Prelude to Crisis

By John Mauldin


Ignoring problems rarely solves them. You need to deal with them—not just the effects, but the underlying causes, or else they usually get worse. The older you get, the more you know that is true in almost every area of life.


In the developed world and especially the US, and even in China, our economic challenges are rapidly approaching that point. Things that would have been easily fixed a decade ago, or even five years ago, will soon be unsolvable by conventional means.


There is almost no willingness to face our top problems, specifically our rising debt. The economic challenges we face can’t continue, which is why I expect the Great Reset, a kind of worldwide do-over. It’s not the best choice but we are slowly ruling out all others.


Last week I talked about the political side of this. Our embrace of either crony capitalism or welfare statism is going to end very badly. Ideological positions have hardened to the point that compromise seems impossible.

Central bankers are politicians, in a sense, and in some ways far more powerful and dangerous than the elected ones. Some recent events provide a glimpse of where they’re taking us.


Hint: It’s nowhere good. And when you combine it with the fiscal shenanigans, it’s far worse.

Simple Conceit

Central banks weren’t always as responsibly irresponsible, as my friend Paul McCulley would say, as they are today. Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high interest rate, on good securities.


The Federal Reserve came about as a theoretical antidote to even-worse occasional panics and bank failures. Clearly, it had a spotty record through 1945, as there were many mistakes made in the ‘20s and especially the ‘30s. 

The loose monetary policy coupled with fiscal incontinence of the ‘70s gave us an inflationary crisis. Paul Volcker’s recent passing (RIP) reminds us of perhaps the Fed’s finest hour, stamping out the inflation that threatened the livelihood of millions. However, Volcker had to do that only because of past mistakes.

Recently, reader Mourad Rahmanov, who has thought-provoking (and sometimes lengthy) reactions to almost every letter, kindly sent me some of his personal favorite John Mauldin quotes. One was this passage which succinctly captures my feelings about the Fed. (Context: This was part of my response to Ray Dalio’s comments on Modern Monetary Theory.)


Beginning with Greenspan, we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic havoc. Artificially low rates created the housing bubble, exacerbated by regulatory failure and reinforced by a morally bankrupt financial system.


And with the system completely aflame, we asked the arsonist to put out the fire, with very few observers acknowledging the irony. Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with in the not-too-distant future.


This wasn’t a “beautiful deleveraging” as you call it. It was the ugly creation of bubbles and misallocation of capital. The Fed shouldn’t have blown these bubbles in the first place.


The simple conceit that 12 men and women sitting around the table can decide the most important price in the world (short-term interest rates) better than the market itself is beginning to wear thin. Keeping rates too low for too long in the current cycle brought massive capital misallocation. It resulted in the financialization of a significant part of the business world, in the US and elsewhere. The rules now reward management, not for generating revenue, but to drive up the price of the share price, thus making their options and stock grants more valuable.


Coordinated monetary policy is the problem, not the solution. And while I have little hope for change in that regard, I have no hope that monetary policy will rescue us from the next crisis.

Let me amplify that last line: Not only is there no hope monetary policy will save us from the next crisis, it will help cause the next crisis. The process has already begun.

Radical Actions

In September of this year, something still unexplained (at least to my satisfaction, although I know many analysts who believe they know the reasons) happened in the “repo” short-term financing market. Liquidity dried up, interest rates spiked, and the Fed stepped in to save the day. I wrote about it at the time in Decoding the Fed.


Story over? No. The Fed has had to keep saving the day, every day, since then.


We hear different theories. The most frightening one is that the repo market itself is actually fine, but a bank is wobbly and the billions in daily liquidity are preventing its collapse. Who might it be? I have been told, by well-connected sources, that it could be a mid-sized Japanese bank. I was dubious because it would be hard to keep such a thing hidden for months. 

But then this week, Bloomberg reported some Japanese banks, badly hurt by the BOJ’s negative rate policy, have turned to riskier debt to survive. So, perhaps it’s fair to wonder.


Whatever the cause, the situation doesn’t seem to be improving. On Dec. 12 a New York Fed statement said its trading desk would increase its repo operations around year-end “to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures.”


Notice at the link how the NY Fed describes its plans. The desk will offer “at least” $150 billion here and “at least” $75 billion there. That’s not how debt normally works. Lenders give borrowers a credit limit, not a credit guarantee plus an implied promise of more. The US doesn’t (yet) have negative rates but the Fed is giving banks negative credit limits. In a very precise violation of Bagehot’s Dictum.


We have also just finished a decade of the loosest monetary policy in American history, the partial tightening cycle notwithstanding. Something is very wrong if banks still don’t have enough reserves to keep markets liquid. 

