US bonds endure fresh bout of selling after ‘storm’ sweeps market

Ten-year Treasury yield jumps to highest level since last February in choppy trading

Colby Smith in New York

Federal Reserve chairman Jay Powell rattled investors earlier this month after he opted against pushing back forcefully on the recent rise in Treasury yields © AFP via Getty Images


A “storm” swept through the US government bond market on Friday, sending a key measure of long-term borrowing costs to the highest level since last February.

Treasuries dropped in overnight trading after a large sale of long-dated bond futures in Asia, according to people familiar with the matter. 

Yields on the benchmark 10-year note, a key marker across global asset markets, jumped to 1.63 per cent by morning on Wall Street, having traded around 1.53 per cent the day before. 

Analysts said the scale of the move underscored how jittery the $21tn market had become against the backdrop of a more robust economic rebound. 

Treasuries are the biggest and deepest market in the world, something that typically insulates it from sharp rises and falls in prices.

Treasuries have been under pressure since the start of the year, as investors anticipate higher inflation and growth in the coming months following another enormous injection of fiscal stimulus with the passage of the Biden administration’s latest package. 

But the magnitude of the more recent moves has caught investors by surprise, especially after three large auctions of new debt this week went relatively smoothly compared with a previous sale last month that triggered a sharp sell-off and bouts of hectic trading.

“Just when one thought it might be safe in the Treasury market after the auctions went reasonably well, the perfect storm hit,” said Andrew Brenner, head of international fixed income at National Alliance Securities.


Momentum played a part as well, analysts said, as the aggressive positioning of a handful of sellers earlier on Friday encouraged other investors to step back from the market. 

Priya Misra, global head of rates strategy at TD Securities, said markets were also “testing” the Federal Reserve, which is set to convene for its policy meeting next week. 

Chair Jay Powell rattled investors earlier this month after he opted against pushing back forcefully on the recent rise in Treasury yields, which had become choppy at times. 

Instead, he said the Fed would only be concerned if conditions became “disorderly”.

“We are not at ‘disorderly’ yet,” said Misra, noting that financial conditions more broadly remained extremely loose. 

“The path of least resistance is higher rates.”

Investors are also on edge about the potential for a regulatory change at the end of the month that may hamper Treasury market functioning, with Scott Thiel, chief fixed-income strategist at BlackRock calling it a “significant factor” contributing to the recent volatility. 

At the height of the coronavirus-induced financial ructions last year, US regulators introduced a temporary rule change that allowed banks to exclude Treasuries and cash reserves when calculating how much additional capital they need to hold. 

The aim, in part, was to encourage banks to step in more forcefully to stabilise whipsawing markets without worrying about balance sheet constraints.

The exemption is set to expire at the end of the month, and analysts warn a failure to extend it could magnify the problems in the Treasury market, especially given the sheer size of the supply set to flood the market this year in order to fund the record-sized stimulus programmes passed to support the economic recovery. 

“If the rule is not extended, it is certainly possible, maybe even probable, that illiquidity returns to the Treasury market,” said Kelcie Gerson, an interest rate strategist at Morgan Stanley.

“People are really nervous,” added Misra. “We all saw what happened in March [2020].”


Additional reporting by Joshua Oliver in London

The end of the party looms for markets high on stimulus

An economic boom could make last year’s gains go flat for investors

Ruchir Sharma

As consumers emerge from lockdown, the release of pent-up demand could add two to three percentage points to GDP growth in the US alone © David Paul Morris/Bloomberg


It was a jarring image. 

As deaths from the pandemic rose in 2020, financial markets high on government stimulus partied through a devastating global downturn. 

Most people expect the revelry to continue as economies recover. 

But now there are signs the recovery could turn into a boom — and an overheating economy could end the market party. 

This year could unfold as a mirror image of 2020, with markets going flat amid soaring economic growth.

To understand why, follow the money. 

After a brief crash last March, markets started rallying the day after the US Federal Reserve announced its first pandemic relief measures — and kept on rallying. 

