"Tell me how this ends," David Petraeus famously asked back in 2003, referring to the U.S. war in Iraq. Today, I'd like somebody who knows more about international finance than I do to answer that question regarding the eurozone.

Today we learned that with the exception of Germany, the rest of the eurozone is slipping back into recession. Take a look at this graphic here, and you'll see that problem countries like Spain and Italy are in particularly bad shape, with economies that are not only under their 2008 levels, but beginning to shrink at an accelerating rate. And the OECD forecasts for next year -- see here, here, and here -- are not exactly encouraging.

Why does this matter? Because countries like Spain, Italy, and Greece all need genuine economic growth in order to get out of their larger debt problems. In fact, they need economic growth that is sufficiently strong to provide a surplus over their existing debt service (and other expenses), so that people holding their debt (or expecting to buy new bonds when it's time to roll the current set over) have reason to believe that the debts will eventually be repaid. This is why everybody gets nervous when interest rates on new debt rise about the canonical 7 percent mark. 

The issue is ultimately one of confidence. If the institutions holding Spanish or Italian debt and the lenders who have to issue new debt (to cover the service on the old debt) are convinced that the Spanish and Italian economies will eventually start growing and that the money to pay these debts will be there in the future, then interest rates will remain low and the danger of default will recede. But if these same lenders begin to suspect that these economies aren't going to grow enough (and might even continue to shrink) they will rightly conclude that the money to pay their existing debts (including the debt service) will be lacking. At that point, they will only be willing to lend more money at interest rates that are even less sustainable. And that's when states have to start thinking about bailouts, or about leaving the eurozone and solving their problems through a new (and highly devalued) local currency.  

The happy ending to this story, if there is one, is that the various structural reforms now being imposed on these countries will simultaneously cut government costs (thereby freeing up money for debt service) and eventually trigger robust economic growth (thereby increasing tax revenues and providing even more money). But thus far this doesn't seem to be happening. Instead, we get recurring crises, each dealt with by some sort of hastily improvised mechanism mostly designed to kick the can down the road and wait for a miracle to occur. But unless the curves in the graphic cited above hit an inflection point and start heading upward, I don't see how this favorable outcome ever gets reached.  

But international finance isn't my real gig, so there may be aspects of this situation that I've failed to grasp. If any of you think you understand what's really happening, tell me how this ends.

In one of my earliest posts on this blog, I argued that America's penchant for counterproductive global interventionism was driven by not one but two imbalances of power. The first was the imbalance of power between the United States and the rest of the world, which made it possible for Washington to throw its weight around without worrying very much about the short-term consequences. If you're a lot stronger than anyone else, it's hard to imagine you could lose to anyone and you're more likely to do something stupid like invading Iraq.

The second imbalance was the disproportionate influence of pro-intervention forces within the U.S. foreign policy establishment. As I put it back in 2009:

"America's rise to global primacy was accompanied by the creation of a well-developed set of institutions whose stated purpose was to overcome isolationist sentiments and to promote greater international activism on the part of the United States. American liberal internationalism didn't just arise spontaneously as America's relative power grew, it was actively encouraged by groups like the Council on Foreign Relations (founded in 1921), and a whole array of other groups and organizations. These institutions don't always agree on what specific actions the United States ought to take, and they aren't the sort of clandestine capitalist conspiracy depicted by Lyndon Larouche and other fringe groups. But together they stack the deck in favor doing more rather than less."

I went on to describe the DC think tank world (i.e., groups like AEI, Heritage, Brookings, Carnegie, etc.) and the numerous special interest groups that lobby for their own particular causes. And then I noted that:

"By contrast, there are at most a handful of institutions whose core mission is to get the United States to take a slightly smaller role on the world stage. There is the CATO Institute. . . and maybe a few people at the Center for American Progress and the New America Foundation. And there are plenty of peace groups out there with an anti-interventionist agenda. But these groups are hardly a match for the array of forces on the other side."

