According to the paper, corporatization of hospitals — also called “system ownership” — has delivered higher profitability with higher prices and reduced operational expenses. Titled “The Corporatization of Independent Hospitals,” the paper is authored by Wharton professor of health care management Atul Gupta; Texas A&M School of Public Health professors Elena Andreyeva and Benjamin Ukert; Malgorzata Sylwestrzak, associate vice president at Humana Healthcare Research; and Catherine Ishitani, a doctoral student of health care management and economics at Wharton.

Hospital ownership in the US has seen “a rapid corporatization” over the past two decades. Total bed capacity owned by hospital chains — or systems — has raced from 58% in 2000 to 81% by 2020. Driving that trend is not just a desire for greater market power, but also increased profitability when corporate chains buy independent hospitals.

Taking off from that trend, the paper’s authors studied 101 independent hospital acquisitions by systems from 2013 to 2017, and prices for hospital inpatient services in 20 large states. The paper’s data sources included large commercial insurers, Medicare claims and patient discharges across all hospitals in New York State. The study also covered 135 acquisitions of system-owned hospitals by other systems.

The new corporate owners of formerly independent hospitals achieve high profitability by raising prices and cutting operating costs, mainly through staff cuts and lower financing costs, Gupta explained on the Wharton Business Daily radio show that airs on SiriusXM. (Listen to the podcast.) “The average acquired hospital increases its operating margin by about $14 million a year,” he said.

Staff reductions make up 60% of those cost savings, while another 20% comes from lower capital and financing costs. Since most of the savings come from reducing headcount, acquirers may be able to predict those savings with more certainty and plan to pass a portion of these savings to insurers, the paper stated.

The staff cuts are primarily in maintenance and support functions. “That makes sense because they can rely on support staff at the system level, and they don’t need to duplicate those functions, [such as in accounting or IT],” Gupta noted.

Quality of Care May Worsen after Corporatization

But corporatization — or system ownership — of independent hospitals has an underwhelming performance in patient outcomes. “We find no evidence that the quality of care improves [following system ownership of a hospital],” Gupta said. In fact, the quality of care may worsen in some cases — a pointer to that is an increase in short-term readmission rates on average after those acquisition deals. The readmissions were evident across different patient samples spanning multiple payers and disease groups. The study found “no detectable changes in short-term mortality or patient satisfaction.”

Although system ownership of hospitals may improve operating efficiency, the authors advised caution in interpreting reduced costs as improved productivity. That is because the increase in readmissions as the size of the firm grows may be an indicator of declining quality.

Gupta explained why the quality of care may suffer after corporatization. “While cutting back on staff creates some efficiencies, it might also disrupt the protocols that were already in place at a hospital,” he said. Cutbacks in nursing staff, social workers and case managers could affect the ability of the hospital to follow up on patients after they discharge from the hospital, he added. They could also adversely impact “some of those smaller things that play a big role in keeping people out of the hospital,” he noted. “That could be a reason why we see an increase in readmissions after these deals take place.”

Key Findings

• After an independent hospital is acquired by a corporate chain, it sees a 6% increase in the reimbursement per inpatient stay for commercially insured patients, the study estimated.
• That price increase varies from “negligible to 11%” across the top seven specialties by volume. Hospitalization for respiratory, central nervous system and cardiac diseases saw the largest increases.
• After corporatization, inpatient hospital revenue increases by an estimated $11,700 per bed.
• Total operating expenses decline by about $48,300 per bed at the acquired hospital following system ownership, not including any offsetting price increases.
• Based on those changes in revenue and expenses, the acquired hospital sees an average estimated increase in hospital operating profit of about $60,000 per bed per year.
• Acquired system-owned hospitals are less likely to be rural and non-profit, and more likely to be located in urban markets.
• System-owned hospitals enjoyed a much higher profit margin than independent hospitals, on average, perhaps reflecting their higher price levels.

How Cost Savings Are Shared for Hospital Expenses

The savings in operational costs are passed on to insurers in varying degrees. “In the deals where hospitals achieve larger cost savings, the price increases for insurers are smaller in magnitude,” Gupta said. “This is consistent with some passing through of efficiencies to insurers.” How much of that is then passed on to consumers through lower insurance premiums is an open question; the scope of the study did not include data on premiums.

“Notwithstanding such large cost savings, average prices for [privately insured] patients increase following system acquisitions, prompting the question of whether consumers benefit from cost savings at all,” the paper noted.

The increase in prices primarily affects people with private insurance; Medicaid and Medicare set prices unilaterally, which are not affected by changes in hospital ownership, Gupta said.

Medicare and Medicaid (and therefore taxpayers) may not share these gains immediately since they set reimbursement rates based on market-level average costs, the paper noted. However, in the long run, the authors expected greater corporatization to reduce market-level costs and growth in reimbursement rates for public payers as well.

From One Hospital System to Another

While the main focus of the paper is on corporatization of independent hospitals, a companion exercise looked at ownership transfers between two hospital systems, or from one corporate ownership to another. In those cases, the authors found a similar magnitude of price increases and suggested that those increases may be driven more by changes in market power.

However, the authors found “insignificant effects on operating costs, including no effect on employment or personnel spending” after deals between hospital systems. The reason for that is meaningful cost savings are available and extracted when an independent hospital is bought by a system for the first time, and not necessarily after subsequent ownership changes. Such system-to-system deals also have no effect on readmission rates.

Broader Significance of the Findings

The authors set the backdrop for the significance of their study: Hospital care accounts for $1.3 trillion in annual spending, and it is the largest segment in the $4.3 trillion US healthcare sector. Consumer prices for hospital care grew nearly 60% faster than those for prescription drugs and twice as fast as those for physician services. The paper also fills a research gap on the performance of chain ownership in health care – the last study to quantify the effects of hospital system ownership on prices, costs and quality covered deals ending in 2000.

With the corporatization of independent hospitals, “at least in theory, there’s the possibility that efficiencies are generated, and they might be passed on to insurers or consumers ultimately in the form of lower costs and therefore lower insurance premiums,” Gupta said. Those savings are not evident on a matching scale in ownership changes between hospital systems.

Justifications for Hospital Corporatization

The paper included a summary of the arguments by industry participants in favor of corporatization:

• First, independent hospitals expect that they will obtain easier access to capital for capacity, service expansions and upgrades after they are part of a larger corporate entity.
• Second, they anticipate reducing operating costs by leveraging the system’s scale, such as in procuring medical supplies and devices.
• Third is access to a larger and potentially better pool of managerial and clinical talent in the system.

Not all of those promises materialize in hospital corporatization deals. In fact, some deals have produced underwhelming outcomes. As an example, the paper cited the 2015 acquisition of Northern Westchester hospital in New York by Northwell, the largest hospital system and private employer in the state. It noted that “the anticipated capital infusions from Northwell did not materialize in a significant way, although Northern Westchester gained access to expert physicians at Northwell’s academic medical cHospitalReimbursement rates increased, “but the effects on quality and efficiency are not obvious,” the authors added. “This type of ambiguous evidence has led to a debate over the role of hospital systems, and more generally of corporatization, in health care.”

Room for Regulators

Hospital acquisition deals come under the regulatory purview of the Federal Trade Commission and the Department of Justice. But “their hands are tied” because the statutes they have to follow “narrowly define” the conditions that reduce competition, Gupta said. “[For instance], just the fact that prices go up is unfortunately not enough for them to take action,” he added.

“But regulators have become more vigilant,” Gupta continued. “The FTC has been more active [than earlier] in scrutinizing deals and potentially blocking them.”

Gupta pointed to Thomas Jefferson University’s 2018 plan to buy Einstein Health Care Network. The deal faced significant antitrust scrutiny from both the FTC and Pennsylvania’s attorney-general before it was cleared in 2021 after a court ruled against the FTC and Jefferson agreed to invest $200 million over seven years in Einstein’s North Philadelphia facilities, the Philadelphia Inquirer reported.

[Knowledge at Wharton first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Why Are US Hospitals So Expensive? appeared first on Fair Observer.

Not long ago, “artificial” had a negative connotation. “Intelligence” is something we are looking for everywhere, even in outer space. By the amount of money and effort we spend on finding intelligence, we clearly have not seen it yet. Putting blind faith and money in AI exposes our society to a scenario that raises serious questions.

Statistical tools and algorithms apply to large data sets, and we consider the result AI. Statistical theories help make sense of data, assisting AI in its logic and decision-making. In Thinking, Fast and Slow, Daniel Kahneman, a psychologist, received the Nobel Prize in Economics in 2002 for his research on human judgment and decision-making under uncertainty. He tells us how he slowly discovered that, even among scientists, our views of statistics tend to be biased. This is a polite way of saying that we continuously err in our understanding of statistics.

In the context of knowledge in the discussion, AI employs various methods to comprehend human language, enabling it to replicate human decision-making. Data is information transformed into a format that helps AI understand problems and learn solutions. Intelligence is the ability to analyze a collection of data and determine which pieces of information are significant or relevant. Wisdom is knowing and making the right choice, even in uncertain circumstances. No amount of data or number crunching can change that. Suppose the data points contain any information that needs to be more evident. In that case, we need to analyze the data further to find if this information contains any intelligence, which takes even more analysis. Intelligence is the link between information and decision-making. The result will only show if we display wisdom after making the decision.

The pitfalls of AI

There are solved problems or questions and unsolved problems. “This focus on established knowledge thus prevents us from developing a ‘common culture’ of critical thinking.” Peter Isackson: “Outside the box: Media Literacy, Critical Thinking and AI.” Can AI deliver anything sensible to unsolved problems? 

AI relies on a larger amount of data than what was ever available before. However, more data does not guarantee coming closer to a correct decision. Statistics and algorithms form the basis of AI data manipulation. Statistics refers to data collected from the past. It cannot say anything specific about the outcome of future processes. More data, more of the same, will not generate anything new.

The information content of a system, be it a book, the universe or an LLM, is measured by the behavior of large sets of discrete random variables and is determined by their probability distribution. This is saying in a complicated manner that we are talking about probabilities, not certainties. 1+1 does not necessarily equal 2.

Therefore, AI’s outcome will be mediocre at best. AI will likely have even more trouble separating correlation and causality than humans have. Correlation does not tell us anything about cause and effect. It may seem that way sometimes, but only to an undiscerning observer. So, the more times a specific set of information occurs, the more likely that information will be included in the AI’s response. 

Some researchers have asked whether more information or data will enhance AI’s answers. This is not the case. The larger the data set’s size and complexity, the more difficult it will be to detect causality. The addition of new knowledge will not significantly change the answers AI gives. Even if researchers were to discover a cure for cancer tomorrow, this knowledge would be just one fact among millions. 

Values are marginal, not absolute. Doing more of the same will only give you more value for a limited time and a limited number of marginal increments. Beyond such a point, the marginal costs will rapidly outweigh any gains. AI relies on continually doing more of the same. The more AI is applied, the lower the additional value will be.

Economic observations to help avoid the pitfalls of AI

Too many economists tried to follow astrologists’ footsteps and attempted to predict the future. Except by coincidence, the forecasts tend to be wrong. This has led to a general disregard for some of the main insights that rule economies, societies and human life. They are worth mentioning here.

There are no returns without risks. This is true in all sectors of the economy, not only in the financial markets. Every decision involves a risk, and the desired outcome is never certain. Whatever man does, there will never be guaranteed certainty about the outcome. We look to AI to give us more precise answers and diminish our uncertainty. If AI ever can, every decision involves risk, and the desired outcome is never certain. The hope is that AI can help mitigate some risks and give humans more certainty in their decision-making. If AI can provide us with specific answers at lower costs and less risk, the returns will be lower than what we otherwise gain.

All decisions involve a trade-off. Whatever decision you make, whatever choice or gain you make, you will lose something. You will pay opportunity costs. Rest assured that no website, shopping basket or fine print will disclose those opportunity costs.

A good example is dynamic pricing. With the rise of the internet, it seemed as if price comparison would lower the search costs associated with imperfect information. Soon, merchants discovered the benefits of dynamic pricing based on the benefit of having better knowledge of consumers’ search behavior. Any benefit the consumer had from the internet was turned into a disadvantage, based once again on unequal access to information.

One of the oldest laws in Economics states, “Bad money always drives out good money.” also known as Gresham’s law (1588). Thomas Gresham, financial agent of Queen Elizabeth I, elucidated that if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment. In contrast, people tend to hoard or export items made of more expensive metal, causing them to disappear from circulation. Strangely enough, very few people, even economists, understand that this applies to everything of value, not just money. Today, money holds little value; most people prefer stocks. We’ve witnessed the emergence of bad stocks over good stocks, which are no longer secure. In the 1970s, we saw the emergence of “Bad quality always drives out good quality” (Phillips vs. Sony video-systems, Ikea is an example of what happened in furniture. Is there anyone who doubts the prevalence of polyester over natural fibers, the dominance of Chinese goods?) If “information is money,” low-quality information will always have the upper hand over good-quality information. If schools and universities accept AI-based work, what are the chances of any progress in knowledge?

Bad (low-quality) information always drives out good information. The emergence and rising use of the ‘fake news’ label should remove doubts in that field.

Profit is based on value-added. To add value, someone or something must create and incorporate that additional value into a product or service. Creativity plays a central role in providing added value. Can AI generate added value? 

Conclusions

I used to joke about intelligence. Why are people looking for intelligent life in space when it is already so difficult to find on Earth? Today, I no longer joke about it. Does the emergence of ‘Artificial’ Intelligence mean we have given up hope of finding real intelligence?

Business leaders may have more confidence in AI than they do in economists. I can’t even say I blame them. But whatever else AI may bring, the displays of blind faith in AI, as are currently being witnessed, will have consequences:

• The quality of information will deteriorate.
• Our ability to make decisions will be impaired.
• The price of decision-making will rise. 
• The quality of our decision-making will deteriorate.
• Products and services offered will be of lesser quality.
• We will have less choice in products and services.

Less choice means less freedom.

I used to think that computers would never outsmart humans. I was wrong. I was thinking of computers getting more ingenious and overtaking human intelligence. If humans become less intelligent, the average person will someday be less intelligent than a computer. The complacency and sometimes blind trust people display towards AI can make this a self-fulfilling prophecy.

As with all supply and demand, if there is a demand for AI with all its current pitfalls, someone will supply such a tool. The consequences will be anybody’s guess. The good news is that someone will supply such a tool if there is a demand for AI without the pitfalls. Mankind might even be the winner. Can I have some natural intelligence, please?

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post The Economic Reality of AI: Statistics and Decision-making appeared first on Fair Observer.

To address this crisis, Egypt has turned to international lenders and allies, including the International Monetary Fund (IMF), European Union (EU) and Gulf Cooperation Council (GCC) countries. They have secured over $50 billion in financial commitments in 2023 alone.

These interventions have allowed Egypt to implement critical short-term measures, such as devaluing its currency, reducing subsidies and increasing interest rates. Meanwhile, the IMF has offered an $8 billion loan package as part of its 2022 program for Egypt, aiming to mitigate currency overvaluation and fiscal imbalances. Yet analysts like Steven Cook, a Senior Fellow at the Council on Foreign Relations, note that Egypt’s economic resilience remains uncertain without deeper structural reforms. This is particularly true given the limited progress on divesting military-controlled businesses and liberalizing the private sector.

Egypt’s exchange rate has shown significant volatility over the past two decades, with the Egyptian pound (EGP) experiencing sharp depreciations against the United States dollar (USD). In 2024, the EGP/USD rate dropped by 37.03%, driven by shrinking foreign currency reserves, a widening trade deficit and rising demand for USD amidst persistent economic uncertainties. The Central Bank of Egypt (CBE) has responded with various stabilization measures, including devaluations, interest rate hikes and capital controls. However, structural economic challenges and market pressures continue to weigh on the EGP, signaling ongoing currency instability for the near term.

Historically, Egypt’s crisis reflects a dependence on international financial aid to address chronic fiscal issues. The country has experienced at least eight significant BOP crises since 1952, each leading to IMF programs or financial interventions from international partners to stabilize the economy temporarily. However, these interventions have rarely resulted in lasting reforms, as Egypt often returns to fixed or highly stabilized exchange rates following periods of financial distress. This recurring cycle is largely driven by Egypt’s state-centric governance model and persistent cronyism, which have deterred sustainable growth and prevented the formation of a resilient market economy.

While Egypt’s strategic importance makes it “too big to fail” for many international partners, questions remain about whether the current assistance will drive meaningful change or merely delay another crisis. According to a report by the United Nations Development Program (UNDP) and research from the IMF, without comprehensive reform, Egypt risks continued fiscal and economic instability. Experts argue that structural adjustments — including reducing military control of the economy and allowing a fully flexible exchange rate — are essential for breaking the cycle of economic instability and achieving sustainable growth.

