The Real Victims of China’s Trade Patterns

Many in the West, especially US President Donald Trump, have railed against China’s massive trade surpluses, which emerged after the country’s accession to the World Trade Organization in December 2001. But China’s developing-country neighbors have far more reason to be worried.

Jayati Ghosh

ghosh9_Frédéric Soltan Corbis via Getty Images_bangladeshfactoryworkers

NEW DELHI – Much has been written about the consequences of China’s Belt and Road Initiative (BRI), especially for the developing countries of Asia. Yet another, equally consequential phenomenon has gone largely unnoticed: China’s upending of trade relationships with those countries.

Many in the West, especially US President Donald Trump, have railed against China’s massive trade surpluses, which emerged after the country’s accession to the World Trade Organization in December 2001. But China’s developing-country neighbors have far more reason to be worried.

Since peaking in 2015 – when the surplus in merchandise trade reached nearly $680 billion – China’s trade imbalance has been shrinking. But its surpluses remain very large in absolute terms, and in developing Asia, they continue to grow.

This was not always the case. For years, trade between China and Asia’s developing economies was mostly balanced. China was a source of voracious demand for raw materials, energy, and other intermediate inputs needed to fuel its massive processing-export sector. Those inputs came largely from developing economies, especially in Asia.

Chinese demand was highly beneficial for many of these countries. It drew them into (China-centered) manufacturing value chains and produced the combination of larger export volumes and better terms of trade desired by primary-commodity exporters. Exports to China thus became a powerful engine of these countries’ economic growth.

After 2011, however, China’s imports from Asia’s developing economies stagnated, while its exports to them continued to swell, partly offsetting declining demand for Chinese goods in the advanced economies. In the decade after the global financial crisis, Asia’s share of China’s total exports doubled, standing at about 15% last year. In 2012, China’s merchandise trade surpluses with Asia began swelling as well, reaching some $130 billion in 2015 and $111 billion in 2018.

Within the last decade, China’s trade balance with the Philippines has swung from persistent deficits to a substantial surplus, and its longtime surpluses with Indonesia, Bangladesh, Vietnam, and India have continued to grow. India’s trade deficit with China has experienced the biggest increase, rising nearly threefold from 2010 to 2018. Among Asia’s major developing economies, China has had persistent deficits only with Malaysia (from which it generally imports high-tech goods) and Thailand; but even these declined after 2011.

So while China reaps growing benefits from its neighbors, most of the rest of Asia faces a negative net stimulus from the country, as trade deficits drain effective demand. This trend is likely to deepen.

Chinese imports from developing Asia have risen since 2016, including last year, but not by much. And a sudden surge is unlikely, because China has been developing domestic sources for a range of intermediate inputs – an effort that has steadily reduced its integration into global value chains over the last decade.

In China – unlike in most other economies covered by the OECD’s trade in value-added (TiVA) database – the foreign content of exports declined by nearly ten percentage points from 2005 (26.3%) to 2016 (16.6%). Meanwhile, China’s contributions to the value-added in partner countries’ exports increased, especially for developing Asian economies, several of which showed significantly higher shares of Chinese value-added in their own exports of manufactures, even those that went to China.

To some extent, China’s de-integration from global value chains also goes the other way: the country is working to decrease its overall reliance on external demand, by shifting from a manufacturing-focused, export-led growth model to one driven by services and underpinned by domestic consumption. According to TiVA data, foreign demand accounted for less than 17% of domestic production in 2015, down from nearly 24% a decade earlier.

But this trend creates risks for China’s trading partners. It will not stem the growth of China’s overall trade surpluses with much of developing Asia, because China’s exports to Asia will increasingly extend beyond manufactured consumer goods to include the high-tech products that are at the forefront of the country’s current growth strategy. This will contribute not just to trade imbalances, but also to growing technological and value-added imbalances.

The pattern can already be seen in trade with India, which exports mainly raw materials (like iron ore) and processed agricultural goods to China, but imports from it manufactured goods (including a growing volume of high-tech items). This implies increasing returns on activities in China. For India, however, less technology-intensive exports do not generate dynamic returns to scale.

Taken together, recent trade trends are the cause of both macroeconomic and sectoral concerns for China’s trading partners in developing Asia. But these countries’ options for resisting these trends are limited. After all, China has achieved much faster diversification and productivity growth, especially over the last decade, giving it a substantial competitive advantage over its trading partners.

Will China ensure that BRI projects and other financial flows mitigate the damage these trade trends imply for developing Asia’s growth? Or will the BRI make matters worse for China’s neighbors? As Chinese economic and political influence in Asia continues to grow, questions such as these will become increasingly urgent.

Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University in New Delhi, Executive Secretary of International Development Economics Associates, and a member of the Independent Commission for the Reform of International Corporate Taxation.

America’s Unusual Recovery is Now Also its Longest

After overcoming significant political and economic headwinds during the past decade, the US economy now appears to have undergone its longest sustained expansion in history. Yet, behind the data showing historically low unemployment and long-awaited wage growth lie vulnerabilities that cannot be ignored.

Mohamed A. El-Erian


LONDON – Data released over the next few months will show that the current US economic expansion is the longest on record. But while the United States continues to outperform other advanced economies, this success has yet to dispel many Americans’ persistent sense of economic insecurity and frustration; nor does it alleviate concerns about the lack of policy space to respond to the next economic downturn or financial shock.

