Category Archives: Global Economics

America Will Lose Patience With European Appeasement

My Comments: It is much easier to imagine a future as an extension of the past as seen in our minds than to visualize a future with totally new and different dynamics. This is where I have a problem with leaders like Israel’s Netanyahu, with the likes of Rand Paul and others on the right.

They seem unwilling to recognize that the coming years will be dramatically different from those in the past and simply want to turn back the clock. You only need to look at the life of my grandparents as they grew up, married and had children in the late 1800’s and the lives their children lived in the 1920’s and ‘30s. Never mind my life in the 40’s and 50’s. The shifts in what they experienced as “normal” are almost like night and day as I look back.

The issues faced by my children and grandchildren to advance themselves in society will demand different skill sets, different rule sets, and a different mind set if they are going to be happy and productive citizens. The sooner we elect leaders who are sufficiently imaginative and willing to articulate this perspective, the more comfort I will have as my life ends.

( Some of you will note that I’ve been absent for a week or so. I’ve been trying to find a way to legitimately use this site to help promote my business activities without infringing on my ability to simply express ideas that I want to share. If any of you have any ideas about this, I’d like to hear from you. – TK )

Robert D Kaplan April 7, 2015

Why should Washington defend a continent that will not defend itself, writes Robert Kaplan

Appeasement is an age-old tactic of diplomacy. It can be a defensible one, but not as a frame of mind for an entire continent. Yet no word captures the general mood of Europe better than appeasement.

Europeans, it has been said, cherish freedom but do not want to sacrifice anything for it. Only about half a dozen of Nato’s 28 members spend 2 per cent of output on defence, the alliance’s guideline level. When Vladimir Putin’s Russia undermined the strategic state of Ukraine, they stood and watched.

This is of a piece with the EU’s inability to deal with its own economic difficulties. Whatever they may claim, each member follows its own national interest without asking what is best for Europe. Decades into the project, there is still no chill-up-your-spine loyalty to Europe. There is simply no larger purpose and nothing to fight for, other than providing for the good life under welfare state conditions.

Europe has been reduced over the decades to a regulatory regime. Yet a rules-based order, however much it protects the rights of the individual, is not a replacement for conviction: rather, it must evolve out of a healthy and determined national purpose. A supranational purpose might exists in Brussels but not on the European street.

Because of their anaemic sense of national purpose, European elites have in several countries ceded measurable ground to the far right or the far left, resulting in a lumpen and populist form of nationalism. Elites are often stranded in the middle, seeking ways to appease both Mr Putin and their own, homegrown extremists. Lumpen nationalism, defeatism and a latent anti-Semitism all flow together.

Europe’s elites are post-historical. Living in history means living in a world of constant threat where there is no nightwatchman to keep the peace among nations, so nations must keep the peace themselves by maintaining a balance of power. But for 70 years Europe has relied on the US to do exactly that: guarantee its security, so that Europe can spend relatively little on defence and relatively much on providing for the good life. Seventy years is much longer than the distance between the end of the Napoleonic Wars and the outbreak of the Franco-Prussian war; or between the end of that conflict and the outbreak of the first world war.
For 70 years Europe has relied on the US to guarantee its security, so it can spend less on defence and more on the good life.

This American security umbrella will not stay up for ever. Barack Obama’s alleged lack of resolve in dealing with Mr Putin may say less about the US president’s own foreign policy than about a gradual shift in US opinion. Why should America defend a continent that will not defend itself?

The last of America’s second world war veterans will soon be dead. The European-oriented elites that have influenced foreign and defence policy in Washington are gradually being replaced by bright young men and women — many of them the offspring of immigrants from Asia and Latin America — who bring with them different family histories and emotional priorities. This coincides with the security challenges and opportunities that America encounters outside Europe, particularly in Asia, where American allies are willing to maintain robust, deployable militaries.

Or take Israel, a country with which the American public has for more than half a century been stubbornly sympathetic, whatever its often-misguided politicians do to inconvenience US policy. This is (among other things) the result of Israel’s stiff national resolve and gutsy, demonstrated willingness to defend itself.

