The Steele Papers

Dossier at Heart of Trump Scandal Still Dogs President

By Christoph Scheuermann and Jörg Schmitt

At the heart of Donald Trump's Russia scandal is a mysterious dossier prepared by a former British intelligence agent. Many of the suspicions in the papers have been confirmed and have hounded his presidency for two years now.

Donald Trump and Vladimir Putin

The story of the intelligence report that has dogged, threatened and angered Donald Trump since the beginning of his term in office began in a sparsely furnished office in central London, just a stone's throw away from Buckingham Palace. The room has gray carpeting, bare walls and, at its center, a conference table made of dark wood. Displayed on a sideboard are matryoshka dolls with painted portraits of Russian authors -- Tolstoy, Gogol and Dostoyevsky -- as souvenirs from Moscow. The noise of people typing on a keyboard emanates from the adjacent room. This is the home of Orbis Business Intelligence, a kind of miniature intelligence agency for the private sector. The firm is run by two British men, Christopher Steele and Christopher Burrows.

Steele and Burrows have more in common than just the same first name. Both have gray hair, an inconspicuous appearance and a posh middle-class accent. Steele is 54 and lives in the county of Surrey, Burrows is 60 and lives in York. They're about as English as it gets. Before they established their company 10 years ago, they worked for the British foreign intelligence service, MI6. Steele was an undercover agent in Moscow for a number of years, and later headed the agency's Russia desk; Burrows was stationed in India, Greece and Brussels. Both served as spies for Her Majesty's government.

The difference between the two is that Steele won't talk, at least not publicly. Burrows spoke one year ago to The New Yorker -- and now he's agreed to be interviewed by DER SPIEGEL.

Steele is the author of the dossier on Donald Trump and his entourage that was leaked to the public two years ago, shortly before the inauguration of the 45th president of the United States. In the report, the former spook cites high-ranking sources from Russia who make scandalous allegations. They say that Trump was wooed and backed by Putin's regime for years, and they accuse his election team of colluding with the Russians in the summer of 2016 in a bid to tarnish Hillary Clinton's reputation and win the election.

For over two years now, the Russia affair has been hanging like a dark cloud over Trump's presidency. In a report published on Jan. 26, The New York Times listed more than 100 contacts that Trump and his allies had with Russia, such as meetings, emails and text messages, just in the period of time between the launching of his candidacy and the day of his inauguration.

Meanwhile, special counsel Robert Mueller has indicted 34 suspects, including Trump's former campaign manager, Paul Manafort, who is mentioned in the Steele dossier along with many other Trump allies. The most recent indictment was filed by Mueller on Jan. 24 against Roger Stone, a longtime Trump adviser. Stone is accused of witnesses tampering and making false statements to a congressional committee about his communications with WikiLeaks, which published emails stolen from the Democratic National Committee during the presidential election campaign. Stone denies the allegations.

Steele's Russia dossier lies at the heart of the scandal. It reads today like a preview of everything that has happened since then. Many of the names that dominate the Trump-Russia affair appeared for the first time in the report, like Aras Agalarov, for example, a Russian property mogul. There's also Trump's former lawyer Michael Cohen, former campaign adviser Carter Page, Trump's former national security adviser, Michael Flynn, and Rosneft Chairman Igor Ivanovich Sechin. They all appear in Steele's report -- and they've all become important for Robert Mueller's investigation.

The 35-page dossier consists of 17 individual reports that Steele wrote between June and December 2016. The report was commissioned by a Washington-based political research and intelligence firm called Fusion GPS. The investigation was initially ordered by a major Republican donor to gather material against Trump, but it was later funded by the Democrats.

Steele alerted the FBI to his suspicions back in July 2016. Together with the findings of the FBI, the dossier blew open the scandal. Steele is ultimately responsible for a good deal of the investigative work that led to the appointment of a special investigator. Aspects of Steele's report that seemed incredible and inconceivable over two years ago now sound far more plausible.

The most vulgar and still unconfirmed allegation is listed right at the beginning of the dossier, on Page 2. According to Steele's sources, Trump stayed in the presidential suite of the Moscow Ritz-Carlton Hotel and reportedly looked on as prostitutes gave each other golden showers on a bed in which Barack Obama had once slept. One informant said that the Russian authorities had collected "enough embarrassing material" to blackmail Trump.

Trump denies the allegations. Last week, he took to Twitter again to denounce Steele's dossier, which he claims was paid for by Clinton, as "fake and unverified." The paper continues to hound him.

The story of the Trump-Russia dossier vacillates between an espionage thriller and a mafia movie set in London, Berlin, Prague, Moscow, New York and Washington. Key figures include former British agents Steele and Burrows; Trump's former associate Michael Cohen; journalist Ben Smith, the editor-in-chief of BuzzFeed News, which decided two years ago to publish the dossier; and Carter Page, a pro-Russian consultant who has received death threats.

I. The Spies

Christopher Burrows is the kind of intelligence agent who quickly charms people. He's cultured, well-read, has a penchant for the fine arts and can fluently converse in Greek, German and French. He's sitting in a café in Berlin, not far from Savignyplatz, and he's here on a rather unpleasant business matter. Burrows' firm is engaged in a legal battle with the German company Bilfinger over 150,000 euros in outstanding fees for an investigation commissioned by the company.

