How yuan-dollar became the world’s most closely watched asset price

China’s currency has “cracked seven”, prompting a share sell-off and bond rally

A PRINCIPLE FOLLOWED by traders who speculate on short-term movements in market prices is “cut your losses early”. This doctrine finds expression in the stop-loss—an order to sell a security, such as a company share, automatically when it hits a predetermined price. People being people, stop-loss orders tend to cluster at salient levels, such as whole or round numbers. They might instruct a broker to sell the pound at $1.20, say, or sell Apple at $200.

The round-number fetish is a strange one. But when a situation is uncertain (and financial markets are always uncertain) arbitrary numbers or thresholds are often charged with great meaning. And few have had the significance of seven yuan per dollar. So when the yuan broke through seven on August 5th, it prompted a violent sell-off in stocks and a rally in bonds. That was followed by a formal charge by the US Treasury that China was manipulating its currency.

On the face of it, that looks like an overreaction. If things were fine when the yuan was at 6.99, why did all hell break loose when it reached 7.01? Odder still is the idea that a currency that has only fairly limited use outside China is suddenly a prime mover in global capital markets.

Yet China’s heft in the world economy has made it so. The yuan-dollar exchange rate is now the world’s most watched asset price. And “seven” mattered simply because people had come to believe that it did.

To understand why, go back four years. Until August 2015 the yuan had been closely tied to the dollar. Since then its external price has been set by officials each day, ostensibly by reference to a basket of currencies. The idea is that the yuan’s value should somewhat reflect market forces.

The outcome is that the yuan has moved in a limited range against the dollar, capped at seven.

Were the yuan to surge, it would hurt China’s exports; were it to plummet, the dollar debts of Chinese firms would loom larger. A large fall would intensify an ever-present fear: devaluation and capital flight.

The yuan is still a long way from being a free-floating currency. It is further away still from being a global one to rival the dollar. It is not a straightforward business to buy and sell yuan.

Traders joke that it is less liquid than the shares of Alibaba, a giant Chinese e-commerce firm, which is listed in New York. Yet despite the constraints, the waxing and waning of the yuan’s value has had a growing influence on the foreign-exchange market and on asset prices more generally.

This is in large part because the currencies of economies that do a lot of trade with China have tended to move in tandem with the yuan. Its clout owes much to China’s weight in the global economy, but also to its gravity in export markets. When the yuan moves, it imparts news about global trade. The message is quickly picked up by the currencies of other export-oriented economies, not only in Asia but in Europe too.

It is not wholly surprising, then, that President Donald Trump’s trade war with China has bled into a conflict over the yuan-dollar exchange rate. Reports from China in recent months suggested that it had become a sticking point in the stalled trade negotiations. The governor of China’s central bank even dropped a public hint in June that there was no red line at seven. America’s treasury secretary, Steven Mnuchin, countered that if China gave up supporting the yuan, it might be interpreted as an attempt to weaken it. That is one reason why crossing seven caused such a fuss.

But there are others. The yuan-dollar exchange rate has become a gauge of global risk appetite. A weak yuan is often associated with weakness in a host of other important currencies, including the euro. The result is a strong dollar. That in turn squeezes global credit, because many countries and companies beyond America’s borders borrow in dollars. One consequence is slower global GDP growth. Another is that money tends to flow out of riskier sorts of securities, such as stocks and emerging-market bonds, into safer assets such as Treasury bonds.

Arbitrary numbers often take on a life of their own in financial markets. China bears some blame in this instance. It has a penchant for control and opaque policymaking. Left to their own devices, investors start to impute greater significance to key thresholds. Officials follow their lead. The markets had become used to the yuan trading in a familiar range. It is not clear what the new rules are. The only thing that is certain is that yuan-dollar remains the asset price to watch.

Get Used to Trade-War Stalemate

It makes sense for China to allow the cycle of trade tensions with the U.S. to persist

By Nathaniel Taplin

A year and a half into the Sino-U.S. trade war, a pattern is emerging. President Trump threatens new tariffs on China. Beijing retaliates, announces modest measures to support the economy and lets the yuan weaken. Mr. Trump castigates the Chinese. And both economies slow further.

