. Xi Jinping and some of his cohorts, I think, are more translucent.

And I think the point about Xi Jinping and perhaps one or two others like him is that they are children of high officials of the Maoist era. And so they have a certain self-confidence, a feeling that they're born to do this, and hopefully that will give them more flexibility when they actually take power. We'll have to see.

ZAKARIA: How does this leadership strike you, this new leadership in China?

The Maoist era. They have a certain self-confidence, a feeling they're born to do this, and hopefully that will give them more flexibility when they actually take power. We'll have to see.

How does this leadership strike you, this new leadership in China?

GORDON CHANG, AUTHOR, "THE COMING COLLAPSE OF CHINA": Well, I think the problem, though, is that the Communist Party is splintering, and we've seen dramatic evidence of this in the last couple weeks. So I'm not so sure that it really matter who the leaders are.

You know, when you're the leader of the Communist Party of China, you act under certain institutional constraints, which are very important. And right now the hard-liners are in control in China, and that means that Xi Jinping, whether he's a liberal, a democrat or a hard-liner, has got to act with the prevailing views in Beijing, and that's really the most important thing.

ZAKARIA: How is the Communist Party changing? Let's just start with this fascinating thing that seems to have happened last week, which is Bo Xilai, the party secretary in Chongqing, sort of China's Chicago, if you will, very popular guy, had been cracking down on crime, had got into a spat with the chief of police, who then went to the U.S. consulate, asked for asylum, was turned down. What is going on?

CHANG: We'd love to know. I mean, what happened is that essentially we had the top cop go to another province and try to defect to the United States, probably with documents, maybe with documents relating to Bo Xilai's wife. This is really fascinating.

And what is even more interesting is that Bo Xilai sends security troops, who are armed, across provincial lines. He invades another province, Szechuan, in order to try to get this top cop, Wang Lijun, back. This really, you know, we talked about our politics being corrosive and dysfunctional? I mean, this -- we don't have a candle -- light a candle to China's, in terms of really what's going on there.

This probably will be controllable, but we don't know, because this is the first transition in the history of the People's Republic that has not been masterminded by Deng Xiaoping. And that means that there's no real elder behind all of this to be -- keep the kids in line.

FALLOWS: I'd make a point -- I agree the Communist Party is in considerable turmoil, and that its nature matters more than the individual. There's one thing that Xi Jinping said at the lunch that I attended that I thought was significant and different from his predecessors. He talked at some length about his own personal experience in Iowa.

And these couple days he spent there in the 1980s seemed to have made a huge impression on him. And one doesn't want to romanticize this too much, but I was impressed in living in China how much it mattered that rising generations of Chinese financial and increasingly governmental people had experience here. It doesn't change the nature of the Communist state, but it's very different from Hu Jintao and Wen Jiabao.

ZAKARIA: Fascinating. When we come back, we're going it talk more about China and the U.S. And also China's own domestic future, when we come back.


ZAKARIA: Welcome back. We're discussing China with Gordon Chang, James Fallows and Roderick MacFarquhar.

Gordon, you wrote a book called "The Coming Collapse of China." And, you know, they say about predictions, never make predictions with a specific date.

And you had a specific date and said China was going to collapse in 2011; 2011 came, it didn't happen, you doubled down and you said it's going to happen in 2012. I guess the simplest question is why were you wrong? Is there something you've learned about it?

CHANG: Well, I think there were a couple reasons. First of all, I focused in on China's accession to the World Trade Organization. And I thought that foreign businesses and foreign governments would be tougher on compliance.

And then they weren't, because they wanted the -- saw the opportunities in the China market. And so they allowed China really to continue with some very predatory trade practices.

ZAKARIA: What is the fundamental weakness you saw in China that led you to this, and do you think it still exists?

CHANG: Well, I think the fundamental weakness is that the Communist Party has lost the conversation in China. It can no longer persuade people, and that's why it's become much more repressive over the last three or four years, maybe even over the last seven, because I think most Chinese people don't believe that a one-party system is really appropriate for a modernizing society.

And that's why we've seen increasing number of protests, perhaps as many as 300,000 a year, and we've seen the protests become more violent. So it's no longer just strikes or demonstrations. It's become riots, insurrections, bombings. This is a sign of social disintegration. The Communist Party can only deal with it with force, and really that's not an answer in the long term.

ZAKARIA: Jim, you lived there for the last --

FALLOWS: I have been there like four of the last five years basically, and I guess what strikes me as being so important and so fascinating about China is, at least to me, it is genuinely unknowable what's going to happen there. You see on the one hand it's a 30-year period in which, for most Chinese people, most of life has gotten dramatically better in those 30 years, but all the tensions that Gordon and Roderick have talked about are certainly there.

The environment is a disaster. The social and economic inequalities are more extreme than any place else on Earth. The corruption is extreme. My impression -- I would disagree with Gordon that the Communist Party has entirely lost the narrative. My sense is that most people feel the system they know is still delivering more than any visible alternative.