I mention all this because there seems to be a concerted effort underway to turn one of those organizations -- the CATO Institute -- into another member of the pro-intervention choir. In particular, right-wing industrialists Charles and David Koch (who are long-time CATO supporters) have recently sought to place several new members on CATO's board of directors, and have filed a lawsuit challenging its current governance structure. You can read about this power struggle here and here.

Why does this matter for foreign policy? Because, as CATO Vice-President for Foreign Policy Studies Christopher Preble lays out in this blog post, the individuals the Kochs are seeking to appoint hold views that are decidedly antithetical to the libertarian, mostly realist, and generally peace-oriented foreign policy perspective that has been CATO's trademark, and which is an increasingly rare perspective in post-Cold War, post 9/11 Washington. Preble also notes that the Koch Foundation helped sponsor an invitation-only seminar series at the American Enterprise Institute last year, whose lineup consisted of a "who's who" of hawkish neo-conservatives (Eliot Cohen, Walter Russell Mead, Eric Edelman, Niall Ferguson, etc.). Each of the speakers was a strong supporter of the Iraq War, which tells you something about where the Kochs are coming from.

It's a free country where just about everything is potentially up for sale, and the Kochs are free to use their money to try to shape public discourse as they see fit. Needless to say, they haven't been exactly shy about doing that, though a commitment to truth doesn't seem to be a high priority of theirs. But if their efforts to transform CATO succeed, we will lose one of the few influential institutions in Washington that consistently calls for a more sensible and restrained foreign and defense policy. I'm not a libertarian and I don't agree with all of CATO's positions on these matters, but a further narrowing of public discourse on foreign policy is not what the country needs right now. So I hope CATO's current management wins this fight, and that the institution remains true to its original vision. We'll be better off as a country if it does.

The struggle to save the euro is beginning to look like a chase scene from an Indiana Jones movie. First, our hero dodges the landslide, then runs from the spear-wielding aborigines, then is surprised by a snake ("I hate snakes!"), then is pursued by well-armed Germans and has to escape on horseback, only to plunge over a waterfall, only to be captured by ... you get the idea.

So this week we had 48 hours of excitement after Greek Prime Minister George Papandreou announced he was going to hold a referendum on Greece's acceptance of the European bailout. Consternation reigned, and markets tumbled. And then he said, in the best tradition of Emily Litella: "Never mind." Markets rebounded, and the bus lurched on toward the next crisis.

As I've emphasized before, I'm no macroeconomist (although my respect for some of them has been dropping steadily since 2007). From my decidedly non-expert perspective, here's what I've concluded.

The real issue with respect to Greece and Italy (and thus, the euro) is whether genuine economic growth can be restored to these economies. All the bailouts and austerity and haircuts (i.e., voluntary reductions in debt) in the world won't help these states (and especially not Italy) if they can't generate enough economic growth to pay back what they owe. (Strict austerity is a problem here, by the way, because it reduces growth in the short term). If they don't grow they can't pay, which will place a lot of European banks at risk of major losses and maybe bankruptcies. And because this whole arrangement depends on confidence -- a debt is an asset if you think it will be repaid, but it's a loss if you believe it won't -- you'll get a credit event if the markets ever conclude that growth won't happen and the debts won't get repaid, and the euro is probably finished (at least in its present form). End of story.

So the fact that things have calmed down a bit (just as they do at the end of a good chase scene), doesn't tell us much about the future. All these diplomatic machinations to arrange rescue packages, etc., can buy time, but they won't solve the problem if economic growth does not return. And the big difference between this thriller and a Spielberg movie is that the script is being written as we go along and we have no guarantee of a happy ending.

Remember the 1990s? Back in those days, the U.S. was recognized as the world's sole superpower. Our economy was booming, we ended the decade with a budget surplus, and there was a widespread sense around the world that the United States really had its act together.  True, we had some pretty bitter partisan politics, misguided polices like "dual containment" were helping pave the way for 9/11, and corrupt financiers were busy sowing the seeds for the 2007 meltdown, but most of the world had the impression -- rightly or wrongly -- that the United States knew what it was doing. People like Tom Friedman extolled America's virtues in books like The Lexus and the Olive Tree, arguing that the rest of the world would have to embrace "DOS.Capitalism 6.0" (in other words, our system), or fall by the wayside. Overall, a powerful aura of competence enhanced U.S. influence and magnified our "hard power." 

