Farewell Uncle Sam, hello Uncle Donald

The Trump administration is undermining some of America’s closest alliances

Gideon Rachman

All over the world there are countries that rely on the protection and leadership of the US. But dependable old Uncle Sam seems to have gone on a long vacation — and his malicious twin, Uncle Donald, has taken up residence in the White House. The result is confusion and soul-searching among some of America’s closest allies.

Three countries — Britain, Australia and Japan — exemplify the problem. All three pride themselves on their close relationships with the US. All three are currently led by centre-right governments that would normally expect good relations with a Republican president.

And yet all three have seen their prime ministers humiliated or put in excruciatingly awkward situations by Mr Trump. The most recent example came with the president’s retweeting of anti-Muslim videos from a far-right group in Britain. The result has been an unseemly, unprecedented and wholly unnecessary row between the US president and the British prime minister. Mr Trump’s much-deferred “state visit” to Britain is now disappearing into the dim-and-distant future.

Theresa May is simply going through the kind of bruising encounter, already experienced by Malcolm Turnbull, the Australian prime minister. His first phone call with Mr Trump degenerated into a row after Mr Turnbull asked the president to uphold a US-Australian agreement on resettling refugees.

Shinzo Abe, the Japanese prime minister, has skilfully avoided embarrassing showdowns with Mr Trump. But no amount of bonhomie on the golf course can disguise the fact that Mr Trump’s election led to a calamity for the Abe government. On his very first day in office, the new US president repudiated the Trans-Pacific Partnership — a multi-nation trade deal that Mr Abe had made the centrepiece of his economic and security policies.

Despite these humiliating rebuffs, the British, Australian and Japanese governments have all gritted their teeth — and attempted to humour Uncle Donald. All three countries face challenges that make them more anxious than ever to cling to the US. The rise of China has made both Japan and Australia determined to bolster the American presence in the Pacific. Britain is struggling with Brexit and dreams of a new trade deal with the US.

Dependence on the US is also deeply embedded in the foreign and security policies of the three nations. So they are all holding on to the hope that Uncle Donald’s advisers will keep America roughly on course, until reliable old Uncle Sam reappears once again.

The pliant attitudes of Britain, Japan and Australia might lead Mr Trump to conclude that dishing out the occasional humiliation to close allies is a cost-free exercise. But that would be excessively complacent. For while official policy remains unaltered, Britain, Japan and Australia are all now having public debates about their relationship with the US that highlight the possibility of radical changes in the future.

The Turnbull government has just issued a white paper which asserts that “Australia will continue strongly to support US global leadership”. But some prominent Australians argue that basing their nation’s foreign policy on an alliance with the US is not a sustainable long-term option. Hugh White, a former senior official who is now an academic, has long argued that China will displace America as the dominant power in the Pacific. Mr White believes that the election of Mr Trump is a “massive additional blow” to Australia’s traditional reliance on the US.

The crisis over North Korea could bring Australian doubts about Mr Trump to a head. Mr Turnbull has said that Australia would join a war on the Korean peninsula “if there is an attack on the US”. But Australian officials warn that the situation would be very different if a Korean war is initiated by a US pre-emptive strike. In that case, Australia would not fight alongside America — breaking with the precedent established in two world wars, Korea, Vietnam and Iraq.

The Korean crisis and the erratic nature of the Trump administration are also causing soul-searching in Japan. Mr Abe remains determined to hug the Americans close. But only 24 per cent of Japanese say they trust Mr Trump to “do the right thing” in world affairs — compared with 78 per cent who trusted former president Barack Obama. These plummeting levels of faith in US leadership mean that hitherto taboo ideas are entering the public debate in Japan — with the left pushing for a rapprochement with China, and the right advocating much faster rearmament.

Britain’s options seem even narrower than Japan’s, because the UK is locked into longstanding relationships with the US over intelligence and nuclear weapons. But Brexit has demonstrated that the British public is willing to consider policy shifts that seem inconceivable to the establishment. Jeremy Corbyn, the leader of the opposition Labour party, has a long record of anti-Americanism — and may now find the British public much more in tune with his own deep suspicion of Washington.

