Category Archives: Global Economics

Washington’s Hawks Have Usurped the Huntsmen

My Comments: If you are unsure what is meant by the headline above, you are not alone.

However, a reading of the comments that appeared in the Financial Times tends to reinforce in my mind the discomfort all of us should feel about the US Government agency known as NSA or the National Security Agency and others whose responsibility it is to spy, as they say in the movies.

At some point someone has to take responsibility for this crap, put it in context, and then put people in charge that have a fundamental understanding that in this age of instant news and technology, ANYTHING and EVERYTHING you do might have public consequences.

Some of it is probably justified, but to simply say OK to all of it means we are already far down that ubiquitous slippery slope. Time for some new rules.

By Constanze Stelzenmüller / July 9, 2014

The unspeakable in pursuit of the uneatable.” This was Oscar Wilde on fox hunting. Spying is hunting, of sorts. But in the latest instalment of the saga of US spying on the Germans, it is beginning to look more like the irresponsible in pursuit of the incompetent.

First, the prey. A low-level registry clerk at the Bavarian headquarters of the BND, the German federal intelligence service, offers his services to the Americans by mail. He sells them more than 200 documents over several years for a five-figure sum. His handlers are especially interested in the parliamentary committee investigating the US National Security Agency’s efforts to spy on Germany; according to Der Spiegel, a news magazine, they tell him to send everything he can find on the committee.

Then our man in Pullach sends another email, this time to the Russians. Would they be interested in his wares as well? To prove that he is not bogus, he attaches a handful of secret papers.

How could this have happened in a section of the federal intelligence service that has access to information about the Bundestag’s most sensitive committee? Susceptibility to greed or treason may be difficult to test for. But surely this man was either dim, lacking a survival instinct, or both. Who vetted him? Who hired him? Who watched him? Germany can guard the space between its goalposts as though it housed a nuclear bomb. Apparently, however, it cannot guard a parliamentary committee on intelligence.

Next: the pursuers. This was a tempting offer. But did no one in the US embassy say: “Hold it one second, guys. Remember how upset Angela Merkel was when we tapped her cellphone? What if this comes out, and the ambassador has to dine alone with his family for the rest of his tenure?” They might have reflected that, in his speech in Berlin in June last year, President Barack Obama sort of said the US would not resort to such tactics again.

They might have considered that Edward Snowden’s disclosures of NSA documents have made him a folk hero for many Germans. They might have done well to weigh the benefits of espionage against the potential costs. They could even have contemplated telling the German authorities that they had a little problem, in a bid to repair trust.

But evidently they thought none of these things. John Emerson, the US ambassador, was duly summoned to the foreign ministry in Berlin. And not on just any day; he was invited to a “conversation” on July 4, when the American community throws a party for Berliners, who munch on hot dogs while their children bury their noses in ice-cream cones, and gratefully remember the “Luftbrücke”, when the US Air Force flew in food and medicine to sustain the city during the Russian blockade of 1948-49. German displeasure might have been inferred.

All that was missing was news that Germany learnt of the leak through a friendly tipoff from Russian intelligence. This news reached the chancellor during a trip to Beijing (her seventh). Standing next to Premier Li Keqiang, she acknowledged grimly that this incident was “very serious”. Her host’s response was to say that Germany and China are “both victims of hacking”.

The large business contingent in Ms Merkel’s delegation will have taken note. The head of Germany’s domestic intelligence service, Hans Georg Maassen, had despatched them with a public warning that the country’s small and medium-sized Mittelstand firms are the “easy prey” of systematic cyberespionage by Chinese intelligence, which he called an “overpowering foe”. All that was missing was news that German authorities learnt of the leak through a friendly tipoff from Russian intelligence.

Cue wild harrumphing in Berlin, from justice minister Heiko Maas mulling criminal action, via interior minister Thomas de Maizière threatening “360-degree” counter-espionage, to mutterings about expelling US diplomats. The Americans, meanwhile, are issuing limp promises to “work with” the Germans.

Both reactions are off the mark. But they ought to serve as a warning. Just a year after the first revelations about NSA spying in Germany, resentment still runs high in Berlin; a rare case in which elites are in sync with the public mood. And Washington’s feeble response is not so much a sign of guilt – though it is probably that, too – as of helplessness in the face of a secret state that appears to have outgrown political judgment or control.

Yesterday, German media were reporting that a new espionage case was being investigated – this time in the defence ministry. Mr Emerson promptly made another visit to the foreign ministry.

There is no time to lose. A nasty US-German spat on Nato’s role in the Ukraine crisis is brewing. Negotiations on a US-European free- trade agreement face bitter public resistance. Add a breakdown of trust over espionage and you could have a transatlantic trifecta of disaster by the autumn.

The writer is a senior transatlantic fellow with the German Marshall Fund

World Weather Gone Haywire – Effects On… CRB Index and The Economy

My Comments: No, we are not doomed. But I can’t recall this much rain every day, some of it at night, when there wasn’t a hurricane. I’m sure it happened, but I don’t remember.

Does it have an effect on the economy? Experts agree last winters’ storms had an effect. So it’s worth paying attention to from time to time. If you are looking for solace, you won’t find it here. My cousin in England just wrote to tell me their weather is noxious and unpleasant. Have you thought about the price of vegetables and fruit in the coming months, stuff that we normally get from California? No rain there at all.

The people who give us economic data now say that the first quarter of 2014 saw really bad numbers. Early on it was an assumption that the economy was poised to enter another recession. Now, the powers that be say it was largely the weather. That’s a mixed blessing.

If you insist on keeping your head where the sun never shines, sooner or later it won’t matter how hot it is. Regardless of whether this is Gods’ plan, if the oceans continue to rise life is going to be more difficult for my grandchildren. But I guess if God hasn’t yet told you the plan can be changed by paying attention to CO2 levels, you don’t have to worry about consequences. And anyway, I’ll be dead by then and my Tea Party brethren can get all the credit.

James Roemer / Feb. 19, 2014

Cold U.S. Winter Affecting Nation’s Economy

You have heard it on your local news for weeks, read about it in dozens of newspapers around the world and if you live in the deep south, Midwest or Northeast, have “felt” it first hand—the most severe U.S. winter since 1982, at a time when much of the rest of the planet continues to see overall warmer than normal weather.

Look for another potential big storm in the east around February 26th and at the very least, record cold weather next week into early March.

You can hear a broadcast on Bloomberg a while back talking about natural gas prices possibly going over $6.00 and discussing global warming, the Brazilian drought, etc.