Fast forward to right now. We are on the brink of a major self-inflicted wound, driven solely by the deep dysfunction that now seems baked into our political system. Why should Pakistanis, Afghanis, Europeans, Chinese, Thais, Mexicans, Venezuelans, or anybody else take our advice on how to govern, when they watch the sorry set of ignorant clowns who are holding the rest of us hostage? If the worst case happens and the United States ends up defaulting, the economic costs will be significant enough. But it is also likely to do considerable damage to America's reputation for being a reasonably well-governed society, and it will accelerate the tendency for people around the world to look elsewhere for guidance. And while all this time and attention has been wasted on the debt ceiling, other problems are festering and will be there to bite us later.

I wonder if all those "patriots" in the Tea Party and the GOP ever thought about that. And if they did, would they even care?

If you're relaxing on Memorial Day and reflecting on the sacrifices that some of our fellow citizens have made to advance the common good, I have three suggestions for things to read.   All are drawn from the Sunday New York Times, and together they paint a worrisome portrait of the challenges we face as a nation.

The first article, appropriately, is a portrait of several soldiers from the 1st battalion, 87th infantry and the challenges they face as they return from Afghanistan. Several have been wounded, one has seen his marriage dissolve, all of them face an array of medical problems or personal obstacles, and none seem to have bright prospects once they return. Together, their stories remind us that most of the people who have been fighting these wars aren't members of a privileged elite; quite the contrary, in fact.  

The second article, by Gretchen Morgenson, summarizes a recent paper by Joseph Gagnon and Marc Hinterschweiger of the Peterson Institute of International Economics. Here the subject isn't the human cost of war; it is the economic consequences of a decade or more of American profligacy. The basic story is that our society has lived well beyond its means, and we will face a rising mountain of public debt -- in the best case rising to more than 150 percent of GDP by 2035 -- unless we "design a long-term plan to reduce fiscal deficits in the future." Gagnon and Hinterschweiger believe there is still time to ward off this gloomy scenario, but only political leaders are willing to make hard choices about entitlements, tax rates, and other forms of government spending (including defense).  

And the third article is Robert Reich's review of a new book on the financial crisis: Reckless Endangerment, also by Gretchen Morgenson (the same) and Joshua Rosner. The book (which I have downloaded this but not yet read) is a portrait of some of the key individuals who helped create the environment in which the mortgage crisis and financial meltdown occurred. Here's the paragraph (by Reich), that caught my eye:

The real problem, which the authors only hint at, is that Washington and the financial sector have become so tightly intertwined that public accountability has all but vanished. The revolving door described in "Reckless Endangerment" is but one symptom. The extraordinary wealth of America's financial class also elicits boundless cooperation from politicians who depend on it for campaign contributions and from a fawning business press, as well as a stream of honors from universities, prestigious charities and think tanks eager to reward their generosity. In this symbiotic world, conflicts of interest are easily hidden, appearances of conflicts taken for granted and abuses of public trust for personal gain readily dismissed."

Reich is quite familiar with this world, having famously been a "Friend of Bill (Clinton)" from the latter's Oxford days, as well as faculty member at Harvard and Secretary of Labor in Clinton's first term.  As someone who has been lucky enough to teach at prestigious universities, I've some experience with these interconnected webs of influence myself, though hardly at the highest reaches, and Reich's summary here rings true to me.

Put the three pieces together, and it makes somber reading for Memorial Day. For they remind us that the people who have engineered our biggest failings in recent decades -- including the wars in Iraq and Afghanistan-have largely escaped any of the consequences. Similarly, most of the people whose mistakes led to the financial meltdown have retained their wealth, status, and political power. And as we spend the next couple of decades  digging ourselves out from these various messes (assuming that our sclerotic political system actually manages to make do something effective), it's ordinary Americans who will pay the biggest price. As usual.