Part of it may be that regulations outside the Fed’s control prevent banks from using their reserves as needed. But that doesn’t explain why it suddenly became a problem in September, necessitating radical action that continues today.


Here’s the official line, from minutes of the unscheduled Oct. 4 meeting at which the FOMC approved the operation.

Staff analysis and market commentary suggested that many factors contributed to the funding stresses that emerged in mid-September. In particular, financial institutions' internal risk limits and balance sheet costs may have slowed the distribution of liquidity across the system at a time when reserves had dropped sharply and Treasury issuance was elevated.


So the Fed blames “internal risk limits and balance sheet costs” at banks. What are these risks and costs they were unwilling to accept, and why? We still don’t know. There are lots of theories. Some even make sense. 

Whatever the reason, it was severe enough to make the committee agree to both repo operations and the purchase of $20 billion a month in Treasury securities and another $20 billion in agencies. They insist the latter isn’t QE but it sure walks and quacks like a QE duck. So, I and many others call it QE4.


As we learned with previous QE rounds, exiting is hard. Remember that 2013 “Taper Tantrum?” Ben Bernanke’s mild hint that asset purchases might not continue forever infuriated a liquidity-addicted Wall Street. The Fed needed a couple more years to start draining the pool, and then did so in the stupidest possible way by both raising rates and selling assets at the same time. (I don’t feel good saying I told you so but, well, I did.)


Having said that, I have to note the Fed has few good choices. As mistakes compound over time, it must pick the least-bad alternative. But with each such decision, the future options grow even worse. So eventually instead of picking the least-bad, they will have to pick the least-disastrous one. That point is drawing closer.

Ballooning Balance Sheet

Underlying all this is an elephant in the room: the rapidly expanding federal debt. Each annual deficit raises the total debt and forces the Treasury to issue more debt, in hopes someone will buy it.


The US government ran a $343 billion deficit in the first two months of fiscal 2020 (October and November) and the 12-month budget deficit again surpassed $1 trillion. Federal spending rose 7% from a year earlier while tax receipts grew only 3%.


No problem, some say, we owe it to ourselves, and anyway people will always buy Uncle Sam’s debt. 

That is unfortunately not true. The foreign buyers on whom we have long depended are turning away, as Peter Boockvar noted this week.


Foreign selling of US notes and bonds continued in October by a net $16.7b. This brings the year-to-date selling to $99b with much driven by liquidations from the Chinese and Japanese. It was back in 2011 and 2012 when in each year foreigners bought over $400b worth. Thus, it is domestically where we are now financing our ever-increasing budget deficits.


The Fed now has also become a big part of the monetization process via its purchases of T-bills which also drives banks into buying notes. The Fed's balance sheet is now $335b higher than it was in September at $4.095 trillion. Again, however the Fed wants to define what it's doing, market participants view this as QE4 with all the asset price inflation that comes along with QE programs.


It will be real interesting to see what happens in 2020 to the repo market when the Fed tries to end its injections and how markets respond when its balance sheet stops increasing in size. It's so easy to get involved and so difficult to leave.


Declining foreign purchases are, in part, a consequence of the trade war. 

The dollars China and Japan use to buy our T-bills are the same dollars we pay them for our imported goods. But interest and exchange rates also matter. With rates negative or lower than ours in most of the developed world, the US had been the best parking place.


But in the last year, other central banks started looking for a NIRP exit. 

Higher rate expectations elsewhere combined with stable or falling US rates give foreign buyers—who must also pay for currency hedges—less incentive to buy US debt. If you live in a foreign country and have a particular need for its local currency, an extra 1% in yield isn’t worth the risk of losing even more in the exchange rate.


I know some think China or other countries are opting out of the US Treasury market for political reasons, but it’s simply business. The math just doesn’t work. Especially given the fact that President Trump is explicitly saying he wants the dollar to weaken and interest rates go even lower. 

If you are in country X, why would you do that trade? You might if you’re in a country like Argentina or Venezuela where the currency is toast anyway. 

But Europe? Japan? China? The rest of the developed world? 

It’s a coin toss.


The Fed began cutting rates in July. Funding pressures emerged weeks later. Coincidence? I suspect not. Many factors are at work here, but it sure looks like, through QE4 and other activities, the Fed is taking the first steps toward monetizing our debt. If so, many more steps are ahead because the debt is only going to get worse.


As you can see from the Gavekal chart below, the Fed is well on its way to reversing that 2018 “quantitative tightening.”




Louis Gave wrote a brilliant essay recently (behind their pay wall, but perhaps he will make it more public) considering four possible reasons for the present valuation dichotomies. I’ll quote the first one because I believe it is right on target:


1) The Fed’s balance sheet expansion is only temporary.


