Monthly Archives: August 2014

It is an inconvenient truth for Russia, Europe and the US, but we must call a spade a spade: Russia and Ukraine are engaged in a war between sovereign states, even if Kiev is the only government yet willing to acknowledge it. There is evidence of Moscow’s direct involvement in Ukraine, including troops on the ground, shellings and the provision of advanced weaponry. A separatist leader has claimed that as many as 4,000 Russian citizens have fought on Ukrainian soil. Moscow has opened a new southern front in the fighting. The bottom line: Russia’s actions constitute an invasion.

But Russia and the west still will not call it that. Moscow wants to maintain implausible deniability, regardless of the facts on the ground. In his speech on Thursday,Barack Obama acknowledged that Russia was “responsible”, but the US president dubbed recent events nothing more than a “continuation of what we’ve seen for months”. The US and the EU feel that the “I word” would necessitate a sharp acceleration in their response. So they are sticking with a euphemism: “incursion”. The west cannot maintain this song and dance much longer. Read more

Whether one feels positive or negative about China’s economic prospects, everyone can agree that its indicators are a mess. But the fact that the data are flawed does not mean that they are deliberately manipulated to yield a particular outcome.

These distortions affect two key policy concerns that dominate public attention. One has to do with purportedly overstated gross domestic product growth rates. The other involves perceptions about China’s unbalanced growth as reflected in its extremely low consumption share of GDP and high investment share. Read more

Severe political crises in Pakistan and Afghanistan, both mired in wrangling over recent election results, have obscured the fact that these two neighbours’ finances are rotten. Both are on the verge of economic meltdown but the billions needed in international bailouts are unlikely to be forthcoming until their respective political elites stop fighting among themselves and start to act more responsibly.

In Pakistan, opposition politician Imran Khan’s blockade of Islamabad for more than two weeks, and his demands for the resignation of Prime Minister Nawaz Sharif’s government, have backfired. His opponents have been able to mobilise many sectors to condemn him: business people, lawyers, journalists and aid workers. Meanwhile, groups from across the political spectrum have organised counter protests. After extensive talks between Mr Khan and the government, a minister announced on Thursday that the government had agreed to five of his six demands but drew the line at Mr Sharif’s resignation. The stand-off continues. Read more

Let’s be clear: Russia has invaded Ukraine. We can debate the reasons. But we can no longer debate the fact. Nor can we stand by and do nothing. It is time for the United States and Europeans to act. This weekend’s European Council meeting in Brussels and next week’s Nato summit in Wales should be devoted to forging an effective, and lasting, response.

Numerous reports from southeastern Ukraine make clear that Russian military forces are operating in Ukraine in ways that can only be described as an invasion. Russian artillery, long used to fire against Ukrainian forces from the Russian side of the border, is now firing from inside Ukraine. Russian tanks and armoured vehicles are rolling along Ukrainian roads. Russian airborne troops, captured by Ukrainian forces, openly admit that they had been sent there to disrupt Ukraine’s effort to retake control of its territory. Read more

The US and much of the world have been rudely awakened to the fact that the group formerly known as Islamic State in Iraq and the Levant is both a dangerous terrorist organisation, and considerably more than that. The deadly reality of its capabilities and ambitions is captured in the latest title by which Isis styles itself: the Islamic State. It is a de facto government with evolving borders that seeks to impose its vision of society on the millions of people over whom it rules. And, as it has dramatically shown since the capture of the Iraqi city of Mosul in June, it seeks to expand its borders and the numbers subject to its control.

The biggest question now facing western states is what to do about Syria. Iraq’s neighbour is where Isis established itself and from where it directs its operations. The fact is that the world cannot defeat Isis in Iraq, or limit its potential elsewhere, if it continues to enjoy sanctuary in Syria. Yet this is a country whose president, Bashar al-Assad, stands accused by the west of war crimes as part of an onslaught against his own citizens that has fuelled a conflict costing almost 200,000 lives. Read more

The biggest threat to investors may come from the foreign exchange market rather than the stretched prices of equity and bond markets. Judging by recent policy and technical signals, the forex market may be about to exit an unusual phase of low volatility.