But you can imagine the things that are wrong in China getting uncontrollably beyond any of the government's ability to cope with, or you can imagine them muddling along more and less the same way for another generation.

MACFARQUHAR: I think I would agree, though, with Gordon, Jim, because -- about losing the narrative, because the Communist Party, above all, no one respects it any longer because of its deep, deep corruption.

And Hu Jintao himself said we can't talk to the people, and the reason is that there is no ideology. No one looks to Marxism and Leninism any longer. It's a Leninist party, but no one goes to the good books in order to find out what to do.

And so they've got no glue that keeps the system together. What keeps the party in power -- and this is why I think it's rash, perhaps, to predict dates, what keeps the party in power is inertia, the most powerful force in politics.

FALLOWS: And just to come back, I think that the Communist Party in China would have a higher popularity rating than the U.S. Congress in the U.S.

And so in both cases, what keeps American government in place is that people think, on the whole, it's delivering. And I think most people in China, as of this moment, would think that, on the whole, it's moving in the right direction rather than the wrong direction.

CHANG: But we're seeing, you know, the last six months is that China's economy is faltering, after the conditions that created 35 years of virtually uninterrupted growth are ending. We're seeing capital flight at the rate of maybe $50 billion a month.

And, you know, essentially this is a problem because the conditions that are there don't really help the Communist Party. You know, they're in a super cycle downwards now.

ZAKARIA: Is there a danger that if there is some faltering and if there is this problem of legitimacy, that they move toward a kind of nationalism and particularly blaming America? I was struck by Hu Jintao's recent essay, in which he basically calls for and then executes a mass censorship of television shows (inaudible). And all of it is about preventing westernization of China. But this is the Communist Party that radically embraced westernization, by which I mean market economics and things like that. And now they're worried about it.

FALLOWS: I think much as Americans might fear a superbly successful China, they have much, much more to fear from an unsuccessful China, because I think all the things you can imagine happening internally and from the government, at least in the short and medium term, would be to our disadvantage.

I think that nationalism is the main tool of government in disarray any place. And so I don't think the U.S. should welcome these signs of a fracture within China.

MACFARQUHAR: Nationalism, of course, is a two-edged weapon for the Chinese, because if -- take, for instance, Japan, which is the favorite whipping boy of the Chinese blogosphere, if the Chinese reprimand Japan, the blogosphere gets whipped up, and you the nationalists are talking loudly and the government doesn't deliver anything more because it doesn't want to damage trade and relations with Japan too much.

So the government is then under threat from the nationalists. So they have -- the party has to play nationalism very carefully.

CHANG: You know, and really when you have the military in China becoming more independent, starting to execute its own policies, becoming power brokers inside the Communist Party, as we saw with Bo Xilai running to the generals, Xi Jinping himself has a power base inside the military, this is a very dangerous trend for all of us.

ZAKARIA: And do you think that there's the possibility of greater conflict with the United States?

CHANG: Oh, there's always the possibility of that because China, for instance, claims the entire South China Sea as an internal Chinese lake. And if there's been any consistent foreign policy in the U.S. for over two centuries it's to defend freedom of navigation. This is a zero-sum issue for us.

FALLOWS: And I agree, Roderick, in the last year and a half, the U.S. has sort of reasserted its interest and its presence in the Pacific and this announcement in Australia of the Marine presence there was part of a -- I thought, a very skillful, coordinated diplomatic act by the Obama administration to say we're still there and the balance of power with China will remain.

MACFARQUHAR: I think Obama came into power thinking that he could deal with the Chinese, he would have a new approach to the Chinese, and they would actually develop a partnership of some kind across ideological boundaries. He proved wrong. They thought he was weak. They took advantage.

And what we've seen over the last year with Secretary of State Clinton and with Biden this last few days is a reassertion of American determination, that it is going to have its allies protected in the South China Seas, in Southeast Asia and freedom of navigation will be something they will protect.

ZAKARIA: And the Chinese, you think, will respect that?

MACFARQUHAR: Well, the Chinese don't want a conflict. The last thing they want is a war, because then everything is up for grabs. So I don't think they're going to challenge.

ZAKARIA: On that note, Gordon Chang, Roderick MacFarquhar, James Fallows, thank you so much, fascinating conversation.

Up next, the last look, how Switzerland is taking cleanliness to otherworldly levels. Stay with us.


ZAKARIA: Somewhat overlooked in President Obama's budget proposal this week was a section about saving money on money. Turns out it costs 2.4 cents to make every American penny. If they change the mix of metals used, the cost will go down.

That brings me to my question of the week -- how many pennies does the U.S. Mint make every year? Is it, A, 43 million; B, 430 million; C, 4.3 billion or D, 43 billion? Stay tuned, we'll tell you the correct answer. Make sure you go to for 10 more questions.