More recently, Mr. Trump has also brought the Federal Reserve into the fray, berating the central bank for not doing more to help.

Unfortunately for investors, this cycle could well persist until at least the next presidential election, in November 2020. There are three reasons that could make sense from Beijing’s point of view.

China can likely weather another year of President Trump. Photo: Olivier Douliery/Bloomberg News

First, China appears increasingly skeptical that Mr. Trump is a reliable negotiating partner, giving it more incentive to try to wait him out. Second, it has the tools to blunt, if not entirely offset, the damage from U.S. tariffs: Chinese growth is slowing but not collapsing. Third, China brings more weapons to the trade fight, even if its big trade surplus with the U.S. makes it look like the more vulnerable of the two.

That is because China’s political leadership has ultimate control of national monetary and currency policy; the U.S. president doesn’t. The American system works to the U.S.’ advantage over the long run by deterring wasteful investment binges ahead of elections and keeping inflation in check. For now, though, it means the prospects for countering American economic weakness through aggressive interest-rate cuts or a weaker dollar are muddy at best—even if U.S. manufacturing is looking shakier than it did, thanks in part to weakening exports.

August illustrates this perfectly. Mr. Trump unveiled a round of tariffs on Aug. 1. By midmonth, Chinese policy makers rolled out a change to its interest-rate mechanism that amounts to a modest rate cut, building on other low-key easing measures.

On Friday, China introduced retaliatory tariffs, and Mr. Trump responded in kind. The yuan depreciated by close to 1% on Monday, bringing its total fall against the dollar since Aug. 1 to about 4%.

Later on Monday, the U.S. president said his officials had received calls from China saying, “Let’s get back to the table.” Investors should be skeptical. The long-run damage to China’s economy from slower trade growth will be significant, but the nation can most likely weather another year of Mr. Trump.


Argentina’s crisis shows the limits of technocracy

What went wrong for Mauricio Macri

IF YOU CAN’T beat them, join them. That seems to be Mauricio Macri’s response to his crushing defeat in presidential primary elections on August 11th. He won 32% of the vote against the 48% secured by the Peronist slate of Alberto Fernández and Cristina Fernández (no relation), a populist former president. At first Mr Macri blamed the outcome on the voters for “believing that returning to the past is an alternative”, a scolding for which he later apologised.

Then the blame shifted to his finance minister, Nicolás Dujovne, who had been slashing the budget as demanded by the $57bn agreement the government negotiated with the IMF last year. Mr Dujovne resigned on August 17th after Mr Macri scrapped VAT on staple foods, increased hand-outs and temporarily froze petrol prices in a desperate effort to placate Argentines. These are the kind of measures typically associated with his Peronist opponents, and they are contrary to the IMF agreement.

Mr Macri is not quite beaten yet. The presidential election is not until October 27th. But in Argentina’s peculiar system, the primaries are a dress rehearsal. Few think he can overturn a 16-point deficit in nine weeks. The fact that the peso crashed after the primary result will add to inflation of 50% a year and makes his task even harder. 
This drubbing came as a shock, but it probably should not have done. Mr Macri’s search for a second term always looked quixotic after the economy ran into trouble last year. Argentines are worse off than they were four years ago. The economy is forecast to have shrunk by around 4% over this period; prices have increased by more than 250%; the peso has gone from 15 to the dollar to almost 60, while real wages have fallen by 10% in the past 15 months.

Many had high hopes for Mr Macri, a former businessman turned successful mayor of Buenos Aires. After years of economic debauchery under Ms Fernández, he promised that Argentina would rejoin the world as a normal country. He appointed a team of brilliant technocrats. So what went wrong?

One hypothesis is that he erred in trying to stabilise the economy gradually. That decision was political: the hope was that growth would cushion the blow of cuts and big rises in the cost of electricity and transport as Ms Fernández’s huge subsidies were withdrawn. It meant that the government had to finance a still-large deficit, mainly through debt. In 2018 investors became alarmed about Argentina, forcing the government into the arms of the IMF and the economy into recession.

