This week Japan has provoked the ire of the United States and Europe by unilaterally intervening in currency markets to depreciate the yen against other major currencies. Japanese Prime Minister Naoto Kan has responded to these criticisms by telling the US and EU to go suck a lemon stating that further "resolute actions" would be taken on this front. 

This comes on the heels of mounting U.S. frustration with China's "go-slow" policy on letting the yuan appreciate against the dollar. [What do you mean by "go slow"?--ed. Let's put it this way: the tortoise thinks that China is being pokey on this question.]

So, is this the beginning of beggar-thy-neighbor? Will other countries start intervening in foreign exchange markets to gain a competitive advantage for their export sectors? 

The New York Times' Hiroko Tabuchi thinks not, because Japan can't unilaterally devalue its currency like in the old days:

It is unlikely, though, that intervention by Japan alone will sway currency markets in the long term. The global volume of foreign exchange trading has grown rapidly in recent years, which prevents intervention by a single government from countering bigger market trends.

Other countries are unlikely to help Japan’s cause, because they need to keep their own currencies weaker to bolster exports. A weak currency makes a country’s exports more competitive and increases the value of overseas earnings.

Much of the yen’s weakening came from investors selling the currency on expectations that the Japanese government would be more active in keeping the yen in check. Japan did not disclose how much it had spent in currency transactions, but dealers put the initial amount at 300 billion to 500 billion yen ($3.5 billion to $5.8 billion).

But as Switzerland found this year, a single government’s efforts to weaken its currency can prove futile. Switzerland abandoned that effort, after its central bank had lost more than 14 billion Swiss francs ($14 billion) in foreign currency holdings in the first half of the year, after a fall in the euro’s value ate into the bank’s reserves.

The Swiss franc is also seen by investors as a relative haven and has also strengthened amid global financial unrest. This month, the franc hit a record high against the euro.

Hmmm.... maybe. Japan's economy is much larger than Switzerland, so I'm not sure the comparison holds up. The real problem, however, appears to be that countries perceived of as "safe havens" wind up with overvalued currencies. 

This little parable also makes me wonder whether we might see beggar-thy-neighbor policies in a different guise this time around. This is going to sound a little crazy, but here goes: rather than explicit exchange rate intervention, what if countries decided to play fast and loose with Basle III and other measures to strengthen financial integrity? 

This really does sound crazy -- it suggests that governments would be willing to tolerate a higher risk of domestic banking collapse in order to avoide being a "safe haven" status for capital. That said, think of how much Europe benefited from the depreciation of the euro due to the Greek crisis. Basle III, by taking so long for banks to meet standards allow those countries with more insolvent financial institutions **cough** Germany **cough** to take their own sweet time in having them meet new capital adequacy standards.  This would allow Germany to have the euro stay relatively cheap without abandoning its anti-inflationary zeal. 

Now, in all likelihood, not even the Germans would purposefully do this. This is crazy talk. What I'm suggesting, however, is that there is more than one way for a country to have its currency depreciate, and these policies are substitutable. Looking only at explicit exchange rate intervention might be just a bit too narrow. And if more countries find more ways of keeping their currency undervalued, well then, the days of beggar-thy-neighbor would have arrived.

Developing....

I think it's safe to say that Venezuela's economy has seen better days.  The government has been issuing something that looks an awful lot like food rationing cards.  Now the Financial Times' Benedict Mander reports that Venezuela's new currency controls are affecting its import sector in a really sensitive area: 

Unable to access enough dollars, local importers are feeling the pinch across a wide range of goods, from Scotch whisky, the nation’s favourite drink, to luxury foods and swanky cars....

Each month, whisky importers – some of the worst hit – say they can legally get only as much foreign currency as they would normally use in a day. Bars and restaurants fear the reaction when they run dry. “We’ve got enough boxes to last a few more weeks, but after that, I’m worried about what will happen,” said the manager of one bar.

