Donald Trump’s clash of civilisations versus the global community
     
Human affairs are too interwoven to be the product of purely national decision-making      
by: Martin Wolf
    

 

     
Donald Trump seemed to declare a clash of civilisations, in Warsaw last Thursday. Thereupon, he participated, uncomfortably, at the summit of the group of 20 leading economies. The G20 embodies the ideal of global community. A war of civilisations is the opposite. So which will it be?

The central remark in Mr Trump’s Warsaw speech was this: “The fundamental question of our time is whether the west has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilisation in the face of those who would subvert and destroy it?”

The speech took further the stance of two of Mr Trump’s senior advisers, HR McMaster and Gary Cohn, in an article published in May: “The world is not a ‘global community’ but an arena where nations, non-governmental actors and businesses engage and compete for advantage.” They argued that “America First does not mean America alone”. Yet the US was alone at the G20. Despite papering over of the cracks, the US was alone on climate and protectionism.

If the west is asked to unite for a war of civilisations, it will fracture, as it did over the Iraq war.

It is easy to agree that what Mr Trump calls “radical Islamist terrorism” is a concern. But to judge it an overriding existential threat is ludicrous. Nazism was an existential threat. So was Soviet communism. Terrorism is just a nuisance. The great danger is that of overreaction. This could poison relations with 1.6bn Muslims worldwide.

We must beware the self-fulfilling prophecy of a clash of civilisations, not just because it is untrue, but because we have to co-operate. The ideal of a global community is not airy-fairy. It reflects today’s reality. Technology and economic development have made humans masters of the planet and dependent upon one another. Interdependence does not stop at national borders.

Why indeed should it? Borders are arbitrary.






People are increasingly using the word “Anthropocene” to describe our epoch: this is the era when humans transform the planet. The important point about the notion of the Anthropocene is that humanity causes the harms and only humanity can deal with them. This is one reason why the idea of global community is not empty. Without it, harms will go unmanaged.

Consider peace, as well. In a nuclear age war should be unthinkable. But that does not make it is impossible. Managing frictions among nuclear-armed powers is an inescapable necessity.

Consider also prosperity. Global economic integration is not a malign plot. It is a natural extension of market forces in an era of rapid technological innovation. Such a world inevitably exposes countries to the policy decisions of others. As we all learned in 2008, the global financial system is no stronger than its weakest links. Those who depend on international trade need confidence in the terms of access to the markets of other countries.




This is why the G20’s concern over financial regulation, notably at the London summit in 2009, and the ongoing worries about protectionism are justified. Sovereignty is not the same as autarky. As the 2009 G20 communiqué rightly noted, “We start from the belief that prosperity is indivisible”.

Moreover, we are also rightly interested in the fate of other people. Development is a moral cause.

But it is also essential if migration is to be managed.

The decision to call the initial summit of G20 leaders in Washington in November 2008 was therefore inescapable. The western-dominated group of seven countries had neither the right nor the power to co-ordinate global economic affairs. The rise of the rest, above all of China and India, had made that increasingly clear. Moreover, the west contains far too small a proportion of humanity to lay any moral claim to global management.

Global co-operation will always be both imperfect and frustrating. It cannot escape differences of opinion and clashes of interest. Nor can it replace the vital foundation of good domestic policies and legitimate domestic institutions. Indeed, both are essential,

Yet humanity’s affairs are now too interwoven and their impact far too profound to be the byproduct of purely national decision-making. This truth may be painful. But it is a reality.

Within that system of global co-operation the west may still have, for a while, the loudest voice.

But even that is only possible if it is united. If the cause Mr Trump’s US now wishes the rest of the west to embrace is that of a clash of civilisations, in which the US aligns with the most reactionary and chauvinistic of contemporary European opinions, then there can be no west. If necessary, the Europeans will have to align themselves, on some vital issues, not with the US, but with the more enlightened of the rest.

How, one might ask, has this clash of civilisations now emerged, not so much between the west and the rest as within the west — a clash symbolised by the contrasting perspectives of Germany’s Angela Merkel and Mr Trump? For that tragedy I blame the rise of US “pluto-populism”. Behind this is something remarkable: the US income distribution is now more like that of a developing than an advanced country. Populism (of both left and right) is a natural consequence of high inequality. If so, Mr Trump may be no temporary anomaly.