Gutsy is not a word one would use to describe Europe’s political class. And unless that changes, no US president will be as committed to Europe as his predecessors were during the cold war.

The writer is a senior fellow at the Center for a New American Security

The Monetary Illusion

Global Nominal GDP Growth, as Measured in Dollars, Is Projected to Decline

global-growthMy Comments: It has been argued that Wall Street is corrupt and greedy and doing its best to create further income inequality in this country and across the globe. And that as a result, we should hold Wall Street accountable, send people to jail and reform the system. It’s suggested that only the Democrats can do this if they control Congress and the White House. I’m a liberal, and it’s not that simple.

Wall Street is playing the cards it has been dealt. I’ll agree they have done their level best to get good hands, but the responsibility for this falls on us as voters. If you want a more level playing field, you cannot avoid the voting booth. They say ignorance is bliss, but ignorance in this case will also be painful.

Until recently, during my 50 years as a marginally productive citizen in these United States, I’ve enjoyed an increasing standard of living. I feel that standard is now eroding, and by the time I’ve died, the prospects for my children and grandchildren will be less promising than were my prospects when I was their age. I’ll do my best for them, but I’m running out of time.

March 27, 2015 by Scott Minerd, Guggenheim Partners

The long-term consequences of global QE are likely to permanently impair living standards for generations to come while creating a false illusion of reviving prosperity.

A version of this article first appeared in the Financial Times.

As economic growth returns again to Europe and Japan, the prospect of a synchronous global expansion is taking hold. Or, then again, maybe not. In a recent research piece published by Bank of America Merrill Lynch, global economic growth, as measured in nominal U.S. dollars, is projected to decline in 2015 for the first time since 2009, the height of the financial crisis.

In fact, the prospect of improvement in economic growth is largely a monetary illusion. No one needs to explain how policymakers have made painfully little progress on the structural reforms necessary to increase global productive capacity and stimulate employment and demand. Lacking the political will necessary to address the issues, central bankers have been left to paper over the global malaise with reams of fiat currency.

With politicians lacking the willingness or ability to implement labor and tax reforms, monetary policy has perversely morphed into a new orthodoxy where even central bankers admittedly view it as their job to use their balance sheets as a tool to implement fiscal policy.

One argument is that if central banks were not created to execute fiscal policy, then why require them to maintain any capital at all? Capital is that which is held in reserve to absorb losses. If losses are to be anticipated, then a reasonable inference is that a certain expectation of risk must exist. Therefore, central banks must be expected to take on some risk for policy purposes, which implies a function beyond the creation of a monetary base to maintain price stability.

Global Nominal GDP Growth, as Measured in Dollars, Is Projected to Decline
With a surging U.S. dollar and growth remaining sluggish in much of the world, Bank of America Merrill Lynch forecasts that world output measured in dollars could fall in 2015 for the first time since the financial crisis. Over the past 34 years, this has happened just five times.

What kinds of risk are appropriate for a central bank? Well, the maintenance of a nation’s banking system would plainly be in scope, given the central bank’s role as lender of last resort. The defense of the currency as a store of value and medium of exchange is another appropriate risk. This was the apparent motivation of Mario Draghi, European Central Bank president, for his famous promise to defend the euro at all costs in the summer of 2012. The central bank balance sheet has proven a flexible tool limited in use only by the creativity of central bankers themselves.

In response to those who argue against the metamorphosis of monetary policy into fiscal policy, one need only point toward the impact of quantitative easing (QE) on interest rates. The depressed returns available on fixed-income securities, largely as a result of QE, are acting as a tax on investors, including individual savers, pension funds, and insurance companies.

Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers. Taxation and subsidies, as well as other wealth transfer payment schemes, have historically fallen within the realm of fiscal policy under the control of the electorate. Under the new monetary orthodoxy, the responsibility for critical aspects of fiscal policy has been surrendered into the hands of appointed officials who have been left to salvage their economies, often under the guise of pursuing monetary order.

The consequences of the new monetary orthodoxy are yet to be fully understood. For the time being, the latest rounds of QE should support continued U.S. dollar strength and limit increases in interest rates. Additionally, risk assets such as highyield debt and global equities should continue to perform strongly.