After a prolonged period of monetary policy alignment, advanced economies are embarking on increasingly contrasting paths. This “multi-track” world of central banks reflects notable divergence in underlying economic performance. Read more

As soon as the latest gross domestic product figures emerged, showing that the French economy was becalmed in the second quarter of the year, it was clear that the new political season would be very tough for Socialist President François Hollande and the still new government of Manuel Valls. But the president’s decision to dissolve and reassemble his cabinet under the same prime minister was still a surprise. Valls Mark One lasted 147 days. When one starts to count the age of governments in days there is an unmistakable scent of the Fourth Republic in the air. Read more

In the consumer realm, Asia has always been about choices. Which smartphone, which brand of music, which kind of cuisine and increasingly which kind of car are the kinds of decisions at a consumer level that Asians make on a daily basis. There has been and continues to be brand loyalty that is often aligned with nationally favoured producers, but there are numerous examples of popular brands that have a broader cross-border regional appeal (witness Toyota cars traditionally or Samsung Electronics and K-pop music today).

Despite the historical tensions and distrust that lurk just beneath the surface of Asia’s modern prosperity, there has been remarkably little pressure or imperative for political elites or governments to make choices with regard to friendships or favourites in their respective strategic relations. Indeed, what is most striking is how the strong political and security ties between several Asia-Pacific states and the US have coexisted relatively comfortably with very strong (and growing) commercial and economic ties between these same countries and ChinaRead more

Huge cash buffers, together with cheap and plentiful financing, are fuelling a merger and acquisition boom that has delivered sizeable windfalls for investors. To sustain these gains, however, real economic growth will need to materialise from what, at least so far, remains a phenomenon dominated by financial engineering and mostly short-term objective maximisation.

The numbers are unambiguous. After a hyper-cautious period triggered by the trauma of the 2008 global financial crisis, companies are increasingly putting their record cash holdings to work – so much so that the herd instinct has shifted from prudent accumulation to concern about being seen to be just sitting lazily on cash. Read more

This year’s annual conference of central bankers in Jackson Hole is focused on the right question: how to determine the extent of labour market slack in the US and other advanced economies. This is the most pressing issue for Janet Yellen, Federal Reserve chairwoman, and her colleagues, given the limits of what monetary policy can do about structural unemployment.

There has been a legitimate debate over what lies behind the low US labour force participation rate, which measures the proportion of adults who are either working or looking for work. Some blame demographics, with two large cohorts (ageing baby boomers and women of child-bearing age) both disproportionately likely to leave the workforce. Eight years ago, a group of Federal Reserve staff predicted in an academic paper that labour force participation would fall to about 63 per cent this year for precisely this reason. That turned out to be eerily close to reality, suggesting the US may be at full employment. If so, there is nothing the Fed can do to improve matters; it would cause inflation if it tried. Read more

What is it about political leaders installed by America in third world countries? It seems they never want to leave office. It started in Vietnam in the 1960s, where the CIA ruthlessly removed Vietnamese leaders who at first were useful to the US occupation, but refused to step down when they were not.

President Hamid Karzai of Afghanistan was a darling of Washington after the attacks of September 11 2001. Now he is a hate figure in the US capital, alleged to have allowed rigged elections that have plunged the country into an ethnic crisis that pitches Pashtuns against Tajiks. Read more

Investors have already navigated a global financial crisis, experimental monetary policies and a frustratingly weak western recovery.

Now they face an additional challenge: how to deal with politically motivated sanctions on Russia that are both broadening (targeting whole sectors rather than individuals and particular firms), and morphing (from being imposed by the west on Russia to involving counter sanctions). Read more

What the world saw last Thursday evening was an American president torn between personal preferences and cold reality. The result is a US that is once more moving towards greater military involvement in Iraq – but only reluctantly and incrementally.

Describing himself as someone who ran for office “in part to end our war in Iraq and welcome our troops home”, Barack Obama announced a policy of dropping supplies to save thousands of members of the Iraqi Yazidi religious minority – and authorised but did not order air strikes on advancing insurgents from the Islamic State of Iraq and the Levant (known as Isis). Read more

The latest data release of the Italian second quarter gross domestic product shows that the economy shrank 0.2 per cent, confirming that the country is back in recession. This is worrying in several ways. It brings GDP below the 2000 level, making Italy the worst performer since the start of the European monetary union. The slowdown in exports, the only component of GDP that had grown in the recent past, shows the underlying fragility of the country’s economy and its lack of competitiveness. The negative result, together with the very low level of inflation, makes debt sustainability more difficult to achieve, thus raising new concerns in financial markets.