The irony, of course, is that Venezuela is doing to itself what the United States has been trying to do to North Korea for years (and re-emphasized in the past few months) --  denying access to luxury goods for the elites. 

Let's call these kind of measures Mad Men sanctions, shall we?  Anything that embargoes sumptuous indulgences -- including alcohol, cigarettes, and Christina Hendricks -- counts as a Mad Men sanction.  The question is, whether self-imposed or externally imposed, do they make a difference? 

With respect to North Korea, I think the answer is pretty clearly no.  This is mildly surprising.  Even though I'm pretty skeptical about these kind of sanctions in general,  the DPRK is one of the few countries where Mad Men sanctions truly are "smart."  The North Korean elite leads a very segmented life, and making it harder to get Johnny Walker Blue affects very few average North Koreans.  That said, while the North Korean elite appears to be tottering just a little, it's not because they're going into Scotch withdrawal. 

Of course, there is a difference between an external actor imposing a Mad Men embargo and an internal actor screwing up the economy to the point that a petrostate needs to husband foreign exchange reserves.  For IR grad students out there, it's a good test:  is a regime hurt more from an externaly-created embargo or from an internally-created one? 

[And what about the IR effects of Christina Hendricks?--ed.  Definitely a question that begs for further research.  Dibs!!--ed.]

Developing....

Your humble blogger is back in the USA, and will be posting with gusto later today about everything he learned while in Europe. 

However, I can't resist commenting quickly on Goldman Sachs' settlement with the SEC.  Some financial bloggers are already describing it as a huge win for Goldman.  Ordinarily, I don't like this kind of frame:  settlements should be win-win, because both sides avoid litigation costs.  That said, this paragraph from Sewell Chan and Louise Story's New York Times write-up did catch me short: 

Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws. 

Really?  Really?!  REALLY?! 

Goldman Sachs requires a judicial order  to not commit intentional fraud?  If that judicial order wasn't drawn up, fraud is part and parcel of Goldman Sachs' standard operating procedure?  Does this mean that, prior to this settlement, defrauding customers was part of its overall corporate strategy? 

I can just picture Goldman Sachs' prospectus to investors: 

Goldman Sachs has become the world's most profitable institutional investor through an integrated three-part strategy:

1.  Maximizing the profit opportunities from financial globalization;

2.  Optimizing the core research strengths of Goldman Sachs' legendary research arm;

3.  Scamming the living s**t out of investors stupid enough to think that we have ethics. 

Seriously, what the f**king f**k?  If this counts as a Goldman Sachs "concession," then they just pulled off the best piece of financial statecraft I've ever seen.  It's almost as bad as the old Number Six.

Am I missing anything? 

UPDATE:  Ah, this comment by A.S. does provide some useful context for this provision.  Still, writing it up as a Goldman Sachs concession  seems like poor reportage.

Last week Russia used some economic coercion to get a friendlier government in Kyrgyzstan.  This week, Russia uses some financial inducements to secure a strategic base in Ukraine, as Roman Olearchyk and Stefan Wagstyl report for the Financial Times. 

Russia on Wednesday agreed to slash gas prices to Ukraine by 30 per cent in exchange for far-reaching economic and political concessions, including a long extension of the Russian navy’s lease of a strategic Black Sea port....

Mr Yanukovich agreed to grant permission for Russia’s Black Sea Fleet to remain in Sevastopol for an additional 25-30 years – far beyond 2017 when the current lease expires.

Mr Medvedev said Russian gas giant Gazprom would grant Ukraine a 30 per cent discount on gas, bringing the price down by about $100 per 1,000 cubic meter from a current rate of just above $300. “Our Ukrainian partners will receive a discount on gas. These funds will turn into a real resource for [Ukraine’s] business and economic aims,” he said.

The deal also appeared to secure lucrative contracts for Russian companies to build two nuclear reactors in Ukraine, and preserve their roles as monopoly nuclear fuel suppliers.

