Defusing Iran

Joschka Fischer

FEB 25, 2014
Newsart for Defusing Iran

BERLINOn February 18, crucial negotiations over Iran’s nuclear program began in Vienna between Iran and the five permanent members of the United Nations Security Council plus Germany (the P5+1). The alternative to the talks is a further nuclear buildup by Iran, followed by additional international sanctions and, eventually, another war in the Middle East, which no one believes can resolve the problem. So, can a comprehensive agreement that respects Iran’s right to civilian nuclear energy, while allaying the international community’s fears of weaponization, be achieved?

The interim agreement reached last November in Geneva reflected the West’s de facto acceptance that Iran is entitled to carry out limited low-grade uranium enrichment within the framework of the Non-Proliferation Treaty (NPT). The West released about $7 billion of frozen Iranian funds and relaxed some sanctions (in particular, on crude oil and auto parts), while Iran agreed to a quasi-freeze of its nuclear program. That created the basis for a lasting agreement. But realizing that potential will be difficult.

First and foremost, a mountain of mutual distrust will need to be overcome. The West and Israel do not believe that Iran’s nuclear program is meant to serve merely civilian aims. Otherwise, why would Iran invest billions of dollars in a program that is almost tailor-made for military purposes, including long-distance delivery systems?

The Iranian leadership, for its part, remains convinced that the United States still seeks to bring about regime change. From Iran’s perspective, accepting an American hand extended in a spirit of conciliation could turn it into a fist.

Moreover, any compromise would be fiercely contested within both camps, possibly leading to serious domestic political conflict. And even if both sides’ current leaderships are sincere, will this hold true for their successors?

The absence of trust between Iran and the West leads directly to the second obstacle to a comprehensive agreement: verification and monitoring. The central issue in these negotiations, around which everything else revolves, concerns Iran’sbreakout capability” – the time it would need, within the framework of any agreement with the West, to renege and build a nuclear weapon. How much supervision will be required not just to verify compliance but also to detect any possible attempt at a breakout?

The technical questions are complex, and the proverbial devil really is in the countless details. But prospects for a deal will hinge on resolving three broad issues.

The first two issues reflect the two paths toward the bomb: uranium enrichment and plutonium production. Any workable agreement will require Iran to renounce uranium enrichment above the 5% level needed for a civilian nuclear-power program; accept limits on enrichment volumes, the number of centrifuges, and technology; agree to forgo reprocessing; and address operations at the heavy-water reactor in Arak. The third issue concerns supervision and monitoring, which for quite some time would probably have to go beyond that agreed in the Additional Protocol to the NPT and include certain military installations.

Indeed, the duration the agreement will be of vital importance. The West wants it to be implemented for as long as possible, while Iran would prefer a very short timeframe within which to achieve its central objectives: a comprehensive and lasting repeal of international sanctions and recognition as an NPT non-military nuclear power.

That raises another important question: Does US President Barack Obama really have a domestic mandate for negotiating a comprehensive repeal of the sanctions?

Here, we are brought back to the central issue in this process: technical questions, though important, are still only an expression of the underlying political conflicts and animosities. These are the real factors driving the confrontation that the Vienna negotiations are meant to defuse over the next six months. And the current regional and sectarian confrontation in the Middle East affects the nuclear negotiations directly.

All of the relevant players – including those, like Saudi Arabia and Israel, that are not sitting at the table but whose presence is very much felt – are clinging to their initial positions. The US does not want Iran to become a military nuclear power or gain regional predominance; above all, the Americans do not want another Middle East war. Iran, however, wants to become a (non-military?) nuclear power and shape a region in which it is heavily involved militarily (in Syria, Lebanon, and Iraq).

Europe shares the US position, but is more flexible. Saudi Arabia, a Sunni power, wants to stop Shia Iran from becoming an emerging or, worse still, a military nuclear power in the Gulf, and has taken the opposite side in Syria, Lebanon, and Iraq. Israel opposes Iran’s becoming a military nuclear power – or even a nuclear-threshold state – and is willing to try to prevent this by military means.

To achieve a sustainable compromise that all sides accept (even if with gritted teeth), the negotiations must be accompanied by diplomatic steps aimed at building trust both in the region and beyond. Europe is very well versed in such processes and should put its experience to good use.

Iran must decide whether it wants to follow the North Korean route to international isolation, or some variation on the Chinese route to integration into the global economy. It must also understand that its relationship with both Israel and Saudi Arabia will affect the negotiations, either positive or negatively.