While you're there, check out the rest of our offerings on our Global Public Square website, and you can follow me on Facebook and Twitter as well. And if you ever miss a show, you can now find full video episodes of GPS on the iTunes TV store. Go directly there by typing into your browser.

This week's book is "Coming Apart" by Charles Murray. It is the hot policy book now. In it Murray explains that white America is now essentially divided into two groups that live, work, marry and fraternize together, cannot comprehend each other's lives.

On the one hand an upper class elite, and then there is the white working class. This is serious social science research, very well written. I don't agree with some of its conclusions. You might want to argue with the book or you will want to read contrary perspectives, but this book will make you think.

And now for the last look. When you think of Switzerland, the image that comes to mind is pristine, clean, unlittered. In fact, no one dares litter in Switzerland for fear of a huge fine. Well, now they've taken their cleanliness to a new level, out of this world, you might say. The Swiss have decided they are going to clean up outer space.

Clean Space One announced this week by the Swiss Space Center will be a, quote, "janitor satellite," unquote, whose mission will be to tidy up the upper atmosphere. There are said to be more than 500,000 pieces of space junk up there. When they're done with space, I'd love for them to pay a visit to my office.

The correct answer to our GPS challenge question was C, the U.S. Mint mints 4.3 billion pennies each year. And they aren't made of much copper anymore: 97.5 percent of a penny is zinc.

Thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for "RELIABLE SOURCES."



COLORADO SPRINGS, Colo. (Feb. 13, 2012) -- The Space Foundation has chosen Junichiro Kawaguchi, Ph.D., Senior Fellow at Japan Aerospace Exploration Agency (JAXA), who was program director, Lunar & Planetary Exploration Program Group for JAXA, to receive the 2012 Space Achievement Award.

The Space Foundation bestows this honor annually in recognition of extraordinary accomplishments in space. Kawaguchi is being lauded for his engagement in planetary robotic exploration, science and technology since the late 1970s, including development and advancement of a series of orbital maneuvering technologies applied to planetary missions.

"Dr. Kawaguchi's work has had major impact on several levels, including creating innovative flight strategies while at the same time enhancing public understanding the importance of space exploration," said Space Foundation CEO Elliot Pulham.

The award will be presented during the opening ceremony of the 28th National Space Symposium on April 16 at The Broadmoor Hotel in Colorado Springs, Colo.

About Kawaguchi
Kawaguchi's major accomplishments include:

Developing a maneuvering technique that leverages tidal force with the gravitational pull of the Moon and the Earth
Restoring JAXA's Martian space probe Nozomi by devising an alternative trajectory using double Earth swingbys
Serving as project manager on the Hayabusa project, the world's first sample-and-return mission from an asteroid, accomplished in 2010
Kawaguchi is currently Senior Fellow at JAXA. He has been, at the same time, a professor at the University of Tokyo, author of numerous books and articles, has presented keynote speeches and appeared on TV.


Hormuz Isn't the Only Oil Hot Spot


The paradox of today's oil market is that to be an optimist, you have got to be a prophet of doom.

There are a lot of them about: Net speculative long positions in Nymex crude oil are at their highest since last May. Such optimism can hardly be predicated on surging demand; both the International Energy Agency and the Organization of Petroleum Exporting Countries have just cut estimates. Loose U.S. monetary policy offers some support, but the euro zone's own laxness offers an offset by weakening the euro against the dollar.

A series of smaller disruptions could cut far into the world's thin cushion of spare capacity.

Committed oil bulls must be banking on supply disruptions. The big one would involve Iran blocking the Strait of Hormuz, through which roughly a fifth of the world's oil transits. But a series of smaller disruptions could also support prices.

Even if the Persian Gulf remains tranquil, tightening sanctions will cut Iran's oil output by about 300,000 barrels a day this year, according to consultancy JBC Energy. South Sudan's dispute with Sudan could keep another 100,000 barrels a day off the market in 2012. Unrest in Syria and Yemen keeps another 200,000 barrels a day offline.

The world is counting on another 800,000 barrels a day from Libya to come back after its civil war. Riots and strikes in Kazakhstan raise the prospect of disruption in a country home to Kashagan, one of the largest fields outside the Middle East. Meanwhile, Iraq, which the IEA expects to account for 70% of incremental output from OPEC out to 2016, remains a high-risk country.

Even without Hormuz being blocked, a series of smaller disruptions could cut far into the world's thin cushion of spare capacity of just 2.8 million barrels a day. Little wonder ever more oil-industry investment dollars are flowing back into a region where resources are growing and political spats usually involve zingers on televised debates: the U.S.

Write to Liam Denning at

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WSJ article,,


Moody's Investors Service downgraded six European nations and became the first ratings firm to warn the U.K.'s rating could be at risk, citing the area's weakening ability to implement measures aimed at reducing debt.