The most worrying aspect, however, is that the recent number proves once again how wrong economic forecasts have been about the Italian economy. At the end of last year, the consensus of Italian and international institutions projected the 2014 GDP growth at about 0.6 per cent. The Italian government courageously aimed at 0.8 per cent. These forecasts were revised down earlier this year – and lately by the International Monetary Fund – to 0.3 per cent. The last release will probably induce a further correction towards zero. Read more

Faced with a choice between solving a problem and winning an issue, Barack Obama invariably opts for the former. The US president is a pragmatist who sees compromise not as a painful necessity but as a virtue. Unfortunately, he has seldom found any partners for peace on Capitol Hill. House Republicans do not lose their seats when they fail to address a challenge such as the budget or immigration. They lose them when they cast unpopular votes.

In his first term, this conflict between presidential temperament and legislative incentive was frustrating to Mr Obama’s liberal base. As the president continued to give but not receive, they came to regard him as timid and weak. Read more

Disillusionment with Washington has rarely run higher. Congress is unable to act even in areas where there is widespread agreement that new measures are necessary, such as immigration, infrastructure and business tax reform. Barack Obama’s administration is condemned as ineffectual with respect to both domestic and foreign policy.

There was once a flood of extraordinarily talented people eager to accept political appointments and go into government; it has shrunk to a trickle. Crucial positions remain unfilled for months or years. Read more

Barack Obama’s decision to bomb the forces of Isis – in order to blunt the danger of a genocidal mass killing of tens of thousands of Christians and Yazidis seeking shelter in the mountains of northern Iraq without food and water – reflects a much-needed change of policy, but could be too little too late.

Never before in modern Islamic history has a group such as Isis so mercilessly set out to not only undo long-standing frontiers in Iraq and Syria, but also to carry out mass killings of Muslims and non-Muslims (Isis do not consider Shia as Muslims and has been executing them at will). Read more

Last week’s global sell-off, the worst since January, had all the features that make such market events both frightening and exciting for investors. It serves as a reminder to policy makers of the latent threats to financial stability, and the implication this carries for growth and jobs. It also provides insights for the more bumpy road that lies ahead.

The sell-off was sharp, sudden and generalised. In just a few days, the downturn erased the year-to-date gains for major US equity indices, with virtually every segment – both large and small – experiencing significant losses. To add insult to injury, conventional correlations among asset classes broke down as the spillover of the equity market correction spread beyond corporate credit. Commodities also sold off, as did the safest of all havens, German and US government bonds. As such, well-diversified asset allocations did little to mitigate portfolio risks. Read more

As the Federal Reserve starts tightening US monetary conditions, a key issue is how capital markets will respond overseas, especially in the eurozone. Given the relative size of the US financial system, the rise in short and long-term interest rates on dollar assets can be expected to translate directly elsewhere. Higher yields in the US will attract capital from other parts of the world, thus raising rates there too. The overall impact will nevertheless depend on the reaction of local policy authorities and on the portfolio preferences of global investors.

A year ago, when the Fed hinted at tapering, the reaction differed across regions. In several emerging markets rates started rising, reflecting a reassessment of the risk profile of several larger economies, such as Turkey, Brazil or Russia, leading to massive capital outflows towards safe havens. The eurozone, on the contrary, was not affected much, benefiting itself from capital inflows coming in from emerging markets. Global investors had reassessed their view of the eurozone economy, in light of the interest rate convergence between member countries produced by the European Central Bank’s “whatever it takes” announcement, but also of the concrete progress realised in the implementation of banking union and the prospects for a strengthening economic recovery. As the tail risks in the euro seemed to fade away, international investors did not want to be overweight in one currency only, and a large part of the outflow from emerging markets landed in the eurozone, strengthening the euro exchange rate. Read more

Outrage about inequality is big these days, and for good reason. Despite this justified attention, the discussion has been much too polite and limited. We should care about injustice, and not all forms of inequality are unjust per se – some are far more unfair than others. We still should do something about insecurity, the now largely forgotten theme of the 2008 US presidential campaign. That remains the real threat to poor Americans from inequality, not the (sometimes vast) wealth of some other people.

And we should care about inclusion, which means recognising that many individuals are still excluded from economic security – let alone wealth – because of race, region, ethnicity or gender. In short, noticing who is actually hurt, and how, is left out of the current inequality furore. The consistent omission of insecurity and inclusion is a moral failure, and one that results in policy mistakes. We obsess about the aggregate magnitude of economic disparities. But we cannot understand the risks of inequality, or identify the right policy response, unless we pay as much attention to the identity of those excluded from economic opportunity. Read more