That alarm was partly because of the rise in interest rates in the United States. A severe drought also cut Argentina’s farm exports, driving up its current account-deficit. But the main blow was self-inflicted: the government’s decision in December 2017 to loosen its own inflation targets, which undermined the credibility of the central bank. According to Federico Sturzenegger, the bank’s then-president, who opposed the decision, it did so because (other) officials worried about the bank’s relatively tight monetary policy; some did not want inflation to fall so swiftly because of the fiscal cost. Tax revenues would rise less in nominal terms but much spending (such as on pensions) would keep rising fast, because it was indexed to past inflation.

As this highlights, the government had too many economic cooks following different recipes. They wanted, variously, to slash inflation, increase economic growth and tighten the budget. Some wanted a weaker peso (for growth) and others a stronger one (to fight inflation). They should have accepted that the price of fiscal gradualism was tighter money.

Populist politicians are often skilled at explaining away economic reverses and persuading voters that they feel their pain. Technocrats find that harder. Mr Macri’s re-election campaign was based on fear, that the return of Ms Fernández would turn Argentina into Venezuela. She deftly defused that. By opting to run for vice-president behind Mr Fernández, a more moderate Peronist, she turned the election into a referendum on Mr Macri’s economic record.

Mr Macri’s advisers trusted in social media and marketing, and failed to see the strength of sentiment on the Argentine street. “What happened was that the government ended up with no politics and couldn’t explain anything,” Mr Fernández told Clarín, a newspaper. Everything suggests Argentina will end up with him. Many fear the worst. But Argentina’s current circumstances leave little room for populist excess. And Mr Fernández is not his namesake.

The Race To The Bottom

Bill Ehrman


•The common thread occurring around the world is slowing growth despite significant monetary ease.

•We doubt that lower rates and even negative real rates will do much to stimulate growth at this point.

•We are convinced that there will not be any acceleration in global growth until trade deals are finalized so that business confidence to spend is rekindled.

Monetary authorities around the world are using an old playbook: lowering interest rates and the value of their currency in the hopes of stimulate growth in their region. Unfortunately, it won't work in today's VUCA (volatile, uncertain, complex, and ambigous) environment.

Our blog last week, "Global Uncertainty Trumps Lower Interest Rates" was on the mark. It may be helpful to read it again. Our thesis was that there was little or no corporate demand for money no matter what the interest rate was due to global uncertainty centered around trade.

Who wants to spend in today's uncertain environment? We blamed Trump and his administration's actions - not monetary policy - for holding back growth here and abroad. That view has only been reinforced by the key events of last week. There were continued moves down in interest rates around the world. Global growth continues to slow with deflationary forces rising. Risks remain to the downside without trade deals.

Three major countries: India, Thailand and New Zealand, "lowered interest rates (last week) in a series of unexpected moves that shook the currency markets just two days after China allowed the renminbi to weaken" above 7 to the dollar which prompted Trump to label China a currency manipulator claiming they are ratcheting up the tensions between our two countries as well as rattling global markets.

Why shouldn't the renminbi weaken as growth in China is slowing, monetary policy is easing, and the government wants to sustain export growth? China is just using the same playbook that all countries utilize to sustain growth. Why not? And don't forget the tensions in Hong Kong too, hurting their currency! The key question remaining is whether the trade conflict will turn into something much larger-a currency war. If so, there are no winners. We doubt that will occur but the markets are on pins and needles worrying about one.

While we continue to believe that the U.S is best positioned to weather the trade storm, we are growing increasingly cautious short term as we expect Trump to go to the wall raising tariffs the full 25% in the fall on all Chinese exports hoping to lower them next winter/spring prior to elections after some sort of a deal is reached. Trump recognizes that now is the time for maximum pressure on China knowing full well that the financial markets will suffer only to reverse course next year before the election if/when a deal is reached, and tariffs come down.

