International Organizations Are Tools for Powerful Countries

By Jacob L. Shapiro


In the modern world, relations between states operate at two levels. The first is the bilateral level. The U.S. and China, for instance, don’t see eye to eye on issues like Taiwan, the South China Sea, or how to denuclearize the Korean Peninsula. Their representatives communicate with each other to try to address their disagreements. The second is the multilateral level. For example, the United Nations passes a resolution placing economic sanctions on North Korea.

Most of the U.N.’s 193 member states do not themselves have a problem with North Korea, but they go along with the sanctions because the U.N. says so.

Products of Geopolitics

Many point out that nationalism is rising as an ideological force in the world today. That would suggest that bilateral relations between states are the most important part of understanding the world, since nationalists prefer to work directly with other states rather than have their interests muddled by a multilateral bureaucracy. But it is also true that multilateralism is alive and well. In fact, if you consider some of the major headlines from this past weekend, you might get the impression that the development of new international organizations and new free trade pacts are driving global events.

On Nov. 10, officials from 11 countries announced that they had a preliminary agreement on the core elements of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which means the saga of the TPP has now become the CPTPP.

Also on Nov. 10, officials from Central Asia’s five countries signed a Program on Mutual Cooperation, one of the stated goals of which is to encourage cooperation with the U.N., the Commonwealth of Independent States, the Organization of Islamic Cooperation, and the Organization for Security and Cooperation in Europe, to name a few.

On Nov. 11, on the sidelines of an Association of Southeast Asian Nations and East Asia summit, officials from the U.S., Japan, India and Australia resuscitated the Quadrilateral Security Dialogue. The Quad is an emerging multilateral grouping drawn together to resist China’s influence in Asia, though just what the Quad is isn’t yet clear. Is it an alliance? A multilateral organization? A communication forum?

On Nov. 12, Saudi Arabia convened an extraordinary session of the Arab League to discuss Iran’s “destructive meddling” in the region.

Not to be outdone, on Nov. 13, ministers from 23 European countries signed a joint notice on Permanent Structured Cooperation, which aims to boost military coordination between the military forces of the signatories.

None of these headlines are actually that important. The CPTPP faces the same problems that the TPP faced and no longer features access to the U.S. market as a centerpiece. Before it can be transformative, it has to be passed, and that is hardly a sure thing. Central Asian states saying they are going to cooperate with an alphabet soup of international organizations just means that we will read more press releases about cooperation in the coming year. ASEAN’s member states don’t agree on most things, the ill-defined Quad collapsed once before and may very well again, and the Arab League has extraordinary summits with ordinary results all the time. It took the European Commission 15 years to allow the sale of excessively curved bananas and cucumbers in EU member states; military coordination is slightly more complex.

There are many who believe in the potential efficacy and power of international groupings, but actually finding an example of one that transformed the world is very difficult. That’s because power in the international political system does not rest in the hands of international organizations. States imbue international organizations with power if it serves their strategic ends, but more often than not, such organizations are fairly impotent. Even the most vaunted and mighty of the world’s international organizations, like the United Nations, have a fairly checkered history when it comes to defending the causes they were created to defend.

International organizations in and of themselves are not transformative. They are products, not drivers, of geopolitics. We can make a similar argument for free trade pacts, which are only as effective as states’ willingness and ability to enforce them.

Sometimes they can be hugely important, the European Economic Community or NAFTA being prime examples. But even the most consequential free trade pacts don’t emerge out of the ether. They reflect reality rather than define it.


U.S. Vice President Mike Pence (R) and British Prime Minister Theresa May vote on a resolution during a Security Council meeting at the 72nd U.N. General Assembly at U.N. headquarters on Sept. 20, 2017, in New York City. SPENCER PLATT/Getty Images


And yet, international organizations do exist, which raises important questions. If history is replete with so many failed international organizations, why do they continue to pop up all over the place? And, more important, are there circumstances in which international organizations really do matter, and should be taken as seriously as whether the U.S. plans to strike North Korea’s nuclear program, or whether Saudi Arabia actually means to combat Iran’s ambitions for power in the Middle East in any way beyond aggressive statements? To answer these questions, we must understand the impetus for the creation of international organizations.

Ironically, the answer to that question begins with understanding what most think of as an ideology diametrically opposed to the very existence of international institutions: nationalism.