The adverse weather is having a multi-billion dollar affect on our nation’s economy. Pipes are bursting in the Northeast, salt companies are running out of supplies to remove snow, and various businesses are running into more economic hardship, as a result of the weather. Florists saw national revenues fall 60% during the Valentine’s Day period, unable to deliver flowers to tens of thousands of loved ones.

Our $16 trillion economy can usually ward off a couple of snowstorms, but NOT the incessant nature of 3 consecutive months of brutal cold and near record snowfall, in which tens of thousands of flights are being cancelled every other week. Other industries such as plastic and rubber products, auto sales, etc. are also being hurt.

The drought in California (one of the top 8 economies in the world), could also have a trillion dollar affect on our nation’s economy as food bills could soar without widespread rains and winter snow cover in the next winter or two. If El Nino forms, this could all change. It’s something I am arduously looking into.

TK – the balance of this article is full of charts and comments that may influence you if you are a short term trader. My primary interest is the long term performance of clients money (and mine) so I tend to ignore short term issues as they are largely noise. But global warming is going to have a long term influence on virtually everything, including our money. To get to the site where you can see the charts and read the rest…

The Outlook for Yields

My Comments: Guggenheim Partners has recently been sending periodic macro insights about investments and opportunities for investors. Good stuff, so if investments interest you, I encourage you to grasp as much of it as you can.

global investingGlobal CIO Commentary by Scott Minerd of Guggenheim Partners – July 03, 2014

As U.S. economic growth gathers pace, yields on 10-year U.S. Treasuries should shift higher over the next two-three years, eventually moving as high as 3.25 – 4 percent.

While a broad-based secular increase in inflation will be a problem that comes most likely in the next decade, a number of technical and cyclical forces, such as healthcare and shelter costs, are working to push consumer prices higher over the next six months or so.

However, these forces are unlikely to spark sustained inflation in the near term, given that the U.S. unemployment rate is still quite high, the labor force participation rate has been on a downward trend for a number of years, and capacity utilization is still significantly lower than the threshold associated with a broad increase in consumer prices. In the medium-term, wage pressure will continue to rise and aggregate demand should improve. Rather than being the harbinger of an inflationary spiral many investors fear, that should be positive for economic activity.

Our research suggests that the yield on the U.S. 10-year Treasury bond should now be 3-3.25 percent, yet yields have been hovering around 2.6 percent. Keeping rates low in the near term are technical factors such as central bank accommodation flooding global markets with liquidity and some form of quantitative easing likely coming in Europe.

This week’s ADP report showing U.S. firms added 281,000 jobs in June, the most since November 2012, is the latest sign that the U.S. economic recovery is picking up steam. Over the next two to three years, given that economic growth is likely to be stronger, unemployment is likely to be lower, and inflation is likely to be higher, we will eventually start seeing fundamentals take over, resulting in higher yields on U.S. Treasuries. Assuming the U.S. Federal Reserve starts raising interest rates mid to late next year, we could see the U.S. 10-year Treasury bond reaching a cyclical high of somewhere around 3.75-4 percent.

U.S. Wage Pressure Approaching, But Not Here Yet

An improving labor market, brighter growth prospects, and higher capacity utilization are pointing to a U.S. economy approaching equilibrium. Historically, once the economy moves past equilibrium, whether defined by unemployment, output, or capacity, significant wage inflation tends to follow. Though we are drawing nearer to these levels, it is likely to take one year or longer before the gap is closed and broad-based wage inflation emerges.

Source: Haver, Guggenheim Investments. Data as of 7/2/2014. Note: We define the output gap using Congressional Budget Office (CBO) data on potential GDP, where the gap is the difference between actual and potential GDP as a percentage of potential GDP. We define the capacity utilization gap in the same way, using 82 percent as the natural rate. We define the unemployment gap using CBO data estimates of the natural rate of unemployment.

U.S. Data Points to Strong Second Quarter

• The ISM manufacturing index cooled slightly in June but remained well in expansion territory, inching down to 55.3 from 55.4.
• Personal Consumption Expenditures (PCE) rose less than expected in May, up 0.2 percent after April’s flat reading.
• The University of Michigan consumer confidence increased in June to the highest level this year, to 82.5 from 81.9.
• Pending home sales increased in May for a third consecutive month, rising by 6.1 percent from a month earlier, making it the best month in over four years.
• Construction spending rose for a second month in May but was below expectations, rising just 0.1 percent from April.
• Initial jobless claims inched down by 2,000 for the week ended June 21, to 314,000.
• Factory orders fell by 0.5 percent in May after rising during the previous three months.
• The core PCE deflator, the Fed’s preferred measure of inflation, rose in May for a third straight month, to 1.5 percent — the highest since January 2013.

China Manufacturing Positive, European Prices Muted

• Euro zone consumer prices rose 0.5 percent year over year in June, equaling May’s gain.
• Euro zone economic confidence unexpectedly declined in June to 102.0 from 102.6.
• Retail sales in Germany unexpectedly fell for a second consecutive month in May, decreasing 0.6 percent.
• Germany’s CPI accelerated to 1.0 percent year over year in June, the highest in four months.
• Spain’s manufacturing PMI rose to 54.6 in June, a seven-year high.
• The manufacturing PMI in the United Kingdom expanded to 57.5 in June, the best level this year.
• China’s official manufacturing PMI showed a faster pace of expansion for a fourth straight month in June, rising to 51.0.
• Japan’s Tankan survey of large manufacturers dropped to 12 from 17 in the second quarter. The outlook index, however, reached its highest level since 2007.
• Japan’s industrial production showed a small rebound in May, rising 0.5 percent after a 2.8 percent drop.
• Japan’s CPI climbed higher in May to 3.7 percent year over year, reflecting the recent sales tax hike. Core prices rose 3.4 percent, the highest since 1982.

Moscow’s Moves and Your Investments

My Comments: Geopolotical events almost always influence the world of investments. Today, global economic health, or lack of it, dictates to some extent how we invest our money, where we invest our money, and what we can expect going forward.

All of us saw recently how the ISIS jihadists in Iraq caused the price of gas at the pumps in far away Gainesville to jump upward. That means that if your business involves moving stuff from point A to point B, somewhere in the continuum from start to finish, the cost of transportation increased. Either you absorbed the increase, meaning you made less money, or you passed it on the next guy, which means somewhere in the chain, the final price went up also.

Don’t for a minute disregard the events going in Russia and the Ukraine. That doesn’t mean we should obsess about it, but it will affect our lives, and the lives of those around us. If you ignore it, that too will have consequences, however small. It’s just that the outcome in Ukraine is and will remain a part of the fabric of our financial future.

