By Benjamin Sutherland

How might the United States ratchet up pressure on foreign enemies and threats, wherever they are on the globe, while reducing the need to station warships, planes, and troops within striking distance? A new type of weapon might do the trick--and even facilitate President Barack Obama's efforts to reduce the U.S. arsenal of nuclear warheads, which are of limited use against terrorists anyway.
 
THE IDEA: The Department of Defense is designing nonnuclear intercontinental ballistic missiles, which could be operational in less than two years. Packed with conventional explosives, they would be able to strike pretty much anywhere on the planet within one hour. ICBMs travel above the atmosphere, so they avoid most radar systems and the airspace of countries en route. For this capability, the U.S. is "willing to pay a great deal," says Mark Lewis, the Air Force's top technology official until his retirement this year.

What’s more dangerous than being an American in Afghanistan? Being an Indian in Afghanistan. On Oct. 8, a car bomb exploded outside the Indian Embassy in Kabul, killing 17 people and wounding 76. The attack came 15 months after another bomb damaged the embassy and killed 58, including the Indian defense attaché. Elsewhere in the country, Indian workers have been victims of suicide attacks and kidnappings.

Sean Gallup/Getty Images
Merkel at the Reichstag.

Why can't German leader Angela Merkel abide her own peers? She bristles at Nicolas Sarkozy, protests Gordon Brown's widely praised economic-stimulus plan as a "pointless race to spend billions," and appears immune to the charm of U.S. President Barack Obama, whom most other Germans seem to love.

Merkel's standoffish manner is the outgrowth of a German foreign policy that has, since the end of the Cold War, grown increasingly independent of American influence and focused on German self-interest, whether in military adventures in the Balkans, Iraq, or Afghanistan or in handling the global economic crisis. And unlike her recent predecessors, Helmut Kohl and Gerhard Schröder, Merkel grew up outside the political mainstream, as a physicist in East Germany. As a result, her style is more businesslike, less backslapping. She is "Ms. Cautious," and growing more so as elections approach in September, says Thomas Kleine-Brockhoff of the German Marshall Fund. "She's not just jumping onto a global hype."

Thus, she has remained silent on whether Tony Blair (or anyone else) should become the first president of the European Council, if the powerful post is created as planned. Her relationship with Sarkozy is limited by his spontaneity and her disdain for it. And her initial coolness to Obama suggests neither dislike nor disregard, but rather a sizing up of a young leader and a straightforward respect for seniority; she sees herself as sen-ior to Obama, just as she saw herself as junior to George W. Bush when she became chancellor in 2005, says one Merkel watcher.

The ties to Obama, at least, could warm over time. In contrast to Brown and Sarkozy, the American and German leaders are popular at home, with approval ratings of 60 percent or more. Both are realists who recognize that their countries' different national interests may lead to disagreements on issues like handling the economic crisis and Afghanistan. And both are known for their unsentimental personal styles, suggesting that a meeting of the minds, if not the hearts, is possible.

You might have heard about a little report from New York Attorney General Andrew Cuomo this morning. With all the subtlety of a sledgehammer--it's titled No Rhyme or Reason: The 'Heads I Win, Tails You Lose' Bank Bonus Culture, for chrissakes--it gives the most detailed accounting to date of the Wall Street bonus fiasco, showing that, as they were losing billions, a whopping 4,793 lucky folks took home bonuses of $1 million or more last year.

It's grist for the rage mill, to be sure, but is it a game changer? To find out, I checked in with another man making noise about regulation these days: Eliot Spitzer, once known as "Lord High Executioner" among the Wall Street crowd. Here's what he had to say about the matter:

So I take it you’ve heard about this Cuomo report?
Is that the one about the poor investment bankers struggling to pay their bills?

That’s it. It’s a sad tale.
Yeah, like Dickens.

My basic question is: after all this, why is it still so hard to regulate these guys?
Setting pay is a quintessential private sector activity. The question is, how do you do it properly and fairly? Whose voice should be heard? Take the public bailout out of the equation for a moment, because let’s hope that’s not a permanent fixture. These are bigger issues. Why have compensation committees failed so utterly? Why have shareholders never been able to reign this in?

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Blair's new popularity lies in a changing Europe. In the past, the EU has filled top posts with mediocre candidates, chosen after months of horse-trading between member states. But the new president will be Europe's chief spokesman and mediator, and will need all the charisma that Blair exudes. Besides, Blair has some handy credentials: He speaks French. He's a socialist--a useful gesture to the left--yet his pro-market sympathies mean he won't offend conservatives. Paradoxically, his strongest qualification could be his nationality. How better to allay British skepticism of Europe than by putting a Brit at its head?