Given his disdain for US allies, Mr Trump probably does not worry too much about the views of the UK, Japan and Australia. But America’s network of alliances — such as the US-Japan security treaty, Nato and the Anzus treaty — are bedrocks of US power. If those alliances are allowed to crumble, America’s global power would crumble with them.

Ego Trip in Brussels

Juncker Seeks Greater Commission Control over Eurozone

By Peter Müller and Christian Reiermann

French President Emmanuel Macron and European Commission President Jean-Claude Juncker
French President Emmanuel Macron and European Commission President Jean-Claude Juncker

European Commission President Jean-Claude Juncker would like the EU executive to have more control over the Eurozone in the future. But member states aren't eager to give up control.

Jean-Claude Juncker never lets others outshine him if he spots an opportunity to give the European project a boost. And that goes for friends and enemies alike.

Indeed, the European Commission president has now come up with a project that not only transgressions the mandate given him by the leaders of the European Union member states, but also pits him against all the Eurozone finance ministers as well.

Juncker was supposed to reach an agreement with finance ministers from the common currency area on proposals for deepening European integration he will present at the forthcoming EU summit later this month. Plans for greater EU integration are currently in vogue, a trend started by French President Emmanuel Macron, who presented his ideas for a better Europe two days after the German election in late September.

But instead of getting the finance ministers on board, Juncker has embarked on an ego trip. On Wednesday, the Commission is to present its plan without any input from the finance ministers whatsoever. The Eurogroup of 19 Eurozone finance ministers met in Brussels on Monday and on Tuesday it was the turn of Ecofin, which represents the EU finance ministers, but officially neither group was consulted on the Commission's plans.

"The entire approach is a disaster," one participant complained. And because the national experts had no input, it's unlikely that EU heads of state and government will do more than simply take note of Juncker's proposals.

The timing is an expression of rivalry between the Commission and the EU member states when it comes to questions relating to theeconomic and currency union. And the finance ministers aren't likely to be impressed with the content, either. After all, the Commission's proposals are designed to increase its own influence at the expense of the member states.

Turning the ESM into an EU Institution

But there is more at stake than just a few bruised Brussels egos. The clash over competencies between European institutions risks torpedoing the French president's drive for reform.

For the first time in years, the French have seized the opportunity to once again set the tone in the EU. Yet, their call to arms is being met with hardly any response. Germany is preoccupied with forming a new government -- and nothing much happens in Brussels without Chancellor Angela Merkel. Juncker, though, does not want to stand accused of wasting the chance to implement reforms.

His central idea is to turn the EU bailout fund, the European Stability Mechanism, into an EU institution. Up to now, it has remained an intergovernmental body, controlled by the Eurozone countries. As such, it's the national finance ministers who have the final say, not the Economic and Monetary Affairs Commissioner Pierre Moscovici. They are the ones who decide if, when and to what extent a country that gets into financial difficulties should be helped.

By turning the bailout fund into an EU institution, Juncker hopes that the Commission will have access to the ESM's sizeable financial means. The ESM can extend loans worth a total of half a trillion euros. In order to ensure it maintains the highest possible credit rating, member states provide the fund with 700 billion euros in paid-in capital. Juncker, of course, would like to see that capital remain in the ESM, even as his plan calls for the countries that supplied the capital to lose some of their influence over how it is spent.

Turning the ESM into an EU institution should in theory necessitate treaty change, but the Commission has come up with a way around that requirement. Article 352 of the EU Treaty, a kind of emergency clause, allows the Commission to grant itself competencies it might need.

The chances of Juncker's proposal finding success are slim, for the simple reason that all member states must approve it. In Austria, the ESM is anchored in the constitution. And even Macron, the self-appointed EU reformer, is unenthused by the idea. France is the largest contributor to the ESM after Germany, yet according to Juncker's plan, Paris in the future would no longer have a say in how it is used.

There is, though, a rival idea to Juncker's and one that stands a much better chance. ESM head Klaus Regling, along with a handful of Eurozone finance ministers, want to expand the bailout fund into a kind of European Monetary Fund with broad powers for budget supervision and crisis management - an idea first proposed by former German Finance Minister Wolfgang Schäuble. The idea would be for the ESM to have a budget available to aid countries that are not officially in a bailout program but which need help to weather external shocks. One potential candidate, for example, could be Ireland, should its economy suffer drastically as a result of Brexit.

