Sree Iyer: Namaskar, Hello and welcome to Daily Global insights. I’m your Sree Iyer and joining me Sridhar Chityalaji. This is episode number 118, March 15 2021.
The main points in today’s news are as follows:
There are two different types of meetings going on. The first one that concluded last week, new dawn: quad leaders vow to define the Indo-Pacific century new group of Nations. The second one that is coming up this weekend is Anthony Blinken and Jake Sullivan will be meeting Wang Yi and security officials of PRC (People’s Republic of China).
China’s new dam on the Brahmaputra on the lower reaches of the Yarlung Tsangpo River is not a concern but it is an eco-disaster.
Blinken and Austin will have two plus two meetings with Japanese counterparts Toshimitsui Motegi and Nobuo Kishi.
And now on the quad update, a new dawn, quad leaders vow to define the Indo-Pacific century as a new group of Nations. Sir, what is really interesting here is they have come up with three different commitments plus there was an article that appeared in I think Washington Post that had four different global leaders pinning that thing and it was a combined article by Joe Biden, Narendra Modi and the Japanese prime minister and Australian prime minister.
Sridhar Chityala: Well, I think whenever Washington Post and New York Times get involved in publishing any of these articles you have to really take it with a pinch of salt and I’m calling the spade, a spade. A quad is established as a strategic deterrence and it was started by none other than Shinzo Abe a going back in 2007. To say that a new dawn of the century, our first priority is covid, second priority is Green Accord and third priority is around open and free Indo Pacific Pathways or Indo-Pacific Maritime boundaries, you know to some extent it’s almost like, a tail leading the dog, which is effectively to say you needed to come to your resolution you come to a resolution and which is around all kind of covid. Remember again they are using covid as a mechanism whereby India is the producer, Australia is the distributor and Japan and the United States will fund this one 1 billion vaccines to be manufactured. I have just taken one item out in a bit in a kind of context and state the kind of the narrative around what you are saying around the Washington Post. To me, it is a ceremonial figurative kind of a statement often, it does not achieve the Strategic objectives. So therefore whatever you want our Washington Post you want to take you can take it.
Sree Iyer: Now covid-19 vaccine diplomacy tops the agenda. India is going to manufacture, Australia to distribute and the US and Japan will be funding 1 billion vaccines for Global needs. This one a good agreement that came out of the Quad, isn’t it?
Sridhar Chityala: Yes, it is a great agreement, but does it need to be part of the quad is my question? The quadrilateral is around that trade, is around Commerce and it’s around security. So to me, I think it is a bi-product of an agreement that was reached prior, which is around the rare 3.40 to me is a good agreement. Where is here? You know, it’s great. They are trying to address a human disaster that has engulfed. Naturally, at least there is a theory that it is started in China. So, therefore, it is, very appropriate is the Forum that is more appropriate within the kind of context of the first whatever, you know, the global leaders kind of statement coming out of the thing, to that extent I agree, but it to me, it doesn’t kind of really aligned with the Strategic agenda with which quad was established. Again, we’re going to have a separate discussion between have it because if you recall we talked about it, we’ll have a separate discussion around this topic. We are waiting for some developing events and once that happens, then we would have a more strategic important framework.
Quad is established with three principal objectives one preserving the sovereignty of the islands in Nations around South China, East China area stretching up to the Indian Ocean. Second, it is to preserve a significant amount of Natural Resources as well as the maritime passages free and open passages on the maritime and the third is the whole kind of ecosystem around fisheries and so on and so forth. This is the purpose with which quad was established, but we seem to have slightly deviated from that strategic agenda. So that’s fine because of the relevancy, but I really would like to always go back to the what’s the framework under which quad was established.
Sree Iyer: And Defense minister Lloyd Austin or we should say Secretary of Defense Lloyd Austin will be visiting India to provide further Clarity. I think he is going this week right?
Sridhar Chityala: He is reaching there on Wednesday. Monday and Tuesday they have meetings which are today, they would have completed the meeting in Japan. There’s a two plus two dialogue going on between obviously that’s why you have Antony Blinken and you also have Lloyd Austin meeting with the appropriate officials from the Japanese side.