Nearly 20 per cent of all dollars in circulation were printed in 2020 alone. 

Major central banks followed the Fed, and governments topped that up with stimulus spending. 

US disposable incomes rose at the fastest rate in decades, but much of that went unspent. 

Americans saved at the highest rate since the second world war, putting away an additional $1.7tn, or more than 16 per cent of their 2020 income.

With more money in the bank, and more time on their hands because of lockdowns, many workers turned to punting in the markets. 

Of 49m online brokerage accounts in the US, 13m opened in 2020, according to calculations by Scott Rubner of Goldman Sachs. 

The week after stimulus checks went out in April, trading by middle-class Americans soared.

US retail investors helped fuel flash manias for bankrupt companies like JC Penney, and more recently for another faltering retailer, GameStop. 

From South Korea to India, individuals bought stocks at a furious pace. 

The huge winners were large growth stocks, particularly in the US and China. 

Together they accounted for most of the 2020 market gains worldwide.

Where will all the money go when the virus fades? 

Epidemiologists say the pandemic could be contained by summer, perhaps even by spring in the US and UK, where vaccines are rapidly rolling out. 

As consumers emerge from lockdown, excess savings are likely to drop sharply. 

Even by conservative estimates, the release of pent-up demand could add two to three percentage points to gross domestic product growth in the US alone.

The consensus prediction for global GDP growth in 2021 is just over 5 per cent. 

But my team thinks growth could top 6 per cent worldwide, and reach 8 per cent in the US. 

I think other forecasters are underestimating the recovery, given the savings glut and the apparent eagerness of policymakers to err on the side of overstimulating. 

Ironically, a booming economy may not be good for markets. 

Savers will become shoppers again. 

Resurgent demand for leisure travel, fine dining and other services will strain the capacity of industries gutted by the pandemic.

The deflationary impact of business closures could give way to the potentially inflationary impact of supply shortages, which are already visible in sectors such as shipping, airlines and semiconductors. 

The prices of commodities from oil to soyabeans have also been surging of late.

The bond market is beginning to price in higher inflation, and the prospect of higher yields could suck money out of stocks, which are now much more vulnerable to interest rate swings. 

Last year stock valuations received an unusually large boost as rates plunged. 

A sharp rise would deliver a proportionately large shock. 

Further, the rally was driven mainly by growth stocks — the kind most sensitive to interest rate shifts — and they now dominate many stock market indices.

Higher long-term interest rates could end the extraordinary bull run for giant tech stocks in the US and China and move flows towards a new set of countries and industries. 

The buzzwords of last year — the virus, virtual, work from home, recession — are likely to make way for vaccines, the real world, back to the office and reflation. 

This transition may be more disruptive than imagined for financial markets, which have become hooked on last year’s themes and low long-term interest rates.

Markets often underestimate the impact of big shifts in the global economy. 

In the early 1980s, disinflation led to a sharp fall in interest rates, with much greater fallout for the markets than most investors had foreseen. 

Now the risk is that inflation resurfaces, and bond yields rise more sharply than anticipated, overwhelming the rise in earnings during a recovery. 

The impact could easily end the rally of 2020, leaving markets suffering withdrawal symptoms despite a global economic boom.


The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

Tea and tributaries

In no region is China’s influence felt more strongly than in South-East Asia

The region has a complex relationship with its giant neighbour


Last year a remarkable if informal confederacy formed online across Asia, in scarcely the time it takes to boil a kettle: the Milk Tea Alliance. 

Its members were young activists, mostly in South-East Asia. 

All had disparate agendas at home. 

But they united in pushing back at a perceived growing menace—authoritarian China’s overweening presence in the region.

It began when a Thai heart-throb, Vachirawit Chivaaree, star of “2gether”, a drama popular across Asia, retweeted a collection of cityscapes that innocently described Hong Kong as a country. 

Thousands of jingoist Chinese internet trolls called for a boycott of Mr Vachirawit’s show. He apologised. 