The current expansion began in mid-2009, following the 2008 financial crisis and the “Great Recession.” Powered initially by exceptional fiscal interventions and previously unthinkable monetary policies, the economy built enough of a foundation for private-sector confidence to return, and for corporate balance sheets to recover. Coupled with accelerating advances in new technologies, the expansion came to be led in large part by technology and platform companies presiding over the new “gig economy.” It was given further impetus by pro-growth measures, including deregulation and tax cuts.

With the US unemployment rate at 3.6%, real (inflation-adjusted) wages are now growing at 1.6%. And with the most recent quarterly data indicating an annualized GDP growth rate of 3.1%, US economic activity continues to outpace that of Europe and Japan by a significant margin. Owing to this strength, America has become increasingly assertive in pursuing national objectives abroad, including by circumventing longstanding cooperative and conflict-resolution mechanisms and threatening import tariffs and other protectionist measures.

To get to this point, the US had to overcome headwinds from abroad, including an existential debt crisis in Europe and slowing economic growth in China. Domestically, deep political polarization, especially since 2011, has impeded congressional legislative activity and produced multiple actual or threatened government shutdowns (including the longest on record). In the absence of new pro-growth measures from Congress, monetary policy became the “only game in town.” After being forced to expand its role in the economy substantially during the crisis years, the US Federal Reserve flirted with some major policy mistakes, and became more vulnerable to political interference.

Because annual growth over the past decade has often been tepid and insufficiently inclusive – what has become known as the “new normal,” or secular stagnation – the US economy has been left with a residual sense of underperformance and potential vulnerability. According to an oft-cited Fed survey, almost half of US households report having insufficient savings to cover a $400 emergency expense.

No wonder trust in institutions and expert opinion remains so low. Coupled with excessive inequality (of income, wealth, and opportunity), frustration and political anger remain high. Making matters worse, fearmongering about the implications of technology and globalization continues to fuel concerns of job dislocations and disruptions. And outside the US, many have come to worry that the superpower responsible for issuing the global reserve currency, and that plays a decisive role in many multilateral interactions, is no longer a reliable and predictable anchor for global trade and finance.

Moreover, unlike in prior expansions, the US is yet to build sufficient buffers to deal with future economic and financial challenges. Or, to quote former US President John F. Kennedy by way of IMF Managing Director Christine Lagarde more recently, we have not fixed the roof while the sun was shining.

Beyond the lack of self-insurance at the household level, the Fed’s ability to counter economic recessions and financial disruptions is rather limited. Whereas the current policy rate is 2.25%-2.5%, past downturns have usually required cuts of five percentage points or more. Also, the Fed has a bloated balance sheet and a rather weak mechanism for transmitting monetary-policy measures to the real economy. And even if fiscal policymakers were to become more responsive, they would be starting from a point of relatively high deficits and debt.

Prolonging the current expansion will require great care. Policymakers, particularly Congress, need to avoid big mistakes and minimize the risk of market accidents while doing more to promote growth. The US needs a well-targeted approach to modernizing and upgrading its infrastructure.

Policymakers and leading economists also must be more sensitive to how the fruits of economic growth are shared; among other things, there should be better protections for the most vulnerable segments of society and stronger automatic stabilizers. Businesses, for their part, need to do more to embrace their social responsibilities, if only to avoid ending up in the same position as the banks after the 2008 crash. There is already a growing chorus calling for more regulatory constraints on Big Tech.

Moreover, having shaken up global trade, the US needs to ensure that it will remain the anchor of the rules-based international system. Otherwise, its ability to inform and influence economic and financial outcomes around the world will weaken.

The US will – and should – soon be celebrating its longest-ever expansion. But it must not lose sight of its remaining challenges. The last thing the world needs right now is for today’s expansion to give way to a sustained period of lower growth, higher financial instability, and greater cross-border tensions.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

 A Different Kind Of Wage Inflation Heralds This Cycle’s End

by John Rubino

Towards the end of long expansions (this one is the longest on record) things get tight. Factories operate flat-out and start raising prices. Good workers become harder to find and companies start competing for them with higher wages and other perks.

This story is about the “other perks” which, because they don’t show up in wages aren’t directly inflationary. But they do cost money, which means they shrink corporate profits nearly as much as would a big wage increase. From today’s Wall Street Journal:

Factories Tire of Wage Wars; Give Fridays Off, Spiff Up Bathrooms 
Five years ago, entry-level candidates could expect to earn nine bucks an hour at a Haworth Inc. office-furniture factory. The economy was humming, but job growth was choppy, and wage gains anemic. 
Things changed, though, as average unemployment in the counties where Haworth makes products like movable walls, desk chairs and storage cabinets tumbled from 6.3% in 2014 to 3.6% last year. Today’s newcomer makes $12.50 an hour. 
Pay increases have become table stakes for those doing battle in this tight labor market. Consulting firm Mercer LLC found in a February study that the No. 1 human-resources risk executives face is excessive time required to fill open positions. The median cost to recruit an employee is $1,300, according to recent data. 
If you’re a hiring manager and not prepared to pull out your pocketbook, prepare to suffer. And even if you are, prepare to suffer. 
“This wage war isn’t winnable,” Ann Harten, Haworth’s human-resources chief, told me at the company’s Holland, Mich., headquarters. It’s simple arithmetic: Haworth’s revenue grows at about a 5% annual clip, trailing the approximately 8% in entry-level increases it has been dishing out. 
The wage wars aren’t going away. As we chatted, a construction company offered jobs paying $13.50 an hour, a $500 signing bonus, benefits and a car to drive materials around the Grand Rapids area. A farm in nearby Zeeland offered $14 an hour to load turkeys into cages during the overnight shift. 
Nonetheless, Haworth thinks it can respond without going broke, and a growing number of companies agree. By shaking up shift scheduling, investing in amenities for workers or offering more flex time, companies believe that treating blue-collar workers more like white-collar counterparts may convince them to sign on or stick around. 
Haworth will put this theory to the test on May 19. That’s when about 300 employees at a plant that makes laminated tops of desks and conference tables in Holland start working a new schedule that allows a three-day weekend every other week, a golden benefit for people living near Lake Michigan during the summer. 