Sree Iyer: So, looking at the other side of Alaska the United States and China are going to have a summit. On the US side, we’re going to have Anthony Blinken and Jake Sullivan and they had been meeting with Wang Yi, who the foreign minister of PRC and other security officials. Was this not supposed to be a Biden versus the Prime Minister Li Keqiang meeting, sir, what happened?
Sridhar Chityala: Well, I think that it seems to have been to some extent water down if I have to use the principal and I think PRC set the right context. In fact, Li Keqiang set the context which is to say Hey, you know, we need to recalibrate the relationship, tone down the rhetoric. Don’t interfere in our affairs as far as Hong Kong, Uyghur, Tibet, you know, any of these things are concerned. It is part of our Sovereign rights. Let us look at restarting and resetting the trade relationship. He seems to have thrown the first coin. Jake Sullivan in his briefing mentioned to the Press Corps, which is to say that not the agenda is not about tariffs, but it is around what areas we can cooperate with and what areas we agree that we have a conflict?
Sree Iyer: And some of the bans on Chinese companies with close proximity to the PLA will continue to remain isn’t it?
Sridhar Chityala: Huawei stays. The only thing that has seemed to have got a concession is Xiaomi the phone company so they seem to have got their ban lifted and so Xiaomi will be back in action in the United States. So, therefore, to some extent, the policies of the Trump administration seems to be staying.
Sree Iyer: And finally the generals in the US Army have been raising the rhetoric on Chinese threat with the UK and other commanders. What is this threat, sir?
Sridhar Chityala: So, there is the threat is around China’s threat is imminent. There is an imminent conquest’ and invasion of Taiwan in 2022, coinciding with this Congress. They believe that somewhere between 2022-23, this will happen. Another set of generals have said that the confrontation with China will be on land. So therefore the United States must be ready. The same has been said by the commanders of the United Kingdom. So therefore there seems to be a set within the Army that is going on one track in terms of the imminent threat emerging from China and then you have this is where I am predicting the are now you can understand the context behind why I’m criticizing the covid outcome. The covid outcome is completely silent on the core issue, which is this Taiwan. If you recall that the Chinese Army went to the Taiwan Strait, the United States went thrice, the Indian Navy went through once, the German Navy went, the French, the Japanese all pass through this little Taiwanese Strait showing their solemn support for independence of Taiwan recognizing. They also showed solemn support for Senkaku. And when you ask the question. What is this? This is the imminent threat, they are referring to this particular region seems to be the next point of Confrontation between the US and China and Taiwan and Japan emanating in that area. So I think this is the threat that they are alluding to so you almost have a fracture you have this meeting in Alaska. You have this virtual meeting of the quad and then you have the rhetoric and the noise that is coming from the US generals.
Sree Iyer: In other news, the $1,400 stimulus checks are now been going to hit people’s account, isn’t it?
Sridhar Chityala: Yes, in fact in some of the people maybe sir, you already got it in your account. So, some of the people would have received funds into the account. It’s those who are electronic would have received it. It’s great news and you know people generally seem to be, you know, well-disposed that they’re getting their money.
Sree Iyer: Yellen says is that the tax increases will come when funds are needed for other priorities just not now, so there is a differing this is the thing that has been happening for a long time, sir.
Sridhar Chityala: The question that’s been asked is we already close to 4.1 trillion? We’re adding another 2.1 trillion dollars. The question being asked is how are you going to fund all this when you have such a big number that to kind of accommodate? I think that we were 14.3% deficit of GDP in 2020 will be about 11% without additional spending coming in 11% or 10.5 % of the GDP. So, there are questions being raised around as to how are you going to fund all this in the medium to long-term? Interest rates at Great, Bond rates are rising. How is this going to be funded? So Yellen is saying we don’t need anything right now, but if we have, we will be doing more when we do more will be raising taxes.
Sree Iyer: So now that we have talked about numbers. I put up the first chart which is a budget projection under CBO for up to 2051 and would you like to talk about this a little bit because the debts are going totally out of control.
