The year of the demagogue: how 2016 changed democracy

From Brexit to Donald Trump, this year has seen a thundering repudiation of the status quo by:

Lionel Barber

On the morning of June 21, two days before the Brexit referendum, I met David Cameron in Downing Street. During a 25-minute conversation, the prime minister assured me that everything would be all right on the night. I wasn’t entirely convinced.

In hindsight, Brexit defined 2016. This was the year when the unthinkable became possible, the marginal invaded the mainstream, and Donald Trump, a property tycoon and television host, was elevated to US commander-in-chief.
 
In his memoir Present at the Creation (1969), Dean Acheson, a former US secretary of state, describes how he and fellow “Wise Men” helped President Harry Truman to build a new liberal, rule-based order after the second world war. It was founded on institutions: the UN, the IMF, the World Bank and the Nato alliance. 
In 2016, as Trump dismissed Nato as “obsolete” and his consigliere Newt Gingrich described Estonia as a suburb of St Petersburg, it felt at times as if we were present at the destruction.
 
Acheson epitomised the East Coast establishment. He was a diplomat, lawyer and scholar — an expert, if you like. This year, the establishment was hammered, the experts humbled. Most missed Brexit. Many declared a Trump victory impossible. Michael Gove, a leading Brexiter, caught the public mood: “People in this country have had enough of experts.”
 
'Trump won by attacking the Republican party as much as his Democratic opponent' © Getty Images
 
Brexit and the Trump triumph mark a revolutionary moment. Not quite 1789 or 1989, but certainly a thundering repudiation of the status quo. Some detect echoes of the 1930s, with Trump cast as an incipient fascist.
 
It was a good year for strongmen: Vladimir Putin in Russia; Recep Tayyip Erdogan in Turkey; Xi Jinping, now promoted to “core” leader in China. It was an even better year for demagogues, the crowd-pleasers and rabble-rousers who feed on emotions and prejudice. In the year of the demagogue, several vied for the lead role: Nigel Farage, then Ukip leader, godfather of Brexit and Trump acolyte; Rodrigo Duterte, a brutal newcomer to power, who pledged to slaughter millions of drug addicts to clean up the Philippines; and Trump himself, who constantly marvelled at the size of his crowds.
 
Yet the 1930s analogy is in many ways misplaced. We are nowhere near a Great Depression.
 
The US economy is approaching full employment. The pre-Brexit UK economy has seen employment rise by just over two million since 2010. Credit is flowing. Corporate profits are up. The trouble is that swaths of the population, often those living outside the great cities, have little sense of the economic recovery.
 
Real incomes in the UK have not grown for the past decade. In the US, 95 per cent of households still had incomes last year that were below those in 2007, according to the Economic Policy Institute think-tank. In Europe, unemployment in the eurozone, especially in countries such as Greece, Spain and Italy, remains high. Yet the wealth of the top one per cent (“the privileged few”, to borrow Theresa May’s mantra) has continued to rise.
 
Something more profound is happening in advanced democracies. The forces at work are cultural, economic, social and political, driven in part by rapid technological change. Artificial intelligence, gene editing, self-driving cars — progress on all these groundbreaking technologies accelerated in 2016. Each is massively empowering (the smartphone has given everyone a voice) but also massively disruptive (the impact of artificial intelligence on jobs has barely begun to be felt).
In political terms, Brexit and the Trump triumph highlight the decline of the party system and the end of the old left/right divide. The centre-left appears in terminal decline. This month, François Hollande, whose approval rating hit a low of 4 per cent, ruled out a second run for the Elysée. Jeremy Corbyn, the hard-left leader of the opposition Labour party, had more to say about the death of Fidel Castro than Britain departing the EU. Matteo Renzi, the centre-left reformer in Italy, lost heavily in his own referendum on constitutional reform and promptly resigned.
 
The Conservative or Christian Democrat centre-right fared better but remains under pressure from an anti-immigrant, nationalist fringe, from Austria to England, France, Germany, Hungary, the Netherlands and, increasingly, Poland. In 2016, we witnessed the birth of the “Fourth Way” — a new brand of politics that is nativist, protectionist and bathed in a cultural nostalgia captured by Trump’s pledge to “Make America Great Again”.
 