But the trolls found an old Instagram post from Mr Vachirawit’s girlfriend that seemed to indicate her support for Taiwan as a country separate from China. 

It further nourished their rage.

Soon Thai netizens were fighting back with witty memes. Chinese patriots responded by insulting the Thai king and prime minister, who had come to power in a coup, as inept. 

The Thai gadflies were jubilant: they could not agree more. 

Their deft turning back of Chinese criticisms brought applause from young people in Hong Kong and Taiwan, who are no strangers to China’s heavy hand. 

Others in South-East Asia resentful of strongman rule, such as that of President Rodrigo Duterte in the Philippines, also cheered.

Thus the alliance was born, named because of popular variations of tea drunk across Asia. 

In mainland China tea is drunk without milk. 

But Taiwan’s best-known beverage is milky boba tea with chewy tapioca balls; Hong Kongers drink tea with milk, a British holdover; and Thailand’s tawny tea is sweetened with condensed milk. 

Others have since joined. 

After Chinese soldiers fought a deadly brawl with Indians guarding their two countries’ disputed border, Indian netizens added masala chai to the brew. 

And after the army seized power in a coup in Myanmar on February 1st, photos of laphet yay, Burmese milk tea, flooded social media.

The Milk Tea Alliance is far from cohesive, or purely anti-China. Lambasting China is part of a critique of domestic authoritarian rule, says Frank Netiwit, a young Thai activist at the forefront of protests calling for more democracy. 

In Myanmar the anger is overwhelmingly directed at Gen Min Aung Hlaing and the army.

China has long had the backs of the region’s autocrats. It described the coup in Myanmar—in which Aung San Suu Kyi, the country’s leader, and hundreds more were arrested—as a “major cabinet reshuffle”. 

It has growing investments in South-East Asia and seeks political influence to protect them. But South-East Asian rulers are prickly and nationalistic. Most chafe at any suggestion that they are in China’s pocket.

The Milk Tea phenomenon underscores how, for all that South-East Asians often welcome China’s economic engagement, it also comes with added complications to which China’s leaders often appear oblivious. 

South-East Asia, Murray Hiebert argues in “Under Beijing’s Shadow”, is a microcosm of China’s global ambitions—signalling how its diplomats, corporations and even its armed forces might operate elsewhere in future.

More than anywhere, South-East Asia is bound to feel China’s presence. South-East Asia begins where China leaves off—in the mountainous border regions of northern Vietnam, Laos and Myanmar. 

Many groups that make up modern South-East Asia’s mosaic of ethnicities have their origins farther north. Imperial China claimed primacy over the rulers of South-East Asia. Vietnam, Thailand and Burma (now Myanmar) were important tributaries.

Tributary relations fostered trade, including in exotics such as jade that have come to define Chinese taste. Emigrants (mainly men) from southern China began to seek livelihoods in the European settlements of Batavia (now Jakarta) and Manila. 

In the 19th and early 20th centuries they flocked to British and French rubber plantations and tin mines, or sought fortunes in the entrepots of Singapore and Rangoon (now Yangon). 

Sojourners at first, most stayed. Today, some 33m South-East Asians claim Chinese ethnicity. In Malaysia and Indonesia, they form significant minorities—and in Singapore the majority. 

In Cambodia, Thailand and elsewhere, distinctions are often absurd—the Thai royal family is of recent Chinese descent.

Crazy rich South-East Asians

South-East Asia’s “overseas Chinese”, Charlotte Setijadi of Singapore Management University points out, have played crucial roles in the story of modern China. 

They were key backers of those seeking the overthrow of the imperial Qing dynasty and the establishment of a modern republic. 

More recently, South-East Asian nationals of Chinese descent helped kick-start China’s own industrial transformation.

The commercial success of many overseas Chinese families is notable—and in part a result of the political marginalisation of ethnic Chinese in colonial and successor independent states. 

China welcomed their capital and managerial nous following its opening after 1978. Today the ten-country Association of South-East Asian Nations (asean) is a key link in the supply chains of a China-centred electronics sector. 