Sridhar Chityala: Yes. So I think that with your permission once you put up that chart I will use my phone here. Yeah, look at the same chart here. So I think that what we are pointing out here is that when you take a look at that key numbers that you need to look at is the revenue line, when you take a revenue line between now and 2019, 2020, 2021. 2021 is 16% of GDP is the revenue that is the one that takes by way of revenue collected through personal taxes, corporate taxes around the kinds of stuff. When you look at that from 2021 to 2051, the increase is very very small 18.5% of the GDP in 30 years, we have moved almost at a snail’s pace. Then, take a look at the spending, the spending is 26.3%of GDP and 2051 is 31.8. So on a scale of for a two percentage points increase in Revenue over this period, there is a 5 percentage point increase in the spending. When I say that is 26.3 to 31.8, that is about 5.5. So therefore there is almost 2.5 times the growth in expenses relative to the income right relating to the revenue. So this puts tremendous pressure on the deficit of the total debt that is why you are saying that they’re going from 102% in 2021 to 202% by the time you get to 2051. This is factoring in no new kind of incremental debt coming into the balance sheet of the budget now. Take a look at the net interest, the net interest is the one that you pay on the borrowings that you make. When you take a look at the net interest, it is today around 1.6 or 1.4 per cent of the GDP. We discussed this in our budget projections, right which is basically the re-architecting of the balance sheet using the 10-year 30-year lower cost of funds available, i.e., lower cost of borrowing. This goes 8.6%
as high as five-point two per cent in 2014 about 20 years, right? We’re having a great time in the next 10 years as the interest is only 1.4% to 2 %. Then, there is a jump up 3% percentage in terms of the cost of the balance sheet. Okay. So again, what are the mainline items is mainline. The mainline items are healthcare is a big line item, then, you have the net interest which is a big line item, Healthcare is mandatory, Social Security is mandatory. Then, you see the discretionary spending which is you know, all the kind of stuff that you spend money on but net interest is rather a big line item, which is driving the expense or the spending and which in turn is contributing towards this growing gap between revenue and expense and hence the doubling of the debt of the US balance sheet. Effectively, we are sinking without any kind of programs the more and more you borrow is basically going to put non-unmanageable balancing in terms of having any flexibility in terms of how to address future disasters.
Sree Iyer: Nancy Pelosi is kicking off a big bowl transformational infrastructure deal of about 2 trillion dollars, now, this is just a new one coming down the pipeline. So there is more expenses. So that is also going to put more stress on the Debt, isn’t it?
Sridhar Chityala: It is and that is where Yellen and these Progressive groups have come up with this concept which we again touched on our prior shows which is there is this, those who are 500 million dollars to 1 billion dollars wealth, they will have a one per cent wealth tax those who are above 1 billion dollars, they will pay an extra 2% wealth tax which is a No-No to the Republicans. There is also a tax that is being contemplated by Janet Yellen, which is a 10% tax for those companies which are keeping X percentage of revenue and profits overseas are 10% flat tax on the overseas revenue. This does not augur very well. This will also be a No-No as far as Republicans are concerned. So, this is their funding mechanism as far as the future debt is concerned but there are stopping when this tax is as a source of making up but they’re also trying to say that they’re going to do more this universalization of the basic income and the child tax credits, which were given $3,000 for those above 6 below 17 and then $3,600 for those below 6. They see that as the beginning of the harmonization of everybody getting paid.
Sree Iyer: Now, how much will all these tax measures net them per year sir in terms of how many million dollars?
Sridhar Chityala: It is not fully quantified as yet in terms of this specific benefit, but there is definitely to some extent it will converge the spending to revenue gap because it’s spending to some extent it will converge but it’s not going to converge to the extent of your you can see already the deficits. We were around 4.6 to 5%, We are today already, last year I can understand 14.3, this year, I can understand as that now 10.3 is likely to blow up but very quickly we are moving into the 10% gap which is considered an unhealthy way of managing the balance sheet in public finance in a context. Typically, the number that is always mentioned is 4% to 6%. Once upon a time the rating agencies will dump, you are born if you are about 2% to 4% deficit of your GDP is considered a bad way of managing public finances, but the US has opened a new chapter in this whole concept of deficits.
Sree Iyer: Sir, while we are at a deficit, let’s take a look at the second drawing which is the covid funds and there is a lot of unspent funds available for this Administration to splurge on. I wouldn’t say splurge on, but at least they can use that also isn’t it?