“We’ve been desperately seeking the ideal of sustainable workloads,” Ellen Kossek, a professor at Purdue University’s Krannert School of Management, said. But “people always said in manufacturing you can’t do work-life balance.” 
Her research indicates a similar logic is applied to sectors like retail, logistics, hospitality or transportation. You can’t assemble John Deere combines in your home office or serve a hamburger to a hungry customer after you pick up the kids. Conventional wisdom tells us the only way to improve your lot at a job that strictly adheres to a time clock is to demand a raise. 
Workers have different ideas. Homebase, a San Francisco company helping local business manage time sheets, hiring and payroll, polled 2,000 hourly employees about important factors in deciding where to work. Pay ranked near the top, but respondents gave about equal weight to a positive work environment and schedules that fit their lifestyle. 
Haworth has been experimenting with friendlier shifts, Ms. Harten said, as a way to attract workers as unemployment sank. The company found it worth its while. 
Big changes aren’t simple or smooth. Haworth’s scheme includes 20 different shift patterns and a variety of pay variations, adding complexity when most firms seek simplicity. For example, one pattern has employees working a 36-hour week—three 12-hour shifts on Sunday, Tuesday and Wednesday. Then, they get the rest of the week off, before working four 12-hour shifts, Monday through Thursday, the next week and receiving eight hours of overtime pay. Rinse, repeat.

The trend towards more reasonable working environments in blue-collar industries is both a good thing and long overdue. But companies aren’t doing this because they want to. The alternative is an empty factory floor.

Flexible schedules and nicer bathrooms are expensive and their spread is an indication of how tight labor markets have become.
In other words, late-cycle dynamics are now in play, as wages and better-but-more-costly working conditions produce lower corporate profits which then collide with record high stock prices and soaring debt (both of which are also signs of late-cycle excess) to bring the expansion to an end. After ten straight years of debt-fueled growth, this shouldn’t surprise anyone.

Clever science alone cannot prevent the next mass extinction

We must accept that having more children is not in our interest as a species

Camilla Cavendish

We cannot win a war against water. So says the chair of the UK Environment Agency, warning that climate change may force homeowners in Britain to retreat from the coasts.

Nor should we persist in our war against nature more broadly. That is the message of the UN’s sober but devastating report into biodiversity, which warns that human overpopulation is harming the very plant and animal species on which we rely for survival.

It’s hard to get one’s head around the UN forecast that up to 1m of the planet’s estimated 8m species now face extinction. The assessment says that our dominant species is now eroding the ecosystems that form the foundations of our economies and our quality of life. The debate is no longer simply about ethics and cuddly polar bears. It has become about self-interest and the need to preserve those ugly but essential creatures, insects and nematodes, which are vital to pollination and soil fertility. Perhaps, as a result, it will gain more traction.

A “background” level of extinction, an ebb and flow of species, is perfectly normal. Some species die out because they are poorly adapted; some vanish without us ever having been aware of their struggle for survival. But mass extinctions are different — they swallow both the fit and the unfit. Five such events have been especially devastating. The most recent was at the end of the Cretaceous period, 65m years ago. It wiped out not just the dinosaurs, but 75 per cent of all species.

Now we face what some scientists believe will be the sixth mass extinction — one brought about by humans. The forecasts are not at Cretaceous levels yet, but they are deeply alarming. Scientists have catalogued only a small fraction of all species. We know far too little about which bricks in the pile might, if removed, topple whole structures.

Clever science cannot turn this tide. Far-sighted organisations have already created gene banks, seed banks and zoological reserves. But, in the long term, species can only survive in the wild. Complex ecosystems are extremely hard to recreate once damaged.

In her book The Sixth Extinction: An Unnatural History, Elizabeth Kolbert has vividly described the vain struggles to save species ahead of the extinction wave. She writes of ecologists visiting Panama and Costa Rica, trying and failing to salvage the golden toad and 19 other amphibians. She has trudged with biologists through the Adirondacks in the US, where once commonplace bats were suddenly dying. She describes ecosystems upended not only by farming, logging and fishing, but also by trade, travel and science. Doctors using the African clawed frog to develop pregnancy tests have unwittingly spread a fatal fungal disease among frog species in Central America.

What is striking about these experiences is how swiftly tipping points can be reached — and how powerless we are to respond. We are out of our depth trying to fathom or control the biosphere’s complex connections.