A third of China’s integrated circuits come from South-East Asia, along with three-fifths of computer imports. Now capital is flowing the other way, from China to South-East Asia. 

Investment has grown almost 30-fold in the past decade, to nearly $40bn. 

South-East Asia’s ethnic-Chinese tycoons are still intermediaries in the region’s economic relationship with China. 

But the Chinese state is also asserting itself, in ways that South-East Asians recognise carry benefits—but also risks.

China’s economic interaction with South-East Asia has happened chiefly by sea. That is changing. 

China’s industrial centre of gravity is shifting away from the coast towards the south-west and its borders with Myanmar, Laos and Vietnam. 

For this new heartland, nearby South-East Asia is an obvious market, a source of inputs, and a ready route to the sea.

The chief obstacles to a push south are geographical—the impassable borderlands. 

To overcome them, China has engaged South-East Asia in a frenzy of cross-border infrastructure (see map): new roads, a gas pipeline through Myanmar to a deepwater port at Kyaukphyu on the Bay of Bengal, and a planned high-speed rail through Laos eventually connecting Kunming with Singapore. 

Most of these projects are presented as part of President Xi Jinping’s Belt and Road Initiative. 

In South-East Asia China presents its plans as commensurate with asean’s own desire for regional integration. 

The Asian Development Bank calculates that if developing Asia is to keep up growth, eliminate poverty and deal with the effects of climate change, then it will need to invest $1.7trn a year in infrastructure over 15 years.


Mr Xi and other Chinese leaders harp on about the “win-win” benefits of economic co-operation—as well as emphasising China’s non-interference in others’ affairs. That is balm to the region’s authoritarians.

South-East Asia’s post-colonial states are young and insecure. 

Their leaders bridle at any perceived challenge to sovereignty—or to their right to rule.

Yet, for all the advantages, many South-East Asians find the Chinese presence sometimes overwhelming and the protestations of non-interference insincere. 

Chinese investment comes with strings attached. 

Lenders and construction firms insist on Chinese workers. Contracts are often opaque and grossly overpriced (some to include bribes needed to win them).

China-linked corruption was a factor in the electoral defeat in 2018 of Malaysia’s prime minister, Najib Razak, and his party, which had ruled since independence. 

So, too, was the Chinese ambassador’s appearing to campaign openly for the ethnic-Chinese party in the ruling coalition—so much for non-interference. 

Meanwhile, under-the-table donations to political parties in Malaysia and Indonesia, says a senior diplomat from the region, are often an entry ticket for doing business. 

Chinese money is assumed to have been behind Mr Duterte’s successful bid in the Philippines for the presidency in 2016.

Some Chinese-backed projects, above all the high-speed railway for tiny, impoverished Laos, have little economic rationale and the environmental costs can be high. 

An exceptional drought in 2019 in the lower Mekong was exacerbated by Chinese dam-building interrupting the river’s seasonal flows, on which millions of Cambodian and Vietnamese fishermen depend. 

In Cambodia, Laos and Myanmar, Chinese land-grabs mean deforestation.

As for China coming in peace, how, policymakers ask in private, to square that with sweeping maritime and territorial claims in the South China Sea, bringing China into dispute with Brunei, Indonesia, Malaysia, the Philippines and Vietnam? 

In 2016 an arbitral court in The Hague dismissed China’s claims, in a case brought by the Philippines. 

When Singapore called for China to abide by the tribunal’s rulings, China’s diplomats savaged the government. 

By contrast, tiny Cambodia, which has prioritised loyalty to China over asean solidarity, has been rewarded with loans.

Yet appeasing China does not guarantee rewards. Mr Duterte set The Hague ruling aside in hopes of attracting Chinese investment. 

Mr Xi promptly promised him billions for infrastructure. 

But little investment has materialised. Meanwhile, on the South China Sea, Chinese aggression persists. 

As Bilahari Kausikan, formerly Singapore’s top diplomat, puts it: “Only the irredeemably corrupt or the terminally naive take seriously Beijing’s rhetoric about a community of common destiny.”

