Year in Review: 2006

No one event dominated 2006, although several smaller developments wove a confusing tapestry. Geopolitically, the two issues that have dominated the new century both took turns for the worse, as the US situation in Iraq deteriorated and the World Trade Organization’s Doha round of trade talks turned up empty. The results of these developments will be felt long after New Year’s Day has come and gone. On the economic front, the US economy continued to emit mixed signals, as key indicators would seem to show a slow-down, yet the stock markets steamed ahead amid worrisome signs of a bubble in some sectors. The global economy, for all the grousing and unease, enjoyed a pretty solid year despite the high price of oil: emerging-market stocks did fairly well, the Chinese economy continued to grow at a break-neck pace, buoying the commodities markets, and Europe, too, showed signs of shaking off a decade of malaise, as growth rates edged upward in some key Eurozone economies.

As benign as these things may be, the major challenges to global order were not surmounted in 2006. Militant Islam remained a concern, as 2006 saw Afghanistan slide back into regional chaos, Iraq dissolve amid sectarian violence, a brief, hot war erupt along the Israeli-Lebanese border, and a strengthening of Islamist political factions from the Levant to South Asia. Nuclear proliferation, too, rated as a front-page issue, as unreliable states continued to develop and weaponize nuclear technology. And finally, energy insecurity showed no signs of lessening as the cost of oil and gas remained high.

THE DIVAGATOR has noted these things and others throughout the year, sometimes offering up very prescient analysis…and sometimes not. I haven’t always been able to follow up with each essay to provide additional commentary (also known as CYA). In any event, the quotations below are drawn from the past year’s essays; some are spot on, and some are, well, just spotty.


“Why, then, is the United States so keen to introduce democracy into the region, a move that, were it ever carried out, would bring to power, from Casablanca to Kandahar, precisely those folks whose interests diverge from those of the West?”

from “Those nettlesome Near-East elections,” January 28, 2006

This still remains a central contradiction in American foreign policy, but it seems the Bush administration is finally attempting to throw its support behind a more coherent set of policy goals in the Mid-East. Realpolitik is back in fashion in Washington, and I would expect to see the US’s taste for democratic reform in the region to subside over the next two years.


“One might expect a $67 billion dollar merger to receive more attention than Sunday’s announced deal between AT&T and BellSouth, particularly so since the deal will reconstitute a large portion of Ma Bell that federal regulators had so tirelessly rent asunder in the 1980s, but by and large, notwithstanding the notable antitrust history of AT&T, antitrust concerns have been markedly understated.”

“This is the greatest reason for granting the BellSouth deal regulatory approval. No one, not even the companies battling it out for market dominance, really knows what that market will ultimately look like. The sum of AT&T and BellSouth might end up being just a big phone company that slowly bleeds itself dry, and as we saw in the gross incompetence of regulators in the attempted bust-up of Microsoft, regulating a quickly evolving industry often means solving a problem that will solve itself in due time.”

from “All the king’s men,” March 7, 2006

This merger was smooth sailing until the Democrats swept the mid-term elections. Suddenly, the Federal Communications Commission took a far more activist approach to the deal. Gartner, a technology research and consulting firm, reported that the FCC forced AT&T to make the following concessions to close the deal:

• AT&T made commitments for 100% broadband coverage (DSL, satellite or WiMax) to all residences in the combined territory by year-end 2007.
• Consumers who had not subscribed before got a low-cost DSL choice ($10 per month and a free asynchronous DSL modem), and a stand-alone DSL option was added.
• Enterprises and other carriers received rate caps on special-access circuits.
• In wireline, AT&T agreed to treat all Internet traffic equally, in a bow to “net neutrality” advocates.
• In wireless, AT&T is giving up the 2.3 and 2.6 GHz spectrum owned by BellSouth.

“If (and it’s still a big if) we should see a true yield-curve inversion in the second quarter of this year—and if it is sustained for the better part of 2006—chances are high that the 2008 presidential campaign will occur smack in the middle of a recession.”

from “The bond market’s crystal ball,” March 21, 2006

The inversion did occur…we must wait and see what that means for the 2008 cycle of elections.


“For example, in February, while The New York Times was busy nattering on about the high time Russian Olympians were having in Turin, a little-noticed shakedown was occurring concerning the fate of the Sakhalin-2 project off the coast of Sakhalin Island. Through a series of state-sponsored extortions and coercions, ongoing since January 2004, Gazprom, the state-owned Russian oil and gas major, has insinuated itself into the project, forcing the project’s main stakeholder, Royal Dutch/Shell, to lower its stake.”

from “Russia’s new drink of choice,” March 23, 2006

Gazprom and the Kremlin further displayed their hand, forcing Royal Dutch/Shell to cede control of the entire project to Gazprom. The final straw for Royal Dutch/Shell was the Kremlin’s sudden interest in reported environmental violations, which is a laughably transparent example of extortion. On December 22, the Wall Street Journal reported the following:

Shell and its partners agreed yesterday to hand over 50%, plus one share, of the project to OAO Gazprom, the state-controlled Russian giant, for $7.45 billion.

The stake is difficult to value because of steep cost overruns at the project. But by most estimates, the deal provides Gazprom with extremely attractive terms, essentially allowing it to buy into the project late in its development stages with little project risk and at a price that would be similar to one it could have paid as a ground-floor investor.

“…only time will tell whether 9/11 was the Maine or Pearl Harbor, but the latter is looking doubtful.”

from “Let’s roll the cameras,” May 7, 2006

…and looking ever more doubtful still.


“But come what may, this much is certain: the next president will inherit a situation not altogether different from that inherited by Gerald Ford and Jimmy Carter.”

