Monthly Archives: June 2013

Julian Assange and Edward Snowden are very lucky that the president of the nation aggrieved by their leaks is Barack Obama of the US and not Rafael Correa. Continue reading »

During the recent US-China summit, one of the few issues on which Chinese tempers flared was that of a small group of rocks in the East China Sea – islands that the Japanese call the “Senkaku” and the Chinese call “Diaoyutai”. Unless handled more judiciously by leaders in both Beijing and Tokyo, there is real potential for a rupture in relations over the ownership of these barren islands.

Behind the scenes, all the key players in the rest of Asia and the US are urging Japan and China to handle the matter carefully, to let cooler heads prevail and change the subject. Still, the situation remains serious – if little understood. It has the potential to create a crisis that could rock northeast Asia, and have an impact on the global economy. Continue reading »

In December 2011, at a major conference in Bonn attended by ninety foreign ministers, the Taliban were on the verge of accepting US conditions that would allow them to open a political office in Doha. The Americans had held four rounds of direct secret talks with the Taliban that had started in November 2010 thanks to mediation mainly by German diplomats and Qatar.

However, at the last minute, Afghan President Hamid Karzai balked and refused to agree to the terms for opening the Taliban office, citing that he had not been adequately consulted by the US or Germans – which was untrue.

It has taken nearly two years for all the players to get back to where they were at Bonn that cold December and once again try and open a Taliban office in Doha. Yet the latest attempts to do so were shambolic – for which everyone, including the Americans, shares part of the blame. Continue reading »

Financial markets are on tenterhooks after yet another wild week. Triple-digit intra-day moves in the Dow have become the norm rather than the exception. Conventional asset class correlations have broken down. Virtually every financial security has lost money. And liquidity dislocations are common.

Damage is not contained to financial markets. If these factors persist, they will undermine global economic fundamentals, thereby threatening adverse vicious cycles. So here are six factors that speak both to recent developments and what may happen next. Continue reading »

Before the onset of the global financial crisis, China could be relied upon to export its way out of trouble. Year after year, its exports grew at an annual rate well in excess of 20 per cent. As its current account surplus rose, its economy expanded with a swagger that became the envy of the world. Now, however, China’s export growth has faded, its current account surplus has almost disappeared and Beijing has had to search for alternative sources of rapid economic expansion. Continue reading »

In his Mansion House speech this week, George Osborne, chancellor of the exchequer, declared that the British economy is healing. But he also argued that the recovery still needs to be secured, and that policymakers need to continue to treat the ailments that brought it low in the first place.

The chancellor is right. There is strong evidence that prospects for the UK economy are, at last, looking up. A variety of indicators – of business and household sentiment,retail and car sales, housing market conditions and of the labour market – all suggest that the recovery is underway and is hopefully becoming self-sustaining.

This is unequivocally good news, though nothing should be taken for granted. We have been here before – notably in 2010, when the economy grew at around its trend rate for nine months, only for recovery to sadly evaporate. Three years later, some headwinds persist, such as the deleveraging that is still to be done – most obviously by the public sector, but probably by the private sector too. And there are other risks too, not least that of another flare-up of stress in continental Europe. Continue reading »

The UN reported last week that almost 100,000 people are estimated to have died in Syria to date, although it notes that the figures is quite possibly much higher. Syrian refugees and activists argue that as many as 250,000 may have died. Roughly two million have been driven from their homes. That is without even beginning to count the life-altering injuries, rapes, and shattering of homes, businesses and communities. Many of the pictures of Syrian towns look like bombed out cities from the second world war. Continue reading »

Markets rallied sharply late on Thursday on unconfirmed indications that the Fed may push back more forcefully on investors’ fear of a pre-mature tightening in monetary policy. To sustain the change in market sentiment for more than a few days, the Fed would need to follow up with greater details or, even better, have its beneficial market impact gradually superseded by an accelerated improvement in economic fundamentals.