Case comparisons: Argentina and Turkey’s currency crises

The economic trajectories of Argentina and Turkey offer insights into the cyclical nature of currency crises in emerging markets, particularly those burdened with high levels of external debt and recurrent currency depreciation. These cases demonstrate the limitations of short-term financial fixes in the absence of comprehensive structural reforms and robust fiscal management, with implications relevant to Egypt’s current economic challenges.

Argentina’s financial history is marked by chronic fiscal mismanagement, high external debt and recurrent reliance on IMF bailouts. Since the early 2000s, Argentina has defaulted on its debt multiple times, eroding investor confidence and creating a volatile investment environment. The country’s approach has typically focused on immediate crisis resolution through IMF assistance, currency devaluation and austerity measures, rather than on deep structural reforms. For instance, Argentina’s 2000–2002 crisis, during which it defaulted on $95 billion in debt, led to a sharp devaluation of the peso and significant social hardship. Despite an IMF bailout and subsequent restructuring, Argentina’s pattern of accumulating debt and renegotiating it without establishing a sustainable fiscal framework has continued. This culminated in additional defaults in 2014 and 2020.

The core of Argentina’s instability lies in its weak fiscal discipline, characterized by chronic budget deficits and a lack of political consensus on sustainable economic policies. This instability has created a self-perpetuating cycle: High debt burdens lead to recurring defaults, eroding trust among foreign investors, which then necessitates further reliance on external support and austerity measures, perpetuating economic fragility. Argentina’s experiences underscore the limitations of debt-driven growth and the dangers of relying on short-term financial infusions without addressing underlying structural issues, such as public spending control and inflation stabilization.

Turkey’s recent economic difficulties stem from a combination of high inflation, excessive reliance on foreign-denominated debt and an unorthodox approach to monetary policy under President Recep Tayyip Erdoğan. Unlike Argentina, Turkey’s crisis has been driven by its refusal to adhere to conventional monetary strategies, particularly concerning interest rate management. Erdoğan’s insistence on maintaining low interest rates, despite high inflation, has led to significant currency depreciation; the Turkish lira has lost over 80% of its value against the dollar from 2018 to 2023.

Turkey’s debt dynamics, particularly its dependence on short-term foreign debt, have exacerbated this volatility. Turkish corporations and financial institutions, heavily indebted in foreign currency, face severe financial strain as the lira depreciates, making dollar-denominated debt more expensive to service. This high level of exposure to external financing has heightened Turkey’s vulnerability to global economic conditions, such as interest rate hikes by the US Federal Reserve. It has increased the cost of borrowing for emerging markets.

Jeffrey Frankel, a research associate at the National Bureau of Economic Research, notes that Turkey’s reliance on foreign capital, paired with its unorthodox policy stance, has deterred investors. It has further devalued the currency and intensified inflation.

Policy shifts and economic reforms

Egypt’s rising external debt raises concerns about the government’s capacity to service it without continuous outside assistance. This debt burden puts downward pressure on the currency, as investors demand higher returns to offset the risks associated with holding Egyptian assets. Moreover, declining foreign exchange reserves have limited the Central Bank of Egypt’s (CBE) ability to stabilize the currency, contributing to further depreciation. Countries like Argentina have encountered similar difficulties, with diminishing reserves constraining options for currency defense and increasing reliance on the IMF.

The CBE’s recent shift to a more flexible exchange rate is intended to attract foreign investment and fulfill IMF requirements, allowing the EGP to fluctuate more freely. While a floating currency can provide stability over time, Egypt’s experience reflects the risks associated with rapid depreciation. This phenomenon is also evident in Turkey’s recent currency challenges.

To counteract inflation, the CBE has raised interest rates, hoping to draw in foreign investment; however, this has not been sufficient to prevent the EGP’s decline. This underscores the need for comprehensive economic reforms to secure long-term stability.

Strategic economic reforms for Egypt

Ruchir Agarwal, a Mossavar-Rahmani Center for Business & Government (M-RCBG) research fellow at Harvard Kennedy School, and Adnan Mazarei, a non-resident senior fellow at Peterson Institute for International Economics (PIIE), argue that Egypt’s recurring economic crises, exacerbated by governance and policy shortcomings, require a fundamental shift in approach. They emphasize that Egypt has to address governance and policy deficiencies, military dominance and cronyism to implement necessary economic reforms and break its cycle of recurring crises, rather than relying on international financial bailouts.

To stabilize and attract foreign investment, Egypt should prioritize macroeconomic stability and regulatory reform using four steps. First, maintaining a flexible exchange rate will help reduce speculative pressure on the EGP, creating a more predictable environment for investors. Second, focusing on inflation control through targeted subsidies and supply chain improvements would further support this stability. Third, by adopting global standards in transparency and corporate governance, Egypt can build investor confidence; streamlining regulatory processes would make foreign investment more accessible. Finally, reducing the military’s role in the economy, curbing cronyism and enforcing anti-corruption measures could help establish a more equitable environment for private businesses.

The Egyptian conundrum: elite capital flight and economic stability

Egypt’s economic journey has frequently involved partnerships with the IMF to address persistent fiscal challenges and stabilize the macroeconomic framework. However, one of the most significant yet underexplored dynamics undermining Egypt’s fiscal stability is elite capital flight — the large-scale transfer of domestic wealth by political and economic elites to offshore financial centers. This practice has far-reaching consequences for economic development, governance and societal equity.

Egypt’s case exemplifies the challenges of elite capital flight. Over decades, economic and political elites have transferred vast sums of wealth to offshore havens, facilitated by weak anti-money laundering (AML) frameworks and global financial opacity. While exact figures are difficult to ascertain, estimates of the financial assets held abroad by Egyptian elites highlight the magnitude of this issue.

These outflows coincide with structural economic inefficiencies and governance gaps, leaving the state financially constrained. In turn, the government is often forced to implement austerity measures or seek external funding, amplifying socio-economic pressures.

Elite capital flight undermines economic stability and development through several interrelated mechanisms. It exacerbates socio-economic disparities. While elites secure their wealth abroad, the general population faces the consequences of reduced public spending and austerity measures. This creates a dual economic reality where the wealthy remain insulated from domestic economic pressures, while lower-income groups bear the brunt of fiscal challenges.

Elite capital flight is a longstanding feature of Egypt’s economic landscape, deeply rooted in governance inefficiencies and weak regulatory frameworks. Economic and political elites often perceive domestic instability, potential expropriation or shifts in policy as triggers for safeguarding wealth abroad. These dynamics are facilitated by global financial systems that accommodate opaque wealth transfers and shield assets from domestic scrutiny.

Egypt’s economic elite have historically diversified their financial portfolios, funneling resources into offshore financial centers such as Switzerland, the United Kingdom and other jurisdictions with favorable conditions for wealth concealment. This “insurance” mechanism not only provides security against domestic uncertainties but deprives the nation of critical resources that could otherwise bolster infrastructure, public services and social programs. As Andreas Kern, a Teaching Professor at the McCourt School of Public Policy at Georgetown University, argues, “the ability to draw on the IMF creates perverse economic incentives so that a country’s elites can privatize economic gains by moving funds into offshore financial destinations before the arrival of the Fund.”

Egypt’s economic trajectory highlights the interplay between governance failures, elite capture and external financial interventions. Without addressing the systemic drivers of elite capital flight, external assistance risks perpetuating a cycle of dependency rather than fostering sustainable growth. As global scrutiny on financial transparency intensifies, Egypt’s experience offers valuable lessons for crafting more equitable and resilient economic policies.

Egypt’s next steps

To effectively implement and sustain the policy recommendations made in this piece, in addition to macroeconomics and government reform, Egypt must prioritize the development of expertise in AML and counter-financing of terrorism (CFT). This will require a skilled workforce across financial regulation, law enforcement and compliance to ensure that Egypt’s AML/CFT frameworks align with international standards while addressing the country’s unique economic challenges. Building this expertise will involve continuous training, technical assistance and collaboration with global organizations such as the Financial Action Task Force (FATF) and IMF.

Elite capital flight also represents a significant barrier to Egypt’s economic development and stability. By diverting critical resources from the domestic economy, it exacerbates fiscal deficits, perpetuates inequality and undermines trust in governance. Addressing this issue requires a comprehensive approach that combines domestic reforms with international cooperation to foster a more equitable and resilient economic framework. For Egypt, tackling elite capital flight is not only a question of fiscal prudence but also of social and economic justice.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Egypt’s Policy Challenges and Deep Reforms for Lasting Financial Stability appeared first on Fair Observer.

“It’s important to note that the narrative ‘BRICS countries target the USD’ seems just a propaganda topic that the so-called mainstream media is pushing. It has very little to do with reality, but as far as propaganda is concerned, it works fine because few people seem to understand what is really going on anyways. The correct narrative is ‘The USD targets the BRICS countries.’ Here’s why:

The part that everybody seems to get wrong: the BRICS+ bankers are not trying to dethrone or attack the dollar. They have been compelled to decouple from the USD because some have already been locked out of USD trade via Western banks and had their assets frozen in Western banks. Others logically anticipate the same treatment at some time in the future. At the same time, they happily trade in USD when they can or need to, and still hold trillions of dollars worth of American treasuries and other paper denominated in USD, although the preference for holding T-bills is changing.

So, as I mentioned earlier, they are undollaring (diversifying away from dollar-only trade), but not dedollaring completely, and they are doing it out of necessity, not some strategic evil scheme they designed out of their own volition. BRICS Bridge is designed to trade in any currency, including the dollar – this fact alone runs counter to the many overarching statements under the ‘BRICS are the enemy of the dollar’ narrative.

The clever propaganda trick is to flip cause and effect, making it appear as though BRICS+ countries are deliberately undermining the dollar, when in fact, they are reacting to being forced out of the USD system. It’s like blaming someone for leaving a burning building when they had no choice but to escape. In this regard, no one has done more than the powers that be in the USA to push the world away from the USD.

One more peculiarity that nobody reports on: allegedly, at least two European banks already using or testing mBridge/BRICS bridge (quietly) are Rothschild & Co and The Institute for the Works of Religion. That got me thinking that this may explain why the Bank of International Settlements (BIS) found themselves between the rock and the hard place:

• BIS bureaucrats think they may have leverage over mBridge
• BIS may not have the authority to do anything about it at all. I would like to hear your thoughts on this.

Nevertheless, it certainly appears that Bloomberg and similar outlets are pushing a narrative that lacks any real analysis or investigation, but instead works to push someone’s divisive geopolitical agenda. The question is why and who is paying for the music?”

It was this question coming from Edward that prompted Alex to pen the response we featured in Money Matters, Part 12, a week ago.

“Who is paying for the music? $1.6 billion ($325 million for 5 years each) appropriated by US Congress to be distributed to journalists to ‘counter the People’s Republic of China Malign Influence’ and the “malign influence of the Chinese Communist Party and the Government of the People’s Republic of China and entities acting on their behalf globally.” 

Should anyone be surprised that the US Congress is ready to spend so many of its citizens’ “hard-earned” tax dollars on “correcting” the vocabulary, themes and memes journalists are allowed to use? That sum of $1.6 billion gives us an idea of the cost of managing the news. “Undollar” holds no connotation of aggression, whereas “dedollar” sounds like an assault not just on the dollar, but implicitly on the “rules-based order” associated with it.

If “dedollar” and “undollar” exist, we might wonder whether there should also be a verb “to dollar.” It doesn’t appear so, though such a verb would accurately describe what happened to the global economy in the aftermath of World War II. That was the crucial moment in history when the US economy held all the cards, not just because of its industrial development, but especially because it held the debts of everyone else’s war spending. We sometimes forget that the post World War II world order drew its initial strength and based its stability on the value of a gold-convertible dollar.

Today’s dollar has seen its psychological stature as the universal solvent for international trade seriously diminished. This happened over time, but it now seems to be coming to a head. The dollar ceased being tethered to gold in 1971 when President Richard Nixon waved his hegemonic wand, effectively floating the greenback. But very quickly, by 1975, it had acquired a new platform of stability thanks to Henry Kissinger’s cleverly engineered petrodollar monopoly with Saudi Arabia. But that connection, though not completely broken, has been radically loosened over the past two years.

The dollar’s fundamental strength resides in the perception of the performance of the US economy. But the economy has thrived, above all, on the dollar’s special status. Giscard d’Estaing famously called it the dollar’s “exorbitant privilege.” Gold and then oil became the equivalent of the collateral a bank requires to secure a loan. But the link to both has been compromised. The world has now moved into uncharted waters. The risk of endemic instability for the currency of a nation that is rapidly heading towards an unmanageable accumulated debt of $36 trillion is real. And, like the debt itself, that risk is growing by the day.  

This period of political transition following this month’s election offers a new twist. During the campaign, President-elect Donald Trump promised to punish countries that “leave the dollar.” His choice for Secretary of State, Marco Rubio, recently introduced a bill in Congress “to punish countries that de-dollarize.” Asia Times notes that “Rubio’s bill, ominously called the Sanctions Evasion Prevention and Mitigation Act, would require US presidents to sanction financial institutions using China’s CIPS payment system, Russia’s financial messaging service SPFS and other alternatives to the dollar-centric SWIFT system.”

Would such a campaign to sanction and punish be feasible? Does the Trump team seriously believe it can succeed without doing even more damage to the US itself than to the culprits it is seeking to harass? The same article, in its opening paragraph, reminds readers of Edward’s point. “Economic and financial sanctions often backfire. The most notable example is the weaponization of the dollar against Russia.” That, of course, was the event that put dedollarization in the headlines and made it a permanent talking point.

With the arrival of Trump, his cherished taste for trade wars is spawning something else: currency wars. Given that we already have a couple of ongoing hot wars that appear to be escalating, we may soon lack the vocabulary to describe the other wars that may be festering.

On that score, Alex shared with us this week a video document that reveals yet another dimension of the war-infested mindset of today’s political and geopolitical culture. It’s a new kind of war with potentially cataclysmic consequences. Let’s call it the “quantum war.” The British mathematician and writer, Professor Hannah Fry, interviews some of the key players developing quantum computing. They all agree the stakes are very high. Impressed by the potential significance of quantum computing, Alex raised an interesting question:

“Can you imagine if China gets to build a quantum computer before the US does? It would be ‘game over,’ at least for the geo-political games the US likes to play in other countries’ backyards. China could disrupt the DTCC (Depository Trust & Clearing Corporation), the backbone of the US’s financial markets. It processed $3 quadrillion (!) in securities transactions in 2023.”

At one point in the video (19:19), Fry interviews Alexander Ling, a professor at the University of Singapore and head of the Centre for Quantum Technologies. Fry points out that Ling’s group “want to build an unhackable network so that anyone can use it.” She adds this surprising observation: “They also collaborate with US and Chinese companies.”

Ling evokes the period in which quantum technology was first being developed: the 1980s and 1990s. “Everyone was open to having an exchange of people and ideas at that time.” Noting that in her earlier interviews with specialists in the US and the UK, everyone appeared focused on security and the risk of proliferation, Fry calls into question the rhetoric “framed as a quantum race between two giant superpowers who are throwing everything they have at it.” She then asks the real question: “Will a high stakes duel for supremacy really define the future of global power?”

Whether considering reserve currencies or scientific research, for some people, every issue boils down to a duel for supremacy.

Join the debate

Money Matters…, is dedicated to developing this discussion and involving all interested parties.

We invite all of you who have something to contribute to send us your reflections at dialogue@fairobserver.com. We will integrate your insights into the ongoing debate. We will publish them as articles or as part of the ongoing dialogue.

*[Fair Observer’s “Crucible of Collaboration” is meant to be a space in which multiple voices can be heard, comparing and contrasting their opinions and insights in the interest of deepening and broadening our understanding of complex topics.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Crucible: Money Matters in a Multipolar World, Part 13 appeared first on Fair Observer.

This state of crafted ambiguity would inevitably lead to growing instability among the Western governments united in a poorly and clearly failing designed mission, a process confirmed by recent events in France, Germany and, of course, the US. This was further confirmed by the return not only of Donald Trump to the White House, but of a Republican majority in the US Senate, the House and of course, the Supreme Court.

Whether it’s been a good year for democrats — those who believe in the resilience of democracy — is debatable. It has clearly been a good year for Republicans, even in unstable France, where President Emmanuel Macron nominated a Républicain prime minister, despite the fact that les Républicains, formerly the dominant right wing party, were clear losers in this summer’s parliamentary elections, drawing a mere 5.7% of the vote. It was the left-wing coalition, Le Nouveau Front Populaire, that came out on top.

In the meantime, the German coalition government, in power since September 2021, has collapsed and Deutschland will hold a new general election in February 2025. It appears likely that the Christian Democrats (CDU), the party of Angela Merkel, will win that election. That may sound reassuring to some, who believe in bringing back formulas that seemed to work in the past, but Germany’s voters appear increasingly defiant of the ruling elites of the present and past. Rather, they appear attracted by solutions coming from the far-right (Alternative für Deutschland) and the far-left (Bündnis Sahra Wagenknecht). The sense of disillusionment and confusion related to Germany’s policies concerning the Ukraine war have been aggravated by recent events in the US and in Europe itself.

