War jitters in the Strait of Hormuz

Iran is blowing up ships in the Gulf, says America

How will the Trump administration respond?

THE BLACK-AND-WHITE video is grainy, but what it shows is clear, claims America. An Iranian patrol boat pulls up alongside a ship called the Kokuka Courageous. Iranian sailors, thought to be members of the Revolutionary Guard Corps, then remove an unexploded limpet mine from the hull of the ship. The Kokuka Courageous and another ship, the Front Altair, had been crippled hours earlier in “unprovoked attacks” by Iran on June 13th, said Mike Pompeo, America’s secretary of state. Iran denied it was to blame. But hardliners on both sides risk escalating the conflict.

This is the second time in just over a month that tankers have been damaged in the Gulf. On May 12th four ships anchored off Fujairah, a port in the United Arab Emirates (UAE), had holes blown in their hulls. A preliminary investigation suggests that they were damaged by limpet mines. America blamed Iran, which issued a denial. The latest explosions caused far more damage, forcing crews to abandon both ships as they were underway. It also sent the price of oil upwards. One-fifth of the world’s supply travels through the Strait of Hormuz, an important chokepoint for international shipping. 
America last month dispatched an aircraft-carrier strike group to the region, citing the threat of Iran; then, in response to the attacks on ships, it also began deploying an extra 1,500 troops to bases in Qatar, Bahrain and Iraq. America’s naval vessels will probably step up their patrols. “Ordinarily the fact that the US wasn’t directly targeted and there were no casualties would give Washington some breathing room to respond,” says Michael Singh of the Washington Institute for Near East Policy, a think-tank. “However, because the free flow of energy is of such vital importance to the world economy, there is a need to show a determination to secure the straits while calming fears of a conflict.” 
For an idea of how things could play out some are looking to the past. The so-called tanker war between Iraq and Iran in the 1980s ravaged shipping in the Gulf. Though most attacks were from the air, the Guards honed the use of mine-planting boats—similar to the vessel captured on video on June 13th. Eventually, and with reluctance, America agreed to reflag and escort Kuwaiti vessels through the area. When that did not work, American special forces, operating from special sea barges, were sent to hunt and destroy Iranian mine-layers. That culminated in Operation Praying Mantis: a major air and naval attack on Iranian ships and platforms in 1988.

A repeat of such dramatic moves remains unlikely, for now. Only a half-dozen tankers have been the target of attacks so far, compared with hundreds in the 1980s, and the damage has been limited. With more naval forces in the region, America should be able to keep an eye on suspect ships. Air and naval patrols, to monitor Iranian vessels and hoover up their communications, will have increased. That will make it harder for would-be attackers to approach tankers without being detected. Britain’s Royal Navy also has a frigate and four specialised mine-hunting units patrolling the region, but “we’re not going to be steamrollering into that area with grey ships,” says a well-placed source.

Iran has in the past threatened to close the Strait of Hormuz in response to American sanctions.

Some will see the strikes against ships in the area as a veiled warning of its readiness to make good on its threat. President Donald Trump said on June 14th that if Iran were to block the strait, “it’s not going to be closed for long.” (A study published in 2008 showed that if Iran were to mine the strait, it could take America “the better part of a month" to re-open it.) The Iranian government, for its part, issued a statement on June 13th saying, “The US and its regional allies must stop warmongering and put an end to mischievous plots as well as false flag operations in the region.”

Many hardliners in the Middle East would, indeed, like to see America go to war against Iran.

But the history of revolutionary Iran, including its threats to close the strait, mean that its government—or one of its factions—is the prime suspect. President Hassan Rouhani probably understands that attacking regional shipping would be to invite a Western military response. A day before the attacks he met Shinzo Abe, the prime minister of Japan, who tried to reduce tensions between America and Iran. But Mr Rouhani staked his legacy on a deal, signed in 2015, that loosened sanctions on Iran in exchange for limits on its nuclear programme. That seemed a good bet—until Mr Trump took office in America. Mr Trump’s decision to withdraw from the deal vindicated Iran’s hardliners, who have long argued that America is untrustworthy. Mr Rouhani’s popularity has plunged, and with it his control (always tenuous) over the Revolutionary Guards and other hawkish factions.

Iran’s supreme leader, Ayatollah Ali Khamenei, is decidedly in the latter camp. Though he gave Mr Rouhani space to negotiate the nuclear deal, his dismissive reaction to Mr Abe suggests that his patience has run out. (As it turned out, one of the ships hit in the latest attacks is operated by a Japanese company, Kokuka Sangyo.) Ideology aside, the Guards benefit from what they call the “resistance economy”. Two years ago Mr Rouhani was trying to reduce the group’s role in business. Now, with private firms sidelined, the Guards can step in as the contractor of last resort. Sanctions forced Total, the French energy giant, to pull out of a major offshore gas project; the Guards hope to take its place. The nuclear deal was a threat to the Guards’ interests, and the group has no desire to see it restored.