Barack Obama’s Gamble on the Future of Iran

Nixon+ChinaMy Comments: I must confess to being tired of all the crap going on in politics, whether its local, state, national or international. Increasingly my opinions, concerns, fears, hopes, expectations, etc., seem irrelevant. The temptation is to walk away and try to ignore it.

That’s an emotional response and there’s a parallel with my universe as a financial planner. I’ve preached that “hope” is not a valid investment strategy. To be successful, you have to be proactive and alert and overcome emotion. And there’s still a chance you’ll fail. The alternative is to roll over and die. Which is not going to happen.

With respect to Iran, I don’t see a reason not to try and work with them. We hated China, and we are now friends. We hated Japan, and we are now friends. We hated Germany, but are now friends. Hell, if you go back far enough, we hated the French. At some point, someone has to reverse course and I see no reason to favor war without first trying to establish a negotiated truce. For that to happen, you have to at least talk with them.

Edward Luce March 15, 2015

At stake is the idea that talking to your worst enemies makes sense

President Barack Obama is poised to take the biggest foreign policy gamble of his presidency. Ignoring opposition at home, and near unanimous dissent in the Middle East, he looks likely to push ahead with an Iran nuclear deal in the coming days. His bet is that the world’s most hardline theocracy can be induced to change for the better. Over time Iran’s silent majority will gain sway over their ayatollahs.

At stake is the idea that talking to your worst enemies makes sense. Mr Obama’s bet on diplomacy could hardly differ more from George W Bush’s world view. Yet they share a weakness — the belief that one inspired move can transform the game. Mr Bush thought he could implant democracy in the Middle East by toppling its most brutal autocracy. Mr Obama hopes to create stability by engaging its most dangerous regime. In American football they call this a ‘Hail Mary’ pass. Will Mr Obama’s fare any better?

The more you listen to Mr Obama’s critics, the more you sympathise with his approach. From Israel’s Benjamin Netanyahu to Saudi Arabia’s rulers and nearly every Republican in the US Senate, Mr Obama’s detractors believe Iran’s word is not worth the paper it is written on. At best, Mr Obama is naive. At worst he is un-American. Making deals with a rogue regime betrays US values.

In fact, such trade-offs are very American. For the greater good, Franklin Roosevelt struck an alliance with Joseph Stalin, one of history’s most prolific mass murderers. Richard Nixon made peace with Mao Tse Tung, who killed even more people than Stalin. Jimmy Carter and Ronald Reagan backed Afghanistan’s mujahideen. By these standards, Iran’s transgressions are small potatoes.

Furthermore, Iran poses no threat to America’s universal values. Communists claimed to speak for all mankind. Iran only appeals to about 2 per cent of it — the world’s Shia population. As Mr Obama was fond of quoting John F Kennedy: “If you want to make peace you don’t talk to your friends, you talk to your enemies.”

Mr Netanyahu says no deal is better than a bad one. Here again, Mr Obama is more grounded in reality than his critics. If the choice is between a bad deal or war, the former is far better. Others glibly talk about bombing Iran. In an ideal world, Mr Obama would have persuaded Iran to dismantle its civil nuclear programme, rather than capping its resources at a low ceiling. The deal would hold indefinitely rather than for 10 to 15 years. Iran’s “nuclear breakout time” would last for ever, rather than just a year. Tehran would end its support for Hizbollah, Syria’s Bashar al-Assad and others, rather than pledging to do nothing. It would also be legally binding, rather than a political document. Alas, no such terms are realistic. Mr Obama is not permitting the perfect to be the enemy of the good.

So what could go wrong? The flaw in Mr Obama’s logic is that Tehran will pay no real price for breaking its word. Compared with five or 10 years ago, it is negotiating from a position of strength. If it implements the deal, Mr Obama will gradually relax economic sanctions. If it breaks its word, they will be reimposed. Iran’s worst case scenario would mean reverting to today’s status quo. What does it have to lose? This is where Mr Obama’s innate reasonableness can count against him. His administration insists that “all options remain on the table” — including military strikes. But Mr Obama makes no secret of the fact that he would never exercise that option.

