Monthly Archives: October 2013

It will be instructive to compare this Wednesday’s policy announcements from the Federal Reserve with the gradual tapering and forward policy guidance many analysts and commentators forecast just a few weeks ago. I suspect the US central bank will appear to be stuck with the same mix of policy tools even though growth outcomes have consistently fallen short of their expectations. And while recent congressional dysfunction has reduced its room for manoeuvre in the short term, there are deeper forces at play that blunt America’s job recovery, with implications that extend well beyond the Fed.

At the conclusion of their two-day policy meeting, Fed officials are likely to announce few if any changes to the big three components of their current policy stance: floored policy rates will not be touched; forward guidance language will not evolve much; and balance sheet purchases will remain as is, at $85bn a month (also with no change in composition). Read more

All over Europe, government officials are doing their best interpretation of Captain Renault in the movie Casablanca, who declared himself “Shocked – shocked!” when he learnt there was gambling going on. Rather than gambling, though, European leaders are expressing shock over the revelation that nations – even allies – spy on each other.

Part of the surprise may arise from the fact that allegations of American tapping of senior officials’ mobile phones have come at the same time – and apparently from the same source – as earlier revelations of widespread data gathering and surveillance by the National Security Agency as part of US counter-terrorism efforts. Presumably, listening to the conversations of allied leaders does not have any counter-terrorism value. Read more

To judge by recent newspaper headlines, something is going wrong with the British version of capitalism. There are two related items on the charge sheet. One is that companies are exploiting their customers in order to maximise short-term profits. The other is that this preoccupation with financial performance is holding back needed investment and helping to turn Britain into a low-skill, low-wage economy.

Consider the evidence. This week, first the Archbishop of Canterbury and then a former Conservative prime minister accused the energy companies of profiteering by pushing up prices at an unjustified pace. Making the case for a one-off windfall tax on the sector, Sir John Major said that “governments should exist to protect people, not institutions”. Read more

US politicians are playing a game of chicken similar to the one European policy makers played during the eurozone debt crisis, bringing the single currency very close to collapse.  Read more

When Prime Minister Nawaz Sharif meets President Barack Obama at the White House on Wednesday, their meeting will be critical for the future course of US-Pakistan relations. One issue at the top of the agenda – alongside the future of Afghanistan, Pakistan’s own much-weakened state and attacks by terrorist groups – will be the country’s nuclear weapons programme. Pakistan’s rapid development of battlefield nuclear weapons raises many questions in the region and abroad. Read more

By Ian Bremmer and Vuk Jeremic

On Thursday Saudi Arabia was elected to the UN Security Council as one of the 10 rotating members for the first time in history. On Friday it became the first country ever to decline that offer, sending diplomatic shockwaves around the globe.

In a public statement, the kingdom’s ministry of foreign affairs cited the UNSC’s inability to help bring about a solution to the Israeli-Palestinian conflict or to curb nuclear weapons proliferation in the Middle East. But most importantly, the Saudis cited the UNSC “allowing the ruling regime in Syria to kill and burn its people by the chemical weapons, while the world stands idly, without applying deterrent sanctions against the Damascus regime”. They said all of this was “irrefutable evidence and proof of the inability of the Security Council”. Read more

The latest growth figures in China – published on Friday – suggest that the country’s economic slowdown has indeed bottomed out. Its economy expanded at an annual rate of 7.8 per cent for the third-quarter of this year, up from a rise of 7.5 per cent in gross domestic product from the previous quarter. The storyline is becoming a bit monotonous and perhaps that is good. However, views over whether this rebound is sustained are mixed. Optimistic bulls predict the small uptick will continue next year yet the less convinced bears factor in a small decline. There are also extreme bears who still predict an imminent collapse or growth falling to an annual rate of 3-4 per cent. Of the latter two arguments, one is implausible and the other illogical. Read more

For the past 20 years, American politics has been defined by Republican revolt. The rightwing radicalism that now worries the whole world first emerged in response to Bill Clinton’s election in 1992. It is not that Republicans were never extreme before that time; their challenge to the legitimacy of federal authority traces back to proslavery attempts at nullification and segregationist assertions of states’ rights. But it was 20 years ago that the Congressional wing of the Grand Old Party, led by Newt Gingrich, adopted belligerent non-co-operation as its defining stance. Read more

Can you hear the sound of cans being kicked down the road? The US disaster scenario has been avoided, for now. But given the deep disagreements between Democrats and Republicans and the even deeper divisions within the Republican party, we may end up going through the process all over again early next year.

If it had been any other country than the US, we’d all have had a good laugh before putting our money elsewhere. The guilty nation would have faced a much higher cost of credit and a much weaker currency. Read more

With the US government shutdown and the possibility of a debt default occupying a lot of the bandwidth, last week’s International Monetary Fund/World Bank annual meetings struggled to deliver on already-low expectations regarding major policy breakthroughs. Yet, if they internalise well what was discussed in formal meetings, in panels and in the corridors, policy makers from more than 180 countries would return to their national capitals with four important realisations. Read more

On Friday the Organisation for the Prohibition of Chemical Weapons received the Nobel Peace Prize for “its extensive efforts to eliminate chemical weapons”. The OPCW has only been around for 16 years, and it has one-fifth the staff and budget of the International Atomic Energy Agency, the world’s principal nuclear watchdog. The Nobel Prize committee’s announcement made clear that the organisation’s recent work in Syria was the real catalyst. Few had heard of the OPCW until the UN tapped it to inspect and shut down chemical weapons in Syria.