Unfortunately, we expect that the Chinese recognize Trump's playbook too, so they must decide whether they are better off dealing with Trump today or a Democratic president in 2021 if that occurs. Biden would take a more accommodative stance toward China than Elizabeth Warren who seems even further to the right on dealing with China than Trump. Is it better for China to deal with the devil they know or take the risk of dealing with an unknown? That's a good question.

We think that the Chinese will decide to deal with Trump in the end. And, Trump is likely to accept a deal even if not a really good one if it helps his election chances. No deal would hurt him for sure as the economy and financial markets would only continue to suffer. The bottom line is that we expect a deal over the next 6-8 months. You can easily guess what happens then to all financial markets around the world.

We would use any further weakness ahead to build positions in great global companies selling at recession level valuations. We are setting up an options strategy to do just that to minimize the risk if we are wrong. Right now, we own defensive stocks with high dividend yields, super-growth companies that do not have exposure to China and many special situations.

Our current view remains that there is no place like home, but we do see risks rising globally including in the U.S. While our market is statistically undervalued for investors with a longer time frame, we do see rising short term risks geopolitically that could create an unusual opportunity for us to take advantage of as we look over the valley.

We do not believe that lower interest rates globally as the race to the bottom escalates will boost global growth without trade deals.

Let's look at the most recent data points that support/detract that the U.S economy is best positioned to weather a potential trade storm next month if the U.S begins tariffs on an additional $300 billion of Chinese exports.

The U.S. consumer along with government fiscal stimulus remains the bedrock of strength underlying our economy for the foreseeable future. Remember that consumer expenditures plus government spending make up over 85% of GNP and both remain in strong uptrends. The number of job openings (JOLT) remains over 7.1 million as of the end of June? The U.S has created well over 2 million new jobs over the last twelve months with hourly wages rising well in excess of inflation at 3.2%. It does not hurt that the core PCE price index, which is favored by the Fed, increased by 1.6% in June, undershooting the Fed target of 2.0% for the 10th year.

Wouldn't you consider that a pretty good backdrop for continued growth in consumer spending? And then add that the Senate just signed off on the new budget resolution increasing government spending by well over $200 billion over the next two years increasing the fiscal deficit to over $1 trillion.

Now, do you understand why we expect the U.S economy to continue to expand by 2+% over the next twelve months? But we do see risks to our forecast rising if the trade conflict escalates out of control. It could then clearly impact consumer sentiment which could dampen spending intentions as we enter the all-important Christmas season. Is Trump that foolish? We don't think so! But we are watching the situation closely and hedging our bets.

We remain convinced that the Fed will lower rates by an additional 25 to 50 basis points before year-end as insurance against the potential negative impact of further global slowing, escalating trade conflicts and rising deflationary forces. Do we feel that the cuts will lead to accelerating domestic growth? Not really as it won't change business psychology/spending intentions one bit.

We do believe that the rate cuts will push investors further out on the risk curve which should be the objective/concern of the Fed.

There is no doubt in our minds that growth in China is slowing rapidly despite the recent surprise export number reported last week showing an increase of 3.3% year over year reversing a negative number reported in June. Trade patterns are being impacted by the negative trade rhetoric and we doubt that China can offset weakness on exports to the U.S by increasing them enough to Europe and Southeast Asia. Continued weakness in imports, down 5.6% from a year ago, was more telling to us and reveals the true weakness in China.

China has to worry about rising deflationary forces as evidenced by a 0.3% decline in producer prices from a year ago. It is clear that China must pump up its economy by easing monetary policy further and increasing fiscal stimulus or growth will likely slow to less than 6% before year-end and employment may fail to increase which is now a real risk. That is a formula for pressure on its currency which was evident last week as the yuan plunged past 7. The currency will continue to weaken further unless the PBOC intervenes spending a lot of its reserves which declined by over $15 billion in July alone to $3.1 trillion. Problems in Hong Kong as not helping its currency for sure.