By Dmitri Trenin / July 1, 2014

Russia needs people and should think of the Eurasian Union as a Nafta, says Dmitri Trenin. It needs to build a nation, not an empire.

If the Maidan protests and their aftermath did not disabuse Russia of the hope of a Eurasian Union that includes Ukraine, the signing last week of EU association agreements on economics and trade with Ukraine, Georgia and Moldova should have done so. Three former Soviet republics are now linked, however loosely, to the EU.

President Vladimir Putin is discovering that the “Russian world” he often refers to is a soft-power category – geocultural rather than geopolitical or geoeconomic, and that Ukrainians and Russians are not “one people”.

At this point, rather than worrying about what it sees as its losses, Moscow should consolidate its gains.

It has managed to reincorporate Crimea, arguably the only part of post-Soviet Ukraine that had a strong affinity with the Russian state. It should work hard to turn the peninsula, particularly its southern coast, into a thriving region, economically on a par with the Greater Sochi area, making it a showcase of Russia’s capacity to develop depressed areas with significant potential for tourism.

It also needs to keep Crimea’s diverse population happy, including the ethnic Russian majority; the ethnic Ukrainian minority (about 25 per cent); and, particularly, the Crimean Tatars (more than 10 per cent), Muslims who regard the territory as their ancestral homeland.

Next, its main strategic interest lies in keeping Ukraine out of Nato – and here the prospects are good. Washington has to balance its global commitments, from the South China Sea to Iraq, and Ukraine is nowhere near the top. Berlin and Paris are adamant neither Ukraine nor Georgia and Moldova should join. London sees no reason to extend the borders of common defence to Russia’s heartland.

Moscow should shift to a longer-term approach to relations with Kiev, switching from using armed rebellion in the eastern region of Donbass as a means of protecting its interests to a broader political strategy involving all of Ukraine. As the Russian defence industry’s ties with Ukrainian contractors grow unreliable, it should seize the chance to create a fully sustainable defence industry within own borders. Russia will also need to adjust its overall trade relations with Ukraine, and do so in full compliance with World Trade Organisation norms and principles.

One clear gain, besides Crimea and Sevastopol, may be the Ukrainians who cross the border into Russia. Sharing a common language and culture, they can be perfectly integrated. Rather than gathering further lands, Moscow needs to gather people from the former Soviet Union who would help it build a motivated and younger workforce, and a greater consumer base. Such a policy should favour those who can contribute the most to its wellbeing – primarily the engineers and other workers producing aircraft engines and missiles, enterprises that used to be important to Russia but face contraction or extinction as Ukraine adapts to the EU’s trading requirements.

The Russian Federation needs to continue its transition from an empire to a continent-size nation state. While it needs more people, it does not need more land. It should not think of the Eurasian Union as a replica of the EU but rather as a kind of North American Free Trade treaty. Economic interest, rather than common ethnicity or shared history, is the glue to seal the new association.

Moscow’s longing, in the past quarter century, to be admitted into the west has suffered a setback: it should see this as a blessing in disguise. With its occidental option closed for now, its choices are clearer than ever. If it embraces a “fortress Russia” concept and practises economic isolation and political repression, it will head for a catastrophe on the scale of the Soviet Union’s. If it turns east, it will make itself a raw materials appendage and a tributary of China, destroying its self-image as a strategically independent power.

If it wants to stay in the game of global competition, it has no choice but to work towards becoming a civic nation, a rules-based polity and a modern economy.

Countries, like people, often do the right thing when all other options are closed. For Russia, the choices have rarely been starker.

The writer is director of the Carnegie Moscow Center

Removing Saddam Hussein Did Not Cause This Crisis

global econMy Comments: The price of oil is increasing. The news is full of both the World Cup and Iraq. How will any of this affect our investments? And, of course, as always, it depends.

At first glance one might dismiss the author as expressing a self-serving platitude. On second glance, you remember he rose to prominence in global politics because he is intelligent, charismatic and a formidable thought leader. You don’t last ten years as the political leader of a major world player if you don’t have your act together.

It would be nice if we could simply let the folks in the middle east solve their own problems, but it’s more complicated than that, and I, for one, have no clue how to force a resolution. There probably isn’t one. But I add my voice to those who say NO to further military involvement by the US without a clear threat to our national best interests.

By Tony Blair / June 22, 2014

The Middle East’s problems lie in the toxic mix of bad politics and bad religion, writes Tony Blair

For the avoidance of doubt, of course the Iraq of 2014 bears, in part, the imprint of the removal of Saddam Hussein 11 years ago. To say otherwise, as a recent editorial in this newspaper implies that I do, would be absurd. However, there are two important points that must also be recognised.

We cannot ignore the fact that Isis, the jihadist group advancing across Iraq, rebuilt itself and organised the Iraq operation from the chaos in Syria. Isis and other al-Qaeda-type groups in Iraq were flat on their back four years ago, having been comprehensively beaten by a combination of US and UK forces and Sunni tribes. The civil war in Syria allowed them to get back on their feet.

So the first point is that non-intervention is also a decision with consequences. In the case of Syria those consequences have been dire, and as security chiefs in the UK and Europe are warning, they pose a real threat to our security.

Second, no analysis of the Middle East today makes sense unless we examine the impact of the Arab revolutions overturning the old regimes. It is odd to argue that revolution would not have come to Iraq. And surely Saddam Hussein’s response would have been more like that of Bashar al-Assad in Syria, than that of Hosni Mubarak. Whatever decision had been taken in 2003, in 2014 we would be facing a major challenge.

There is a tendency to write off the Saddam Hussein time in Iraq as if he were a force for stability and peace. Just to remind ourselves: he began the Iraq-Iran war in which there were more than 1m casualties, many dying from chemical weapons, something which then played a part in pushing Iran towards its nuclear programme; he invaded Kuwait; he used chemical weapons in a genocidal attack against the Kurds; he excluded the Shia majority; and he persecuted the Marsh Arabs. The region’s problems are the result of deep-seated issues that, with the removal of those regimes, have now come to the surface.

That is the point I am making. I am not seeking to persuade people about the decision in 2003. I am trying to convince them that the fundamental challenge is not the product of that decision or indeed the decision in Syria. It is a challenge of immense complexity that has not originated in anything we have done since this challenge burst fully on to our consciousness after the attacks of September 11 2001. Its origin lies in the toxic mix of bad politics and bad religion that is not confined to Iraq or Syria but is spread across not just the Middle East but also the world.

The reason we got into such difficulty in Iraq, as in Afghanistan, was precisely because once the dictatorship was removed, extremist Islamist forces then made progress extraordinarily difficult. That is their hideous impact the world over. The fundamental challenge today arises not from the decisions of 2003 or those of 2014. It is the challenge of Islamist extremism and it is global.