And the West – the US, Europe, and, more than any other country, Israel – will have to get used to the idea of living with an Iranian civilian nuclear-power program, while limiting Iran’s capacity to become an emerging military nuclear power. As the very different examples of the Soviet Union and China show, the Iranian regime might someday collapse or change fundamentallyprobably when hardly anyone expects it. Until then, we must do our best to defuse the nuclear time bomb together.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO’s intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960’s and 1970’s, and played a key role in founding Germany's Green Party, which he led for almost two decades.

February 23, 2014 8:05 pm

RIP Obama’s stimulus: funeral for a policy success

Rarely has the gap between the US public’s perception and that of economists been greater

Matt Kenyon illustration©Matt Kenyon

Five years after Barack Obama helped to prevent a Great Depression, his $830bn stimulus is unloved and misunderstood. Republicans have had an almost clear run at a law they say squandered taxpayer dollars. Yet without it the Great Recession would have been far deeper in the US. As is often the case, Mr Obama chose the right policy and failed to win anyone over. Next time America needs to dig itself out of disaster – and that time will come it will be a far tougher sell. The past is never dead, said William Faulkner, it’s not even past.

Rarely has the gap between the public’s perception and that of economists been greater. A plurality of Americans say the stimulus was a bad idea, according to the Pew Research Centre. Almost all economists say it was essential. Some believe it was too small. Others that it was too large. Some say it should have been skewed towards more direct spending, others towards larger tax cuts. But virtually no accredited scholar doubts a measure that saved 9m jobs, added between 2 and 3 percentage points to US gross domestic product and paid for itself in higher tax revenues. On economic grounds it is as close to an open and shut case as you get.

On political grounds, the largest fiscal stimulus in history is close to being toxic. Mr Obama failed to produce a “moonshot” which would live on in the public imagination. Under Franklin Roosevelt’s New Deal, millions of Americans were directly employed the US federal government. They could also see and feel the Hoover Dam, New York’s LaGuardia airport and San Francisco’s Golden Gate Bridge. Mr Obama’s stimulus left nothing anywhere near so tangible. 

There was money for rural broadband, cash to keep teachers in their jobs and resources to upgrade roads and highways. Mostly they will be remembered for traffic jams.

Even Mr Obama’s make work paytax cuts, which took up more than a third of the stimulus, passed by unnoticed. In contrast to George W Bush, who had passed his own mini-stimulus a year before leaving office, American taxpayers did not receive cheques in the post signed by the president. Economists advised Mr Obama that a one-off tax windfall would more likely be saved than spent, thus defeating its purpose. Instead they said it should be secreted into their fortnightly pay stubs.

Among Mr Obama’s advisers, only Joe Biden, the vice-president, saw the futility in giving most Americans an invisible boost of roughly $40 a month in their take-home pay. “Are you totally kidding me?” Mr Biden asked – or words to that effect. Apparently not

Instead of seeing that Mr Obama had cut their taxes, most Americans believed they had gone up. They still do (quite wrongly). Mr Obama is seemingly powerless to convince them otherwise.

But the largest fallout from what was Mr Obama’s biggest act as president more so even than his healthcare reform – is bitter polarisation. It was Richard Nixon, a Republican president, who said: “We are all Keynesians now.” That held true right up until February 2009. Mr Bush passed two stimulus billsboth of which pasted his name all over the tax rebate cheques. Even after Mr Obama was elected, Republicans drafted their own stimulus bill, which was only marginally smaller than the Democratic version

Everyone understood the need to revive a plummeting US economy. Only the means were disputed.

The Keynesian Humpty Dumpty was shattered the day Mr Obama’s stimulus was enacted. It is very hard to see how it will be put back together again. Only three Republicans all of the them in the US Senate voted in its favour, having extracted big concessions in the form of larger tax cuts and less spending.

Every single Republican in the House of Representatives voted no. In place of Humpty Dumpty, Republicans have adopted Hamlet’s Polonius as their mascot: “Neither a borrower nor a lender be.” Keynesianism has been supplanted by Austerianism. Technical expertise be damned. All that matters is perception.

Can Mr Obama do anything to change it? Probably not. Whether his successor is Hillary Clinton or a Republican, the US federal government is more distrusted than ever, according to the polls. Mr Obama inherited a historic low of public mistrust. It has since plumbed new depths.

Worse, the more that he argues for something, the less people seem to believe him. Some of the blame for this must go to the mishandling of the rollout of his “Obamacarehealth reform, which continues to poll terribly for Democrats. Promising to fix your own law is never going to be an easy sell.