Not long ago the border ranges of northern Laos were impenetrable. Today the boundary is being blurred and geography reshaped by Chinese infrastructure projects and wildcat Chinese enterprise. 

As Chinese development moves south, hundreds of thousands of Chinese move too.

These are China’s xin yimin, the country’s “new” migrants or sojourners. They are the shock troops of China’s growing economic presence. 

Many have come to work in South-East Asia on belt-and-road projects. Others follow in their wake to chance their luck. Where China’s strategy ends and individual initiative begins is rarely clear. 

Either way, Chinese power and presence is being extended.

The presence is starkest in Cambodia, Laos and Myanmar, small or weak states, two with porous borders with China. 

Several hundred thousand mainland Chinese operate in Myanmar, many carrying forged citizenship cards. In the “Golden Triangle Special Economic Zone”, where Laos meets Myanmar and Thailand, a Chinese city of gambling, smuggling and sleaze is rising up. 

The centrepiece is a pink neoclassical confection of a casino that attracts Chinese high-rollers—gambling is banned in mainland China. 

The town’s currency is the Chinese yuan. 

The security force was recruited in China. 

The signage is in the simplified Chinese of the mainland.

Much farther from China’s borders, in Manila, the capital of the Philippines, Chinese online gambling operations known as pogos occupy more office space than the country’s international call centres. 

At their peak, before the coronavirus pandemic, perhaps 500,000 Chinese operated in Manila, many overstaying their visas. 

Chinese-run agencies arrange everything for new arrivals, from work visas to accommodation to massages and sex.

Across Asia the same chorus of complaints is heard: that the xin yimin keep to themselves, take local jobs, import their own supplies and push up the price of local housing. 

In Vientiane, Mandalay and Manila, the same dark joke is deployed: welcome to China’s newest province.

To tar all xin yimin with the same brush is misleading. Thousands of middle-class Chinese have been a boon for Malaysia’s private schools. 

Many migrants are well-trained professionals. In Singapore, young Chinese who study, work and apply for nationality are bright, energetic and willing to work hard in their new home.

Yet the presence of xin yimin often complicates the supposedly warm “people-to-people” relations that Mr Xi trumpets. Criticism of Chinese initiatives is proof of insincerity, malign intentions or Western meddling, Chinese officials suggest. 

Mr Kausikan attributes the attitude to “imperial hauteur”—a conviction that lesser states owe deference to China.

One striking dimension is China’s increasingly possessive language towards the Chinese diaspora. Any suggestion by officials, however ambiguous, that China has an extraterritorial claim over ethnic Chinese in South-East Asia, no matter how long ago their ancestors left the motherland, is dangerous ground.

In theory, the Chinese language distinguishes between huaqiao, Chinese nationals abroad, and huaren, anyone with Chinese ancestry regardless of their citizenship. 

Yet in a speech in 2014 Mr Xi conflated the two by referring to haiwai qiaobao—“overseas sojourner-siblings”. The point of working with haiwai qiaobao, Mr Xi said, “is to promote the revival of the Chinese nation.” 

He reiterated this in an address in February marking the Chinese New Year.

To emphasise its importance, in 2018 outreach to overseas Chinese was handed to the Communist Party’s united front department. Dozens of operations around in the world aim to build support for the party and to neutralise political enemies. 

A key mission is to ensure that, as Bill Hayton puts it in “The Invention of China”: “regardless of how long ago someone’s ancestors left home, or for how many generations they have been citizens of another country, they…still have obligations to the ancestral nation.”


It is an overtly racial understanding of Chineseness, about blood, not citizenship, that puts many Chinese South-East Asians in a bind. 

It is rarely hard to whip up anti-China feeling. China’s backing for communist insurgencies was grounds in Malaysia and Indonesia to exclude ethnic Chinese from power—and worse. 

In May 1998 decades of cronyism under Indonesia’s dictator, Suharto, triggered a paroxysm of violence against the regime and those seen to have profited from it—above all, the country’s ethnic-Chinese minority. 