The ratings firm's actions follow similar moves by Standard & Poor's and Fitch Ratings last month where multiple downgrades were made all at once. Like S&P and Fitch before it, Moody's said concerns with the debt crisis, how it is being handled and the impact on the region's various economies were at the heart of the downgrades.

Moody's also noted the fragility of financial markets in Europe and the possibilities of future shocks to the system because of the crisis. The company previously said late last year it would review ratings broadly on European Union members, including those in the union that don't use the common currency.

Where Moody's did deviate from recent actions by other ratings firms was in changing the outlook for the U.K. There had been no indication the U.K.'s outlook was necessarily in danger based on how other ratings firms view U.K.'s debt. Both S&P and Fitch have a stable outlook on their U.K. rating.

U.K. Chancellor of the Exchequer George Osborne said the negative outlook is proof that Britain can't waver from its plans to deal with the country's debt. He said the rating firm was explicit that only thing stopping an immediate downgrade of the U.K. was the government's fiscal-consolidation plan.

"This is a reality check for anyone who thinks Britain can duck confronting its debt," Mr. Osborne said.

The ratings firm downgraded Italy a notch to A3, which is four rungs above speculative-grade territory, and maintained a negative outlook on the euro-zone's third-biggest economy. Malta, Portugal, Slovenia and Slovakia also received one-notch downgrades and still have negative outlooks, Moody's said. Spain was downgraded two notches.

Each of those six countries was downgraded by S&P last month. Fitch downgraded Italy, Slovenia and Spain last month.

While Moody's might have been the last to act, it was the most severe on Portugal and Spain. Among the three biggest ratings firms, Moody's now has the lowest rating on each of those countries.

Concerns over Portugal's debt problems have mushroomed in recent weeks, sending its bond yields to record highs. Moody's downgrade of Portugal sends the country's rating further into junk territory at Ba3, which is three notches below investment grade.

Moody's didn't go as far as S&P when it came to two top-rated euro-zone members, France and Austria. Moody's simply lowered their outlooks to negative, while S&P downgraded each of those countries.

An outlook indicates a longer time horizon, of about two years, in which a ratings action could take place. The maintenance of triple-A ratings from both Fitch and Moody's should alleviate some of the potential pressure on those two countries. Typically investors tied to minimum ratings requirements to hold debt will look to see where the majority of the big three rate debt, so France and Austria maintaining triple-A ratings at Moody's means two of three ratings firms still see them as top-notch investments.

―Ainsley Thomson contributed to this article.
Write to Drew FitzGerald at and Stephen Bernard at


Staying Current on China's Imbalance


The trade imbalance that characterized China's economic relations with the rest of the world for the best part of the past decade has all but disappeared.

China shrinking surplus 2.13.12

(Despite a large surplus in merchandise trade, the current account surplus is not so big due to a deficit in invisible trade.)




China's current-account surplus for 2011 shrank to $201.1 billion, from $305.4 billion in 2010. More important, as a ratio of gross domestic product, the current-account surplus fell to about 2.7%. That's close to a decade low and below the 4% threshold that suggests an exchange rate out of whack with equilibrium.

The argument in past years has been that the fall in China's surplus is cyclical, the result of the investment-heavy domestic stimulus that led to a surge in commodity imports, and recession in major trade partners that crimped exports.

But the International Monetary Fund seems to think there could be something more at work. The IMF now predicts China's current-account surplus will be 3.8% of GDP in 2013, way down from a forecast of 6.2% last September. Taken together with an unusual fall in the value of China's foreign-exchange reserves in the final quarter of 2011, it's a serious challenge to the argument that the yuan is undervalued.

Forecasts for yuan appreciation against the dollar in the year ahead are now down to 2% to 3%―compared with gains of 5.1% in 2011. For investors, the implications of that slowdown are far reaching. Also set to suffer if yuan gains slow: other regional currencies like the Singapore dollar and Malaysian ringgit that track their big neighbor.

Hong Kong will also feel the heat. Investors in mainland companies listed in Hong Kong are used to seeing their earnings juiced by a favorable exchange rate. That benefit could be reduced. Investors in offshore yuan bonds―also known as dim sum bonds―accepted lower yields for much of last year because of the upside from yuan appreciation. That argument no longer looks so compelling. In the fourth quarter of 2011 issuance of dim sum bonds fell by 26% quarter-to-quarter, according to Dealogic.

In an election year, and with unemployment at 8.3%, the U.S. might still ratchet up the rhetoric on the yuan. But investors should prepare for China to start ratcheting down the pace of appreciation.