His hope is that Iran’s moderates, led by Hassan Rouhani will gain popular support as growth picks up with the gradual lifting of sanctions. Domestic backing for the deal would therefore rise. In turn, Iran will dilute its sponsorship of the Shia militias and terrorist groups in the region. Moderate Sunni regimes will also pull back. The logic of economics will replace the lure of sectarianism. Mr Obama would have converted today’s vicious circle into a virtuous one. It is an optimistic vision that is worth pursuing. No one has any better ideas. But it needs a plan B and Mr Obama does not seem to have one.

His approach has two further drawbacks. First, the US-led war on the Islamic State of Iraq and the Levant is largely being fought by Iran and its Shia allies in Iraq and Syria. Mr Obama is relying on an unspoken alliance with Iran to do most of the fighting. Mr Obama’s reluctance to put US boots on the ground has increased Iran’s leverage.

Second, America’s Sunni allies, led by the Saudis, Egypt and Turkey, believe Iran will bide its time before abandoning the deal. It will first pocket the rewards. They have little faith in Mr Obama’s grasp of Iran’s internal dynamics. Ayatollah Khamenei’s declining health adds another imponderable. The danger of a Middle East nuclear arms race has never been greater.

Mr Obama risks sharing another legacy with his predecessor. Mr Bush tried to install democracy at the point of a gun. In practice he created a vacuum that was filled by Iran. Baghdad became a satellite of Tehran, which is what it remains today. Iran was the largest beneficiary of Mr Bush’s blunders in the Middle East. Its power has continued to grow during the Obama years. It would be an irony if the impending deal were only to cement that trend.

Current Oil Price Decline May Set Stage For Price Spike And Global Recession

oil supply+demandMy Comments: There are relatively high taxes on the sale of gasoline at the pump where I live. In spite of this, we are almost at the $2.00 per gallon level. As I’ve mentioned before, this is both a good thing and a potentially bad thing.

The bad is that money invested to bring us domestically produced fuel and money invested to develop fuel efficient cars and trucks will be diverted and will appear somewhere else. Long term that is not a good thing for us. The world is evolving, as it has forever, and anomalies like what we are now seeing will have consequences.

Zoltan Ban / Dec. 30, 2014

Summary
• Current oil price decline is likely to lead to significant investment cutback, which will affect supply for many years to come.
• When the price of oil starts to recover, it will very probably spike, as there will be no supply mechanism able to react fast enough.
• A price spike will only be broken by a recession. It could be the beginning of a period of repeating such cycles.

For a few months now, there has been a very spirited debate in regards to the net effect lower oil prices will have on the economy. There are some who point to lower prices potentially bankrupting a large number of oil & gas companies, especially those that are mainly reliant on high-cost unconventional resources, such as shale oil, therefore it is bad for the economy. Others point to consumer demand being stimulated by the lower price of oil, which effectively acts as a tax cut for most households.

My take on the entire argument is that it is not as relevant as the fierce debate surrounding it might suggest. The effect on the economy might be a slight positive and the longer the lower price lasts, the stronger the effect. But there is no denying the fact that there are many oil extraction projects around the world that are not profitable at current price levels, therefore it is only a matter of time before the current price decline will lead to a drop in global production. Furthermore, even countries where the oil industry is mainly dominated by state-owned enterprises and production costs may be lower than the current price level, there will be a significant cutback in capital spending, because many of these governments are very dependent on oil revenues for their budgets. It makes perfect sense for a country like Russia for instance to cut investments in new projects until prices recover, in order to free up revenue for other government needs.

The effect of some investment cuts will be more immediate as may be the case with oil sands and shale oil. In the case of other expensive projects such as deep-water, the effects may only be felt many years from now. We have no way of knowing yet how deep the cut in production potential will be over the next few years, in part because we don’t know yet how much capital will be cut next year. Goldman Sachs projects that there may be a need for as much as a 30% cut in non-government owned projects around the world in order for the industry to avoid collectively taking a loss. ConocoPhillips (NYSE:COP) announced it will cut spending by 20% next year and it should not come as a huge surprise if it will cut even more as the year progresses (link). Many companies involved in shale drilling already announced they will cut their drilling activities next year. The announcements of plans for lower oil & gas investment are now coming in at a fast pace.

