Battered, bruised and jumpy — the whole world is on edge

Not one global power is optimistic and even in America, which should be cheering, the mood is sour
Daniel Pudles illustration©Daniel Pudles
In 2015, a sense of unease and foreboding seemed to settle on all the world’s major power centres. From Beijing to Washington, Berlin to Brasília, Moscow to Tokyo — governments, media and citizens were jumpy and embattled.
This kind of globalised anxiety is unusual. For the past 30 years and more, there has been at least one world power that was bullishly optimistic. In the late 1980s the Japanese were still enjoying a decades-long boom — and confidently buying up assets all over the world. In the 1990s America basked in victory in the cold war and a long economic expansion. In the early 2000s the EU was in a buoyant mood, launching a single currency and nearly doubling its membership. And for most of the past decade, the growing political and economic power of China has inspired respect all over the world.
Yet at the moment all the big players seem uncertain — even fearful. The only partial exception that I came across this year was India, where the business and political elite still seemed buoyed by the reformist zeal of prime minister Narendra Modi.
By contrast, in Japan, faith is fading that the radical reforms, known as Abenomics, can truly break the country’s cycle of debt and deflation. Japanese anxiety is fed by continuing tensions with China. However, my main impression from a visit to China, early in the year, is that this too is a country that feels much less stable than it did even a couple of years ago. The era when the government effortlessly delivered growth of 8 per cent or more a year is over. Concerns about domestic financial stability are mounting, as the upheavals in the Shanghai stock exchange over the summer revealed.
However, the main source of anxiety is political. President Xi Jinping’s leadership is more dynamic but also less predictable than that of his predecessors. Fear is spreading among officials and business people, who are scared of being caught up in an anti-corruption drive that has led to the arrest of more than 100,000 people.
The slowing of the Chinese economy has had global ramifications. When China was fuelling a commodities boom, Brazil was pulled along like a water-skier attached to a speedboat. This year, though, the Brazilian economy sank beneath the waves, contracting by 4.5 per cent.
President Dilma Rousseff has been caught up in a corruption scandal amid attempts to impeach her.
The mood in Europe is also bleak. The year was framed by two bloody terrorist attacks in Paris. The economic crisis that has bedevilled the continent for several years threatened to come to a head in July, as Greece teetered on the edge of expulsion from the eurozone.
Meanwhile, Germany — which has stood out as a beacon of political and economic strength — is now struggling to cope with the arrival of more than 1m refugees, mostly fleeing conflict in the Middle East. The euro had already created divides between Germany and the nations of southern Europe, and the refugee crisis has driven a wedge between it and countries to the east.
Meanwhile, Britain is threatening to leave the EU and French voters are turning to the far-right in ever greater numbers.
If you judge by the economic figures, the US should be an exception to all this gloom. The country is in the sixth year of an economic expansion. Unemployment is about 5 per cent. The US dominates the internet economy. And yet the public mood is sour. The prospect that the Republicans, one of America’s two great political parties, might genuinely nominate Donald Trump, a boorish demagogue, as its candidate for the presidency, does not suggest that the US is at ease with itself. Indeed, Mr Trump’s entire campaign — and that of his main rivals for the GOP nomination — is based around the idea that America is in dangerous decline. Beyond these local factors, are there common elements behind this global unease? Clearly, the world economy has not fully recovered from the financial crisis. There is also a widespread fear that, after years of highly unorthodox monetary policy, another financial or economic crisis might be building.
On the political and security front, the implosion of the Middle East continues. Outside powers have proved unable to restore order to the region and are finding that disorder is spreading to Africa and Europe, in the form of refugees and jihadi terrorism.

The biggest common factor is also the hardest to pin down — a bubbling anti-elite sentiment, combining anxiety about inequality and rage about corruption that is visible in countries as different as France, Brazil, China and the US. In America and Europe, such complaints are often linked to a pervasive narrative of national decline. These social and economic anxieties have political side effects, fuelling a demand for “strong” leaders, such as Mr Xi, Mr Trump or Vladimir Putin of Russia, who promise (however hypocritically) to tackle the corrupt elites, fight for the little guy and stand up for the nation.

The global gloom makes the international political system feel like a patient that is still struggling to recover from a severe illness which began with the financial crisis of 2008. If there are no further bad shocks, recovery should proceed gradually and the worst political symptoms may fade. The patient is vulnerable, however. Another severe shock, such as a major terrorist attack or a serious economic downturn, could spell real trouble.