Sridhar Chityala: They are going to use it. Sorry. I’m just going to go back and look at my diagram. They are going to use it close to a trillion dollars, they have not spent before they did the next two trillion dollars right be close to 390 billion dollars is on PPP. You know, you remember your saying about many people who did not get these PPP loans, the loans closed early all these kinds of things. So a lot of those things around that $390 billion is around the PPP, the healthcare benefits that flow with it, the augmented direct payments that are part of it has still not occurred. That’s going to happen, but that roughly constitutes 40% of the one trillion unspent. Then there is $340 billion. It is about 34% of the unspent money. This is around what they call the Economic Disaster Recovery Loans. People, who are suffering from a whole set of consequences as a result of that so 34% of that money has not been spent. Then you have about 20%, which is called pay overtime, I can understand this is the healthcare rebates, tax credit rebates, childcare rebates; all these kinds of things that still need to be spent that is 190.
Now let’s look at the last number 70 billion. 7% is unquantified, not allocated, to be allocated, missing incomplete data as to where this 70 billion goes. So this is 1 trillion to be put into the money. Now, we actually can go in and dig and get a report as we did last time. What the hell are these 70 billion dollars that are not yet quantified, but that just tells you how callous way the government works in the United States. The only thing is it is sophisticated as the world’s leading economy. But in terms of the practices, this is a demonstration to the world which we are pointing out through this show that basically it is no good or no better than any of that other kind of economies in terms of how the spending is done. Overall balance sheet management, maybe, compliant with the best practices but in terms of the spending, it is very frivolous.
Sree Iyer: Charles Schumer has said that the Biden team needs to be very clear on the Border crisis. So you would not tern him a progressive, Sir? Charles Schumer – Chuck Schumer?
Sridhar Chityala: Chuck Schumer sits between progressives and left. So, therefore, he still has not fully advanced to the left of the leftmost. But he is still very much supportive of the progressive agenda. It’s very clear he’s got two crisis, we don’t have enough time here. We have a crisis in New York, which is all the saga around Andrew Cuomo, he is involved in part of asking Cuomo to get out. We have all issues around the management of the healthcare staff that’s something that he has left. His focus is really on he thinks that this could effectively bring the Democrats down to its knees because it is becoming a very big disaster. They have sent FEMA over the weekend because they’re not able to tackle it. Now, I hear there’s a lot of these kids with no parents are being left along the border with the hope that they will come to this side or that side along with all other kinds of things. The number of people who are afflicted with covid they’re not courtesy tested and being sent into the community. One number estimates this to be close to 25% of the people who are coming in are covid affected.
Sree Iyer: Trump makes a surprise appearance at fundraisers and hints at Lara Trump run for Senate in 2022. Now, how is Lara Trump related to Donald Trump, sir?
Sridhar Chityala: She is the daughter-in-law, she is Eric Trump’s wife. She’s from North Carolina. She is expected to contest from North Carolina. So Donald Trump Junior’s younger brother Eric Trump’s wife is Lara Trump.
Sree Iyer: Now, let’s take a look at India, South Asia news. I’m going to put up the image deck again, sir of the Brahmaputra. China’s new dam on the Brahmaputra on the lower reaches of the Yarlung Tsangpo River is not a concern, but it is an eco-disaster. How so? I’m putting up this deck now, sir.
Sridhar Chityala: When you look at the Yarlung Tsangpo River you can see that it is in the Tibetan Plateau. It makes its curve around just past Nyingchi into Arunachal Pradesh and then flows through Arunachal Pradesh through Guwhati, Assam and so on and so forth. So the dam is in the lower reaches. It was considered to be problematic in terms of water flooding and shortages etc. So the story was whether it really is going to be creating drought and water issues. The Indian Meteorological and Eco-Environmental people seem to have studied and they’ve come to the conclusion; when you actually look at the Brahmaputra, it is cut by a number of tributaries in India. So, therefore, the Brahmaputra going dry and not enabling the farming and the ecosystem of India does not arise. But they have said that it is an eco-disaster. Why is it an eco-disaster? It is an eco-disaster because this is not the only dam, we have covered this extensively in a separate program that we ran as to the number of dams that China is constructing and basically what it does is, it feeds-off a number of ecosystems around the Tibetan and the Indian subregion. They feel that by creating a more number of reservoirs and dams you can create opportunities for flash floods in the event of congregated flow within that specific domain. We saw such a disaster in Uttarakhand with the breakage of the avalanche suddenly there was a huge flash flood because it is very mountainous terrain. So it is in this context that they are saying these opportunities for flooding, abnormal kind of activities that can occur, also seismic because the whole ecosystem is a very fine balance and creating more and more dams along the waterways can potentially create a problem. These are not just mere dams, these are actually hydroelectric projects which are creating electrical impulses as a result of the activity that is taking place around that area. That’s why they say yes, it’s a potential eco-disaster, but it is not a water issue.
