Monthly Archives: April 2013

Amazon has built its empire on the legitimate advantages it has over retail shopping: an endless range of products at a steep discount and stunningly good customer service. But it has also benefited from one unfair advantage over its bricks-and-mortar competitors: it does not have to charge a sales tax, which American states levy in varying amounts on consumer goods. Depending on where you live in the US, this can save you up to 12 per cent on purchases, making it foolish not to buy online when you can. 

After last week’s horrible unemployment numbers from Europe, some may be tempted to downplay the monthly US jobs report coming out this Friday. That would be a big mistake. The data will help shed light on four issues that are central to the wellbeing of both America and the global economy.

First, some context. Almost five years after the global financial crisis began, western economies as a group still struggle to overcome a “new normal” of unusually sluggish growth and persistently high unemployment. The longer this persists, the greater the risk that – rather than serving as a transition to revamped growth and job creation models – the new normal will morph into one or more lost decades with terrible human costs. 

The curtain has been pulled aside on the once secret world of tax havens, and the scale of abuse is nearly beyond reckoning. Week after week, Americans and Europeans worn down by budget austerity have learnt about the secret accounts of their politicians, tax evasion by leading companies and hot money destabilising the world economy. The darker truth is that these havens are not gaps in the world’s financial system; they are the system. 

There is a famous cartoon by the French artist Voutch in which a customer in a wine merchant’s shop is asking the owner if he can recommend “a bottle that would go well with a very, very, very bad piece of news I am giving my wife this evening”.
There must be several European leaders in the market for similar bottles at present. 

Down the road, a regional war beckons if nothing is done to contain the escalating conflict and chaos that has killed at least 70,000 and displaced up to a quarter of Syria’s population. 

So, more drugs to deal with our collective lack of growth. The Bank of England’s Funding for Lending extension is welcome: the scheme lasts longer than before, contains extra incentives to lend to cash-strapped small and medium-sized enterprises and has been widened to include non-bank sources of credit, including financial leasing corporations. And after some remarkably soggy eurozone data – including purchasing manufacturers index figures suggesting that the German economy is not quite as dynamic as Bayern Munich – investors are increasingly hopeful that the European Central Bank will come to the rescue, buying up equities as if the dark clouds are about to lift. 

With apologies to nostalgic cold war views about Russia, or unmet dreams of a united Europe with a single foreign policy, the world’s most important bilateral relationship is the one between the US and China. For that relationship to succeed, it must be embedded in a larger framework of US diplomacy in Asia, stretching from Japan to India, but certainly the US-China piece will be central for the 21st century. With new leadership in Beijing under President Xi Jinping settling in and President Barack Obama starting his second term, this is a defining period for the future of US-China relations. Both countries have challenging domestic agendas, but Washington and Beijing fully recognise the importance of their international interactions. 

Officials from around the world gathering for the semi-annual meetings of the IMF and World Bank should go beyond the important issue of how individual countries emerge more quickly from their malaise. They should also spend time on the implications of the new global economic configuration for the west’s ability to project and deploy economic power 

Structural weaknesses are part of the explanation for the eurozone’s predicament. But Europe also made two mistakes in responding to the crisis. First, it failed to recognise the true extent of its banking problem. It believed – or pretended to believe – that the guarantees and recapitalisations of 2008-2009 had addressed the issue whereas weaknesses were in fact much more widespread. Second, it failed to appreciate that excessive private-sector debt was not just an American problem. In Europe too many households and companies needed to deleverage. 

With last week’s release of the president’s budget, Washington has once again descended into partisan squabbling. In the US today, there is pervasive concern about the basic functioning of democracy. Congress is viewed less favourably than ever before in the history of opinion polling. There is widespread revulsion at political figures seemingly unable to reach agreement on measures to reduce future budget deficits. Pundits and politicians alike condemn “gridlock”. Angry movements, such as Occupy Wall Street and the Tea Party, are present and still active on the extremes of both sides of the political spectrum.

Meanwhile, profound changes are redefining the global order. Emerging economies, led by China, are converging towards the west. Beyond the current economic downturn lies the even more serious challenge of the rise of technologies, which may raise average productivity but will displace large numbers of workers. Public debt is increasing in a way that is without precedent except in times of total war. A combination of an ageing population and the rising prices of health and education will put pressure on future budgets. 

The Iron Lady, the leader who had no time for diplomatic niceties, who was not afraid to stand up for the truth, who would not back down on the global stage. But the starry-eyed supporters of Margaret Thatcher who have filled the opinion pages over the past week are themselves besotted with a vision of Britain in the world that is both deeply anachronistic and dangerous. Nowhere is the folly of this view more apparent than in Thatcher’s attitude towards Europe, a view that was less a throwback to Winston Churchill than to her 19th-century predecessors. Like them, Thatcher saw the European continent as a stage for balance-of-power politics, with Britain holding the balance. In the 21st century, however, that view is likely to leave Britain outside global power circles altogether. 

For the first time since the North Koreans began their rhetorical climb toward the summit of Mount Apocalypse, they have taken a step back – and it is an important one. It appears that Pyongyang’s closure of the Kaesong industrial complex, the only co-operative commercial link between the two Koreas, is temporary. That is good news, if not a huge surprise. It reassures us that the regime still cares about cash flow and the jobs of the more than 50,000 North Koreans who work there – and that there is still some distance between Pyongyang’s words and deeds.