The second development is a widespread disillusion among western democracies with globalisation, the postwar phenomenon marked by three trends: the Roaring Eighties deregulation of the Reagan-Thatcher era; the 1994 Uruguay Round agreement on global trade liberalisation; and the opening of a market economy in China. The progressive abandonment of controls on capital, goods, services and labour, epitomised by the launch of the single European market and the single currency, reached its apogee in the summer of 2007. In 2016, we saw, finally, that this period — call it Globalisation 2.0 — is over.
 
'In the year of the demagogue, several vied for the lead role, including the Philippines' Rodrigo Duterte' © AFP/Getty Images

 
 
Free trade has become ever harder to sell to a public worried about job security and the competitive threat from developing countries. Trump denounced the Trans-Pacific Partnership pact between the US and 11 Pacific Rim countries, and the North American Free Trade Agreement with Canada and Mexico. Hillary Clinton, once a free trader, caved. No one countered that the US consumer, including many Trump voters, bought cheap goods at Target and Walmart thanks to efficient global supply chains and cheap labour in the developing world. Hostility to free trade was a vote winner. Only last-minute arm-twisting of the Walloon regional government in Belgium salvaged a Canada-EU trade pact seven years in the making.
 
Free movement is also in question. Europe has experienced mass migration on a scale not seen since the late 1940s. In 2016, the refugee flow from the Middle East and north Africa was stemmed at one end thanks to a German-brokered deal with Turkey but record numbers travelled (and drowned) on the treacherous route from the central Mediterranean to Italy.
 
Terror attacks, notably in France, heightened public insecurity about immigrants. There was a sense governments had somehow lost control, of national borders and national identity.
 
This explains the power of Trump’s pledge to build a “beautiful” wall on the Mexican border, and Theresa May’s conference jibe about politically correct multiculturalism: “If you believe you are a citizen of the world, you are a citizen of nowhere.” The party faithful in Birmingham cheered but cosmopolitan London, home to hundreds of thousands of “foreigners”, including Mark Carney, the Canadian governor of the Bank of England, was not amused.
 
The Brexit referendum exposed an economic gap between winners and losers of globalisation; but also a cultural divide between those comfortable with the pace of change, from technology to same-sex marriage, and those wanting to slow down the clock and rediscover their roots in ethnicity, religion or nationality.
 
'Brexit and the Trump triumph highlight the decline of the party system' © Getty Images
 
 
Leave’s slogan in the Brexit campaign, “Take Back Control”, was simple and brilliantly effective across classes and generations. Constitutionalists liked the idea of regaining sovereignty from EU institutions. Everyone liked the idea of reclaiming money from Brussels and diverting the savings to the NHS. Clamping down on immigration was a vote-winner. No matter that these claims were deeply misleading (as were Remain’s claims of imminent economic disaster in the event of a Brexit vote). Throughout the year, facts were elastic concepts.
 
In 2016, the world woke up to “fake news”, sponsored by political activists but also increasingly by state actors and their surrogates. The CIA accused Russia of being behind the leaking of emails from the Democratic National Committee, a shocking, brazen attempt to interfere in a US presidential election. Trump dismissed the claims as ridiculous, as did his supporters.
 
Throughout this political cycle, many appeared to live in a parallel universe where facts were entirely subjugated to opinión.
 
Scottie Nell Hughes, a Trump supporter and CNN commentator, explained: “So one thing that’s been interesting this entire campaign season to watch, is that people that say facts are facts — they’re not really facts. Everybody has a way — it’s kind of like looking at ratings, or looking at a glass of half-full water. Everybody has a way of interpreting them to be the truth or not truth. There’s no such thing, unfortunately, anymore as facts.
 
Welcome to the world of post-truth politics, turbocharged by technology such as the smartphone. A single device allows individuals to project in real time an unfiltered version of the news and (often highly partisan) views across Facebook, Google and Twitter. In the US election, journalists, once enjoying a degree of trust as the filter of last resort, were howled down or singled out on Twitter as “disgusting” or “lame”.
 