It is a challenge we cannot avoid. Its outcome will dramatically affect our own security. We may be war weary and want to disengage but the people we are fighting do not share that weariness. Leave aside Iraq or Syria; look at Pakistan today. It has powerful institutions; it has a functioning democracy. Yet be in no doubt, the struggle it is waging is existential. Nigeria was two decades ago a model of religious tolerance. Today it is on the rack of extremism. Even in western societies, there are tensions that are real and dangerous.

The bad news is that this issue is not going away. That is why I am speaking about it. Since leaving office I have spent a large part of my time studying it and through my foundation trying to counter it.

Short term, we have to do what we can to rescue the situation in Iraq and Syria. In Iraq, without inclusive government this will be hard to do. The US is right in demanding political change as the price of its engagement. In Syria, an outright win for either side is no longer sensible; the majority of Syrians just want the torment to end.

Long term, we have to have the right mixture of soft and hard power responses, which fights this extremism wherever it is conducting its terror campaigns. We must deal with the root cause of the problem which lies in the formal and informal systems that educate young people in a closed-minded approach to religion and culture.

The good news is that this extremism does not represent the majority of Muslims. As the recent elections in both Iraq and Afghanistan show, where despite threats, violence and terror, people came out to vote in their millions.

These people want to be free: free of dictators and free of terror. We should help them. It is in our interests that they succeed.

The writer was prime minister of Britain from 1997 to 2007

Obama: Prevaricating On Foreign Policy

My Comments: It’s hard not to be tired and uninterested in the speeches of a President now well into his second and last term as President. Never mind that I voted for him twice and have a generally favorable opinion of his efforts on our behalf.

Foreign policy is not something that does much for the economic fortunes of those of us in the great unwashed middle class of America. Not unless and until we find ourselves at war with various groups across the planet who have vowed to bring us to our knees and have us die a painful death.

When that happens, I get more involved. Like it or not, we are the world’s policeman. We’ve been that since the end of the Cold War and Russia dissolved into something resembling a third world country. But the death of American lives in support of those around the planet who, for the most part simply argue their God is better than my God, is not something I want to see.

As a financial planner, I’m accustomed to thinking about the future and what is likely to be in my clients best interests, things they have little use for as they live and work today. Same with the President. It’s not just who is trying to kick someone else’s ass today, it’s who is likely to be kicking who tomorrow and whether that will impact the planet to our detriment.

I don’t know the answer, and it appears as if Obama and his team don’t either. At least they don’t seem to, and I find that troubling.

By Richard Haass / May 29, 2014 6:38 pm

US president’s speech tells us what he opposes not what he favours, writes Richard Haass

Barack Obama’s long-anticipated speech on Wednesday at West Point, the US Military Academy, was designed to answer a growing number of domestic critics of his foreign policy, who believe he is not doing enough to advance American interests around the world. It was also intended to push back against the growing tide of isolationism in a country preoccupied with domestic challenges and disillusioned with the results of long wars in Iraq and Afghanistan. And the address was meant to reassure America’s friends around the world.

Not surprisingly so ambitious a speech, aimed at so many audiences, failed to meet any, much less all, of its goals.

A big part of the problem resulted from a speech that told us more about what the president opposed than what he favoured. He is against too much military intervention, but he is also against too little of it. America must avoid choosing between realism and idealism in its global conduct. It must be multilateral, except when it must act alone. All arguably true, but such generalities are more fitting for someone starting out in office than for an incumbent in his sixth year.

It did not help that, one day before the speech, Mr Obama laid out his new policy toward Afghanistan. US military forces are to come down to just below 10,000 by the end of this year, and to be removed entirely a month before he leaves office in early 2017. But this is a calendar-based policy, not one determined by conditions. It is an exit without a strategy, one that increases the odds the new Afghan government will struggle – much as has happened in Iraq in the aftermath of the complete US military departure from that country.

It would have been far better for the president to make the case for long-term presence in which the probable results justified the anticipated costs. This calculation is what lies behind the wise decisions to maintain US forces in Europe, Japan and South Korea for more than half a century. Instead, Mr Obama reinforced the very trend towards avoiding responsibility that he criticised a day later.

Elsewhere, the president did suggest that he favoured providing more help to those countries surrounding Syria that risk being overwhelmed by the flow of refugees. And he declared he would approach Congress to increase help to those opponents of the Assad regime that held agendas the US could live with. This is to be welcomed, although details were left unsaid.

Mr Obama is smart to limit direct military involvement in Syria’s civil war, but he has not made the case why the US has done so little indirectly over the past three years. Nor has he said why it should not use military force when Syria’s government clearly violates international norms, as it has done by using chemical weapons.

The president also neglected to mention Libya, where a modest military intervention by the US and others helped to create a vacuum, now mostly filled by terrorists. What we were to learn from this, Mr Obama did not say.

The president defended his policies towards Ukraine and Iran, although major tests lie ahead for both. In the meantime, he largely ignored the part of the world most likely to shape this century, the Asia Pacific.

What makes this omission more glaring is that in his first term Mr Obama called for a pivot, or rebalancing, of US foreign policy towards that part of the world. This makes great strategic sense given US interests and commitments, the rise of China, the surge in local nationalism and the weakness of regional diplomatic arrangements. One part of this pivot is a commitment to increase the presence and role of US military forces, the ostensible subject of Wednesday’s address. This has yet to happen. For now, the pivot remains mostly rhetorical. On this occasion it was not even that.

Another part of the pivot also went unmentioned – the goal of bringing about a regional trade pact. Here the greatest problem might not be in the region but back at home, where Democrats and, to some extent, Republicans in Congress have abandoned the country’s commitment to free trade. Protectionism and isolationism tend to go hand in hand, and here, too, an opportunity to make a point as to the strategic and economic benefits of expanding trade was forfeited.

The president is right to warn against the folly of isolationism in today’s world, that what happens beyond the country’s borders can and will affect what takes place within them.

And he is right to suggest that American leadership is indispensable, that international order will not come about without it.

However this requires that the American people are prepared to back such a role for their country, and that American friends and foes alike see it as predictable and steadfast.

Unfortunately, Mr Obama’s statements this week will do little to help accomplish these tasks.

The writer is president of the Council on Foreign Relations and author of ‘Foreign Policy Begins at Home’

Capitalism: Looking Past The Bottom Line

My Comments: If this author is right, then this issue will have an impact on the mid-term elections this fall as well as the elections in 2016.