There is no doubt that China needs a trade deal more than the U.S. corporations continue to shift their supply chains to other countries at an accelerating rate despite assurances from the government that they will not retaliate against foreign companies.

We were surprised that Japan's second-quarter GNP rose by 1.8%. We believe that the threat of increased taxes in October has pulled forward consumer spending (approx. 50% of GNP) and may also help the third quarter results too. The 10-day holiday to celebrate the enthronement of Emperor Naruhito also boosted consumption in the quarter. We clearly expect a sharp shortfall in spending in the fourth quarter and early next year. We do not believe that the BOJ has must left in their arsenal to stimulate growth but at least Japan is benefitting from a stable currency. We doubt whether a trade deal between the U.S and Japan by the end of the summer will do much improve business sentiment/spending/hiring without the U.S and China reaching a ceasefire at a minimum.

We remain very pessimistic about the prospects of the Eurozone especially with the risks of a hard Brexit rising daily. Germany, the engine of Europe, reported a 1.5% decline in industrial output in June driven by much weaker production of intermediate and capital goods than expected. It appears that Germany may report negative growth in the second quarter. What does that say about the prospects for the rest of Europe?

Maybe that explains why German rates fell further into negative territory last week. Does anyone really believe that lower rates and further monetary easing by the ECB will do much for growth in the Eurozone? Nada! By the way, growth in England has turned negative already too. And what happens if there is a hard Brexit in the fall? Lower rates by the BOE won't do much to save England.

India, the third largest country in Asia, continues to ease monetary policy aggressively to offset a weakening domestic economy but so far it has not helped one bit. Growth in India has slowed to less than 6% which is very disappointing to say the least. Inflation, here too, is running well below the government's targets and fears of deflation are on the rise. India's main problem is a lack of private investment as domestic demand and global growth slows.

The common thread occurring around the world is slowing growth despite significant monetary ease. There is a race to the bottom occurring globally as each nation/region is virtually doing the same thing (lowering rates plus weakening the currency) but to no avail. Have lower rates and a weakening currency helped the Eurozone and Japan? Will China benefit if they let the yuan fall in value offsetting tariffs? Think about all the debt globally that now has negative rates and/or is dollar denominated.

And what about our Fed! We doubt that lower rates and even negative real rates will do much to stimulate growth at this point here. We are convinced that there will not be any acceleration in global growth until trade deals are finalized so that business confidence to spend is rekindled. Hear us Trump and Xi! The bottom line is that we have moved defensively in the last few weeks after Trump tweeted about the additional Chinese tariffs effective September 1st .

Global growth will NOT accelerate until there is an end/cessation to the trade conflict so that business can plan/spend/hire once again. And the U.S will NOT be totally immune either although the real impact will be far less than virtually everywhere else as our Fed has lots of ammo to spend offsetting economic weakness, our consumer remains in good shape and our government is spending way more than they should too as we enter a Presidential election year.

Lower rates globally will force investors further out on the risk curve. Paix et Prospérité has navigated pretty darn well during these turbulent times. We sold economically sensitive companies including global industrials/capital goods producers; the financials for obvious reasons; and commodity companies.

We used the proceeds to buy some utilities including telecommunications; consumer non-durables; retailers, airlines, and healthcare companies. We have maintained/increased our exposure to high growth technology companies that sell at reasonable multiples and have no exposure to China, cable with content like Comcast (NASDAQ:CMCSA) and Disney (NYSE:DIS), and finally to several special situations with high dividend yields selling at ridiculously low valuations to earnings and cash flow. Our cash positions have increased meaningfully too.

As we said earlier, we are preparing an options strategy that would quickly shift our portfolio if a trade deal is reached. Remember to review all the facts; pause, reflect and consider mindset shifts; look at your asset mix with risk controls; do independent research and… Invest Accordingly!

The Real Reason for China’s Rise

The standard account of China’s economic rise focuses on its state capitalism, whereby the government, endowed with huge assets, can pursue a wide-ranging industrial policy and intervene to mitigate risks. This explanation is wrong.

