Monthly Archives: September 2013

The most significant diplomacy surrounding the opening of this year’s UN General Assembly did not involve Syria but Iran. What was agreed with Tehran is potentially significant. Talks will focus on nuclear issues. The rationale was straightforward: if nuclear talks succeed, everything else is possible; if no nuclear deal is reached, nothing else will matter.

Once there is agreement on an end-game, the sides will negotiate the pace and sequencing for getting there. Thus implementation will be step by step, but the parties will know what the final step will require before they take the first one. 

The main reason why the US Federal Reserve decided not to start tapering asset purchases at its last meeting was that the central bank considered the US economy to be still too fragile. The stock market nevertheless reacted with euphoria, jumping to new record levels.

The two facts are not easy to reconcile. The stock market rally should mean that investors are bullish about the earnings of the major listed companies, which should happen only if the US economy is on its way to a strong recovery, contrarily to the Fed’s forecast. If instead its view of the economy is correct, market prices are too high and are likely to be reversed downwards. In any case, asset prices do not seem to be in line with the central bank’s view of the US economy’s underlying fundamentals. 

As we edge towards deals in Syria and Iran, other countries in the wider region and beyond are in a state of meltdown – and one overwhelming cause is sectarianism. Muslim leaders are failing to offer answers to the devastating impact on politics and society. 

Baseball, America and Japan’s shared national pastime, is a useful window through which to view the two countries’ contrasting and changing attitudes to foreigners in general – and in the economy in particular.

Fans in the US have long embraced Japanese stars such as Ichiro Suzuki, the hit machine long with the Seattle Mariners; Hideki Matsui, the slugger beloved by the New York Yankees (and nicknamed Godzilla by fans); and Daisuke Matsuzaka, formerly of the Boston Red Sox, the thrower of the mythical gyroball pitch. 

by Laura Tyson and James Manyika

The Bureau of Economic Analysis recently announced that US output grew at an annualised rate of only 1.7 per cent during the second quarter of 2013. The figure was later revised upward – to 2.5 per cent – but there was something truly surprising about the reaction to the earlier, lower number. This sluggish performance was actually treated as good news.

The Great Recession, it seems, has put an end to great expectations for the US economy. As Washington remains gridlocked, business leaders, public officials, and commentators alike have begun to accept lackluster growth and depressed employment levels as the new normal. But the new normal may prove to be much more robust than anticipated. 

The US Federal Reserve’s decision last week to delay the start of its so-called “tapering” has confused investors about the reliability of its forward guidance. It has also created a trap that will make it difficult to start the tapering programme in the future unless the Fed changes its basic approach.

More specifically, Ben Bernanke, the Fed chair, explained that the Federal Open Market Committee (FOMC) had decided not to reduce its pace of bond-buying because current economic conditions were not as favourable as the FOMC members had expected in June. Looking ahead, he said the Fed could begin tapering later this year “if the data confirm our basic outlook”. 

As the Labour party gathers for its conference in Brighton, its leader, Ed Miliband, faces a more aggressive Conservative party that is getting its act together. David Cameron’s strategists have launched what will be a relentless campaign to persuade voters that, despite all the pain and hardship of the austerity years, “hard-working families” can now enjoy lower income tax and a smaller public deficit with less welfare spending, crime and immigration. Labour’s task is to dispute these claims but, above all, offer better policies in their place.

Mr Miliband has laid important foundations for his campaign. He has recalibrated Labour’s position on public spending, welfare and immigration, aligning his approach with economic reality and popular opinion. He has ensured that Labour’s door remains open to working with the Liberal Democrats, despite the short-sighted attacks made by some in the party. Above all, he has not allowed his party its habitual descent into factional war following election defeat. With the quiescence of the New Labourites he disowned during his leadership campaign, the party has chosen to close ranks behind him. 

Europe’s politicians must support him with a credible and binding route to capital-raising for those eurozone banks that are viable but remain undercapitalised. 