The argument: The Fed’s current liquidity injection program is not a genuine effort at quantitative easing by the US central bank. Instead, it is merely a short-term liquidity program to ensure that markets—and especially the repo markets—continue to operate smoothly. In about 15 weeks’ time, the Fed will stop injecting liquidity into the system. 

As a result, the market is already looking through the current liquidity injections to the time when the Fed goes “cold turkey” once again. This explains why bond yields are not rising more, why the US dollar isn’t falling faster, and so on.

My take: This is a distinct possibility. But then, as Milton Friedman used to say: “Nothing is so permanent as a temporary government program.” The question here is: Why did the repo markets freeze in mid- to late September? Was it just a technical glitch? Or did the spike in short rates reflect the fact that the appetite of the US private sector and foreign investors for short-dated US government debt has reached its limit? In short, did the repo market reach its “wafer-thin mint” moment?

If it was a technical glitch, then the Fed will indeed be able to “back off” come the spring. However, if, as I believe, the repo market was not the trouble, but merely a symptom of a bigger problem—excessive growth in US budget deficits—then it is hard to see how, six months before a US election, the Fed will be able to climb back out of the full-on US government monetization rabbit hole in which it is now fully immersed.

In this scenario, the markets will come to an interesting crossroads around the Ides of March. 

At that point, the Fed will have to take one of two paths:

1. The Fed does indeed stop its “non-QE QE” program. In this scenario, US and global equities are likely to take a nasty spill. In an election year, that will trigger a Twitterstorm of epic proportions from the US president.

2. The Fed confirms that the six-month “temporary” liquidity injection program is to be extended for another “temporary” six months. At this point bond yields everywhere around the world will shoot up, the US dollar will likely take a nasty spill, global equities will outperform US equities, and value will outperform growth, etc.

Looking at the US government’s debt dynamics, I believe the second option is much more likely. And it is all the more probable since triggering a significant equity pull-back a few months before the US presidential election could threaten the Fed’s independence. Still, the first option does remain a possibility, which may well help to explain the market’s cautious positioning despite today’s coordinated fiscal and monetary policies (ex-China).


Just this week Congress passed, and President Trump signed, massive spending bills to avoid a government shutdown. There was a silver lining; both parties made concessions in areas each considers important.

Republicans got a lot more to spend on defense and Democrats got all sorts of social spending. That kind of compromise once happened all the time but has been rare lately. Maybe this is a sign the gridlock is breaking. 

But if so, their cooperation still led to higher spending and more debt.


As long as this continues—as it almost certainly will, for a long time—the Fed will find it near-impossible to return to normal policy. The balance sheet will keep ballooning as they throw manufactured money at the problem, because it is all they know how to do and/or it’s all Congress will let them do.


Nor will there be any refuge overseas. The NIRP countries will remain stuck in their own traps, unable to raise rates and unable to collect enough tax revenue to cover the promises made to their citizens. It won’t be pretty, anywhere on the globe.

Luke Gromen of Forest for the Trees is one of my favorite macro thinkers.

Like Louis Gave, he thinks the monetization plan will get more obvious in early 2020.

Those that believe that the Fed will begin undoing what it has done since September after the year-end “turn” are either going to be proven right or they are going to be proven wrong in Q1 2020. We strongly believe they will be proven wrong. If/when they are, the FFTT view that the Fed is “committed” to financing US deficits with its balance sheet may go from a fringe view to the mainstream.


Both parties in Congress are committed to more spending. No matter who is in the White House, they will encourage the Federal Reserve to engage in more quantitative easing so the deficit spending can continue and even grow.


As I have often noted, the next recession, whenever it happens, will bring a $2 trillion+ deficit, meaning a $40+ trillion dollar national debt by the end of the decade, at least $20 trillion of which will be on the Fed’s balance sheet. 

(My side bet is that in 2030 we will look back and see that I was an optimist.)


My 2020 forecast issue, which you’ll see after the holiday break, I’m planning to call “The Decade of Living Dangerously.” Sometime in the middle to late 2020s we will see a Great Reset that profoundly changes everything you know about money and investing.


Crisis isn’t simply coming. We are already in the early stages of it. I think we will look back at late 2019 as the beginning. This period will be rough but survivable if we prepare now. In fact, it will bring lots of exciting opportunities. More on that in coming letters.

Merry Christmas and the Happiest New Year

Perhaps I should say Feliz Navidad, as I will be spending Christmas in Puerto Rico with some of my children coming to visit. Not much chance for a white Christmas, but Shane and I really enjoy living in this tropical paradise.


There will be no letter next week. The first issue of January will be my annual forecast letter. This is the time of year when I think deeply about my goals for the future and reflect on how I responded to life’s challenges in the past. Perhaps it is just my age, but as I approach each new year, I become a great deal more reflective and appreciative of the time that I have to enjoy with family and friends.