A Happy New Year for Europe?

Carl Bildt

 European flags

PARIS – As the European Union prepares to enter the new year, it faces an almost perfect storm of political challenges. The strategy it has used in the past – barely muddling through a series of calamities – may no longer be enough.
Of course, the EU is no stranger to crisis management. The euro crisis, for example, was widely expected to destroy it; but, after a couple of years of tough summits, the issue was more or less handled. Greece remains in poor shape, but it has retained its EU and eurozone membership.

And the EU now has stronger mechanisms for economic-policy coordination.
But the situation today is far more demanding than anything the EU has seen so far – not least because of the sheer number of serious challenges that Europe faces. Far from the “ring of friends” that EU leaders once envisioned, the European neighborhood has turned into a “ring of fire,” fueled largely by the combination of Islamist terrorism and Russian aggression in eastern Ukraine. The idea that the EU, with its open societies and firm rule of law, would inspire those values in surrounding countries has been turned on its head, with the disorder of Europe’s near abroad projecting tensions and instability into the Union.
One of those challenges is the surging refugee crisis, fueled by conflict in the Middle East, especially Syria. To be sure, only a tiny fraction of those who have been displaced are currently seeking to enter the EU, and the million refugees expected to arrive this year represent only about 0.2% of the EU’s population. But when so many arrive in so short a time in just a few countries, the EU’s capacity to manage the influx has been overwhelmed, and controls at some borders within the Schengen Area have been restored.
In 2016, EU countries can be expected to get a handle on the immediate challenge, agreeing to key steps to control borders and share the burden of migration more equitably. But the longer-term challenges – integrating the refugees into European society and countering the rise of xenophobic political parties – will be far more difficult.
Even without the refugee crisis and its aftershocks, the EU would be facing a demanding agenda. Progress on both the Transatlantic Trade and Investment Partnership and a single digital market are central to the EU global competitiveness, as are efforts to implement the planned capital-markets union. As if that were not enough, a new “global foreign and security strategy,” to replace the one that was developed during the more optimistic days of 2003, must be in place by June.
To fulfill this demanding agenda, the EU must be at its best, cooperating effectively on multiple fronts simultaneously. That will be extremely difficult at a time when the United Kingdom is flirting with withdrawal. Although it seems increasingly likely that British Prime Minister David Cameron will strike a deal with his European counterparts by February, the chances that British voters will endorse the deal in the subsequent referendum, which Cameron has promised to hold in 2017, are probably no higher than 50/50.
Of course, referenda are inherently unpredictable. On December 3, Danes voted on whether to modify their country’s opt-out on EU home and justice matters to an opt-in (which would allow Europe-wide rules to be adopted on a case-by-case basis). Very few predicted that the change would be rejected – and even fewer that it would be defeated so soundly, with 53% voting no.

The refugee influx clearly influenced the result. Likewise, any new crisis conditions that emerge between now and the British referendum, especially close to the vote, could affect the outcome.
The resulting uncertainty is highly damaging. A vote against continued EU membership would be a disaster of the first order for Europe. With the EU’s geopolitical clout greatly reduced, anti-EU forces in other member countries would gain strength. After expanding for more than a half-century, the EU would suddenly start shrinking. Dealing with the consequences of a UK exit would consume too much political oxygen in the succeeding years to address the myriad other challenges Europe faces.
Whatever happens, one thing is certain: a year or two from now, the EU will look very different. It might be a fractured union, so preoccupied with arresting its breakdown, spurred by the UK’s withdrawal, that it stumbles on virtually every other issue it faces. Or it could be a vigorous union that includes the UK and has gotten its act together on refugee, border, and asylum issues and is finalizing the TTIP and the digital single market.
In this sense, whether the new year is a happy one for Europe may well determine whether the next decade is a happy one – both for Europe and those, including the United States, that depend on it.

A Monster With A Key To Its Own Cage

By: John Rubino

Out on the fringes of monetary policy, a merger of sorts is taking place between the debt jubilee and Modern Monetary Theory (MMT). The result -- likely to emerge sometime in 2016 -- will make the past decade's bank bailouts and QE programs look like kid stuff.

Let's start by defining these terms:

The debt jubilee -- an idea from biblical times in which debts are periodically forgiven -- involves the government creating a lot of new currency and giving it to debtors, either through stepped-up public spending, tax cuts, or some sort of direct transfer. A more recent term for this is "helicopter money," which reflects a central bank's ability to simply drop newly-printed bills out of an aircraft if necessary.