Hundreds of ethnic Chinese were killed and dozens of women and girls raped. Glodok, Jakarta’s Chinatown, was left a charred hulk.

With democratisation following Suharto’s fall, the fate of Chinese Indonesians improved. 

But progress, as Evan Laksmana of the Centre for Strategic and International Studies in Jakarta, puts it, “came screeching to a halt” in 2017 with the arrest, trial and imprisonment on trumped-up blasphemy charges of Basuki Tjahaja Purnama, or Ahok, the gruff Chinese Indonesian governor of Jakarta (and a Christian in a majority-Muslim country). 

Some Islamic leaders decry the likes of Ahok as the beachhead of a new Chinese communist infiltration. 

The paranoia is no less strong for a lack of evidence. 

Playing the Chinese conspiracy card either in politics or as a businessman cut out of a lucrative deal rarely does the cardplayer any harm.

Too often, China’s Communist Party is blind to the risks of using influence campaigns with Chinese South-East Asians as a tool of nation-building. 

As Reynard Hing, a Chinese-Filipino who runs an ngo in Manila, puts it: “Are you trying to co-opt overseas Chinese as part of the propaganda machinery? 

That would be very bad for Chinese-Filipinos. It would give credence to the notion of a fifth column.”

A shot in the arm

It is against China’s complex backdrop of engagement in South-East Asia that it now is gearing up for perhaps its biggest influence campaign ever: vaccine diplomacy. 

As the promised supplier of most of the region’s vaccines, it intends not only to wipe from people’s minds the memory of China as the origin of covid-19 but also to engender a wave of gratitude for ending the pandemic. 

Its diplomats are making clear to South-East Asian governments that part of the deal is lavish praise for China.

Yet none of China’s vaccines has yet completed all trials, and results to date are patchy. 

Perhaps more troubling, South-East Asian suspicion of China has translated into vaccine hesitancy. 

President Joko Widodo, known as Jokowi, received Indonesia’s first shot, of the Sinovac jab, in January. 

The same month Indonesia’s top Islamic body declared the Chinese vaccine to be halal, and thus permissible for Muslims. 

That came as a relief to Jokowi, who has promised herd immunity in 15 months. 

Yet vaccine hesitancy in Indonesia is running high, especially around Chinese ones.

If the programme of Chinese vaccines falls short in South-East Asia, says Dr Setijadi of Singapore Management University, “that could massively backfire in terms of China’s influence.” 

It would do no favours for Chinese South-East Asians to be tarred with the same brush as China. 

Can China be expected to be sensitive to these dynamics? 

On past performance, perhaps not.

The US, Iran and Bargaining Positions

By: George Friedman


The Iranian government has announced that it will not attend the first round of negotiations over restoring the agreement that limited its ability to develop nuclear weapons. 

Tehran says sanctions imposed by the administration of former President Donald Trump must first be removed for talks to begin.

Obviously, this is a tactic meant to improve its bargaining position with the United States. But that position must be credible, and read that way by both sides. 

Iran reads President Joe Biden to be particularly vulnerable on this issue. 

Biden has long maintained that abandoning the nuclear agreement was a mistake that he would correct at the first opportunity.

Biden therefore needs to resurrect the original agreement or replace it with something similar. 

Iran understands U.S. politics as well as anyone, and it has proved to be an excellent negotiator. 

If officials believe Biden must restore the agreement, they will make it as difficult as possible.

One of the best ways to negotiate is to appear irrational. 

Rational actors believe themselves to be reasonable and operate under the assumption that their counterparts believe them to be rational too. 

Negotiators might well be rational, but showing their cards in a reasonable way gives the counterpart a roadmap of how to calm the talks. Iran is a master at appearing suicidal, when, in fact, it is as scared of nuclear annihilation as any other country. 

Religious fanaticism about the annihilation of Israel, for example, doesn’t comport with reality. 