One of the greatest gifts I receive is your attention and time to reading these hopefully thoughtful musings. One serious challenge of The Age of Transformation is the overwhelming amount of information demanding our attention. That you would give me part of your time is a greater honor than I can possibly imagine. My pledge to you in 2020 is to continue treating it with the respect you deserve.


And with that, I will hit the send button and wish you a truly Merry Christmas and the best of New Years. May you spend it with friends and have the most prosperous year ever!


Your ever hopeful analyst,

John Mauldin
Co-Founder, Mauldin Economics

Why Europe will choose the US over China

America’s allies are belatedly heeding its warnings about the Chinese technology threat

Gideon Rachman

US EU China bone
© James Ferguson


The Nato summit last week did not present an inspiring picture of western unity. The assembled leaders sniggered behind each other’s backs and squabbled childishly.

But the official Nato communiqué did contain one significant new departure. For the first time ever, it mentioned China, stating that Beijing’s growing influence poses challenges that “we need to address together as an alliance”. 

That statement, bland though it is, will be regarded with alarm in Beijing and delight in Washington. With the US and China locked into an increasingly heated rivalry, the Nato meeting signalled that — slowly, hesitantly — America’s European allies are beginning to swing behind the US. 

The key issue to watch here is Huawei, the Chinese telecoms firm, that is bidding to build 5G broadband networks across the world. The US has blacklisted Huawei, imposing sanctions that prevent the Chinese firm from buying components from America. 

Senior officials in Donald Trump’s administration are passionate on the surveillance risks posed. I have heard one suggest that adopting Huawei technology is like “inviting the Chinese government into your bedroom”. He added that European governments that allow Huawei to build their 5G networks are “insane”.

For many months, this superheated American rhetoric made limited progress. 

Japan, Australia and New Zealand announced their intention to keep Huawei out. But the US’s European allies did not follow suit. Despite Washington’s lobbying, Huawei has made considerable progress in signing up international customers for 5G. As a recent article in Nikkei Asian Review points out: “So far, the company has sealed 65 contracts, with almost half coming from European countries.”

But attitudes in Europe are now shifting. Mr Trump lobbied hard at Nato and claimed to have secured Italian agreement to shut Huawei out. Boris Johnson, UK prime minister, said that Britain would not allow Huawei into its 5G network if that endangers the “five eyes” intelligence-sharing arrangement with the US. This pledge hands the Americans a powerful lever. There are also suggestions in Congress that a UK-US free trade agreement would be endangered if Britain works with Huawei.

Angela Merkel, the German chancellor, has kept the door open for Huawei. But a backlash is under way in the German parliament led by Norbert Röttgen, head of the Bundestag’s foreign-affairs committee. He casts the issue as one of “European sovereignty”. Faced with this onslaught, the Merkel government is beginning to shift position. In a recent interview, Peter Altmaier, Germany’s economic affairs minister, spoke of the need to promote European suppliers of 5G to compete with Huawei.

The European shift is partly down to American pressure. But many Europeans were already taking a more jaundiced view of China. An important moment came earlier this year, when the European Commission issued a paper that described China as a “systemic rival”. 

The EU has belatedly woken up to the fact that China is much more than a large market. It is also an authoritarian state with an increasing influential presence in Europe. Beijing’s efforts to cultivate 17 European countries through a diplomatic dialogue known as “17+1” has excited suspicion in Brussels, where it is seen as a Chinese effort to buy influence and disrupt EU unity. 

European industry is also taking a more sceptical attitude towards China, echoing many American complaints about market access and intellectual property theft.

Industrial policy is also coming back into fashion in Europe, making it easier to argue that 5G is a strategic industry, whose development cannot simply be left to market forces. There are two European companies that can offer 5G technology: Ericsson of Sweden and Nokia of Finland. 

But while the Europeans are now more receptive to American arguments on 5G and wider Chinese issues, actually changing policy poses significant problems. Shunning Huawei in favour of a European solution is likely to lead to a more costly and slower deployment of the technology. Even more dauntingly, Huawei equipment is already embedded in the existing telecoms systems of Britain, Germany and other European nations. Ripping it out would be expensive and disruptive. 

There is also a fear that banning Huawei would invite Chinese retaliation, damaging access to the world’s fastest-growing market. And Mr Trump is regarded as an unattractive and unreliable partner who could easily target Europe with the kind of trade sanctions he has already aimed at China.

The speed and cost advantages of Huawei 5G is likely to mean that it will continue to find many willing customers outside the west. That means that Huawei will stand a good chance of establishing a global standard in 5G, pulling its customers into a China-dominated tech world — while the west is left in the unfamiliar position of falling behind on advanced technologies. 