So, Russia is finally getting its way in the near abroad, which is bad for the United States, right?  Well, not exactly.  No question, the new governments in Bishkek and Kiev are an improvement for Moscow compared to the ones installed by the color revolutions of the past decade.  On the other hand, the legality of the base deal remains murky under Ukrainian law. 

More importantly, these new governments are not acting in an unfriendly manner towards the United States.  Kyrgyzstan's interim president Roza Otunbayeva has told Western reporters that the U.S. lease on its airbase in Kyrgyz will be extended automatically.  Meanwhile, Ukrainian president Viktor Yanukovych gave Barack Obama his biggest deliverable at the Nuclear Safety Summit earlier this month when he pledged that his country would eliminate its stockpile of highly enriched uranium. 

The familiar language in talking about the near abroad is whether a government is a friend of Russia or a friend of America.  These governments are clearly more friendly to Russia than the previous ones, but there also appears to be no strategic loss for the United States.  Which appears to be a win-win for both countries. 

I see I was not the only blogger to point out the Paul Krugman = neoconservative argument -- see Ryan Avent's recent posts over at Free Exchange, which also challenge Krugman on the question of whether an appreciating yuan would actually reduce macroeconomic imbalances.  It's safe to say that the neocon meme got Krugman and his supporters a wee bit snippy. 

Krugman has posted a more substantive reply, however, and Avent has responded as well.  They are debating across a number of issues:  1)  whether the Chinese government can truly control China's consumption rate; 2) whether a revaluation would in fact lead to an improvement in U.S. exports/macroeconomic imbalances; and 3)  The best way to get China to alter its status quo policies. 

On the first two questions, I find myself siding with Avent on the first point (it's going to take a looong time for China's consumption rate to increase) and with Krugman on the second point (revaluation would still make a difference).  Scott Summer, Michael Pettis, and Tom Oatley have all also posted thoughtful responses/critiques of Krugman that are worth checking out.  

I want to focus on the third question, however -- what's the best way to pressure China into altering its position?  Krugman's proposal in his op-ed was Nixon redux -- slap on a 25% import surcharge and let slip the dogs of a trade war.  It was the unilateralist (and violation-of-WTO-trade-rules) aspect of Krugman's proposal that sparked the neocon snark on my part.  In my opinion, the U.S. should not act in a unilateral manner on the currency issue when other countries are also seriously put out with China's behavior.  I'm not saying it should be off the table, either -- but it's a policy of last resort rather than first resort.  Coordinated action to isolate China -- through the G-8, G-20, and other international bodies -- seems like the next step, rather than slapping on an import surcharge. 

Krugman elaborates -- a bit -- here: 

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little. (emphasis added) 

Look, Krugman is blogging here -- I'm sure that he's thought about the political economy dimension a bit more that a single post suggests.  That said, Krugman is talking exactly like the most neocon of neoconservatives was before Iraq.  He evinces complete disregard for existing multilateral structures, makes casual assumptions about how allies will line up behind the United States and adversaries will simply fold, and underappreciates the policy externalities that would take place if his idea was implemented. 

On the multilateralism point:  as Simon Lester points out, a countervailing duty applied against all of China's imports across the board because of currency manipulation would be a flagrant violation of WTO rules.  So, question to Krugman (and Bergsten):  are you prepared to jettison the WTO to alter China's behavior?  Because that's exactly the policy choice you're setting up in your proposal.

This leads to the next problem -- Krugman/Bergsten's assumptions about how other countries would react.  First of all, I'm not sure at all that China will roll over.  I agree with Krugman that China's compellence power over the United States is limited.  The thing is, America's compellence power over China is also limited. It's the larger economy and the deficit country, so it does have some leverage.  What Krugman is suggesting is a huge demand, however -- one that would have wrenching effects on China's domestic political economy.  Expectations of future conflict between the two countries are quite high, and have escalated in the past two months.  Chinese nationalism is pretty robust at the moment, and nationalists are willing to make economic sacrifices rather than suffer a perceived blow to their country's prestige.  This is not a good recipe for concessions, even if China is hurt more than the United States by a trade war. 