In the UK, both Leave and Remain regularly lambasted the BBC, which tried to remain neutral. Timothy Garton Ash, the Oxford historian, warned presciently about the risks of “fairness bias”. The danger was that the BBC, in seeking to remain impartial, would fail to be informative, especially on complex economic issues. “You give equal airtime to unequal arguments, without daring to say that, on this or that point, one side has more evidence, or a significantly larger body of expert opinion, than the other,” he wrote.
 
      'Trump's victory was the triumph of the brand' © Reuters

 
 
The Trump campaign presented “mainstream media” with a challenge on a different scale. His demagoguery broke every taboo in the book, casting Mexicans as “rapists”, eliding the difference between traditional Muslims and radical Islamic terrorists, and threatening to jail his Democratic opponent.
 
The TV networks, especially Rupert Murdoch’s Fox News, gave Trump far more airtime than other candidates. “It may not be good for America, but it’s damn good for CBS,” quipped Les Moonves, head of the media group.
 
Trump won by attacking the Republican party as much as his Democratic opponent. He spent hardly any of his own money, less than a fraction of the Clinton campaign’s war chest. His was the triumph of the brand.
 
Yet Clinton was a deeply flawed candidate at a moment when Americans wanted change — not a continuation of the Obama presidency by other means or a return to the Bush or Clinton dynasties. She had sky-high negative ratings, just like Trump. She was not liked, she was not trusted, and she was evasive. “Crooked Hillary”, Trump’s signature tweet, stuck for a good reason.
 
In this respect, it is misleading to suggest that the typical Trump supporter was an angry white man on opioids from West Virginia. Educated people voted for Trump. Women voted for Trump. As Salena Zito wrote in The Atlantic, Trump’s supporters took him seriously but not literally. By contrast, liberals, including the media, took Trump literally but not seriously.
 
What this ignores is the damage the tycoon may have inflicted on public trust in American democracy. He coarsened civic discourse. He declared the political system corrupt. He even cast doubt on the legitimacy of the election not once but twice, declining to confirm he would accept the result if he lost.
 
In the late spring of 2016, I travelled to Houston, Texas, to have lunch with James Baker, a former Treasury secretary, US secretary of state and White House chief of staff under Ronald Reagan and George Bush Sr. I asked him whether America could survive a Trump presidency. “We are a country of laws, limited by bureaucracy. Presidents are not unilateral rulers,” Baker replied.
 
This confidence in the power of democratic institutions will be tested in the coming months. Trump wants to undo Obama’s legacy and unleash the animal spirits of American capitalism. The initial reaction in the stock market bordered on euphoric. Foreign policy is the bigger risk. Trump wants to pursue an America First foreign policy, renegotiating trade pacts and obliging allies to pay more for their collective defence. His world is about money not values: America the selfish superpower, as Robert Kagan has described it.
 
The centre-left appears in terminal decline. Marine Le Pen hopes to triumph in next year's French elections © AFP/Getty Images

 
 
Trump’s victory gives succour to the demagogues-in-waiting in 2017, notably Marine Le Pen, who will almost certainly make it through to the run-off for the French presidency. A win for Le Pen on top of Brexit would surely spell the end of the European Union. Elections in the Netherlands may also signal a shift to the right. Even in Germany, Angela Merkel, running for a fourth term, faces a challenge from the populist right in the form of Alternative für Deutschland, which will make the task of forming a ruling coalition much harder.
 
Trump’s foreign policy, assuming action follows words, also leaves the door wide open for the rising power of China. His abandonment of the TPP — a geopolitical building block as well as a trade pact — has unsettled Japan and Pacific neighbours. His anti-Mexican rhetoric has undermined the peso and left Latin Americans wondering whether Beijing is a safer bet.
 
Among the Baltic states and Scandinavia, many are fretting about Nato’s defence guarantee in the face of Russian aggrandisement under Putin.
 
For more than two centuries, the US has served as a beacon for democratic values such as pluralism, tolerance and the rule of law. For the most part, it has been on the right side of history. In 2016, Americans for the first time voted into the White House a man with no previous government or military experience. Like Brexit, it was a high-risk gamble with utterly unpredictable consequences.
 
Trump’s winner-takes-all approach and his lack of respect for minority rights violates a cornerstone of democracy and free society, as set out in the 10th of the Federalist Papers written by James Madison, one of the founding fathers. His position mirrors the more extreme Brexiter demands that the “will of the people” be respected at all costs. Anyone who raises objections — the media, the opposition or, indeed, the judiciary — risks being branded “enemies of the people”.
 