It is hard to disentangle the threat to species from climate change, for example, because each problem exacerbates the other. Species find it harder to survive as temperatures warm and a loss of peat bogs, rainforests and other carbon sinks accelerate the volume of greenhouse gases in the atmosphere. According to the UN report, coral reefs could shrink by at least 70 per cent if the world warms by a further 0.5C — or virtually disappear by 1C.

Our slowness to appreciate the danger seems strange, when scientists have been warning of it for decades, and when human impact is so glaring. The UN says that about three-quarters of the land, two-thirds of our oceans and 85 per cent of wetlands have already been altered or lost. Yet modern life is increasingly disconnected from nature.

We move to cities and entertain ourselves indoors. Fewer people notice depleted hedgerows, or that the swallows no longer nest. We waste food without knowing its provenance. We used to talk about “food miles” — how far products had travelled. Now, we are inured to supermarket shelves of vegetables shipped around the globe in all seasons.

These issues are almost too big to think clearly about. But we are poorly prepared partly because we long ago internalised the fact that the global population increase in the 20th century has been three times the level it had reached during all of previous human history, from 1.5bn in 1900, to 6.1bn in 2000. The population growth rate peaked in the 1960s, but the total is still growing, partly because sub-Saharan Africa is not following other continents in the trend of falling birth rates. There is some disagreement between the UN forecast of global population growing to 11bn in 2100, and that of the International Institute for Applied Systems Analysis, which predicts the global population will peak at 9.4bn in 2070 and then decline. Whichever view you favour, it will clearly be a priority to help African countries adopt education programmes to slow population growth.

Having more children is not in our interest as a species. But many governments worry about the impact of falling fertility on their own nation’s gross domestic product: Germany, Singapore, France and Poland pay baby bonuses to encourage couples to have children — though a rather tasteless Danish campaign, urging couples to “Do It For Denmark”, doesn’t seem to have worked.

It is irresponsible to welcome the UN report with warm words, while promoting increases in population. We started a war with nature to survive. But if we do not call a truce now, the losers will be us.

The writer, a senior fellow at Harvard University, is the author of ‘Extra Time: Ten Lessons For An Ageing World’

Life and Debt Question: Are Bank Loans More Pricey Than Bonds?

Wharton's Michael Schwert discusses his new research on the pricing of bank loans relative to capital market debt.

In his recent research, Wharton finance professor Michael Schwert uses a novel data set to examine the pricing of bank loans relative to capital market debt. His findings point to firms’ willingness to pay for the unique qualities of bank loans and raise questions about the nature of competition in the loan market. Schwert recently spoke with Knowledge@Wharton about his paper, “Does Borrowing from Banks Cost More Than Borrowing from the Market?”

An edited transcript of the conversation follows.

Knowledge@Wharton: This study looks at the interaction between public and private markets, but what’s new about this paper?

Michael Schwert: This paper studies the relative pricing of private and public debt, which surprisingly has not been studied directly in the academic literature before. There is a lot of research out there on firms’ decisions whether to borrow from a bank or to issue bonds, and there’s plenty of research out there on the pricing of bonds or the pricing of loans, but this is the first paper that has actually made a direct comparison between the pricing of the two types of debt.

Knowledge@Wharton: What are the key findings?

Schwert: The main challenge is to establish a clean comparison between the two types of debt…. If you were to compare two different types of firms, then you would have these unobservable risks that would be hard to compare between the two. Even if you compare the loans and the bonds from the same firm — because some firms use both — then you’re dealing with different levels of seniority. Loans tend to be senior to bonds, so they’re safer from a payoff standpoint for investors than bonds are, and they should have a lower cost of capital.

I use a sample of firms that use both types of debt, so I mitigate that first problem of comparing across firms that use different types, and I use a structural model of credit risk to adjust the seniority of the bond so I can establish a capital market comparison point for the pricing of the loan. What I find is that loans appear to be a very expensive source of financing for firms relative to public debt issued in the capital markets. Sixty percent of the average credit spread on a loan is credit risk that’s priced by the capital markets, and 40% is a premium that’s earned by the loan syndicate above the price of credit risk, as in the capital markets.

Knowledge@Wharton: What does this paper say about firms’ views on the relative value of a bank loan versus issuing bonds?

Schwert: One implication of this is that firms must place a high value on other services that the bank offers, such as flexibility in terms of pre-payment or renegotiation of the loan and information production that can spill over into the pricing of other assets. One function that banks serve is to screen and monitor borrowers, which provides a signal to bond market participants as well as equity market participants on the quality of the firm from privately observed signals that the bank has, but the market does not have.

Knowledge@Wharton: What questions do the findings raise about the nature of competition in this market?

Schwert: To interpret the finding that bank debt is more expensive than capital market debt, there are two possibilities. One is that the banking market is perfectly competitive, so the cost of providing these benefits that I just mentioned are passed through directly to borrowers. And that’s what this premium is reflecting.

The other possibility is that the banking market is imperfectly competitive, which means that banks are earning rents lending to firms, and they’re not competing aggressively with each other to undercut prices until they’re at the competitive level.

I provide some evidence in the paper that the loan spread premium that I find is not correlated with variables such as the size of the loan or the size of the firm, which casts doubt on the perfectly competitive side of possibilities because there are some fixed components to the cost of providing these benefits that I mentioned before. If these costs were fixed, then we would expect the premium to be small for larger loans.