Because that's what would happen -- Beijing would immediately respond with its own retaliatory tariffs on U.S. imports.  They would likely harass U.S. companies with significant amounts of FDI in China.  These moves would hurt China a little, but hurt the United States more.  Like Michael Pettis, I think the chance of a full-blown trade war at this point becomes pretty high. 

Krugman's assumption that Europe would automatically follow suit without prior consultation seems awfully casual.  As the New York Times reported today, there are a lot of European companies that are not thrilled with volatility in the value of the euro -- and what Krugman is proposing is guaranteed to increase volatility.  European authorities might  prioritize bolstering the EU's reputation as an actor that doesn't violate multilateral norms over the economic issues at stake (and if you think that materialist explanations always trump arguments about political prestige, well, then, the euro should never have been created in the first place).  I'm not sure how keen the Europeans will be about the unilateral move Krugman is suggesting.  It's far from guaranteed that the EU would even be able to speak with a single voice on the issue. 

Krugman's ignorance about how Japan would react (to be fair, Japan is not the easiest read right now), and his omission to mention how the rest of the G-20 or ASEAN would respond, suggests that he really hasn't thought this all the way through.  I'd like to see some contingency planning in case the rest of the world doesn't line up the way he thinks. 

Finally, there's no discussion -- none -- about what the political and economic effects would be during the period of uncertainty and/or  if China decided they weren't going to acquiesce.  Let's keep this within the economic realm and consider the following question:  what's the effect of political uncertainty on investment behavior?  Consumption levels?  I would posit that it would increase risk-averse behavior -- particularly if this kind of trade war roiled financial markets.  Wouldn't this simply exacerbate the liquidity trap concerns that Krugman has been fretting about? 

Note that much of the last paragraph was framed in the form of questions.  I'm not sure my answers are correct -- but I'm really not sure that Krugman's assertions/assumptions are correct. 

Blake Hounshell highlights a tidbit from Henry Paulson's new memoir that caught my attention as well.  According to Paulson, in the summer of 2008 Russia approached China to sell off their Fannie Mae and Freddie Mac debt.  This merited stories from Bloomberg and the Financial Times.  According to the FT:

Russia proposed to China that the two nations should sell Fannie Mae and Freddie Mac bonds in 2008 to force the US government to bail out the giant mortgage-finance companies, former US Treasury secretary Hank Paulson has claimed....

Mr Paulson said that he was told about the Russian plan when he was in Beijing for the Olympics in August 2008. Russia had gone to war with Georgia, a US ally, on August 8.

“Russian officials had made a top-level approach to the Chinese, suggesting that together they might sell big chunks of their GSE holdings to force the US to use its emergency authorities to prop up these companies,” he said.

Fannie and Freddie are known as GSEs or government sponsored enterprises.

“The Chinese had declined to go along with the disruptive scheme, but the report was deeply troubling,” he said. A senior Russian official told the Financial Times that he could not comment on the allegation.

The Russians deny the story in the Bloomberg story, but Ashby Monk points out the possible implications: 

Paulson’s report is pretty amazing. If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.

This revelation–while unconfirmed–will not comfort those in the West that fear SWFs; it doesn’t help anybody if these funds are seen to be potential weapons of economic destruction…

Let's assume this is true for the sake of making life interesting.  There's still a few more pieces of data I'd like to have before drawing conclusions. 

Monk assumes that the Russians did this for geopoltical reasons. If memory serves, however, China and Russia were both concerned about protecting the value of their GSE debt.  Forcing the U.S. government to intervene would have helped protect their remaining holdings.  So this might have been an entirely commercial gambit. 

Second, this really isn't about sovereign wealth funds per se but about official holdings of U.S. debt and equities.  Some people think this is a real problem -- others don't.  Readers should provide their thoughts in the comments.