The 5G decision is likely to be the first of many such awkward choices for Europe. For as long as possible, European countries will try to keep both Washington and Beijing happy. But if America’s key allies, such as Britain and Germany, are forced to choose, then values, economics, security and strategy will all point in the same direction. They will have to choose the US over China.


Cracks Appear in the Turkey-Russia Partnership

By: Allison Fedirka


The contradictions in the Turkish-Russian relationship, which seemed on the surface to be blossoming in recent months, are beginning to show themselves. Any one of these signs of trouble on its own may not be important. However, when grouped together, they paint a gloomy picture of what may lie ahead for this bilateral relationship.

As Turkey gains confidence and asserts itself more aggressively, countries will inevitably be forced to react. In the case of Russia, Turkey’s expansionary efforts make it evident that its days of pragmatic collaboration with Russia, particularly when it comes to security and foreign influence, will eventually reach an end. In Syria, Libya and Central Asia, the makings are underway for Turkey and Russia to be competitors more than collaborators.

Syria

Though the civil war in Syria forced Turkey and Russia to work together politically and on military operations, the two ultimately have different endgames. The nearer Syria’s civil war comes to its conclusion, the less compatible the agreed framework will be. Which regional powers gain influence over the different parts of post-war Syria will directly affect their ability to exert influence.

The problem for Russia and Turkey is that they both want the same slice of the pie: northern Syria. Russia’s approach in Syria has been to increase its influence in the region by propping up the Assad government against its enemies, which include Turkey to Syria’s north. Turkey, meanwhile, recognizes that Russia and President Bashar Assad are not going away, but that northern Syria can be a buffer between them and itself.

Russia’s interest in supporting the Assad regime is twofold: to stabilize the region so that the volatility doesn’t spread to Central Asia and the Caucasus, and to maintain a relatively low-cost footprint in Syria (including a naval base at Tartus and a growing number of other military installations) such that it does not fall solidly under the influence of Turkey or Iran.

Moscow does not seek direct control over Syria; it wants to be able to check any expansionary movements or migration of Syrians (especially former fighters and opposition members) to the Caucasus and other Russian territories. Turkey, however, has a more ambitious endgame, which includes direct power projection and territorial expansion into Syria.

Ankara’s current buffer zone in Syria and its efforts to prevent Kurdish settlement in the area feed into Turkey’s long-term strategy to build a more permanent political influence and military presence to counter Russia, Iran and Assad.

Russia and Turkey’s relationships with two closely related militias – the People’s Protection Units (YPG) and the Syrian Democratic Forces (SDF), which falls under the YPG’s umbrella – are evidence of their competing interests over the fate of northern Syria. So far, Russia has been modestly successful in containing Turkey by limiting Ankara’s border corridor to the areas around the cities of Ras al Ayn and Tel Abyad (as opposed to the desired area totaling 112 square miles) and halving the number of repatriated refugees to 1 million. With the U.S. pulling out, Russia, in tandem with the Assad regime, has courted YPG/SDF fighters to join Assad’s ranks in support of the regime and against Turkey’s advance.

This puts Turkey in a difficult position. In the event Russia and the Assad regime are successful, the YPG/SDF alignment with Assad’s forces would essentially disband much of Turkey's “peace corridor” and thwart Turkey’s all-out attempt to destroy the YPG and its Turkish affiliate, the Kurdistan Workers’ Party (PKK). Based on a presentation by former U.S. National Security Adviser Robert O’Brien at the Halifax International Security Forum, Turkey’s countermove to Russia’s efforts has been to support the sale of Syrian oil from the SDF-controlled oil fields, thereby enabling the SDF to pay the salaries of its fighters and undercutting Russia’s efforts to convince the SDF to swing over and support Assad.

Eastern Mediterranean

Turkey’s latest forays in the Eastern Mediterranean pose another point of competition with Russia, this time over offshore energy resources. Turkey recently asserted its influence over the Eastern Mediterranean by signing two agreements with the U.N.-backed Libyan Government of National Accord; one calls for military cooperation and the other demarcates maritime zones in which both parties exercise sovereignty. President Recep Tayyip Erdogan has even gone so far as to float the possibility of Turkey sending troops to Libya to support the GNA as it battles for control of the country (and the latest agreement with Libya allows for this).



Prior to the start of its civil war, the country was a major producer of oil. Libya’s land and sea holds an estimated 48 billion barrels of oil deposits, the most in Africa and 9th-most in the world. Right now, the GNA has control of oil revenues, while its opponent, the Libyan National Army led by Khalifa Haftar, controls most of the oil fields. The race to take advantage of postwar oil production has already begun, and foreign allies on each side are jostling for position. Russia certainly had as much in mind this year as it sent more soldiers and mercenaries to Libya to back Haftar’s forces.