I'm back in Singapore for the first time in nearly two years, and what a difference two years can make. Back in 2009, Singapore was reeling from the after-effects of the global recession, which hit its trade-dependent economy particularly hard.

The island nation has regrouped quickly, however, and its economy reportedly grew by an astonishing 17.9 percent in the first half of 2010. The harbor is chock-full of ships again, construction is proceeding apace, and the government expects robust growth to continue.

I don't want to go all "Asian values" on you, and comparing Singapore's economy with that of the United States is risky at best. But I've been reading a few books and articles on the endemic corruption (or if you prefer, criminality), embedded within the United States political/economic system (and watching documentaries about it too). And it made me wonder how much this feature might have to do with the varying trajectories of the two countries.

Case in point: today's Herald Tribune reports that Goldman Sachs has concluded that there's nothing really wrong with how it does business. To quote the print version (not the online edition) Goldman decided "its operations need only a fine-tuning, not a complete overhaul." Hmmmm. I don't know about you, but when a major investment bank has to get bailed out by the American taxpayer, and just paid a $550 million fine to settle civil fraud charges (not the first time Goldman has had to do something like this, by the way), one might reasonably conclude that there were more fundamental problems involved. Not from the point of view of Goldman's present profits, perhaps, but from the point of view of what is good for the society as a whole. And the problem seems to be that maximizing political influence is as much a part of Goldman's business model as the pursuit of economic gain itself.

Mind you, I'm not an economist, and I'm sure there are legions of people out there who would be quick to leap to Goldman's defense. And I'm not really picking on Goldman, because the financial meltdown of 2007-2008 suggested that the rot was far more widespread. Instead what troubles a layperson like me -- and maybe ought to worry you, too -- is that we've just lived through the most significant global recession since the 1930s but don't seem to have learned much in the process. That recession was triggered by malfeasance in mortgage and financial markets, and yet not much seems to have been done to create new arrangements that would prevent something similar from happening again. And the main reason isn't conceptual or economic but political: financial interests give a ton of money to politicians, and -- surprise, surprise -- those same politicians tend not to take actions that these donors oppose, like significantly tighter financial regulations. 

Singapore is far from a perfect society, and as I said at the outset, direct comparisons between its situation and that of the United States are somewhat dubious. But I can't help but wonder if maybe we could learn a few things about political economy from them. Like not letting private money play an enormous role in politics, and paying civil servants enough so that more of our best brains choose public service over Wall Street.  

The New York Times and other news agencies are now reporting that China is preparing to get behind the U.S.-led effort to toughen economic sanctions on Iran. The Times's headline (in the print version) reads "China Supports Iran Sanctions," but the actual story tells a rather different tale. It says that President Hu Jintao agreed yesterday to "join negotiations" for a new sanctions package, but reminds readers that China has a well-established pattern of using negotiations to delay and deflect stiffer measures. In particular, the article reports that former President George W. Bush tried three times to "corral Chinese support " for tougher penalties on Iran, only to have China use its participation to "water down" the resulting resolutions.

This pattern should not surprise us, because China has every reason to drag its feet on meaningful economic sanctions. To begin with, China wants to safeguard its access to Iranian oil and gas and protect its ability to invest in Iran. Iran is now China's second largest source of oil and gas (providing about 15 percen of its consumption), and China is Iran's second largest customer. China has also become a substantial investor in Iran's economy. With demand for oil likely to grow in the future, this is not a relationship Beijing is likely to jeopardize.

Second, China is sanguine about the prospects of an Iranian bomb because it has a more realistic view of what that development would mean. China's leaders know that they didn't gain a lot of geopolitical clout when they tested their own nuclear weapon in 1964, and being a nuclear power didn't enable them to dictate or blackmail Taiwan, Vietnam, the Koreas, or anyone else. China's rise to great power status was driven by its economic development, not its modest nuclear arsenal, and Bejing knows that same would be true for a nuclear Iran. While China would probably prefer that Iran not develop nuclear weapons, it hasn't succumbed to worst-case paranoia and isn't willing to pay a large price to prevent that from happening.