Nationalist Fervor

Nationalism very crudely understood is an ideology whose core principle is national self-determination. Nationalism emerged in the 17th century, began shaping the world in the 18th century, and became the dominant political ideology in the 19th and 20th centuries. Nationalism is the idea that unique groups of people exist, and the political legitimacy of a state flows from governing a territory for the individuals of that group.

Nationalism became a dominant political force only after it was fused with another 18th-century ideology: classical liberalism. One of the basic tenets of classical liberalism is that human beings are endowed with certain inalienable rights simply by being human. The state exists to preserve the liberty of the individual, and the state’s ability to preserve and defend that liberty gives the state its legitimacy. In exchange for this protection, citizens of the nation-state forfeit some degree of freedom to the sovereign.

There is a tendency to think that ideology drives geopolitics, but usually it is the other way around. Nationalism and liberalism did not emerge in a vacuum. They emerged in the context of advances in technology that transformed human life. Advances in transportation allowed once impassable distances to be traversed relatively easily. Advances in agricultural technology meant more food could be grown without needing to have 10 children to till the fields. Advances in communication helped stitch the world together in ways that had never been possible in human history. The Industrial Revolution brought huge numbers of young men and women into the factory workforce in rapidly growing cities. The sclerotic bureaucracies of hulking monarchies often could not respond fast enough to the demands of their once pliant subjects.

At that point, things began to change. The old political structures were either reformed or discarded. Nationalism fused with liberalism, and across Europe, proto-liberal democracies began to emerge, states that ruled with at least a modicum of the consent of the governed.

Liberalism helped supply popular legitimacy. Nationalism helped provide the loyalty necessary for these new governments to manage a rapidly transforming world. Average individuals could no longer expect to live their entire lives in the same village as their family, and as national economies became more intertwined, different groups of people came into contact with other groups of people and began to define their identities by their language, values and culture.

Nationalism is a particularistic ideology. It is concerned with the well-being of a well-defined group of people; it is not in and of itself interested in the well-being of all people. But nationalism was colored by its encounter with liberalism, which was and remains a universalistic ideology, one that believes in the basic rights of all individuals. Nationalism began to cast a wider net. It subsumed larger groups than the family or the tribe had ever done before. (Some of those groups, like the Catalans or the Scottish, never were completely subsumed. Others, like the Castilians or Bretons, assimilated more completely.) And so new nation-states were created. Out of the ashes of the Napoleonic wars, Germany unified in 1871.

Out of several disparate city-states and principalities, a unified Italy emerged in the same year.

What is often forgotten, however, is that while all this nationalist fervor was happening, international organizations were emerging too. The world’s oldest extant international organization is the Central Commission for the Navigation of the Rhine. Most people remember the Congress of Vienna in 1815 as the conference in which the victors against Napoleon crafted a political settlement designed to ensure peace on the European continent.

But it was also at the Congress of Vienna that the CCNR was created, and tasked with implementing freedom of navigation on the Rhine River. Over the course of several decades, the CCNR reduced tolls, set up rules for navigation, and held meetings and conferences in support of its efforts. At various points in the past two centuries, the CCNR has been politicized, and during major wars even stopped functioning, but the CCNR still exists to this day, continuing its work in support of European integration.

A Common Impulse

There is an important cycle here: International organizations of real efficacy always seem to emerge after a major conflict. After World War I, the victors tried to banish the scourge of war by creating the League of Nations. It failed, though for a time the League of Nations played an important role in shaping global politics. After World War II, the victors tried to use the same strategy once more and created the United Nations. The impulse to create international organizations comes from the same impulse that creates nation-states. The difference is that internationalists hope the circle can be expanded ever wider – that it might be possible to create a global nation. It is not surprising that the universalist impulse to protect the rights of all individuals is strongest after terrible wars, and that the victors invest so much of their own powers into attempting to create structures that prevent future wars (or, put more cynically, secure the victors’ position).

What all of this tells us is that international organizations emerged from the same ideological current as the nation-state. The main difference between them is that international organizations emphasize the innate rights of the individual, and the nation-state emphasizes the government’s responsibility to the nation. For better or worse, nation-states rule the world today. So powerful are nation-states that they use international organizations for their own purposes. Think of the U.S. and the Soviet Union dueling at the U.N. Security Council, fighting a Cold War while simultaneously pledging faithful membership in an organization whose purpose is the maintenance of international peace and security. Or China and Russia using their place on the Security Council today to project more power than they actually have.

International organizations can matter when they are the product of the shared, mutual interests of like-minded states. And multilateral free trade agreements can matter when they codify economic realities that are beneficial for the parties involved. Occasionally this happens in some organizations, like the European Union from 1991-2008, or the League of Nations immediately after World War I.