Write to Tom Orlik at


Iran Sanctions Tighten as OSG to Frontline Halt Crude Cargo

By Isaac Arnsdorf - Feb 13, 2012 12:27 AM CT

Sanctions on Iran are tightening after Overseas Shipholding Group, Frontline Ltd. and owners controlling more than 100 supertankers said they would stop loading cargoes from the Organization of Petroleum Exporting Countries’ second-largest producer.
OSG, based in New York, said Feb. 10 that the pool of 45 supertankers from seven owners in which its carriers trade will no longer go to Iran. Four OSG-owned ships, managed by Tankers International LLC, called at the country’s biggest crude-export terminal in the past year, ship-tracking data compiled by Bloomberg show. Nova Tankers A/S and Frontline, with a combined 93 vessels, said Feb. 9 and 11 they won’t ship Iranian crude.

Previous efforts to curb Iran’s oil income and stop it from developing nuclear weapons failed because the structure of the shipping industry means vessels are often managed by companies outside the U.S. or European Union. An EU embargo on Iranian oil agreed to Jan. 23 extended the ban to ship insurance. With about 95 percent of the tanker fleet insured under rules governed by European law, there are fewer vessels able to load in Iran.
“It’s the insurance that’s completed the ban on trading with Iran,” said Per Mansson, a shipbroker for 31 years and the managing director of Norocean Stockholm AB, which handles tanker charters. “Last summer, many countries started to be a little bit tougher, but the insurance is the real trigger.”

Kharg Island

OSG’s Overseas Rosalyn, which can carry about 2 million barrels, arrived at Kharg Island on Jan. 27 and departed the next day, tracking data compiled by Bloomberg show. It left about 16 feet deeper in the water, an indication it loaded cargo. The vessel is managed by Tankers International, which has its head office in Cyprus. OSG complies with all U.S. and European laws and its head office in New York doesn’t manage charters, OSG Chief Executive Officer Morten Arntzen said in an e-mail Jan. 30.
Tankers International told owners the pool’s vessels will no longer sail to Iran after changes to EU regulations, Arntzen said in a Feb. 10 e-mail. Insurers are no longer able to cover vessels trading in the Persian Gulf nation, he wrote.
Ship owners sometimes group their vessels to coordinate charters and improve earnings. The Tankers International pool operates 45 very large crude carriers, or VLCCs, from OSG and six other companies, including Antwerp-based Euronav NV (EURN) and St. Helier, Channel Islands-based DHT Holdings Inc. (DHT)

Nova Tankers

“All the owners in the pool have stated that they will not trade Iran because of the consequences,” DHT CEO Svein Moxnes Harfjeld said by phone Feb. 10. “DHT is complying with all relevant regulations and sanctions and following recent developments our vessels have been instructed not to trade Iran.”
Frontline companies including Hamilton, Bermuda-based Frontline Ltd. and Frontline 2012 won’t ship Iranian crude, Jens Martin Jensen, chief executive officer of Frontline Management AS, said by e-mail and phone on Feb. 11 and 12. Frontline operates 43 VLCCs, according to its website.
Nova Tankers, the Copenhagen-based operator of a pool of ships, including vessels owned by Mitsui O.S.K. Lines Ltd., won’t load Iranian crude because of European sanctions, Managing Director Morten Pilnov said by phone from Singapore on Feb. 9. The pool will have about 50 vessels by the end of this year, according to data on its website.
Nippon Yusen K.K. (9101), the second-largest owner of VLCCs, won’t carry Iranian oil if it means ships aren’t insured, Yuji Isoda, an investor relations manager for the Tokyo-based company, said Feb. 9. The company doesn’t yet know how its insurers will handle the EU sanctions, he said by phone.

Tighter Restrictions

U.S. and EU leaders are trying to tighten restrictions on business with Iran, which produced 3.55 million barrels of crude a day in January, 11 percent of OPEC’s total, according to data compiled by Bloomberg. Oil sales earned Iran $73 billion in 2010, accounting for about 50 percent of government revenue and 80 percent of exports, the U.S. Energy Department estimates.
The United Nations has imposed four sets of sanctions on Iran and the International Atomic Energy Agency said in November the country has studied how to make an atomic bomb. The government in Tehran says its nuclear program is for civilian purposes and that documents held by the IAEA purporting to show designs and tests of weapon components are fakes.
Iran has threatened to block shipments through the Strait of Hormuz in the Persian Gulf, through which about 20 percent of the world’s globally traded oil passes. Crude futures in New York advanced 32 percent to $99.53 a barrel since Oct. 4.
Senate Bill
More trade with Iran may be blocked if a U.S. Senate Banking Committee bill approved Feb. 2 becomes law, making U.S. companies responsible for the actions of their foreign units when dealing with Iran. A spokesman for committee chairman Tim Johnson, a South Dakota Democrat, declined to comment.
While the Japanese government said last month it would curb imports from Iran, India’s Foreign Secretary Ranjan Mathai said Jan. 17 his country won’t. China, the Persian Gulf country’s largest customer, needs the oil for development, Vice Foreign Minister Zhai Jun told reporters Jan. 11.
Founded in 1948, OSG has 111 vessels and 3,500 employees, according to its website. Its biggest shareholders include the family of board members Oudi and Ariel Recanati, who control about 10 percent, data compiled by Bloomberg show. Oudi Recanati is an Israeli citizen and Ariel Recanati a U.S. citizen, according to a Sept. 6 filing with the Securities and Exchange Commission. Charles A. Fribourg sits on the board of OSG and Continental Grain Co., the data show.