Zhang Jun


SHANGHAI – China’s rapid economic rise in recent decades has astonished the world. Yet the reasons behind the country’s success are often misunderstood and misinterpreted.

The rise of China widely attributed to its state capitalism, whereby the government, endowed with huge assets, can pursue a wide-ranging industrial policy and intervene to mitigate risks.

Accordingly, China owes its success, first and foremost, to the government’s “control” over the entire economy.

This explanation is fundamentally wrong. True, China has benefited from having a government with the capacity to implement comprehensive and complementary policies efficiently. With leaders not subject to the short election cycles that characterize Western democracies, China’s central leadership can engage in visionary and comprehensive long-term planning, exemplified by its Five-Year Plans.

Moreover, the Chinese state’s power has buttressed its implementation capacity, which dwarfs that of most developing and transitional economies. A strong state – and the social and political stability that it underpins – has been essential to enable China’s rapid advancement in areas like education, health care, infrastructure, and research and development.

It is telling, however, that China is using its long-term planning and robust implementation capacity not to entrench state capitalism, but rather to advance economic liberalization and structural reform. It is this long-term strategy – which has remained unswerving, despite some stumbles and short-term deviations – that lies at the heart of the country’s decades-long run of rapid economic growth.

Interestingly, elements of this strategy come directly from the advanced countries. Over the last 40 years of diplomatic normalization with the United States, American-style capitalism has gained a solid foothold in China, not least among the country’s intellectual and business elites. So, while China’s government has always placed a high priority on stability, it has also worked to apply global best practices in many areas, including corporate governance, finance, and macroeconomic management.

Yet this process of economic liberalization and structural reform is also uniquely Chinese, insofar as it has emphasized local-level competition and experimentation, which in turn have supported bottom-up institutional innovation. The result is a kind of de facto fiscal federalism – and a powerful driver of economic transformation.

The fruits of this approach are irrefutable. In the last decade, a number of Chinese private financial and tech giants have emerged that, unlike their state-run counterparts, have managed to establish themselves as global leaders in innovation. The recently released Fortune Global 500 list for 2019 – which ranks firms by operating revenues – includes 129 Chinese companies, compared to 121 from the US.

Among China’s Fortune 500 firms are e-commerce giants Alibaba, JD.com, and Tencent, the company behind the popular mobile app WeChat. The tech giant Huawei managed to rise 11 places since last year, despite US President Donald Trump’s campaign against the company. And the nine-year-old Xiaomi, a smartphone manufacturer, made history as the youngest firm ever to make the list.

The spectacular rise of these companies – and the prosperity and competitiveness that they have helped to foster – was not enabled primarily by top-down industrial policies, but by economic liberalization and the bottom-up innovation it has facilitated. At a time when the US is accusing China of using state-capitalist tools – such as subsidies for domestic companies and entry barriers for foreign firms – to gain an unfair advantage, it is worth highlighting the extent to which the country does not owe its economic success to such policies.

This is not to suggest that China’s own leaders should not also take note of its unfinished reform programs. After three decades of double-digit GDP growth rates, a slowdown was inevitable. But, even as China’s central government accepts some decline in annual growth, it must be alert and remain committed to addressing the structural factors that are compounding the trend, such as the rising cost of finance and declining return on capital.

Meanwhile, China’s government must continue to encourage private entrepreneurship and innovation (and has already committed to doing so), while reinforcing its system of competitive quasi-federalism. And it must also accelerate governance reform, as promised, to ensure that it can keep up with further market liberalization.

China has traveled far along the path of reform and opening up. But it should not underestimate the challenges ahead, let alone forget how it got this far in the first place. As a Chinese proverb puts it, “On a journey of a hundred miles, 90 is but halfway.”

Zhang Jun is Dean of the School of Economics at Fudan University and Director of the China Center for Economic Studies, a Shanghai-based think-tank.

David Koch Was the Ultimate Climate Change Denier

How a playboy billionaire built a political army to defend his fossil fuel empire.

