We need pragmatic incremental steps to deliver tangible gains to people beyond our shores, repair our reputation, maintain harmony among the Big Three, keep the second world stable and neutral and protect our common planet. Let’s hope whoever is sworn in as the next American president understands this.

Waving Goodbye to Hegemony

If the Democrats want to emerge from this primary ready to face Republicans in the general election, they need to find a cohesive, defensible way to talk about their foreign policy and how it differs from that of Republicans.

How to Talk Foreign Policy

This week in the magazine, Steve Coll writes about the assassination of Benazir Bhutto and the growing violence in Pakistan. Here Coll talks with Matt Dellinger about the country’s insurgency, the influence of the Taliban, and Musharraf’s changing role.

Listen to the mp3.

Audio: Armed and Dangerous: Online Only: The New Yorker

Russian President Vladimir Putin and his anointed successor, Dmitri Medvedev, were in Bulgaria on Jan. 17. The point of the trip was to put the crowning touch on a Russian effort to hook Europe into Moscow’s energy orbit. After a touch of bitter rhetoric about how Russia and Bulgaria were “doomed to be partners,” Putin agreed to grant equal rights to the South Stream natural gas pipeline Moscow hopes to lay through Bulgaria. Yet the tension of the meeting and the concessions that Putin had to make simply to get permission are symptomatic of a broad unraveling of Russian foreign policy toward Europe.

The Unraveling of Russia’s Europe Policy

The Soviet Union collapsed in 1991, and the Russia left in its wake has long since moved past the bad old days. Or has it? Rare survey data from the four main universities that feed Russia's Foreign Ministry reveals that the next generation of Russian diplomats may not turn out to be as “post-Soviet” as you think.

Generation Putin

In a major strategic shift, France is setting up its first permanent naval base in the Persian Gulf, just across from Iran, President Nicolas Sarkozy announced during a visit yesterday to the United Arab Emirates.

The 400-strong military base will be built in Abu Dhabi, the wealthiest and most influential of the Emirates, and will include a significant intelligence operation, French officials said.

Right hand, left hand:

At first sight this is proof that capitalism works. Money is flowing from countries with excess savings to those that need it. Rather than blowing their reserves on gargantuan schemes, Arab and Asian governments are investing it, relatively professionally. But there are still two sets of concerns. The first has to do with the shortcomings of sovereign-wealth funds. The second, bigger, problem is the backlash they will surely provoke from protectionists and nationalists. Already, Nicolas Sarkozy, the French president, has promised to protect innocent French managers from the "extremely aggressive" sovereign funds (even though none has shown much interest in his country).

France setting up naval base in Persian Gulf

This report provides an overview of the role foreign investment plays in the U.S. economy and an assessment of possible actions a foreign investor or a group of foreign investors might choose to take to liquidate their investments in the United States. Concerns over the potential impact of disinvestment have grown as national governments have become more active investors and as uncertainty over the risks associated with securities backed by sub-prime mortgages has increased volatility in financial markets. Actions taken by foreign investors to liquidate their holdings could affect the U.S. economy in a number of ways due to the role foreign investment plays in the United States and due to the current mix of economic policies the United States has chosen. The impact of any such action on the economy would also depend on the overall condition and performance of the economy and the financial markets.

If the economy were experiencing a strong rate of economic growth, the impact of a foreign withdrawal likely would be minimal, especially given the dynamic nature of credit markets. If a withdrawal occurred when the economy were not experiencing robust rate of growth or if credit financial markets were under duress, the withdrawal could have a stronger effect on the economy.

The particular course of action foreign investors might choose to take and the overall strength and performance of the economy at the time of their actions could affect the economy in different ways. Congress likely would become involved as a result of its direct role in making economic policy and its oversight role over the Federal Reserve. In addition, the actions of foreign investors could complicate domestic economic policymaking. Foreign investors who decide to liquidate their holdings of one particular type of investment would normally need to look for other types of assets to acquire. While there are a multitude of possible strategies foreign investors could pursue, this analysis assesses the impact of four of the most likely strategies a single large foreign investor or a group of foreign investors could choose to employ to reduce or withdraw entirely their holdings of U.S. financial assets:

* A rapid liquidation of U.S. Treasury securities.
* A shift in the make-up of foreign investors’ portfolios among various dollar-denominated assets.
* A rapid shift from dollar-denominated assets to assets denominated in other currencies.
* A slow shift in the make-up of future accumulations of assets away from dollar-denominated assets to assets denominated in currencies other than the dollar.

This report will be updated as events warrant.

Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal

Given its relatively low savings rate, the U.S. economy depends heavily on foreign capital inflows from countries with high savings rates (such as China) to help promote growth and to fund the federal budget deficit. China has intervened heavily in currency markets to limit the yuan’s appreciation. As a result, China has become the world’s largest and fastest growing holder of foreign exchange reserves (FER), which totaled $1.4 trillion as of September 2007. China has invested a large share of its FER in U.S. securities, which, as of June 2006, totaled $699 billion, making China the 2nd largest foreign holder of U.S. securities (after Japan). These securities include Treasury debt, U.S. agency debt, U.S. corporate debt, and U.S. equities.

U.S. Treasury securities are issued to finance the federal budget deficit. Of the public debt that is privately held, about half is held by foreigners. As of October 2007, China’s Treasury securities holdings were $388 billion, accounting for 16.8% of total foreign ownership of U.S. Treasury securities and making China the second largest foreign holder of U.S. Treasuries after Japan. From March to October 2007, China’s Treasury holdings declined by about 8%.

Some U.S. policymakers have expressed concern that China might try to use its large holdings of U.S. securities, including U.S. public debt, as leverage against U.S. policies it opposes. For example, various Chinese government officials are reported to have suggested that China could dump (or threaten to dump) a large share of its holdings to prevent the United States from implementing trade sanctions against China’s currency policy. Other Chinese officials have reportedly stated that China should diversify its investments of its foreign exchange reserves away from dollar- denominated assets to those that offer higher rates of returns.

A gradual decline in China’s holdings of U.S. assets would not be expected to have a negative impact on the U.S. economy (since it be matched by increased U.S. exports and a lower trade deficit). However, some economists contend that attempts by China to unload a large share of its holdings U.S. securities holdings could have a significant negative impact on the U.S. economy (at least in the short run), especially if such a move sparked a sharp depreciation of the dollar in international markets and induced other foreign investors to sell off their U.S. holdings as well. In order to keep or attract that investment back, U.S. interest rates would rise, which would dampen U.S. economic growth, all else equal. Other economists counter that it would not be in China’s economic interest to suddenly sell off its U.S. investment holdings. Doing so could lead to financial losses for the Chinese government, and any shocks to the U.S. economy caused by this action could ultimately hurt China’s economy as well.

The issue of China’s large holdings of U.S. securities is part of a larger debate among economists over how long the high U.S. reliance on foreign investment can be sustained, to what extent that reliance poses risks to the economy, and how to evaluate the costs associated with borrowing versus the benefits that would accrue to the economy from that practice. This report will be updated as events warrant.

China’s Holdings of U.S. Securities: Implications for the U.S. Economy

Reza Aslan, on why the next American president should leave God out of the war on terror.

What America Must Do

For nearly a decade, one man has ruled Russia. Marked by scandal, enormous oil profits, and confrontation with the West, Vladimir Putin’s tenure has been nothing if not dramatic. A look back at some of the moments that defined his presidency.

Photo Essay: The Many Faces of Putin