The transformation of the US we are seeing might prove enduring. If so, the world has moved into a dangerous era. “The US”, argues former state department official Richard Haass, “is not sufficient, but it is necessary.” He is right. If the one “necessary” player is absent, disorder would appear to be inevitable.


The New Abnormal in Monetary Policy

Nouriel Roubini
. New monetary policy

 
NEW YORK – Financial markets are starting to get rattled by the winding down of unconventional monetary policies in many advanced economies. Soon enough, the Bank of Japan (BOJ) and the Swiss National Bank (SNB) will be the only central banks still maintaining unconventional monetary policies for the long term.
 
The US Federal Reserve started phasing out its asset-purchase program (quantitative easing, or QE) in 2014, and began normalizing interest rates in late 2015. And the European Central Bank is now pondering just how fast to taper its own QE policy in 2018, and when to start phasing out negative interest rates, too.
 
Similarly, the Bank of England (BoE) has finished its latest round of QE – which it launched after the Brexit referendum last June – and is considering hiking interest rates. And the Bank of Canada (BOC) and the Reserve Bank of Australia (RBA) have both signaled that interest-rate hikes will be forthcoming.
 
Still, all of these central banks will have to reintroduce unconventional monetary policies if another recession or financial crisis occurs. Consider the Fed, which is in a stronger position than any other central bank to depart from unconventional monetary policies. Even if its normalization policy is successful in bringing interest rates back to an equilibrium level, that level will be no higher than 3%.
 
It is worth remembering that in the Fed’s previous two tightening cycles, the equilibrium rate was 6.5% and 5.25%, respectively. When the global financial crisis and ensuing recession hit in 2007-2009, the Fed cut its policy rate from 5.25% to 0%. When that still did not boost the economy, the Fed began to pursue unconventional monetary policies, by launching QE for the first time.
 
As the last few monetary-policy cycles have shown, even if the Fed can get the equilibrium rate back to 3% before the next recession hits, it still will not have enough room to maneuver effectively.
 
Interest-rate cuts will run into the zero lower bound before they can have a meaningful impact on the economy. And when that happens, the Fed and other major central banks will be left with just four options, each with its own costs and benefits.
 
First, central banks could restore quantitative- or credit-easing policies, by purchasing long-term government bonds or private assets to increase liquidity and encourage lending. But by vastly expanding central banks’ balance sheets, QE is hardly costless or risk-free.
 
Second, central banks could return to negative policy rates, as the ECB, BOJ, SNB, and some other central banks have done, in addition to quantitative and credit easing, in recent years.

But negative interest rates impose costs on savers and banks, which are then passed on to customers.
 
Third, central banks could change their target rate of inflation from 2% to, say, 4%. The Fed and other central banks are informally exploring this option now, because it could increase the equilibrium interest rate to 5-6%, and reduce the risk of hitting the zero lower bound in another recession.
 
Yet this option is controversial for a few reasons. Central banks are already struggling to achieve a 2% inflation rate. To reach a target of 4% inflation, they might have to implement even more unconventional monetary policies over an even longer period of time. Moreover, central banks should not assume that revising inflation expectations from 2% to 4% would go smoothly. When inflation was allowed to drift from 2% to 4% in the 1970s, inflation expectations became unanchored altogether, and price growth far exceeded 4%.
 
The last option for central banks is to lower the inflation target from 2% to, say, 0%, as the Bank for International Settlements has advised. A lower inflation target would alleviate the need for unconventional policies when rates are close to 0% and inflation is still below 2%.
 
But most central banks have their reasons for not pursuing such a strategy. For starters, zero inflation and persistent periods of deflation – when the target is 0% and inflation is below target – may lead to debt deflation. If the real (inflation-adjusted) value of nominal debts increases, more debtors could fall into bankruptcy. Moreover, in small, open economies, a 0% target could strengthen the currency, and raise production and wage costs for domestic exporters and import-competing sectors.
 
Ultimately, when the next recession strikes, central banks in advanced economies will have no choice but to plumb the zero lower bound once again while they choose among four unappealing options.
 
The choices they make will depend on how they weigh the risks of bloating their balance sheets, imposing costs on banks and consumers, pursuing possibly unattainable inflation targets, and hurting debtors and producers at home.
 