In this context, reports of what took place at the BRICS+ summit in October 2024 in Kazan, Russia made that event and the order it adumbrates resemble a haven of peace and mutual understanding. A major outcome was the resolution to promote “expanding the use of local currencies to Promote Economic Stability” complemented by an expanding list of countries that will be associated with BRICS.

This may explain why the US Congress decided to act with the aim of ensuring that the public does not become seduced by such a harmonious approach to global affairs.

On November 4, Alex Gloy shared this bit of news with us, as he helpfully provided the link to a piece of legislation bearing the ominous title: H.R.1157 – Countering the PRC Malign Influence Fund Authorization Act of 2023.

“Who is paying for the music?” Alex asked. He then provided the figures.

“$1.6 billion ($325 million for 5 years each) appropriated by US Congress to be distributed to journalists to ‘counter the People’s Republic of China Malign Influence’ and the ‘malign influence of the Chinese Communist Party and the Government of the People’s Republic of China and entities acting on their behalf globally.’”

George W. Bush launched his famous “Global War on Terror” primarily with military means in Afghanistan, Iraq and elsewhere. Congress is launching what is beginning to look like a global war on malign influence. In this case the theater of war is journalism. This tells us something about how we should think about what we read in the media over the next five years.

Alex continued with these comments:

“This makes it easy to discard anything you read about China, Russia, and therefore the BRICS in traditional western media as propaganda. When you know what to look for, you see it everywhere. Western media reports on China used to be infatuated with pollution. Now that China is adding more solar capacity than the rest of the world combined – crickets. China’s success in making affordable EVs is greeted with tariffs. Western countries exporting their wares to China are ‘export champions.’ Chinese companies doing the same are ‘dumping overcapacities.’

There is a Chinese high-speed train making the 1,600 km (1,000 miles) trip from Shanghai to Hong Kong in 8 hours. It took my daughter more than that to travel from NYC to Burlington, VT (300 miles).

Every economic report paints a dire picture of the Chinese economy, despite it having grown 5.2% in 2023, and GDP having expanded 17x over the past 25 years.

A rather hilarious example: WaPo’s ‘China ruined caviar for us.’”

Before returning to the question of BRICS, which Congress certainly deems to be a vehicle for China’s “malign influence,” Alex notes that “$325m would have paid for 5,000 public school teachers.” Disinformation is clearly more valuable and especially more urgently required than the information schools seek to instill.

Alex then added the following observations:

“But back to BRICS:

• Yes, the US threw the first stone by cutting Russia off. Russia used to be in the top 20 international holders of Treasury securities ($109 billion in 2017). Russia helped finance the US budget deficit, including the US defense budget!
• From the BRICS perspective the aim to reduce dependency on the US dollar is nothing but logical – it would be stupid to continue to finance the US and run the risk of confiscation.
• As long as the US runs a trade deficit, the external sector (non-US countries), in aggregate, will be forced to accumulate US dollars AND will be forced to keep sending goods and services to the US. As the US dollar is overvalued, this benefits US consumers to the detriment of other countries’ consumers.
• From a US perspective, however, losing the ability to send digital dollars in exchange for real goods and services is, of course, a threat. Losing the status of the world’s reserve currency would go hand in hand with losing the position of global hegemon. Hence the US correctly identifies any attempts to do so as hostile.
• The official reason for the withdrawal by the Bank of International Settlements (BIS) from the mBridge project that aimed at creating a multi-central bank digital currency (CBDC) platform, which had been developed to the MVP stage, was the fact that it would have meant working with a sanctioned country (Russia). But it is probably safe to assume there was heavy US pressure to do so.
• The BRICS countries will have to figure it out by themselves. One solution could be a supra-national currency, pegged to gold (but at a floating rate). National currencies will also have to float against the supra-national currency used for settlements; otherwise, imbalances pile up. Maybe a managed float, like the CNH (or the ECU before introduction of the Euro), to reduce volatility.
• A floating gold peg is, in reality, not a peg, but it helps build confidence.
• If a US person wanted to exchange dollars into gold, they can do so at $2,600 per ounce today. But few people take advantage of that possibility. However, once a currency rapidly loses value, people will line up to buy gold. So, you have to make sure the currency is somewhat stable. This means you need a stable banking system, and a credible lender of last resort (central bank). And some fiscal discipline. Which is hard, even for Germany. If it’s hard for Germany, with its currency account surplus, it’s even harder for emerging economies (strong growth usually leads to strong import growth leading to current account deficits).”

Since Alex’s contribution on November 4, the BIS rescinded its announced decision to scuttle mBridge and write off the investment. It has now agreed to leave it in the hands of central banks who wish to continue developing it and ultimately deploy it. Most observers agree that the likely candidates would be China, Hong Kong, Thailand, and the United Arab Emirates.

Alex has also noted an important point: that the election of Donald Trump has buried any ambition of a US CBDC (Central Bank Digital Currency) at least for the next four years. This offers an opportunity for other nations to leap ahead. Privately-issued Tether is filling the gap for now, but other nations might take advantage of this golden opportunity and benefit from first-mover advantage.

Concerning the BIS decision to drop mBridge, Josh Lipsky of the Atlantic Council noted “that while China could continue developing mBridge, Western central banks may turn their attention to alternative platforms such as Project Agorá, a similar initiative backed by central banks in Europe, Japan, Korea, and the US.”

Will this be the face of a new currency cold war? The first Cold War famously pitted God-fearing capitalism against atheistic communism. This one is more likely to become a contest between “benign influence” on one side and “malign influence” on the other. Future observers will have to decide which one is which.

Join the debate

Money Matters…, is dedicated to developing this discussion and involving all interested parties.

We invite all of you who have something to contribute to send us your reflections at dialogue@fairobserver.com. We will integrate your insights into the ongoing debate. We will publish them as articles or as part of the ongoing dialogue.

*[Fair Observer’s “Crucible of Collaboration” is meant to be a space in which multiple voices can be heard, comparing and contrasting their opinions and insights in the interest of deepening and broadening our understanding of complex topics.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Crucible: Money Matters in a Multipolar World, Part 12 appeared first on Fair Observer.

Among the prominent experts, former central banker at the Federal Reserve Bank of New York, Kathleen Tyson, recently tweeted concerning the global trend of central banks to diversify away from strict dependence on the US dollar: “Currency optionality is now a matter of economic and national security. US threats of more tariffs and sanctions against states moving to Local Currency Trade demonstrate the dangers of dollar dependence and the urgency of optionality and resiliency.”

Everyone understands the meaning of resiliency. But what about optionality?

Today’s Weekly Devil’s Dictionary definition:

Optionality:

A euphemistic synonym of the common noun “choice.” It is employed to avoid provoking the simulacrum of “moral judgment” exercised by dominant powers who believe that their set of rules intended to normalize economic behavior endow them with the right to coerce others and the duty to limit others’ ability to choose.

Contextual note

Tyson is of course referring to the growing trend seen in a diversity of nations to devise methods, techniques and technology that will allow central banks and other foreign exchange operators to conduct transactions flexibly and, when possible, directly between the widest range of individual currencies. This means adopting an attitude that aims at avoiding dependence on what used to be the most convenient solution for everyone: holding US dollars reserves.

So why pedantically insist on a technocratic neologism? Why not be more simple and natural and call this “currency choice?” 

There are several comprehensible reasons for this innovation in vocabulary. Unlike the idea behind the word choice, optionality refers not to the act of choosing but to a persistent state in which flexible strategic choice appears as the default setting. In contrast, the idea of choice to modern ears evokes a specific act governed as much by taste as rational calculation. It even includes the idea of not choosing. Optionality implies the necessity to choose.

The emergence of the notion of “consumer choice” in the 20th century has polluted our vocabulary. It defines a mentality in which consumers, confronted with a diversity of brands, exercise their free will by choosing the one they find most attractive. This has even affected the model of democracy in the US. Americans now understand that they have a choice between exactly two viable brands. Elections are about convincing the electorate that one brand is better than the other. 

The advent of the consumer society enabled marketers to develop a complementary concept, the notion of impulse purchasing decisions fueled by advertising. Given the seriousness of foreign exchange, optionality can thus be seen as the necessary alternative to the ultimately trivial notion of consumer choice. 

Unlike consumer decisions, optionality is emotionally neutral. It supposes cold rationality in its decision making. Some find it ironic that at the same time dominant macro theories of modern capitalism posit and indeed require a belief in the existence of homo economicus — a purely rational being capable at all times of calculating what best correlated with their interest — the notion of impulse buying emerged as a staple of the “science” of marketing.

To understand the transition from the increasingly unipolar, normative and conformist 20th century and the disruptive increasingly multipolar 21st century, pondering these distinctions of vocabulary can prove helpful. It’s too easy to dismiss a word like optionality as a futile example of a self-enamored professional elite’s taste for jargon, designed to meet their need to feel both different from and superior to the common culture.

What we’re seeing today is an emerging world wounded and sent into disarray by Washington’s obsessive recourse to sanctions. Rather than seeking to undermine the dollar, the wise bankers and politicians are focusing on defining a field of options in which normal economic relationships may play out, free of the fear of coercion and intimidation. Rather than taking the form of a slave revolt, they are inventing not only new practices and technologies, but even a vocabulary that helps define a new economic culture.

Historical note

Since the beginning of the 21st century, two major events have transformed the way nations understand the world order. When President George W. Bush responded to the drama of the September 11 attacks by launching a war with a nation state, Afghanistan, instead of framing the issue as a criminal affair, his futile “forever wars” focused on regime change ultimately undermined the image of the US as the unipolar enforcer of a self-defined rules-based order. The prestige of its global military presence, ready to police the world in the name of democracy, took a serious hit. President Joe Biden’s ignominious retreat from Afghanistan in 2021, after 20 years of feckless war, confirmed the world’s worst suspicions.

The supposedly indomitable US military machine had confirmed what should have been clear with the fall of Saigon nearly 50 years earlier: Even with no rival global power on Earth, the US military was incapable of imposing its will on other regions of the world. Thanks to Bush, one pillar of US supremacy was seriously cracked for all the world to see. 

The financial crisis of 2007–2008 offered an initial glimpse of the weakness of the other pillar: the US economy, its tentacular stock market and the almighty dollar. The shock was real but not fatal. Thanks to President Barack Obama’s commitment to quantitative easing (QE), the dollar maintained its pivotal role, but at its core it was already seriously fragilized.

After the withdrawal from Afghanistan, Biden made a new strategic error that had the effect of confirming the world’s perception that currency optionality had become an existential necessity. For decades, Washington has been addicted to sanctions designed to weaken and ultimately topple the governments of every nation that fails to show due respect to what Noam Chomsky has called “the Godfather.” The extreme measures taken in reaction to Russian President Vladimir Putin’s invasion of Ukraine in February 2022 brought to the fore what should have been obvious: every nation should fear the dollar. When Biden cut Russia off from the SWIFT payment system and threatened to punish any country that did business with Russia, nations across the face of the globe realized that holding too many dollars, though convenient for trade, entailed a possibly existential risk.

The “de-dollarization” movement has been growing slowly over time. In 2016, Obama’s Treasury Secretary Jack Lew expressed his awareness of the risk for the US. He warned that the “escalation of financial sanctions will only accelerate this trend, precipitating further de-dollarization as more countries capitalize on digitalization to expand their use of LCS for bilateral transactions and to develop more hedging instruments.” He added this observation: “The more we condition the use of the dollar and our financial system on adherence to US foreign policy, the more the risk of migration to other currencies and other financial systems in the medium term grows.”

As Lew predicted, the medium term is living up to his forecast. Currency optionality will inexorably be part of a new world order.

*[In the age of Oscar Wilde and Mark Twain, another American wit, the journalist Ambrose Bierce produced a series of satirical definitions of commonly used terms, throwing light on their hidden meanings in real discourse. Bierce eventually collected and published them as a book, The Devil’s Dictionary, in 1911. We have shamelessly appropriated his title in the interest of continuing his wholesome pedagogical effort to enlighten generations of readers of the news. Read more of Fair Observer Devil’s Dictionary.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post How Optional Can De-Dollarization Become? appeared first on Fair Observer.

Given the centrality of trust in the crypto-economy (see Kevin Werbach’s outstanding book and this podcast), understanding the drivers of confidence from a consumer perspective in this sector is critical. To do this, Wharton marketing professors David Reibstein, Cait Lamberton and Z. John Zhang and visiting scholar Martin P. Fritze began collecting data from online panelists in January 2023, trying to build a baseline understanding of confidence in cryptocurrency. More importantly, they wanted to understand what drives that confidence, and how it might change over time.

These online panelists look much more typical than Hilton and Laurie: On average, they have an age of 42.14 years (SD=14.05) and have a 47.4% female/50.9% male (rest “other/prefer not to declare”) gender split. Though much remains to be learned, after more than 1.5 years of data and over 25,000 responses have been analyzed, the researchers have some insights into how political conviction tints individuals’ confidence in crypto — and more importantly, why.

They find that as political conservatism increases, so does confidence in cryptocurrency. Specifically, individuals who rate themselves as more conservative on a seven-point scale — where 1 represents extremely liberal and 7 represents extremely conservative — tend to show greater optimism about statements like, “Do you think cryptocurrencies will become more important or less important in business over the next 12 months?” (with 1 meaning definitely less important and 7 meaning definitely more important).

Moreover, the more conservative they are, the more likely consumers were to indicate current cryptocurrency holdings. A total of 41% of Republicans, compared to 32.4% of Democrats, reported owning cryptocurrencies. With an overall average of about one-third of the sample holding cryptocurrencies, Republicans significantly exceed the general trend.

A key factor: distributed trust

The researchers also have some initial insights about why self-described conservatives are confident in crypto and how they think about it. Rather than feeling that trust is best placed in institutions like the Federal Reserve, conservatives tend to place more stock in distributed trust. In contrast to trust that relates to a 1:1 relation to a person or institution, distributed trust can be defined as a decentralized form of trust that spans multiple entities and where no single entity alone can dictate the outcome.

In their data, the researchers captured belief in distributed trust by asking questions like, “In general, who do you trust more (1 — Individuals; 7 — Institutions),” “In general, what type of system would you feel more comfortable in? (1 — A system with CENTRALIZED power; 7 — A system with DECENTRALIZED power).” They find that as conservatism rises, so does trust in individuals (vs. institutions) and trust in decentralized (vs. centralized) power.

While only time will tell if current crypto-confident consumers will fare well riding out long-term vacillations, the researchers anticipate that ongoing changes in regulation and the political landscape will continue to shift perceptions at a macro level. In this sense, they believe that research on consumer confidence in cryptocurrencies will also provide important insights, allowing us not only to consider the way that this emerging form of currency evolves from a technical perspective, but also the way in which it both shapes and responds to consumers’ everyday experiences, fears and aspirations.

[Knowledge at Wharton first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Crypto Politics: Liberals’ and Conservatives’ Confidence in Cryptocurrencies appeared first on Fair Observer.

In the US, where industrial policies, tariffs and labor-market shifts play a pivotal role in economic competitiveness, the ongoing trade tensions with China are proving to be a significant factor in shaping the future of work. As manufacturing jobs evolve in response to technological advances and shifting global markets, the broader narrative of globalization is also changing. This shift presents new opportunities and challenges, with profound implications for economic stability, workforce development and the overall trajectory of international trade. The outcome of this complex interaction will determine the US’s ability to adapt to a new economic order while safeguarding its industrial base and global competitiveness.

The Kuznets curve and manufacturing employment

The Kuznets curve is a graphic illustration of an economic theory introduced by Simon Kuznets. It shows an inverted-U-shaped relationship between economic development and income inequality, positing that inequality rises during early industrialization but declines as economies reach advanced stages of development. The curve framework illustrates that as economies mature and technological advancements drive productivity, manufacturing’s share of employment tends to decline, pushing nations toward service-oriented sectors. This inverted-U-shaped trajectory suggests that both income inequality and manufacturing employment follow a similar pattern in response to structural economic transformations. For developing regions such as Africa, where manufacturing plays a critical role in employment, the Kuznets curve provides a useful framework for understanding the complex dynamics of industrialization and employment as economies mature.

The transformative role of AI in manufacturing

AI and automation technologies are driving a profound transformation in the manufacturing sector, automating many tasks previously performed by human workers. This shift is enhancing productivity, enabling companies to sustain or increase output levels with a smaller workforce. Further, the growth of AI and automation is contributing to a structural shift from manufacturing toward services and knowledge-based sectors. As high-skill industries, such as software development and data science, expand, they attract educated workers, while manufacturing employment stagnates or declines. For many developing countries, the rise of automation could make it harder to maintain large-scale manufacturing jobs as advanced economies increasingly turn to robotics and AI-driven production to stay competitive.

The inverted-U-shaped relationship between manufacturing employment and GDP per capita reflects a broader transition from labor-intensive manufacturing to service-oriented economies. This shift is not solely a result of economic development but also reflects the influence of advancing technologies, which reduce the need for manufacturing labor.