I find it to be similar for larger loans in terms of the credit spread. This premium is 100 times larger for a $10 billion loan than it is for a $100 million loan, which casts doubt on this perfectly competitive sort of explanation. But future work is necessary to establish whether there is imperfect competition in the syndicated loan market. That’s beyond the scope of this paper.

Knowledge@Wharton: What is the message here for firms?

Schwert: The message for firms is a nuanced one, and the reason for that is that if you look at the interest expense on each of these types of debt, it’s actually very similar for a healthy firm. 

The credit spreads on loans and bonds are very similar for firms that are rated BB or above. 

This is not inconsistent with what I just told you about loans being more expensive per unit of credit risk than bonds because the loans are senior to the bonds in these circumstances, so they’re actually safer and should earn a lower credit spread. At the beginning of the paper, I established a simple benchmark, which is that the loan spread should be one-third of the bond spread on average. So, the fact that the loan spread and the bond spread are similar does indicate that the loans are more expensive on a credit-risk basis. But at the same time, the fact that they’re similar means that for the shareholders of a firm or the manager making a decision on which source to borrow from, they actually have similar costs.

Knowledge@Wharton: What are some future lines of inquiry for this research?

Schwert: The next project I’m exploring is going to dig more into this question of whether the loan market is competitive or imperfectly competitive. I have a co-author at Columbia University, Olivier Darmouni, and a co-author at the Federal Reserve Board, Stephan Luck. We’re going to use regulatory data on all loans of more than $1 million that the top 30 banks have made — or all of the banks that are subject to stress testing under the Dodd-Frank Act.

The benefit of these data is that they will allow us to use local variation in competition because a $1 million loan, while it sounds large, is really a small business loan, so it would be made by a single bank that would be located in the same area as the firm.

Across the country, there’s a great deal of geographic variation where some areas are very competitive banking markets and some are much less competitive. We plan to look at whether credit market conditions are passed through differently when they deteriorate or improve to firms that are located in these different areas, which should shed some light on whether loan pricing is reflecting competitive or noncompetitive outcomes.

Doug Casey on What Happens After the Next War

By: Doug Casey

International Man: The US government is actively at war in about half a dozen countries. It’s eyeing new conflicts all the time.

On the topic of getting involved in another war… President Trump was reported to have said this about his National Security Advisor John Bolton: “If it was up to John, we'd be in four wars now.”

What do you make of all this?

Doug Casey: Where to start?

Well, first of all, things are out of control. The US Government has become so big, so dysfunctional, and with its fingers in so many pies that anything can happen, unpredictably. Secondly, it’s extremely dangerous. Prodding lots of hornet’s nests guarantees you’ll be stung—perhaps enough to put you in the hospital. Third, it’s extraordinarily expensive. And the US Government is already bankrupt.

As you pointed out, the US is actively at war in right now in who knows how many countries— including at least a half a dozen in Africa that nobody can find on a map. There are combat troops in probably 100 countries around the world.

There are probably 800 bases around the world. These things are all just trip wires waiting for an accident or an incident to draw the country into a real war. So far—at least since the misadventure in Vietnam—the US has just engaged in trouble-making exercises and sport wars. But the big thing on the horizon right now is Iran. This is hunting big game.

One of the things that I most regret not having done in recent years was taking advantage of an all-expense paid junket, courtesy of the Iranian Ambassadors’ Polo Club, for the New Zealand Ambassadors’ Polo Club, of which I was member. It would have been wonderful to have seen three of the major Iranian cities and met some of the top people in the country while playing polo. I couldn’t do it though, because I was injured at the time.

The Iranian people have no negative animus towards the American people. The average Iranian likes the average American. He likes American cars, American music, American movies, American culture. He likes California girls. He likes everything about America.

The way to change that and turn the average Iranian into an enemy is to send uniformed American teenagers there to destroy property and kill people. That’s exactly what morons like John Bolton and Mike Pompeo are talking about. It could be a real catastrophe, because Iran is big game. It's not like hunting small game, like Iraq, Afghanistan and Syria—which themselves were terrible catastrophes.

If this gets out of control—accidentally, or through a false flag incident, or simply because Bolton decides it’s a good idea—you could be looking at the start of World War III.

The “powers that be” think that war stimulates the economy. But the idea is complete nonsense. These fools actually believe turning lots of cities into smoking ruins would stimulate the economy.

International Man: The US government and mainstream media often justify these wars on the need to “spread democracy.” What do you make of that?

Doug Casey: The idea of spreading democracy is a snare and a delusion. Democracy has become the new societal god. In fact—and I know most readers will be appalled to hear this—democracy is a bad idea. At least for anything larger than a city-state with a small, cohesive population.

First of all, democracy is simply mob rule dressed up in a coat and tie. It’s where a bunch of people—who are marginally competent at running their own individual lives—go to a voting booth to have what H.L. Mencken termed “an advance auction on stolen goods.” Democracy usually winds up turning the State into a vehicle for theft, and making that seem like a good and moral thing...

Democracy—a gentler form of mob rule—is not a good thing. It politicizes the average person and distracts him from running his own life. It focuses his attention on trying to run other people’s lives through elected representatives. Worse, the elected representatives aren’t the best and the brightest.

They’re generally sociopaths who are drawn to power. They’re the worst kind of people, the kind that want to rule other people by winning a popularity contest. This is true in the US and every other place where ballot boxes are used to determine the new ruler.