Juncker would also like to create a mechanism to deal with such cases, but with the Commission pulling the strings. He would like to see a so-called stabilization function in the EU budget with funding in the hundreds of billions of euros. It's not clear where that money might come from, but just as in the case of the ESM, the battle lines are drawn: Should it be the Commission or the member states who decide how the money is distributed?

Juncker, though, has yet another idea that could cost a lot of money. He would like to see countries that do carry out reforms be rewarded financially. And his package contains several more elements that might provoke ire, such as the proposal for a common deposit guarantee for EU banks. Germany has long opposed such a thing, and its joined by a number of other member states. These governments don't want to see their banks set aside capital only for it to be used to protect customers of foreign banks from the loss of their deposits.

Raising Hackles

Juncker is also seeking to avail of dozens of billions of euros in the ESM as a kind of nest egg for future bank bailouts. Experts describe this as a backstop, with the money being made available for bailing out struggling financial institutions that have not amassed enough of their own capital. Here, the Commission president is acting upon the wishes of the member states.

However, another of Juncker's plans is raising hackles. He wants to use a Eurozone-wide figure to determine whether the Stability Pact is being adhered to. That would mean that individual countries would no longer have to keep new borrowing below 3 percent of GDP, but the common currency are as a whole, which has long been the case.

The Commission denies that it wants to weaken the Stability and Growth Pact. According to information obtained by DER SPIEGEL, however, Monetary Affairs Commissioner Moscovici has long been pushing for a greater used of aggregate figures for the whole of the Eurozone.

This idea would essentially be a blank check for countries unwilling to keep a handle on their deficits. The more some countries met their own obligations and achieve surpluses, the more debt others would be able to accrue. "That would undermine the Stability Pact," warns Markus Ferber, financial expert with the Bavarian Christian Social Union. "The issue is not that the Eurozone is not keeping to its debt targets, but that individual countries are not." The European Commission is also proposing to no longer use the fiscal compact. Instead the focus should be on countries reducing their public debt.

Juncker's preference would be that the Economic and Monetary Affairs Commissioner would also take over the presidency of the Eurogroup. However, it's highly unlikely that the irritated finance ministers are going to allow an EU commissioner tell them what to do.

As such, critical voices are not just to be found in the member states' finance ministries. Guntram Wolff, head of Bruegel, the influential Brussels-based think tank, is also unimpressed by the proposal to merge the Economic and Monetary Affairs portfolio with the Eurogroup presidency.

That would "unduly mix the roles of the Commission and the Council," he wrote in a Bruegel policy brief. And Wolff has major issues with the reform plans. "Juncker's proposal would over-emphasize the Commission when fiscal policy making is national."

Dealing with Asymmetric Shocks

Yet, Schäuble's plans for the expansion of the ESM into a kind of European Monetary Fund with its own budget is also criticized in the brief, which was published last Friday. The former German finance minister "neglects the fact that national fiscal policy matters for the euro area," Wolff writes.

Instead Wolff suggests developing the Eurogroup into a sort of European financial government. He envisions a permanent, full-time Eurogroup president reporting to European Parliament and representing the interests of the entire Eurozone. The Commission would continue to oversee the Eurozone member's fiscal policies, but the Eurogroup president would have the political weight to put pressure on countries to reform.

Member states that ended up in financial difficulties through no fault of their own and which were not eligible for ESM aid could be helped via a so-called stabilization instrument as part of the EU budget, but with far less funding than that envisaged by Juncker. A fund amounting to between 50 and 70 billion euros would enable "significant support" to be provided to countries affected by so-called asymmetric shocks. "It would be insurance to support specific countries," Wolff writes.

Meanwhile, the Eurogroup remains an informal group for now. On Monday, the 19 finance ministers gathered in Brussels to elect a new president to replace the outgoing Dutch Eurogroup head, Jeroen Dijsselbloem, who is giving up the post in January. Portugal's Mário Centeno was elected and in his acceptance speech, he said that he looked forward to working with his peers "to form a consensus" on the Eurozone's future.

The Portuguese finance minister now faces another election in the coming months: that for the chair of the board of governors of the ESM.