The lasting legacy of the Obama administration will be the PPACA or ObamaCare legislation. When it was enacted, our cost of health care was increasing much faster than the overall cost of living, or our ability to pay for it. In short, a health crisis was looming.

Had Congress not passed this legislation, the imbalance would have eventually been solved by two or more of the five major stakeholders. It would not have been you and I, as patients, or health care providers, primarily physicians. That leaves the pharmaceutical industry, the insurance industry and hospitals. You would have to be incredibly naive to think their solution would be in our best interest. That’s not how capitalism works.

That outcome was pre-empted when you and I, in the form of our elected officials, and ratified by the Supreme Court, affirmed the Affordable Care Act. Now, those industries are having to adjust, and are trying very hard with the help of politicians they own, to change the playing field to their advantage. Ultimately, it will be you and I as voters who tell the story. Let’s hope all of us actually cast a ballot.

By Lynn Forester de Rothschild | May 20, 2014 | The Financial Times

Business cannot solve society’s ills, but it is now the problem, says Lynn Forester de Rothschild

It is no coincidence that the jargon of capitalism borrows so heavily from the language of human relationships: think equity, credit, trust, share, bond and fair value. Capitalism is an extension of these basic human aspirations, and has guided the world economy to unprecedented prosperity.

Yet faith in market institutions has rarely been lower. This is not without reason. Markets mostly encourage a near maniacal focus on short-term financial results, tolerance of disparities of opportunity, and an apparent disregard for the common good. If these tendencies are left unchecked, the public cannot be expected to show faith in capitalism.

Polls show a correlation between public confidence in the system and broad-based income growth. In the 1990s, middle-class US household incomes improved by 14 per cent in real terms, according to official data. In the same decade, opinion polls show, the proportion of people who believed the US was moving in the right direction went from 28 per cent to 51 per cent. But between 2000 and 2012, the average income of this group declined by more than 8 per cent; not surprisingly, the number who believed their children would be better off than they were fell from 71 per cent in 2000 to 15 per cent in 2013.

Disillusioned by the market, voters increasingly demand politicians rein in finance and corporations. In a poll by Populus and the Financial Times, 61 per cent of Britons said they would vote for whichever party is tougher on big business. The mayor of New York was elected on an agenda of being tough on companies and the rich. Although it is not the business of business to solve society’s problems, it is dangerous when business itself is viewed as the problem. To reverse this belief and end the political backlash, it must actively address its failure to deliver for the common good.

This is a tough task requiring leadership and co-operation between businesses, philanthropies, individuals and governments. It will mean investments must be measured not just by short-term returns but by the development of human capital, management of innovative potential, compensation aligned with true value creation, supply chains that are sustainable and measurable evidence of the overall contribution of the enterprise to society.

Businesses are beginning to make a difference. Since abandoning quarterly profit reporting five years ago, Unilever has publicly stated its long-term strategy and adopted plans to expand the consumer goods group while shrinking its environmental footprint. The Tata industrial group has long prioritised its responsibility to communities in India where it invests in schools, hospitals and research institutions. In the US, businesses such as Costco and the Container Store pay workers far more than the legal minimum wage.

These steps can provide financial returns. Higher wages cut employee turnover, sustainable supply chains are likely to cut costs in the long run, and community-conscious firms are increasingly attractive to the skilled workers and devoted customers businesses covet. But their most important contribution is to reinforce the consensus that capitalism can be relied upon as an engine of progress and a source of optimism.

It is not, however, fair to expect chief executives to shoulder all the responsibility for making capitalism more inclusive. Corporate behaviour will not change without a critical mass of investors and customers who demand long-term thinking and higher ethical standards.

This is starting to happen. Norway’s nearly $800bn sovereign wealth fund has appointed a committee to advise on both rethinking its investment strategy and principles to improve returns and become more socially responsible. A broader move to reorganise fund management structures and adjust management incentives could drive enormous change. However, no chief executive, asset manager or institutional investor can improve the system alone, so it is vital that key players demonstrate that they manage and invest in a way that expands the benefits of capitalism.

The writer is chief executive of EL Rothschild, and founder and co-host of the Conference on Inclusive Capitalism 2014

Keeping the NSA in Perspective

snoopingMy Comments: This won’t interest some of you, which is OK. Others will recognize it as part of the cosmos that includes our economy and our political environment. These things contribute to the process that results in the amount of money we have to live our lives the way we want to.

I’ve long said that in the 21st century which we inhabit, having more money is better than having less money. So your understanding of as many variables as possible helps make that possible. Or at least it does for me.

My wife and I are gone to my 55th high school reunion this weekend so don’t expect a post tomorrow or Monday. We should be back on Tuesday. Have a great Memorial Day.

Editor’s Note: The following Geopolitical Weekly originally ran in July 2013. We repost it today in light of the April 21 awarding of the 2014 Pulitzer Prize for public service to The Washington Post and The Guardian US for their reporting on the National Security Agency’s large-scale surveillance programs.

By George Friedman | Tuesday, April 22, 2014
In June 1942, the bulk of the Japanese fleet sailed to seize the Island of Midway. Had Midway fallen, Pearl Harbor would have been at risk and U.S. submarines, unable to refuel at Midway, would have been much less effective. Most of all, the Japanese wanted to surprise the Americans and draw them into a naval battle they couldn’t win.

The Japanese fleet was vast. The Americans had two carriers intact in addition to one that was badly damaged. The United States had only one advantage: It had broken Japan’s naval code and thus knew a great deal of the country’s battle plan. In large part because of this cryptologic advantage, a handful of American ships devastated the Japanese fleet and changed the balance of power in the Pacific permanently.

This — and the advantage given to the allies by penetrating German codes — taught the Americans about the centrality of communications code breaking. It is reasonable to argue that World War II would have ended much less satisfactorily for the United States had its military not broken German and Japanese codes. Where the Americans had previously been guided to a great extent by Henry Stimson’s famous principle that “gentlemen do not read each other’s mail,” by the end of World War II they were obsessed with stealing and reading all relevant communications.

The National Security Agency evolved out of various post-war organizations charged with this task. In 1951, all of these disparate efforts were organized under the NSA to capture and decrypt communications of other governments around the world — particularly those of the Soviet Union, which was ruled by Josef Stalin, and of China, which the United States was fighting in 1951. How far the NSA could go in pursuing this was governed only by the extent to which such communications were electronic and the extent to which the NSA could intercept and decrypt them.

The amount of communications other countries sent electronically surged after World War II yet represented only a fraction of their communications. Resources were limited, and given that the primary threat to the United States was posed by nation-states, the NSA focused on state communications. But the principle on which the NSA was founded has remained, and as the world has come to rely more heavily on electronic and digital communication, the scope of the NSA’s commission has expanded.