The winner of an election is typically the most skilled liar. Look at what president Wilson did by pointlessly drawing the US into WWI, while claiming to do the opposite. He said it was all about making the world safe for democracy. In fact, he initiated the long decline of Western Civilization. The French Revolution was based on democracy. It didn’t work out very well. It had a lot to do with democracy—but had nothing to do with freedom. Democracy and freedom are typically at odds with each other.

International Man: Aside from the claim of promoting democracy, the US government and mainstream media also use alleged human rights abuses as a justification for war. The term “human rights” seems to be vaguely defined and inconsistently applied. It seems like more sophistry. What’s really going on here?

Doug Casey: Let me first say, the most important “human right” is simply to be left alone by other people, to be left in peace. Whenever a government gets involved in people’s private affairs it makes things worse. The US government is actually the greatest danger to both world peace and human rights today. It’s quite Orwellian the way most Americans have been propagandized into believing the opposite, like the citizens of Oceania in 1984.

The best thing to do with foreign countries is leave them alone to work things out themselves.

You cannot change a culture. When you try to change a culture, you generally wind up with chaos. That’s what the US government has created in Syria, Afghanistan, Libya, Iraq, and everywhere else it sticks its nose. 
International Man: So, do these wars provide a net benefit to the average American?

Doug Casey: No. There’s no benefit at all. The correct U.S. foreign policy is to withdraw all the troops from everywhere in the world. Foreigners don’t want to see American troops on their land any more than Americans would like to see Iranian, or African, or Korean troops parading through the streets and maybe breaking down doors at 3:00 AM. That’s the first thing. If you want to “support the troops” bring all the troops home.

The next step is to cut off all foreign aid, which is really just a transfer program of about $50 billion per year from poor people in the US to rich people in poor countries. It’s almost all skimmed by cronies.

People forget that Osama bin Laden said that he only wanted three things.

First, he wanted infidel soldiers out of the homeland of the prophet, a reasonable request.

Second, he wanted the US to stop replacing Middle Eastern leaders with quislings, and interfering with local politics. Another reasonable request. The US has no more right to interfere in the politics of Middle Eastern countries than Mohammedans would interfering in US politics.

Third, he wanted the US to stop supporting Israel. Once again, a very reasonable request. We should be friendly towards all, but shouldn’t get involved in other people’s local squabbles, regardless of who we think is the good guy or the bad guy at the moment.

Of course, my saying something Osama bin Laden said was reasonable is like saying something that Hitler said was reasonable. But it doesn’t matter who says something. The facts should speak for themselves. And—just to head off hysterics—no, I neither like nor support either Osama or Adolf.

International Man: US foreign policy has serious domestic consequences. After all, “War is the health of the State" as Randolph Bourne said.

Specifically, the rapid rise of the domestic surveillance apparatus, the curtailments of civil liberties, and the turbocharging of militarized local police forces… they’re all connected to US foreign policy.

Related to all this is the inane expression “if you have nothing to hide, you have nothing to fear.” What do you make of all of this?

Doug Casey: Well, if that’s true then John Bolton, Mike Pompeo, and the rest of the apparatchiks around the DC Beltway should be happy to post their tax returns on the internet, and have microphones and cameras in every room of their houses. They ought to be perfectly happy when they’re having a private conversation in their living room to have it available to anybody that wants to listen.

The ability to maintain privacy is one thing that separates civilized men from primitives living in mud huts. In a primitive society you have zero privacy, because your neighbors can see and hear absolutely everything that goes on through the paper-thin walls of your hut. Privacy is something that grows with civilization. These people have everything exactly backwards. They’re not just anti-freedom. They’re anti-civilization. They’re the same basic personality type as Stalin, or Ceausescu, or Pol Pot.

International Man: Another arena that has been drastically affected is the airports and the creation of a new federal bureaucracy, the TSA. Thanks to the TSA, everyone knows that “if you see something say something.” That saying is actually a registered trademark of the Department of Homeland Security.

Doug Casey: It's Orwellian. It's the type of thing Big Brother would advise you to do… to report your neighbors to the State for any real or imagined offense.

One time I was in a line that was snaking back and forth at immigration. My briefcase weighed about 25 pounds, so I put it down and left it for about 15 feet so I could pick it up when the line snaked back.

Not once, but twice, somebody looked around like a righteous busybody citizen and said, "Unattended baggage! Unattended baggage!"

These people are really just chimpanzees. They picked up this behavior from the government… monkey see, monkey do. I said to them sarcastically "See something, say something", but they didn't think I was kidding. They thought I approved of what they were doing.

International Man: Do you see this degraded behavior in other places?

Doug Casey: Of all the countries in the world that I’ve traveled to—including backwards hell holes in Africa, Russia, China, it doesn’t matter—going through the US immigration, customs, and TSA, probably provides the most degrading experience. None of these other countries ask you the kinds of questions or seem so anxious to go through your laundry. Although Canada and Australia in particular are closely following the US lead.

The average American has been propagandized into thinking that he lives in the land of the free. As a matter of fact, that’s no longer true.

The US has descended from being a shining beacon—that really was exceptional and different from every other country in the world—to being just another nation state. But, perversely, one that thinks it’s still exceptional. It’s paranoid. It thinks it’s under attack, when actually it’s the attacker.