Modern Monetary Theory asserts that in today's world there's no reason for governments to borrow money and levy taxes. Armed as they are with fiat currencies and unlimited printing presses, they can just fund themselves directly, without having to tax their citizens or issue bonds.

The synthesis of these two concepts calls for government to eliminate the current debt overhang through some form of jubilee, i.e., by creating a bunch of money and giving it away with the proviso that the recipients use the windfall to pay off debt. Borrowers get out from under, creditors get paid in full, and a new monetary age begins with a relatively-clean slate. Then the government abolishes taxes and starts self-funding via the printing press, creating as much money as it needs to do what has to be done.

Australian economist Steven Keen is one of the highest-profile proponents of this idea. Here he is on a recent Max Keiser:

This is obviously a big change, but because it promises to solve so many problems so painlessly it's attractive in a world where leverage has run amok and the number of governable countries is shrinking fast.

The first tentative step towards a jubilee/MMT fusion is now being debated in Finland:

Finland considers giving every citizen 800 euros a month

Finland is taking a new approach to lift its economy as it faces record-high unemployment. The nation is moving toward offering its citizens a tax-free payout of 800 euros, equivalent to $868 USD per month, in place of current social welfare payments, child benefits, and state pensions.  
The proposal that's being designed by the Finnish Social Insurance Institution would benefit all citizens, regardless of whether or not they receive any other income. A final proposal will not be presented until November 2016, Quartz reports. If it's approved, Finland would become the first to implement universal basic income. Giving every Finn 800 euros per month comes with a pretty hefty price tag. Based on the country's population of 5.5 million, it will cost a total of 52.8 billion euros a year. 
So far, the plan seems to be gaining support. A survey commissioned by KELA shows that 69 percent of the Finnish population is in favor. 
Finland's economy has struggled to find ways to dig itself out of recession since 2012. Prime Minister Juha Sipilä told the BBC, "For me, a basic income means simplifying the social security system." 
Finland is not the only country that is debating basic income programs. Switzerland will hold a referendum on a proposal to pay each citizen about 2,500 Swiss francs a month next year, while the Netherlands plans to begin universal income pilot projects in several cities next year.
For readers who view this as a good idea, please go back to the first part of this post, note the phrase "... creating as much money as it needs to do what has to be done ..." and consider the implications.

Even if the new monetary system begins with limits on, say, spending as a portion of GDP, the fact that government is the entity that measures both spending and GDP makes nominal limits a sad joke.

To get higher spending in such a regime a government only has to tweak the black box that spits out, for instance, the inflation measure used to turn nominal GDP into to real GDP. Or it can fiddle with the imputed rent that homeowners could get if they made their homes available, or any of a dozen other subjective measures of growth and spending.

And the limits themselves, unless written into a revised constitution, would be subject to congressional vote and so will rise whenever the next emergency is engineered. There is, in short, no possible way to keep a self-funding government from growing like crazy, providing every possible perk for major constituents and trying to impose its will on its neighbors. We'll have put a monster in a cage, not realizing that it can open the door whenever it wants.

Said another way, if giving governments fiat currency printing presses caused a bit of trouble in a system with bond markets and debt ceilings, imagine what giving them the power to spend as much as they deem necessary without reference to any external limit would do.

Actually don't bother imagining. Just wait a few years to find out.

Saudi riyal in danger as oil war escalates

“If anything happens to the riyal exchange peg, the consequences will be dramatic," warns the country's exchange rate guru

By Ambrose Evans-Pritchard

The Saudi riyal is under serious speculative attack 
Saudi Arabia is burning through foreign reserves at an unsustainable rate and may be forced to give up its prized dollar exchange peg as the oil slump drags on, the country’s former reserve chief has warned.
“If anything happens to the riyal exchange peg, the consequences will be dramatic. There will be a serious loss of confidence,” said Khalid Alsweilem, the former head of asset management at the Saudi central bank (SAMA).
“But if the reserves keep going down as they are now, they will not be able to keep the peg,” he told The Telegraph.

His warning came as the Saudi finance ministry revealed that the country’s deficit leapt to 367bn riyals (£66bn) this year, up from 54bn riyals the previous year. The International Monetary Fund has suggested Saudia Arabia could be running a deficit of around $140bn (£94bn).