What drove all of this was Pearl Harbor. The United States knew that the Japanese were going to attack. They did not know where or when. The result was disaster. All American strategic thinking during the Cold War was built around Pearl Harbor — the deep fear that the Soviets would launch a first strike that the United States did not know about. The fear of an unforeseen nuclear attack gave the NSA leave to be as aggressive as possible in penetrating not only Soviet codes but also the codes of other nations. You don’t know what you don’t know, and given the stakes, the United States became obsessed with knowing everything it possibly could.

In order to collect data about nuclear attacks, you must also collect vast amounts of data that have nothing to do with nuclear attacks. The Cold War with the Soviet Union had to do with more than just nuclear exchanges, and the information on what the Soviets were doing — what governments they had penetrated, who was working for them — was a global issue. But you couldn’t judge what was important and what was unimportant until after you read it.

Thus the mechanics of assuaging fears about a “nuclear Pearl Harbor” rapidly devolved into a global collection system, whereby vast amounts of information were collected regardless of their pertinence to the Cold War.

There was nothing that was not potentially important, and a highly focused collection strategy could miss vital things. So the focus grew, the technology advanced and the penetration of private communications logically followed. This was not confined to the United States. The Soviet Union, China, the United Kingdom, France, Israel, India and any country with foreign policy interests spent a great deal on collecting electronic information. Much of what was collected on all sides was not read because far more was collected than could possibly be absorbed by the staff. Still, it was collected. It became a vast intrusion mitigated only by inherent inefficiency or the strength of the target’s encryption.

Justified Fear
The Pearl Harbor dread declined with the end of the Cold War — until Sept. 11, 2001. In order to understand 9/11’s impact, a clear memory of our own fears must be recalled. As individuals, Americans were stunned by 9/11 not only because of its size and daring but also because it was unexpected. Terrorist attacks were not uncommon, but this one raised another question: What comes next? Unlike Timothy McVeigh, it appeared that al Qaeda was capable of other, perhaps greater acts of terrorism. Fear gripped the land. It was a justified fear, and while it resonated across the world, it struck the United States particularly hard.

Part of the fear was that U.S. intelligence had failed again to predict the attack. The public did not know what would come next, nor did it believe that U.S. intelligence had any idea. A federal commission on 9/11 was created to study the defense failure. It charged that the president had ignored warnings. The focus in those days was on intelligence failure. The CIA admitted it lacked the human sources inside al Qaeda. By default the only way to track al Qaeda was via their communications. It was to be the NSA’s job.

As we have written, al Qaeda was a global, sparse and dispersed network. It appeared to be tied together by burying itself in a vast new communications network: the Internet. At one point, al Qaeda had communicated by embedding messages in pictures transmitted via the Internet. They appeared to be using free and anonymous Hotmail accounts. To find Japanese communications, you looked in the electronic ether. To find al Qaeda’s message, you looked on the Internet.

But with a global, sparse and dispersed network you are looking for at most a few hundred men in the midst of billions of people, and a few dozen messages among hundreds of billions. And given the architecture of the Internet, the messages did not have to originate where the sender was located or be read where the reader was located. It was like looking for a needle in a haystack. The needle can be found only if you are willing to sift the entire haystack. That led to PRISM and other NSA programs.

The mission was to stop any further al Qaeda attacks. The means was to break into their communications and read their plans and orders. To find their plans and orders, it was necessary to examine all communications. The anonymity of the Internet and the uncertainties built into its system meant that any message could be one of a tiny handful of messages. Nothing could be ruled out. Everything was suspect. This was reality, not paranoia.

It also meant that the NSA could not exclude the communications of American citizens because some al Qaeda members were citizens. This was an attack on the civil rights of Americans, but it was not an unprecedented attack.
During World War II, the United States imposed postal censorship on military personnel, and the FBI intercepted selected letters sent in the United States and from overseas. The government created a system of voluntary media censorship that was less than voluntary in many ways. Most famously, the United States abrogated the civil rights of citizens of Japanese origin by seizing property and transporting them to other locations. Members of pro-German organizations were harassed and arrested even prior to Pearl Harbor. Decades earlier, Abraham Lincoln suspended the writ of habeas corpus during the Civil War, effectively allowing the arrest and isolation of citizens without due process.

There are two major differences between the war on terror and the aforementioned wars. First, there was a declaration of war in World War II. Second, there is a provision in the Constitution that allows the president to suspend habeas corpus in the event of a rebellion. The declaration of war imbues the president with certain powers as commander in chief — as does rebellion. Neither of these conditions was put in place to justify NSA programs such as PRISM.

Moreover, partly because of the constitutional basis of the actions and partly because of the nature of the conflicts, World War II and the Civil War had a clear end, a point at which civil rights had to be restored or a process had to be created for their restoration. No such terminal point exists for the war on terror. As was witnessed at the Boston Marathon — and in many instances over the past several centuries — the ease with which improvised explosive devices can be assembled makes it possible for simple terrorist acts to be carried out cheaply and effectively. Some plots might be detectable by intercepting all communications, but obviously the Boston Marathon attack could not be predicted.

The problem with the war on terror is that it has no criteria of success that is potentially obtainable. It defines no level of terrorism that is tolerable but has as its goal the elimination of all terrorism, not just from Islamic sources but from all sources. That is simply never going to happen and therefore, PRISM and its attendant programs will never end. These intrusions, unlike all prior ones, have set a condition for success that is unattainable, and therefore the suspension of civil rights is permanent. Without a constitutional amendment, formal declaration of war or declaration of a state of emergency, the executive branch has overridden fundamental limits on its powers and protections for citizens.

Since World War II, the constitutional requirements for waging war have fallen by the wayside. President Harry S. Truman used a U.N resolution to justify the Korean War. President Lyndon Johnson justified an extended large-scale war with the Gulf of Tonkin Resolution, equating it to a declaration of war. The conceptual chaos of the war on terror left out any declaration, and it also included North Korea in the axis of evil the United States was fighting against. Former NSA contractor Edward Snowden is charged with aiding an enemy that has never been legally designated. Anyone who might contemplate terrorism is therefore an enemy. The enemy in this case was clear. It was the organization of al Qaeda but since that was not a rigid nation but an evolving group, the definition spread well beyond them to include any person contemplating an infinite number of actions. After all, how do you define terrorism, and how do you distinguish it from crime?