Burrows knows Berlin from previous stays. He came to the city as a student in the late 1970s and served as a member of the British Embassy staff in the mid-1980s. Speaking in German, he orders calf's liver, Berlin style. Then he says: "We didn't expect the findings on Russia to reach the public."

This is the second time that he has spoken publicly on the matter, the first time being last year in an interview with a journalist from The New Yorker. Burrows says it annoys him that the report is referred to as a "dossier" when "it's actually information that is referred to as 'raw intelligence' in intelligence circles." He says the reports are in large part a summary of tips from sources that Steele knew from his time in Russia -- a mixture of knowledge, rumor and hearsay, not a "dossier."

He goes on to say that an intelligence agency would enrich the findings with data, test probabilities and write analyses. It's an elaborate process. But Steele is not an intelligence agency. His company employs eight people. Steele is a man with good contacts.

His job was to investigate whether and -- if they actually did it -- how Trump's people colluded with the Russians. When he found information that confirmed this theory, he informed the U.S. authorities. "We were concerned about national security," says Burrows. After all, as he points out, it concerned a presidential candidate who may have been manipulated by Russia.

Steele and Burrows are convinced that spies from friendly powers should assist each other if they suspect foul play. Both men move in a world of people who work in the shadows, deal with sensitive information and go to the office in the morning with the knowledge that they carry the weight of the world on their shoulders. They see themselves as indispensable, but, as with Christopher Steele, are not prepared to speak openly about it. They're not really spies - they're more like business people.

Burrows says: "We also informed the German authorities when we received information that terrorists were mingling with Syrian refugees."

Steele's first report to his client was submitted on June 20, 2016, and the second dates from July 26. In early August both of these reports were handed over to FBI agents in Rome. Steele's findings made their way into the ongoing U.S. investigations into Trump's election campaign team.

II. The Witness

For years, Michael Cohen was the self-proclaimed "fixer" in the Trump organization, sort of like a crime-scene cleanup man who shows up when the boss has messed up again. He has the compact and pugnacious strut of an amateur boxer who expects somebody to take a swing at him at any moment. Only 17 months ago, he said that he would take a bullet for Trump. Now he's cooperating with Mueller and has become the key witness in the affair.

Cohen's story shows to what extent the dossier anticipated developments that did not come to the attention of the public until months and, in some cases, years later. Steele's suspicions were staggering. During the election campaign, Cohen allegedly took part in a clandestine meeting with envoys dispatched by the Russian president. According to Steele's source -- who is the friend of a "Kremlin insider," -- the meeting with the Russians took place in Prague, sometime in August or September 2016. Cohen maintains to this day that he has never been to Prague.

Cohen is also an interesting minor character in this saga because he has sparked so many new scandals. First his name appeared in the Trump-Russia dossier, then last year he said that, acting on orders from Trump, he paid $130,000 in hush money to a porn star to cover up their alleged affair.

According to the dossier, Cohen and three other Trump emissaries met with people in Prague, including a man named Oleg Solodukhin. The meeting allegedly had to do with paying off Romanian hackers who, under the direction of the Kremlin, had been working to undermine the Clinton campaign. Cohen and Solodukhin reportedly discussed how they could funnel the money to the hackers and how the cooperation between Trump and Putin's people could be covered up.

Steele wrote that Trump's people and the Russians agreed at the meeting that the Romanian hackers should go into hiding and "other operatives should head for a bolt-hole in Plovdiv, Bulgaria where they should 'lay low.'"

What a story! -- that is, if it's true. Trump's lawyer allegedly conspired with the Kremlin. If this can be proved, it would amount to treason, but so far there is no concrete proof.

Late last year, the U.S. newspaper publishing group McClatchy reported that one of Cohen's mobile phones had logged on to a cell phone tower near Prague at the time in question. The journalists referred to four anonymous sources. But Cohen has repeatedly stated that he has never been to Prague or anywhere else in the Czech Republic.

Oleg Solodukhin, the alleged contact from Russia, works for a Russian government agency in Prague. Western agencies have reason to believe that the agency has close ties to the Russian intelligence service. In a written statement to DER SPIEGEL, Solodukhin denies having met Cohen or anyone else from Trump's entourage. He also says that he has never worked for intelligence agencies.

Neither Steele nor Burrows are willing to comment on the individual allegations in the dossier. Close associates of theirs, though, say that the two men are fairly certain that Cohen was in Prague in late summer. There is no proof, they admit, but there are indications that a meeting may have taken place. Cohen could have flown to Germany in a private jet and landed at an airfield in Bavaria, from where he could have crossed the Czech border without being checked. Cohen's lawyer declined to comment on this and instead made reference to Cohen's statement from August 2017, in which he denies all allegations.

This fits with a story currently circulating among intelligence officials in Europe. Acting "on behalf of an affiliated agency," the Czech intelligence agency purportedly planned to observe a meeting between Solodukhin and another individual. But the surveillance was reportedly called off "because the matter was too sensitive and the security precautions surrounding the meeting were too tight." The Russians had "taken countermeasures." The Czechs were allegedly not informed by their foreign partners of the reason behind the operation or who might possibly attend the meeting.