While this may benefit high-income countries by reducing labor costs and boosting efficiency, it poses significant challenges for developing economies. These economies, which traditionally relied on labor-intensive manufacturing to fuel economic growth and job creation, may find that the model is no longer as feasible in a world increasingly dominated by automated production processes. As AI and automation reshape the global production landscape, policymakers face the challenge of balancing support for manufacturing with fostering innovation in service and technology sectors to ensure long-term economic resilience.

For developing nations, sustaining manufacturing as a vital employment source requires adapting industrial policies to embrace both traditional manufacturing and high-growth, technology-driven sectors. In high-income nations, on the other hand, AI and automation are essential for retaining competitiveness in high-value sectors. For example, specialized manufacturing remains vital, as seen in industries like aerospace, biotechnology and electronics in the US, Japan and Germany. Here, manufacturing is integrated with high-value services, maintaining competitiveness through constant innovation.

The complex transformation of US manufacturing employment

As the global economy shifts, manufacturing employment in the US faces a complex transformation, intricately connected to the ongoing trade dynamics with China. Historically, US manufacturing employment surged with industrialization, but the rise of automation, coupled with shifting trade policies, has led to a gradual decline in these jobs. The US–China trade relationship has played a pivotal role in shaping this trajectory. China’s growing dominance in manufacturing, aided by low-cost production and state-driven economic policies, has led to significant outsourcing of US manufacturing jobs, exacerbating concerns over job loss and wage stagnation in key sectors.

In response, the US has increasingly turned to tariffs and industrial policies, notably during the Trump administration, to counteract China’s perceived unfair trade practices, such as intellectual property theft and subsidies to domestic industries. While these tariffs were intended to bring manufacturing jobs back to the US and reduce reliance on China, they also brought unintended consequences, such as higher costs for US consumers and disrupted supply chains. Moreover, these trade wars have highlighted the delicate balance between protecting domestic industries and fostering long-term economic growth.

Simultaneously, the rise of automation and artificial intelligence in manufacturing further complicates the issue. As advanced economies like the US embrace AI-driven production to stay competitive, manufacturing jobs are increasingly automated, reducing the number of workers needed in these sectors. The decline in manufacturing employment is not just a result of trade policy but also a structural shift driven by technological advances. This poses a significant challenge for policymakers as they seek to navigate the dual pressures of protecting employment and encouraging technological innovation. Ultimately, the future of US manufacturing employment will depend on balancing industrial policies, trade strategies and the need to foster both high-skill jobs in technology-driven sectors and resilient manufacturing industries that can adapt to the changing global landscape.

Historical perspective on tariffs and economic growth

While tariffs undeniably helped protect emerging American industries, their primary function before 1913 was as a crucial revenue source for the federal government, funding about 90% of expenditures. This revenue was essential for infrastructure and military needs in a time when other federal taxes were nearly nonexistent. Economist Yeo Joon Yoon argues that America’s rapid economic growth was not only a result of tariffs but also due to favorable institutional conditions, such as the absence of direct taxes on income and corporate profits, which allowed capital to be freely reinvested. This fiscal environment, combined with a growing market and resource base, offered additional momentum for economic expansion.

Early US Treasury Secretary Alexander Hamilton, a key advocate for industrial growth, recognized both the opportunities and constraints that tariffs imposed. While he promoted tariffs as a way to nurture US industry, he cautioned against excessively high rates that could reduce imports and, consequently, government revenue. For a young nation reliant on foreign goods and raw materials, finding the right tariff balance was vital for sustaining both government funding and industrial growth. This complex approach reflects early American economic policy’s reliance on tariffs as a flexible tool for revenue, protection and stability.

Modern protectionists often refer to 19th-century America as a model of successful industrial growth under high tariffs. Figures like former US Trade Representative Robert Lighthizer argue that tariffs were key to America’s transition from an agrarian economy to an industrial powerhouse. Advocates such as Oren Cass and Michael Lind also suggest that tariffs enabled the US to pursue import-substitution policies that supported domestic industries. For them, 19th-century tariff policy exemplifies how protective measures can help build and sustain local industries, despite the associated trade-offs.

However, Hamilton’s careful approach to tariffs reflected a nuanced understanding of economic development, balancing protectionist goals with the need to keep markets open to support revenue and ensure access to imported goods. His caution underscores the complex nature of tariff policy, where protecting industries had to be weighed against the need for stable federal funding. While tariffs shielded fledgling American industries, they were vulnerable to economic cycles and international trade fluctuations that could impact revenue streams.

The introduction of the modern federal income tax, passed in 1913 on the heels of the 16th Amendment, marked a turning point in American fiscal policy. With this new source of income, the government gained financial flexibility and could pursue targeted economic policies beyond tariffs. This shift diminished the federal government’s dependence on tariffs, allowing for a more diversified fiscal strategy that could support economic development without relying solely on trade barriers. This historical evolution underscores that while tariffs can play a vital role in early industrial growth, their effectiveness is greatly enhanced when complemented by broader fiscal tools, such as income taxes, which provide the government with more stable and adaptable revenue sources.

US–China trade history

The US–China Permanent Normal Trade Relations (PNTR) policy aligns with a broader historical framework of US foreign policy, beginning with President Richard Nixon’s 1972 initiative to establish diplomatic ties with China. Nixon’s decision marked a strategic pivot, recognizing China’s rising economic and military influence and the importance of constructive engagement. This vision influenced the US’s decision to grant China PNTR status in the late 1990s, rooted in the belief that integrating China into the global economy would reduce risks associated with isolating a growing power.

By normalizing trade relations, the US aimed to encourage China to adhere to international trade norms, fostering stability through economic interdependence. Advocates viewed PNTR as part of a strategy to promote gradual economic and policy alignment. While China’s rapid export-led growth and market integration reflected some successes, challenges persisted, particularly in areas like intellectual property rights, trade imbalances and China’s state-driven economic approach.

While China has adopted some global trade practices, particularly in exports and production, it continues to selectively comply with international norms, especially in areas like intellectual property protection. This selective compliance has fueled ongoing tensions with the US, particularly during the 2018–2020 trade war initiated by President Donald Trump. The trade war aimed to address perceived unfair practices through tariffs and other measures under Sections 301 and 232, targeting industries such as electronics and high-tech equipment. These tariffs were designed to reduce China’s trade imbalances and encourage greater market access, highlighting the US’s concerns over China’s protectionist policies and state-driven economic model.

Despite these tariffs, which failed to yield significant changes in Chinese behavior, the US–China trade friction underscored China’s drive for technological self-sufficiency. In response, China accelerated its efforts in innovation, placing a greater emphasis on research and development, technology transfer and fostering collaborations between industry and academia. These initiatives aim to reduce China’s reliance on external technology and strengthen its domestic capabilities. This ongoing tension between the two nations reveals the strategic importance of high-tech sectors in a globally connected economy, where both must navigate the delicate balance between protectionism and innovation to remain competitive.

Balancing national security and economic efficiency

US Treasury Secretary Janet Yellen, speaking at the Stephen C. Friedheim Symposium on Global Economics hosted by the Council on Foreign Relations, outlined President Joe Biden’s administration’s strategy for aligning international economic policy with domestic priorities. Yellen emphasized the need to balance economic efficiency with national security, particularly regarding China and key industrial sectors. While acknowledging China’s low-cost production of essential goods like solar panels — which could advance climate goals if heavily relied upon — Yellen warned of the risks of over-dependence. She stressed the importance of strengthening supply-chain resilience and promoting US domestic manufacturing, even at the expense of higher costs.

Yellen also addressed China’s high savings rate, which has fueled substantial subsidies in advanced sectors like semiconductors and clean energy, contributing to global overcapacity and undermining industries in the US and other countries. She called for China to shift its focus toward increasing consumer spending and reinforcing social safety nets, though the Chinese government continues to prioritize state-backed investments. The secretary observed that the Chinese government has chosen instead to continue funneling resources into state-backed investments. She cautioned that this approach could lead to a “slippery slope,” where demands for subsidies may extend across more industries, potentially straining fiscal discipline. Also, the subsidy programs implemented by Japan, the European Union and other select groups perpetuate crony capitalism, fostering undue influence and squandering taxpayer resources. Given these dynamics, the US may wish to maintain or even strengthen trade barriers to counteract practices, particularly extensive subsidies, not only in China but also in Japan and the European Union, practices which distort global markets and undermine US competitiveness. 

Her analysis reflects the administration’s belief that targeted trade and industrial policies are vital for national security and long-term economic stability, despite the short-term challenges they may pose. In parallel, the Biosecure Act, recently passed by the US House of Representatives, seeks to restrict US pharmaceutical partnerships with certain Chinese companies due to national security concerns — an action contested by firms like WuXi AppTec. Amid rising geopolitical tensions and ongoing tariffs, US drugmakers are diversifying their supply chains to reduce reliance on Chinese suppliers. This shift is part of a broader strategy to enhance resilience, though it comes with increased costs and potential delays as companies seek high-standard alternatives. The move highlights the tradeoff between securing supply chains and managing rising production expenses, which could impact drug prices and availability in the US market.

Negotiating this crossroads

As US–China trade tensions persist, the US faces a critical balancing act between fostering economic growth, driving technological innovation and maintaining global competitiveness. The rapid evolution of automation and AI in manufacturing is reshaping the economic landscape, presenting a dual challenge: the US must preserve its industrial base while adapting to an increasingly service-oriented economy. At the same time, US trade policies — especially tariffs and industrial strategies designed to address China’s trade practices — further complicate this transition.

While tariffs on Chinese goods may offer short-term protection to certain US industries, they have also exposed deeper structural challenges. The risk is that these trade measures could inadvertently stifle the very innovation that is essential for the US to maintain long-term global competitiveness. As policymakers grapple with these issues, it’s clear that a nuanced trade approach, focused not only on protecting domestic industries but also on cultivating a highly skilled workforce for emerging sectors, will be crucial for ensuring the nation’s economic resilience.

This evolving dynamic emphasizes the urgent need for a more refined global trade framework, particularly within the World Trade Organization (WTO). The WTO must adapt to the rising importance of industrial policy globally, ensuring that trade rules remain relevant in an era of technological transformation. Equipped with an updated toolkit, the WTO can help nations navigate the delicate balance between pursuing national industrial strategies and fostering global cooperation. How the US responds to these shifts in manufacturing employment and trade policy will ultimately define its ability to thrive in a rapidly changing global economic order.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Reshoring: Reality or Myth? US–China Trade and the Future of American Manufacturing appeared first on Fair Observer.

Labour’s Chancellor of the Exchequer, Rachel Reeves, is now taking action. On October 30, she introduced a post-Brexit budget aimed at tackling Britain’s structural deficits while fostering economic growth. Reeves’s goal is to put the UK back on a steady financial path by raising revenues and directing funds toward essential services and infrastructure. Her budget includes £40 billion ($52 billion) in new tax measures alongside targeted investments. 

The budget reflects two competing priorities: increasing growth by stimulating investment and balancing government finances. The UK has been operating with persistent deficits, and the outgoing Conservative government left Labour with a £22 billion ($28 billion) overspend, adding pressure to address the country’s long-standing issues.

Key budget measures

Reeves’s budget introduces a series of tax increases aimed at generating revenue to meet Britain’s immediate fiscal needs. The UK Treasury collects roughly £800 billion ($1 trillion) annually, but economists estimate an additional £20-30 billion ($26-39 billion) is required to achieve a stable economy. Reeves’s budget takes steps to bridge this gap.

Significant tax changes include:

• National insurance contributions: Employers will see increased rates starting in April 2025.
• Capital gains tax: The lower rate will increase from 10% to 18%, while the higher rate moves from 20% to 24%.
• Private school fees: VAT will apply from January 2025, and these schools will lose business rates relief from April 2025.
• Stamp duty land surcharge: The rate on second homes will increase from 2% to 5%.
• Employment allowance: Relief for smaller companies will increase from £5,000 ($6,400) to £10,500 ($13,500)
• Private equity taxation: Tax on managers’ profit shares will rise from 28% to 32%.
• Corporate tax rate: The main rate will stay at 25% for businesses with profits over £250,000 ($320,000) until the next election.

On the spending side, Reeves allocated £22.6 billion ($29.1 billion) to the healthcare sector and £5 billion ($6.4 billion) to housing investment. She also secured funding to extend the High Speed 2 (HS2) railway to London Euston, enhancing transport connectivity across the country. This investment aims to promote growth by addressing years of underinvestment in essential infrastructure.

Will it work?

Britain’s budget deficit and low investment levels echo the issues faced across Europe, with the EU also struggling to maintain competitiveness. According to Mario Draghi’s recent report to the European Commission, the EU’s investment rate of 22% of GDP is insufficient for sustainable growth. The UK has an even lower investment rate, barely surpassing 20% over the past 50 years, often ranking lowest in the G7.

British Prime Minister Keir Starmer has responded to this investment gap by prioritizing wealth creation. Speaking at an international summit, Starmer emphasized the need to attract private investment to support industries where the UK has a competitive edge, such as creative services, legal and accounting sectors and luxury manufacturing. Starmer has appointed an entrepreneur as investment minister to ease business relations and streamline regulation. However, some business leaders are wary of the government’s new interventionist policies and increased payroll costs. Executives of listed companies have been selling shares at double the rate seen before Labour took office, reflecting concerns over rising wages, expanded employee rights, and growing administrative burdens.

The UK’s attempts to balance its welfare state with economic growth will serve as a test case for other European economies facing similar post-globalization challenges. While the United States benefits from cheap energy and a flexible labor market, European countries, including the UK, must find ways to compete on the global stage with limited resources. How Britain navigates this delicate balance will be closely watched across Europe. If successful, Reeves’s budget could provide a framework for European governments to address similar structural issues, particularly as the EU faces its own struggles to adapt to global economic shifts.

[Anton Schauble wrote the first draft of this piece.]

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Exclusive: Rachel Reeves Delivers Important Post-Brexit Budget appeared first on Fair Observer.

The BRICS countries argue that the US and its allies have weaponized the global financial system. The dominance of the dollar, and to a lesser extent the euro, in international trade and finance allows the West to impose sanctions that impact countries’ economies deeply. For instance, following Russia’s invasion of Ukraine in 2022, the US and its allies froze $282 billion of Russian assets held overseas and cut Russian banks off from SWIFT, a global system for cross-border payments. America also warned other countries’ banks of potential “secondary sanctions” if they supported Russia.

These actions have led several countries to reevaluate their reliance on the US dollar. Central banks around the world, especially in countries at odds with the US, are stockpiling gold and exploring alternatives to dollar-based transactions. BRICS members see this dependency on Western-controlled systems as risky and are eager to reduce it. China, in particular, views reliance on the dollar as a major security vulnerability.

The proposed solution: BRICS Bridge

To reduce dependency on Western financial systems, Russia proposed a new payment system called “BRICS Bridge.” This digital platform would allow BRICS countries to conduct cross-border payments through their central banks without relying on US-controlled networks like SWIFT. The concept borrows elements from a similar system, mBridge, which is partly overseen by the Bank for International Settlements (BIS) in Switzerland, a prominent institution in the Western-led financial order. However, BRICS Bridge aims to challenge that order, offering a financial lifeline to countries facing Western sanctions and creating a more multipolar financial system.

Different visions of global influence

Russia and China are the main drivers behind the push for BRICS reforms, but their motivations differ. Russia seeks to create a sphere of influence that protects its interests and supports its allies through a flexible, transactional approach to international relations. This approach would allow countries to engage with Russia based on mutual benefits without subscribing to Western “normative” values, which Russia sees as biased.

China’s ambitions go further. Rather than just establishing an independent sphere, China wants to rewrite international rules, shaping a world order where multiple centers of power coexist, with China as a central authority. This would give China greater control over global trade, finance, and diplomacy, gradually replacing the US as the primary rulemaker.

Many countries in the Global South support BRICS because they see it as a pathway to a more flexible international environment where they can negotiate deals that directly benefit their economic growth. For example, India has reaped significant benefits from purchasing discounted Russian oil, prioritizing these economic gains despite the moral conflict posed by the ongoing war in Ukraine. In a multipolar world, countries in the Global South could avoid being tied down by Western rules and make independent decisions in their best interests.

However, this freedom comes with risks. Without a dominant Western power like the US to counterbalance rising powers, these smaller countries could find themselves vulnerable to regional giants, such as China, who may impose their will on them by force in the future.

The BRICS alliance reflects a growing dissatisfaction with the current global order. Critics argue that the US-led international system has become ineffective and no longer serves the interests of many countries, leading them to seek alternatives. However, BRICS itself has limitations. Despite its symbolic appeal, it has not achieved substantial progress on key issues like creating a global currency to rival the dollar or liberalizing global trade. The dollar remains dominant, and the influence of Western-led institutions persists.