Three thousand people died in the 9/11 attacks, and we know that al Qaeda wished to kill more because it has said that it intended to do so. Al Qaeda and other jihadist movements — and indeed those unaffiliated with Islamic movements — pose threats. Some of their members are American citizens, others are citizens of foreign nations. Preventing these attacks, rather than prosecuting in the aftermath, is important. I do not know enough about PRISM to even try to guess how useful it is.

At the same time, the threat that PRISM is fighting must be kept in perspective. Some terrorist threats are dangerous, but you simply cannot stop every nut who wants to pop off a pipe bomb for a political cause. So the critical question is whether the danger posed by terrorism is sufficient to justify indifference to the spirit of the Constitution, despite the current state of the law. If it is, then formally declare war or declare a state of emergency. The danger of PRISM and other programs is that the decision to build it was not made after the Congress and the president were required to make a clear finding on war and peace. That was the point where they undermined the Constitution, and the American public is responsible for allowing them to do so.

Defensible Origins, Dangerous Futures
The emergence of programs such as PRISM was not the result of despots seeking to control the world. It had a much more clear, logical and defensible origin in our experiences of war and in legitimate fears of real dangers. The NSA was charged with stopping terrorism, and it devised a plan that was not nearly as secret as some claim. Obviously it was not as effective as hoped, or the Boston Marathon attack wouldn’t have happened. If the program was meant to suppress dissent it has certainly failed, as the polls and the media of the past weeks show.

The revelations about PRISM are far from new or interesting in themselves. The NSA was created with a charter to do these things, and given the state of technology it was inevitable that the NSA would be capturing communications around the world. Many leaks prior to Snowden’s showed that the NSA was doing this. It would have been more newsworthy if the leak revealed the NSA had not been capturing all communications. But this does give us an opportunity to consider what has happened and to consider whether it is tolerable.

The threat posed by PRISM and other programs is not what has been done with them but rather what could happen if they are permitted to survive. But this is not simply about the United States ending this program. The United States certainly is not the only country with such a program. But a reasonable start is for the country that claims to be most dedicated to its Constitution to adhere to it meticulously above and beyond the narrowest interpretation. This is not a path without danger. As Benjamin Franklin said, “They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”

US Economy: Blame Misaligned Policies, Not Structural Flaws

080519_USEconomy1My Comments: I recently engaged in what turned out to be a mindless discussion on LinkedIn that started with the question “Who Creates Inflation?” My comments and those of several others offered our thoughts that it was a “what” that creates inflation and not a “who”. It was soon apparent that the leader and some of his followers had never attended Economics 101, much less passed it.

In the 1930’s, as this country recovered from the Great Depression, the remedies proposed were relatively simple compared to those in place today. At the time, there was virtually no “global economy”. Probably 99% of US economic activity was bound in what was then 48 states. We all spoke the same language and all of us used the dollar as our medium of exchange.

The complexity today, coupled with the almost impossible challenge of getting 100 different countries to agree on solutions is just the beginning. And regardless of how certain you are as a leader that X will work, there are always unintended consequences. The variables are staggering.

The “discussion” leader referenced above attempts to blame the Fed for all our ills, maybe even global warming. HIs solution is to get rid of the Fed. Which might have been possible in 1933, when our economy largely stood on its own two feet. Someone commented that you could argue all day long with fools, but at the end of the day they were still fools. It’s depressing to realize there are so many of them.

Michael Ivanovitch / Sunday, 4 May 2014

Investors need not worry about naysayers’ myriad structural flaws of American economy. Some of these problems do exist, most are fanciful, but none are currently responsible for America’s Mediterranean style output gap.

The U.S. economy is held back by a misaligned policy mix: Excessive fiscal restraint and an ineffective monetary policy at a time when aggregate demand remains well below its noninflationary potential.

Jobs, incomes and credit costs are the key variables driving America’s economic activity. All of them are in a dire need of more supportive demand management policies.

It is wonderful to see that 288,000 new jobs were created last month in a broad range of nonfarm business sectors. But that still left 9.8 million people out of work, 7.5 million people stuck in part-time jobs because they could not get full-time employment and 2.2 million people who dropped out of the labor force because they were unable to find a job.

Adding all that up, we get an actual unemployment rate of 12.6 percent — double the officially reported rate of 6.3 percent.

And there is nothing structural about this, even though there are sectoral and regional mismatches between the labor skills demanded and those on offer. A meaningful decline in this huge number of unemployed can only be obtained with a steady and sustained increase of labor demand as businesses expand their output to meet rising sales. That is what we have don’t have enough of.

Weak incomes are a direct corollary to such a large labor market slack. The real disposable household income bounced back in the first quarter of this year, but over the last four quarters incomes grew at an average annual rate of only 1.3 percent.

Ask the Fed why the banks are not lending

How can one expect a buoyant household consumption (70 percent of U.S. economy) from these employment and income numbers?

A puny 2.2 percent average annual growth of consumer outlays during the last four quarters is partly a result of households drawing down their savings to maintain their customary consumption patterns. Indeed, the savings rate, now down to 4 percent of disposable income, has been on a steady decline since the middle of last year.

And neither are we getting much help from a near-zero effective federal funds rate and massive monthly asset purchases that have expanded the balance sheet of the Federal Reserve (Fed) to a mind-boggling $3.9 trillion and the banks’ loanable funds (excess reserves) to an equally extraordinary $2.6 trillion – an increase of 32 percent and 49 percent, respectively, from the year earlier.

All we got from that is a 4 percent increase in bank lending to households. People are increasingly turning to nonbanks, whose consumer loans are soaring at annual rates of 7-9 percent and represent 60-70 percent of total consumer lending.

Somebody should perhaps find out why it is that U.S. banks prefer to keep $2.6 trillion at the Fed at an interest rate of 0.25 percent instead of financing car purchases at 4.2 percent or extending two-year personal loans at 10.1 percent.

Residential investments — the other interest-sensitive component of aggregate demand that is directly influenced by jobs and incomes – have also drastically weakened since the middle of last year. They increased in the first quarter at an annual rate of 2.3 percent, practically collapsing after a hefty 15 percent annual gain in the second quarter of 2013.

The most frequently heard explanations that rising real estate prices and higher mortgage costs are the main reasons for the weakening housing demand are largely peripheral to the core issues of high unemployment and virtually stagnant real disposable personal incomes.

I am not dismissing the negative impact of a 12.9 percent increase in real estate prices over the last twelve months, and a 100 basis points gain in mortgage rates. But, as important as these things might be, they literally pale into insignificance compared with the depressive force of high jobless rates and nearly flat incomes.

A low labor participation rate offset April’s better-than-expected jobs report, says David Dietze, President & Chief Investment Strategist at Point View Wealth Management.