In this week’s Wednesday column, Martin Wolf argued that the collapse of Lehman Brothers five years ago was merely a symptom of deep-rooted problems in the global economy. He suggests – rightly, in my view – that the underlying stresses stemmed from the global saving glut and excessively loose monetary policy – itself an inevitable response to the global savings glut.

It is odd, then, that while Mr Wolf admits the glut still exists, he concludes that policymakers today should persist with aggressive monetary stimulus. His “least bad” option is, however, precisely the approach which led to the crisis in the first place. Repeating the process could be regarded as no more than an act of folly. 

The Federal Reserve refrained on Wednesday from reducing its experimental bond purchase program, thus maintaining its unconventional support for markets and the economy. In doing so it is probably signalling more than continuing worries about America’s tepid recovery, high unemployment rate and the risk of another round of self-manufacturing problems courtesy of Congress. It may also be signalling its concern about triggering renewed financial volatility that would undermine growth, job creation and global financial stability – worries that are unlikely to dissipate easily given the different reaction functions of the economy and markets.

Starting in the last few months of 2008, the Fed successfully normalised markets whose functioning was severely stressed by the global financial crisis. It pivoted in 2010 to the more ambitious goal of using unconventional monetary policies to deliver better economic outcomes; and did so with little policy support from other government agencies with better tools, but constrained by political polarisation. 

As we mark the fifth anniversary of Lehman Brothers’ demise and the onset of the global financial crisis, we must ask: what have we learnt? How well have we done? To what extent are the persistent weaknesses in the US and Europe a result of the misdeeds of the financial sector before the crisis, the crisis itself, and the way in which the crisis was managed?

The best – and it’s a great deal – that can be said is that we avoided the worst: another Great Depression. Whether this was a result of the forceful action of governments and central bankers is an exercise in counterfactual history – what would have happened without the massive bailouts we’ll never know for sure. 

The public campaign against corruption is emblematic of a bitter underground battle between the orthodox and reform wings of the Communist party that is playing out with greater frequency and intensity under the new leadership 

Putin can fairly claim to have won this round of diplomacy, through his own cleverness and Obama’s multiple missteps, but he cannot assume it is the harbinger of a trend, much less an era of global politics 

Barack Obama is both right and wrong. He is right in saying that “the credible threat of US military action” pushed Syria to give up its chemical weapons. He is wrong in believing that a “limited military strike” would have made the Syrian situation better. If indeed the US president had ordered a bombing of Syria, it would have made him and some Americans feel good. But it would have done no good. The people of Syria would not be better off. It would only have made a messy situation messier. This is obvious.

It is good that Mr Obama has decided to pursue the diplomatic path. Yet the bad news here is that America has over time lost its skills in diplomacy. If anyone doubts this, just look at Washington’s failure to even persuade its fellow Group of 20 countries to join its statement on Syria. 

The last-ditch effort by Moscow to avert a US strike against Syria – proposing Damascus signs up to the global ban on chemical weapons and puts its chemical stockpile under international controls – has merit and is worth pursuing. It also demonstrates that the threat of using even limited force can have real utility, and that a speedy congressional vote backing President Barack Obama on strikes remains necessary.

When the first reports of the deadly poison gas attack emerged from Damascus three weeks ago, the issue of military action took an important turn. Up to that point, the Obama administration had steadfastly – and rightly – resisted calls to intervene militarily in the increasingly bloody civil war. Not only did the president confront a war-weary public that had absolutely no interest in becoming entangled in another Middle Eastern conflict, but he had also long concluded that doing so would make this his war – and ending the conflict his responsibility. He rightly held back. 

Some central banks in advanced economies have recently put themselves into an uncomfortable corner. They have started to implement “forward guidance”, which consists of communicating to the markets their views about the appropriate level of interest rates, with the aim of influencing them. Unfortunately, the strategy is not working as expected. In spite of the central bank commitment to keep the level of policy rates unchanged, or even lower, for a prolonged period of time, market rates have risen instead.

The reason why forward guidance is not working is that it is not time consistent. If central banks really want to convince market participants that the prevailing rates over different maturities should be lower, they should explain why. In particular, they should provide arguments to dismiss the assessment made by market participants according to which interest rates are expected to rise over the medium term. In this respect, they could use at least two arguments. 