Even if BRICS doesn’t have the power to immediately reshape the world, its existence signals a significant shift. Countries are increasingly interested in alternatives, showing that faith in the US-led system is waning. The BRICS alliance may lack the cohesion and power to fully realize its vision, but its popularity underscores a global desire for change.

[Anton Schauble wrote the first draft of this piece.]

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Exclusive: Make Sense of BRICS Summit in Russia appeared first on Fair Observer.

The first panel of the series, held on October 23, 2024, focused on the federal debt, trade policies and the future of the US economy. Sharing their insights were Jeremy Siegel, professor emeritus of finance and Kent Smetters, professor of business economics and public policy and faculty director of the Penn Wharton Budget Model (PWBM), with session moderator Joao Gomes, professor of finance and senior vice dean of research, centers and academic initiatives.

Watch the full panel or read some key takeaways below:

Containing the federal debt

Both Trump, a Republican, and Harris, a Democrat, have promised tax incentives such as scrapping taxes on tips and Social Security payments and expanded child tax credits, even as the US federal debt is at record levels. “We can’t afford it. Even without either candidate, we are on an explosive path in terms of the debt,” Smetters said. Going that route in the present times would mean contraction in the economy and lower wages, which then would warrant tough corrective action, he warned. “While our fiscal house is burning down, both candidates are moving in more furniture.”

If raising taxes is the solution to fund those tax breaks, it would mean an “immediate and permanent” increase of 33% on all federal taxes. If spending cuts is the option, that would mean a 25% scythe across the board, including Social Security benefits. Those two scenarios are based on the current debt trajectory “and if we acted today. The longer we wait, the harder it becomes,” he said.

Siegel said excessive debt offerings by the government will raise the interest rate on long-term treasury bonds, which then would make everything more expensive, such as buying a home or financing for firms. At that point, the government will be forced to either cut spending and/or increase taxes, he added.

Outlook for interest rates

A Republican sweep where the party leads the House, the Senate and the presidency will enable “a free reign for goodies,” Siegel said. That could trigger a spike in interest rates, but rates may come down after “some soothing words” by those elected, he added. He did not foresee any big increase in interest rates in three to five years, or to levels that would hurt the economy.

Interest rates will have to respond when the federal debt grows to 175% of GDP, said Smetters. A Penn Wharton Budget Model brief noted that under current policy, the debt-to-GDP ratio would grow from 98% in 2023 to 150% by 2045; the debt becomes unsustainable beyond 200% of GDP, PWBM warned. “[Those high debt levels are] not mathematically possible, either without explicitly defaulting or implicitly defaulting,” Smetters said. Implicit default could occur either through monetization, which would result in higher inflation, or by pruning liabilities like Social Security and Medicare, he explained.

Siegel sees some light on that front. Foreigners own a third of U.S. debt, and the U.S.-owned portion is the remaining two-thirds, he pointed out. “The debt-to-world GDP ratio or the U.S. portion of [the debt-to-GDP] doesn’t look as scary. I see an ability to absorb the deficit that we have.”

Tax cuts and tarrifs

“Trump is way more expensive, and Harris is a lot cheaper,” Smetters said. “Nonetheless, neither candidate has proposed anything that both reduces debt and grows the economy.”

Trump wants to extend tax cuts to higher-income households and corporate income tax. Harris proposes to increase taxes on higher marginal payers and the corporate income tax. Many provisions of the 2018 Tax Cuts and Jobs Act, including individual income tax rate cuts, are temporary and will expire on December 21, 2025; the corporate tax cut from 35% to 21% is permanent.

If there is a split in control of Congress, there will be “huge negotiation on taxes,” Siegel said. “Everything will be on the table.” If the Republicans sweep Congress, they could extend all the tax cuts if the bond markets signal approval with interest rates, he predicted. “The long bond market tells politicians whether they have to act.”

Trump wants to impose stiff tariffs on imports (60% on Chinese goods and 20% on all others). A 20% tariff increase would cause the dollar to rise by about 10%, offsetting the price impact on goods to that extent, Siegel said. But higher import tariffs might provoke exporting countries to retaliate, he added. “If everyone retreats to barriers by taxes, that’s not going to help anyone.”

Such retaliation could cause a contraction of the economy, which in turn would lead to lower taxes than the higher revenues from tariff increases, Siegel continued. But the biggest cost of those tariffs will be felt more on the capital account than the current account, Smetters said. “When you have more debt, that also lowers capital flows across countries, which makes it harder for our government to sell debt,” he added.

Reading market expectations

“The stock market would prefer a Trump victory,” cheering his plan to extend tax cuts, including to long-term capital gains, Siegel said. But the bond market may not relish that (because of the impact on the federal debt and interest rates), he added. At the same time, “the market likes a legislative split; they like Congress to keep tabs on [the parties], he added. Smetters agreed: “The market wants gridlock. That would be the perfect outcome for them.”

“The other market that really matters for the average American is the housing market,” Gomes pointed out. Here, Harris’s proposed tax credits of up to $25,000 for first-time homebuyers is unrealistic because of supply shortages, Smetters said.

What would really help younger homebuyers is lower interest rates, made possible with a sustainable debt policy. “Think about doubling your house bill as you go from a 3% borrowing rate to a 6% or 7% borrowing rate. That is way more important than a $25,000 credit,” Smetters said. Home prices are up 45% since the COVID pandemic began, but along with the cost of an 80% mortgage, they have risen almost 150%, Siegel added.

Missing the math

• Harris’s proposal to avoid raising taxes for households that earn less than $400,000 annually is “mathematically impossible,” Smetters said. “There’s just not enough money at the high-income [levels].”
• Both parties have pledged not to touch Social Security, Medicare and Medicaid, including increasing the retirement age. “It’s not mathematically possible either,” said Smetters.
• Higher minimum wages also don’t evenly spread the gains. Both Smetters and Siegel said the earned income-tax credit (EITC) is far more effective in redistribution than higher minimum wages.
• Proposals by both parties to create more manufacturing jobs also seem to be overambitious. The idea is to “bring back the halcyon days of the 1960s, when manufacturing jobs were among the highest paying jobs,” Siegel said. “That’s just not the world today.”

“Both parties are so disconnected from reality that the stakes in the ground don’t make any sense,” Smetters said.

[Knowledge at Wharton first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post What Lies Ahead for the Federal Debt and the US Economy appeared first on Fair Observer.

China is facing its largest economic crisis in 40 years, a period over which the West experienced multiple crises and learned how to forecast and navigate them a little better each time. Lacking experience, the Chinese government and people are uncertain how they may resolve the underlying economic issues. The present actions, even if clumsily executed at times, are better than the inaction of the past eight months.

China makes moves in equity and financial markets

In concert with real-estate sector initiatives, Chinese financial regulators triggered a 30% stock market rally last month by encouraging banks to lend to listed companies so they could buy back stocks and allowing qualified institutions to secure low-interest loans from the People’s Bank of China to purchase shares. Retail investors also borrowed heavily to buy shares, and there are rumors of some even selling their apartments in the hope they would reap the windfall of a lifetime. The rally has been fragile, but more reforms and stimulus are to come.

If the China Securities Regulatory Commission committed to improving the quality of initial public offerings (IPOs) and the accuracy of earnings reporting, governing bourses more rigorously and cracking down on corruption, China’s capital markets would expand swiftly and supply much-needed capital to businesses and investment options for citizens. It was fine to use state-owned enterprises to trigger recovery, but Beijing must give private investors more confidence to invest in capital markets for the present trend to turn into a bull run.

The Chinese government can adapt to the role of capital markets regulator, rely less on intervention and allow companies representing China’s present and future growth — such as privately owned technology and service firms — to list. They must disincentivize those who see IPOs as one-off capital-raising events without long-term obligations to investors and others who bribe listing authorities and accounting firms to help create illusions of value while obscuring risks and liabilities.

Beijing must reform its capital markets to augment the strength of its manufacturing sector, which in itself cannot compensate for the role real estate fulfilled in the past of driving domestic growth and retail investment. China’s recent stimulus focus indicates Beijing does recognize it must reform its financial systems, especially its capital markets, and China may be on the cusp of a capital markets revolution.

The fundamentals are compelling. China has more banking assets and foreign exchange reserves than any other country. Its bond, stock and insurance markets are second only to the US. Despite quality and governance issues in its capital markets, Chinese equities do not reflect the strength of an economy whose factories contribute more than 30% to global manufacturing. Chinese equities are arguably the most undervalued in the world, and with Chinese households holding less than 8% of their assets in shares (as opposed to the US average of 48%), retail investors will be a crucial spur in any expansion of capital markets. The Chinese government values social stability above all else, and as only radical capital market reforms can ensure Chinese households’ share portfolios are not exposed to inordinate risks, it is likely to undertake such reforms, which in turn will attract foreign portfolio investment.

It is a misconception that one man makes all economic decisions in China and that the state acts as a monolith, deaf to the masses. There appears to be an intense debate in Beijing on how to best restore confidence and growth, and if an initiative from one part of the government fails, another will launch an alternative. In the West, governments change swiftly while policies are usually slow to change. In China, administrations change slowly, yet policies may change swiftly once the government understands an issue.

Targeted stimulus can help

On the other hand, Western politicians and regulators frequently announce policy changes by speaking directly to the public, explaining the reasons and benefits. In China, the government tends to reveal initiatives incrementally as it instructs its own numerous, far-flung institutions regarding new policies’ functions and how cadres should implement them. Now, more than ever, the leadership needs to talk directly to the people and explain how the multiple new and upcoming stimulus packages will benefit individual citizens.

Recent stimulus measures applied in individual cities may be harbingers of national policies to come. The Beijing city government, for example, is offering to reimburse money spent by lower-income households and retirees on apartment renovations, particularly to accommodate those with diminished mobility and disability needs. Many in the wider population share the anathema under which the government holds direct cash handouts, seeing them as a weakness of developed economies causing low productivity and competitiveness. Yet the state needs to offer reimbursements for extra health and education costs until it has reformed these sectors and lowered their cost to citizens.

If the Chinese government issued time-constrained, non-transferable vouchers to its citizens to help them pay for essential services, it would boost consumption significantly and release some of the money householders now hoard for future welfare needs. Basic medical care and education are free or at least inexpensive in China, and these have been extended to even the most remote regions and are better than those offered by most developing countries. But the costs of more complex medical treatments increase exponentially and are out of reach of the majority of Chinese people.

The Chinese government has begun reviewing the status of the 170 million domestic migrant workers and should begin allowing those employed gainfully to transfer their hukou (residency permits) to the towns where they presently work beyond the few recent experiments in selected cities. In becoming residents, these former migrants would benefit from local health and education services, motivating them to buy homes and generally consume more. Domestic migrant workers save more than city residents because they must pay for the social services local residents receive gratis. Such a move would add at least 1 trillion renminbi ($140 billion) annually to the national GDP.

Over 900 million Chinese people earn less than $300 per month. With some coastal cities possessing an annual per-capital GDP of over $35,000, the income disparity is striking. On the other hand, China’s developmental potential is considerable. Perhaps the current administration needs to reflect on the capacity for political and social risk of their predecessors and apply some of their radical thinking to today. There are a few signs the leadership is at least trying to do so: The slogan for the current slew of stimulus measures is “bold and steady,” a phrase used by Deng Xiaoping in the early years of economic reform.

China’s geoeconomic position is precarious

The air of geopolitical insecurity among ordinary people will take more than a recovering economy to change. Foreign direct investment is 7% of what it was pre-pandemic, and foreign business travelers and tourists are few. Throughout the lead-up to the US elections in November, Republicans and Democrats have threatened even more punitive tariffs and strategic containment when referring to China. Chinese people are beginning to understand how politically isolated they have become from a West that once treated their country with respect or at least curiosity and whose businesses were keen to realize the economic opportunities it offered.

Hope that the European Union will not follow the US in trying to block China’s economic growth is also waning. Chinese people think the EU’s choice to place tariffs on Chinese EVs is unjust, revealing to them the harsh reality that Europe is as much, if not more, a trade fortress as a source of global partnerships and prosperity. They point to the fact that European automobile companies have been dominant in China until recently and that three foreign companies — Volkswagen, Tesla and Toyota — remain in the top ten domestic sedan manufacturers. It is reasonable to hope, however, that as the Chinese economy recovers, foreign investors will return and more companies will come to take advantage of China’s growing consumer market.

Some early signs of economic recovery are encouraging. At 1 trillion renminbi (6% of GDP) the stimulus to date is the largest in China’s economic history and is just the beginning. The government is likely to do more, now that it seems to know it has no choice but to fuel confidence and consumption wherever it can. It understands this is needed to prevent a deeper downturn this year and avert a full-blown economic crisis in the near future.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post China Watch: Beijing’s New “Bold and Steady” Economic Stimulus appeared first on Fair Observer.

The euro, underpinned by the Eurozone’s robust institutional framework, offers political stability and a solid monetary authority. These traits make it a compelling candidate for a global reserve currency. Nevertheless, the structural and political fragmentation within the European Union and divergent fiscal policies among its member states undermine the euro’s reliability as a universal reserve asset. As of 2023, the euro accounts for just 21% of global foreign exchange reserves compared to the US dollar’s commanding 58%. Even with the issuance of 400 billion euros (over $447 billion) in jointly backed debt during the Covid-19 crisis, the Eurozone still lacks the deep and liquid debt markets needed to elevate the euro’s status as a reserve currency.

China’s rapid economic growth and its expanding role in global trade have significantly boosted the renminbi’s global status. In 2023, the renminbi accounted for 3.71% of global payments by value, according to Society for Worldwide Interbank Financial Telecommunications (SWIFT). Its share of trade finance payments doubled from 4% in 2022 to 8% in 2024. These advancements, driven by China’s economic prowess, have positioned the renminbi as a potential global reserve currency.

However, it still faces substantial obstacles that deter other countries from adopting the renminbi as a reserve currency. These include strict capital controls, a lack of transparency in financial markets and the Chinese Communist Party’s centralized political power.

The dollar’s competition

Recent discussions highlight potential shifts that could influence the demand for dollar alternatives. For instance, emerging markets might begin issuing more debt in the currencies of their trading partners, like China. In 2023, China’s Panda bond market experienced record growth, with foreign issuers raising over $15.3 billion in renminbi-denominated bonds, up from $12.4 billion in 2022. This major growth signals an increasing confidence in the renminbi as a funding currency, potentially advancing its status as a reserve currency.

Also, China’s efforts to promote the renminbi as a global currency include the 2015 establishment of the Cross-Border Interbank Payment System (CIPS) and the development of the digital yuan (e-CNY). These initiatives aim to reduce reliance on US-dominated financial systems like SWIFT and increase the renminbi’s global accessibility. However, the renminbi’s share of global reserves remains minimal, at just 3% compared to the dollar’s 58%.

Furthermore, the introduction of central bank digital currencies (CBDCs) could reshape the global currency landscape. However, the dollar’s dominance in DeFi trading, where 99% of stablecoins are pegged to the dollar, suggests that any expansion in digital currencies will likely reinforce the dollar’s role.

Why the dollar endures

Despite the growing presence of the euro and renminbi, the dollar remains firmly in the lead. Its stability and liquidity, combined with the US’s geopolitical influence — which is underpinned by a $877 billion military budget — ensures its continued dominance. The euro faces significant hurdles due to political fragmentation within the EU and differing fiscal policies among its member states. These undermine its reliability as a universal reserve currency despite its relatively large share of global reserves.

Geopolitical factors also play a crucial role in maintaining the dollar’s dominance. Its status as the world’s leading currency is reinforced by US political and military supremacy, as well as its unrivaled sanctioning power. Countries that rely on the dollar for international trade and financial transactions are more likely to align their policies with US interests. This further entrenches its central role in the global financial system.

From an econophysics perspective, the strength of the dollar evidently endures compared to the euro and renminbi. By quantifying the divergence rates between the dollar and these currencies, analysis reaffirms the dollar’s role as the core of the global financial system from 2001 to 2022. Even with emerging challengers, its dominance is likely to persist. It is supported by the unparalleled liquidity of US financial markets, the US’s geopolitical influence and the historical legacy of the Bretton Woods system.

While the euro and renminbi have made notable strides in global trade and finance, they do not yet present credible alternatives to the dollar as the world’s primary reserve currency. The structural and political challenges both currencies face suggest that the dollar’s dominance will continue for the foreseeable future.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Can the Euro or Renminbi Really Challenge the US Dollar? appeared first on Fair Observer.

Ishiba’s idealism (or “Ishibaism”) has long placed him at odds with the late Prime Minister and LDP President Shinzo Abe, whose vision for Japan centered on bolstering national power and economic dominance. By contrast, Ishiba advocates “purer” solutions that aim for deeper structural improvements. This divergence is central to his critique of “Abe politics,” which he sees as prioritizing short-term gains over long-term national rejuvenation.

Ishiba and incumbent Prime Minister Fumio Kishida are committed to refocusing Japan’s growth strategies on rural regions, which have been disproportionately affected by economic disparities. While Ishiba is inclined towards fiscal discipline, he is unlikely to pursue immediate austerity measures; rather, he will probably consider carefully timed tax increases to finance rising defense expenditures.