In other words, central banks will have to confront the same policy dilemmas that attended the global financial crisis, including the “choice” of whether to pursue unconventional monetary policies. Given that financial push is bound to come to economic shove once again, unconventional monetary policies, it would seem, are here to stay.
 
 


The Ultimate Debt Bubble Is Upon Us

by: Zoltan Ba


- Since the last economic crisis, the Western World consumer's debt deleveraging has been the only major exception to broad debt accumulation.

- The only reason we were able to cope in the US and globally is because of the lower interest rates. That trend has now come to an end.

- While the broad nature of this debt bubble can give it more longevity as the burden is spread out, it can also make the next crash more painful.

 
According to the US debt clock, the country pays about $2.5 trillion annually in interest expenses, within the context of an economy that has a GDP of about $19 trillion. What this means is that about 13% of the economy goes to servicing debt expenses. This of course also means that on the other side of the equation, somebody else gains an income from those interest expenses, so it is seemingly not all bad. Nevertheless, it is a problem when the interest/GDP ratio tends to grow, because the interest collecting institutions or individuals are not necessarily the ones who will contribute to consumer demand. A bank will take those interest revenues and put them towards creating lending capacity for consumers, but it will not go out and purchase houses, cars, or furniture for itself. It means that in the end, most consuming entities are paying more and more on interest, which means that we can afford less of everything else. And, when most people, companies, and governments have to settle for less of everything else, we end up experiencing an economic contraction, unless we substitute with even more debt, which leads to more interest on debt. Within this context, the burning question of our time has to be how much of an interest payment load we can bare, in the US, and globally, given that there are signs of central banks looking to tighten in order to prevent asset bubbles. Unfortunately, there is no way of knowing what that answer is until we will see this latest debt bubble burst.
 
Based on the debt clock data, total US debt outstanding at all levels of the economy, including governments, mortgages, corporate, business, and consumer debt stands at about $67.5 trillion.
 
The interest rate we therefore pay on the economy as a whole is somewhere in the 3.7% range, based on the $2.5 trillion in total interest figure. Based on the fact that back in 2007, 10-year bond yields were around 4.5%, mortgage rates were around 6.5%, we can assume that the average interest yield on the economy as a whole may have been about 6-7%, given other high-yield debts, such as credit cards. Going on this assumption, total interest on debt throughout the economy may have reached as high as 20% of GDP, just before the crash, according to data on total debt from that period, which can be found on Economics Help.

The total debt/GDP ratio reached over 300% by the time the crisis reached full-blown status and the economic contraction became severe in 2009. In the run-up to the crisis, it was about the same as it is now, or about 270-280%. Therefore, it is important to highlight the fact that the current decline in interest on the economy to about 13%/GDP from the high of as much as 20% before the crisis hit is mostly due to the years we had of people, businesses, and governments refinancing old debts at lower rates for the past seven years or so, as well as taking out new debt at much lower rates. After years of re-financing at the recent, historically very low costs, the trend is now coming to an end. In effect, there is no realistic way to take interest rates significantly lower from current levels, and as we can see lately, central banks are increasingly looking at moving rates up, even if it is not going to get back to average levels seen in the previous economic cycle.
 
Government and corporate business debt/GDP increasing sharply since beginning of economic recovery, while consumer debt holding stable after years of deleveraging
 
After the dramatic run-up in consumer debt, which drove the last economic recovery, consumers seem increasingly content to just keep pace with nominal economic growth in terms of debt accumulation, after half a decade of deleveraging.
 
 
Source: FRED
 
 
Corporate and business debt also entered a period of deleveraging during the last economic downturn, but it did not take long to get back to the business of feasting on the cheap money made available through central bank policies.
 
 
As we can see, between the end of 2010 and the beginning of 2016, the corporate and business debt level as a percentage of the size of the overall economy increased from 38.4% to 44.88%.
Government debt increased at a much faster pace when measured against the size of the economy. It went from 64% of GDP at the beginning of 2008 to over 105% currently.
 