Get ready for 10 percent unemployment. That's the message from the Fed.

Every quarter, the five members of the Federal Reserve Board and the presidents of the 12 regional Federal Reserve Banks give their best guesses about the economic outlook. The latest batch of numbers--released July 15--indicate that the Fed's gotten both more optimistic and more pessimistic. How could that be?

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Our Rio de Janeiro correspondent, MacMargolis, delves into a new microfinance study and wonders whether the much-lauded sector is about as efficacious as a subprime CDO and as bubbly as a Pets.com equity option. --BWS

The international financial crisis has destroyed many certainties,but one of the touted survivors is the old saw that small is beautiful.Sure, no one is flogging mansions to paupers anymore. But microfinance is still flourishing, and even expanding. Ever since Bangladeshi economist Muhammad Yunus started handing out small loans to the poor in1974, the idea that a little credit can help peasants and simple villagers climb out of poverty has swept the map. Civic groups, the World Bank, even commercial lenders have gotten into the act, capturing millions of barefoot clients across the developing world. Today microfinance is a global growth industry. It reaped Yunus the Nobel prize. Even the developed world is catching on. Grameen Bank, the Bangladesh-based microlender Yunus founded, opened a branch in Queens,New York, last year and plans to unveil another in Omaha, Nebraska.Take that, Citicorp.

But hold that confetti...

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The news that Barclays, a British bank, will pay $4 million to rename the Atlantic Ave. subway stop in New York City's Brooklyn borough has attracted quite a bit of interest. It does seem odd. Although Barclays made a profit in 2008, it was 14 percent lower than the year before, and sponsoring a mismanaged, underfunded public transport hub might be considered a frivolous expense while the bank still faces the most challenging financial environment in seven decades.

But perhaps, just perhaps, this was a smart move. After all, Barclays acquired much of the dearly-departed Lehman Brothers, so it's probably looking to expand its name recognition in North America. Barclays already plans to sponsor the sports center that will be built at the nearby Atlantic Yards site. Why wait to begin your publicity blitzkrieg when fans walk in the stadium? Better if your corporate logo is on their minds from the moment they start planning their trip to the game.

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There is no shortage of scapegoats to finger in the credit boom and bust. Exotic derivatives, overcompensated executives, Alan Greenspan, the SEC, reckless borrowers -- all have worn the scarlet letter at one point or another. But the list has not yet been exhausted. Baby boomers, it's your turn.

The Baby Boom lasted from 1946 to 1964, and some 78 million American children were born during that time. As this cohort ages, its sheer size overshadows the rest of society. If you look at an "age pyramid" for the U.S. (shown below), the baby boomers are the metaphorical bulge in the python's throat. 

As this bulge moves from bottom to top, it is having a dramatic impact on the economy. Indeed, the impact is so large that there are hedge fund managers that specialize in picking stocks that will benefit from boomers' buying habits ("Go long on denture manufacturers!").

The big question, of course, is what happens when boomers start to retire. The oldest of them became eligible for Social Security in 2008, and as we move forward in time, more and more of the bulge will switch from middle age -- when they're busy earning and spending -- to retirement, when they start to draw down on their savings. According to the "age wave theory," popularized by money manager Harry Dent in the late 1990s, when the boomers hit this transition point, the U.S. will enter a long bear market, as new retirees start tapping into their pension funds and 401(k)'s, selling their stocks and bonds to pay for their golden years.

Seen in this light, the credit boom and bust was almost an inevitable byproduct of demographics. As the boomers hit their peak spending and borrowing years in the late 1990s and 2000s, they splurged on second homes, SUVs, and went crazy on credit. At the same time, pension funds and retirement accounts peaked in size. There was more money than ever, since boomers had entered their final decade before retirement, and fund managers grew desperate to find attractive returns for the huge piles of cash they managed. Hence, when charming bank salesmen came bearing AAA-rated CDOs backed by subprime mortgages, it was an offer they couldn't refuse. The subsequent crash marked the turning point, after which the boomers will buckle down, try to rebuild their nest eggs in the final years before retirement, and soon thereafter start to draw down on the assets they've accumulated over a lifespan.

This is basically what happened to Japan, which experienced an enormous asset boom in the 1980s -- at one point the land around Tokyo's Imperial Palace was worth more than the entire state of California -- and then a crash in 1990. In the subsequent two decades, the country has grown very little or not at all. The investment managers at Sitka Pacific Capital chalk it up to the factors described above. In the company's most recent investor newsletter, they write:

What happened in Japan in the 1990s was a demographic shift into retirement, where a large portion of the population went from a lifestyle of earning, saving and spending to a lifestyle of not earning, living off assets and spending less. This resulted in less demand for investments like stocks, less demand for housing, and less demand for material 'things' -- and the prices of all these fell.