By Christopher Leonard

Koch Industries financed a network of political activists in the form of Americans for Prosperity, to fight against any form of climate change legislation that would dampen the demand for oil.CreditCreditPhelan M. Ebenhack/Associated Press

A few years ago, I was sitting in the book-lined study of an elegant condo with a view of downtown Washington, interviewing a former senior Koch Industries lobbyist about his job. I asked him what got him up in the morning when he worked for Koch. He gave me a one-word answer: “Carbon.”

At the time, I had been reporting for years on Koch Industries, one of the largest and most confusingly complex private companies in the world. Its annual revenue is larger than that of Facebook, Goldman Sachs and U.S. Steel combined, and it makes everything from gasoline to nitrogen fertilizer to nylon, paper towels and windows. For all this complexity, one business inside Koch Industries remains more important than the rest — processing and selling fossil fuels.

David Koch, who died Friday at the age of 79, is best known as a major funder of right-wing political causes, from tax cuts to deregulation, an enthusiastic patron of the arts and a man-about-town. But to his critics, his most lasting political legacy might very well be the rapidly warming world that he has left behind.

Koch Industries realized early on that it would be a financial disaster for the firm if the American government regulated carbon emissions or made companies pay a price for releasing carbon into the atmosphere. The effects of such a policy would be measured over decades for Koch.

The company has billions of dollars sunk into the complex and expensive infrastructure of crude-oil processing. If a limit on greenhouse gas emissions were imposed, it could dampen demand for oil and diminish the value of those assets and their future sales.

The total dollar losses would likely be measured in trillions over a period of 30 years or more. 
In the face of this political problem, David Koch and his brother Charles built a political influence machine that is arguably unrivaled by any in corporate America.
Construction on the Koch political machine began in the 1970s, after Charles Koch took over the family company. He and David began funding and orchestrating a political project to restrain government power in the United States through lobbying, think tanks and political donations.

The effort accelerated in the 1990s after a Senate committee, following a long investigation, accused Koch Industries of stealing oil from Native American reservations where the company was operating. That experience convinced David and Charles Koch that they needed to have a stronger presence in Washington to fend off their critics.

The machine reached full fruition in 2008, when Barack Obama was elected president. The machine is so effective because it is multifaceted. In addition to one of the largest registered corporate lobbying offices in the country, located about two blocks from the White House, there is a constellation of Koch-funded think tanks and university centers.

They all convey a consistent message: that government programs can only cause more harm than good and that market forces alone must shape human society. And their work is bolstered by a private network of donors that David and Charles Koch assembled over the years, a network that gives donations at levels rivaling a political party.

Finally, Koch controls a “boots on the ground” army in the form of Americans for Prosperity, a network of employees and volunteers who knock on doors, attend rallies to protest climate change legislation, and visit the offices of any lawmakers who seem likely to cross Koch Industries on the issue.

This machine has been employed to great effect to ensure that no government action is taken to control greenhouse gas emissions. In the early 1990s, President George H.W. Bush made it clear that he would support a treaty to limit carbon emissions. The Republicans even had a market-based solution to tackle the problem, a system called “cap and trade” that put a price on pollution and allowed companies to buy and sell the right to pollute.

Cap and trade had been used to great effect to reduce power plant pollution and acid rain. But in 1991, the Cato Institute, a Koch-funded think tank, held a seminar in Washington called “Global Environmental Crises: Science or Politics?” This was part of a decades-long effort to cast doubt about the reality of climate change.

David Koch worked tirelessly, over decades, to jettison from office any moderate Republicans who proposed to regulate greenhouse gases. In 2009, for example, a South Carolina Republican, Representative Bob Inglis, proposed a carbon tax bill. Koch Industries stopped funding his campaign, donated heavily to a primary opponent named Trey Gowdy and helped organize teams of Tea Party activists who traveled to town hall meetings to protest against Mr. Inglis.

Some of the town hall meetings devolved into angry affairs, where Mr. Inglis couldn’t make himself heard above the shouting. Mr. Inglis lost re-election, and his defeat sent a message to other Republicans: Koch’s orthodoxy on climate rules could not be violated.