But overall, international organizations and most other multilateral groups are slaves to nation-states and tools of great powers. Once created, they often take on lives of their own, limping along by virtue of inertia and bureaucracy’s survival instinct. This can give them the appearance of being supremely important. But more often than not, they are co-opted by the interests of their member states. The key to analyzing them is not to take their statements too seriously, and to keep your eyes on who is pulling the strings.

 Finally, An Honest Inflation Index – Guess What It Shows


Central bankers keep lamenting the fact that record low interest rates and record high currency creation haven’t generated enough inflation (because remember, for these guys inflation is a good thing rather than a dangerous disease).

To which the sound money community keeps responding, “You’re looking in the wrong place!

Include the prices of stocks, bonds and real estate in your models and you’ll see that inflation is high and rising.”

Well it appears that someone at the Fed has finally decided to see what would happen if the CPI included those assets, and surprise! the result is inflation of 3%, or half again as high as the Fed’s target rate.

New York Fed Inflation Gauge is Bad News for Bulls 
(Bloomberg) – More than 20 years ago, former Fed Chairman Alan Greenspan asked an important question “what prices are important for the conduct of monetary policy?” The query was directly related to asset prices and whether their stability was essential for economic stability and good performance. No one has ever offered a coherent answer even though the recessions of 2001 and 2008-2009 were primarily due to a sharp correction in asset prices. 
A new underlying inflation gauge, or UIG, created by the staff of the New York Fed may finally provide the answer. Its broad-based measure of inflation includes consumer and producer prices, commodity prices and real and financial asset prices. The New York Fed staff concluded that the new inflation gauge detects cyclical turning points in underlying inflation and has a better track record than the consumer price series. 
The latest reading shows inflation of almost 3 percent for the past 12 months, compared with 1.8 percent for the consumer price index and 1.8 percent for core consumer prices, which exclude food and energy. Since the broad-based UIG is advancing 100 basis points above CPI, it indicates that asset prices are large, persistent and reflect too easy monetary policy. 

 
The UIG carries three important messages to policy makers: the obsessive fears of economy-wide inflation being too low is misguided; monetary stimulus in recent years was not needed; and, the path to normalizing official rates is too slow and the intended level is too low. 

Harvard University professor Martin Feldstein stated in a recent Wall Street Journal commentary that “The combination of overpriced real estate and equities has left financial sector fragile and has put the entire economy at risk.” If policy makers do not heed his advice odds of another boom and bust asset cycle will be high — and this time they will not have the defense mechanisms they had after the equity and housing bubbles burst.

To summarize, a true measure of inflation – one that is highly correlated with the business cycle – is not only above the Fed’s target but accelerating.

Note on the above chart that both times this happened in the past a recession and bear market followed shortly.

The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.

But it’s too late to moderate anything this time around. Asset prices have been allowed to soar to levels that put huge air pockets under them in the next downturn. Here’s a chart that illustrates both the repeating nature of today’s bubble and its immensity.




In other words, it is different this time — it’s much worse.


Big banks push back on launch of bitcoin futures

US regulators told financial system ill-prepared for dealing with cryptocurrencies

Philip Stafford in London


The Chicago Mercantile Exchange plans to start listing bitcoin futures with a centralised clearing mechanism © Bloomberg


The world’s largest banks are pushing back on the introduction of bitcoin futures, raising concerns with US regulators that the financial system is ill-prepared for the launch of the contracts as the value of the volatile cryptocurrency has soared.

On Wednesday, the price of bitcoin climbed to a fresh record high of more than $12,000. Institutional investors have been keen to trade the asset but only via a regulated market.

However, the planned launch in the next 10 days of futures contracts by the Chicago exchanges CME Group and CBOE Global Markets, given a green light from the Commodity Futures Trading Commission last week, has prompted a backlash among the major brokers who backstop trading across the industry.

The Futures Industry Association, the main futures industry lobby group, plans to send a letter to the CFTC that will be published on Thursday.

In a draft seen by the FT, the FIA writes that the rapid introduction of bitcoin futures “did not allow for proper public transparency and input”.

The CME and CBOE agreed to operate under a self-certified regime for their upcoming contracts, meaning regulators had minimal time to review them formally.

Using it for “these novel products does not align with the potential risks that underlie their trading and should be reviewed”, the draft reads.

The CFTC warned last week during its approval process that the emerging cryptocurrency markets were largely unregulated and the agency had “limited statutory authority”.

