China’s impending Minsky moment

Beijing must act now to avoid deeper trouble in the future

William Rhodes


Workers queue up for lunch at a building site in Beijing. Debt-fuelled growth has created dangerous imbalances in China’s economy © AP


Two years ago, Zhou Xiaochuan, then China’s central bank governor, ​told a press conference at the 19th Communist party Congress in Beijing ​that too many procyclical factors in the economy and excessive optimism risked generating “accumulating contradictions that could lead to the so-called Minsky moment”.

There is still a danger of a “Minsky moment” hitting China’s economy. US academic economist Hyman Minsky, who died in 1996, warned of the risks of periods of financial excesses leading to​ ​crises. Today, China’s debt-to-gross domestic product ratio is more than 300 per cent and continues on a dangerously upward trajectory.

The Chinese authorities are aware of the situation and the risks but they continually refrain from acting with the necessary force. They are concerned that actions to confront rising domestic debt will constrain economic growth. They are wrong in believing there will ever be a good time to curb financial excesses, as they fail to comprehend that delay now will make action in the future harder and costlier.

Actions on this front are made all the more complicated by two formidable challenges that are undermining economic growth. In both cases, the consequences of these challenges are so difficult to quantify that the famous words of former US secretary of defence Donald Rumsfeld are particularly apt: “There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know.”

First, China’s authorities — like everyone else — cannot predict the outlook for US-China trade relations, despite what the White House has called a “phase one” agreement. This appears to be a deal that avoids some of the toughest issues and one in which both sides believe they can publicly claim to be winners.

The Chinese are well aware that the most complex and, arguably, the most important set of issues, which are still far from being resolved, relate to the role of intellectual property rights and the enforcement of an agreement on this, and constraints on the subsidies to China’s state-owned enterprises. If negotiations in coming months fail to be productive on these issues, then President Donald Trump may again resort to imposing new tariffs on a wide range of goods.

Second, there are assuredly economic consequences for China as a result of the continuing public protests in Hong Kong. I believe that investment flows to mainland​ ​China from Hong Kong are slowing and, of greater concern, the situation could influence the long-term strategies of foreign financial institutions based in Hong Kong.

The trade war and the Hong Kong situation have already had some impact on China’s economic growth, which I believe is now running at an annual rate of less than 6 per cent.

However, there are no “known unknowns” when it comes to China’s domestic financial threats. The high debt levels are due to the continued heavy borrowing by municipal and provincial authorities, which has produced substantial overbuilding of housing and infrastructure. State-owned-enterprises continue to be heavy borrowers, propping up employment and GDP in a manner that is not sustainable.

China’s authorities have not addressed adequately the “shadow banking” sector, or the rising levels of non-performing loans at the big commercial banks. We have already seen financial problems in a number of small banks. Failure to act may lead to a loss of investment confidence, quite possibly in 2020 or 2021, and then President Xi Jinping will indeed face a Minsky moment.

Paul Volcker is remembered as a man of principle and integrity with an exceptional understanding of the need for politicians to accept that there are times when temporary sharp declines in economic growth, accompanied inevitably by rises in unemployment, are an essential price to pay for longer-term sustained economic stability. He tamed rapidly rising US inflation because he well understood the acute dangers that it posed.

Now, Mr Xi needs to demonstrate similar wisdom and courage — accepting that the longer-term prosperity of his country will depend upon his willingness to constrain the unhealthy appetite for borrowing that runs so rampantly across China’s municipal and provincial authorities and the giant state-owned enterprises, and recognising that the health of the financial sector is crucial for China’s prosperity.


William R Rhodes is president and CEO of William R Rhodes Global Advisors, LLC. He is a former chairman, CEO and president of Citibank and former senior vice-chairman of Citigroup. He is the author of “Banker to the World: Leadership Lessons from the Front Lines of Global Finance”.

Turkey Makes Its Move

By: George Friedman



In “The Next 100 Years,” I described Turkey as an emerging regional power that would over time extend its sphere of influence to resemble the range of the Ottoman Empire.

Over the past decade, in spite of pressure from various directions, it has refrained from taking risks to assert itself. This changed significantly in recent weeks, signaling what is, in my opinion, the inevitable emergence of Turkish power.

The shift came in two steps. First, Turkey announced that it had expanded its exclusive economic zone in the Eastern Mediterranean in collaboration with Libya’s Government of National Accord.