This is not merely populism run rampant. It is a denial of politics itself, which, as the late scholar Bernard Crick reminds us, is the only alternative to government by coercion and the tyranny of the majority.
 
We have been warned.
 
 
Lionel Barber is the FT’s editor
Photographs: Getty; Eyevine




Fact or Fiction: Is China’s Holding of US Debt a Source of Leverage?

Beijing faces a number of constraints.


Summary
This is the second piece in an occasional series re-examining the economic relationship between the United States and China. Here, we explore Chinese holdings of U.S. debt and explain why these holdings exemplify the Chinese economy’s dependence on the U.S. rather than being a source of leverage.

  • China needs the U.S. market more than the U.S. needs cheap Chinese goods.
  • China is a significant holder of U.S. debt, but it is not the largest holder.
  • China has significantly reduced its holdings of U.S. debt with no perceivable ill effect on the U.S. economy.
  • As long as the U.S. dollar is the reserve currency and U.S. bonds remain attractive investments, China can do relatively little with its U.S. debt to harm the U.S. economy.
Introduction
Much has been made of the fact that China has been the largest holder of U.S. debt for most of the last eight years. The latest statistics available from the U.S. Department of the Treasury indicate that China held $1.15 trillion in Treasury securities at the end of October 2016, and the total value of official Chinese holdings of U.S. securities as of June 2015 was $1.84 trillion. Chinese holdings of U.S. Treasury securities alone have increased in value by a preternatural 93.6 percent since April 2000.


A screen shows the U.S. national debt as U.S. Federal Reserve Chair Janet Yellen (front L) testifies before the House Financial Services Committee on Capitol Hill in Washington, on Feb. 10, 2016. Yellen warned that the U.S. economy faced risks from tightening domestic financial conditions as well as global economic turmoil. NICHOLAS KAMM/AFP/Getty Images





Many claim that China has a significant financial advantage to wield in its relationship with the U.S., and China has done nothing to dissuade these claims.
As recently as 2011, a senior editor at the People’s Daily newspaper said that China should “use its ‘financial weapon’ to teach the United States a lesson” in response to increased U.S. arms sales to Taiwan. There is just one small problem with this recommendation: No such weapon or advantage exists. China’s large holdings of U.S. debt are not a geopolitical lever; rather, they are a symptom of the structural problems that make China vulnerable to the U.S.
 
China’s Imperative
We begin this analysis in the same way that we begin all of our analyses – on the basis of imperatives and constraints. China is an export-driven economy with a very basic, overriding imperative: It must preserve access to the U.S. market for its exports.

 

China's Top Export Destinations, 2015
 

The U.S. is by far the world’s largest market for Chinese exports. In 2015, the value of U.S. imports of Chinese goods was triple the value of Japan’s imports and six times the value of Germany’s. (These figures do not take into consideration goods that are first exported to Hong Kong and then sent to the U.S.) Furthermore, China has no good alternative to the U.S. market in the event that U.S. imports dramatically decrease. The U.S. economy is the largest in the world, representing 24.4 percent of global GDP per the latest figures available from the World Bank. The world’s only comparable market is the European Union, which comprises 22.1 percent of global GDP, but there are significant obstacles to China increasing its exports there. First, Europe is still reeling from the 2008 financial crisis. Second, the EU is built around another massive exporter – Germany. Third, 15.6 percent of Chinese exports already go to the EU. It is not an exaggeration to say that if China jeopardizes its access to the U.S. market, the domestic economic and social ramifications could challenge the power of the Chinese Communist Party (CCP).

 

China's Current Account
 

Because of its exports to the U.S., China’s trade balance with the U.S. is weighted heavily in China’s favor. In 2015, China had a positive trade balance of over $260 billion with the U.S. alone and an overall positive trade balance of $600 billion.
According to the State Administration of Foreign Exchange, China’s current account surplus was $330.6 billion in 2015 and, according to the most recent data, $64.1 billion in the second quarter of 2016. Though China’s foreign exchange reserves have dropped by almost 20 percent since January 2015, according to the People’s Bank of China, the country still has $3.05 trillion in foreign exchange reserves, largely due to years of export-driven surplus. China does not publish the precise make-up of its foreign exchange reserves, but a report by the Congressional Research Service estimates that the dollar composition is around 70 percent of the total.