The Prague story was so important to Steele that he wrote an update on Cohen five weeks after Trump's election victory. This was the last of his 17 reports, dated Dec. 13, 2016. His previous reports were already on the desk of then-FBI Director James Comey. The Steele dossier started to make the rounds in Washington.

III. The Journalist

The headquarters of BuzzFeed News is located on the fifth floor of an office building not far from the East Village in New York. An assistant leads the way along rows of workstations, all occupied by journalists, and motions toward a conference room with glass walls. Slips of paper, books and notes lie scattered on the table, and a half-empty bottle of whiskey stands on a shelf.

Ben Smith apologizes for being late -- he just gave a TV interview. The previous evening, BuzzFeed reported that Cohen told special counsel Robert Mueller he had been instructed by Trump to lie to Congress about a real estate project in Moscow. The news sent shockwaves through Washington, even though the special counsel quickly denied the story. Cohen, as usual, was making headlines.

Smith says he learned about the existence of the dossier before Christmas 2016. He was not the first journalist to hear about Steele's investigations. At the time, Steele had traveled to Washington and informed a select group of reporters. In late October, Mother Jones magazine published an article outlining Steele's findings. Smith was determined to get his hands on the dossier.

BuzzFeed News can't be compared with The New York Times. The website is colorful, plastered with photos, and it occasionally tips into gaudiness. It's immediately apparent that much of the workforce here is under 50. At the same time, Smith endeavors to publish investigative reporting. "We've been reporting aggressively on the Russia scandal for more than two years," he says.

In late December 2016, Smith dispatched a reporter to Washington to find Steele's dossier. Parts of it had made their way into the hands of members of Congress. The journalist hit pay dirt with a staff member at the think tank of the now deceased Senator John McCain. Shortly thereafter, Smith had the dossier in his hands and set out to verify the information.

"We put a lot of reporters on it," says Smith. A team tackled the fact-checking, but it wasn't easy. Many claims were difficult to verify working under pressure and with limited resources, especially without a direct line to Trump or Putin. A BuzzFeed reporter flew to Prague with a photo of Michael Cohen and asked hotel staff if they recognized the man. Then, while their reporting efforts were in full swing, a CNN report broke that was the first to mention "memos" by a former intelligence agent.

This was on Jan. 10, 2017. Smith said: Let's post the dossier online.

It was one of the most momentous journalistic decisions of recent years. A secret report alleging that a newly elected president had won the election with the help of the Kremlin was suddenly revealed to the eyes of the world. The big difference here was that these sensational findings originated not from a government or an intelligence agency, but instead from the interview notes of a former spook with friends in Russia.

"It was a big deal for us to release the dossier," says Smith, adding that the American public had a right to see the original document. When Steele wrote his reports, says Smith, the Americans knew hardly anything about Russian attempts to influence the election. "In the summer of 2016, these were explosive accusations."

This sparked a race among American journalists to land exclusive stories. It looked as if Trump's presidency was hanging by a thread even before he was sworn into office. Less than two weeks after taking office, Trump fired National Security Advisor Michael Flynn because he had lied about his contacts to the Russian ambassador -- and in May, the president dismissed FBI Director James Comey, presumably in the hope of burying the investigation. Then came Mueller.

BuzzFeed continues to benefit from the dossier, and Smith's reporters are still getting mileage out of Steele's findings today.

IV. The Adviser

Carter Page was at the airport in Boston, waiting for a flight to the Middle East, when Smith published the Steele dossier. Page is a wiry, baldheaded man who gets red in the face when he's nervous. He was in the U.S. Navy, worked at an investment bank and finally joined the Trump team as a foreign policy adviser specializing in the energy sector and Russia.

Looking back, Page says: "I was just a minor player -- an unpaid volunteer."

Steele wrote on Page 9 of the dossier that Page secretly met with the head of Russian oil and gas giant Rosneft during the summer of 2016. The two men allegedly discussed the possibility of easing sanctions that the U.S. Treasury had imposed against the Rosneft CEO and other associates of Putin. On Page 30 of the dossier, it says that Page was offered Rosneft shares if Trump lifted the sanctions.

Page denies everything: the meeting with the Rosneft boss, the financial offer and the discussion about a more favorable U.S. foreign policy toward Moscow. His theory: "Mr. Steele was hired to influence an election." In other words, not to benefit Trump, but to help Hillary Clinton.

Early last week, he agreed to a short phone call, which ended up lasting a half-hour. He also sent text messages and emails to DER SPIEGEL with links to websites and documents as evidence of his innocence. Page says that Steele was fed false information by European intelligence agents to pave the way for a war against Russia. He says that he lived in Russia for three years, adding: "I know the truth."

It was a meandering interview. Page has the ability to dodge a question with such a profusion of words that you forget what it was you were asking. He refused to say from where he was making the call, citing the death threats that he has received. "I'm in the United States," was all he could say.

Has he ever met the head of Rosneft?

"Never," he said.

Has he spoken to others at Rosneft?

"Let me mention someone who I've met. He works for Gazprom and his name is Gerhard Schröder."