Both America and Iran seem to be calibrating their response to each other’s actions. With his economy sinking under the weight of American sanctions, Mr Rouhani has warned that Iran will abrogate parts of the nuclear accord unless other signatories—Britain, France, Germany, Russia, China and the European Union—help his country bypass the sanctions. The Guards may have drawn the conclusion that sporadic mine attacks are a deniable, low-cost and risk-free way to apply pressure on American allies, without incurring a military response.

“We want to get them back at the table, if they want to go back,” says Mr Trump, referring to his efforts to negotiate a new nuclear deal with Iran. But there are hardliners in America, too. Mr Trump’s hawkish national-security adviser, John Bolton, has long supported regime change in Iran, and even military action against it. In response to the attacks in May, American commanders in the Middle East are reported to have called for an increase of nearly 20,000 troops in the region. Moreover, countries such as Saudi Arabia and the United Arab Emirates have, in recent years, demonstrated a willingness and ability to take military action largely independent of America, in places such as Yemen and Libya. All sides insist they do not want war. But that may not be true of all players. And even if it were, the risk of miscalculation is growing.

Democrats take aim at big agribusiness

Tech companies are not the only ones under fire as competition concerns rise

Rana Foroohar

The two major beneficiaries of the global status quo since the 1980s have been big companies, and big countries. US president Donald Trump is (and will continue to be) spending much of his airtime ahead of the 2020 election going after the biggest of them all: China.

However, Democrats are focusing their economic policy attention at home on the issue of corporate monopolies. And in the last couple of weeks, they have come up with a new focus for their complaints about antitrust issues that could help them gain ground in Republican and swing states — agribusiness.

At a recent “heartland forum” in Iowa, five Democratic presidential hopefuls laid out policies to break up “Big Ag” and help small, family farmers. Elizabeth Warren said she would challenge mergers of big agricultural companies, such as German chemicals group Bayer’s 2016 purchase of US seeds group Monsanto. Meanwhile, Amy Klobuchar, the ranking member of the Senate antitrust subcommittee, complained that two seed companies dominate that market, and four railroads — the same number as “on the Monopoly board”— do most food shipping.

Other contenders, including Cory Booker and Bernie Sanders, have introduced measures to level the playing field in farming. Even the centrist think-tank, Center for American Progress, has come out with a report on concentration in agribusiness, pointing out that four transnational companies control the bulk of America’s food supply. That turns Midwestern pig farmers into unlikely mascots for the diminishing power of labour relative to capital, and links their fortunes to those of groups being targeted by the Democrats, such as gig economy workers. Their message is that while Mr Trump may claim China is the problem, America has bigger issues at home.

The markets for corn seed and meat processing are not quite as concentrated as those for mobile phones or search engines, according to data compiled by the Open Markets Institute. But farms are far more emotionally resonant than technology. The beleaguered American farmer has been a powerful political icon for decades — think of Dorothea Lange’s photographs of Dust Bowl migrants, or the 1985 Farm Aid concert featuring artists including Neil Young, Willie Nelson, and my fellow Hoosier John Mellencamp, whose hit song “Rain on the Scarecrow” was inspired by the worst rural economic conditions since the Depression: “The crops we grew last summer weren’t enough to pay the loans; couldn’t buy the seed to plant this spring, and the Farmer’s Bank foreclosed”.

Current conditions are not that bad, but they are not good. In April, a sentiment index based on a survey of 400 agricultural producers across the US, recorded the fourth largest one-month drop since data collection began in October 2015. Worries about trade had increased, the Purdue University/CME Group Ag Economy Barometer, found. Only 28 per cent of respondents felt that the growing dispute between the US and China over soyabeans (and other trade issues) would be resolved by July, down from 45 per cent the previous month. Nearly half wanted the US to rejoin the Trans-Pacific Partnership, the free trade pact that Mr Trump pulled out of shortly after his election.

This presents an opportunity for Democrats to pick up votes in crucial Midwestern swing states. Farming represents only 1.3 per cent of US employment. But nearly one in five rural counties depend on agriculture as a primary income source. In Iowa, the site of the caucuses that are an early test of US presidential candidates, 30 per cent of the economy is linked to agriculture.