But the lessons we have learnt in recent weeks suggest that this war of nerves is not over. We have learnt for example that Kim Jong-eun, or whoever is really driving this crisis, has the nerve, and perhaps the poor judgment, to deliberately sail his country into uncharted troubled waters. Pyongyang has torn up its armistice with Seoul and threatened “thermonuclear war”, dashing early hopes that generational change in North Korea’s leadership might bring something new to a country that badly needs it. 

President Barack Obama’s budget this week makes clear the real political equilibrium in the US. The federal government is shrinking. Discretionary spending in the new Obama budget would shrink to 4.9 per cent of gross domestic product in 2023, compared with 7.9 per cent of GDP in 2008. Both parties have signed on to this shrinkage. Neither will try to stop it.

The implications are enormous. Until 2017 at the earliest, there is likely to be no or very meagre action to address America’s growing underclass, gaping inequalities, decrepit infrastructure, persistent drought or worsening climate change. Slow growth, unemployable young people, a vast incarcerated minority population and gaudy excesses at the top will remain the norm. Even Mr Obama’s few new initiatives, for example for early childhood development and new infrastructure, are tiny drops in America’s ocean of unmet need. 

The tie to the US was for Thatcher an article of faith. It didn’t matter that this faith was not always reciprocated. American reluctance to back the UK fully against Argentina was more a source of disappointment for her than a cause for rupture. The same was true for the Reagan administration’s embarrassing failure to consult before introducing military forces into Grenada. 

With the announcement by Haruhiko Kuroda, the Bank of Japan’s new governor, of the doubling of the monetary base within the next two years at most, the Japanese authorities committed to do “whatever it takes” to achieve their newly assigned objective — an inflation rate of 2 per cent. Two questions should be raised. First, why such a drastic step up in monetary expansion? Second, will it work? 

This week, a new book, “The Great Deformation: The Corruption of Capitalism in America” by David A. Stockman was published in the US, garnering a great deal of notice. The attention is due not so much to the 742-page book, which is dense with discussions of obscure financial topics, but because of the author, who once played a critical role in American economic policy.

Mr Stockman was the proverbial whiz-kid of American politics. After college, he worked on the staff of the US Congress for Rep John B. Anderson of Illinois, the third-ranking Republican in the House of Representatives. In 1976, Mr Stockman returned to his native state of Michigan to run for Congress himself, winning elective office on his first try. 

So far, so good. The commitment is most definitely there and the ambition has now been well-defined. Yet Japan is not yet out of deflationary trouble and, even in the event of the monetary equivalent of the Great Escape, it might still all end in disappointment. 

The US monthly figures are eagerly anticipated for more than the insights they provide into the health of the economy. These days they also serve as an indicator of the direct impact of congressional dysfunction, the evolution of experimental policies from the Federal Reserve and trends in income inequality. 

I have been working on and following issues in Asia for more than 20 years from various vantages; from the US government (including stints at the Department of State, White House, Department of Defense and Treasury) to think-tanks, through to journalism and business. But no issue has been more vexing or confounding to me than North Korea. Virtually every aspect of my experience has been frustrating and often counterintuitive. Just when you anticipate a new leadership in Pyongyang testing the waters of engagement with a friendlier South Korean government, North Korea instead embarks on a risky course of confrontation. When the US and South Korea are ready for a showdown, Pyongyang suddenly switches gears and talks about peaceful relations. Despite North Korea’s recent starring roles in Hollywood blockbusters either as scheming masterminds (Olympus Has Fallen) or ruthless conquerors (Red Dawn), the truth is no country has played a bad hand more daringly. 

The eurozone finds itself back in the headlines. Once again, the world has been forced to watch a small country – this time Cyprus, with an economy smaller than that of Vermont – potentially threatening the integrity of the euro project. And not long before that, general elections in Italy produced extraordinary results – how often has a standing prime minister garnered only 10 per cent of the public vote?

Both events remind us that, after a period of calm since Mario Draghi’s bold and forceful introduction of a conditional European Central Bank backstop, the eurozone has yet to resolve its fundamental problems. Ultimately, strategic, long-term solutions, rather than short-term fixes, will be necessary to do so. 

In announcing that it will restart its nuclear facilities, North Korea seems to many people to be behaving strangely. In fact, North Korea is behaving predictably: it is issuing belligerent statements, cutting off hotlines and taking ever more threatening postures. The big question is: should the response of the world be equally predictable?

The US seems to think so. It refuses to talk directly to Pyongyang, preferring to continue with isolation and sanctions. This is the wrong approach. It is reasonable to fear that North Korea wants war. But its record shows that bellicosity is the only way it believes it can get attention. Maybe it is time to show North Korea that it does not have to behave weirdly to get talks going. 

Ben Bernanke is convinced that monetary stimulus will lead us to economic salvation, Mark Carney talks about “escape velocity”, Haruhiko Kuroda hopes that a rise in Japanese inflation to about 2 per cent will pave the way to greater economic riches and, given half a chance, Lord Turner of Ecchinswell would happily launch the monetary helicopters in a bid to deliver more in the way of economic growth. Our masters of money may hope that faster economic growth will arrive but are they right to think that monetary policy can be recalibrated to deliver the goods?