In a scenario where Libya is stable, European companies will want to increase their presence in Libya's oil industry, since it will be viewed as a reliable source of energy and an alternative to Russian oil. Russia’s presence in the country aims to ensure it gets a piece of the pie on the business end and will still have a hand in energy supplies to Europe even if they don’t directly come from Russia. A strong Russian presence also helps lay the groundwork for greater port access for Russian naval forces that pass through the Mediterranean.

While the idea of Turkish troops in Libya remains suspect – the Turkish military has its hands full in Syria – Turkey and Russia are clearly on opposing sides in Libya. The two countries will likely be able to sort out their differences in the immediate future. Russia does not want to escalate its foreign military ventures, and Turkey faces additional opposition to greater involvement in Libya from well-established rivals such as Egypt and Saudi Arabia, which will make Turkey think twice before acting.

Central Asia

While Syria and the Eastern Mediterranean are currently the two most active areas of growing competition between Russia and Turkey, there is the potential for Central Asia to join the list as well. After the fall of the Soviet Union, Russia managed to keep close economic and military ties with the region. Kazakhstan and Kyrgyzstan are both members of the Russia-led Eurasian Economic Union. Russia ranks among the top four export destinations for Kazakhstan, Kyrgyzstan and Uzbekistan and serves as the first or second leading importer for those countries as well as Tajikistan.

In addition, Russia’s prominence in the energy sector has allowed it to join many hydrocarbon production projects and related infrastructure in these countries. In terms of security and defense, Russia serves as the cornerstone for military hardware, training and organization for Central Asia. Russia maintains military bases in Kazakhstan, Kyrgyzstan and Tajikistan, and Russian troops and equipment have reinforced Tajik forces along the latter’s border with Afghanistan.

Turkey’s footprint in Central Asia pales in comparison to that of Russia and even China, whose increasing economic prowess has eroded Russia’s monopoly on the region. Nevertheless, Ankara’s growing interest and economic initiatives in the region do not go unnoticed and should not be underestimated.

In the past, Turkey has contemplated the grand venture to revive the dream of a pan-Turkic project in which better ties with Central Asia would open to Turkey new opportunities for gas pipelines, military partnerships and even a buffer zone with Russia. Given the initial success in Syria and advancements in the Eastern Mediterranean, the thought of being able to act on such a project in Central Asia is not completely out of the realm of possibility. For now, however, Turkish involvement in the region is primarily economic in nature.



Turkish companies have substantially increased their participation in the region. For example, as recently as 2016, Turkish companies had a negligible presence in Uzbekistan, but now there are more than 750 Turkish enterprises in the country. In Kazakhstan there are now roughly 2,200 Turkish enterprises, compared to 1,616 in 2013.

Bilateral trade has also been on the rise. In January-October 2019, the volume of bilateral trade with Uzbekistan increased by 26.9 percent compared to the same period of 2018, up to $1.97 billion. Trade between Kazakhstan and Turkey from January-August 2019 increased by 63 percent ($782 million) compared to 2018, and totaled $2.01 billion.

Also notable are Turkey’s gains in the Turkmen market, where Russia holds a smaller share than other countries in the region. Based on the limited statistics available, Turkey is Turkmenistan’s lead import partner, accounting for 30 percent of Turkmen imports compared to 10 percent from Russia. (Turkey also outranks Russia in exports).

Security cooperation is fairly nonexistent, though Turkey and Kazakhstan did sign a military agreement that calls for the exchange of officers at national defense universities for study. Right now, Turkey’s influence in Central Asia is still limited, but what’s notable is the speed with which Turkish economic engagement with this region is growing. While Russia likely remains fixated on Chinese encroachment, Turkey is now also creeping into its Central Asian backyard.

Black Sea and S-400s

And of course, no conversation on Russian-Turkish spheres of competition would be complete without addressing the Black Sea and Russia’s sale to Turkey of the S-400 air defense missile system. The Black Sea remains a historic battleground between Russia and Turkey. Turkish control of the Bosporus and Dardanelles, which serve as a gateway for Russian grains and goods to the wider world, makes Russia permanently uneasy of its vulnerability.

Erdogan recently poked the bear over this issue by suggesting that Turkey’s offshore hydrocarbon ambitions may not be limited to the Eastern Mediterranean but could also include the Black Sea. Such rhetoric is mostly political posturing given that both Russian and Turkish hydrocarbon exploration efforts in the Black Sea have not been commercially successful.

While Turkey and Russia are permanently at odds over the Black Sea, the chances for confrontation remain negligible at this point. NATO has a strong interest – and accompanying naval presence – to contain Russia in the Black Sea. Any conflict there would risk drawing in the U.S. and European heavyweights, which is not something Russia wants to deal with.