What is more, concentration of power in agribusiness has been a bigger and certainly a longer-term problem for American farmers than China. As a few companies gained control of key areas of the food supply chain, spending on research and development fell, input costs rose, and margins for individual farms went down. The CAP report also documents small farmers being forced into opaque contracts and held up by ridiculous rules, such as those forbidding them to repair their machinery without permission from John Deere or other large manufacturers. (That is something Ms Warren wants to overturn.) Those who try to organise unions have faced retaliation.

It all fits into the larger Democratic effort to reset the economic discussion. They are promising to shift from a trickle down, market-knows-best, technocratic approach that limits the use of public policy solutions to one that acknowledges that where outsized power exists, it needs to be curbed with appropriate regulation.

Do not underestimate heartland support for Mr Trump. His approval ratings in Iowa are at the same level as before the trade war. And I have spoken to any number of people willing to take economic pain in order to reset what they see as a false “free” trade paradigm, in which China gets more than it gives.

But I think Democrats are wise to plant their policy seeds in Iowa. The president has done very little to help the Midwest in real terms over the past two years. Quite the opposite: Deutsche Bank calculates that eight of the 10 states most affected by Mr Trump’s tariffs voted for him in the last election.

Tension in the Strait of Hormuz

Who is blowing up ships in the Gulf?

A mysterious and violent game may yet lead to war

SHINZO ABE hoped this was a moment for diplomacy. His visit to Tehran this week, the first by a Japanese prime minister since the Islamic revolution in 1979, was meant to reduce tensions between America and Iran. After a meeting with Iran’s president, Hassan Rouhani, Mr Abe warned that the region could “accidentally” slip into conflict. And then, a few miles off Iran’s southern coast, came an illustration of how that might happen.

On June 13th two tankers in the Gulf of Oman sent distress calls after they had been damaged by large explosions. The Front Altair, flagged in the Marshall Islands and owned by Frontline, a Norwegian shipping company, was hauling a cargo of naphtha, an oil derivative, from Abu Dhabi; the Kokuka Courageous, registered in Panama and operated by the Japanese company Kokuka Sangyo, was laden with methanol. Both were bound for Asian ports. Photos from Iranian news agencies showed a fire burning on the starboard side of the Front Altair. The plume of black smoke overhead was thick enough to appear in satellite images. One-fifth of the world’s supply travels through the Strait of Hormuz, an important chokepoint for international shipping.

This is the second time in just over a month that tankers have been damaged in the Gulf. On May 12th four ships anchored off Fujairah, a port in the United Arab Emirates (UAE), had holes blown in their hulls. A preliminary investigation suggests that they were damaged by limpet mines. The latest explosions caused far more damage, forcing crews to evacuate both ships as they were underway. It will take weeks to probe what happened, amid reports of torpedoes being used. But the explosions do not seem accidental. The president of Kokuka Sangyo said the Kokuka Courageous vessel was “attacked” twice in a three-hour period.

Nor is it likely that two sets of explosions, weeks apart and in the same area, were mere coincidence. Though a UAE-led investigative team did not assign blame for last month’s sabotage, it said an unnamed “state actor” carried it out. America has blamed Iran for both sets of attacks. Iran, which is a regional rival of the UAE and Saudi Arabia, both American allies, has denied responsibility and hints that the latest explosions were orchestrated by its rivals. “Suspicious doesn’t begin to describe what likely transpired,” tweeted Iran’s foreign minister, Muhammad Javad Zarif, on June 13th.

Iran has in the past threatened to close the Strait of Hormuz if it were ever attacked. Some will see the strikes against ships in the area as a veiled warning of its readiness to make good on its threat. Messrs Zarif and Rouhani probably understand that attacking regional shipping would be to play with fire. But they do not call all of the shots in Iran. They are stuck in an internal battle with Iran’s ruling mullahs, who are more distrustful of the West, and their Revolutionary Guards, who back local forces in Syria and Yemen that have fought against Emirati- and Saudi-backed forces. Iran has a history of irregular warfare that allows it to maintain a measure of plausible deniability. In the 1980s it fought the so-called tanker war with Iraq. The conflict ravaged international shipping.

Tensions in the region have been rising since last spring, when Donald Trump withdrew from the deal, signed in 2015, that loosened sanctions on Iran in exchange for limits on its nuclear programme. Mr Trump reimposed sanctions and added new ones, in effect cutting Iran off from the global economy. After a year of abiding by the agreement, a bid to win European sympathy, Iran last month said it would begin enriching uranium in excess of the prescribed limits. Mr Rouhani warned that he would abrogate other provisions unless other signatories—Britain, France, Germany, Russia, China and the European Union—helped his country bypass American sanctions, which is unlikely to happen. Critics of Mr Trump’s approach have long warned that economic distress would lead Iran to lash out.