Furthermore, keeping the U.S.-Iranian pot simmering (but not boiling) is in Bejing's long-term interest. America's ham-handed involvement in the Persian Gulf and Central Asia has been a tremendous strategic boon for Beijing, and they undoubtedly feel a profound schadenfreude as they watch the Uncle Sam expend trillions of dollars in Iraq and Afghanistan while simultaneously maintaining an icy confrontation with Iran. After all, the more time, money, attention and political capital we devote to Iran, the less we can focus on China's long-term efforts to build influence in Asia and eventually supplant the U.S. role there. Plus, bad relations between Washington and Teheran creates diplomatic and investment opportunities for China. The last thing Bejing wants is a prompt resolution of the Iranian nuclear issue, because it might pave the way for a more substantial détente between Washington and Teheran, thereby diminishing Beijing's value and allowing U.S. strategists to shift their attention elsewhere.

At the same time, China doesn't want a war to break out in the Gulf, which could send oil prices soaring (at least temporarily), put the world economy back in recession, and lead to other unpredictable consequences. So it would like the United States and its allies to keep confronting Iran via economic sanctions, but slowly, so that the dispute with Iran never goes away and the use of force stays off the table.

For China, therefore, the optimal strategy is to drag its heels and play for time. This approach means never quite refusing to go along with stiffer sanctions but never saying "yes" either. They'll probably agree to some additional penalties eventually (maybe after a desperate United States agrees to guarantee China's oil supplies against an Iranian cutoff!), but they won't back anything severe enough to convince Iran to forego nuclear enrichment altogether. The dispute will continue, U.S. leaders will devote lots of time and attention to it, and China's long-term interests will be advanced. 

That, ladies and gentlemen, is Realism 101. Too bad that Washington seems to have forgotten how to play it.

There is an old saying among military experts that "amateurs talk strategy; professionals talk logistics." I was reminded of that while reading a recent commentary from my friends at the S Rajaratnam School of International Studies in Singapore. The somewhat arcane subject was the "carrying capacity" of the Straits of Malacca/Singapore, a vital maritime artery in South East Asia, and it reminded me that there are a host of issues in our globalized world that rarely get much elite or public attention, yet are absolutely vital to "business as usual." As this example suggests, a lot of them have to do with the principles, procedures and infrastructure that enable people and things to move from place to place cheaply and relatively efficiently.   

At its narrowest point, the Straits of Malacca and Singapore are about 2.2 kilometers wide. Nearly 100,000 vessels transit the Straits each year -- carrying about a quarter of the world's traded goods -- and several recent studies project that as many as 150,000 vessels could be moving through the Straits by 2020. That many ships would exceed the Straits’ current "carrying capacity" (i.e., the number of ships that could move safely through it).   

The key takeaway, however, is that "carrying capacity" is not a fixed number: The number of ships that can safely transit the Straits can be increased by timely government action to remove shipwrecks, improve navigation aids, tidal monitoring, and meteorological information, increase towing capacity, and other rather straightforward measures.  

The good news, according to the RSIS commentary from which I gleaned this information, is that the three littoral states (Indonesia, Malaysia, and Singapore) have adopted a proactive policy on this issue. As a result, "projects are already underway, or are being proposed, to address the safety of navigation issues in order to improve sea lane conditions, with the participation of all interested stakeholders." If only the negotiations in Copenhagen were this easy.

The broader lesson here has to do with the importance of maintaining public infrastructure -- roads, bridges, air terminals, electrical grids, maritime waterways, rail lines, etc. -- the sinews upon which global commerce depends. These policies aren't exactly sexy, but they aren’t frivolous luxuries either. Indeed, they are essential ingredients that make the modern world work. It wouldn't be such a bad thing if world leaders got asked more questions about what they were doing to improve national and global infrastructure, at least as often as they get asked about where they are planning to send troops or what they think about the latest celebrity scandal.