Turkey, meanwhile, benefits from the status quo.



As for Turkey’s acquisition of the S-400 system from Russia, despite all the hype, the S-400 is far from a linchpin securing long-term Turkish-Russian ties. Since the 1980s, Turkey has made a concerted effort to develop its domestic military industry. This effort has grown in recent years, and it remains a greater priority for Turkey than stronger ties with Russia. However, Russia is more likely to freely share technology than the United States. Turkey’s agreement with Russia on the purchase of S-400s does include a partial transfer of production technologies to the customer.

The U.S., on the other hand, resists technology transfers and often requires other conditional agreements for a major military purchase. Furthermore, Turkey has yet to conduct trial runs on the new system, and it is unclear how effectively it will operate in the Turkish climate (similar Russian systems experienced failures when used in Syria).

There is also the fact that this system, and talks to acquire more from Russia, gives Turkey leverage in talks with the U.S., which is far more valuable to Turkey in the here and now than the S-400 itself. The same is true for the possible sale of Russian S-35 fighter jets in the event the U.S. definitively refuses to sell the F-35 to Turkey.

The signs of an eventual fallout in the Turkey-Russia relationship are already apparent. As Turkey continues to push its influence further abroad, it will naturally start to butt up against other countries that seek to preserve their own interests, especially if they run counter to Turkey’s agenda. For Moscow and Ankara, this means their ability to cooperate will grow increasingly constrained, and both countries will need to pursue their own paths, which will likely clash with the other.

OK boomer

French workers strike to keep their lavish pensions

Proposed reforms will coddle the old and squeeze the Young



After months of talks, endless delays and a week of disruptive strikes, the French government finally unveiled on December 11th its long-promised pension reform. The good news is that it has decided to press ahead with its plans, including the abolition of regimes with special privileges, despite the biggest show of union force on the streets since President Emmanuel Macron took office in May 2017. The bad news is that the new system will push the full burden of the changes on to France’s younger generations.

In a speech that leaned studiously to the left, Edouard Philippe, the centre-right prime minister, described the new universal points-based system as a “fairer” system that will guarantee “social justice”. It will replace the current sprawl of 42 regimes, most of which have different rules. For those beginning their working life, the new rules will apply from 2022, and from 2025 for those already in work but currently under the age of 45. Older generations will keep the existing rules. Sliding transition rules will bring the new system fully into effect by 2037.


Under the new system the special regimes, which today allow train drivers to retire at the age of 50, will be abolished. Pensions for public-sector workers will be calculated according to the same (less favourable) rules as those in the private sector. The new points-based system will allow those with patchy careers, including many women, to accumulate credit for every hour worked.

A minimum monthly pension of €1,000 ($1,100) will be brought in from 2022, to help farmers and others currently surviving on less. High earners will pay extra contributions for the pensions of others. And, although the minimum legal retirement age will remain 62, a new “equilibrium age” of 64 will build in incentives to work beyond that. Medef, the bosses’ federation, described the package as a “good balance”.

Will this moderate approach help to calm the streets? Mr Philippe made it clear that he will not shelve the project altogether, as the unions want. Since December 5th sncf, the national railway, as well as regional trains, the Paris metro and airport ground staff, have been on a rolling strike that looks likely to continue.

Teachers are staging walkouts every few days. The unions know full well that past French governments have backed down in the face of paralysing strikes. Alain Juppé, prime minister in 1995, famously insisted that he would hold firm in the face of industrial action, only to cave in and shelve his own pension reform a few weeks later.

Mr Macron is keen to prove that he is different. He has long argued that France needs to be “transformed” rather than merely “reformed”. This is why he promised during his election campaign in 2017 not to raise the retirement age but to redesign the entire system. At stake therefore is not just France’s ability to create a fairer and more flexible pension regime, but also Mr Macron’s reputation as a reformer who does what he promises.

This week, the hard-line unions dug in and vowed to stay on strike. Even the Confédération Française Démocratique du Travail, a more moderate union which supports a points-based system, is now furious because of the “equilibrium age”. If he is to get his reform through, the unpopular Mr Macron will have to rely on public opinion. For now a majority of the French continue to support the strikers, just as they did in 1995.

The longer the disruption goes on, however, the more this support could ebb. On day one, a massive 800,000 people, according to official figures, took to the streets countrywide. By December 10th only 339,000 turned out.

The share of teachers on strike dropped to 16% from 47%. By mid-week only 16% of all sncf workers had downed tools, down from 56% on the first day. Most metro lines in Paris and most fast trains across the country, though, continue to be shut down. The strike could last a while yet.

A year after the gilets jaunes (yellow jackets) protests, France remains restless and suspicious. To this has now been added a further division, between the generations. “The baby-boomer generation benefits from the current system, and wants to avoid any pension reform at all costs,” says Maxime Sbaihi of Génération Libre, a liberal think-tank.