“It is also our understanding that not all risk committees of the relevant exchanges were consulted before the certification to launch these products,” the letter added.

Futures brokers are worried they will bear the brunt of the risk associated with bitcoin futures, because the margin that backstops the contract is placed in a clearing house.

Clearing houses stand between two parties in a trade, managing the risk to the rest of the market if one side should default. They are mutually funded in part by banks to guard against the failure of their largest members.

Several brokers among the top 10 largest providers have privately confirmed to the Financial Times that they will not clear the products immediately.

CBOE said its futures exchange did not have a risk committee, but it consulted with its board and regulatory oversight committee. The OCC, its clearing house, also has a risk committee that reviewed the product.

In its filing, CME said it had discussed the specifications of the contracts with customers for around six months. It did not have an immediate comment on Wednesday.

One clearing broker said that it would be open-minded about cryptocurrencies, as they were US dollar products, but only if they were “properly controlled and regulated”. However he added: “We’d still be on the hook in a worst-case scenario as we are exposed as members of the clearing house.”

Other exchanges are showing interest in bitcoin futures but are more cautious. Thomas Book, chief executive of Deutsche Börse’s Eurex Exchange, said timing was crucial in launching a new derivatives contract.

“We still do see challenges that have to be tackled in close discussion with our clients. It is important for an exchange to follow a sustainable approach on this asset class well co-ordinated with the market.”

Thomas Peterffy, a pioneer of electronic trading and head of Interactive Brokers, has warned that the introduction of bitcoin futures into a clearing house could increase systemic risk. On Wednesday Interactive said its clients would be unable to short the bitcoin futures market because of the extreme volatility of bitcoin.


The Pandora’s Box of the Digital Age

CARL BILDT

South Korea missile


STOCKHOLM – Is the world sliding dangerously toward cyber Armageddon? Let us hope not; but let us also apprehend the threat, and focus on what to do about it.

One country after another has begun exploring options for bolstering their offensive capabilities in cyberspace, and many other countries have already done so. This is a dangerous escalation. In fact, few other trends pose a bigger threat to global stability.

Almost all societies have become heavily dependent on the Internet, the world’s most important piece of infrastructure – and also the infrastructure upon which all other infrastructure relies. The so-called Internet of Things is a misnomer; soon enough, it will be the “Internet of Everything.” And our current era is not a Fourth Industrial Revolution; it is the beginning of the digital age, and the end of the industrial age altogether.

The digital age has introduced new vulnerabilities that hackers, cyber criminals, and other malign actors are already routinely exploiting. But even more alarming is the eagerness of national governments to conduct cyber-warfare operations against one other.

We have already reached the stage at which every conflict has a cyber dimension. The United States and Israel crossed the Rubicon in 2010 by launching the Stuxnet attack on Iran’s nuclear facilities. Now, there is no telling where ongoing but hidden cyber conflicts begin and end.

Things were different in the old world of nuclear weapons, which are complicated and expensive devices based on technology that only a few highly educated specialists have mastered. Cyber weapons, by contrast, are generally inexpensive to develop or acquire, and deceptively easy to use. As a result, even weak and fragile states can become significant cyber powers.

Worse still, cyber-war technologies have been proliferating at an alarming pace. While there are extensive safeguards in place to control access to sensitive nuclear technologies and materials, there is almost nothing preventing the dissemination of malicious software code.

To understand the scale of the threat we face, look no further than the “WannaCry” virus that, among other things, almost shut down the British National Health Service this past May. The virus exploited a vulnerability in the Microsoft Windows operating system that the US National Security Agency had already discovered, but did not report to Microsoft. After this information was leaked or stolen from the NSA, North Korea quickly put the ransomware to use, which should come as no surprise. In recent years, North Korea has launched numerous cyber attacks around the world, most notably against Sony Pictures, but also against many financial institutions.

And, of course, North Korea is hardly an exception. Russia, China, and Israel have also developed cyber weapons, which they are busy trying to implant in systems around the world.

This growing threat is precisely why other countries have started talking about acquiring offensive cyber capabilities of their own: they want to have a deterrent to ward off attacks from other cyber powers.

Cyber security is regarded as complicated and costly; but cyber offense is seen as inexpensive and sexy.

The problem is that, while deterrence works in the nuclear world, it isn’t particularly effective in the cyber world. Rogue actors – and North Korea is hardly the only example – are far less vulnerable than developed countries to cyber counterstrikes. They can attack again and again without risking serious consequences.