 
Source: FRED
 
 
Looking at these separate debt/GDP numbers together and by sector, there are a number of conclusions that we can draw. The first and obvious is the fact that since the beginning of the last economic crisis, total debt/GDP is still on a growing path. The significant decline in consumer debt between 2008 and 2015 helped temper that growth, but that trend has now come to an end. At best, we can expect consumer debt/GDP to remain steady. Government and business debt are both increasing at a significant rate in proportion of the size of the economy, meaning that in the absence of interest rates somehow continuing to decline from current levels, interest on debt as a percentage of GDP is also most likely on a rising trend, given that we can no longer expect relief from declining interest rates.
 
If we look at the individual components of debt, we can also notice the fact that most of the decline in debt/GDP came from the debt category which generally carries a higher interest rate, namely consumer debt, while the main increase came within the category which can borrow at a lower interest rate. This trend has been one of the contributing factors which drove the interest/GDP burden in the economy down in past years. In effect, government spending has become a more effective way of stimulating the economy, because it carries a lower interest rate. Therefore, it expands the economy's total debt-carrying capacity. With interest rates not going significantly lower from current levels anytime soon, shifting debt to lower interest rate categories may be the only sustainable way forward. By sustainable, I of course mean that it is sustainable in the short to medium term. I don't think this can be sustained in the longer term, because eventually the US government, as well as other governments around the world will find it very hard to sustain their debt servicing obligations. Whether they will cut back on spending in order to pay for increasing debt servicing costs, or eventually resort to massive money printing, which can come with its own problems, including perhaps the first ever global hyper-inflation crisis, something will eventually have to give.
The global picture
 
One of the factors that allowed for a sustained, (even if weak) global economic recovery in the aftermath of the 2008 financial crisis was the shifting of debt accumulation to the developing world, with China in particular shouldering a very significant portion of it. It has just been reported recently that China's total debt surpassed 300% of GDP in the first quarter of 2017. It is thought that its total debt has quadrupled since 2007, far outpacing its increasingly sub-average economic growth when compared with its growth trajectory before the global crisis. A number of other developing countries have also seen quite a bit of debt accumulation, at a higher rate of growth compared with economic expansion rates.
 
Total global debt now stands at $217 trillion, which is 327% of global GDP. We should keep in mind that the world borrows at an average interest rate that is considerably higher than America's economy can secure on average. It's impossible to tell just how significant the interest burden is on this debt, but for the sake of mental visualization, if we assume a conservative 5% average, it is about $11 trillion per year. The reason why I say that it is a conservative estimate is because governments, consumers, and businesses pay a significantly higher interest on debt in the developing world. India's 10-year government notes yield is about 6.5% at the moment, while Brazil pays 10.5%. We should keep in mind that consumer and other debts carry a much higher average interest burden. The world's entire GDP is about $76 trillion, meaning that global interest on debt is at least 14.5%. It should be worth noting that a lot of the debt is accumulating in countries with higher interest rates, while in places like Europe, deleveraging still continues, with private sector debt declining from $103.4 trillion, to $97.7 trillion. Keeping this in mind, the total global interest burden is likely to rise at a faster pace than the total debt/GDP ratio, because the global interest rate on each net dollar borrowed, or old debt being re-financed, is likely to be higher than the current global average.
The ultimate debt bubble
 
The last financial crisis was in large part due to a particular sector of the economy, within a number of individual countries becoming overly saturated with debt, beyond the ability of many to cope with it. The main sector where over-indebtedness led to crisis was the consumer sector, with some sovereign issues such as was the case with Greece and other countries in Europe being exposed as a secondary effect. All data points since the recovery started suggest that we are in another debt bubble.
 
It is a global one, and it involves debt becoming unsustainable at government, business, and consumer levels, across much of the world. The Western consumer is the exception to this trend, and it is in large part due to the fact that we are already carrying a heavy debt load, even after the deleveraging since 2008. But even in the Western world, the consumer deleveraging story is not absolute. For instance, in Canada new record highs are being recorded pretty much every quarter when measuring household debt as a percentage of disposable income. That ratio is now at 167%, and there is no sign that there will be a trend reverse happening anytime soon.
 
Not to mention that Canada's new Liberal government abandoned the old goal of balanced budgets and is now running significant deficits instead.
 