Remittances by foreign workers in Saudi Arabia are draining a further $36bn a year, and capital outflows were picking up even before the oil price crash. Bank of America estimates that the deficit could rise to nearer $180bn if oil prices settle near $30 a barrel, testing the riyal peg to breaking point.

Dr Alsweilem said the country does not have deep enough pockets to wage a long war of attrition in the global crude markets, whatever the superficial appearances.

Concern has become acute after 12-month forward contracts on the Saudi Riyal reached 730 basis points over recent days, the highest since the worst days of last oil crisis in February 1999.
The contracts are watched closely by traders for signs of currency stress. The latest spike suggests that the riyal is under concerted attack by hedge funds and speculators in the region, risking a surge of capital flight.

A string of oil states have had to abandon their currency pegs over recent weeks. The Azerbaijani manat crashed by a third last Monday after the authorities finally admitted defeat.

The dollar peg has been the anchor of Saudi economic policy and credibility for over three decades.

A forced devaluation would heighten fears that the crisis is spinning out of political control, further enflaming disputes within the royal family.

Foreign reserves and assets have fallen to $647bn from a peak of $746bn in August 2014, but headline figures often mean little in the complex world of central bank finances and derivative contracts.

Dr Alsweilem, now at Harvard University's Belfer Centre, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”

The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preperaring the ground for recovery in prices. But the current situation is sui generis.

The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.

The energy intensity of global GDP is falling rapidly. Renewable technology and energy efficiency have both made huge strides. The latest climate accords in Paris imply some form of carbon tax that will ratchet upwards over time, slowly changing the cost calculus for oil use.

“There is an overwhelming feeling among many in Saudi Arabia that this crisis is just cyclical and that it will reverse soon, so everything will be OK. But the danger is that what is happening is structural, and that means a country like Saudi Arabia can’t just sit still,” said Dr Alsweilem.
The Saudi government may have unveiled an austerity package of spending cuts and increased taxes, and be looking to slash electricity and water subsidies for the wealthy. But Riyadh has to tread with care. The country’s cradle-to-grave welfare system is what keeps a lid on dissent and binds the country’s fissiparous tribal polity.

Prince Mohammed bin Salman, the 30-year old deputy crown prince now running the country, is trying to push through radical reforms, firing princelings from sinecure positions and bringing in an elite team of technocrats to transform Saudi Arabia’s archaic oil-based economy.

He is drawing on a McKinsey study – ‘Beyond Oil’ - that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 with a $4 trillion investment blitz across eight industries, from petrochemicals to metals, steel, aluminium smelting, cars, electrical manufacturing, tourism, and healthcare.

The underlying message of the report is that Saudi Arabia faces disaster unless it can overcome its resources curse - and reinvent itself fast, and this includes an acceptance that women must be drawn fully into the workforce.

The warnings have been seized on with alacrity by Prince Mohammed to confront vested interests.

The public debt to GDP ratio will reach 140pc by 2030 and the deficit will still be in double digits, if only partial reforms are pushed through. That course implies bankruptcy.

Dr Alsweilem said Saudi Arabia is now paying the price for failing to establish a proper sovereign wealth fund during the fat years along the lines of the Norwegian Pension Fund or the Abu Dhabi Investment Authority. “What matters is a credible long term-fiscal strategy rather than short-term measures. The IMF has warned them repeatedly on this,” he said.

The Saudis can disguise the effect of reserve depletion by issuing bonds to raise money but this is mere legerdemain under the current monetary structure. “It is completely wrong to think the Ministry of Finance can protect foreign assets by borrowing in riyal instead of selling reserves. This does not help at all. There is a one-for-one outflow from savings accounts,” said Dr Alsweilem.

Saudi Arabia has taken a diametrically different route to Russia in the gruelling price-war between the two petro-powers, as each knuckles down in the hope that the other will crack first.

Russian President Vladimir Putin shakes hands with Saudi Arabia's Defense Minister Prince Mohammed Bin Salman in the Konstantin Palace, St. Petersburg, Russia
Russian President Vladimir Putin shakes hands with Saudi Arabia's Defense Minister Prince Mohammed Bin Salman  Photo: Rex

The Kremlin has stopped running down reserves and has instead allowed the rouble to fall by 60pc against the dollar. This is painful for Russian consumers but protects the internal budget from the immediate shock of collapsing oil revenues.

Both face crises, but each of a different character. What is clear is that Russia and Saudi Arabia will both be in deeper trouble by 2017 unless they can agree to cut crude production and eliminate the global glut. No such concordat is yet on the cards.