Cyber attacks’ often-ambiguous origins make it even harder to apply a rational theory of deterrence to the cyber world. Identifying the responsible party, if possible at all, takes time; and the risk of misattribution is always there. I doubt we will ever see unambiguous proof that Israel is conducting offensive cyber operations; but that certainly doesn’t mean that it isn’t.

In the darkness of cyberspace, sophisticated actors can hide behind oblivious third parties, who are then exposed to counterstrikes by the party under attack. And in the ongoing conflict among Gulf countries, at least one government may have contracted hackers based in other countries to conduct operations against an adversary. This method of avoiding detection will almost certainly become the norm.

In a world riven by geopolitical rivalries large and small, such ambiguity and saber-rattling in the cyber realm could have catastrophic results. Nuclear weapons are generally subject to clear, strict, and elaborate systems of command and control. But who can control the legions of cyber warriors on the dark web?

Given that we are still in the early stages of the digital age, it is anyone’s guess what will come next.

Governments may start developing autonomous counterstrike systems that, even if they fall short of Dr. Strangelove’s Doomsday Machine, will usher in a world vulnerable to myriad unintended consequences.

Most obviously, cyber weapons will become a staple in outright wars. The United Nations Charter affirms all member states’ right to self-defense – a right that is, admittedly, increasingly open to interpretation in a kinetic, digitized world. The Charter also touches on questions of international law, particularly with respect to non-combatants and civilian infrastructure in conflict zones.

But what about the countless conflicts that do not reach the threshold of all-out war? So far, efforts to establish universal rules and norms governing state behavior in cyberspace have failed. It is clear that some countries want to preserve their complete freedom of action in this domain.

But that poses an obvious danger. As the NSA leaks have shown, there is no way to restrict access to destructive cyber weapons, and there is no reason to hope that the rules of restraint that governed the nuclear age will work in the cyber age.

Unfortunately, a binding international agreement to restrict the development and use of offensive cyber weapons in non-war situations is probably a long way off. In the meantime, we need to call greater attention to the dangers of cyber-weapon proliferation, and urge governments to develop defensive rather than offensive capabilities. An arms race in cyberspace has no winners.


Carl Bildt was Sweden’s foreign minister from 2006 to October 2014 and Prime Minister from 1991 to 1994, when he negotiated Sweden’s EU accession. A renowned international diplomat, he served as EU Special Envoy to the Former Yugoslavia, High Representative for Bosnia and Herzegovina, UN Special Envoy to the Balkans, and Co-Chairman of the Dayton Peace Conference. He is Chair of the Global Commission on Internet Governance and a member of the World Economic Forum’s Global Agenda Council on Europe.


The Zuckerberg delusion

Facebook founder is a digital superstar, but he has poor human skills

Edward Luce


Mark Zuckerberg takes a selfie with a group of entrepreneurs. The Facebook co-founder personifies the myopia of America’s coastal elites: they wish to do well by doing good © AP


Here is what Mark Zuckerberg learned from his 30-state tour of the US: polarisation is rife and the country is suffering from an opioid crisis. Forgive me if I have to lie down for a moment.

Yet it would be facile to tease Mr Zuckerberg for his self-evident observations. Some people are geniuses at one thing and bad at others. Mr Zuckerberg is a digital superstar with poor human skills.

Facebook’s co-founder is not the first Silicon Valley figure to show signs of political inadequacy — nor will he be the last. But he may be the most influential. He personifies the myopia of America’s coastal elites: they wish to do well by doing good.

When it comes to a choice, the “doing good” bit tends to be forgotten.

There is nothing wrong with doing well, especially if you are changing the world. Innovators are rightly celebrated. But there is a problem with presenting your prime motive as philanthropic when it is not. Mr Zuckerberg is one of the most successful monetisers of our age.

Yet he talks as though he were an Episcopalian pastor.

“Protecting our community is more important than maximising our profits,” Mr Zuckerberg said this month after Facebook posted its first ever $10bn quarterly earnings result — an almost 50 per cent year-on-year jump.

When a leader goes on a “listening tour” it means they are marketing something. In the case of Hillary Clinton, it was herself. In the case of Mr Zuckerberg, it is also himself. Making a surprise announcement that Mr Zuckerberg would be having dinner with an ordinary family is the kind of thing a Soviet dictator would do — down to the phalanx of personal aides he brought with him.

This is not how scholars find out what ordinary families are thinking. Nor is it a good way to launch a political campaign.