Today the Nikkei is about 75 percent below its 1989 high. Sitka thinks that the U.S. is "now starting a similar demographic shift into retirement, and that has coincided with what appears to be a peak in spending and debt." If they're right, the current bear market isn't a mere hiccup or even an indicator of a particularly nasty recession -- it's the start of a decades-long slide. (See Sitka advisor Mike Shedlock's blog for more background.)

Is the U.S. really at the same point? One piece of evidence suggests that it is: in 1990, near the start of Japan's woes, the median age was 37.4 years, meaning half the population was older than that. The U.S. today has a median age of 38 years. We're at roughly the same demographic place that Japan was at 20 years ago. Will we face the same future?        

Beijing lost a fair bit of face yesterday when Chinalco, a Chinese state-backed aluminum company, was forced to walk away from a $19.5 billion offer to purchase a large chunk of Anglo-Australian mining giant Rio Tinto. The deal was high-profile, and it had triggered all the usual paranoia about Chinese companies and the notion that they are somehow aiming to corner the market on every commodity in order to feed their own (still growing) economy. My favorite quote against the deal was from former Australian Treasury head John Stone: “Once in the spider’s parlor, the fly doesn’t often get out.” How’s that for sinister?

There’s no doubt that China is hungry for natural resources and that its global shop for them is going to continue to be contentious. But the truth is that’s not what killed the Rio Tinto deal. For starters, while there was lots of public protest about the potential buy in Australia (including television ads paid for by opponents of the deal that showed Chinese police quelling protesters 20 years ago in Tiananmen), Australia’s leadership is not anti-Chinese; in fact, just the contrary. Prime Minister Kevin Rudd speaks fluent Mandarin; his daughter married an Australian-Chinese man, and one of his sons studied at Fundan in China. The demise of the Rio Tinto deal was ultimately about business. During the long and very complex negotiations, both the commodities market and the financial markets turned significantly, making it a much better time for Rio Tinto to do a big share rights issue – which is what it now seems to be planning – than it was before. Why give away 18 percent of your company to a controversial buyer when you can raise money on the public markets?

That’s not to say that Australian politicians aren’t breathing a sigh of relief that they don’t have worry about the fall out from Chinalco. The problem is that the failure of the merger will be perceived as a real slap in the face back in Beijing. Back in December when I attended a meeting of Chinese and Western business leaders in Barcelona, I was amazed that the Chinese oil executives in the group were still smarting about the U.S. blocking CNOOC’s bid for Unocal back in 2005. Today, an interesting Eurasia Group report today is speculating that yet another high profile failure might prompt Beijing to take a firmer hand in directing China's multinationals and their acquisitions overseas. It’s funny, because the specter of more state control is actually what seems to worry people who get nervous about China’s resource grabs.

The other important point here is that China doesn’t have to limit its shopping to the West. Already, Chinese oil companies seem to be focusing their recent acquisitions mainly on emerging markets (where there’s plenty of natural resource wealth to be had). It’s likely that other commodities firms will follow. I think this is just the beginning of a larger trend in which BRIC nations – those emerging market giants – will be dealing more and more with each other, deepening trade and financial ties amongst themselves. And why not? After all, developing countries have economies that are still growing strongly – which is more than can be said for the U.S. and Europe.

One does not want to be disrespectful of the dead, and Jack Kemp was an admirable man in many ways. If the Republican Party had only followed his advice about reaching out to the inner cities and underclass—and ignored his happy talk about supply-side economics—the GOP might not be in nearly the fix it is today. Unfortunately the opposite happened. Kemp, a consummate professional as a football player, was a classic case of an amateur econo-cultist whose understanding never reached quite deep enough. In mid-life, when he decided to switch from sports to politics, Kemp became enamored of simplistic free-market ideas, in particular a toxic combination of Arthur Laffer and Ayn Rand. He then sold another gifted amateur, Ronald Reagan, on the idea that drastic tax cuts would so stimulate the economy that the ensuing growth would more than make up for the loss in revenues. In pushing this idea, Kemp proved to be as effective a quarterback in Washington politics as he had been one on the gridiron, and the results are now economic history—much of it bad, though the tax cuts did help give the Reagan economy a jolt. Kemp was such an economic purist—i.e., amateur—that he argued with Reagan himself a number of times when the president decided that perhaps he’d cut taxes enough.