“The truly unfortunate thing is not its own failure, but its ability to hamstring its successor to the Oval Office. In that event, the next few years of presidential politics will look nothing like The West Wing, but more like That ‘70s Show.”

from “The Bush legacy,” May 16, 2006

Due to the death of Gerald Ford over the Christmas holidays, we got a full review of just how constrained the Ford administration was, thanks to the lack of wisdom exhibited by his predecessor. While Bush is not Nixon, expect Congress to be more assertive with whomever might win the 2008 election, party affiliation notwithstanding.


“So is this a civil war? Call it that if you must, but so long as both sides attempt to game the political system—even if the means are violent—I would refrain from calling it a civil war. It’s closest historical analog is something like the Weimar Republic, where groups across the political spectrum from left to right used violence and intimidation as a means of enhancing a political outcome. And that requires the pretense that the current political sphere is still worth winning. We are indeed in a gray area that may yet end without one of the parties withdrawing from the political stage to carry out its arguments via all-out war.”

From “The widening gyre,” June 13, 2006

The Weimar allusion seems particularly apt now, as a form of low-grade violence continues to warp Palestinian politics without completely destroying the state.


“Still, our difficulties in Iraq should not obscure other fronts of the War on Terrorism where we have experienced some success. I should add, these successes argue for a more diffuse decision-making process, not less. For example, our ability to tightly regulate capital flows in the post-9/11 world has been largely successful, and that success is a product of, above all, cooperation and open-mindedness. One small circle of bureaucrats in Washington could have never achieved so cheaply and efficiently the desired goal: to monitor capital flows internationally in order to prevent terrorists from using the international banking and financial system to fund their worldwide operations. By enlisting the international banking community, as well as foreign governments, we were able to formulate strategies and put them in place with far greater skill and utility than if, say, the Treasury Department had attempted to do it all by themselves.”

From “The Global War Against Abstraction,” June 20, 2006

Although I didn’t remark on it at the time, it was but days after I published this essay that all hell broke loose over the US Treasury’s practice of data mining, whereby the CIA and Treasury Department gained access to the confidential financial information of private citizens, using blanket subpoenas to access the database, rather than individual subpoenas for each record examined. Luckily, the benefits of this practice had probably been exhausted long before the issue became a political football for lawyers to kick around, since the US government had been so engaged in the practice for well over four years.


“So Israel moves in, destroys what it can of Hezbollah’s fighting capability, leaves, and then what? Nothing changes. Hezbollah will have demonstrated once again that the ideology of continuous warfare against Israel is feckless and misguided.”

From “The moving parts begin to spin,” July 13, 2006

Nothing like being flat wrong to humble the intellect. I completely misread the entire situation surrounding the brief war on the Israeli-Lebanese border between Israel and Hezbollah.


“The idealists have had their go at Iraq; it is now time for the practical men to step forward and make such lemonade as we can from the bitter lemons we’ve been dealt, and the first step forward in this regard is to dispense with the fantasy of a unified Iraq willed into being on the cheap. We should begin the effort toward partition immediately.”

From “Breaking up is hard to do,” July 24, 2006

While the tone of the Bush administration’s Iraq rhetoric shifted considerably during 2006, unfortunately, the substance of US policy did not. Can’t say that was entirely unexpected, but I would have thought we would have moved with more speed and urgency in 2006 to re-craft our approach to the problem.


“…and I doubt much that Hezbollah will accomplish much of anything with its Katyusha attacks, other than making it unacceptable to the Israeli people to settle for anything less than total victory. Hezbollah’s attacks have actually guaranteed against an early cessation of hostilities as such a response would be political death for any Israeli politician.”

From “Asymmetry and jus in bello,” August 9, 2006

Again, hair shirts all around. Just flat-out wrong on all counts relating to the conflict. While I stick by the philosophical points I made relating to just-war theory, my strategic and political understanding of the war was about as off as one could be.


“Of course, primary elections are well known for lousy turnouts; typically, only politically active people tend to vote in them, so one should be wary about drawing conclusions based on comparing primary results to past mid-term general elections. Still, Lieberman corralled 828,000 votes in his 2000 campaign for US Senate. There is obviously a pool of past support out there that didn’t show up for the primary; Lieberman feels he can tap into that support in a general election.”

From “Liberman v. Lamont redux?” August 9, 2006

OK, so I made up for my Hezbollah blunder by noting that Lieberman’s primary-election loss was not necessarily a knock-out punch.


“At this point, however, it’s not even a given that Mr. Lamont will be seated in the 110th Congress when it convenes next year. In short, there has been too much talk too soon concerning Mr. Lamont.”

From “Tea leaves in Connecticut,” August 19, 2006

Ditto.


“The current fad is to see the housing market as a barometer of sorts for nationwide confidence in the US economy. Such a view might be an overstatement, but if true, it would stand to reason that this year’s retail sector might see lower sales figures during the all-important holiday season. If confidence is low—as the housing market would indicate—then, naturally, folks will spend less money this Christmas.”

From “Conflicting signals,” November 30, 2006

James Covert reports in today’s Wall Street Journal:

Holiday retail sales, once considered a barometer of the health of the economy, are no longer a crystal ball.

The same-store sales figures dozens of retailers reported yesterday don't reflect two big shifts in the way consumers shop these days. Gift cards have grown in popularity, but they aren’t logged as sales until they are redeemed. Online sales, another booming category, also aren't included in the widely watched numbers.

Overall, retailers reported a 3.1% increase in December in sales at stores open at least a year, according to an index of 55 chains compiled by the International Council of Shopping Centers. That fell short of the 3.5% gain recorded a year earlier as well as the 3.6% increase in same-store sales the chains logged for the year as a whole.

Perhaps confidence is not as low as it seemed a month ago, but with the advent of the gift card and online holiday shopping, the predictive power of the retailers’ holidays sales may not be as closely correlated with economic confidence as we once thought.