Marshall Islands

Shares (OSG) of OSG, which has 14 supertankers, fell 70 percent in the past year as a glut of vessels drove down transport rates. The company will report a loss of $178.6 million this year, down from $204.4 million in 2011, according to the median of five analyst estimates compiled by Bloomberg.
Three other OSG vessels from the Tankers International pool called at Kharg Island in the past year, data compiled by Bloomberg show. They fly the Marshall Islands flag, which means they are registered there for regulatory purposes, according to data on the website of International Registries Inc. Almost 9 percent of the tanker fleet is flagged in the Marshall Islands, behind Panama and Liberia, according to data compiled by London- based Clarkson Plc (CKN), the world’s biggest shipbroker.
“Ship owners and brokers are now seeing a tightening of sanctions,” said Bob Knight, the managing director of tankers at Clarkson in London. “This is a sign that sanctions are starting to bite.”

To contact the reporter on this story: Isaac Arnsdorf in London at
To contact the editor responsible for this story: Alaric Nightingale at


Time Running Short to Avoid Greek Default


Even by the standards of the euro crisis, the speed with which the latest Greek austerity package unraveled is remarkable. Less than 24 hours after Greek Prime Minister Lucas Papademos announced an agreement on budget cuts that he hoped would unlock a €130 billion ($172.72 billion) second bailout, euro-zone finance ministers rejected the proposals as inadequate.

Markets this year have been indulgent as Greece has missed deadlines to reach agreement with its creditors. But there is now a risk of a serious political accident that sends the crisis spinning out of control.

Greece and the euro zone are locked in high-stakes brinksmanship. Euro-zone finance ministers are frustrated by Greece's lack of progress on previous commitments and wary Athens won't stick to its promises. On Thursday evening, they demanded further details on €325 million of spending cuts, a parliamentary vote to approve the measures and written pledges to support the program from party leaders. The ministers had no documents available to them when they met, meaning there was no basis for approval, said a person familiar with the matter.

That has put the ball back in Athens' court. Politicians there face soaring unemployment―with youth unemployment reaching 48%―and a continuing deep recession. Violence broke out at street protests Friday. Giorgios Karatzaferis, leader of the Laos party, said he could not vote for the reform package. Laos only controls 16 of the coalition's 252 seats in the 300-strong parliament, but this may encourage further dissent. Mr. Karatzaferis said he doesn't believe the euro zone will allow Greece to default because it fears the wider contagion.

But time is running out. The bailout package is needed to avoid a default on €14.5 billion of bonds that fall due March 20. To get the bailout money, Greece needs to complete a bond swap with its private-sector creditors to lop €100 billion off the country's €360 billion debt pile. Greece's lenders will only sign off on the bond swap when the full austerity package has been agreed. Yet the swap will take time to implement, including possible legislation to introduce collective action clauses.

It is in the interests of all sides to agree and prevent a disorderly Greek default―even though this second bailout is unlikely to deliver debt sustainability for Greece. The euro zone is still poorly equipped to deal with the fallout of a Greek default and exit from the euro zone. Bailout facilities are still not large enough to support sovereign-bond markets and banks in peripheral countries could face capital flight that would be difficult to contain.

That still points to both sides finding a compromise. But if euro-zone ministers cannot sign off on the deal when they meet again Wednesday, it may be too late.

Write to Richard Barley at


Pipeline Deficit Clogs American Oil Dream


Welcome to Clearbrook, Minn.: America's cheapest gas station.

Want to lay your hands on some oil at just $70 a barrel? Turns out you can. Question is what you'll do with it once you own it. Such cheap oil also raises a worrying prospect: America's vaunted progress toward less reliance on energy imports may well get bogged down for want of a pipeline.

This cheap oil isn't the familiar West Texas Intermediate or Brent crude grades. They haven't been at $70 in almost two years (WTI now hovers around $98 and Brent at $117).

Instead, this oil is coming out of fields in the Bakken basin underlying North Dakota and Montana, as well as Canada. Much of it flows through pipelines that meet at Clearbrook, a Midwest oil hub like the bigger one at Cushing, Okla. In the past week or so, the price of oil delivered at Clearbrook has plummeted from about $95 a barrel to $70.

Bloomberg News
North Dakota's oil output has quintupled since 2005. Above, an oil tank outside Alexander, N.D.

The reason for Clearbrook crude's big discount to WTI is much the same as for WTI's big discount to Brent: logistics. The volume of oil heading into Clearbrook has surged. North Dakota's output in 2005 was below 100,000 barrels per day. Today it's more than five times that level and rising as development of shale resources has exploded. Meanwhile, Canadian producers trying to move their oil south toward the Gulf coast are also filling local pipelines.