We have to realize that it will in fact not take much of a cut in the rate of growth in global oil production in order to close the relatively small glut in oil supply. The gap between supply and demand will be only about 400,000 b/d in 2014. It would have increased to about a million barrels per day by next year, if the supply/demand forecasts for 2015 would have turned out to be more or less accurate.

Thing is however that many projects take years from beginning till completion, so the effect may be felt only a few years from now. There will also be a slowdown in global production growth, especially in North America, where much of the global increase in production comes from since 2008, which will have a more immediate effect. Oil sands and shale oil projects do not have such a long lead time. If there is to be a reduction in supply in order to bring the market back into balance, it will most likely start with a decline in North American production growth, or even a decline in production.

As we can see from the chart, the US and Canada provided all the growth in oil production that the world needed since 2008. If the current low oil price will persist, it is probable that the shale oil industry in particular may suffer significant and probably permanent damage. The industry is vulnerable in large part because to date there has been very little self-sustaining growth in the industry. In other words, revenue re-investment is not sufficient by itself to push production volumes up. The main ingredient in the shale revolution has been the availability of credit. One of the main outcomes of the shale revolution has been the accumulation of about $170 billion in junk debt by many companies which are rated below investment grade (link). If the market will cut the industry off from continuing to accumulate debt, production will eventually stagnate and possibly decline as companies will have no choice but to cut back on drilling.

The production decline should help to stabilize the price of oil and eventually work towards the old plateau established starting from 2010, as long as there will be no global economic slowdown. The main problem I see is that when the price of oil will start to move back up, in response to a tighter supply/demand situation, there will be no mechanism in place to prevent the price of oil from overshooting. In other words, it will not stop at the tolerable $100 level we learned to live within the past few years, but continue climbing until demand destruction will occur. That means we are most likely looking at a global economic slowdown.

The reason I believe that the price will overshoot, is because just as there has been very little to keep the price of oil from falling in 2014 as for the first time in years there is a significant level of over-supply, there will also be little to keep the price from spiking as prices will rise too fast for new supply to catch up. The cuts in investment we are seeing right now will affect supplies for the next five years and even beyond. The extra spending companies will engage in once prices recover may in fact provide extra supply only once it will be too late. The recession inducing price spike could happen within a period of just a few months once the upward trend is established, while new supply may take many years to come online in response to the higher prices. In fact, the new supplies may come online only once the price of oil crashes again as a new recession takes a bite out of demand.

Future nostalgia for $100 oil plateau.
At an average price of about $100/barrel in the 2010-14 period, it was not a pleasant situation by any means. That price range was much higher than historical trends and it took out a bite out of potential global economic growth, given an economy that was built around much cheaper oil in past decades. Now that the price of oil is at a level that is more in sync with the economic needs, most of us feel much better about things overall. Pimco recently upped its estimate for global economic growth, citing lower oil prices, which will stimulate more consumption of all goods.

Needless to say that even though the economy feels better with the current oil price levels, many of the oil companies involved in producing the oil are not feeling all that great right now. That is especially the case with shale oil producers. What is worse, their financiers are not feeling all that great about them either and probably will be more cautious of them even when the price of oil will increase. As I pointed out in a previous article, there can be no shale oil production growth without the backing of lenders, because the industry cannot sustain itself from production revenue, which was the case even when the price of oil was in the $100 range (link). This is a very important fact to keep in mind, because resources such as shale oil and Canadian oil sands are the resources which could be the fastest responders to the price signal sent once oil prices start rising again.

With the response to the price increase much delayed and insufficient, there will be nothing else to stop the price from rising, except demand destruction and as we well know, demand destruction of oil means a recession, because oil is a very inelastic product. A recession will in turn cause prices to go back down again, which means that oil producers will have no choice but to cut back on investment once again, just as they are increasingly doing now. It is possible that we will be caught up in a long period of repeated cycles of oil price spikes and plunges, with the price failing to stabilize as it did after the 2009 price drop. The resulting effect on the global economy can potentially be devastating.