Sree Iyer: A couple of things that come to my mind. This is all a rugged territory like Himalaya terrain, there are not many people living there and even if they produce a lot of hydroelectric electricity, it’s going to be a long haul for them to take it down to Chinese plains, isn’t it?
Sridhar Chityala: This is mostly to address the strategic defence deployments that are taking place in the Tibetan region. All these things are not for taking it to Mainland China. This is all around how you create a whole ecosystem as a strategic deterrence for any point of time, Tibet to be, maybe independent, autonomous, whatever you want to say and I think if you take a look at the same chart, you will see Nyingchi is not very far. That is the point of termination for the big Railways that is actually coming from Lhasa to Nyingchi. What is that area? That area is also going to have a fast train which goes with connects Lhasa to Chengdu, again we covered that in another topic, that’s mainline. So they really can have mass transportation of the PLA from one side to the other side. So, obviously, this is all serving the strategic PLA’s interest. There are also going to be bunkers and temporary households that are supposed to be constructed, not too far, 11 to 21 kilometres from the Indian border. So, I think it is those things that are the purpose for which these dams are being built and the usage for which it is being built is the one that is causing alarm amongst people.
Sree Iyer: The next chart shows all the different tributaries that flow into the Brahmaputra. I think you said you didn’t have much to talk about this one, right? Shall I go to the next slide?
Sridhar Chityala: All I was just trying to say is that you have the Manas River, the Sankosh River, you have the Barnadi, you have the Kolong, Lohit, Dibang, Siyang, Burhi-Dihing, so you have all these rivers flowing into the Brahmaputra river. So there are various tributaries which from either side from the Indian side as well as from the Tibetan side. So they say that even at the points of the lower reaches the tributaries feed the river. So, therefore, there is no opportunity for drying the Brahmaputra river.
Sree Iyer: Next, we’re going to talk about China news in the East China Sea – the Senkaku issue. We touched upon it during QUAD saying the Senkaku could be the critical point where the US and Japan and many of the countries around that area are concerned about so what do you think is going to play out next as part of the QUAD plan there, sir?
Sridhar Chityala: We’ll do a more extensive brief in our detail session, but I want to show one chart – Natural Gas Exploration in the disputed East China Sea. If you take a look at this area, you can see that there are red dots and blue dots you can see why the Senkaku which is in the trough of Okinawa, why is it important? It is very important because not too far from there is a natural gas exploration in the disputed East China Sea. Three nations are contesting, Japan is contesting, then Korea probably will have some say this and then you have China. So they are all drilling. Why they’re drilling? Because the island is strategically important due to its obvious proximity from a defence point of view. There are three specific earmark zones. One earmark zone is the Strategic Air Defense. That is whenever you cross the territory, within the territory, you have the air defence Radars flash-up either in Japan, or Korea, or in China. So you have the air defence zones. Then you have the economic development zones where you actually can do activities, you can even get a temporary Island, you can create a zone. So you have economic development and then you have the third which is the natural gas excavation and the drilling platforms where you have both Japan as well as China in that specific area. Now, if you take a look at where Taiwan is, Taiwan is not too far from these strategic gridlocks around the Senkaku islands. So this is the reason why the Senkaku and Taiwan have become very important in the East China Sea for contention between China, Taiwan, and Japan.
Sree Iyer: China intensifies cyberattacks after the disengagement at Pangong Tso. What are the new incidents that you feel could be construed as that?