Third, the fact that the Russians thought the Chinese would go along with them on this says a lot about the delusions Russian leaders had during the Russian-Georgian conflict.  They really seem to have believed that China, other members of the Shanghai Cooperation Organization, and the rest of the Collective Security Treaty Organization  would be perfectly cool with Russia recognizing the independence of two secessionist states -- just because it would be an affront to the U.S.A.  Whoops.

This raises my provocative but closing point -- that the Russian-Georgian war might have been the best thing that could have happened for the bilateral relationship.  Despite all the doomsaying at the time, the conflict -- combined with Great Recession -- had a modest humbling effect on Russian ambitions.  The commodity bubble - which had fuelled Russia's economic growth and self-confidence for the past decade - popped in the summer of 2008.  The recognition of Abkhazia and South Ossetia abetted a capital outflow that had begun in reaction to the Russian government's heavy-handedness in picking winners and losers in the domestic economy.  These trends, if nothing else, likely highlighted the opportunity costs of continued bellicosity to Russian elites and Russian policymakers. 

At the same time, the invasion itself provided a moment of clarity to U.S. policymakers about the precise limits of their influence when dealing with balky republics in the Caucasus.  Even as a candidate, Obama articulated a "realist internationalist" position towards the Russian Federation.  This approach recognizes Russia's great power status and the utility of a great power concert in dealing with global trouble spots.  Rather than prioritizing human rights, democratization, or even economic interests in the bilateral relationship, this policy position prioritizes great power cooperation on matters of high politics, such as nuclear nonproliferation and the containment of rogue states that transgress global norms.

You can argue about the priorities, but on the whole I think this policy has worked.  The war allowed both sides to confront the costs of continuing down a very negative trajectory.  They both stepped away from the brink.

This is worth thinking about whem mulling over a different bilateral relationship that's had a bad few months.

As my boss U.S. envoy Stephen Bosworth arrives in Pyongyang, I think it's worth noting that the North Korean government has not been endearing itself to its citizenry.  Hmmm... let me rephrase that -- the DPRK government has been acting with even more disregard fo its citizens than usual. 

The nub of the problem has been a currency revaluation/reform in which North Korean citizens will be forced to trade in their old notes for new ones -- and each citizen is limited in the amount they can exchange.  This move was designed to do two things:  lopping off a few zeroes of the North Korean won, and flushing out private traders along the Chinese border who are sitting on currency notes that will soon be worthless. 

It appears, according to AFP, that the DPRK regime has finally come up with a move that actually roils their population: 

Amid reports that some frustrated residents have been torching old bills, South Korean aid group Good Friends said authorities have threatened severe punishment for such an action.

Many residents would burn worthless old bills rather than surrender them to authorities, in order to avoid arousing suspicions about how they made the money, Good Friends said.

The banknotes carry portraits of founding president Kim Il-Sung and his successor and son Kim Jong-Il. Defacing their images is treated as a felony.

With nascent private markets for food collapsing because of the currency reform, citizens are finding it difficult to obtain basic staples. The U.N.'s Food and Agriculture Organization is already projecting another grain shortage for the country. 

Over at the U.S. Institute for Peace, John S. Park does a nice job of explaining the political economy effects of this currency move: 

As North Korean people in key market-active regions benefited from growing commercial interactions, low- to high-level DPRK officials figured out ways to get a cut of the money made. These officials used most of these bribes (viewed by traders as a "cost of doing business") to line their own pockets, but also used a portion of these for their respective organization's operating budget. With less to skim from the markets due to this revaluation, these officials will have funding gaps to fill. Given that these officials also enjoyed a higher standard of living, the discontent of the North Korean people will be aligned with these "skimming" officials. New groups of losers from this revaluation may be more advanced and better organized than protesters during previous periods of government-initiated economic and currency reforms....

If the DPRK government had improved and restored the inconsistent Public Distribution System and other public services on a national basis (a massive undertaking), a revaluation may have triggered greater state control by minimizing the benefits from the non-formal market system and making the North Korean people dependent on the state again. It does not appear that the DPRK government has improved these national systems. In an apparent effort to restore discipline through this revaluation, the DPRK government may have initiated a period of economic, social, and political destabilization by undermining a widely used coping mechanism for the people, as well as a growing number of officials.

