June 9, 2023

Thought of the Week:

Earlier this week, the PGA Tour announced that it had reached an agreement with LIV Golf and the DP World Tour to unify and form a larger commercial enterprise. Given the extreme animosity shown among the various factions over the past two years, it was an absolutely shocking announcement that took nearly everyone by surprise, including the game’s biggest stars. The controversy stems almost entirely from LIV Golf’s financing, which comes from Saudi Arabia’s more than $600 billion Public Investment Fund (PIF). Beyond the cries of “sportswashing,” the term given to the use of games, teams, and stadiums to cleanse an image and/or launder a reputation, the episode provides a window into just how much U.S. foreign policy in the Middle East has changed over the past 2 ½ years. In meetings with Sumitomo Global Research, analysts at Stratega told the Washington office that upon coming into office, the Biden administration wanted a very different relationship with Saudi Arabia than the one projected by the Trump White House. In fact, President Biden was determined to “pivot to Asia,” and sought to make Saudi Arabia a pariah state. The decision was very personal with the thought being that such a policy would not only restore dignity to U.S. foreign policy but also enable the pivot. The resulting absence of a strong American presence in the region created a vacuum, which China, and Russia, were more than willing to fill. What China offered to Saudi Arabia was an alternative approach, one based on simply developing a cooperative security arrangement between the two nations. In contrast, bilateral relations with the U.S. required additional alignment against so called third country “bad actors.” In less than two years, the Chinese approach has sunk in deep at the highest levels of the Saudi government, and what we now see from Middle East nations, particularly Saudi Arabia, are countries acting with more self-direction, on their own, and without regard to U.S. preferences. Rather than concerning itself with U.S. protection over global energy security, of prime importance to Riyadh today is the realization of its economic and social reform blueprint Vision 2030, which requires the establishment of a stable environment to attract investment (the PIF’s investments in Formula 1 Racing, Premier League Soccer, and now the PGA Tour represent financial diversification under Vision 2030). Over the same period, both China and Russia have made inroads into the Middle East. Consider that China is building a naval base in the UAE, and is developing a maritime network across the region to rival its land-based Belt and Road Initiative. What’s more, with Russian support, Syrian President Assad has been welcomed back to the Arab world, and Moscow now serves as the co-manager of OPEC+. The U.S. finds itself scrambling to find a path forward. In the days prior to Secretary of State Blinken’s trip this week, Saudi Arabia announced oil cuts, greeted Venezuelan President Maduro, and enabled the reopening of the Iranian embassy for the first time in seven years. In years past, these actions would have been considered such insults that even one of them would have prevented the travel of a high ranking American official. Today, however, Secretary Blinken visited with no preconditions in an effort to prevent the Saudis from undermining U.S. foreign policy even further. The Blinken visit, as well as last month’s trip by National Security Advisor Sullivan, mark a complete reversal of initial Biden policy with the conclusion being that the U.S. will struggle to fulfill in its agenda in the Middle East. 

Thought Leadership from our Consultants, Think Tanks, and Trade Associations

Eurasia Group Says Trump’s Legal Troubles Will Have to Grow to Damage Him…and His Position as Frontrunner is Only Helped by a Larger GOP Field. Former president Trump continues to draw headlines for multiple criminal investigations. The troubles fall into three camps: state/federal investigations into actions related to January 6; a federal probe of mishandling documents; and an active New York trial about business record fraud. Of these, investigations related to January 6 have the most potential for damage because they inspire discomfort among non-Trump Republicans and could potentially lead to a constitutional disqualification from running for federal office in certain states if he is found guilty of insurrection; however, courts are undecided on this question and there are no indications that such charges are being brought. At the same time, even never-Trump Republicans see as politically tinged recent news indicating that the former president will be charged by Biden’s Justice Department for mishandling documents…The increase in size of the GOP primary field benefits the frontrunners—former president Trump and Florida Governor  DeSantis. The former president’s odds of victory in the primary stand at 55%, due to his 30-point lead over DeSantis in public opinion polling. While DeSantis has started to find his footing and has garnered support from state officeholders in early primary states, he still trails Trump in public opinion polls by an enormous margin that appears durable despite the multiple criminal investigations. DeSantis’ best chance for victory is if the non-Trump field unites behind him before the Iowa and New Hampshire contests. The first debate in late August may be the most important inflection point in the race as the Republican National Committee’s qualifying standards for the debate could narrow the field, cause long shot candidates to drop out, and put downward pressure on Trump’s odds of victory.