Ishiba’s policies to manage economic turmoil

In March 2024, the Bank of Japan (BOJ) raised interest rates for the first time in 17 years. This signals an end to its negative interest rate policy in response to persistent inflationary pressures. In July, the yen dropped to its lowest value in 38 years; a second rate hike followed. Political pressure had been building for such hikes to address the yen’s devaluation.

By early August, Japan’s stock market experienced a historic decline. It was partly triggered by concerns over the BOJ’s hawkish stance — a stance advocating immediate, vigorous action — and a hard slowdown in the US economy predicted by the Sahm Rule. Yet a soft landing was also predicted, as the US economy is currently strong. The decline caused political sentiment in Nagatachō — the district in Tokyo where the prime minister resides — to shift.

The Salm Rule observes the unemployment rate over the past 12 months to identify economic struggle; if the rate increases by half a percent or more in a three-month period, the rule is triggered. This usually happens at the start of a recession. Via Federal Reserve Bank of St. Louis.

Ishiba is expected to uphold the principle of central bank independence, a cornerstone of sound monetary policy as exemplified by institutions like the US Federal Reserve (or the Fed). By maintaining the BOJ’s autonomy, economists evaluate that Ishiba will allow Governor Kazuo Ueda the space needed to pursue further rate normalization, which will enhance Japan’s economic stability.

Ishiba emphasized that the government is in no position to direct monetary policy. However, he expressed his expectations that Japan’s economy will continue to progress sustainably under the BOJ’s accommodative stance, ultimately eradicating deflation. He underscored the importance of maintaining close collaboration with the central bank to observe market trends calmly and cautiously, while engaging in careful communication with market participants.

Prior to the prime minister’s remarks, Ueda indicated that the BOJ is strongly supporting Japan’s economy through its highly accommodative monetary policy. Future adjustments to monetary easing are contingent on economic and inflationary developments aligning with BOJ projections. Regardless, Ueda noted that there is ample time to evaluate these conditions, and the BOJ will proceed carefully.

Ueda further clarified that there were no specific requests made by the prime minister regarding monetary policy. Additionally, the joint 2013 accord between the government and the BOJ, prioritizing the early elimination of deflation and sustainable economic growth, was not part of their discussion.

Takaichi’s opposition to monetary tightening

Ishiba plans to appoint former Chief Cabinet Secretary Katsunobu Kato as Minister of Finance. Kato, who is a former member of the Ministry of Finance, was first elected to the House of Representatives in the 2003 general election. He served as Deputy Chief Cabinet Secretary during the Abe administration and championed the continuation of Abe’s economic policy, “Abenomics,” during the party presidential election. As always, this is the mysterious LDP way of saying, “inadequate knowledge and strategies can lead to harm.”

Sanae Takaichi, another strong conservative-leadership contender from the House of Representatives, is a staunch advocate of continued monetary easing. She has publicly opposed the BOJ’s rate hikes. During a recent online discussion, she argued that tightening monetary policy at this juncture would be premature, calling it “foolish.” Takaichi’s stance has raised fears about potential political interference in the central bank’s operations, reminiscent of certain US political figures like former President Donald Trump, who seeks to exert control over the Fed.

Meanwhile, some observers worry about having a repeat of the United Kingdom’s experience in 2022: The government of then-UK Prime Minister Liz Truss employed aggressive fiscal expansion which, compounded by concurrent rate hikes by the Bank of England, led to sharp currency depreciation and a surge in interest rates. Observers caution Japan to avoid a similar scenario, where ill-considered political statements trigger a destabilizing “Truss shock.” Indeed, Takaichi’s remarks have already contributed to volatility in the foreign exchange market, causing fluctuations in the US dollar/Japanese yen rate.

The yen depreciated from 143,000 to 146,000 following Takaichi’s rally, reversing the earlier appreciation from 146,000 to 142,000 that occurred after Ishiba’s selection. Via TradingView

Ishiba envisions the creation of an “Asian NATO” as essential for securing robust regional deterrence, with serious consideration of nuclear sharing with the US. He also desires a revision of the US–Japan Status of Forces Agreement, addressing concerns related to jurisdiction, environmental protection and the balance of legal authority between both nations over military activities and personnel.

In line with this strategic vision, it appears that he is willing to prioritize short-term economic gains over central bank independence. This signals a potential shift in his economic approach moving forward.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Will Takaichi’s Risky Opposition Now Challenge Ishiba’s Economic Reform? appeared first on Fair Observer.

Why this report? Europeans are increasingly anxious about their future. Stagnating growth and a lack of innovation threaten the European way of life. As the global landscape shifts, Europe must adapt. Both the US and China have adopted protectionist measures and are aggressively promoting their domestic industries. Meanwhile, Europe has fallen behind. In 1995, European productivity was 95% that of the US; today, it stands at just 80%.

A significant part of Europe’s problem lies in its reliance on banks for corporate borrowing. In Europe, 75% of corporate loans come from banks, compared to just 25% in the US, which boasts deeper and more liquid capital markets. This gives the US a stronger growth engine. Europe lags behind in key sectors like artificial intelligence, electric vehicles, self-driving technology and other cutting-edge fields.

In response, Draghi’s report calls for a bold €800 billion “new industrial strategy for Europe.” This proposal represents a fundamental shift in economic policy and signals the end of the post-Cold War era of European economics. The report’s key recommendations include:

• A complete overhaul of investment funding in the EU.
• Relaxing competition rules to allow market consolidation in industries like telecommunications.
• Greater integration of capital markets and centralized market supervision.
• Joint procurement in defense.
• A new trade agenda for the EU.
• The creation of European Advanced Research Projects Agencies, following US models, to drive world-leading research.
• Raising investment by both the private and public sectors from 22% to 27% of GDP.

This marks a shift in the global economic zeitgeist. Industrial policy, long dismissed by free-market economists as inefficient, has become a central strategy for the US, China and now Europe. Countries like Japan, South Korea, Taiwan, Vietnam and India are also pursuing industrial strategies with some success. It has worked for Europe before, as the success of Airbus demonstrates. Draghi and his team aim to make Europe more competitive while keeping it distinctly European.

There are still some flies in the ointment. Will European nations be able to integrate sensitive sectors like defense, banking and telecommunications? Can the famously divided EU countries overcome their differences and work together? And the most pressing question: Can the EC actually spend the €800 billion that Draghi’s report proposes?

Besides, isn’t this just more of the same old story — a push for greater European integration that will inevitably be resisted? This time, the stakes are different. Europe faces a crisis of competitiveness unlike any before.

The European powers are simply no longer as influential as they used to be. Individual nations can no longer hope to negotiate trade deals on equal footing with powers like China. They must negotiate as a bloc.

The world has changed. France and Britain have lost their colonies. Technology has changed. Volkswagen cannot keep up with Tesla in the electric car space. Europeans are afraid of slipping off the cliff into irrelevance.

Recent developments have convinced Europeans their position is precarious. The Russian invasion of Ukraine, the failure to effectively integrate immigrants and the rise of far-right movements across Europe show that the European project itself is at risk, unless leaders can prove to their populaces that it can work for everyone.

This report, and the broader conversation it represents, could mark a pivotal moment in Europe’s future trajectory.

[Anton Schauble edited this piece.]

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Exclusive: Mario Draghi Calls for a New European Industrial Policy appeared first on Fair Observer.

Furthermore, I believe opposition to CBI risks politicizing monetary policy. I recommend strengthening legal protections for CBI, enhancing the legal framework and prioritizing long-term stability over short-term political gains. Additionally, we should promote international agreements and cooperation among central banks to effectively manage global economic spillovers. These measures are essential for preserving the integrity and effectiveness of central banks in a rapidly changing global economy.

The role of central bank independence

Central bank independence is essential for maintaining a balanced approach to monetary policy, particularly in managing the trade-off between inflation and unemployment.

According to the Federal Reserve (or the Fed), the Federal Reserve System is “independent within the government:” It works within the framework established by Congress. By operating independently of the government, central banks can focus on long-term economic objectives rather than succumbing to short-term political pressures. This independence prevents governments from using monetary policy to achieve electoral gains, such as artificially lowering interest rates to stimulate the economy before an election.

Moreover, an independent central bank is better positioned to manage inflation, which is a critical component of economic stability. When inflation is allowed to rise unchecked, it can erode purchasing power, destabilize financial markets and harm economic growth. By maintaining a focus on price stability, central banks prevent these negative effects and actively create an environment conducive to sustainable economic development. This offers a hopeful outlook for economic growth.

CBI has long been regarded as a cornerstone of sound economic governance, particularly in an increasingly globalized economy. As nations become more integrated through trade, finance and technology, the ability of central banks to operate independently from political influence has become crucial for maintaining economic stability.

One of the key drivers behind the global movement toward CBI is the need to attract and retain foreign investment. In a globalized economy, countries compete for capital and investors seek stability and predictability in monetary policy. Central banks perceived as free from political interference are more likely to inspire confidence among investors. As a result, many countries, particularly emerging markets, adopted or strengthened CBI as part of broader economic reforms aimed at integrating into the global economy.

The experience of countries like Chile and South Korea in the 1990s illustrates this. Both nations, seeking to stabilize their economies and attract foreign investment, implemented significant reforms that enhanced the independence of their central banks. These reforms were instrumental in reducing inflation and fostering economic growth, demonstrating the positive impact of CBI in a globalized world.

During the Eurozone debt crisis that began in 2009, the European Central Bank (ECB)’s independence was critical in preventing the collapse of the euro. As several Eurozone countries, including Greece, Ireland and Portugal, faced severe financial difficulties, the ECB resisted political pressure from member states to engage in direct bailout financing. Instead, it implemented unconventional monetary policies, such as the Outright Monetary Transactions (OMT) program. This provided a backstop for sovereign bonds without directly compromising its independence. This approach was pivotal in stabilizing financial markets and restoring investor confidence, helping to prevent the crisis from spreading further across Europe.

Donald Trump’s opposition to CBI and the risks of weakening it

Former United States President Donald Trump has expressed his view that, as president, he should have more influence over monetary policy. He has suggested that his business success gives him better instincts than those at the Fed. He criticized Fed Chairman Jerome Powell for poor timing in policy decisions, asserting that central banking is largely based on “gut feeling.”

During a press conference in August 2024, Trump asserted, “I think that, in my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve or the chairman.” Trump’s business success, particularly in the real estate sector, where he has built a multi-billion-dollar empire, gives him a unique perspective on economic growth. Trump’s preference for easy money and low interest rates reflects his background in real estate, where tight money can harm developers.

Trump’s desire for more direct control over the Fed is reminiscent of historical instances where political influence over monetary policy led to disastrous outcomes. A notable example is US President Richard Nixon’s influence over Fed Chairman Arthur Burns in the 1970s, which resulted in policies that contributed to the stagflation of that era — characterized by high inflation and stagnant economic growth. Trump’s approach risks repeating these mistakes by prioritizing short-term economic gains over long-term stability.

Trump appointed Jerome Powell as Fed Chairman but later criticized him when the Fed did not lower rates. Trump also favors a weak dollar, believing it benefits exports; critics, however, argue that this approach harms Americans. Regardless, Trump would need a legal change to gain more control over the Fed. This is unlikely given the political risks and the Senate’s role in confirming any Fed Chair.

Trump criticized the Fed’s timing on monetary decisions. In particular, he noted that its models are outdated, still relying on a flawed tradeoff between inflation and unemployment. He pointed out that the Fed’s policies, such as quantitative easing (QE) and the expanded balance sheet, have given it excessive influence over the economy. Trump believes a debate over the Fed’s mandate and models would be beneficial. Economists, however, warn that focusing on easy money and a weak dollar could lead to more inflation and economic problems in a potential second term.

Trump’s criticism of the Fed, particularly his calls for lower interest rates and more accessible monetary policy, reflects a fundamental misunderstanding of the role of central banks. As a businessman with a background in real estate — a sector that thrives on low interest rates — Trump’s preference for easy money is understandable but misguided when applied to national monetary policy. His critique overlooks the risks associated with such an approach, like the potential for inflation to spiral out of control.

Trump’s advocacy for easy money is particularly concerning in the context of inflation. While low interest rates can stimulate economic growth in the short term, they also increase the risk of inflation if not carefully managed. The Fed’s primary mandate is to balance the goals of maximum employment and price stability. However, political interference that prioritizes growth at any cost could lead to the abandonment of this careful balance, resulting in higher inflation and economic instability.

Additionally, weakening CBI could undermine the Fed’s ability to respond effectively to economic crises. The 2008 financial crisis demonstrated the importance of a strong and independent central bank in stabilizing the economy. The Fed’s swift actions, including quantitative easing and emergency lending facilities, were crucial in preventing a deeper recession. Political influence that hampers the Fed’s ability to act decisively in future crises could have severe consequences for the US and global economies.

Weakening CBI can also exacerbate economic inequality, which is a growing concern in many advanced economies. When political figures influence monetary policy to achieve specific economic outcomes, like lower interest rates to spur growth before an election, the benefits often accrue disproportionately to certain sectors, like those reliant on cheap credit. Meanwhile, the costs — such as higher inflation — can disproportionately impact lower-income households. Inflation erodes the purchasing power of fixed incomes and savings, which can exacerbate wealth disparities and strain the social fabric.

The Biden administration’s commitment to CBI

The global shift towards CBI is not just a change in monetary policy but a significant evolution that carries the weight of history. It is a response to the devastating inflationary episodes of the 1970s and 1980s, a movement that was a deliberate rethinking of the central banks’ role. This shift is rooted in the understanding that politically driven monetary decisions could lead to destabilizing and unsustainable economic conditions.

In the US, the passing of the Federal Reserve Reform Act (1977) marked a pivotal moment in this global shift. By enshrining the Fed’s dual mandate — promoting full employment and maintaining price stability — Congress also took crucial steps to protect the central bank from political interference. Incumbent President Joe Biden’s administration, building on Trump-era policies, has pursued significant investments in key industries through initiatives like the CHIPS and Science Act (2022) and the Inflation Reduction Act (2022). Some of these major industries include green energy and semiconductor manufacturing.

These initiatives demonstrate a strategic alignment of fiscal and industrial policy, aiming to strengthen domestic supply chains and promote technological leadership. While advocates argue that they enhance economic resilience and innovation, they also raise questions about the potential erosion of CBI. Central banks, traditionally insulated from political pressures, might face increasing demands to coordinate with government-led industrial policies. This would challenge the delicate balance between fiscal and monetary objectives.

Though a more collaborative approach between fiscal and monetary policy could generate short-term economic benefits, it also risks compromising the central bank’s ability to act independently to stabilize inflation and manage long-term economic health. This legislative move was significant because it showcased the importance of allowing the Fed to operate independently. It recognized that short-term political pressures could undermine the economy’s long-term stability.

The US experience set a powerful example that soon influenced global economic policy. In 1997, both the Bank of England (BoE) and the Bank of Japan (BoJ) were granted formal independence. This signaled a major shift away from the historical norms of political control over monetary policy. Establishing the European Central Bank (ECB) in 1998 exemplified this trend. The ECB’s creation marked a new era in European monetary policy: It replaced national central banks that had been subject to varying degrees of political influence, thereby promoting a standardized and politically neutral approach to monetary governance across the Eurozone.

Empirical evidence robustly supports the benefits of this move towards CBI. It has become increasingly prevalent among advanced economies, connecting with a significant reduction in inflation rates and more firmly anchored long-term inflation expectations. These outcomes tie directly to the enhanced credibility and predictability that independent central banks bring to monetary policy. They allow them to focus on long-term economic health rather than short-term political considerations.

The global commitment to CBI has only strengthened over time. A comprehensive analysis of 370 central bank reforms from 1923 to 2023 reveals a resurgence in support for CBI since 2016. This underscores its continued relevance as a fundamental pillar of economic stability. The renewed commitment is particularly noteworthy given the complex and evolving challenges facing global economies today, reaffirming CBI as a critical tool in maintaining macroeconomic stability.

Within the Biden administration, the historical context of CBI serves as a crucial guide. The administration’s steadfast support for CBI is not just a matter of policy preference, but a deep-rooted commitment to economic stability. In analyzing the Biden administration’s commitment to CBI, it is essential to recognize the delicate balance between fiscal policy and monetary authority. CBI is often celebrated for its role in safeguarding economies from politically motivated monetary policy that could destabilize inflation control. The separation between monetary and fiscal policy has been vital in maintaining long-term economic stability. The Fed’s autonomy is seen as critical to ensuring that monetary decisions remain focused on inflation and employment targets rather than short-term political gains.

The Biden administration wielded considerable influence over the economy using extensive fiscal policy measures. The American Rescue Plan Act (2021), the CHIPS and Science Act and the Inflation Reduction Act, as well as strategic executive actions such as the release of oil from the Strategic Petroleum Reserves and student-loan debt forgiveness, reflect a pragmatic approach. They leveraged fiscal tools to influence economic outcomes in ways that monetary policy alone could not have achieved in such a short time.