He never had anything to do with the people at Rosneft?

"OK, on July 6, 2016, I was in Moscow at a party thrown by an American bank. There were dozens of people there. By coincidence, I struck up a conversation with a guy from Rosneft. It was a real big deal." He means this ironically.

What remains certain is that Page was one of the campaign team members with connections to Moscow. Steele has documented this. Page's proximity to Putin's people is another piece in the Russia puzzle because it reveals how close the contacts to Moscow were within Trump's entourage.

Page is still dealing with the aftershocks of the dossier and he's embroiled in legal skirmishes. Among Russian experts in Washington he has a reputation for being a hopeless Putin apologist. Six years ago, two Russian undercover agents in New York tried to recruit him as an informant -- that's documented because the FBI had wiretapped the phone call at the time.

What did the Russians have to say about page? He's an "idiot."

V. The Consequences

Chris Burrows, the former spy and Steele partner, orders a cup of coffee after his meal. He says that the weeks following the publication of the dossier were the worst of his life. Photographers and camera teams camped out in front of his office, and eventually also at the door to his house in York. "My wife took the children and headed north to stay with friends for a few days. I spent a night at my eldest daughter's place in London."

Steele was harder hit. His picture was all over the newspapers, TV and internet. He went into hiding for two months, slept at friends' houses and grew a full beard so he wouldn't be recognized. "What worried him the most was his three cats," says Burrows. "We were under siege and didn't know if a maniac wanted to get at our throats." They suspected that an Israeli detective agency run by former Mossad agents had been hired to track them down.

The excitement has since died down. The two former spooks are able to resume their work, even though the publication of the dossier has meant that they have been called to testify in lawsuits involving the Russian Alfa Bank and entrepreneur Aleksey Gubarev. The number of requests for their services has risen, says Burrows. Ultimately, the dossier has been good for business.

Michael Cohen, Trump's former associate, was sentenced last December to three years in jail. He'll start serving his term in March. Cohen says that he and his family felt "threatened" by Trump and, in a surprise move, he decided to cancel a planned public congressional testimony. It sounded like something out of The Sopranos. This Friday, he is expected to testify in a closed-door session before the Senate Intelligence Committee.

Steele's reports on Russia remain astonishingly newsworthy two years after they were released. It seems that every week there is a yet another breaking news story that stems from something in the dossier. Now it's up to Robert Mueller to separate truth from fiction.

Friends of Steele say that the former agent believes that "80 to 90 percent" of the contents of the dossier are true. Perhaps a source here and there has made a mistake or exaggerated, but they argue that the main points of his findings have been confirmed. This is especially true when it comes to the extent that Russia exerted influence on the presidential election. They point out that Trump allowed himself to be compromised by his business dealings in Russia, as confirmed by countless revelations that have surfaced since the dossier was published.

And what about the allegation that Trump hired prostitutes to urinate on a hotel bed in Moscow where the Obamas once slept? Even people close to Steele doubt that proof of this will ever be found. Steele always gives the same response to this question: "The sources for this were good."

Translated from the German by Paul Cohen

The Brexit delusion of creating ‘Singapore upon Thames’

Promoting a small Asian city-state as a model for Britain is magical thinking

Martin Wolf

Singapore is not a laissez faire paradise © Bloomberg

Inside two months, the UK might have crashed out of the EU into a “no deal” limbo. What happens then? For some Brexiters, the answer seems to be to blame this disaster on the EU and then turn the UK into Singapore, or what they imagine Singapore to be. These people are right on one thing: Singapore has been a great economic success. But it is not a laissez faire paradise. On the contrary, its success has been built on hard work, forced sacrifices and a (relatively benign) authoritarianism. We should learn from Singapore, but must not think it a plausible model for the UK’s future.

Of the economic successes of the UK’s former colony, there is no doubt. By 1980, Singapore’s real gross domestic product per head had converged on the UK’s. By 2018, it was more than twice as high. According to the IMF, Singapore’s real GDP per head is fourth in the world (after Qatar, Macau and Luxembourg).

As a city-state with a tiny domestic market, Singapore’s future lay in attracting foreign multinationals and skills. With no domestic market to speak of, free trade was an obvious choice. But free trade is not laissez faire. Singapore promoted new industries. It continues to have large shareholdings via Temasek, its sovereign wealth fund.

Singapore has exploited a superb location in the fast-growing Asian region, its increasingly high-quality workforce and low taxes to turn itself into a premier hub for international business. But it has also participated actively in regional integration via the Association of Southeast Asian Nations. Crucially, the reliability of Singapore’s “offer” to the world is underpinned by the fact that just one highly competent governing party has ruled it throughout its history as an independent country.

Among complementary explanations for Singapore’s fast growth is that it invests so much: between 2008 and 2018, it invested an average of 29 per cent of GDP, while the UK invested a mere 17 per cent. This also helps explain why Singapore’s infrastructure is exceptional. Singapore had a staggering savings rate of 47 per cent of GDP in those years, against the UK’s miserable 12 per cent. Singapore’s gross savings rates are heavily distorted by inclusion of the profits of multinationals. Yet even savings rates in “indigenous GDP” have been around 30 per cent.