Bitcoin Achieved What The Gold Market Never Could & Never Will

By: Sol Palha
There is no absurdity so palpable but that it may be firmly planted in the human head if you only begin to inculcate it before the age of five, by constantly repeating it with an air of great solemnity.
Arthur Schopenhauer
Gold bottomed in 2002, and it took nine years for its trade to a high of roughly $1900 (September 2011). Contrast that to Bitcoin, in less than 1/3rd of the amount of time it is showing gains of more than 11,000%.  It took nine years for Gold to show gains of roughly 700% and Gold has given up a substantial portion of those gains.
We bailed out of Gold in 2011 for two reasons:
  • Gold was trading in the extremely overbought ranges, and the Gold Bug Camp could not contain their glee; they thought the sky was the limit. Instead, they found out that the Ground was a lot closer.
  • The masses were not embracing Gold, and they refused to treat or view it as a currency.

Only those from the hard money camp continued to believe that Gold was a currency,  but sadly their numbers are dwindling with the passage of each day. The masses view Bitcoin as cool and secure; a feat Gold has struggled to achieve and is not likely to achieve in the foreseeable future.  Whether this is true or not, hardly matters for when it comes to investing, perceptions are all that matter.

Does this mean the precious metals sector is dead?

Well, that depends on what one means by dead.   Gold has performed abysmally since (it topped out)  2011.  The money supply soared, and Gold tanked, not exactly a good sign. In doing the opposite of what was expected from it, Gold cemented the view that it was an ancient relic that has no place in today’s monetary system. We are speaking in terms of Mass Perception. What we think, matters not; we follow trends, and we don’t waste time trying to look at things from a personal vantage point.  There are many reasons for Gold’s underperformance after 2011; one of them was the “velocity of the money supply” which all but stalled after 2011. However, the masses don’t waste time on details like this. They look for simple cause and effect answers. Money supply soared, Gold did nothing, and hence Gold is a waste of time.  A bit simplistic but that’s the mass mindset for you.  However, looking forward some factors could limit Gold’s lustre.

Demand for Gold in India continues to drop

India's gold consumption is likely to drop to its lowest in eight years in 2017, hit by government moves to make bullion trading more transparent and by faltering demand from some rural areas, the World Gold Council (WGC) said on Thursday.

Evidence of weaker appetite in a country where gold is used in everything from investment to wedding gifts could drag on global prices that have been hovering near their highest in three weeks. India is the word's No 2 consumer of gold behind China. Full Story

The Dollar appears to be putting in a base

The dollar topped in early 2017 and what did Gold do? Absolutely nothing; take a look at the chart below. Instead of surging to new highs it could not even trade past its July 2016 highs. 

The dollar, in contrast, has been going through a well deserved period of consolidation after mounting a stunning rally that started in 2011.  It tested support and held, and as long as it does not close below 90 on a monthly basis, the outlook will remain bullish.  Consequently, a monthly close above 94.50 will open the possibility for a test of the old highs.

The dollar topped in Jan of 2017 as mentioned above but if one looked at the chart of Gold only, one would think that the dollar hardly pulled back. The reaction was boring, to say the least, and to make matters worse; Gold put in a lower high than it did in July of 2016, even though the dollar traded below its 2016 lows. 

Gold has also been putting a series of lows since 2013, and during this period it has not managed to trade above $1350 for a significant period.   A fortress of strength comes into play in the $1350 ranges, and unless it can trade above this level on a monthly basis, the outlook will remain Neutral to bearish.


The dollar is getting ready to mount a rally, demand for Gold is declining, and Gold has been unable to trade past $1350 even in the face of a weaker dollar.   Then we have the Bitcoin market, which the masses (especially millennia’s) find to be a lot more exciting and rewarding than Gold. All these factors don’t bode well for Gold.  It appears that Gold is likely to test the 1000 ranges unless it decides to diverge and trend upwards in tandem with the dollar.   Bitcoin, on the other hand, is now in the feeding frenzy stage, so this market is ripe for a correction.

However, the upward move is still not over. After a hard correction, Bitcoin is likely to resume its upward trend.

Gold will probably never experience a move akin to that of Bitcoin, but that does not mean it won’t make for a good investment one day. For now, the trend is neutral;  a weekly close below $1100 will darken the outlook for Gold, but a monthly close above $1350 will indicate that Gold is ready to trend higher.