Second, Turkey announced that it was building six new submarines. The construction of new submarines is not of immediate significance, nor is Turkey’s relationship with Libya, whose cooperation it needed to extend its EEZ. But together, these moves indicate a change in Turkish posture.



A Significant Gesture

Notionally, the agreement with Libya creates an economic zone that divides the Mediterranean to the east and challenges Greek Cypriot influence.

At first glance, this appeared to be simply a gesture, even if a significant one.

An economic zone does not define military spheres of influence. It simply denotes an area of economic domination, and Libya’s agreement to reconfigure Turkey’s EEZ, in the midst of an ongoing civil war, doesn’t mean much. Turkey’s move was perplexing but not necessarily significant.

Turkey’s announcement a few weeks later that it would send troops to Libya to defend the GNA against insurgents led by Khalifa Haftar increased the significance of the EEZ changes by several degrees.

A shift in Turkish policy was visible to us when Ankara demanded that the U.S. withdraw its forces from an area of northern Syria that housed Kurdish troops. Thus far, Turkey had been cautious with incursions into neighboring countries.

This time, however, the Turks intended to send a large number of forces, likely for an extended period, extending Turkey’s unofficial border into Ottoman-era territories. It was an interesting move but not a definitive one.

The decision to send Turkish troops to Libya represents a dramatic extension of this policy. In the past, Turkey had sent troops into Cyprus to counter what Turkey saw as Greek Cypriot threats against Turks.

But the move into Libya is a major shift. One of the motives is undoubtedly oil. There is a global glut in oil and prices remain moderate, but that can change, and even in a global glut, access to oil can be shaped by politics. Turkey depends on oil from various regional sources, including Russia.

That is a precarious position for Turkey as it cannot be a regional power without access to energy. It has been looking, along with others, at deep sea drilling around Cyprus. But Turkey’s quest for Eastern Mediterranean oil and gas has been difficult, fiendishly expensive and unsuccessful.

Libya has developed oil fields, and, if pacified, could support Turkish needs and reduce its vulnerability to other sources. Interestingly, the Turks are recruiting pro-Turkey forces in Syria to join their efforts in Libya.

Of great importance is the fact that Russia supports Haftar through economic support, military equipment and Russian mercenaries. The U.N.-backed GNA has been on the defensive for an extended period, with a great deal of international support in the shape of strong statements, but not enough force to break Haftar. The Russian support would appear to be decisive.

In addition to wanting to secure sources of energy, Turkey wants to make it clear that the Eastern Mediterranean is a region where Turkish interests have to be considered. This places it at odds with almost every power in the region.

For Moscow, the planned Turkish intervention in Libya runs counter to long-standing Russian interests. Although, it’s possible that Turkey and Russia have made a deal for the joint administration of Libya.

Turkish claims in the Eastern Mediterranean also run counter to Israeli drilling projects off the coast of Cyprus. Israel has protested vigorously, in concert with Greece.

Egypt, a backer of Haftar’s Libyan National Army, is also hostile to the Turkish move and has good relations with Israel and Greece and interests in protecting its resource-rich continental shelf. Thus, it appears that two blocs are emerging in the Mediterranean: Turkey and the Libyan GNA on one side, and Israel, Cyprus, Egypt, Greece and the Libyan LNA on the other.

An important question is what the Europeans will do. Italy has substantial interests in Libya focused on oil and is part of the EastMed gas pipeline, along with Israel, Cyprus and Greece. Greece, while attracted to Turkish support of the central government, is a member of the European Union, hostile to the Turks, and therefore likely to want to block them. On the other hand, other European countries also have interests in Libya, and a Libyan-French bloc can be decisive.

This matter will not be decided quickly. The French have been talking to the Egyptians, while the Russians have been talking to the Germans, who are attempting to play the role of mediator.

The Greeks have been talking to whoever will listen, and the Israelis have been standing back to read the leaves, although Turkish-Israeli relations and competition for oil are such that their view is clear.

The formal position of all these countries is that no one should destabilize Libya. The reality is that Libya is the poster child of destabilization, and the choice at the moment is between an insurgency backed by Russia and the formal government, now firmly backed by Turkey.

A New Phase

Perhaps the most interesting point, apart from Turkey’s actions, is that the precarious relationship between Russia and Turkey is coming to an end. It was never a comfortable relationship, since Turkey and Russia have been historical regional adversaries, but it worked to contain the Syrian war and to build Turkish leverage with the U.S. It may survive for a while, as each side tests the other and, at times, finds a basis for accommodation.