[So a buckling DPRK regime is a good thing, right?--ed.]  From a nonproliferation perspective, not so much, no.   

Any domestic instability in North Korea is bad for Bosworth, the Six-Party Talks, and nonproliferation efforts in general.   The June uprisings in Iran have led the Iranian regime to adopt a more hardline position on the nuclear issue, both to bolster the conservative base and engage in "rally round the flag" efforts.  I see no reason why this logic would not apply to North Korea as well -- indeed, domestic instability is the likely explanation for Pyongyang's bellicose behavior earlier this year.

Developing.... in a very disturbing way.    

UPDATE:  My FP colleague Tom Ricks has more. 

Over at Politico, Eamon Javers notes an odd trend in the Drudge Report: 

On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.

And October was only 20 days old.

Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.

“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”

Market watchers say it’s unlikely that Drudge is actually moving the currency markets with his relentless attention.

“I don’t think that anyone who seriously trades currencies reads The Drudge Report before making important buy or sell decisions,” said Chris Roush, a professor of business journalism at the University of North Carolina at Chapel Hill. (emphasis added... because that's a priceless quote)

Drudge isn't the only one obsessed about the dollar.  Last week, James Pethokoukis blogged the following for Reuters: 

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

OK, let's be as plain as possible about this - as a reserve currency, the dollar is not going anywhere.  Really. 

The dollar's slide in value has been predictable, as the need for a financial safe haven has abated.  By and large, a depreciating dollar helps the U.S. trade balance (though it would help much more if the Chinese renminbi got in on the appreciation).   

Even the Chinese, who have spoken like they want an alternative to the dollar as a reserve currency, are in point of fact not doing much to alter the status quo.  Why?  To paraphrase Winston Churchill, the dollar is a lousy, rotten reserve currency - until one contemplates the alternatives. 

Because all of the alternatives have serious problems.  The euro, the only truly viable substitute for the dollar, is not located in the region responsible for the largest surge of growth.  It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence (the Europeans wouldn't be thrilled either, as it would lead to an even greater appreciation of the currency).  Oh, and the European Union has no consolidated sovereign debt market.  The euro is worth watching, but it's not going to replace the dollar anytime soon.  

The other alternatives are even less attractive.  Most other national currencies beyond the euro - the yen, pound, Swiss franc, Australian dollar - are based in markets too small to sustain the inflows that would come from reserve currency status.  The renminbi remains inconvertible.  A return to the gold standard in this day and age would be infeasible - the liquidity constraints and vagaries of supply would be too powerful.  There's the using-the-Special-Drawing-Right-as-a-template-for-a-super-sovereign currency idea, but this is an implausible solution.  As it currently stands, the SDR is not a currency so much as a unit of account.  Even after the recent IMF authorizations, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. 

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

The thing is, I'm not sure this gambit is going to work.  People who already think Obama is a socialist will go for it, sure, but that's only rallying the base.  I'm not sure how much fence-sitters care about a strong dollar, however.  If anything, populist movements tend to favor a debasing of the currency rather than a strengthening of it. 

Still, I'm just a political scientist -- I'm sure that, "theories on political behavior are best left to CNN, pollsters, pundits, historians, candidates, political parties, and the voters." 

So, have at it, readers!  Will the falling dollar be a source of populist outrage if Drudge links to it enough? 

UPDATE:  contrasting takes from Kevin Drum and Megan McArdle. 

For reasons that will soon become clear, your humble blogger has been reading up on Iceland's financial boom and bust in recent years.  So I noted with interest that yesterday, Iceland's Prime Minister Jóhanna Sigurðardóttir took to the pages of the Financial Times to vent about her country's treatment at the hand of big countries... like the Netherlands.  See if you can spot the contradiction in her statements:

In its efforts to conclude negotiations over compensation for foreign savers in failed banks, Iceland has been accused of a tendency to imagine a British or Dutch conspiracy behind any bad news.