Those who have already gained the most from France’s generous welfare state look set to keep their rights to enjoy one of the world’s most generous pension systems.

The Lives You Saved

Living ethically in today’s interconnected world involves helping people who, through no fault of their own, are suffering in ways that we could easily prevent or alleviate. In the last ten years, many people seem to have taken that message to heart.

Peter Singer

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PRINCETON – A decade ago, I wrote The Life You Can Save: Acting Now to End World Poverty. This month, a fully revised Tenth Anniversary edition was published, and is available, free, as an eBook and audiobook. The chapters of the audiobook are read by celebrities, including Paul Simon, Kristen Bell, Stephen Fry, Natalia Vodianova, Shabana Azmi, and Nicholas D’Agosto. Revising the book has led me to reflect on the impact it has had, while the research involved in updating it has made me focus on what has changed over the past ten years.

The book argues that for middle-class people living in affluent countries, abiding by the traditional moral rules against lying, stealing, maiming, or killing is not enough. Living ethically in today’s interconnected world involves helping people who, through no fault of their own, are suffering in ways that we could easily prevent or alleviate.

The book influenced many readers to change their lives. Among them was Cari Tuna, who with her husband, Dustin Moskovitz, a co-founder of Facebook and Asana, created a foundation aimed at doing the most good possible with the billions of dollars they have given it. They have provided funding to GiveWell, enabling it to expand its team of researchers rigorously assessing charities to find those that save or improve lives the most per dollar.

Charlie Bresler was at the peak of his career in the retailing industry when he picked up a copy of The Life You Can Save. Reading it awoke a deep-seated dissatisfaction with work that, for all its financial rewards, did not really accord with his fundamental values. At that time, the book had spawned an organization, also called The Life You Can Save, but it had no full-time staff and wasn’t accomplishing much.

Charlie contacted me with an offer: he was willing to take on the task of building up the organization into something that would effectively spread the ideas contained in the book. What made the offer too good to refuse was that he didn’t want to be paid for his time – in fact, Charlie and his wife Diana have been substantial donors to The Life You Can Save. As a result, the organization is now directing many donors, and millions of dollars, to the most highly effective non-profit organizations.

What has happened to extreme poverty in the decade since the first edition was published? To answer this question, let’s first ask what extreme poverty is. As defined by the World Bank, to be in extreme poverty is to lack sufficient income to meet one’s basic needs and those of dependent family members. The 2009 edition of my book refers to 1.4 billion people living below this line. The good news is that, despite a steadily increasing world population, that figure has been nearly halved, to 736 million.

That encouraging drop in extreme poverty is paralleled by another, perhaps even more significant figure. Each year, the United Nations Children’s Fund (UNICEF) publishes its estimate of the number of children dying before their fifth birthday. Most of these deaths are related to extreme poverty and its consequences, including malnutrition, lack of clean water and sanitation, diseases such as malaria, and the absence of even minimal health care. In the first edition, the most recent estimate of child deaths was 9.7 million. Now it is down to 5.4 million.

To put that extraordinary success in perspective, suppose that an Airbus A380, with a child in every seat, is about to crash, killing everyone on board. Somehow, with great skill, the pilot manages to land the plane safely. The story would be all over the media, and the pilot would be touted as a hero.

Now, imagine that the pilots of 21 fully laden A380s have informed air controllers that they are likely to crash. As the news quickly spreads, people become aware that more than 10,000 children could be killed. We would all be glued to the latest reports, hoping that at least some of the children would be saved. What a sense of relief we would experience if, somehow, they were all saved!

Well, that is approximately the number of children – 11,780, to be exact – whose lives have been saved, and are being saved, every day, by the reduction in child mortality over the past ten years.

Not all of this gain is the result of aid. Much of it has been brought about by economic growth, especially in China and South Asia. But aid, when it is well thought out, carefully implemented, and, most important, independently tested and verified in the field, plays an important role. It can, at extraordinarily low cost, save lives, prevent or cure blindness, improve nutrition, give children an education, and enable people to start small businesses. 

Peter Singer is Professor of Bioethics at Princeton University and founder of the non-profit organization The Life You Can Save. His books include Animal Liberation, Practical Ethics, The Ethics of What We Eat (with Jim Mason), Rethinking Life and Death, The Point of View of the Universe, co-authored with Katarzyna de Lazari-Radek, The Most Good You Can Do, Famine, Affluence, and Morality, One World Now, Ethics in the Real World, and Utilitarianism: A Very Short Introduction, also with Katarzyna de Lazari-Radek. In 2013, he was named the world's third "most influential contemporary thinker" by the Gottlieb Duttweiler Institute.