But the Syrian issue is a submerged explosive between the two countries. Russia needs to remain in control for credibility, and Turkey is historically opposed to the Assad regime, hence the Turks’ recruitment of Syrian fighters for Libya. Of course, Turkish troops haven’t arrived yet, and much else may happen, but Turkey has declared that it has become a regional power, and its actions are driving the reactions. That itself is important.

The United States is present, but its interests are unclear. The U.S. is the decisive naval force in the Mediterranean, if it chooses to be, but it is unlikely to challenge the Turkish move. Thus far, the U.S. has been quiet. Secretary of State Mike Pompeo plans to visit Cyprus in January, but the topic of discussion will be the Eastern Mediterranean Security and Energy Partnership Act, not increased Turkish presence in the region.

More important, the overriding interest in the Mediterranean is limiting Russian power. The Russians and Syrians have been conducting naval maneuvers in the Eastern Mediterranean. At the same time, the U.S. wants to retain its relationship with Turkey, particularly as it becomes a major force.

But the question would be what price Turkey will want for this friendship. It is noteworthy that the United States began bombing Iranian bases in Syria and Iraq, without, apparently, informing the Russians. There is no reconciliation between Turkey and the United States but there is parallel play, for the moment at least.

We are now entering a new phase.

The Turks are not so much in control of the Eastern Mediterranean but all countries in the region must take their wishes and intent seriously.

They do not dominate the Mediterranean basin, but they dominate the Mediterranean’s defining issues – maritime boundaries and its oil chief among them.

Most important, the maritime delimitation agreement with Libya has made Turkey the driving force in the region for now and, we think, in the long run.

A Low, Dishonest Decade

Eighty years ago, the poet W.H. Auden wrote that “Waves of anger and fear / Circulate over the bright / And darkened lands of the earth.” Like Auden in 1939, we must accept the possibility that things could become far worse than they already are.

Kaushik Basu

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MUMBAI – I write this not as a professional economist, nor as a policymaker, but as a citizen of a tiny planet that is spinning through a vast universe that we barely understand.

I write this “As the clever hopes expire / Of a low dishonest decade,” and as “Waves of anger and fear / Circulate over the bright / And darkened lands of the earth.”

It was 80 years ago that W.H. Auden wrote those lines, in his poem “September 1, 1939.”

We find ourselves in a similar position today.

As the current decade draws to a close, large parts of the world are mired in conflict, stable democracies have suddenly been knocked off kilter, and societies are increasingly divided by race, religion, and political ideology.

And as the planet warms, millions of people are feeling compelled to move elsewhere in search of survival and opportunity. But new barriers, born of a renascent nationalism and narrow tribalism, are increasingly standing in their way.

I am not foolish enough to be certain that this will all pass. The world may not, in fact, turn back from the brink of political and environmental disaster, and continue to prosper and grow, just because it did so in the past. As Bertrand Russell cautioned about the dangers of such inductive reasoning, in The Problems of Philosophy,

“The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken.” Like Auden in 1939, we must accept the possibility that things could become far worse than they already are.

At the same time, we must not abandon hope. These are not just dangerous times, but uncertain ones. The world is at a crossroads, where one turn can make all the difference. The start of a new decade is thus an occasion for pause and reflection.

Why are longstanding democracies breeding anger, rage, and political folly that may destroy their own foundations? Why are familiar economic policies failing, setting the stage for trade conflicts, rising joblessness, faltering monetary policies, and higher inequality?

Such periods have occurred throughout recorded history. The shifts that define them are usually slow and imperceptible, but every now and then they reach a critical point when deep fault lines appear.

It is during these periods that one must rethink the laws of the social sciences, the basis of our behavior, and the balance of our choices. As human beings, we must do what Russell’s chicken could not: reject complacency and take stock of our own predicament.

Exactly ten years before Auden wrote his poem, the economist-statistician Harold Hotelling published a paper that became a seminal work for understanding electoral democracy. It showed that political parties have a propensity to drift closer to each other, eventually creating a scenario in which there is little difference between the “left” and the “right.”

This theory implied that over time all politicians will cater to the median voter. The outcome could be criticized for being boring, not dangerous.

Hotelling’s work – which was later picked up by economists Duncan Black and Anthony Downs – established the paradigm for thinking about political economy in the twentieth and early twenty-first centuries. But, owing to the disruptive advances of globalization and technology, the ground beneath our feet was always shifting.