There is only one potential factor which could help prevent such a situation and that is OPEC action. All indications are however that OPEC is no longer in the business of oil price stability. I will not speculate on the possible reasons why Saudi Arabia seems to be unwilling to stabilize the global oil market, because there has already been plenty of speculation in that regard already. We can only go on what we actually know right now, and what we do know is that OPEC is currently dysfunctional. As I pointed out many times in the past year and a half or so, the current WTI price range that is sustainable more or less from both the consumer and producer perspective seems to be $80-120, with the price ideally spending most of the time in the middle of that range. We are now obviously very far outside that range, and when prices will recover, there is a very good chance that the price will overshoot the ideal range. If we will be unable to once again stabilize within the range I suggested, we will be looking at a period of great economic upheaval for many years.

Division and Crisis Risk Sapping the West’s Power

My Comments: I make no apologies for having supported and voted for Barack Obama in 2008 and 2012. Much of the pressure from the right, in my opinion, is irrational and disguised racism.

Here is an opinion from England, my birthplace and true friend of America. It’s an interesting perspective and to the extent you are interested in understanding the dynamics of global economics, a helpful thing to read.

By Gideon Rachman / September 1, 2014

The people who prepare President Barack Obama’s national security briefing must be wondering what to put at the top of the pile. Should it be the Russian assault on Ukraine, or the advance of the Islamic State of Iraq and the Levant (known as Isis) in Iraq and Syria? And what items should go just below that?

The violent anarchy in Libya, the dangerous stalemate in Afghanistan, the looming political crisis in Hong Kong, or a confrontation between Chinese and US planes, near Hainan island? The US president might reasonably ask why all these crises are breaking out at the same time.

His critics have a ready answer. They argue that the Obama administration has shown itself to be weak and indecisive. As a result, America’s adversaries are testing its limits and the US-led security order is under challenge in Europe, the Middle East and Asia.

There is no doubt that the US is war-weary after the conflicts in Iraq and Afghanistan. However, the multiplication of security crises around the world is not just about Mr Obama and the US. In fact, the obsession with what the Americans are doing points to the underlying problem. Its allies have come to rely excessively on the US to guarantee their security.

As a result, the biggest weakness in the global security system is not a lack of resolve in Washington, but the learned helplessness of America’s regional allies. The Nato summit this week in Wales represents a crucial opportunity for America’s most important allies to start doing more to share the burden. If they fail, the inability of the US to police the world alone will become increasingly apparent, and the various global security crises will intensify.

The pattern of Nato spending reflects Europe’s increasing reliance on the US. At the height of the cold war, America accounted for roughly half the military spending of the alliance, with the rest of Nato accounting for the other 50 per cent.

Now, however, the US accounts for some 75 per cent of Nato spending. Last year, of the 28 Nato members, only the US, Britain, Greece and Estonia met the alliance’s target of spending at least 2 per cent of gross domestic product on defence. Even the UK may soon slip below 2 per cent, with the British army on course to shrink to about 80,000, its smallest size since just after the Napoleonic wars.

Even when it comes to the non-military side of security, the Europeans have lagged well behind. The US was quicker to push through sanctions on Russia, and its measures have been tougher, despite the fact that Russia’s undeclared war in Ukraine is a much more direct threat to Europe.

This same over-reliance on the US is evident in the Middle East. The rise of Isis is a massive threat to the dwindling band of stable regimes in the region, above all Saudi Arabia and the Gulf states. In recent years, these countries have spent lavishly on their armies and air forces. And yet it has been left to the US to wage the bombing campaign against Isis, while the nations of the Gulf Co-operation Council keep their 600 combat planes on the tarmac and complain about American weakness.

A similar pattern is on display in Asia, where US allies such as Japan and the Philippines agitate for the US to increase its military commitment to the region in response to an increasingly assertive China. And yet, even as they call for US help, America’s allies in east Asia have been unable to present a united front, in opposition to China’s maritime claims.