But Mr Obama’s political failing began in his first 100 days with his mis-selling of the stimulus. It helped give rise to the Tea Party that put an end to a sensible debate on what fiscal policy can do for US growth. In the president’s defence, it is hard to argue thatthings could be so much worse!” – even if that was true of the stimulus. It is far easier to say: “See how rapidly things are getting better!”

The first was the case Mr Obama needed to make. He botched it. And thus we are left with a trademark Obama legacy. The US president assumed a good policy would make the case for itself. Republicans filled the vacuum with their own

Mr Obama won the policy and lost the politics. Now he is losing both.

Copyright The Financial Times Limited 2014

The Banks that Ate the Economy

Howard Davies

FEB 24, 2014Newsart for The Banks that Ate the Economy

LONDON Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050. His forecast represented a simple extrapolation of two trends: continued financial deepening worldwide (that is, faster growth of financial assets than of the real economy), and London’s maintenance of its share of the global financial business.

These may be reasonable assumptions, but the estimate was deeply unsettling to many. Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers. In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed. The result was disastrous.

Quite apart from the potential bailout costs, some argue that financial hypertrophy harms the real economy by syphoning off talent and resources that could better be deployed elsewhere. But Carney argues that, on the contrary, the rest of the British economy benefits from having a global financial center in its midst. “Being at the heart of the global financial system,” he said, “broadens the investment opportunities for the institutions that look after British savings, and reinforces the ability of UK manufacturing and creative industries to compete globally.”

That is certainly the assumption on which the London market has been built and the line that successive governments have peddled. But it is coming under fire.

Andy Haldane, one of the lieutenants Carney inherited at the BoE, has questioned the financial sector’s economic contribution, pointing to “its ability to both invigorate and incapacitate large parts of the non-financial economy.” He argues (in a speech revealingly entitledThe Contribution of the Financial Sector: Miracle or Mirage?”) that the financial sector’s reported contribution to GDP has been significantly overrated.

Two recent papers raise further doubts. In “The Growth of Modern Finance,” Robin Greenwood and David Scharfstein of Harvard Business School show that the share of finance in US GDP almost doubled between 1980 and 2006, just before the onset of the financial crisis, from 4.9% to 8.3%. The two main factors driving that increase were the expansion of credit and the rapid rise in resources devoted to asset management (associated, not coincidentally, with the exponential growth in financial-sector incomes).

Greenwood and Scharfstein argue that increased financialization was a mixed blessing. There may have been more savings opportunities for households and more diverse funding sources for firms, but the added value of asset-management activity was illusory. Much of it involved costly churning of portfolios, while increased leverage implied fragility for the financial system as a whole and imposed severe social costs as over-exposed households subsequently went bankrupt.

Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements – the central banks’ central bankgo further. They argue that rapid financial-sector growth reduces productivity growth in other sectors. Using a sample of 20 developed countries, they find a negative correlation between the financial sector’s share of GDP and the health of the real economy.

The reasons for this relationship are not easy to establish definitively, and the authors’ conclusions are controversial. But it is clear that financial firms compete with others for resources, and especially for skilled labor. Physicists or engineers with doctorates can choose to develop complex mathematical models of market movements for investment banks or hedge funds, where they are known colloquially as “rocket scientists.” Or they could use their talents to design, say, real rockets.

Cecchetti and Kharroubi find evidence that it is indeed research-intensive firms that suffer most when finance is booming. These companies find it harder to recruit skilled graduates when financial firms can pay higher salaries. And we are not just talking about the so-calledquants.” In the years before the 2008 financial crisis, more than a third of Harvard MBAs, and a similar proportion of graduates of the London School of Economics, went to work for financial firms. (Some might cynically say that keeping MBAs and economists out of real businesses is a blessing, but I doubt that that is really true.)

The authors find another intriguing effect, too. Periods of rapid growth in lending are often associated with construction booms, partly because real-estate assets are relatively easy to post as collateral for loans. But the rate of productivity growth in construction is low, and the value of many credit-fueled projects subsequently turns out to be low or negative.

So, should Britons look forward with enthusiasm to the future sketched by Carney? Aspiring derivatives traders certainly will be more confident of their career prospects. And other parts of the economy that provide services to the financial sectorPorsche dealers and strip clubs, for example – will be similarly encouraged.

But if finance continues to take a disproportionate number of the best and the brightest, there could be little British manufacturing left by 2050, and even fewer hi-tech firms than today. Anyone concerned about economic imbalances, and about excessive reliance on a volatile financial sector, will certainly hope that this aspect of the BoE’sforward guidanceproves as unreliable as its forecasts of unemployment have been.