Global Policy Group Declares Debt Limit Deal Averts Default But Does Little About Debt. On June 3, just days before a June 5 X-date, President Biden signed a bill raising the debt limit that had passed the House and Senate by wide margins. The new law suspends the debt through early 2025, pushing the next potential crisis until well after the 2024 election, although it does nothing to avoid another such crisis in two years. By limiting cuts exclusively to discretionary spending, which accounts for just 15% of total federal spending, by $1.5 trillion over a decade, the bill will do little to slow continued growth in the public debt. As a result, U.S. debt is projected to rise from 97% of GDP to 115%, rather than the 119% it would have been without a deal. The agreement was a rare example of bipartisan cooperation despite the nation’s sharp political divisions, and served as an example of the type of political compromise that was once more common in Washington. While President Biden and House Speaker McCarthy (R-CA) both claimed victory in the talks, the deal disappointed progressive Democrats as well as conservative Republicans. Although signing of the measure allows Congress and the Biden administration to return to addressing the myriad other issues on the agenda that have been put on hold for the past month, the recent turmoil may have lasting impact; Fitch Ratings said it will keep the top credit rating for the U.S. on its negative watch list because “repeated political standoffs” and “brinkmanship” over the national debt have lowered confidence in government.

Institute for International Finance (IIF) Now Sees Soft Landing in the U.S. In the immediate aftermath of the Silicon Valley Bank (SVB) collapse almost three months ago, the key question was if SVB was a genuinely new shock hitting the economy, or, instead, the lagged manifestation of rapid Federal Reserve Bank tightening in 2022. Evidence since then increasingly points to the latter and not the former; meaning that the SVB saga has not sparked a separate tightening in lending standards above and beyond the tightening already in the system because of rapid Fed hikes. The realization of all of this now leans in the direction of a “soft landing” for the U.S. economy, which is the IIF’s updated baseline forecast of the global economic outlook.

“Off the Record”

A case pending before the U.S. Supreme Court is likely to result in substantial alterations to “Chevron Deference,” a longstanding principle of administrative law whereby executive branch agencies have wide latitude to interpret statutes. The expected ruling in the case, which will likely come next spring, is part of a broader effort by the conservative majority on the court to remake administrative law by reducing agencies’ autonomy and making it easier to sue agencies to block new regulations and enforcement actions under the Administrative Procedure Act. The net effect will be a weaker administrative state that cannot effectively override a patchwork of state-level and local regulations. Environmental regulations, which disproportionately rely on Chevron deference, will be particularly prone to litigation if Chevron is overturned. By reducing the ability of administrative agencies to implement their own interpretations of federal statutes, changes to administrative law would also force Congress to adopt a more active role in forming policy than it has taken in recent decades; however, an inability by Congress to adopt this role would impede effective rulemaking.

In Other Words

“The stakes are too high for a crowded field to hand the nomination to a candidate who earns just 35% of the vote, and I will help ensure this does not happen,” New Hampshire Gov. Sununu (R) on not running for president.

“I am going to be very clear—I’m going out there to take out Donald Trump. But here’s why: I want to win, and I don’t want him to win. There is one lane to the Republican nomination, and he’s in front of it. And if you want to win, you better go right through him,” former New Jersey Gov. Christie (R) explaining his campaign rationale. 

Did You Know

UK Prime Minister Sunak engaged in baseball diplomacy this week, using a game between the Washington Nationals and Arizona Diamondbacks to woo U.S. business leaders and politicians the day before meeting President Biden. Although the idea of the prime minister throwing out the ceremonial first pitch had been discussed, that honor went to Stuart Taylor, a British Army veteran. While Prince Harry was the last notable British leader to throw out a first pitch, before an MLB game in 2010, President William Howard Taft was the first U.S. President to throw the ceremonial first pitch at a baseball game.

Former Vice President Pence is now running for president, challenging former President Trump. Pence’s run is the third time a vice president is taking the fight to his current or former boss—Vice President Thomas Jefferson defeated President John Adams in the election of 1800, while President Franklin D. Roosevelt beat John Nance Garner in the 1940 Democratic primaries.

Graph of the Week

Party loyalty in the House would seem to go only as far as the next election. The House members with the lowest party unity scores for the first five months of the current Congress represent districts where voters either elected a president opposite the lawmaker’s party or favor policies not generally aligned with the lawmaker’s party. Political analysis strongly suggests those lawmakers know their best hope for returning to Washington after 2024 is showing an independent streak.


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