Rahm Emanuel famously said what everyone was thinking when he noted earlier this year that "a crisis is a terrible thing to waste." The financial industry has been bruised and battered. There's a golden opportunity to refashion a fairer and more stable system, one less susceptible to "the reemergence of an American financial oligarchy," as Simon Johnson so memorably put it in a recent article in The Atlantic. 

What we need in order to accomplish this -- aside from better government oversight -- is a new generation of financial innovators to fix today's broken system. This is what happened in the energy sector when, as oil prices climbed to $150/barrel and climate-change worries crescendoed, venture capitalists sensed a once-in-a-lifetime opportunity and poured money into clean technology. Although oil prices have since collapsed, that money is still at work, and might yet produce the Google or Microsoft of the cleantech world.

The same should happen in the financial world, but I'm increasingly skeptical that it will. One reason for the skepticism is that the SEC and other government agencies charged with regulating the financial sector are in no way set up to encourage Silicon Valley-style innovation. In fact, they often discourage it.

I'm thinking about this topic after a recent meeting with Chris Larsen, the CEO of Prosper.com. Prosper, along with its main competitors, Lending Club and Zopa, is a peer-to-peer lender. These companies enable people to lend directly to one another online. Because there's not a bloated bank sitting in between the two parties, borrowers and lenders tend to get a better deal than they would by going through more traditional channels.

Financial innovations tend to be either unquestionably good (ATMs, credit cards) or arguably malevolent (credit default swaps), and peer-to-peer lending is widely considered to be among the former. It is the internet era's version of community banking, in which borrowers actually know their bankers, and it's also, in this time of tight credit markets, an alternative way for consumers and small businesses to get access to money when they need it.

But the SEC isn't making it easy for peer-to-peer lending to, ahem, prosper. Last summer, as the mortgage crisis waxed and the regulatory agencies' failures became more apparent, the SEC overcorrected and effectively shut down Prosper, requiring the company to enter a "quiet period" while it registered with the federal government. (While that process continues, on Tuesday, California regulators gave permission for Prosper to start operating again within the state. Lenders from in-state and borrowers from anywhere in the U.S. can use the site as they did before, with the addition of some important features.) Zopa, a UK-based P2P lender, sensed the changing regulatory winds and retreated back to the rainy Isles. To date, only Lending Club has "gone through all the legal pain needed to get full SEC registration."  

Larsen is pretty good-natured about the ordeal, largely because Prosper has enough backing ($40 million in venture capital money) to pay the legal and accounting fees associated with SEC registration. But he's fully aware that most young innovators and venture capitalists in the country's technology hubs aren't willing to put up with months or years of regulatory limbo and the associated costs. When the government wanted to print out Prosper's regulatory filings, they sent the bill for all the paper to Larsen. It came to $75,000. The average, fresh-out-of-college entrepreneur might be able to comprehend the mysteries of solar panels and gas-electric hybrids, but understanding -- or affording -- the SEC? Forget about it. And the time for that to change, and for financial innovation to make headway against today's incumbent oligarchs, is swiftly dwindling, according to Larsen. The window is open, but it will only last 18 months, he says:

Either you’re going to have a total collapse or the existing incumbents are going to reestablish themselves. They’re crawling all over Washington, they’re lobbying, because they get it, too -- they’re under threat right now. Things are going to change but they’re going to change one of two ways: fundamentally, or on the margin. You know, tighten up this, tighten up that, and you’ll have another crisis in 10 years. This has been a meltdown. And it should be a call to actual innovators to come up with new things. 

Watching the protests in Thailand over the weekend brought back some distant memories for me—of covering the pro-democracy protests in that country nearly 17 years ago, in May of 1992. Then, as now, the country was paralyzed, but the story line was a lot simpler in those days. Then it was a nascent middle class clamoring for Thailand’s emergence from military autocracy, making use of technologies like fax machines and cell phones to spread the word and undermining official state TV. It was all part of that simplistic “end-of-history” model we were enthralled with back then. Once people got a taste of prosperity, they wanted open political expression. And boy, were they becoming prosperous in the ‘90s, or so we thought. Western-style open-market economies had dominated in the great cold war contest of alternative ideologies. Even Vietnam found itself surrounded by Asian Tigers -- the cold war dominoes had fallen the other way. The end of the cold war was nigh, as was the collapse of the Soviet Union (that would take place six months later). The ultimate victor, we all knew, would be freedom. And not some abstract concept of freedom -- instead, we all were coming to the belief that the freedom to think and vote and act freely was intrinsically linked to the freedom to invent some hot new technology or to start up your own business. It was a moment of history when the truth really did seem simple.