The Israelis have a substantial nuclear arsenal and years of experience gaming possible Iranian threats. 

Any planned Iranian attack would be detected early in the process, and Israel would strike preemptively. 

In other words, the worst place Iran could be is close to completing a nuclear weapon, and its leaders know it.

The value of a nuclear program, on the other hand, is substantial. 

It shows an attempt to possess a nuclear weapon without giving any indication of already having one. It is the program that is perfect for Iran. 

It frightens without forcing anyone to take risky actions. 

The tools for building a program are lying on the floor with apparently earnest efforts to put it together. 

Iran gets to negotiate concessions for not building a nuke, even without itself being directly threatened by nuclear annihilation.

Meanwhile, it also tries to assert its power in a more effective way – by providing support, for example, for the Houthis in Yemen, Hezbollah in Lebanon, Hamas in Gaza and Islamic Revolutionary Guard Corps forces in Syria, and by becoming deeply involved in Iraq. 

Iran’s most effective foreign policy tactic in the region is delivering covert support to non-Iranian forces that can bring pressure on Sunni Arab states, Israel and U.S. forces still deployed in the region. 

Nuclear weapons are a notional concept designed to magnify Iranian power. 

Their real power rests on their ability to destabilize certain countries. 

This strategy carries with it only minimal risk compared to building a nuclear weapon and the missiles to deliver it. 

Iran wants the ability to go nuclear without going nuclear while engaging Israel, the Arabs and the Americans with covert operations that are difficult to counter.

Refusing to discuss the old nuclear treaty serves two purposes. 

It tests the new American president to see how badly he needs this agreement, and it allows the Iranians to escalate their actual priorities by using the American desire for a resurrected agreement. 

There’s no real downside for Iran. What Tehran needs more than anything is the lifting of sanctions. 

The sanctions imposed on Iran after Trump abrogated the nuclear agreement are wrecking its economy and, in turn, generating political opposition to the architects of the first agreement. (This was compounded by the budding coalition between Sunni Arab states and Israel, a nominally defensive alignment that could, as Iran well knows, turn offensive quickly.)

Politically, if Biden wants to make good on his promises, he needs to resurrect some version of the old treaty. 

The Iranians read this need as an opportunity to extract concessions, particularly removing sanctions but also, in the long run, minimizing the threat from the forces across the Persian Gulf. 

These are critical to Iran.

Biden’s problem is that he has not yet begun to govern. The first few months of any new administration is an extension of the campaign. 

Thus, Biden ordered an airstrike against Iran-backed militias in Syria to demonstrate that he is willing to strike at their prized covert operations. 

The Iranians are watching carefully to see if the left-wing of the party governs or if the center governs. Similarly, following his campaign commitment to human rights, Biden went after Saudi leader Mohammed bin Salman – who, according to U.S. intelligence, authorized the murder of Jamal Khashoggi – before trying to heal whatever breach in relations it might have caused.

The United States needs the Israel-Arab coalition to block Iranian covert ambitions, so it needs Saudi Arabia to be part of it. 

All presidents must figure out how to square the circle of what they promised to do and what they must do. 

And in this sense, Biden has a problem: He is pledged to resurrect an agreement that did not really address the problem of Iran, and he must do it to show the Europeans that he is not Trump while making clear to the Iranians that he is not giving away Trump’s strategy without making a fundamental change in America’s Iranian policy. 

And Iran will make this as hard as possible for him. 

Are Inflation Fears Justified?

In the near term, markets should not be too worried about a possible spike in demand driving up inflation and interest rates, causing asset prices to fall across the board. But longer-term inflation risks are skewed much more to the upside than many investors and policymakers seem to realize.

Kenneth Rogoff



CAMBRIDGE – Massive fiscal and monetary stimulus programs in the United States and other advanced economies are fueling a raging debate about whether higher inflation could be just around the corner. 

Ten-year US Treasury yields and mortgage rates are already climbing in anticipation that the US Federal Reserve – the de facto global central bank – will be forced to hike rates, potentially bursting asset-price bubbles around the world. 