One explanation for these high savings is the “central provident fund”, which compels workers and employers to contribute 37 per cent of wages and salaries up to age 55. People use this money for house purchases, health and pensions: it is Singapore’s alternative to a redistributive welfare state. Another explanation is fiscal surpluses: between 2008 and 2018, these averaged 5 per cent of GDP. Amazingly, Singapore’s net international assets reached 340 per cent of gross national income in 2017.

How can anybody imagine this is a credible model for Brexit Britain? Far from being able to offer stability to global businesses, the UK is busily blowing up the basis on which many of them came to the UK. Far from guaranteeing favourable access to its most important regional economic arrangement, the UK is leaving it, possibly without any deal at all. And, far from being a city-state of 5.6m people, the UK is a geographically, socially and politically diverse democratic polity of 66m. Its future should not — and will not — be determined by people and businesses enticed by turning it into nothing more than a haven of low taxation and light regulation. That cannot stand.

It would be wrong to argue that the UK lacks everything Singapore possesses. Its civil service is non-corrupt, for example, and the rule of law remains entrenched. It would be quite wrong, too, to argue that the UK is unable to learn a great deal from Singapore. Indeed, it would be a good idea for the UK to learn from successes elsewhere. A determined effort to raise abysmally low savings and investment rates, improve infrastructure and transform educational standards, all hallmarks of Singapore’s development, would be highly desirable. Singapore has also raised home ownership to an extraordinary rate of 91 per cent. All these are achievements from which the UK could seek to learn. But they also demand difficult political choices and sacrifices.

The idea that eliminating tariffs and regulations and slashing taxes will deliver broadly-shared prosperity in post-Brexit Britain is a fantasy.

The Singapore example is far more complex and nuanced than that. The two economies and polities are starting from quite different places, with different histories and different possibilities. To believe otherwise is magical thinking. To inflict magical thinking on the lives of real people is an unforgivable political sin.

Negative-yielding government debt jumps above $10tn 
Federal Reserve’s gloomy outlook exacerbates concerns over the global economy

Robin Wigglesworth in New York

The amount of government debt with negative yields has vaulted back over the $10tn mark, after the Federal Reserve’s unexpectedly downbeat outlook exacerbated concerns over the health of the global economy and sent investors scurrying for the apparent safety of sovereign bonds.

Bond yields have sagged lower for much of 2019, as fixed-income investors have remained sceptical that growth will pick up again. With economic data still weak and inflation at bay, central banks have been forced to abandon moves to tighten monetary policy.

This month, the European Central Bank restarted a crisis-era bank lending programme, and last week the Fed shelved plans to raise interest rates this year — unexpectedly cautious moves that have raised questions whether officials see a downturn coming.

“It is puzzling why the Fed felt that it needed to be even more dovish last week than in January,” David Woo, a senior strategist at Bank of America Merrill Lynch noted. “Investors are starting to ask what the Fed might know about the economy that the market does not?”

Coupled with more underwhelming economic data, the central banks’ caution has poured fuel on a rally in safer, higher-rated government bonds, even pushing the 10-year German Bund yield back into negative territory. The total amount of debt trading with nominal yields below zero is $10.07tn, according to Bloomberg data, up from a low of $5.7tn in early 2018. The last time the total moved through the $10tn mark was September 2017.

Other key bond indices have moved higher. The Bloomberg Barclays Multiverse index, which tracks $55tn worth of debt, last week enjoyed its biggest five-day gains in over a year. That pushed the average yield on bonds in the index to 2.03 per cent – the lowest since January 2018.

Meanwhile, longer-term US government bond yields have dipped below short-term ones, an inversion of the “yield curve” that has historically been a useful predictor of economic recessions. On Friday, the 10-year Treasury yield fell below the yield on three-month T-bills, fanning concerns that the long post-crisis economic expansion is coming to an end. The spread between the three-month and ten-year instruments is the Fed’s preferred measure of the yield curve.

That sent global equities on Friday tumbling by the most since the turmoil in December. Many developed markets saw falls on Monday too, led by Japan and Hong Kong.

Some analysts have pointed out that the yield curve often inverts well before a recession, and the Fed itself has been at pains to stress that economic growth remains resilient. However, that is unlikely to comfort investors who remain on edge after the rough fourth quarter, according to Matt Maley, a strategist at Miller Tabak + Co.

“The problem with that thinking is that we don’t invest in recessions, we invest in stocks, and bear markets begin long before the economy falls into recession,” he said.

“Also, we don’t need a recession for the stock market to decline in a significant way. So even if we don’t have a bear market, it doesn’t mean we cannot see a good-sized decline in the stock market as the economy slows.”

The US and North Korea Meet Again

Little has changed since the first Trump-Kim summit. Could the two sides be settling for the status quo?

By Phillip Orchard


In Vietnam this week, U.S. President Donald Trump and North Korean leader Kim Jong Un will meet for the second time. Not much has changed since they met last June in Singapore, but this isn’t necessarily a bad thing for either party.