Now we know better. And nothing demonstrates how complex things have become than the travails of Thailand. The latest protests, after all, are not just a story of brave freedom-seeking demonstrators versus evil authoritarians. Yes, the target of their immediate ire is the latest military coup, the one that toppled Prime Minister Thaksin Shinawatra in 2006. But Thaksin was also corrupt, and the economic inequalities he did little to ameliorate during his increasingly authoritarian tenure have become acute with the latest economic crisis. And as Thaksin faces charges at home, the former telecom magnate has been funneling money to the protesters, known as Red Shirts, who have their own satellite TV channel. Many Thais genuinely want a return to democracy, but Thaksin is hardly the hero of the future.

The deeper problem is the flaws in that rapidly obsolescing old globalization model—free-markets produce democracy which in turn produces general happiness—still need to be addressed. The model is long overdue for rethinking and rejiggering. In the wake of the subprime mortgage fallout, we have realized that simply letting capital flow freely—the global financial system we have depended on—isn’t working. We’ve also known for years that while free trade is generally good, the world is not flat, that globalization has deepened income inequalities rather than narrowed them. Overall globalization is still the way to go: No country, not even would-be rogues like Iran and Russia, has found a way around the iron law of the post-cold war global order: in order to be influential or powerful, a nation must be prosperous; and in order to be prosperous, its economy must take part in the international system. But simply coasting on those verities won’t cut it any more. I’m not sure what the answer is exactly, but to try to find out I’ve begun reading a book by Joseph Stiglitz that for too long I’ve ignored: “Making Globalization Work.”

Aaron Favilla / AP

Two weeks ago our crack digital team released a package on the history of greed, which included a photographic parade of some of the greediest figures of all time. Nestled amongst the likes of Genghis Khan, Charles Ponzi and Bernie Madoff was the Philippines' own Imelda Marcos, the widow of former dictator Ferdinand Marcos, who ruled the country from 1965 to 1986. During that time, Ms. Marcos achieved notoriety for her fashionable taste -- while the average Filipino lived on less than $2 a day, Ms. Marcos jetted to New York and Rome for $5 million shopping sprees, and built up an impressive collection of 3,000 pairs of shoes.

It seemed fitting, then, to open the gallery with the above image of Ms. Marcos, her rouged cheeks, jade earrings and blinged-out ring fingers a perfect glimpse into modern materialism.

Apparently, Ms. Marcos doesn't disagree. NEWSWEEK's selection of her provoked a bit of controversy back in the Pacific island nation, enough that Ms. Marcos eventually had to address the issue herself:

I plead guilty. For me, greedy is giving. I was first lady for 20 years, you have to be greedy first to give to all. It is natural. The only things we keep in life are those we give away.

Righhhtttttt. Check out the video of her "defense" here. (Her English-language statement starts about 35 seconds in; footage of some glorious shoes and jewels is just after the minute mark.) Something tells me that the perfectly matching flower brooch and purple necklace she's wearing, should she choose to "be greedy" and "give to all," could support several Manila families for quite some time.

But give her points for being a First Amendment fan: She says she won't sue NEWSWEEK for the honorific.  

The Smoot-Hawley Tariff has become a bogeyman in economics circles, a piece of misguided, Depression-era legislation that raised tariffs to exorbitant rates and choked the world trade system near to death. I was surprised, then, to find this piece in Prospect magazine, by highly regarded development expert Ha-Joon Chang, who teaches economics at Cambridge, arguing that Smoot-Hawley actually did little to worsen the Great Depression. "The '1930s: never again' story assumes that protectionism is always bad," Chang writes. "But this is not true."

I asked Jagdish Bhagwati, a professor at Columbia University, senior fellow at the Council on Foreign Relations, and one of the best-known defenders of globalization if he cared to respond. He agrees that Smoot-Hawley didn't cause the Depression, but it did "accentuate" it. "When we say today that we must avoid repeating history and succumbing to protectionism, we are basically saying that, yes, we have repeated 1929 (the crash has already occurred) but we should not go on to repeat 1930 through 1934 (i.e. spreading protectionism)."

Further, Smoot-Hawley has become a great marketing tool. "Al Gore, who could not get the Senate to ratify the Kyoto Treaty on Global warming -- they were opposed to it 99-1 under the Clinton regime --- managed to get the world to change its mind on the subject because of the melting glaciers, the penguin film and the polar bears!  We free traders have Smooth-Hawley to play the same role! It is too important to be undermined by misleading argumentation."