Word to the wise; never fall in love with any investment.  In the end, it’s the trend that you should pay attention to, for no sector can trend upwards forever.  The odds of the Dow trading to 29,000 are far better than of Gold trading to $1900.

Iteration, like friction, is likely to generate heat instead of progress.

George Eliot

The Elusive Benefits of Flexible Exchange Rates


Currency boards

CAMBRIDGE – In 1953, Milton Friedman published an essay called “The Case for Flexible Exchange Rates,” arguing that they cushion an economy from internal and external shocks by bringing about just the right price changes required to keep the economy at full employment.

But after almost half-a-century of floating exchange rates, the reality is more complicated than that.

To understand Friedman’s logic, consider a scenario in which productivity in the United States rises. In an efficient system, this should reduce the price of US goods relative to those of the rest of the world, with US exports becoming cheaper than imports. As America’s terms of trade (the ratio of export prices to import prices) deteriorate, demand is shifted toward US goods, keeping the economy at full employment.

If prices are “sticky” (in the producer’s currency), however, a potential hitch emerges. Say the prices of US imports from Japan are sticky in Japanese yen and the prices of US exports to Japan are sticky in dollars. The terms of trade will thus remain unchanged, as long as the exchange rate does as well.

Here is where a floating exchange rate comes in. By enabling monetary expansion, and thus causing the US dollar to depreciate, the logic goes, a floating exchange rate allows the prices of US exports to decline relative to its imports. The result is the desired deterioration of the producer’s terms of trade and the maintenance of full employment.

But this line of reasoning assumes that a country’s terms of trade move in lockstep with its exchange rate. And that, as history over a quarter-century has shown, does not seem to be the case.

In a recent paper, the International Monetary Fund’s Emine Boz, Princeton’s Mikkel Plagborg-Møller, and I construct bilateral export- and import-price indices for 2,500 country pairs, covering 91% of world trade for the period 1989-2015. We exclude the prices of commodities (oil, copper, and other such goods that are traded on an exchange), as these prices are not sticky.

As it turns out, there is no evidence that the terms of trade and the exchange rate move in tandem. On the contrary, a 1% depreciation in the bilateral exchange rate is associated with only a 0.1% depreciation in the bilateral terms of trade in the year of the depreciation. The origin of this disconnect – which Camila Casas, Federico Diez, Pierre-Olivier Gourinchas, and I describe in a 2016 paper – seems to be that, for the vast majority of internationally traded goods, prices are sticky in dollars, not in the producer’s currency, as Friedman’s reasoning required.

Consider the case of the US and Japan. Almost 100% of US exports to Japan are priced in dollars, meaning that they, as in Friedman’s version, are sticky in dollars. But 80% of US imports from Japan are invoiced in dollars, meaning that those prices, too, are sticky in dollars, rather than in Japanese yen. As a result, the terms of trade change very little, even if the exchange rate fluctuates.

This means that, even if the US dollar depreciates, it does not become more expensive for US importers to buy Japanese goods, so there is limited incentive to switch from Japanese to US goods.

A weaker dollar thus has limited impact on US imports. Likewise, a weaker yen does little to spur Japanese exports to the US, because the dollar price of those exports remains roughly constant.

This phenomenon applies even to trade transactions that do not include the US. As I documented in a 2015 paper, the share of world imports invoiced in US dollars is 4.7 times larger than the share of world imports involving the US. For world exports, that figure is 3.1.

This “dominant currency paradigm” lies at the root of the terms-of-trade disconnect.

In fact, we document that global trade prices and volumes are driven by the dollar exchange rate, rather than the exchange rate between the two trading partners’ currencies. So fluctuations in the price and quantity of India’s imports from China, for example, depend on the rupee-dollar exchange rate, rather than the rupee-renminbi exchange rate. The strength of the US dollar is thus a key predictor of aggregate trade volume and consumer/producer price inflation worldwide.

Friedman was right about one thing: flexible exchange rates do provide valuable monetary-policy independence. But, in a dollar-dominated trade environment, their ability to support full employment is severely limited.

Gita Gopinath is Professor of Economics at Harvard University. She is a visiting scholar at the Federal Reserve Bank of Boston, a research associate at the National Bureau of Economic Research, and a World Economic Forum Young Global Leader.