For the Arab states across the Gulf, these latest explosions fit into a troubling pattern. In May, two days after the Fujairah incident, two blasts in the centre of Saudi Arabia, 700km north of the Yemeni border, damaged an oil pipeline that carries crude across the kingdom. On June 12th a rocket hit the international airport in Abha, a Saudi city 200km from the Yemeni border, injuring 26 people. Both attacks were carried out by the Houthis, a Shia militia that controls large parts of Yemen and is fighting a Saudi-led coalition there. A United Nations panel of experts has said that Iran supplied weapons to the Houthis, including drones and missiles, though the group does not always act at Iran's behest.

But Saudi Arabia and its allies have tried not to escalate directly a conflict that would wreak havoc on their oil exports, and thus their economies. The UAE has been particularly circumspect in its public statements about last month’s sabotage (though in private officials evince little doubt about Iran’s involvement). If there is to be a response, they would like it to come from America. Mr Trump’s hawkish national security adviser, John Bolton, has long supported regime change in Iran, and even military action against it. But the president, as ever, is erratic, toggling between fiery threats and offers of dialogue. He is reported to have given Mr Abe a message to pass to Iran’s supreme leader, Ali Khamenei (who declined to reply). “We do not believe at all that the US is seeking genuine negotiations with Iran; because genuine negotiations would never come from a person like Trump,” said Ayatollah Khamenei.

Mr Trump has already bolstered America’s military presence in the region. Last month he rushed an aircraft-carrier strike group to the region. Those vessels have not transited the Strait of Hormuz, an effort to avoid further tension. They will probably step up their patrols; an American destroyer picked up some sailors from the stricken tankers (Iran says it rescued some too). The Pentagon is deploying an extra 1,500 troops to bases in Qatar, Bahrain and Iraq, and Mr Trump is invoking emergency powers to override congressional objections and sell weapons to Saudi Arabia and the UAE.

All sides insist they do not want war. But even if they are sincere, good intentions go only so far. The Gulf states (and their American protector) cannot tolerate threats to shipping. Mr Abe was right to push for diplomacy between America and Iran. But his visit, and the events that overshadowed it, underscore how difficult that will be.

No, China Can’t Sink the U.S. Treasury Market

Chinese officials are more likely to retaliate against flagship U.S. companies than the government bond market

By Jon Sindreu

China owns U.S. Treasurys worth $1.1 trillion, but threats that it could dump them and upend the bond market ring hollow. Potshots at corporate America have a better chance of getting through to President Trump.

On Monday, Chinese media reported that officials could use the country’s Treasurys as leverage in their response to the Trump administration’s new barrage of tariffs. They have already announced retaliatory taxes on $60 billion worth of U.S. goods.

China can’t give as powerful a blow as the one it is taking—the U.S. is far less dependent on exports—but it can still inflict pain, especially given that President Trump seems to care a lot about how the stock market is doing. The S&P 500 has lost almost 5% since the start of last week, including a 2.4% dip on Monday. Technology and industrial stock have been hardest hit.

The threat to the Treasury market is far less real. In 2015 and 2016, foreign nations dumped U.S. government bonds at the fastest sustained pace in recent history as part of a portfolio strategy to find higher returns elsewhere. Many investors feared the Treasury market would buckle.

But it didn’t, and was never likely to.

Government bond prices mostly depend on investor expectations of where the central bank will set interest rates. That is particularly true of Treasurys, which are the most liquid asset in the world. Even massive selling can only move prices for a short time. In 2016, the flood of bonds on the market seemed to have a small impact for a few months, but it was quickly absorbed.

And that was at a time when the Federal Reserve was intent on tightening policy. This time, tensions with China are leading investors to expect lower rates, encouraging them to buy bonds. Ten-year Treasury yields, which move in the opposite direction to prices, have now fallen to roughly 2.4%.

Another complication for China is that Treasurys are the most convenient asset for reserve managers because of their stability and liquidity. It will be difficult for Chinese officials to find somewhere else to put the proceeds, especially when bringing them back home would buoy the yuan, giving exporters another problem on top of the U.S. tariffs.

This doesn’t mean selling Treasurys is impossible for China. Officials could leave the cash in banks or buy U.S. dollar assets in other countries. Dollars could even be swapped for euros and Japanese yen rather than the home currency.