The whole thing is upside-down, and the average American has absolutely no clue.

It's really shameful that the US has turned into both a welfare state—with about 50% of the population reliant upon the government—and a warfare state. We’re getting the worst of both worlds.

The problem is that when the economy turns down—and it will before Trump leaves office—it’s going to go from being depressing to scary. And if they start a major war, it’s going to go all the way to terrifying, because at that point you won’t have any rights. The average American will approve of it, however. Your life and property are becoming the property of the State.

Hong Kong: Just Another Chinese City?

Beijing has slowly been increasing its control over the special administrative region.

By Phillip Orchard

The People’s Liberation Army headquarters in Hong Kong is a drab, Soviet-style building resembling a brutalist fortress. At 28 stories, it’s easily overshadowed by the neon-draped bank towers, glitzy waterfront shopping malls, opera house and giant Ferris wheel flanking it. Yet, located at the confluence of Hong Kong’s busiest ferry and train lines, and with its imposing red star – the PLA emblem – conspicuous from across Victoria Harbor in Kowloon, it’s nearly impossible to miss. It’s as if it was designed to communicate to Hongkongers: You can have your fun, your capitalism, your opulence. Just don’t forget who’s really in charge.
Last week, as many as 130,000 Hongkongers took to the streets to protest Beijing’s latest attempt to extend its reach into the “special administrative region.” This particular fight is over a proposed extradition law that could shrink Hong Kong’s role as a haven for anti-Communist Party dissidents, intellectuals and entrepreneurs ever further. Beijing will win this round, just as it has succeeded nearly every time it has decided to flex its authority in the city over the past decade. But this doesn’t mean the days of self-rule in Hong Kong will disappear altogether.


Creeping Control
Under the handover agreement negotiated with the United Kingdom prior to the former colony’s return to China in 1998, Beijing was supposed to refrain from intervening in Hong Kong’s political and economic affairs for 50 years. But the strength of the “one country, two systems” model supposedly guaranteeing Hong Kong’s autonomy was always going to hinge on Beijing’s interest in upholding it. The city-state is just too strategically important, and potentially too big of a risk to the fragile political landscape on the mainland, for Beijing to keep its distance.
As a result, concurrent with its tilt back toward authoritarianism on the mainland under current President Xi Jinping, Beijing has been quietly but inexorably asserting its authority over Hong Kong ever since reunification. This is driven, in some small part, by China’s long memory of the humiliation that came with losing Hong Kong, with its naturally protected deep-water ports and location astride critical sea lanes in the South China Sea. But Beijing’s main concern today is that the city-state could be used to destabilize China. This can mean dissidents seeking to inspire (and fundraise for) mainland political movements or muckrakers circumventing Chinese media controls to make public the Communist Party leadership’s dirty laundry. It can mean Chinese political rivals and tycoons hiding ill-gotten wealth from the long arm of the Central Commission for Discipline Inspection. It can mean firms using the Hong Kong financial system to undermine Beijing’s endless game of economic reform whack-a-mole. With China facing ever-intensifying competition with outside powers, its ability to snuff out potential foreign backing for its internal enemies via Hong Kong will become all the more important.
Naturally, it’s in these areas where Beijing has been most assertive. In 2014, for example, it demanded the right to prescreen candidates running for Hong Kong’s legislature. In 2015, Chinese authorities began abducting booksellers who were publishing (and smuggling into the mainland) books containing lurid claims about Xi and his cronies. In 2016, it intervened to remove two newly elected pro-independence lawmakers from their seats in the legislature. In 2017, Chinese-Canadian billionaire Xiao Jianhua was abducted from the Four Seasons and whisked to the mainland to await trial on corruption charges. Over the past year, Communist Party critics and foreign journalists have lost their visas, anti-Communist Party lectures have been shut down, and the legislature approved a plan ceding to Chinese authorities the right to enforce Chinese criminal laws at certain rail stations in the heart of Hong Kong.
Several of these moves spawned mass protests in Hong Kong. Only once, following a 2013 attempt to insert communist propaganda into Hong Kong textbooks, did Beijing back down after concluding it had overreached by attempting to indoctrinate Hongkongers with the blunt tools it uses on the mainland. Every other time – even in 2014, when as many as 500,000 protesters joined a monthslong occupation of central Hong Kong – Beijing basically shrugged and waited for the movement to peter out, conceding nary an inch. And though the latest flare-up over the proposed extradition law may spawn yet another wave of demonstrations on a scale approaching 2014, the result is quite likely to be the same.
Just Another Chinese City?
Hong Kong’s autonomy has long been an irritant, at minimum, to Beijing. For half a century after the communist takeover in Beijing, there wasn’t much China could do about it – and not just because the Royal Navy was camped out in Victoria Harbor for most of that time. The other problem for Beijing was how much it relied on Hong Kong as a gateway for trade, an indispensable source of finance, technology and institutional expertise, and as a sort of halfway house for foreign investors wary of the complications of doing business on the mainland. This gave Hong Kong considerable leverage over the terms of its relationship with Beijing and reason to believe during the handover negotiations that its autonomy would be respected, lest Beijing spook investors and erode international faith in the trajectory of China’s opening. Meanwhile, Beijing also hoped that the success of “one country, two systems” would help coax Taiwan back into the fold.
But today, Beijing just doesn’t rely on the special administrative region as much as it once did. Chinese cities like Shanghai and Shenzhen – the latter’s forest of skyscrapers now visible from the Hong Kong airport – have grown to rival or even surpass Hong Kong in economic importance. In 1993, Hong Kong’s economy was equal to 27 percent of China’s gross domestic product. By 2017, this had shrunk to less than 3 percent. Last year, Shenzhen’s GDP alone surpassed that of Hong Kong. At handover, meanwhile, China accounted for around 36 percent of Hong Kong’s trade; by 2016, it had surpassed 50 percent. China is hardly an easy place to do business, but thousands of foreign firms and investors in the country have found ways to get fabulously wealthy without Hong Kong anyway. Peaceful reunification with Taiwan, meanwhile, has become a pipe dream.