Now that the fault lines have appeared, it is clearly time to take stock of our model of electoral democracy. Today’s political parties, reflecting and reinforcing a world defined by animus, are fleeing to opposite poles, rather than converging on the center.

One obvious consequence of globalization and technologies that link people from far and wide is that policies and decisions made in one place affect others in distant locations in more ways than ever before. Who serves as president of the United States is critically important for Mexicans.

When the US Federal Reserve injects liquidity into financial markets, the whole world feels it. One exchange-rate correction by China can now affect the livelihoods of millions of people on distant continents. If democracy means having a say in the election of leaders who can affect your wellbeing, then economic globalization in the midst of nationally segmented politics makes the retreat of democracy inevitable.

Under these conditions, it follows that people will see the democratic process as a tool for protecting their own narrow interests. The irony is that voters in many countries are now electing politicians who oppose not just economic globalization, but democracy itself.

It is time to go back to the drawing board. Policymakers, scientists, and economists clearly have their hands full.

But all citizens of this planet have a role to play in averting an even darker decade. To do so will require looking beyond immediate self-interest.

We need a moral framework that includes empathy for people who do not look like us, and for the generations that will come after us.

We need clarity of mind, and the courage to think for ourselves. As Auden advised, we must not give in to “the lie of Authority.”

We must raise our “voice to undo the folded lie.”


Kaushik Basu, former Chief Economist of the World Bank and former Chief Economic Adviser to the Government of India, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.

Make 2020 the Year of Less Sugar

One of the best things you can do for your health is to cut back on foods with added sugar. Our 7-Day Sugar Challenge will show you how.

By Tara Parker-Pope




Here’s the last New Year’s health resolution you might ever need: resolve to stop eating added sugar.

While you might think you’re not eating much sugar, chances are you’re eating a lot more than you realize. Added sugar lurks in nearly 70 percent of packaged foods and is found in breads, health foods, snacks, yogurts, most breakfast foods and sauces.

The average American eats about 17 teaspoons of added sugar a day (not counting the sugars that occur naturally in foods like fruit or dairy products). That’s about double the recommended limit for men (nine teaspoons) and triple the limit for women (six teaspoons).

For children, the limit should be about three teaspoons of added sugar and no more than six, depending on age and caloric needs.

Cutting added sugar isn’t about dieting and deprivation, and you don’t have to count calories or cut fat. In fact, when you stop eating foods with added sugar, you’ll replace them with foods that taste even better. And yes, you can still have dessert.

Whether you are thin or fat, you can benefit by reducing the sugar in your diet. “It’s not about being obese, it has to do with metabolic health,” says Dr. Robert Lustig, professor of pediatric endocrinology at the University of California, San Francisco, and one of the first to raise the alarm about the health risks of added sugar. (His 90-minute lecture called Sugar: The Bitter Truth has been viewed more than nine million times since 2009.)  
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“Sugar turns on the aging programs in your body,” Dr. Lustig says. “The more sugar you eat, the faster you age.”

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A number of health authorities, ranging from the World Health Organization to the Office of Disease Prevention and Health Promotion, which issues national dietary guidelines for Americans, agree that cutting back on added sugars is a good idea. And critics like Dr.

Lustig believe that the case against sugar is as strong as the case against smoking or excess alcohol. (These recommendations have come under attack by groups with ties to the food industry.)

Yet many of us who wouldn’t dream of smoking or getting drunk on a daily basis might be unknowingly undermining our health by eating too much sugar. 
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“Sugar Belly”

Many scientists now believe that added sugar is a main culprit in the obesity epidemic, but normal-weight people can suffer the same health problems associated with too much sugar.  
A 15-year study found that eating high amounts of added sugar doubles the risk of heart disease, even for people who aren’t overweight. Added sugar has also been implicated in an increased risk for Type 2 diabetes, cancer, stroke and even Alzheimer’s disease.

And too much added sugar in your diet can damage your liver, similarly to the way that alcohol can. About a third of American adults and 13 percent of children have nonalcoholic fatty liver disease, a condition linked to added sugar consumption that is on the rise and that can progress to serious, even deadly, liver illness.

We’ve all seen the beer belly associated with drinking too much alcohol. Consuming too much added sugar can lead to a similar condition called “sugar belly,” in which your waist is bigger than your hips.

Sugar belly can arise when the liver repeatedly detects more fructose, a form of sugar found in fruits that is also added to many processed foods, than our bodies can use.