North Korea is no closer to denuclearization. If anything, it has gone in the other direction, continuing enrichment and amassing around 60 weapons, per U.S. estimates. But with its freeze on long-range missile testing still holding, the North is also no closer to having the ability to reliably strike the U.S. mainland. The U.S. hasn’t even had to sacrifice its regional military installations to achieve this; the North is still suffocating under international sanctions, posing a stiff challenge to Kim’s plans to secure his rule from internal threats by undertaking a complicated pivot to economic development. And the U.S. still has the ability to bring a swift end to the Kim regime, should Washington ever deem it worth the cost. Yet, major joint U.S.-South Korean military drills, which Pyongyang sees as indistinguishable from preparations for an invasion, remain suspended. Seoul is still determined to prevent another war on the peninsula, and North Korea’s nuclear and conventional arsenals are holding the threats on its doorstep at bay – giving Pyongyang reason to feel as safe from foreign attack as it has at any time since perhaps the founding of the Kim dynasty.


In other words, the U.S.-North Korean diplomatic process remains at the quiet impasse that’s existed since the North’s last intercontinental ballistic missile test in late 2017. Any deal inked by Kim and Trump in Vietnam this week will merely formalize this current state and establish the framework for negotiating lesser issues going forward. But this means de facto U.S. recognition that North Korea – yes, that North Korea – is now a nuclear power. Can this frozen peace really hold?
Washington Moves the Goal Posts Forward
The U.S. can live with the status quo, and unless it suddenly becomes more willing to bear the enormous risks of attempting to eliminate the North Korean threat by military force, it will probably have no other choice. Indeed, ahead of the summit in Vietnam, the Trump administration is bending over backward to lower public expectations. Trump himself, who has repeatedly declared that the North would hand over all of its nukes by the end of his first term, said Wednesday that he was in “no rush” to see it happen. This is a stark change from the White House’s pronouncements that surrounded the Singapore summit.

North Korea, of course, never promised “complete, verifiable, and irreversible disarmament,” as touted by the White House for months after Singapore. In Pyongyang’s view, denuclearization means effectively the same thing as what the U.S. agreed to when it signed the 1968 Nuclear Non-Proliferation Treaty, which requires Washington and other nuclear states to pursue disarmament – someday. (The U.S. says one goal of the upcoming summit is to pin down a “common definition” of denuclearization.) Nothing the North has done since then has substantively diminished its nuclear or missile capabilities. Nor will anything it can realistically agree at the summit to give up, including (as rumored) its Yongbyon nuclear reactor complex. Proclaiming otherwise was putting the White House in an untenable political position and bolstering Pyongyang’s negotiating stance.

The Trump administration has instead started to declare that its priority is “securing the U.S. mainland” – that is, permanently ending the North’s ICBM testing. North Korea has tested ICBMs that can fly far enough to strike the U.S., but it has yet to demonstrate that the targeting systems of these missiles can survive re-entry to the Earth’s atmosphere – the last and most difficult step in ICBM development. It makes sense for the U.S. to refocus negotiations on this red line. It’s much easier to persuade the North to give up something it’s struggling to obtain than something it’s already stockpiling, like nuclear weapons. Achieving the latter would likely require war, and the U.S. made clear in 2017 that so long as its mainland remains out of the North’s reach, war just isn’t worth the cost.

In other words, the U.S. negotiating stance is starting to align with geopolitical reality. This tells us two things about the U.S. approach going forward. First, the White House is shifting to containment. It may never publicly abandon the pretense that the diplomatic process will eventually end with a disarmed North. But the U.S. position at the negotiating table will be increasingly focused on things like managing the shape and size of the North’s arsenal and its behavior as a nuclear power. For example, the U.S. is currently pushing for a full accounting of the North’s nuclear facilities and arsenal so that Washington can, among other things, detect attempts by Pyongyang to pass nuclear fuel, technology or even weapons to other U.S. adversaries.

Second, in service of containment, the U.S. is about to take a page from Pyongyang’s own negotiating playbook. North Korea is the master of stall tactics; it keeps adversaries at bay by engaging in endless and typically fruitless diplomatic processes, carving out breathing space for itself without conceding anything that would truly weaken its hand. The past year is illustrative, as Pyongyang has bogged down the talks over largely symbolic measures, disputes over concession sequencing and myriad minor points of contention, whether real or imagined. Freed from the political need to deliver on its promise of rapid denuclearization, the Trump administration can use a protracted diplomatic slog to its advantage, dangling any number of carrots to entice the North to stay on its best behavior indefinitely.
Will the North Buck?
North Korea, however, is less keen to abide the status quo forever. It’s desperate for sanctions relief. It ultimately wants U.S. military forces off the Korean Peninsula altogether. U.S.-South Korean military drills are likely to resume in some form, possibly as soon as next month. (The U.S. is reportedly hoping that refocusing the drills on defensive capabilities will satisfy Pyongyang.) And if it thinks that its existing nuclear and missile arsenal – which, to be clear, can inflict untold damage on U.S. military bases and allies across the Western Pacific – is sufficient to expose U.S. military threats as hollow, it’s not hard to imagine Pyongyang toying with a resumption of ICBM testing to gain leverage in pursuit of these goals.