China can’t give as powerful a blow as the one it is taking—the U.S. is far less dependent on exports—but it can still inflict pain. Photo: greg baker/Agence France-Presse/Getty Images

But why would Beijing go to all this trouble for what would likely be—at most—a small scratch in the Treasury market? China’s retaliation is more likely to be directed where it can be effective, such as at flagship U.S. companies. Appleand Boeing ,for example, have customers and plants in China.

For a decade, global investors have failed miserably every time they have fought the Fed. They can at least rest easy in the knowledge that China won’t succeed either.

The Return of Fiscal Policy

Public debt is not a free lunch in an economy close to full employment. But when investment demand tends to fall short of saving, as it does when monetary policymakers are unable to push inflation higher to reduce real interest rates, there is a risk of chronic underemployment – and a stronger argument for deficit spending.

Barry Eichengreen


FRANKFURT – Five years ago, the French economist Thomas Piketty made a splash with his book Capital in the Twenty-First Century, in which he argued that there is an innate tendency toward wealth concentration in market economies. The mechanism to which Piketty pointed was that the rate of interest, r, is higher than the rate of economic growth, g. With r>g, owners of the means of production – the capitalist class – earn a return that exceeds the growth of the economy as a whole.

By highlighting the problem of wealth inequality and providing a pithy explanation of it, Piketty struck a chord. Not many economics books sell more than a million copies.

Earlier this year, another French economist, Olivier Blanchard, the outgoing president of the American Economic Association and a former chief economist of the International Monetary Fund, gave an acclaimed address in which he argued that the debt-carrying capacity of the advanced economies is greater than commonly supposed. The basis for his conclusion was that the rate of interest was less than the rate of economic growth. With r< g, the debt-to-GDP ratio, which measures a society’s capacity to service debts, will have a denominator that is growing faster than the numerator, so long as the budget is close to balance. Meanwhile, John Williams, the president of the Federal Reserve Bank of New York, has published a series of widely cited studies showing that the real (inflation-adjusted) rate of interest has been trending downward for fully two decades. So have we now moved from Piketty’s r>g world to Blanchard’s r< g world? If so, can their views be reconciled?

The answer is no and yes. The views of Piketty and Blanchard can indeed be reconciled, because they are talking about different interest rates. While Blanchard focuses on the rate on low-risk government bonds, Piketty is concerned with the return on risky capital investments. Because the two interest rates are separated by a risk premium of roughly five percentage points, it is entirely possible for the rate on government bonds to be below the economic growth rate, while the rate on capital is above it.
Why the risk premium is so large is a bit of a mystery. One must assume that consumers are incredibly risk-averse in order to generate a premium of the observed magnitude. Still, the existence of this risk premium explains how Piketty and Blanchard can both reach their respective conclusions.

What are the implications for policy? Williams’s analysis, by highlighting that interest rates are unusually low for this stage of the business cycle, cautions that there may be little room to cut them in a downturn. This prospect has led the Fed to launch a comprehensive review of its monetary-policy strategy.

For Piketty, the rising wealth concentration that results from a large risk premium calls for higher taxes on the wealthy on equity and social-cohesion grounds. For Blanchard, the implication is that governments can safely accumulate more debt. In countries with pressing infrastructure needs, like the United States, there is room for additional public investment. Similarly, government-funded forgiveness of student loan debt, as advocated by Senator Elizabeth Warren, may make sense, because members of the current generation would receive significant relief while future generations would pay only a small share of their higher incomes to service additional public obligations.

That said, public debt is not a free lunch in an economy close to full employment. By spending more, the government will be tapping additional scarce resources. Other spending, including investment, will be crowded out, implying weaker economic growth.

But what about an economy that is not at full employment? This is the case considered by another prominent economist, former US Treasury Secretary Lawrence Summers, who takes Williams’s analysis a step further. Summers argues that the rate of interest delivered by market forces, left to their own devices, is now significantly below zero. Because twenty-first-century firms like Google and Facebook require only modest amounts of tangible capital, and because the relative price of capital goods has been falling, the “natural” rate of interest that equates saving with investment is now actually negative, absent policy support.

But nominal interest rates can’t be forced much below zero. And monetary policymakers, for their part, seem unable to push inflation above 1-2% in order to drive down real interest rates. Investment demand therefore tends to fall short of saving, creating a risk of chronic underemployment.

In this case, the argument for additional deficit spending to supplement deficient private spending is stronger, because there is less risk of crowding out productive private investment. This does not mean that the scope for running deficits is unlimited, because at some point safe government debt could be re-rated as risky, causing interest rates to rise. That said, these arguments lead to a straightforward conclusion: in the future, we will have to rely more on fiscal policy and less on monetary policy to achieve stable and equitable growth.

Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era.