This has had two implications: First, Beijing has had to worry somewhat less about sustaining the international perception that Hong Kong operates by rule of law and is immune to party interference, giving Beijing less to lose by doing in Hong Kong whatever it deems necessary to preserve political stability at home. Second, China’s economic rise has tied the fortunes of much of Hong Kong’s business elite to financial interests on the mainland, giving them ample incentives to stay in the party’s good graces. As a result, the Hong Kong legislature is dominated by pro-Beijing lawmakers – or at least ones who prioritize sustaining the status quo. And the protests, though at times robust, have struggled to attract financial and political backing from large swathes of Hong Kong society.

The fact of the matter is, Hong Kong’s fate is largely out of its hands. It has little power of its own to wield against Beijing. It has its own laws and police force, but unlike Taiwan, no military force or promises of outside support. The Royal Navy is never coming back. How much of Hong Kong’s autonomy survives will hinge almost solely on how much Beijing finds this autonomy threatening, and how much risk of international condemnation, loss of investment, and so forth Beijing thinks it can tolerate by curbing it.

This doesn’t mean that China intends to ever transform Hong Kong into “just another Chinese city.” The special administrative region’s reputation as a stable, law-based gateway to China will always be valuable to some extent. And with foreign firms getting spooked by the Communist Party’s authoritarianism at home, by the threats of new foreign tariffs, and by the trade abuses put in the spotlight by the U.S. trade war, Hong Kong’s importance to the Chinese economy may soon be revived. Already, its role facilitating transshipments of Chinese exports is proving useful for those seeking to circumvent U.S. tariffs and import restrictions.

Where the Communist Party feels threatened enough to push further – to snuff out political threats emanating from Hong Kong or to crush any major independence movement (particularly one with foreign backing) – Beijing can and will. At some point, for example, Beijing is going to have to weather another round of mass protests and extend parts of its “Great Firewall” to Hong Kong. But it doesn’t need to micromanage Hong Kong in the way it does the mainland to feel secure. And picking its battles sparingly will likely be deemed good for business.

Swiss National Bank announces policy rate to replace Libor

Central bank will now seek to influence rates in secured overnight money market

Adam Samson and Sarah Provan in London

Switzerland’s central bank has announced a policy rate to replace one based on Libor as part of a global shift away from the scandal-hit benchmark.

The central bank’s focus will turn from the three-month London Interbank Offered Rate to the Swiss average rate overnight, or Saron, which was jointly developed by the SNB and the Swiss stock exchange.

Saron differs from Libor in that it is calculated using completed transactions and trade quotes in the secured money market, according to the SNB. These are transactions in which the borrower must put up collateral. Libor, by comparison, is based on non-binding prices in the unsecured money market reported by a panel of a dozen banks.

The move comes as the financial industry is shifting to other benchmarks to replace Libor in products such as floating-rate bonds after rate-rigging scandals tarnished its reputation.

“The reason for this adjustment is that the future of the Libor is not guaranteed,” Thomas Jordan, chairman of the SNB governing board, said in prepared remarks for a news conference on Thursday, adding that the “volume of money market transactions underlying the Libor has dwindled”.

“This has also placed a question mark over the basis for its calculation,” he said. “Given that our monetary policy is focused on the medium term, we are already adjusting our strategy at this juncture.”

Other countries have also drawn up similar overnight reference rates meant to replace Libor. The UK has drawn up the sterling overnight interbank average rate (Sonia) while the US has the secured overnight financing rate (Sofr).

Mr Jordan said the shift to the SNB policy rate from three-month Libor did not entail any change in its current monetary policy or its expansionary stance, adding that, at present, three-month Libor and Saron were virtually “on a par”.

The SNB on Thursday kept on hold its highly stimulative monetary policy, leaving the interest on deposits held by banks at the SNB at minus 0.75 per cent.

“Given that the SNB last changed its monetary policy settings way back in early 2015, its announcement this morning that it has maintained the status quo again certainly took nobody by surprise,” said David Oxley, economist at Capital Economics.

The European Central Bank last week left its benchmark rate at a record low, and promised to keep it there until at least the middle of next year. This has placed pressure on the SNB to either hold or maintain its rate, lest it risk an appreciation in the Swiss franc.

“The recent shift to a looser bias in the US and the eurozone only strengthens our view that Swiss rates will be cut further into negative territory, possibly as soon as early 2020,” said Mr Oxley.

The Swiss franc rose 0.25 per cent against the dollaron Thursday, with $1 buying 99.29 Swiss centimes, while €1 would buy SFr1.1208.