This litany of allied weakness is dangerous precisely because America is indeed more reluctant to “bear any burden” (in President John F Kennedy’s famous words) to uphold the international order. The Iraq and Afghanistan wars have left their marks. So has the financial crisis of 2008. Mr Obama’s reluctance to deploy military force is not an aberration or a personal folly. It is an accurate reflection of the mood of the American people, with opinion polls showing the highest levels of isolationism in more than 50 years.

That mood could shift in response to Russian aggression and to the chaos in the Middle East. However, even if it does, the days when the US was capable of being the world’s super-cop – with relatively little assistance – are coming to a close.

The World Bank estimates that this year, China will probably become the world’s largest economy, measured by purchasing power. America’s defence budget is falling, as the US struggles to control its national debt. The gradual relative decline of the US is a much worse problem than it might otherwise be, because America’s closest allies in the EU are in the grip of severe economic crises, which are eroding their ability to exercise power.

Collectively, the west now accounts for a decreasing share of the world economy – as new sources of power and wealth rise up in Asia. A western-dominated world is therefore in danger of looking increasingly like an anachronism – and that is the proposition that, in their different ways, President Vladimir Putin of Russia, Isis and the Chinese military are testing.

The perception of declining western power now threatens to become a self-fulfilling prophecy. The only way for North Americans and Europeans to stop that happening is to work together with greater determination and purpose to combat the crises burning out of control on the fringes of Europe, in Ukraine and the Middle East. That work needs to start at this week’s Nato summit.

As Benjamin Franklin put it: “We must all hang together or, assuredly, we will all hang separately.”

The World Is Marching Back From Globalisation

question-markMy Comments: Those of you who know me well do not consider me a pessimist. But this is Monday. And while I can feel optimistic about the chances for a return to good times from Florida football, the rest of the news is essentially gloom and despair. I’d much rather bring you something uplifting and motivating. But as a very tiny piece of a very big wheel, I’m powerless to do more than share this with you, hoping one of you will lift me off the floor.

My life has been shaped by how the world changed for the better following World War II. Notwithstanding the conflicts in Korea, Viet Nam and the middle east, it felt like there was a steady progression across the planet in terms of rising standards of living, health, and happiness. My family today is a reflection of that.

According to this author, the crash of 2008 has stopped that flow. The maniacs in Iraq are not fundamental to this reversal, though it will help us all if they are simply put down, like one would do with a deranged dog. I expect civilization will survive and once again move in the direction I spoke of a minute ago, but for now, and perhaps for the rest of my life, there are likely to be more questions than there are answers.

As we move toward the elections in 2016, we need to find leaders who don’t need to blow smoke and promote their own egos at our expense.

By Philip Stephens September 4, 2014

There is a mood abroad that says history will record that sanctions against Russia marked the start of an epochal retreat from globalisation. I heard a high-ranking German official broach the thought the other day at the German Marshall Fund’s Stockholm China Forum. It was an interesting point, but it missed a bigger one. The sanctions are more symptom than cause. The rollback began long before Vladimir Putin, Russia’s president, began his war against Ukraine.

The case for calling a halt to business as usual with Moscow is self-evident to anyone who considers that international security demands nations do not invade their neighbours. The valid criticism of the west is that it has been too slow to react. At every step, the Russian president has ruthlessly exploited US hesitation and European divisions.

He will do so until Nato restores deterrence to the core of European security. Mr Putin’s irredentism demands tough diplomacy stiffened by hard power. He will stop when he understands that aggression will invite unacceptable retaliation. To make deterrence credible, the alliance must put boots on the ground on its eastern flank. The Baltics have replaced Berlin as the litmus test of western resolve.

Some, particularly though not exclusively in the rising world, have seen sanctions through a different prism. By punishing Russia economically, the US and Europe are undermining the open international system. Economics, this cast of mind says, must be held apart from the vicissitudes of political quarrels. Why should new powers sign up to a level international playing field if the US and Europe scatter it with rocks in pursuit of narrow interests?

These critics are right to say an integrated global economy needs a co-operative political architecture. Sanctions against Ukraine, though, fit a bigger picture of the unravelling of globalisation since the financial crash of 2008. They testify to a profound reversal in US attitudes. Washington’s steady retreat from global engagement reaches beyond Barack Obama’s ordinance that the US stop doing “stupid stuff”.