The ghost of Tony Blair has haunted the corridors of the Westminster parliament for the past two weeks. David Cameron acknowledged that bad memories of the war in Iraq, and the dubious intelligence reports published to support it, had “poisoned the well”. Many members of parliament experienced painful flashbacks to the “dodgy dossier” and chose to defy their current leaders.

A terrible clanging sound, emanating from Mr Blair’s chains, can also be heard as the House of Commons public accounts committee pursues its inquiries into the management practices of the BBC. Lord Patten of Barnes, the BBC Trust chairman, and Mark Thompson, his former director-general (now steering The New York Times through shark-infested waters), have presented starkly different versions of who was aware of, and responsible for, some remarkably generous pay-offs to departing BBC executives. MPs can hardly believe their luck at having stumbled on such a noisy hornets’ nest. 

Many Financial Times readers, like me, have shied away from US military intervention in the civil war in Syria. Yet, aside from some familiar arguments, three stand out for granting President Barack Obama’s request for authorised action. First, get past the annoyance with the way the administration has handled the issue. Second, reflect on a couple of historical episodes – Guernica and Halabja. Third, focus on feasibility. 

If Germany’s economic model is the future of Europe, we should all be quite troubled. But that is where we seem to be going. The apparently successful re-election campaign of Angela Merkel, the Christian Democrat chancellor, promises “Germany’s future in good hands”. More, in other words, of the same. The policy response to the eurozone crisis is likely to remain a programme to induce member states to follow Germany’s path to competitiveness: cutting the cost of labour. Make no mistake; that has been the basis of the nation’s export success in the past dozen years; and exports have been its sole consistent source of growth in that period. But low wages are not the basis on which a rich nation should compete. 

The repeated use of chemical weapons against the Syrian people has brought the civil war to a new diplomatic and political boil. Yet none of the military options being canvassed – or, in the UK, rejected – promises a decisive shift in the course of the conflict. We are not yet anywhere near the nadir of the humanitarian crisis already consuming five countries at the heart of the Middle East.

The International Rescue Committee has just completed a six-week audit of the situation in Syria and its neighbours. The litany of suffering is grim, the dynamics are all going in the wrong direction and the prospects are bleak. For geopolitical reasons, as well as basic humanity, we need a fundamental step change in the scale of effort. 

This week’s heavy schedule of data releases will likely have a big, if not determining, say in “when” and “how” the US Federal Reserve tapers its quantitative easing programme – that is, start moderating its exceptional support for markets and the economy. And while most assessments will focus on the timing, scale and scope of the policy adjustments, the “why” will be as important, if not more so in shedding light on what may lie ahead.

The context, while quite well known by now, is worth mentioning given its relevance to the outlook. 

Foreign policy is often difficult, as the crisis in Syria all too regularly shows. But the Obama administration has made a difficult situation much worse by articulating a series of objectives (“Bashar al-Assad must go”; “Chemical weapons use crosses a red line”) and policies (“we will arm the opposition”) and then failing to follow them through. Requiring authority from Congress at the eleventh hour introduced further undesirable uncertainty. Improvisation and policy making on the fly can be disastrous.

Adding to the difficulty is the reality that US interests are greater than Washington’s influence; the options that exist are few and in every case come with drawbacks. Nevertheless, the US does have real interests, some intrinsic to the situation and some of its own making. What is more, not acting is as much of a policy choice with consequences no less significant. Which is to say declaring Syria to be “too hard” and throwing up one’s hands in exasperation is not a strategy. Similarly unhelpful at this point are claims that if only the world had acted earlier there would be better choices now; that may be the case, but it is irrelevant. 

Saturday’s election bears close watching because Australia’s importance and stature has risen in Asia and the world in the past two decades. It has proved to be one of the most effective countries in terms of balancing its strong political and security ties with the US with its robust commercial and economic interactions with China.

The election has been hard-fought – the bitterness between the two parties is evident – but the US will do well with either party in power. Still, a closer look at the respective leaders is in order.