AFP/AFP/Getty Images

A while back I commented on the two imbalances of power that drive American grand strategy. The first is the gap between the United States and the other major powers, which makes Americans think they are responsible for managing much of the world and convinces them that they can do so with near-impunity. The second imbalance is the strength and political clout of a host of different institutions and interest groups whose common agenda is encouraging greater international activism on the part of the United States. In recent decades, the forces in favor of "doing more" have been better-funded and better-organized than those who favor greater restraint, which is one reason why we spend so much on defense and why we find ourselves entangled in intractable conflicts on several continents.

But when I read some early reports about the Obama administration’s health care plans, I began to wonder if the various forces that favor global activism are going to face stiffer opposition in the future. We are likely to have a sluggish economy for some time to come and the U.S. population is getting older. Virtually everyone agrees that serious health care reform is badly needed but will cost a lot. Plus, Obama's various economic recovery measures are going to saddle us all with record deficit levels. Us baby boomers are not exactly noted for our altruism, and my generation is going to put a lot of pressure on politicians to deliver the entitlements we've been promised. All of this means that budget dollars are going to be very tight, and the Pentagon is going to face tougher scrutiny when it brings in gold-plated requests. The Nation and Mother Jones may not be all that formidable a political opponent, but what about the AARP?

One of the great triumphs of Reagan-era conservatism was to convince Americans that paying taxes so that the government could spend the money at home was foolish and wrong, but paying taxes so that the government could spend the money defending other people around the world was patriotic. Ever since Reagan, in short, neoconservatives supported paying taxes to promote a U.S.-dominated world order, while denouncing anyone who wanted to spend the money on roads, bridges, schools, parks, and health care for Americans as a “tax and spend liberal." But if I'm right about the emerging fiscal environment, that situation may be about to change.

TIM SLOAN/AFP/Getty Images

At the New Yorker blog, Steve Coll reports that the U.S. Congress is preparing a five-year $1.5 billion per annum non-military aid package for Pakistan, with full support from the Obama administration. (You can read the text of the legislation, entitled the "Enhanced Partnership with Pakistan Act," here.) 

This step sounds impressive, until one remembers that Pakistan's population is nearly 180 million and its GDP in 2006 was about $144 billion. So the aid package amounts to around a 1 percent increase in Pakistani GDP, which works out to about $8 for each Pakistani. In other words, the U.S. Congress is going to increase their per capita income from $850 per year to about $858. (It's actually less than that, because some of the money goes to administrative expenses, auditing, and the like.)

This act might have some symbolic value, and I'm willing to assume that a few good things might get done with the money. But let's not forget that Pakistan has already received about $45 billion of U.S. economic and military aid since 1946 (measured in constant 2007 dollars), so it’s not like $1.5 billion today is going to work miracles. Moreover, because money is fungible, even careful accounting can't prevent Pakistan from shifting some of its own resources to other areas, which means the areas we are trying to help (such as education and public health) may not get that much better.

Overall, it's hard for me to believe it will have much effect on the lives of ordinary Pakistanis or do much to erode the endemic anti-Americanism there. Pakistan actually got a big influx of money after 9/11 (due in part to increased U.S. aid and also to a lot of reverse capital flight), yet the increased cash either went to the army or tended to fuel financial and real estate speculation instead of genuine economic growth. Moreover, even with the best of intentions, big aid initiatives like this one are bound to reinforce perceptions that the United States is perennially interfering in Pakistani society, which probably reinforces hostility and suspicion.  

Instead of another aid package, we could probably do more to help Pakistan by removing U.S. tariffs on Pakistani exports (e.g., textiles), which would benefit Pakistani producers and American consumers alike. But that would trigger opposition from domestic interests here, so Congress will just adopt the politically convenient but less helpful step of appropriating more money.