But the North also has plenty of reasons to stay the diplomatic course. Symbolic but long-sought U.S. concessions, such as an end-of-war declaration and a peace treaty, are within reach. The U.S. appears willing to put limited sanctions relief and, eventually, a limited withdrawal of U.S. troops on the table. In Trump, Pyongyang sees a president who is far more willing than his predecessors (and presumably his successor) to bring all the troops home. The abrupt Syria withdrawal has only strengthened this view. In dovish South Korean President Moon Jae-in, Pyongyang sees an administration whose determined rapprochement is at odds with more hawkish political parties that have historically been more dominant in the South. Reunification is a long-term imperative for both Koreas; the road forward here is complicated enough without the U.S. threatening fire and fury or blocking Moon’s attempts to forge new cross-border ties. A deal on ICBMs that protects the U.S. mainland while leaving the South, Japan and other nearby U.S. allies exposed may widen cracks in the U.S. alliance structure, furthering its rapprochement with Seoul and pleasing China. The longer Pyongyang acts like a responsible nuclear state, the more international isolation and sanctions pressure will weaken, and the more the North will be able to push forward with its all-important economic modernization campaigns.

Most important, the North can never really be sure that the U.S. is bluffing when U.S. B-1 bomber planes are making daily runs toward the Demilitarized Zone. Pyongyang has seen the U.S. as fundamentally unpredictable since U.S. troops began pouring into Pusan in 1950. And in 2017, the U.S. and North Korea came uncomfortably close to a war that would certainly have meant the end of the Kim regime. It won’t risk pushing the U.S. back to war footing without wringing every concession possible from the diplomatic process first. Even then, it’s hard to imagine scenarios where the rewards of an ICBM outweigh the risks.

The path forward will not be smooth. The North won’t hesitate to rattle sabers when it thinks it’s being strung along by the U.S. Expect, for example, shorter-range missile tests intended to cause political problems for the White House and remind U.S. allies of their vulnerability. The North’s response if and when the U.S.-South Korean drills resume will be telling. And the frozen peace won’t be inherently stable. We generally see the North as acting rationally, despite what can sometimes look like utterly bizarre behavior. But the fact remains that it’s a highly militarized, internally fractious state with unclear capacity to implement nuclear safeguards, uncertain command and control structures, and steep incentives to strike first if it concludes that an attack may be imminent – even if that conclusion is borne of its culture of paranoia. The risk of mistake or miscalculation will be high. And Pyongyang has considerable interest in pushing the envelope to explore just how much ability its nukes give it to reshape the regional security environment to its taste.

This isn’t the grand bargain the White House touted, but it’s the bargain geopolitical realities allowed. The U.S. and North Korea have identified the space within which they can coexist, and they’ll have little choice but to learn how to do so.

Debt Derangement Syndrome

Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics.

J. Bradford DeLong

BERKELEY – For the past decade, politics in the Global North has been in a state of high madness owing to excessive fear of government debts and deficits. But two recent straws in the wind suggest that this may at long last be changing.

Earlier this month, I read a Brexit-related column in The Sunday Times of London by the eminent and highly knowledgeable Ken Rogoff. He is perhaps best known for his declarations early in this decade that governments should not let their debt-to-GDP ratios rise above 90%.

But here, Rogoff mused that it had “never been remotely obvious to [him] why the UK should be worrying about reducing its debt-GDP burden [currently 84%], given modest growth, high inequality and the ... decline in ... interest rates ...”

This followed a Financial Times article late last month by the journalist Brendan Greeley, who reported receiving what he called “a panicked email” from the Committee for a Responsible Federal Budget (CRFB), a US think tank that once gave a fiscal responsibility award to Paul Ryan, the then-chair of the US House of Representatives Budget Committee. In its email, the CRFB warned against “mischaracterizations” of an address by my old teacher Olivier Blanchard to the American Economic Association, in which Blanchard essentially said that public debt is a tool governments should use when they need to.

What Rogoff and Blanchard are saying today is standard policy economics. In fact, I always found it hard to believe – and still do – that anybody can take exception to it. Whenever the private sector stops spending enough to keep unemployment low and jobs easy to find, the public sector needs to fill the gap in aggregate demand.

The normal way to do this is for the central bank to buy bonds for cash, inducing those who then have the extra cash to boost their spending. But if and when interest rates approach rock bottom, the private sector’s desire to spend extra cash rather than hold it ebbs. In that situation, monetary stimulus should be aided by fiscal stimulus: in other words, the government directly buys stuff.

This may lead to fears that public debt would rise “too high,” so that issuing more debt to finance additional government purchases would represent a bad deal, even if it boosted employment. But the deal would be bad only if the government had to borrow at a high interest rate, as was the case at the start of the 1990s. And the deal would be risky only to the extent that the government might have to roll over its debt at a high interest rate. Thus, the bond market would signal when the deficit needed to be cut, and the debt-to-GDP ratio placed on a downward trajectory.

The principle that the cost of debt is measured by the interest rate charged would seem simple and obvious. And yet for the past decade – until now – public debate in the Global North has regarded this as a fringe, “ultra-Keynesian” belief.