Howard Davies, a professor at Sciences Po in Paris, was the first chairman of the United Kingdom’s Financial Services Authority (1997-2003). He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.

Where Does Gold Go From Here? Let's Use 40 Years Of History As Our Guide

Feb. 26, 2014 12:12 AM ET

by: Hebba Investments

Let's just get this out of the way - nobody truly knows gold will be in the short or medium term and certainly not next month or next year. Prognosticators and price targets abound, but in reality gold is a very difficult asset to predict because it has so many different factors involved in its price movements which include the understanding of the macroeconomic picture, the mining industry, the financial markets, and even the world political climate - not an easy task for any firm let alone individual investors.

If that wasn't enough, the gold market is very opaque and its political nature means that it historically has been manipulated (GATA has done excellent research on this issue) by many types of entities for different purposes. So even if you get the fundamental analysis right, you could be dead wrong when it comes to the actions of the large players in the gold market.

But we do believe that even though gold may be tough to predict, there are fundamentals in the gold trade that make it a strong investment for the long-term. We may not know where the gold market is going in the short-term, but we certainly can use the fundamentals to give us a higher probability of seeing where it's going in the long-term.

In the past we've gone into the fundamentals of why physical gold ownership and the gold ETF's (SPDR Gold Shares (GLD), PHYS, CEF) should give investors very good returns over an extended period of time, but in this article what we want to do is analyze the historical price movements of gold. We're going to analyze some research put out by the World Gold Council of the historical price action of gold in similar situations to where we find gold today to try and see where it could be headed - and how fast it should get there.

A Historical Gold Price Analysis

As bad as 2013 was for gold investors, it wasn't very different from many other corrections that gold has experienced since the 1970's. In fact, gold's 37% drop from its September 2011 highs was only the fifth largest drop over the last 40 years.



(click to enlarge)

(click to enlarge)

As investors can see, gold has experienced twelve pullbacks that have been greater than 20% since the 1970's and Richard Nixon officially ended the gold standard. The current correction of 37% has been almost exactly average (36% is the average) and at a length of 28 months, has been a bit longer than the average 18 months seen in the research.

We don't know for sure if the correction is over, and even though we would be surprised to make new lows we cannot count it out. But it is more than likely that we saw the bottom in December of 2013, as gold registered a London AM fix low of around $1190 dollars per ounce (it went lower intraday), and with the current turnaround it makes it a good time to calculate where gold will go from here based on its prior recoveries.

What we've done in the table above is summarize the average historical retracement lengths and gains. Then we've used the $1190 bottom that we reached in December 2013, to estimate the expected date and gain of gold's historical retracement performance.

Historically, gold has gained 69% from its low to its retracement date (the same length forward as the downturn - in the current case that would be 28 months). As investors can see, that would mean that we should expect gold to reach $2011 dollars per ounce in April of 2016 - an excellent return that we're sure almost every gold investor would be happy with.

If we take it one step further and examine the average gain until the next gold peak, we find that historically gold has recovered 228% from its downturn low until its new peak. Using that in our calculations for our $1190 gold price, we would expect gold to reach $3903 per ounce - though for this calculation the date is much harder to estimate. If we had to put a date on it based on historic numbers, we would calculate the peak date as about 150% of the downturn length or about 42 months from the low (around June of 2017).

Conclusion for Investors

When it comes to gold we think the fundamentals are still very strong as the financial crisis is far from over, the debt load of governments continues to grow at a faster pace, geopolitical tensions continue to raise the odds of "tail-risk" event, gold all-in production costs hover around current prices, and we could go on and on. But this study by the World Gold Council gives investors a much more historical view on the past recoveries of gold, and it helps gold investors realize that these vicious drops in the gold price have happened before - twelve times to be exact.

Investors should remember that every single time the forward retracement (i.e. the same period forward as the length of the pullback) led to a gold price increase that averaged 69% - not bad at all even if that means a 2-3 year wait. Thus we remain gung-ho on gold and we believe it's a good time to continue to build positions in physical gold and the gold ETF's (SPDR Gold Shares
, PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Agnico-Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG).

Gold investors don't miss the forest for the trees here and get caught up in the daily or weekly movements in the gold price - history shows that we should be expecting much higher gold prices. If we match the average gain of the last twelve 20% declines, then we should expect to see a gold price of $2000 per ounce somewhere in 2016. Be patient gold investors because history is on your side.