Given the widespread aspect of this debt bubble, it is likely that the US and the global economy will prove to have significant stamina in continuing forward with this trend for a prolonged period, due to the fact that the debt accumulation is spread out, instead of concentrated to one sector, as was the case with the previous bubble. The previous bubble burst much faster, because it was concentrated disproportionally in the consumer sector of the economy, which also happens to have a lower threshold in terms of carrying capacity, compared with governments which have various tools at their disposal, including a central bank. Because debt accumulation is more widespread within the economy, it is less likely to become an immediate issue within any particular sector of the economy.

No one can possibly predict the timing of it, because there are just so many factors involved, but eventually, this trend will lead to a severe global financial crisis. And, when it does, the broad aspect of it will make it unlikely that we will be able to achieve a recovery as easily as we did the last time around, because pretty much every major sector of the global economy will be affected and will engage in a similar deleveraging trend to what we have been seeing from the US consumers in the last few years. Problem is that when everyone is forced into debt deleveraging, the deleveraging itself tends to become impossible, because it becomes a game of endlessly catching up to a constantly shrinking economy, and it may take a very long time to actually catch up. In this regard, the lesson of Greece's deleveraging experience, which led to endless rounds of austerity, due to its effect of inducing economic shrinkage, without having the desired effect of reducing the debt/GDP ratio.
 
While the perception that at some point, we can just hunker down and start paying down the mountains of debt we are accumulating collectively in order to get out of this vicious cycle is still relatively prominent among the general public, the reality is that a broad-based effort to deleverage throughout the local and global economy can only result in years or decades of seemingly endless misery, with any debt reduction being matched or perhaps even surpassed by economic contraction, leading to loss of resources such as income and taxes, leading to a need to cut spending even more, causing more economic contraction. While the next global economic slowdown may still be some years away, perhaps, whenever it will arrive, it is very likely that it will be the beginning of this painful process.


In China, a Strategy Born of Weakness

By George Friedman


China’s actions so far in the ongoing North Korean affair have been ambiguous. In order to try to understand China’s strategy toward North Korea, it is necessary to understand China’s strategy in general. To do that, it is important to recognize the imperatives and constraints that drive the country.

First, we need to outline China’s basic geographical parts. The country has four buffer regions that are under its control. Tibet in the southwest has seen some instability and is vulnerable to outside influences. Xinjiang in the northwest is predominantly Muslim, with a significant insurgency but not one that threatens Chinese control. Inner Mongolia in the north is stable. Manchuria in the northeast is also stable and of all four buffers is the most integrated with the Chinese core. These last two regions are now dominated by the Han Chinese, China’s main ethnic group, but they are still distinct. When you look at a map of China, you will see that a good part of what we think of China is not ethnically Chinese.


Within Han China, there are also divisions. The population is concentrated in the east because western China has limited rainfall and can’t sustain very large populations. In this sense, China is actually a relatively narrow country, with an extremely dense population. The interests within Han China are also diverse, and this has frequently led to fragmentation and civil war.

The most important distinction is the one between coastal China and interior China. Coastal China, when left to its own devices, is involved in regional and global maritime trade, while the interior has fewer commercial opportunities. Coastal China’s priority is reaching its customers, whereas the interior wants Beijing to transfer the wealth from the coast to help support the poor interior. Many other regional disagreements exist of course, but this is the source of discord between the two regions.

It is not a new problem, and left to fester, it can result in internal conflict, with coastal interests frequently seeking intervention by their customers. This was the case from the British intervention in the mid-19th century until 1947. During this time, there was endless internal conflict in China and constant foreign involvement. Mao Zedong tried to solve the problem by closing China to trade (at least somewhat), crushing the coastal elite and imposing a dictatorship. Like emperors before him, he imposed a powerful state on a unified but nonetheless very poor country.

Changing Gears

After Mao died, China embarked on a traditional Chinese strategy: It tried to build its economy by selling low-priced manufactured goods to the world without allowing divisions to arise – in other words, it wanted to have its cake and eat it too. This worked for a generation; once the state stopped undermining economic development, China surged. By 2006, exports, particularly to the U.S. and Europe, accounted for 37 percent of China’s gross domestic product. The coastal region became relatively prosperous, while the rest of China and the buffer regions lagged far behind, as they always have. But the surging economy helped raise living standards, even if it also created inequality.

2008 was a turning point. China’s major customers, Europe and the United States, went into recession, and their appetite for Chinese goods declined. Economic growth slowed dramatically, and by 2016, exports only contributed 19 percent of GDP. Although internal consumption increased, the coastal region was focused on markets in advanced industrial countries, which the interior couldn’t replace.