To deal with it, the liver breaks down the extra fructose and changes it to fat globules, which are then exported into the bloodstream and deposited around your internal organs and your midsection.

Fruit vs. Fructose

But isn’t sugar a natural food?

That’s a counter argument often promoted by the sugar industry, but there is nothing natural about the way most of us eat added sugar. When you eat a strawberry or other fruit, you are eating fructose in its natural state, and it comes with a number of micronutrients plus fiber, which slows absorption and the rate at which sugar enters your bloodstream.

So yes, it’s O.K. to eat fruit! Your body can handle fructose when it’s eaten as whole fruit.

But the fructose found in ultraprocessed foods and beverages is concentrated from corn, beets and sugar cane, and much or all of the fiber and nutrients have been removed. Without the fiber to slow it down, your body gets a big dose of fructose that can wreak havoc.

High consumption of processed fructose also can dull your body’s reaction to the brain hormone leptin, which is a natural appetite suppressant. A condition called “leptin resistance” can develop among high-sugar eaters, and the brain stops getting the message to stop eating, leading to weight gain.

And increasingly, the scientific community is acknowledging the addictive nature of the fructose in processed foods and beverages. Brain scan studies show that fructose affects the dopamine system, a messenger center in the brain that controls how we experience pleasure.

Eating lots of added sugar can create changes in the brain similar to those found in people who are addicted to cocaine and alcohol, and it’s one reason so many of us find ourselves craving sweets.

Cutting sugar is a simple concept, but it can be challenging when a majority of foods available in supermarkets contain added sugar.

Gary Taubes, author of “The Case Against Sugar” and an advocate of low-carb eating, scoffs at the food industry recommendation that added sugars be consumed in moderation.

Mr. Taubes has built a career touting the deleterious effects of processed food and added sugar. Just a few bites of a food like banana bread, he says, leave him wanting more.  
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“If I start to allow sugars into my life, there is a slippery slope,” he says. “I think for many people, getting control of their sugar habit is the most important thing they can do for their health. If they can’t do it through abstinence, then mostly-abstinence is a good thing to achieve.”
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Take the 7-Day Sugar Challenge

So how do you start reducing the added sugar in your diet? A good first step is to take our 7-day Sugar Challenge, which Will deliver a new strategy each day for cutting added sugar. By the end of the week, you will have adopted several new healthful habits that can put you well on the way to cutting added sugar from your diet for good.

To start, it’s a good idea to cut sugar out of breakfast, which tends to be the sweetest meal of the day. Cutting sugary beverages and eating whole foods rather than packaged foods makes a big dent in your sugar consumption. If you crave dessert, eat fruit instead (skip the grapes, which are mostly sugar), and it’s best to limit other types of dessert to once a week.

And when you read food labels, look for added sugar in disguise. “One should keep in mind that added sugars go by many different names like ‘brown sugar,’ ‘beet sugar,’ ‘agave nectar’ and ‘honey,’” says Dr. Frank Hu, chair of the department of nutrition at the Harvard T.H. Chan School of Public Health. “But don’t be fooled by these names, because they are all added sugars with similar metabolic effects and extra calories.”

Cutting added sugar isn’t easy. During the first five days of no added sugar, you will probably experience cravings for sweets. And be warned that studies show that many of us are particularly vulnerable to craving sugary snacks in the evening.

But stick with it, and soon the cravings will fade. You’ll start to feel more energetic, more focused and less irritable. You might even lose weight.

While our challenge lasts for seven days, the goal is to change your diet and stick with your new habits for a lifetime of healthful eating. After just 10 days of cutting added sugar, one important study of overweight children has shown improvements in numerous metabolic markers, including blood pressure, cholesterol and blood sugar.
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Note that cutting added sugar doesn’t mean you’ll be eliminating sweet foods from your life entirely. If you adopt a standard daily diet of whole foods with no added sugar, you will still be ingesting about 10 percent of your calories from natural sugars.

And once you’ve got added sugar under control, the occasional treat of chocolate or dessert won’t derail you. Dr. Lustig recommends three weeks of no added sugar to get your brain’s dopamine system back to normal.

“Then you can introduce something back in,” Dr. Lustig says. “But it’s got to be under your control, not the food industry’s control.”


Tara Parker-Pope is the founding editor of Well, The Times’s award-winning consumer health site. She won an Emmy in 2013 for the video series “Life, Interrupted” and is the author of “For Better: The Science of a Good Marriage.” @taraparkerpope