China's Foreign Exchange Reserves
 

These large sums of money appear impressive, but they present a serious challenge to China’s growth model. The value of the yuan would increase if the hundreds of billions of dollars earned from exports entered the Chinese economy, making Chinese exports less competitive. This puts China in a catch-22. On the one hand, China wants to keep the value of its currency low enough on the dollar that its exports remain competitive on the global market. On the other hand, China cannot afford for the yuan to depreciate much because dropping values encourage capital flight, a problem that has become increasingly acute in recent years. Thus, China uses its massive pile of dollars to buy yuan and ensure that the yuan-dollar exchange rate remains in the Goldilocks zone – not too high, not too low. Although China is often accused of manipulating its currency to keep the yuan low to boost Chinese exports, its reserves have nosedived during the past year because of severe downward pressure on the yuan. As a result, China has spent hundreds of billions of dollars propping up the yuan.

Still, the funds spent on boosting the yuan do not account for the vast majority of the dollars that China earns in its trade surplus. China must do something with these dollars, and one of the most attractive options is to invest in U.S. debt. Here again, the U.S. plays a dominant and unavoidable role in the global economy. The latest available International Monetary Fund statistics indicate that the combined value of U.S. private and public debt securities was $36.7 trillion in 2013, or in relative terms, 41 percent of the world’s total debt securities. Debt securities from EU states (28 percent of the world’s total) provide the only other market of sufficient scale to handle the large sums of money China must invest. But our readers know that European banks are currently on shaky ground; therefore, EU debt securities are a much riskier investment than U.S. debt securities. The U.K. and Japan may provide investment options, but in terms of scale, are probably not big enough to handle the sums China seeks to invest. Besides, these nations have serious economic and political issues of their own. In other words, China invests in U.S. debt because it does not have much of a choice.
 
 

The US Imperative
The U.S. needs two things from its economic relationship with China: cheap imports and money.

Of all U.S. imports, 21.8 percent came from China 2015, a number that has steadily increased over the past 15 years. China cannot afford to see its exports curtailed, nor can the struggling American middle class afford to see an increase in the price of imports from China. The first piece in this series examined the trading relationship between the U.S. and China. We determined that there are very few (if any) strategically important Chinese commodities or products that the U.S. could not either import from elsewhere or produce domestically. However, shifting factory production to other countries or to the U.S. would cost U.S. companies considerable money. Those costs would be intensely felt by the average American, considering the sheer breadth and extent to which China currently supplies the U.S. with goods.

The pain China would feel upon losing access to the U.S. market and the pain the U.S. would feel upon losing access to cheap Chinese imports, however, are not equivalent. The Chinese economy and the legitimacy of the CPC itself is built on exports, and losing access to the U.S. market could tear apart China’s social and political fabric. While U.S. consumers would suffer, and a breakdown in economic ties between China and the U.S. could result in a severe U.S. recession, the U.S. government and American political institutions would not be threatened. In other words, China needs exports to the U.S. more than the U.S. needs Chinese imports.

In addition to cheap imports, the U.S. also gets money from its relationship with China. As of Dec. 23, the U.S.’ total outstanding public debt was $19.89 trillion, according to the U.S. Department of the Treasury. That amounts to a 208 percent increase in U.S. public debt since March 2003, and while U.S. government spending in the wake of the 2008 financial crisis has been a big driver in that increase, it should be noted that U.S. national debt was already on the rise prior to the recession. Furthermore, the amount of U.S. national debt held by foreign countries increased from $1.28 trillion in 2003 to $6.15 trillion in the third quarter of 2016, which, in percentage terms, is a whopping increase of almost 383 percent.

In return for buying Chinese exports, the U.S. has enjoyed relatively cheap imports and has been able to spend significantly beyond its means. Some of this spending has been funded by Chinese investment in U.S. debt; put another way, China has lent the U.S. substantial amounts of money. There are, however, two significant reasons these facts do not give China leverage over the U.S. despite the obvious utility of its relationship with the U.S.: China’s relative share in the U.S. debt and the U.S. dollar’s position as the global reserve currency.