So the system around Clearbrook is straining to cope with the oil traffic heading through it. Cushing, Okla., is suffering similar problems as the provenance of U.S. oil shifts, leading to the wide price spread with Brent. Pipeline capacity of about 425,000 barrels per day coming out of the Bakken basin is full, says Anish Patel, an analyst at research firm ISI Group. Expansions are coming but not until mid-2012 at the earliest.

In the meantime, producers are relying on trains and trucks to move some of the excess crude toward refineries where it can be turned into useful products like gasoline. That's great for the likes of Burlington Northern Santa Fe, the railroad owned by Warren Buffett's Berkshire Hathaway. But it's also expensive. One way of thinking about the discount for oil sold at Clearbrook is that it covers the extra cost incurred by the buyer to move the stuff to market by unconventional means.

If the price of oil coming from the Bakken drops below $65 a barrel, that might force some producers there to scale back development, says Patel. Logistical constraints have the potential to slow the renaissance in domestic energy production.

Indeed, owning overworked pipeline operators such as Enbridge is a good way to cash in on these oil market anomalies. Alternatively, you could try filling your tank at Clearbrook. Bring a map.

Write to Liam Denning at


Bernanke Economy Proves Critics Clueless on Fed

By Caroline Salas Gage - Feb 7, 2012 11:01 PM CT

The numbers are proving Federal Reserve Chairman Ben S. Bernanke’s critics wrong.
More than a year after Republicans from House Speaker John Boehner of Ohio to presidential candidate Ron Paul of Texas warned that the Fed’s second round of asset purchases risked a sharp acceleration in prices, the surge has failed to materialize. The personal-consumption-expenditures price index rose 2.4 percent for the 12 months ending in December, near the central bank’s 2 percent target.

“The statements were politically motivated,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. With unemployment stalled above 8 percent for three years, “I don’t see how anybody in their right mind could form a strong argument for persistent, rapid inflation in the United States without the participation of the labor market.”

Even though the economy is showing signs of strengthening and inflation appears in check, Republicans Mitt Romney and Newt Gingrich, who also are running for president, have said they wouldn’t keep Bernanke, 58, when his second four-year term as Fed chairman expires on Jan. 31, 2014. Gingrich said in September that Bernanke was “the most inflationary, dangerous and power-centered chairman” in the central bank’s history.

“The criticism about the Fed being inflationary is not fact-based,” said Mark Gertler, an economics professor at New York University who has co-written research with Bernanke. “In terms of an inflation record, the facts are the Fed has been as close to impeccable as you can possibly get.”

During Bernanke’s tenure, the U.S. consumer price index has risen an average of 2.4 percent, lower than the 3.1 percent average for Alan Greenspan and 6.3 percent for Paul Volcker. Greenspan was chairman from 1987 to 2006; Volcker was Fed chief from 1979 to 1987.
Sacrifice Inflation Goal

Bernanke last week defended his commitment to price stability before Congress in Washington, rejecting suggestions that he would sacrifice his inflation goal to boost employment.

“Over a period of time, we want to move inflation always back toward 2 percent,” Bernanke said Feb. 2 in response to questioning from Republican Representative Paul Ryan of Wisconsin, chairman of the House Budget Committee. “We’re always trying to bring inflation back to the target.”

Bond traders predict the Fed will come close to achieving that goal. The break-even rate for five-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable-maturity Treasuries, was 1.91 percentage points yesterday. The rate, a measure of the outlook for consumer prices over the life of the securities, has fallen from 2.47 points on April 29 as commodity prices have declined.

Inflation ‘Misinformation’

“There’s been an extraordinary amount of misinformation about inflation circulating,” Gertler said. “We have not had any sign of sustained inflation.”

In January, Fed officials lowered their projections for price acceleration, with inflation ranging from 1.4 percent to 1.8 percent this year, and 1.4 percent to 2 percent in 2013. In November, they predicted inflation of 1.4 percent to 2 percent in 2012, and 1.5 percent to 2 percent next year.

Bernanke deflected a question from a reporter at his Jan. 25 press conference about whether he’d resign if a Republican were elected president in November and asked him to do so.

“I’m not going to get involved in political rhetoric,” Bernanke said. “As long as I’m here, I will do everything I can to help the Federal Reserve achieve its dual mandate of price stability and maximum employment.”

Exit Tools

The test on inflation will come when the central bank must withdraw its record stimulus, said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The policy-setting Federal Open Market Committee said last month it plans to keep its benchmark interest rate “exceptionally low” until at least late 2014. Hooper said Bernanke has the tools to contain inflation when it comes time to exit.

“If it looks like the economy is going to overheat, the Fed has a tremendous amount of ammunition,” such as selling assets or raising the interest rate on excess reserves, Hooper said. “Right now the emphasis is on, ‘Hey, the economy is still weak. Let’s focus on getting that back to the norm.’”