Tell the Congress to ease up on the purse

Faced with weak private sector demand, one might expect that the economy would get some help from stronger public spending. Unfortunately, the opposite is happening. While criticizing Germany for palming fiscal austerity on its recession-ridden euro partners, Washington is in fact following the German policy line. According to recent estimates by the nonpartisan Congressional Budget Office, a severe fiscal retrenchment is expected to cut this year’s federal budget deficit to 2.8 percent of the gross domestic product (GDP), marking the fifth consecutive year of a sharply narrowing budget gap.

That is a laudable effort, but such haste in slashing public spending is the last thing we need when the economy is growing below potential and struggling with high unemployment.

The U.S. Congress should allow the government to, as the White House says, “spend money on infrastructure to fill up the potholes” and attend to other worthy public services. More generally, a reasonable increase in public spending would go some way toward supporting demand, output and employment.

Investment thoughts
This discussion shows that there is nothing structurally wrong with the American economy that would degrade it permanently – as some observers seem to believe – to the position of a global growth laggard.

Yes, income inequalities have to be watched carefully, but the U.S. needs no lessons on this because its progressive income tax was introduced in 1862. The progressivity has been sharpened many times since, and the public debate of income inequality will probably heat up during the forthcoming election cycle.

Education, healthcare and a more enlightened approach to immigration are also issues of continuing concern for every administration.

U.S. trade imbalances are another ongoing question of public policy. Clearly, the economy could benefit from a more aggressive enforcement of sound trade practices to even out the playing field for American companies and to protect their intellectual property.

But more than anything else, the American economy needs effective fiscal and monetary policies to narrow its large output gap and to stimulate employment creation.

Don’t sell the U.S. short; its world-beating companies offer some of the best and safest investment assets you can find – anywhere.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.
Follow the author on Twitter @msiglobal9

The SWIFT way to get Putin to scale back his ambitions

My Comments: How many of you have heard of SWIFT? Do you recall it was used in 2012 with Iran?

I’ve commented earlier about the events in Ukraine and how they may effect us and our investments. Not to mention the bad feelings they generate in my head given my personal history.

While the talking heads imply there is little we can do about matters in Ukraine, and there is overwhelming reluctance to put boots on the ground, SWIFT has relevance and needs to be remembered.

By Gideon Rachman | Last updated: May 12, 2014

The disputed referendums in eastern Ukraine give President Vladimir Putin time to take stock and choose between two very different paths. The first involves grabbing more territory for Russia, attempting to rebuild an empire in the old Soviet sphere, and accepting a prolonged confrontation with the west. The second is more pragmatic – and involves attempting to pocket his Crimean winnings and rebuild relations with the US and the EU.

Which path he chooses depends on events on the ground and, crucially, on the resistance that he encounters from the outside world.

The Kremlin has reason to pause and take stock because future rounds of economic sanctions aimed at Russia are potentially very damaging. Western governments have the power in effect to exclude Russia from the world’s financial system. The key to that system is based in Brussels. It is the Society for Worldwide Interbank Financial Telecommunication, otherwise known as Swift.

Even the sanctions enacted so far have come as an unpleasant surprise to the Kremlin. After all, far more blood was shed in the Russian invasion of Georgia in 2008 than the annexation of Crimea. Yet the west barely reacted to the Georgian war. (America’s diplomatic “reset” with Russia came just a few months later.) By contrast, the annexation of Crimea swiftly provoked sanctions – with the threat of more to come.

Moscow has tried to give the impression that it is unconcerned by the travel bans and asset seizures enacted. Prominent Russians who are on the banned list profess to be delighted.
The reality is that some in Mr Putin’s circle are genuinely dismayed by the restrictions on their ability to travel and move their money. Even more important, there is real anxiety in the Kremlin about what a third stage of sanctions could entail. In particular, the Russians fear the kinds of measure that cut off Iran from the global financial system.

In private, officials fulminate against the possibility of being shut out of the Swift system of international banking payments, a measure that was taken against Iran in 2012 and that would hugely complicate efforts to do international business from Russia. Without access to Swift it will become extremely difficult to transfer money in and out of Russia.

Swift is a private institution, owned by its member banks, and based in Brussels. But, as the Iran case illustrated, it is susceptible to pressure from the EU and the US. European and American financial sanctions against Iran forced Swift to take action last time. Similar measures against Russia are on the list of possible sanctions.

Nonetheless, western officials are also aware of the downside of using the Swift weapon. It is advantageous to the west that such a significant part of the world’s financial structure is run from Europe – and indeed, based in the same city as the EU and Nato. The fact that Russian people and institutions use Swift for their financial transactions makes it easier for western governments to monitor how they are moving their money around. Cutting Russia out of Swift would cause chaos in Moscow in the short term.

In the longer term, however, it might hasten the day when Russia and, more significantly, China establish alternative systems for moving money between international banks. This is no easy task – otherwise it would have been done already. But it is something that the Russians and Chinese are known to be looking at.

Just as it is not in the west’s interests to fracture the governance of the internet, so it might be damaging in the long term to block the financial pipes that are needed to sustain a global economic system, particularly when those pipes are routed through the west.

Russia’s President Vladimir Putin moved swiftly to annex Crimea, in the first land grab in Europe since the second world war, and the EU and US are worried over Moscow’s intentions elsewhere in Ukraine.

However, even if the US and the EU decided that including Swift in a stage-three sanctions package would be too drastic a step for now, there are other ways of hitting Russia with severe financial sanctions. Indeed, America could act alone, without the need for similar measures by the more cautious EU, by forcing international financial institutions to choose between doing business in Russia and doing business in America.

Even though Russia is the eighth- largest economy in the world, it is hard to think of any big financial institution that would voluntarily cut itself off from the dollar system so that it could keep its Moscow office open.

Would the US really go this far? Not as things stand. But if the Russian government is intent on annexing more of Ukraine and threatening other independent nations that were once part of the Soviet Union – such as Moldova, Georgia or the Baltic states – it is inevitable that there will be further sanctions packages. At some point on the ladder of escalation, serious financial sanctions, probably involving Swift, would move from pulp fiction to reality.

Of course, if Mr Putin really fancies himself as a new emperor, intent on reclaiming for Moscow the old territories of the Soviet Union – whatever the cost – then these kinds of risk will not deter him. However, the evidence of the Putin years suggests that while the Russian president is bold, he is not mindlessly reckless.

The west should now make it very clear to Mr Putin, preferably in private, just how damaging stage-three sanctions could be. Frank messages now may help the Russian president to decide which path to take.