And in the process of maintaining weakening businesses, saving jobs and increasing domestic demand, the cost of production rose. China faced competition from other countries for markets, and the pressure on its internal system intensified.

Coastal and regional interests diverged again, and each advocated different policies in response to the crisis. The Chinese government tried to accommodate all but accommodated none. In 2012, President Xi Jinping took office and sought to put the genie back in the bottle. He imposed a dictatorship that had two goals: to take control of the Communist Party and to impose party rule over the country. His anti-corruption campaign was intended to take control of the economy and to convince the interior that he was not a pawn of the coastal region. Xi sought to maintain exports as much as possible and to re-establish centralized control with minimal effect on the economy.

He also had to deal with the United States. The United States’ consumption of exports was a major engine of China’s economy. At the same time, the crackdown on government and business officials – an essentially political act – would affect American investments and other interests in China. China had to take greater control of the economy without losing U.S. investment or imports.

But in case the worst happened, China developed a fallback strategy. It began producing a new class of high-tech products. It also had to find new markets outside the U.S. The economic solution posed a military problem.

Protecting Sea Access

In the event there was an economic falling out with the U.S., China had to consider the possibility of a military confrontation. But the key issue was the ability to guarantee China’s access to sea lanes. In this, China had a major geographic problem. The South and East China seas are ringed with small islands, spaced in such a way that passage between them can be blocked with relative ease. The U.S. Navy is far superior to the Chinese navy, and the Chinese were concerned that in some unforeseen crisis the U.S. would block access to their much needed sea lanes. Those small islands were now at the center of Chinese national interest. The Chinese could claim the entire region, but they were not in a position to seize it.


This photo taken on Dec. 24, 2016, shows the Liaoning, China’s only aircraft carrier, sailing during military drills in the Pacific. STR/AFP/Getty Images

At the same time, the Chinese devised a political solution to their strategic problem. If a country like Indonesia or the Philippines aligned with China instead of with the United States, access to the global sea lanes would be assured without having to confront the United States. The problem here is that the two strategies undermined each other. Aggressive assertion of Chinese power in the regional waters and finding accommodation with regional powers were inconsistent approaches. What’s more, they could only work if the United States was not present. And, of course, it was.

China had one other option for getting around potential U.S. actions: creating an alternative export route through Asia to Europe. This was the One Belt, One Road concept. But it, too, was flawed. First, the cost of building the requisite infrastructure was staggering. Second, it would run through countries that were unstable and, for the Chinese, unimportant customers. Add to that the speed with which One Belt, One Road needed to be enacted, and this was more posturing that policy.

China, therefore, is caught in a set of interlocking problems. Its economic miracle has matured into more normal growth rates. It has a vast population that lacks the ability to consume all that it produces. It has to contend with global stagnation and competition from other producers – and competing with high-tech producers is no small task. It is therefore afraid of internal instability and has imposed a dictatorship designed to maintain a vibrant economy without social costs. To do that, it must increase exports and control access to China’s economy, a move designed to alienate a large and dangerous power, the United States. But it can’t afford to confront the U.S., whose navy it can’t defeat.

The Chinese are caught between the need to placate the United States and to distract it with as many problems as possible. North Korea is a perfect diversion, but siding with Pyongyang is not an option. China can appear to be helping the United States while keeping the U.S. focused on Pyongyang.

Incompatibilities

This is a strategy that emerges not from a position of strength but from one of fundamental weakness. China’s internal contradiction is that prosperity creates instability, and stability is incompatible with prosperity. There are complexities and nuances of course, but this is the root of China’s problem. China is therefore trying to maintain what prosperity it can without destabilizing the system. In doing this, it is jeopardizing its overseas markets, particularly the United States, creating the opportunity for a conflict it can’t win and opening the door to regionalism and warlordism.

Unlike Japan, which moved from being a high-growth country to a low-growth country without social upheaval, China may not be so lucky. Japan had a homogeneous, socially integrated society. China is not homogenous, and it has irreconcilable social differences. Its global strategy reflects these contradictions and ultimately poses a greater risk to China itself than to others. And in such a situation, the key is to look confident and try to keep others off balance. But this can only work for so long.