But while markets are probably overstating short-term inflation risks for 2021, they do not yet fully appreciate the longer-term dangers.

To be clear, huge macroeconomic support is unequivocally needed now and for the foreseeable future. 

The pandemic-induced recession is worse than the 2008 global financial crisis, and parts of the US economy are still in desperate straits. 

Moreover, despite promising vaccine-related developments in the fight against the coronavirus, things could get worse.

Against this backdrop, the real inflation risk could materialize if both central-bank independence and globalization fall out of favor. 

In the near term, policymakers are right to worry that, if the economy continues to heal, stimulus measures and consumers’ cash savings will fuel an explosion in demand. 

But this is unlikely to lead to an overnight inflation blowout, mainly because price growth in modern advanced economies is a very slow-moving variable. 

Even when inflation reached double digits in many rich countries in the 1970s (and rose above 20% in the United Kingdom and Japan), it took many years to collect a full head of steam.

This is mainly because the speed at which prices and wages rise is acutely sensitive to how workers and firms view the economy’s underlying inflation dynamic. That is, today’s inflation is very much influenced by long-term inflation expectations.

That reasoning may seem circular, but it reflects the fact that, in many sectors, firms are reluctant to raise prices too aggressively for fear of losing market share. 

So, if central banks can succeed in “anchoring” long-term inflation expectations at a low rate, they can put the brakes on any prolonged inflation outburst. And today, years of ultra-low inflation are firmly embedded in the public psyche.

All this implies that even with rapid economic normalization, pent-up demand and large fiscal stimulus will not trigger an immediate spike in inflation. 

But if politicians undermine central-bank independence and prevent a timely normalization of policy interest rates, even deeply ingrained low-inflation expectations could fray.

The other long-term inflation risk is subtler, but potentially even harder to forestall. 

Many people are vastly more skeptical about globalization today than they were three decades ago, largely because evidence suggests that the wealthy have benefited disproportionately from it. 

While stock markets have soared, labor has been receiving a declining share of the economic pie. And many of the proposed measures that might enable workers to claw back a bigger cut, such as boosting unionization and making offshoring more difficult, will necessarily mean a reduction in trade.

A reversal of globalization could have a big impact on inflation. Many Westerners fear that China will “eat our lunch,” as US President Joe Biden recently warned in calling for a much-needed increase in infrastructure investment in America. 

Maybe, but Westerners need to recognize that when it comes to global manufacturing, China is the one making lunch, and the meal would cost a lot more if it wasn’t.

More broadly, central banks’ disinflation efforts from 1980 until the 2008 financial crisis benefited enormously from the hyper-globalization taking place during this period. 

Trade with China and other developing countries, combined with technological advances, relentlessly drove down the prices of many consumer goods.

With productivity rising and many prices visibly falling, for reasons beyond monetary policy, it became relatively easy for central bankers to move the public’s long-term inflation expectations downward. 

But when I pointed this out at a major conference of central bankers back in 2003, in a paper entitled “Globalization and Global Disinflation,” most of them did not really want to share credit with globalization.

Things could now move in the other direction, especially given the strong bipartisan political consensus in Washington on the need to challenge China. 

The substance of Biden’s policies may not differ from those pursued by former President Donald Trump as quickly or as radically as many internationalists might hope. 

And even if the US and China manage to patch over their current differences, globalization’s impact is set to fade, owing in part to demographic factors, as Charles Goodhart and Manoj Pradhan have forcefully argued. China’s labor force, for example, is projected to shrink by 200 million over the next two decades.

So, should markets be panicking about a possible spike in demand driving up inflation and interest rates, causing asset prices to fall across the board? 

In the near term, not so much. 

It is even possible that a year from now, central banks will be seriously considering deeply negative interest rates in order to rekindle inflation and demand. 

And it would not necessarily be a bad thing if inflation were to rise above target for a couple of years after being so low for so long. But longer-term inflation risks are skewed much more to the upside than markets or policymakers seem to realize.


Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.