 

Total U.S. Public Debt
 

Dispelling Myths

The biggest myth surrounding the issue of China as a holder of U.S. debt securities is the outsized role China is perceived as playing. As noted above, U.S. government debt currently totals $19.89 trillion. This is a somewhat misleading figure, however.
Intragovernmental holdings make up $5.47 trillion of that figure, which means that almost 30 percent of the debt is money that the U.S. government owes to itself. Of the remaining $14.41 trillion, $6.15 trillion is held by foreign sources and the rest is held by various U.S. pension funds, insurance companies and other investors. Of the amount held by foreign sources, only $1.84 trillion is held by China, 61 percent of which is held in U.S. Treasury securities. (The rest is in equities and corporate or U.S. agency securities, as shown below.)


Value of Foreign Holdings of U.S. Securities
 

There are two key things to note here. First, China holds about 12.8 percent of total outstanding U.S. government debt. Second, Japan, rather than China, is the largest foreign holder of U.S. government debt. Although China was the largest holder of U.S. Treasury securities from September 2008 through October 2016, Japan had previously been the dominant holder – a distinction it held as far back as 2000.

 

Foreign Holders of U.S. Treasury Securities
 

 




Even assuming that China uses various proxies, like Belgium, to buy or sell U.S. securities, China’s holdings of U.S. debt as a percentage of the whole are much smaller than they are made out to be.
This, however, is not the most important point. Although China’s share of U.S. debt holdings could increase, this would not necessarily mean that China’s leverage over the U.S. would proportionately increase. Consider the fact that in the last 12 months for which data is available (October 2015 – October 2016), China has reduced its holdings of U.S. Treasury securities by 11.1 percent and it did not result in a serious economic catastrophe for the U.S. In fact, this reduction has had almost no impact on the market for U.S. treasuries. China has sold roughly $140 billion worth of U.S. securities during this period, but the yield on the 10-year bond has increased by only 40 basis points – four-tenths of one percent. This is the worst that has happened as a result of China’s reduced holdings.

Those who claim that the U.S. is constricted by China’s debt chokehold often stoke fears of a scenario in which China dumps all of its U.S. debt holdings at once. The example above, however, is an indicator of an important fact: U.S. debt is held by many countries around the world, and it is still considered to be one of the safest, most reliable assets money can buy in the global market. Therefore, buyers will be interested when China sells a large sum of U.S. Treasury securities. All of this stems from several simple facts: The U.S. dollar is the global reserve currency, the U.S. is by far the most dominant economy in the world today, and the U.S. has never defaulted on any of its debts. As long as that remains the case – and we have no reason to believe that it will change for decades to come – China’s ability to leverage its position as a technical creditor of the U.S. will be limited at best.

Furthermore, even if it could, China would not want to use its position as a creditor to harm the U.S. If China announced tomorrow that it is selling all $1.15 trillion worth of its U.S. Treasury securities, for instance, the potential negative consequences would hurt China far more than they would harm the U.S. The U.S. might see a temporary decrease in the value of the dollar, but there would also be an increase in the value of the yuan, making China’s exports less competitive in the American consumer market. As discussed above, this would violate China’s fundamental economic imperative.

In addition, the value of the securities themselves would begin to decrease as soon as the market caught wind of China looking to sell its U.S. Treasury securities, and China would lose value on the debt it sought to sell. Moreover, China would see a negative impact on any other assets it holds in dollars. There would also be the small problem of where China would move its newly acquired cash in such a scenario – both the euro and the yen present economic and political challenges that aren’t associated with the dollar.
 
Conclusion

As a percent of total U.S. debt, China’s holdings are relatively small. If China uses its holdings of U.S. debt as a “financial weapon,” it would deliver damaging wounds to the Chinese economy while having a relatively minor short-term impact on the value of the dollar. This makes it highly unlikely that China would take such an action. China has already begun to whittle down some of its holdings of U.S. securities (in favor of U.S. equities and real estate), but this has had little substantive impact on the U.S. economy. China’s holding of a significant absolute sum of U.S. debt is a symptom of China’s dependence on an export-driven economic model as well as its dependence on the U.S. consumer market, but it is not a lever that China can use against the U.S. to gain the upper hand.