Ten months after Mr Zuckerberg began his tour, speculation of a presidential bid has been shelved. Say what you like about Donald Trump but he knows how to give the appearance of understanding ordinary people.

More to the point, Facebook has turned into a toxic commodity since Mr Trump was elected. Big Tech is the new big tobacco in Washington. It is not a question of whether the regulatory backlash will come, but when and how.

Mr Zuckerberg bears responsibility for this. Having denied Facebook’s “filter bubble” played any role in Mr Trump’s victory — or Russia’s part in helping clinch it — Mr Zuckerberg is the primary target of the Democratic backlash. He is now asking America to believe that he can turn Facebook’s news feed from an echo chamber into a public square. Revenue growth is no longer the priority. “None of that matters if our services are used in a way that doesn’t bring people closer together,” he says.

How will Mr Zuckerberg arrange this Kumbaya conversion? By boosting the community ties that only Facebook can offer. Readers will forgive me if I take another lie down. Mr Zuckerberg suffers from two delusions common to America’s new economy elites. They think they are nice people — indeed, most of them are. Mr Zuckerberg seems to be, too. But they tend to cloak their self-interest in righteous language. Talking about values has the collateral benefit of avoiding talking about wealth. If the rich are giving their money away to good causes, such as inner city schools and research into diseases, we should not dwell on taxes. Mr Zuckerberg is not funding any private wars in Africa. He is a good person. The fact that his company pays barely any tax is therefore irrelevant.

The second liberal delusion is to believe they have a truer grasp of people’s interests than voters themselves. In some cases that might be true. It is hard to see how abolishing health subsidies will help people who live in “flyover” America. But here is the crux. It does not matter how many times Mr Zuckerberg invokes the magic of online communities. They cannot substitute for the real ones that have gone missing. Bowling online together is no cure for bowling offline alone.

The next time Mr Zuckerberg wants to showcase Facebook, he should invest some of his money in an actual place. It should be far away from any of America’s booming cities — say Youngstown, Ohio. For the price of a couple of days’ Facebook revenues, he could train thousands of people. He might even fund a newspaper to make up for social media’s destruction of local journalism. The effect could be electrifying. Such an example would bring a couple more benefits. First, it would demonstrate that Mr Zuckerberg can listen, rather than pretending to. Second, people will want to drop round to his place for dinner.


The Bright Side of Low Inflation

Retailers can’t raise prices, so consumers are spending more. That will help the Fed raise rates next month

By Justin Lahart

 Shoppers walk inside the Manhattan Mall in New York. Photo: Idris Talib Solomon/Bloomberg News        


Low inflation might be a worrying puzzle for the Federal Reserve, but it is also putting more spring in consumer spending. That will make it easier for the central bank to raise rates again when it meets next month.

The Labor Department released its October report on consumer prices Wednesday and, no surprise here, they showed inflation remained remarkably cool. Overall, prices gained just 0.1% from a month earlier, putting them up a scant 2% from a year earlier. The core index, which excludes food and energy prices to better capture inflation’s trend, was up just 1.8% on the year.

STEADY GOING
Change in retail sales, excluding gasoline stations, from a year earlier



Economists at the Fed and elsewhere think inflation is going to pick up over the next year. How could it not, with the unemployment rate so low, the dollar weaker and the global economy humming? The problem is that people have been waiting for inflation for a while, often arguing that temporary factors are keeping it down. For some at the Fed that counts as reason to hold off on raising rates—tightening too much when inflation is so low could be a dangerous mistake.

But most Fed policy makers believe the economy is performing well enough to handle a continued gradual drift up in interest rates. October retail sales figures, also released Wednesday, underscore that view.

The Commerce Department said that retail sales rose 0.2% in October from a month earlier—a bit better than economists expected—and it revised September sales higher. The report showed that, although the sales data have lately been whipsawed by the effects of this year’s hurricanes, the underlying tone of consumer spending as the fourth quarter got underway was decent.

There is a healthy link between low inflation and solid consumer spending. Without steady price increases, retailers are forced to compete, lowering costs for consumers and allowing them to buy more. One reason Target’s results on Wednesday disappointed investors is that its low prices are boosting sales but cutting into profits.

If consumers haven’t been troubled by the modest rate increases the Fed has put through so far, they probably won’t be troubled by another one in December. And while there are questions about how much staying power consumer spending will have—the saving rate is low, hiring gains have been slowing and banks are tightening lending standards—those are questions for next year.