Sridhar Chityala: The continued cyberattacks are around the government, the defence, I think we have already covered what they tried to do in the Serum Laboratories to look at the value chains and to look at other things of IP. So both on the defense as well as on the governmental databases and so on there seems to be persistent attacks from the Chinese, and also be the the the defence servers and the whatever are the Radars, and monitoring and all those kinds of infrastructure, which is… By the way, India still not upgraded, plans to upgrade this whole mobile telecommunication infrastructure to the Next Generation. So it fairly vulnerable. I would say I’m sure that probably the Indian government would debate and argue to say that they have sufficient different mechanisms in place, which is what they’re probably using to mitigate. I think a lot of work has been done during the Trump period in terms of augmenting India’s infrastructure around that. There’s a new auction or new procurement that is being undertaken and India has made its decision not to import the Next Generation telecommunication infrastructure, especially for communication and its defense needs and it’ll be using its own domestic capabilities.
Sree Iyer: On Farmers’ agitation, a UN body has confirmed that the Khalistanis have donated up to $10,000 for the agitation. So there is the hand of Khalistan in the farmer agitation is now very clear.
Sridhar Chityala: I think I should not interpret that way. I think the farmers’ agitation, basically, is going on independently. It’s very clear based on other anecdotal evidence has that the Khalistani groups are involved in supporting and there was also a theory that somehow the Punjab-Canada trade deal was impacted as a result of everything being domestically produced and for domestic usage and so perhaps this is one of the reasons why the farmers’ agitation was somehow connected to the Khalistani movement. But Khalistani movement seems to have raised its hand and indicated which we saw at least in a couple of cities, a couple of places in the United States we saw that in California, we also saw that in Nevada, boards coming up to say that Khalistani supports the farmers’ agitation in India. I am told that the farmers are now building permanent infrastructures around the border area moving all the way up towards a major strike or a major agitation in India. That seems to be the case on the Farmers’ side. But as the Geneva thing is saying that the Khalistanis who are now fairly active in India in this agitation they seem to have either United States or United Nations Human Rights group has voluntarily come forward or at the request of India has gone public which is say, yes, they have received $1000 as a donation. It’s not good. Not very good.
Sree Iyer: Now, lastly quick look at the markets next week, sir, before we wrap up.
Sridhar Chityala: The markets are expected to be gyrating again as a result of the bond yields and the stocks will toggle between cyclical to the economic recovery stock, which is the traditional kind of stocks rather than the tech stocks. FED Reserve meets on Tuesday and Wednesday. We may get some direction or we make it no direction on the trend of the bond markets. Investor bank will continue to be reliant on the stimulus and the progressive improvements in the economic conditions as a result of the covid vaccines. We don’t have the time to put up a chart that shows basically the rate movements of the 10-year bond. Again, the fascinating thing that you can see is the v-shaped recovery of the yield curve is simply stating that in the pandemic the interest rates dipped to 0.64 is now around 1.6%. At its peak in 2019 interest rates have risen as high as 3%. The bond yields were as high as 3% and we forced it to bring down. It went to 3% because of that 2.25% which we discussed in one of the economic stimulus or the budget programs and which President Trump was forcing it to be brought down saying that we are too early to raise the interest rate to 2.25%. Then we brought it back progressively and then came the pandemic brought it down to zero.
So this is basically saying the gyrations in the bond yields because the bond vigilantes are not buying that the rates are not going to be rising. That is why they are forcing the yield to go up which in turn is creating some gyrations in the stock market and which is also creating problems in the mortgage market because it’s not the short-term raise of 1.6, the 30-year bonds are also around 2.5-2.6% which has grown from about 1.65% to way it is today. So it has implications in terms of how you price your mortgages. They do not want on the verge of recovery the mortgage market, which is a very important market for the United States in terms of its economic outcomes to be going back into the doldrums.
Sree Iyer: That’s all for today folks. We would be back again tomorrow bright and early, same time, same place and a reminder to all our viewers from outside of the United States we have jumped forward by one hour. In India, we used to go live at 6:30 p.m, now will be going live at 5:30 p.m. We will put out tweets and Facebook messages to that effect. Thanks for watching. Please subscribe to our Channel and Namaskar.
Sridhar Chityala: Namaskar and Thank you so much. Have a wonderful day and a wonderful week.
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