While CBI remains a pillar of long-term economic stability, the administration likely recognized that, given the nature of the COVID-19 pandemic, fiscal measures were indispensable. The unique conditions meant fighting inflation and stabilizing the economy required a broader, more immediate response — one where fiscal and executive action played a leading role, complementing rather than conflicting with the Fed’s independence. This dynamic, while preserving the long-term ideal of CBI, also underscores the reality that fiscal policy and executive power can shape economic outcomes in ways that transcend central bank interventions alone. Therefore, reversing the hard-earned progress towards CBI risks rekindling the inflationary pressures that once wreaked havoc on global economies.

Index of Central Bank Independence (CBI) in Advanced Economies, 1970-2022. Via The White House.

Enhancing coordination and the role of globalization

While CBI is crucial, improving coordination between monetary and fiscal policy is merited, as Trump’s critique suggests. Fiscal policy, controlled by Congress and the executive branch, also significantly influences aggregate demand and inflation. Better communication and coordination between these two arms of economic policy could lead to more coherent and effective economic management.

One proposal to achieve this without compromising the Fed’s independence is to include the National Economic Council director and the Congressional Budget Office director as ex officio nonvoting members of the Federal Open Market Committee. This would allow for better alignment between monetary and fiscal policies while preserving the Fed’s autonomy in decision-making.

However, private conversations about economic stability are being held. The June 2024 meeting between the BoJ, the Ministry of Finance and the Financial Services Agency highlights a critical moment in Japan’s economic policy. (Worth noting is the fact that the Minister of Finance, the Minister of State for Economic and Fiscal Policy and their designated delegates cannot vote. When attending Monetary Policy Meetings, they can express opinions, submit proposals and request the Policy Board to postpone a vote until the next meeting.) The yen’s depreciation against the US dollar has raised concerns about its potential impacts on inflation and overall economic stability in 2024. The discussion about the BoJ’s independence becomes particularly pertinent in this context. Though the BoJ traditionally operates with a degree of autonomy to implement monetary policy based on economic conditions, the yen’s current weakness and its repercussions are stirring discussions of whether more direct government intervention is needed.

The independence of the BoJ is rooted in its mandate to focus on price stability and economic growth without undue political influence. This separation is intended to ensure that monetary policy decisions implement policy with the aim of maintaining price stability with long-term objectives, not short-term political pressures. However, there is a growing sentiment within the government to take more assertive actions. This is evidenced by recent statements from key figures such as Minister of Digital Affairs Taro Kohno, who has suggested hiking interest rates in response to the yen’s weakness. Such proposals indicate that some policymakers view the BoJ’s current policy stance as insufficient to address the immediate challenges posed by the depreciating currency.

The involvement of other members of the ruling Liberal Democratic Party (LDP) further complicates the issue. Its discussions about potential interventions, including those that could impact the BoJ’s policy decisions, reflect a broader concern about the yen’s trajectory. While the BoJ has a clear mandate and operational framework, the mounting pressure from the government to align monetary policy with broader economic goals raises serious questions about the feasibility of maintaining its independence. If the government were to exert more influence, it could potentially undermine the BoJ’s ability to focus on long-term economic stability. This would pose significant risks to the economy.

CBI is closely linked to controlling inflation, which is a primary concern in advanced and emerging economies. Independent central banks are better equipped to resist the political pressure to pursue expansionary monetary policies that could increase inflation. This is particularly important in a globalized economy, where trade and financial linkages can transmit inflationary pressures across borders.

Empirical evidence supports the notion that CBI is associated with lower inflation. Countries with more independent central banks tended to experience lower and more stable inflation rates. For example, the relationship between CBI and inflation control became especially evident during the inflationary period of the 1970s and 1980s, when many central banks were subject to political interference, leading to high and persistent inflation. This finding has been corroborated by subsequent research, which has shown that CBI contributes to the anchoring of inflation expectations, thereby enhancing the effectiveness of monetary policy.

The relationship between CBI and inflation control became particularly evident during the inflationary period of the 1970s and 1980s. Many central banks were subject to political interference during this time, leading to high and persistent inflation. Several countries, including the US and Germany, responded by granting greater independence to their central banks, resulting in a significant decrease in inflation.

Central banks navigate an increasingly complex global environment, balancing domestic objectives with the need to manage the global spillovers of their actions. The independence of central banks is critical to ensure economic stability and long-term growth.

In a globalized economy, the actions of a central bank have implications that reach far beyond national borders. The US dollar’s status as the world’s reserve currency means that the Fed’s policies impact global financial markets, international trade and the economic stability of other nations. The importance of a non-politicized Fed in maintaining international confidence in the US dollar cannot be overstated. It helps prevent capital flight, currency volatility and a potential shift away from the dollar as the dominant global currency.

Globalization has fundamentally altered monetary policy dynamics, particularly in the context of central bank independence. As economies intertwine, the actions of one central bank can have profound effects on others, amplifying the importance of independent decision-making. The growing complexity of global financial systems necessitates that central banks adapt rapidly to new challenges, such as capital flow volatility and cross-border financial risks. 

One critical aspect of globalization is the transmission of economic shocks across borders. Central banks must be vigilant in mitigating these shocks while maintaining domestic economic stability. For instance, the 2008 financial crisis demonstrated how quickly financial turmoil can spread globally, underscoring the need for independent central banks to act swiftly and decisively. The crisis also showcased the importance of international cooperation among central banks; while this is necessary, it must be balanced with preserving domestic policy autonomy.

Looking forward, central banks must navigate the delicate balance between maintaining independence and participating in global monetary coordination. The potential for conflicts between domestic objectives and international pressures will likely increase, requiring central banks to adopt more sophisticated and transparent communication strategies. Ensuring that these institutions remain insulated from political pressures while engaging in necessary international cooperation will be crucial for maintaining economic stability in an increasingly interconnected world.

The Global Financial Crisis and central bank coordination

One historic economic event is especially imperative to study. The Global Financial Crisis (GFC) of 2008–2009 marked one of the most significant economic downturns in recent memory, with worldwide impact. The crisis began in the US but quickly spread to other economies, highlighting the interconnectedness of global markets.

The US is one of the largest economies in the world, and its trade relations influence other nations’ economies substantially. For instance, during the GFC, the collapse of US demand had a ripple effect, causing major slowdowns in export-driven economies like those of China, Germany and Japan. This exemplifies how shocks in the US “export” financial stress across the world, while the reverse influence is often less pronounced. The rapid transmission of financial shocks underscored the need for coordinated action among central banks worldwide to stabilize the global economy.

During the GFC, central banks took the following actions:

1. The Fed played a pivotal role by implementing a series of unconventional monetary policies, including lowering interest rates to near-zero levels and introducing QE programs. These measures involved buying assets to restore liquidity to financial markets and support economic recovery.
2. Faced with a severe sovereign debt crisis in several Eurozone countries, the ECB lowered interest rates and provided long-term refinancing operations to banks. The ECB later introduced the OMT program, which was crucial in stabilizing bond markets and preventing the collapse of the euro.
3. The BoE reduced interest rates and launched its own QE program to support the UK economy. Its actions were coordinated with those of other major central banks to ensure a unified response to the crisis.
4. The BoJ expanded its asset purchase program and maintained a low-interest rate policy to support the Japanese economy, which was also affected by the global downturn.

Central banks recognized that unilateral actions would be insufficient to address the global nature of the crisis. Therefore, they engaged in unprecedented levels of cooperation, particularly through these mechanisms:

1. Currency Swap Agreements: Central banks, including the Fed, ECB, BoE and BoJ, established currency swap lines to ensure that banks in other countries had access to US dollars, which were in high demand. This move crucially prevented a liquidity crisis and stabilized global markets.
2. Coordinated Interest Rate Cuts: In October 2008, several major central banks, including the Fed, ECB, BoE and BoJ, conducted a coordinated interest rate cut to reduce borrowing costs globally and stimulate economic activity.
3. G20 Summits: The G20, which includes both advanced and emerging economies, played a critical role in facilitating international coordination. The 2009 G20 summit in London prompted commitments to provide fiscal stimulus, increase resources for the International Monetary Fund and enhance financial regulation to prevent future crises.
4. Bank for International Settlements (BIS): The BIS serves as a platform for central banks to exchange information, coordinate policy responses and discuss strategies for maintaining financial stability. Its role in fostering international cooperation was vital in ensuring a coherent global response to the crisis.

The coordinated efforts of central banks were instrumental in mitigating the worst effects of the GFC. The rapid implementation of monetary easing measures, coupled with international cooperation, helped stabilize financial markets, restore confidence and set the stage for a gradual economic recovery. The crisis demonstrated that in a globalized economy, the actions of one central bank can have significant spillover effects on others, making international cooperation essential.

The experience of the GFC showcases the importance of sustained international cooperation among central banks. As global markets become more interconnected, the potential for spillover effects increases, making coordinated policy responses critical for maintaining global economic stability.

Moving forward, central banks should continue to strengthen their cooperation through global forums like the G20 and BIS, ensuring that their policies are harmonized to prevent adverse cross-border impacts. Additionally, they should work together to develop frameworks for managing future crises. In an interconnected world, the stability of one economy often depends on the stability of others.

What is the solution?

The independence of central banks like the Fed is vital for ensuring sound monetary policy, economic stability and global financial confidence. While Trump’s critique of the Fed highlights legitimate concerns about the need for better coordination between monetary and fiscal policy, his desire for more direct control over monetary policy risks undermining the very foundation of economic stability. A politicized central bank, driven by short-term political goals, would likely lead to higher inflation, economic instability and global volatility.

In an increasingly globalized economy, the role of central bank independence extends beyond national borders. The interconnectedness of global markets means that the actions of central banks can have profound spillover effects on other economies. Central banks must navigate complex global dynamics, where their decisions influence global capital flows, currency stability and international trade.

The solution lies not in reducing central bank independence but in enhancing the mechanisms for policy coordination while preserving the autonomy of institutions critical to the economy’s long-term health. By maintaining a strong, independent Fed, the US can continue navigating the complexities of a globalized economy while safeguarding its economic future. Central bank independence can secure a stable and prosperous economic environment domestically and globally by focusing on policies like the Fed’s dual mandate: maximum employment and price stability.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Central Bank Independence Is Unbelievably Valuable for the World Economy appeared first on Fair Observer.

I’ve written before about how this works in the academic world, describing college and graduate school education as a classic pyramid scheme. Those who got in early got the big payoff — job security, a book-lined office, summers off, and a “sabbatical” every seven years (a concept rooted in the Jewish understanding of the sabbath as a holy time of rest). Those who came late to the party, however, have ended up in seemingly endless post-doctoral programs, if they’re lucky, and if not, as members of the part-time teaching corps.

Too broke to retire

For the most part, I’m sympathetic to Barton’s argument. There are too many people who are old and in the way at the top of various professional institutions — including our government (where an 81-year-old, under immense pressure, just reluctantly decided not to try for a second term as president, while a 77-year-old is still stubbornly running for that same office).

However, I think Barton misses an important point when he claims that “older workers are postponing retirement … because they simply don’t want to quit.” That may be true for high earners in white-collar jobs, but many other people continue working because they simply can’t afford to stop. Research described in Forbes magazine a few years ago showed that more than one-fifth of workers over age 55 were then among the working poor. The figure rose to 26% for women of that age, and 30% for women 65 and older. In other words, if you’re still working in your old age, the older you are, the more likely it is that you’re poor.

Older workers also tend to be over-represented in certain low-paying employment arenas like housecleaning and home and personal health care. As Teresa Ghilarducci reported in that Forbes article:

Nearly one-third of home health and personal care workers are 55 or older. Another large category of workers employing a disproportionate share of older workers is maids and housekeeping cleaners, 29% of whom are 55 or older and 54% of whom are working poor. And older workers make up 34% of another hard job: janitorial services, about half of whom are working poor. (For a benchmark, 23% of all workers are 55 and up.)

We used to worry about “children having children.” Maybe now we should be more concerned about old people taking care of old people.

Why are so many older workers struggling with poverty? It doesn’t take a doctorate in sociology to figure this one out. People who can afford to retire have that option for a couple of reasons. Either they’ve worked in high-salary, non-physical jobs that come with benefits like 401(k) accounts and gold-plated health insurance, or they’ve been lucky enough to be represented by unions that fight for their members’ retirement benefits.

However, according to the Pension Rights Center, a non-profit organization working to expand financial security for retirees, just under half of those working in the non-governmental sector have no employment-based retirement plan at all. They have only Social Security to depend on, which provides the average retiree a measly $17,634 per year — not much more than you’d earn working full-time at the current federal minimum wage, which has been stuck at $7.25 an hour since 2009. Worse yet, if you’ve worked at such low-paying jobs your entire life, you face multiple obstacles to a comfortable old age: pay too meager to allow you to save for retirement; lower Social Security benefits, because they’re based on your lifetime earnings; and, most likely, a body battered by decades of hard work.

Many millions of Americans in such situations work well past the retirement age, not because they “simply don’t want to quit,” but because they just can’t afford to do so.

On the road again

It’s autumn in an even-numbered year, which means I’m once again in Reno, Nevada, working on an electoral campaign, alongside canvassers from UNITE-HERE, the hospitality industry union. This is my fourth stint in Washoe County, this time as the training coordinator for folks from Seed the Vote, the volunteer wing of this year’s political campaign. It’s no exaggeration to say that, in 2022, UNITE-HERE and Seed the Vote saved the Senate for the Democrats, re-electing Catherine Cortez Masto by fewer than 8,000 votes — all of them here in Washoe County.

This is a presidential election year, so we’re door-knocking for Kamala Harris, along with Jacky Rosen, who’s running for reelection to Nevada’s other Senate seat.

When I agreed to return to Reno, it was with a heavy heart. In my household, we’d taken to calling the effort to reelect Joe Biden “the death march.” The prospect of a contest between two elderly white men, the oldest ever to run for president, both of whom would be well over 80 by the time they finished a four-year term, was deeply depressing. While defeating Donald Trump was — and remains — an existential fight, a Biden–Trump contest was going to be hard for me to face.

Despite his age, Joe Biden has been an effective president in the domestic arena. (His refusal to take any meaningful action to restrain the Israeli military in Gaza is another story.) He made good use of Democratic strength in Congress to pass important legislation like the Inflation Reduction Act. That kitchen-sink law achieved many things, including potentially reducing this country’s greenhouse gas emissions by 40% by 2030, allowing Medicare to negotiate drug prices directly with pharmaceutical companies while putting a $2,000 annual cap on Medicare recipients’ outlays for drugs, and lowering the price of “Obamacare” premiums for many people.

Still, Biden’s advanced age made him a “terrible, horrible, no good, very bad” candidate for president. Admittedly, a win for 59-year-old Kamala Harris in Nevada won’t be a walk in the park either, but neither will it be the death march I’d envisioned.

Old and in the way?

Government, especially at the federal level, is clearly an arena where (to invert the pyramid metaphor) too many old people are clogging up the bottom of the funnel. Some of them, like House Speaker emerita Nancy Pelosi, remain in full possession of their considerable faculties. (She’s also had the grace to pass the torch of Democratic leadership in the House to the very able, and much younger, Hakeem Jeffries, representing the 8th District of New York.)

Others, like former California Senator Dianne Feinstein, held on, to paraphrase Rudyard Kipling, long after they were gone. And had my own great heroine Ruth Bader Ginsberg had the grace to retire while Barack Obama was still president, we wouldn’t today be living under a Supreme Court with a six-to-three right-wing majority.

What about the situation closer to home? Have I also wedged myself into the bottom of the funnel, preventing the free flow of younger, more vigorous people? Or, to put the question differently, when is it my turn to retire?

I haven’t lived out the past three stints in Reno alone. My partner and I have always done them together, spending several months here working 18 hours a day, seven days a week. That’s what a campaign is, and it takes a lot out of you. I’m now 72 years old, while my partner is five years older. She was prepared to come to Reno again when we thought the contest would be Trump versus Biden. Once we knew that Harris would replace him, however, my partner felt enormous relief. Harris’s chances of beating Trump are — thank God — significantly better than Biden’s were. “I would have done it when it was the death march,” she told me, “but now I can be retired.”

Until Harris stepped up, neither of us could imagine avoiding the battle to keep Trump and his woman-hating, hard-right vice presidential pick out of office. We couldn’t face a Trump victory knowing we’d done nothing to prevent it. But now my 77-year-old partner feels differently. She’s at peace with retirement in a way that, I must admit, I still find hard to imagine for myself.

I haven’t taught a college class since the spring semester of 2021. For the last few years, I’ve been telling people, “I’m sort of retired.” The truth is that while you’re part of the vast army of the contingent, part-time faculty who teach the majority of college courses, it’s hard to know when you’re retired. There’s no retirement party and no “emerita” status for part-timers. Your name simply disappears from the year’s teaching roster, while your employment status remains in a strange kind of limbo.