Mike Pence, who was then a congressman in Indiana, and others soon signed a “carbon pledge” circulated by Americans for Prosperity, which effectively prohibited the government from putting a price on carbon emissions. Those efforts and others effectively derailed the effort to pass a cap and trade plan for greenhouse gas emissions in 2009 and 2010. In 2009, the level of atmospheric carbon concentration hovered around 370 parts per million. In the decade since, levels have surpassed 400 parts per million, the highest level recorded in human existence.

Since the 2016 election, and in the face of more urgent scientific warnings about climate change and a growing popular movement for action, the Koch network has tried to build a Republican Party in its image: one that not only refuses to consider action on climate change but continues to deny that the problem is real. Just this week, Senator John Cornyn, Republican of Texas, dismissed data about climate change by pointing out on Twitter: “It’s summer.” In doing so, he reflected the politics of a party — and a world — that has been profoundly shaped by David Koch.

Christopher Leonard is the author of “Kochland: The Secret History of Koch Industries and Corporate Power in America.”

Italy’s Political Crisis Comes to a Head

After a year of political instability, the Italian government is finally ready to crumble.

By Ryan Bridges


The Italian government finally appears to be crumbling under the weight of its contradictions. Deputy Prime Minister Matteo Salvini’s right-wing League party, the junior partner in the governing coalition, filed a no-confidence motion today. But the question is: Why now? The League surpassed its coalition partner, the anti-establishment Five Star Movement (or M5S), in the polls about a year ago, and was reaching 38 percent as far back as a month ago. (Under Italian law, a party receiving 40 percent of the vote can govern alone; perhaps Salvini was merely waiting for the League’s poll numbers to get closer to that threshold.) Moreover, the two parties aren’t at greater odds than they have been for roughly the past year, and the League has only been winning the disputes between the two more and more frequently.

The decision to pull the plug now is significant. Early indications are that it may not be possible for Italy to hold a new election before Oct. 15, the deadline for European Union governments to submit their draft budgets to the European Commission. Indeed, one possibility is that Salvini is hoping a League-led government could rapidly pass a budget with a big deficit that fulfills his campaign promises of big tax cuts – though, again, that could have been done earlier, with significantly less trouble. On the other hand, as the leader of M5S and the leader of the opposition Democratic Party have both suggested, Salvini could be using an election to skirt responsibility for tough budgetary measures, such as a value-added tax hike worth 23 billion euros ($26 billion) that will kick in automatically next year if holes in the budget aren’t plugged. The notion of a VAT hike is extremely unpopular, and both the League and M5S have been adamant that they will prevent its implementation. Without a government, however, a provisional budget could take effect for the first few months of 2020, absolving Salvini of blame for the VAT increase and the failure to pass his flat tax proposal (the ambitions of which have already been scaled back in recent months).

Another theory is that the League has become concerned about potential blowback from “Moscopoli” (which translates roughly to “Russiagate”), a scandal in which one of Salvini’s close aides met repeatedly with Russian officials to discuss channeling tens of millions of dollars in illicit oil money to the party. The trouble with that idea is that the party has grown only stronger since the news of that scandal broke – though it’s always possible that there are more leaks to come.

Ultimately, however, it falls to Italian President Sergio Mattarella to dissolve parliament, and he may be hesitant to do so. He will probably leave time for M5S and the Democratic Party, which finished second to M5S in last year’s election, to try to cobble together a new majority, though that is unlikely to succeed. Alternatively, Mattarella could appoint a caretaker administration, but it, too, may not be able to find a majority. The president also reportedly said just a few weeks ago that he wants a government to be in place in September to craft a 2020 budget, but that’s improbable at this late date, unless new elections are somehow avoided. All we can say for sure at this juncture is that Italy’s government is careening toward greater uncertainty. The markets reflect as much: The spread over German 10-year bonds, after lingering close to 200 basis points since the last budget dispute with Brussels ended more than a month ago, had spiked to nearly 235 basis points at the time of writing. What else is new?