I suspect that, having witnessed the recent market turmoil and fearing that the related liquidity disruptions could feed on themselves, Fed officials worry that investors are abandoning too quickly the notion of a “central bank put.” After all, financial markets in general, and equities and corporate bonds in particular, had surged quite nicely on the (repeatedly demonstrated) notion that central banks were investors’ best friends. Continue reading »

The hearings of the German constitutional court this week in Karlsruhe raise a series of interesting questions, in particular about the independence and accountability of the European Central Bank.

Concerning independence, it seems peculiar that the Court called a national institution, the Deutsche Bundesbank, to testify. Since 1 January 1999, the Bundesbank has been an integral part of the Eurosystem – the chain of institutions headed by the ECB – for its monetary policy functions.

Like all the other national central banks of the euro area, it is not responsible for deciding the single monetary policy of the euro area, but only for implementing it. How can part of an institution express a different opinion from the rest, without undermining its integrity, and thus its independence? Continue reading »

Ageneration ago, autocrats could still hope to maintain control of information within their countries and to limit the ability of citizens to communicate with one another and the outside world. Today, people carry gadgetry that allows them to send ideas hurtling across borders, to connect with one another as never before.

Satellite television, mobile phones with cameras, Facebook, YouTube and Twitter have empowered the individual. Recent headlines remind us that the state is developing new tools of its own. But the decision by former US Central Intelligence Agency employee Edward Snowden to expose the National Security Agency’s data dragnets demonstrates that state-sponsored surveillance may prove as difficult a secret to keep as any other in an open society. Continue reading »

I have vivid memories of watching western movies with my father. For a boy, seeing John Wayne get his way brought certainty: it was clear that, with enough firepower, might would prevail. Switzerland and its banks were slow to recognise this simple truth. The price to pay is now uncomfortably high.

In recent years, US authorities have taken an aggressive stand against Swiss bank secrecy on the grounds that US clients are using it to evade tax. Several years of convoluted negotiations between the two nations were characterised by Bern clinging desperately to the belief that the anonymity of alleged tax refugees could be preserved. Continue reading »

The US-China summit meeting between President Barack Obama and President Xi Jinping at the Sunnylands Estate in California is an institutional innovation in the relationship designed to bring more informality and true strategic dialogue to the highest levels. Recent meetings – numerous though they may be — have tended to resemble dueling recitations of diplomatic grocery lists.

Enormous preparation and detailed scripting tended to proceed every high level encounter, often depriving sessions from even modest improvisational exchanges (Author’s brief aside here: for the last four years I was one of the key diplomats inside the US government charged to prepare for just these kinds of meetings. This work can be heady and demanding when given tasks like negotiating the all-important joint statement; or it can seem trivial and inconsequential when asked to take the responsibility to make sure every protocol detail is in order, from the size of hotel fruit baskets to the number of cars in the official entourage). Let us just say that these are not impromptu encounters where the leaders are “winging it”. There are society weddings, Balanchine ballets, and North Korean placard twirling stadium exhibitions that are less choreographed than recent high level US -China engagements. Continue reading »

Friday’s US jobs report is even more eagerly anticipated by financial markets now that investors are being pushed to take longer-term views that they had hoped to avoid, at least for now. With global equities selling off, tepid job creation would end up creating more turbulence and uncertainty. And reaction to something else, that is a number on either side of the distribution of possible outcomes, depends in large part on the faith that investors retain in the unquestioned powers of central banks. Continue reading »

Things are looking up. Led by rising house prices, the US recovery is likely to accelerate this year. Budget deficit projections have declined, too. And although the European economy is stagnant, there is some evidence that stimulative policies are gaining traction in Japan. So this is an opportune moment to reconsider the principles that should guide fiscal policy.

A prudent government must balance spending and revenue collection in a way that assures the sustainability of its debts. To do otherwise would lead to instability and slow growth – and court default and catastrophe. Deficit financing of government activity is not a sustainable alternative to increasing revenues or to cutting public spending. It is only a means of deferring payment. Just as a household or business cannot indefinitely increase its debt relative to its income without becoming insolvent, the same holds for a government. There is no permanent option of public spending without raising commensurate revenue. Continue reading »