The architect of the present era of globalisation is no longer willing to be its guarantor. The US does not see a vital national interest in upholding an order that redistributes power to rivals. Much as they might cavil at this, China, India and the rest are unwilling to step up as guardians of multilateralism. Without a champion, globalisation cannot but fall into disrepair.

Not so long ago, finance and the internet were at once the most powerful channels, and visible symbols, of the interconnected world. Footloose capital and digital communications had no respect for national borders. Financial innovation (and downright chicanery) recycled the huge surpluses of the rising world to penurious homebuyers in Middle America and dodgy speculators on the Costa del Sol. The masters of the banking universe spun their roulette wheels in the name of something called the Washington consensus.

Then came the crash. Finance has been renationalised. Banks have retreated in the face of new regulatory controls. European financial integration has gone into reverse. Global capital flows are still only about half their pre-crisis peak.

As for the digitalised world, the idea that everyone, everywhere should have access to the same information has fallen foul of authoritarian politics and concerns about privacy. China, Russia, Turkey and others have thrown roadblocks across the digital highway to stifle dissent. Europeans want to protect themselves from US intelligence agencies and the monopoly capitalism of the digital giants. The web is heading for Balkanisation.

The open trading system is fragmenting. The collapse of the Doha round spoke to the demise of global free-trade agreements. The advanced economies are looking instead to regional coalitions and deals – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact. The emerging economies are building south-south relationships. Frustrated by a failure to rebalance the International Monetary Fund, the Brics nations are setting up their own financial institutions.

Domestic politics, north and south, reinforces these trends. If western leaders have grown wary of globalisation, many of their electorates have turned positively hostile. Globalisation was sold in the US and Europe as an exercise in enlightened self-interest – everyone would be a winner in a world that pulled down national frontiers. It scarcely seems like that to the squeezed middle classes, as the top 1 per cent scoop up the gains of economic integration.

Much as the south has prospered within the old rules – China’s admission to the World Trade Organisation has been the biggest geopolitical event so far of the present century – yet the new powers show scant enthusiasm for multilateralism. The old order is widely seen as an instrument of US hegemony. India scuppered the latest attempt to reinvigorate the WTO.

Globalisation needs an enforcer – a hegemon, a concert of powers or global governance arrangements sufficient to make sure the rules are fairly applied. Without a political architecture that locates national interests in mutual endeavours, the economic framework is destined to fracture and fragment.

Narrow nationalisms elbow aside global commitments. Sanctions are part of this story, but Russia’s contempt for the international order is a bigger one. Sad to say, we learnt in 1914 that economic interdependence is a feeble bulwark against great power rivalry.

Guess Who’s Back? The Middle Class

My Comments: There is lots of handwringing about last Tuesdays election results. And lots of people looking for someone to blame if it didn’t meet hopes and expectations.

One of my long time concerns has been the growing inbalance between the haves and the have-nots. Statistically it’s very real with the middle class that evolved and grew after WW2 now faltering and fading. That has huge implications for all of us and the quality of our lives going forward.

This article has been on my post-it-someday list since this past summer. It suggests the middle class is making a comeback. What is so perverse for me about the election results is that while I understand why the “haves” are naturally Republican, I find it difficult to understand why so many of the “have-nots” vote Republican. They are the ones most likely to fall down the economic rabbit hole and yet they seem happy to do so.

posted by Jeffrey Dow Jones July 31,2014 in Cognitive Concord

This has been a very important week for economic data. I know everybody saw yesterday’s GDP report coming, but it’s great news nonetheless. It was a blowout, a 4% real increase in the second quarter.

There is no negative way to spin this one. Even personal consumption expenditures rose at a 2.5% rate. Housing bounced back in a big way, with a 7% increase in residential investment. The consumer is alive and well, and given the fact that inventories, durable goods, and other investment all shot much higher, the business world is betting he’ll stay healthy for a while longer.

What’s interesting is what happens when we marry that data to what we saw in the July consumer confidence report. Consumer confidence surged to yet another post-crisis high and is now officially back in the range that, before 2008, we would have called “normal”.
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