I date the full flowering of this affliction to January 27, 2010. That evening, in his State of the Union Address, then-US President Barack Obama announced that it was time for the government to tighten its belt, that he was going to freeze government spending, and that he would veto bills passed by the then-majority-Democratic Congress that overstepped his red line. At the time, my first reaction was that issuing a veto threat against his two chief lieutenants, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, was a unique way of building intra-party comity, and a previously unheard-of way of maintaining a functioning governing coalition.

Obama’s former economic-policy staffers say that he was the Global North’s most rational and best-behaved ruling politician in the first half of this decade. And they are right. But it is a powerful indicator of those debt-fearing times that Obama’s address – delivered when the US unemployment rate was still 9.7% – went against John Maynard Keynes’s 1937 observation that “the boom, not the slump, is the right time for austerity at the Treasury.”

It is still not clear to me why the Global North fell into this fit of denial of basic economic principles. Clearly, the interest rate is a measure of the cost of debt and deficits. Equally clearly, austerity is inappropriate when unemployment is high. But with the likes of Rogoff and Blanchard weighing in, I now have hope that future economists will remember the sorry history of this past decade and prevent it from being repeated.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

Why regulators need to worry about non-bank runs

Transformation of the lending landscape since the crisis brings a new set of risks

Ben McLannahan

Regulators such as those at the US Federal Reserve say they are alive to the risks of a rapid unwinding © Reuters

Craig Reeves knew the banks were in a lot of trouble the day his Dad dropped in to a branch of Northern Rock, shortly before the UK lender became one of the earliest victims of the global financial crisis. People were queueing down the street, waiting to close their accounts. But his father was still offered a big buy-to-let mortgage on a flat in London.

“You could see that fundamentally, things were broken,” says the head of Prestige Funds, a non-bank lender he founded in late 2007. “There was an opportunity there.”

Mr Reeves’ firm — based in a narrow alley just off Oxford Street, in the middle of London — is among thousands that have sprung up around the world since the crisis, seeking to take advantage of a radical reshaping of the financial system. As big banks have been squeezed by tougher rules and more vigilant regulators, forcing them in many cases to pull back from lending, alternative lenders have stepped into the void.

But to some, the rapid growth of the industry has brought new risks. Prestige and its ilk are not banks, so they do not pay into mandatory insurance schemes that encourage depositors to leave their money where it is. If investors suddenly want their money back, many fund managers will have to return it, potentially dumping assets to do so. A lot of small and medium-sized enterprises — the engine of any economy — could be left in the lurch.

Prestige says it has done more than £1bn of small-business loans over the past decade or so, handing out net annual returns of between 5 and 7 per cent to investors including pension funds, sovereign wealth funds, hedge funds and family offices.

“We have an incredibly diverse investor base, from Miami to Malaysia and everything in between,” claims Mr Reeves, who used to trade futures, and then ran a hedge fund-of-funds, before turning to lending. “What they’re all interested in is the capacity: how much more cash can you take?”

Big banks are not coming back, says the head of one of the biggest “direct lending” funds in Europe, speaking on condition of anonymity. Before the crisis Royal Bank of Scotland or Lloyds would do a single mid-market loan of up to £200m, he says. Now both are “nibbling at the edges”, down to about £20m-£40m per deal while his fund is writing cheques for £300m.

“We used to think the market opportunity across Europe was €400bn-€500bn. Now we think it’s more like €1.5tn,” he says.

Regulators say they are alive to the risks of a rapid unwinding. Randy Quarles, the top bank supervisor at the US Federal Reserve, for example, was grilled a few months ago by Elizabeth Warren, the Democratic Senator from Massachusetts, who asked about a surge in lending across America to already heavily-leveraged companies. “The amount itself is not what’s critical,” Mr Quarles replied. “What’s critical is are they being held in ‘runnable’ structures; do we understand how this system is evolving? And that’s something we’re looking at very closely.”

Big banks around the world have undergone fundamental changes since the crisis. On the liabilities side of the balance sheet, they have much more equity funding to absorb losses. But less well appreciated is the transformation of the asset side: vast amounts of liquid instruments such as cash and government bonds, which the banks could sell quickly to cover any sudden outflows of debt funding, such as deposits. The risks of another classic run like Northern Rock, on paper at least, seem much reduced.

But non-bank lenders do not always have big pots of cash sitting around to meet potential redemptions. And investors are often free to pull their allocations any time they like, once they are past an initial lock-up period. As such, the vehicles have “features that make them susceptible to runs”, as the Basel-based Financial Stability Board put it in a thick report this week.

Some structures seem sturdy. At Hermes Investment Management’s direct lending funds there are no redemptions at all; investors’ money is locked up for an initial three years and then up to another seven, depending on when the loans repay. Patrick Marshall, head of private debt, says he seeks an “illiquidity premium” from borrowers — a slightly higher interest rate, in exchange for an assurance that the loans will never be sold.

But others look a little wobbly. An investor with £10m in a Prestige fund, for example, could be out entirely within about six months, including a 60-day notice period, if it maxed out monthly withdrawals of £2m-£3m.

So far the non-banks have performed a vital role, keeping credit flowing to parts of the economy big banks have been unable or unwilling to reach. But the fact remains: we go in to the next downturn with no idea how dependable they will be.