Iceland has no such tendency. It is battling the effects of severe banking and currency crises and a recession that is affecting our part of the world as much as any other. My government, which took over in February and gained a majority in general elections in May, has to deal with the aftermath of the fall of nearly all of Iceland’s privatised banking sector....

The FT has reported how the Dutch opposed the IMF lending to Iceland in order to enforce their demands on Icesave [an online bank headquartered in Iceland that attracted upwards of 300,000 British and Dutch depositors--DD], claiming the UK and Germany as allies. The perception is that Treasury officials in the UK and the Netherlands used their bargaining power against a much weaker party when the Icesave deal, now being debated in the Icelandic parliament, was struck.

This has made it difficult for Iceland’s government to convince the parliament and Icelanders that an agreement on Icesave accounts with the UK and the Netherlands is un-avoidable.

Here's the funny thing -- if you click on the link from the FT about how the Dutch are using the IMF to put the screws on Iceland, you get this story which sources those suspicions to.... Icelandic officials.  The story also goes on to say that, "The view in London is that Iceland has a tendency to imagine a British or Dutch conspiracy behind any bad news." 

To be fair to Sigurðardóttir, she wasn't in power when Iceland got itself into this mess.  Furthermore, Iceland did have help getting into this mess -- reading up, it's clear that EU banking regulations are even more screwed-up than US banking regulations.  And it wouldn't stun me if the Dutch were putting the screws on Iceland. 

Still, reading up on the mess in Reykjavik, it is truly stunning how little Icelanders seem to blame themselves for their current plight (and how much they thought their run of success was completely deserved).  The fault always seems to lie with cabals of hedge funds, rating agencies, foreign central bankers, etc. 

Iceland has had its share of bad luck, and until recently had a political class that was by far the most incompetent in the OECD area (and the competition in this arena is admittedly intense).  Still, reading Sigurðardóttir's op-ed, I can see why Henry Kissinger once described Iceland as the most arrogant small country he had ever encountered. 

My pace on commenting on Iran has been about as sluggish as CNN's.  By my rough estimate, I'm now approximately 4,567 posts behind Andrew Sullivan on the Iran election. Let's try to get back in the game! 

In this post I want to look at what's likely to happen in Iran; the next post will look at what the Obama administration's response. 

OK, so, Iran. There are protests, riots, and Twitters galore -- will it amount to regime change? 

Alas, I think the answer is no.  I don't want this to be the answer.  No matter how I slice the data, however, I get to that outcome.

Let's stiputlate that the election results were rigged.  Here's the question -- why were they so blatant about it?  The speed and skewness of the "official" results seemed design to trigger disbelief. Was that intentional? 

Hey, you know what, I think it was.  University of Chicago political scientist Alberto Simpser has written about why authoritarian leaders like Khamenei would engage in electoral corruption (.pdf). The answer is not pretty: 

[A]n overwhelming victory today can send a powerful signal to the citizenry tomorrow – a large margin of victory can deter opposition turnout, discourage opposition coordination (e.g. when the opposition is fragmented into a number of parties), and increase the winner’s bargaining power with respect to electorally important social actors by rendering it less likely that they are pivotal in a winning coalition.

I suspect that this was the intent in Iran. The question is whether it will work. Khamenei has backtracked a little from his endorsment of Ahmadinejad as the winner, and now wants the Guardian Council to investigate allegations of election fraud. I suspect this is an effort to play for time, however, in order to get his security apparatus prepped for a more brutal crackdown. Twice in the past 10 years (1999 and 2003), this regime has been perfectly willing to crack down on reformist groups to secure its hold on power. I see no reason for Khamenei to hold back this time around. 

In other words, unless Iran's security apparatus starts to split, I don't see how this ends in any outcome other than Khamenei staying in power. 

What does this mean for the rest of the world?  On to the next post!