The OPCW’s work in Syria deserves lasting support, but given that its work has barely begun, does it deserve the world’s most prestigious prize? The chemical weapons round-up may succeed, but it very well may not. Should the prize honour accomplishment rather than promise? Read more

Barack Obama’s cancellation of his planned trip to Malaysia, the Philippines, Brunei and Indonesia for the East Asia Summit and the Asia Pacific Economic Co-operation summit was a blow to his administration’s much-vaunted “pivot”, or rebalance, to Asia. What matters most now is how the US president and his team responds to this setback to the Asia-Pacific region, which had been anticipating Mr Obama’s visit to southeast Asia on several counts.

First, a visit would have underscored the president’s determination to make the East Asia Summit the foundational leaders’ meeting for the region. There was also the hope at the Apec meetings for significant progress around remaining sticking points associated with the complex negotiations over the Trans-Pacific PartnershipRead more

A new study of adult skills across a range of advanced economies is a wake-up call for UK policy makers and business leaders. It highlights serious shortcomings in the provision of the most important workplace skills – literacy, numeracy, and the ability to use digital technology – and points to an all but inevitable decline in economic competitiveness unless the problems are fixed.

The study, conducted by the OECD, covers adults in England and Northern Ireland, and finds their overall performance in literacy is roughly in line with the average of the 24 countries included. But relative performance is significantly worse when it comes to numeracy, which is seen as the best predictor of economic success. And the really shocking news is the poor showing of young people.
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Paul Krugman has posted an interesting and concrete analytical comment (Phantom Crises”) in reply to my October 3 op-ed in the Financial TimesBritain should not take its credit status for granted”. Prof Krugman explained why he never felt any need to temper his famously strong advice to the UK government to massively raise borrowing, even though he simultaneously believed (and widely opined) that the Eurozone might very well soon blow up.

I should also thank Simon Wren-Lewis for his response: he recognised that my op-ed clearly was not intended as a piece of advocacy to justify the UK’s exact policy trajectory. In fact, I point to several areas where it could have been significantly improved, for example, greater infrastructure spending. I am, however, arguing that the insurance elements of the problem need to figure more prominently in the discussion.

Prof Krugman’s comment, using a simplified version of the canonical modern IS-LM macroeconomic model, shows that even if a euro collapse would have led to a run on sterling, the result would be depreciation of the pound and a rise in demand for British traded goods. At the same time, he argues that even if this built-in automatic stabilizer were not enough to prevent a “squeeze” on long-term bonds, the Bank of England could just print money and buy them up en masse thanks to the liquidity trap. (Prof Wren-Lewis, who Prof Krugman cites, also makes this point.) Thus there was in fact no need to reconcile his debt management advice with his euro red alert.

I beg to differ. Read more

As the annual meetings of the International Monetary Fund and World Bank approach, I remember vividly the exceptional collective awakening that took hold of this same gathering five years ago. Hundreds of officials from around the world came to the joint and simultaneous realisation that the global economy they inhabited was on the verge of falling into an abyss.

This collective “intervention” led to unusually candid policy conversations, common analysis and admirable policy co-operation. It culminated six months later in the highly-actionable London Group of 20 Summit. There, the world’s major economic powers agreed on co-ordinated fiscal and monetary policies that helped to sidestep a very costly global depression. Hundreds of millions of people consequently avoided devastating poverty and misery. Read more

Pakistanis are sitting on a volcano. Unless the country’s principal stakeholders – the army, the politicians and the mullahs – get their act together and declare zero tolerance for violent militant behaviour, Pakistan will lose its war against extremism and terrorism.

Over 200 people were killed last week in terrorist attacks that included the killing of an army general, 85 Christian worshippers in Peshawar, housewives in Karachi. On Sunday a massive car bomb killed 40 people in Peshawar– the third terrorist attack in the city in a week. Read more

I am puzzled by commentators who are certain that governments had it all wrong, at every step, in balancing stimulus and stability in the aftermath of the crisis. One often sees claims, for example, that the UK borrowed heavily in the distant past with little ill effect. So today’s leaders were foolish not to engage in even heavier borrowing and stimulus. These people seem to believe everything will be fine when it comes to public debt: like Voltaire’s character Dr Pangloss, they assume “all’s for the best in the best of all possible worlds”.

According to the debt panglossians, UK leaders watched as the economy stagnated, rationing stimulus out of a baseless concern over credit risks. Even though the UK ran one of the largest deficits of any advanced country, the panglossians say it should have borrowed more. Perhaps, but their logic is based on a shallow reading of the evidence – and on amnesia about recent risks to eurozone stability. Read more

It is worth taking a moment to cheer the United Nations for its outstanding successes this past week. The UN is the global home of diplomacy, the art of maintaining peace and co-operation in a world all too ready to head to war. Sometimes it succeeds; often it is brushed aside, by great and small powers alike. Four times last week the UN proved its enduring worth. Read more