Angst in America, Part 5: The Crisis We Can’t Muddle Through
Angst in America, Part 5: The Crisis We Can’t Muddle Through
How the Washington blob swallowed Donald Trump
The US foreign policy establishment should be careful what it wishes for
by: Gideon Rachman
News that the US has launched missile strikes in the Middle East is not normally a cause for celebration. But there was no disguising the relief and pleasure with which the US foreign policy establishment greeted last week’s decision by the Trump administration to unleash a volley of cruise missiles on Syria. Liberal newspaper columnists, hawkish senators and allied ambassadors were united in their approval.
Their reaction reflected a widespread revulsion at the Assad regime’s use of chemical weapons on civilians and children. But a crucial underlying reason for the buzz of satisfaction in Washington is the hope that President Donald Trump’s actions prove that the world’s policeman is back on the beat.
The Washington foreign policy establishment, a group derisively labelled as “the blob” in Barack Obama’s White House, is united by the belief that the willingness to use military power is crucial both to America’s global standing and to the stability of the world order. Mr Obama’s failure to use force to back up an American “red line” over the use of chemical weapons in Syria in 2013 created widespread unease in the blob. And Mr Trump’s isolationist election rhetoric led to something closer to despair and fears of a complete abdication of US power.
So the sudden conversion of the Trump White House to military intervention in Syria has been hailed as a turning point. Mr Trump’s most ardent nationalist defenders meanwhile are appalled. Ann Coulter, author of In Trump We Trust, tweeted her dismay, asking: “Why get involved in another Muslim catastrophe?”
The Syria strikes have crystallised a growing sense that the foreign and security policies pursued by the Trump administration may ultimately turn out to be more conventional than his critics feared, and his nationalist supporters hoped.
In recent weeks, the signs of a shift towards conventional thinking have accumulated. Mr Trump has conspicuously failed to follow through on some of his most radical foreign policy pledges. He has not ripped up the Iran nuclear deal. He has not moved the US embassy in Israel to Jerusalem. He has switched from open hostility towards the EU to cautious support. He has not held a bromantic summit with Vladimir Putin.
Just a couple of days before the Syria strikes, it was announced that Steve Bannon, the president’s chief strategist and the main advocate of “America first” nationalism in the White House, had lost his seat on the National Security Council. General Michael Flynn, who shared many of Mr Bannon’s radical instincts, was sacked as head of the NSC in February. He has been replaced by Lieutenant General HR McMaster, a man who is revered by the blob. Some of the lower-level appointments at the NSC also sent an interesting message. The newly installed director for Russia and Europe at the NSC is Fiona Hill, a noted critic of Mr Putin, who has been plucked out of the Brookings Institution, a centrist think-tank.
The Syrian strikes took place as Mr Trump was playing host to Xi Jinping, his Chinese counterpart.
The outcome of the first US-Chinese summit of the Trump years was, once again, much more conventional than Mr Trump’s campaign rhetoric. During the election, candidate Mr Trump accused China of “raping” America and threatened to raise punitive tariffs on Chinese goods.
He promised that he would not treat Chinese leaders to fancy meals but instead would take them to McDonald's. In the event, Mr Trump offered Mr Xi pan-seared Dover sole with champagne sauce at Mar-a-Lago and emerged from the summit purring about the marvellous rapport he had established with the Chinese leader. Talk of tariffs and confrontations on the high seas had given way to the usual bland, blob-like commitments to joint dialogue and study groups. The Chinese had reason to be pleased, if a little baffled.
Some in the Washington establishment are nonetheless hopeful that the coincidence of the Syria strikes and the Xi summit might serve a useful purpose, sending the message to North Korea, Russia, China and others that the US once again has a leader who is comfortable using military force.
But foreign policy traditionalists should be careful about celebrating Mr Trump’s apparent conversion. The Syria strikes could yet be a turning point — in the wrong direction. Three particular risks present themselves. First, Mr Trump’s about-face on the Assad regime demonstrates his volatility. If he can chuck out a year’s worth of rhetoric on Syria in 24 hours, he could easily reverse himself again in response to the next shocking event.
Second, there is a risk that the president, who is obsessed with his poll ratings, notices that military strikes have boosted his popularity and develops a taste for this sort of thing. But later uses of force, in North Korea or elsewhere, could be a lot riskier than lobbing a few cruise missiles on to a Syrian air force base.
Finally, there is the obvious danger of escalation in the Middle East. There is little sign that Mr Trump has thought about the steps after the cruise missile attack. But the risks and contradictions of military action in Syria are evident, and range from a Russian military response to gains for the jihadis of Isis. The blob should put the champagne back in the fridge and stay tuned.
Major Choke Points in the Persian Gulf and East Asia
By George Friedman and Cheyenne Ligon
The Market Churn Before The Storm?
by: Orange Peel Investments
"...we do think that there is a real case for stocks simply trading sideways over the next few quarters and maybe even over the next few years. The equity market trading sideways while earnings ostensibly continue to increase would almost be the equivalent of a bear market, as valuations would compress, but the optics of the scenario wouldn't be as bad as a full-scale recession. This is the situation we think that the Federal Reserve might actually allowed to happen.
We continue to have numerous events globally that could cause volatility, but the markets just simply don't seem concerned. The continued investigations into the Trump administration regarding Russia and new conflict arising with North Korea don't seem to be of any concern to equity markets. We are not sure what it will take to create some volatility in the markets, and there's part of us that doesn't even want to know what this point."
Trump, China, and the Art of Easy Promises
Chinese officials can afford to make assurances about reducing the trade surplus—as long as things are going well back home
By Nathaniel Taplin
Donald Trump’s summit with Chinese President Xi Jinping this weekend may have passed calmly, but one comment should make investors sit up: Chinese officials expressed an interest in reducing the country’s trade surplus.
Given how hard the U.S. has been pressing on this subject—arguing that the gap is the product of unfair trade practices—this looks like great news for investors hoping the two sides can head off a trade war.
China has good reasons to want a narrower surplus. When its exporters sell their dollar earnings for yuan, the increase in the domestic money can stoke inflation—a headache the central bank had to deal with for much of the 2000s. Domestic inflation is already on the rise, thanks to massive credit-fueled stimulus in 2015 and 2016 and tighter capital controls that keep more money in the country. Lower export earnings might help subdue inflationary pressures.
The problem is that higher inflation may not last. When Chinese prices stop rising so quickly—and tighter credit starts pressuring heavily indebted corporations—assurances given on trade now will be harder to keep.
As recently as the third quarter of 2016, Chinese exports were contracting rapidly—down 7% from a year earlier—and capital was streaming out of the country. Factory-gate inflation was persistently negative, in part because the central bank’s efforts to support the currency by selling dollars and buying yuan were pressuring domestic money supply.
Those conditions could return easily. The main domestic drivers of inflation—easy money and real estate—are already showing signs of reversing. Commodity prices are losing momentum, and industrial overcapacity remains severe, making a sustained pickup in domestic inflation unlikely.
When, as seems likely, prices at home lose momentum, Chinese policy makers may welcome the money-supply boost that healthy export earnings provide. That is when investors will see whether this weekend’s cordiality has truly changed Chinese trade policy in a meaningful way.