The Fed has taken unprecedented measures to spur growth in the aftermath of the worst recession since the Great Depression, leaving the federal funds rate banks pay each other on overnight loans near zero since December 2008 and buying $2.3 trillion of bonds in two programs of so-called quantitative easing.

Harshest Political Backlash

The second round of asset purchases, which ran from November 2010 through June 2011 and was dubbed QE2 by analysts and traders, sparked the harshest political backlash against the U.S. central bank in three decades. 2008 Republican vice- presidential candidate Sarah Palin called it a “dangerous experiment” in November 2010, saying it wouldn’t “magically fix economic problems.”

In September of last year, the FOMC voted to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further lower borrowing costs. The yield on the benchmark 10-year Treasury note was 1.97 percent yesterday, down from 2.13 percent on Sept. 1.

This move and QE2 help “to explain why some of the recent news on U.S. economic activity has been better than anticipated,” Lonski said.

The unemployment rate fell to 8.3 percent in January, the lowest since February 2009, according to a Labor Department report last week. Payrolls rose by 243,000, exceeding the most optimistic forecast in a Bloomberg News survey. The U.S. economy is forecast to grow at a 2.3 percent rate this year, up from 1.7 percent in 2011, according to a Bloomberg News survey of 70 economists last month.

Under Control

Meanwhile, prices appear under control, according to Deutsche Bank’s Hooper. So-called core inflation, stripped of energy and food costs, climbed 1.8 percent in the 12 months ending in December, the personal-consumption-expenditures price index shows.
“It just doesn’t look like there’s any evidence right now” of an inflation surge, Hooper said. “There are no alarm bells going off in terms of the current picture.”

To contact the reporter on this story: Caroline Salas Gage in New York at

To contact the editor responsible for this story: Chris Wellisz at


The Really Negative Story on Natural Gas


Natural-gas prices are on the floor. Could they go negative?

The probability that wholesale gas prices will drop below $2 per million British thermal units, from today's almost $2.50, is rising. Gas hasn't closed below $2 since September 2009. Today's market shares one critical similarity to then: bulging gas inventories. This overhang of excess supply could crash prices even further this spring.

Bloomberg News

Companies that leave gas in storage beyond their contracted time risk stiff financial penalties. Above, a drilling rig sits on a natural gas pad in Pennsylvania.

Like squirrels with nuts, we humans store gas during the summer and then deplete those inventories in the winter. But this winter has been mild and comes amid rising gas production. The latest official figures, released Thursday, show the U.S. has about three trillion cubic feet of stored gas, up 25% from this time last year and the five-year average.

Barring a sudden chill, we will enter summer with gas inventories well above normal. This is a problem because storage operators often need to cycle gas through a facility on a seasonal basis to maintain operational efficiency. Companies that leave gas in storage beyond their contracted time usually risk stiff financial penalties. Morgan Stanley forecasts there will be 2.2 trillion cubic feet of gas in storage at the end of March, which is traditionally when we start refilling inventories. However, that level is very close to the 2.3 trillion cubic feet level at which, Morgan Stanley estimates, storage operators start forcing clients to take gas out.

This carries big risks for prices. BofA Merrill Lynch points out that back in 2009, when capacity limits were again being tested, gas prices almost halved in the space of a month between early August and early September.

But there have been even more extreme instances. In the U.K., for example, gas prices very briefly turned negative in October 2006, after a new pipeline from Norway flooded the market when storage capacity was nearly full already. Rather than pay penalties for causing imbalances in the system through excess gas, some traders preferred to simply pay someone else to take delivery.

That is an extreme example. But logistical constraints mean some gas producers in the U.S. already effectively take a loss on their gas. Last year, over a third of North Dakota's gas output―which costs money to produce―was burned off as production growth outpaced pipeline construction (the proportion flared nationwide is less than 1%).

The more likely scenario is that forced sales of gas push prices below $2, and perhaps even $1, for a brief period at some point this year. The real solution will be for such low prices to encourage more demand or, more immediately, for gas producers to shut-in some production, like Chesapeake Energy did last week. Citigroup puts the breaking point for high-cost producers at about $1.80, 27% below today's price. Ultimately, a crash may be the only way to get this market to rebalance in short order.

Write to Liam Denning at



Author: Nobuyoshi Ozaki

A long forty six years have passed since I stepped on to American soil. I have had various odd jobs in the past until I recently retired. Examples include working with Steven Spielberg as assistant director in a film called "1941." I was supervisor and later became Public Relation representative for Toyota Group - USA. My last occupation was a Senior Research analyst working in Silicone Valley for a major news paper from Tokyo, Japan. My spouse, Christine is a flight attendant, traveling often to the Middle East and Africa. We have spent three quarters of our life together as world adventurers. This photo was taken in Argentina. We now live in swampy Louisiana.