Admittedly, I’ve already passed a few landmarks on the road to retirement. At 65, I went on Medicare (thank you, LBJ!), though I held out until I reached 70 before maximizing my Social Security benefits. But I find it very hard to admit to anyone (even possibly myself) that I’m actually retired, at least when it comes to working for pay.

For almost two decades I could explain who I am this way: “I teach ethics at the University of San Francisco.” But now I have to tell people, “I’m not teaching anymore,” before rushing to add, “but I’m still working with my union.” And it’s true. I’m part of a “kitchen cabinet” that offers advice to the younger people leading my part-time faculty union. I also serve on our contract negotiations team and have a small gig with my statewide union, the California Federation of Teachers. But this year I chose not to run for the policy board (our local’s decision-making body) because I think those positions should go to people who are still actually teaching.

Those small pieces of work are almost enough to banish the shame I’d feel acknowledging that I’m already in some sense retired. I suspect my aversion to admitting that I don’t work for pay anymore has two sources: a family that prized professional work as a key to life satisfaction and — despite my well-developed critique of capitalism — a continuing infection with the productivity virus, the belief that a person’s value can only be measured in hours of “productive” labor.

Under capitalism, a person who has no work — compensated or otherwise — can easily end up marginalized and excluded from meaningful participation in society. The political philosopher Iris Marion Young considered marginalization one of the most ominous forms of oppression in a liberal society. “Marginals,” she wrote, “are people the system of labor cannot or will not use,” a dangerous condition under which a “whole category of people is expelled from useful participation in social life and thus potentially subjected to severe material deprivation and even extermination.”

Even when people’s material needs are met, as is the case for the luckiest retirees in this country, they can suffer profound loneliness and an unsettling disconnection from the social structures in which meaningful human activity takes place. I suspect it’s the fear of this kind of disconnection that keeps me from acknowledging that I might one day actually retire.

Jubilation and passing the torch

The other fear that keeps me working with my union, joining political campaigns, and writing articles like this one is the fear of the larger threats we humans face. We live in an age of catastrophes, present or potential. These include the possible annihilation of democratic systems in this country, the potential annihilation of whole peoples (Palestinians, for example, or Sudanese), or indeed, the annihilation of our species, whether quickly in a nuclear war or more slowly through the agonizing effects of climate change.

But even in such an age, I suspect that it’s time for many of my generation to trust those coming up behind us and pass the torch. They may not be ready, but neither were most of us when someone shoved that cone of flame into our hands.

Still, if I can bring myself to let go and trust those coming after me, then maybe I’ll be ready to embrace the idea behind one of my favorite Spanish words. In that language, you can say, “I’m retired” (“retirada”), and it literally means “pulled back” from life. But in Spanish, I can also joyfully call myself “jubilada,” a usage that (like “sabbatical”) also draws on a practice found in the Hebrew scriptures, the tradition of the jubilee, the sabbath of sabbaths, the time of emancipation of the enslaved, of debt relief, and the return of the land to those who work it.

Maybe it’s time to proudly accept not my retirement, but my future jubilation. But not quite yet. We still have an election to win.

[TomDispatch first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post A Personal Meditation on Growing Old in a Catastrophic Age appeared first on Fair Observer.

Concurrently, the unemployment rate edged up to 4.3%, the highest since October 2021, surpassing the expected 4.1%. These disappointing figures triggered a rush into government bonds, driving benchmark yields below 4%. After the data release, US President Joe Biden acknowledged the mixed signals: While inflation shows signs of easing, job growth is evidently slowing. This dual challenge paints a complex picture for policymakers juggling between fostering employment and curbing inflation.

The market’s reaction to the jobs data highlights the precarious balance that the US economy must maintain. As investors seek refuge in safer assets, the broader implications for growth and stability remain a pressing concern. The road ahead for the country’s economy is fraught with uncertainty, with market dynamics reflecting the underlying anxieties of a potential recession.

Tanking US tech stocks raise economic concern

Similarly, US stocks took a nosedive the next day, on August 3. They closed sharply lower after a weak July jobs report stoked fears about the softening economy. Technology stocks were hit particularly hard as they reeled from disappointing earnings reports. The Nasdaq Composite market index tumbled 2.4% and the S&P 500 fell 1.8%, while the Dow Jones Industrial Average slid 1.5%.

Each major index ended the week on a sour note. The Dow’s four-week winning streak came to an abrupt halt. Both the Nasdaq and S&P 500 marked their third consecutive weekly declines. Notably, the Nasdaq has slipped into technical correction territory, and now sits 10% below its July 10 record close.

The weak jobs report underscored the precarious state of the economy. It exhibited a picture of uncertainty, with employment gains failing to meet expectations. This dismal news, coupled with underwhelming earnings from tech giants, cast a shadow over the markets. Investors are left grappling with the dual challenges of a faltering labor market and lackluster corporate performance.

As the summer heat blazes on, so do concerns about the future trajectory of the US economy. The recent downturn in the stock market serves as a stark reminder of the volatility that lies ahead.

The Sahm Rule warns of an imminent recession 

The July non-farm data from the US has intensified concerns about the employment landscape, raising the specter of a looming recession. With the release of this data, the unemployment rate has surged by 0.6% from its low point earlier this year. 

This rise triggers the Sahm Rule, a principle introduced in 2019 by former Federal Reserve economist Claudia Sahm. According to the rule, when the three-month moving average of the unemployment rate increases by 0.5% or more from its lowest point in the previous 12 months, the US economy practically enters a recession.

The rule serves as an early warning system for the US government. It signals when a recession is imminent and enables timely policy interventions to support households through economic downturns. Its accuracy and reliability have made it a cornerstone in economic forecasting.

As the unemployment rate climbs, the pressing question becomes how the government will respond to cushion the blow for American families. The current data denotes the urgent need for strategic measures to mitigate the impact of a potential recession.

The latest US non-farm employment report has sparked two significant market concerns: fears of an impending recession and anxiety over a potential Federal Reserve policy misstep. Analysts now worry that the economy may be weaker than the central bankers at the Federal Reserve had anticipated. This could compel the Federal Reserve to make a sharp cut in borrowing costs in September, or even resort to an emergency rate cut beforehand to stimulate demand.

The sharp slowdown in payrolls in July and a more pronounced rise in the unemployment rate have made a September interest rate cut seem inevitable. This situation has increased speculation that the Federal Reserve might commence its loosening cycle with a significant 50 basis point cut, or an even more drastic intra-meeting move. With the economy seemingly teetering on the brink of recession, market expectations for Federal Reserve rate cuts are intensifying. Traders are now betting that the Federal Reserve will reduce rates by 50 basis points next month.

Rate cuts are a double-edged sword

Furthermore, the outlook for 2024 has shifted dramatically. Bets on total rate cuts for the year have reached 111 basis points. This growing speculation underscores the precarious balance the Federal Reserve must maintain.

The market’s trajectory hinges not only on economic data but also on how investors interpret potential interest rate cuts. These cuts are typically designed to stimulate economic activity, encouraging businesses to expand and consumers to spend. However, they can also indicate underlying concerns about the economy’s health.

The delicate balance the Federal Reserve must maintain becomes evident in times like these. On one hand, cutting rates can provide much-needed relief to a slowing economy, fostering growth and stability. On the other hand, such measures might be perceived as a red flag. They could indicate that the Federal Reserve is apprehensive about the economy’s robustness. Investors are acutely aware of this duality.

When the Federal Reserve signals a rate cut, the immediate reaction can be a mix of optimism and caution. The optimism stems from the potential boost to economic activity, while the caution arises from the implicit admission that the economy might be faltering. As the market digests these signals, the broader implications for economic growth and stability remain a pressing concern.

The Federal Reserve’s actions are under intense scrutiny, with every move potentially influencing market sentiment. The interplay between rate cuts and market perception reflects the complex dynamics at play, shaping the future trajectory of the US economy.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Horrific Jobs Report Suggests That a US Recession Now Looms appeared first on Fair Observer.

A key battleground in this competition is the rivalry between the US and China. Both nations recognize the immense importance chip production holds for economics and national security. A secure and reliable supply is crucial for maintaining functioning weapon systems and communication networks, not to mention consumer electronics, automation and healthcare. 

The stakes of the global chip industry

East Asia dominates global chip production, with powerhouses like Taiwan (TSMC), South Korea (Samsung, SK hynix) and Japan (Atock, QD Laser) leading the way. Taiwan produces over half the world’s most advanced chips, while South Korea boasts a significant memory chip share and heavy research and development investment. Japan supplies critical equipment for over a third of global chip manufacturing. This concentration establishes East Asia as an indispensable tech hub.

China presents an anomaly. It is not a major producer but the world’s largest consumer, devouring nearly $380 billion in chips annually. The chips fuel China’s booming tech sector, which spans consumer electronics to the telecom and automotive industries. China, however, is now pursuing self-sufficiency in chip production, fueled by significant state-backed investments, positioning semiconductors as a key industry for its future.

The US and China battle for tech supremacy

Chinese President Xi Jinping envisions having a “world-class” People’s Liberation Army (PLA) by 2035. This vision of an intelligent military force implies unparalleled technological sophistication, superior combat capabilities and global influence. It relies heavily on autonomous weaponry and extensive artificial intelligence integration. For this, China has ramped up AI investment, with a particular focus on military application.

A United States Department of Defense report acknowledges China’s aggressive pursuit of next-generation capabilities through AI and advanced technologies. US companies have led the development of advanced microchips and semiconductor manufacturing equipment, and China has historically relied on US-developed semiconductors to help it progress in high-tech fields like AI. By utilizing these technologies, China has been able to accelerate its military modernization and close the gap with other leading powers. The US fears China’s chip advancements could give the nation an edge, built on the back of US engineering.

To counter China’s efforts, the US President Joe Biden’s administration implemented export controls in October 2022. It restricted the nation’s access to US-made chips and chip-making equipment. Now Chinese entities must obtain a special US license to make such purchases. Further tightening its grip, the US convinced the Netherlands and Japan to restrict similar exports to China in January 2023.

The US’s escalating restrictions on chip exports have sent ripples through both the US and global semiconductor industries. Nvidia, the US’s largest tech company by market capitalization, witnessed a significant revenue decline in key markets. Its year-on-year revenue from China and Hong Kong plummeted 20% in the 12 months leading up to February 2023. Tightened US export controls directly caused this downturn. In response, Nvidia introduced a less advanced A800 chip specifically for the Chinese market. However, subsequent US restrictions rendered this solution ineffective, further straining their regional performance.

The chip war has hit Chinese companies hard as well. Data from China’s General Administration of Customs shows a near-30% reduction in chip imports during the first five months of 2023 compared to the same period in 2022. This decline has disrupted production schedules and hindered technological advancements across numerous sectors. China’s official newspaper, People’s Daily, condemned the US for pursuing a strategy of “containment and suppression.”

In May 2023, Chinese Commerce Minister Wang Wentao urged Japan to reconsider its export controls.

Retaliating against US restrictions, Beijing banned the use of chips from major American semiconductor company Micron Technology in critical infrastructure projects. Chinese businesses have adapted by finding alternative methods to obtain high-quality chips. This includes chip rental, the use of intermediaries and even semiconductor smuggling. 

Beijing has restricted exports of rare earth elements, vital for chip manufacturing. These elements power modern technology: Lanthanum aids camera lenses and battery electrodes, neodymium strengthens magnets and dysprosium keeps data storage devices and advanced electronics functioning. This move has escalated tensions with the US.

The chip war endangers the world

This conflict extends beyond chips, encompassing AI and cybersecurity — in this field, technological dominance is a national security issue. While China supplies raw materials for chip production, products like AI algorithms, cybersecurity frameworks and data analytics systems hold greater strategic weight. These advanced technologies shape military and economic power, influencing the trade war’s dynamics. The Australian Strategic Policy Institute (ASPI) research suggests China leads the US in 37 out of 44 key technology sectors. Geopolitical tensions, technological rivalry and supply chain vulnerabilities combine to create a high-stakes global chip industry.

China’s dominance in specific AI applications like facial recognition contrasts with its domestic semiconductor industry’s limitations. Despite significant investments, China struggles to close the gap with leading manufacturers like TSMC and Intel. This is due to technological barriers, including the inability to produce high-end chips that match the precision and efficiency of those made by established industry leaders​. Recognizing this dependency, the government has launched initiatives to bolster domestic semiconductor production.

The chip war threatens to cripple the global economy. Telecommunications equipment shortages threaten to delay smartphone production and lead manufacturers to hike prices and hinder infrastructure advancements. Governments must address national security concerns by diversifying suppliers. The risk of broader economic disruption looms large; telecommunications troubles could cascade, leading to job losses and economic decline.

Furthermore, the semiconductor dispute could exacerbate trade tensions in other areas as countries retaliate against each other by raising tariffs and barriers. To prevent this, international collaboration is needed.

[Ali Omar Forozish and Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Semiconductor Tech Is a New Battlefield in the US–China Rivalry appeared first on Fair Observer.

The VIX index, a measure of volatility, reached 65, its third-highest reading in history. Only in 2008, after the demise of Lehman Brothers, and in 2020, during the onslaught of COVID-19, did the index top that number.

A reading of 65 on the VIX is very high. To justify such a high volatility, stock prices would have to move by at least 4% (in either direction) on at least 13 trading days over the following 20 trading days. This would indicate a major economic calamity of global importance, which, to our best knowledge, has not occurred.

What happened?

On Wednesday, July 31, the Bank of Japan raised interest rates to 0.25%, sparking a rally in the yen that caught hedge funds off guard.

The same day, the US central bank hinted at a possible interest rate cut in September. Two days later followed a worse-than-expected US job market report. The unemployment rate reached a 3-year high.

As predicted by futures markets, the probability of a 0.5%-point cut in interest rates by September briefly reached 100%, with some contracts even implying a reduction by 0.75 percentage points. Jeremey Siegel, who lectures on finance at the Wharton School at the University of Pennsylvania, called for an immediate 0.75%-point via cut emergency meeting followed by another 0.75%-point cut in September.

Within a few days, the Japanese currency reversed its weakness and gained 13% compared to the US dollar, causing large losses to the so-called yen carry trade.

A carry trade involves borrowing funds in a low-yielding currency, like the yen, and investing the proceeds in a higher-yielding currency, like the US dollar. Since the summer of 2023, a large difference in interest rates between the US (5.3%) and Japan (-0.1%) attracted plenty of money.

The exact size of the yen carry trade is unknown. Cross-border yen loans reached $1 trillion as of March. Speculative positioning in yen futures at the CME futures exchange in Chicago reached 180,000 contracts at the beginning of July. With each contract being worth ¥12.5 million, a total of ¥2.25 trillion ($15 billion) was thus at stake.

The prospect of rising Japanese interest rates combined with falling US interest rates meant the yen carry trade became less attractive. Higher volatility in the yen/dollar exchange rate led quantitative and trend-following investors to reduce their positions.

Why did the Bank of Japan raise rates?

Around 30% of the Japanese population is aged 65 and older, making Japan the country with the highest share of elderly people globally.

Elderly people are retired and live off their savings or fixed pension payments. Their income usually does not adjust to inflation. Elderly people are hurt by inflation.

Japan had built up a network of 54 nuclear reactors. The Fukushima incident in 2011 led to the shutdown of all 54 reactors, of which only 10 are back in operation today. This has left a wide gap in energy production, leading Japan to import large amounts of fossil fuels, which make up roughly a quarter of Japanese imports.

Fossil fuels are quoted in US dollars. A decline of the Japanese yen thus makes imports more expensive, leading to higher inflation. The further the yen/dollar exchange rate declined, the lower the approval rating of the current government fell.

Throughout May, the Japanese Ministry of Finance intervened in foreign exchange markets with more than $62 billion, which did not help to stop the yen’s slide. Hence the surprise interest rate hike in late July.

After having achieved its goal of stabilizing the yen, the Bank of Japan quickly reverted to damage control by stating it would not raise rates during times of market instability.

What does this mean for investors?

Stock markets quickly recovered from Monday’s shock — the Nikkei Index gained 10% and the S&P 500 around 1%. Volatility receded; while current reading (about 28) is still elevated, it is a far cry from Monday’s panic-driven levels.

Monday’s sell-off can be explained by technical factors. But what about fundamentals? The market value of all US equities amounted to $51 trillion as of December 2023, or nearly twice the US GDP. In the past, this has been considered an “expensive” ratio.

Market breadth, or the number of shares participating in a trend, has narrowed down to a few mega-cap stocks. The weight of the ten largest US companies makes up around one third of the S&P 500, a proportion that has been growing for at least 50 years. The weight of the largest stock compared to the stock in the 75 percentile even exceeds levels seen in 1929.

Microsoft trades at 25 times operating cash flow while NVIDIA is valued at 60 times. Few market observers dispute that US stock valuations are exceptionally high, and therefore vulnerable to setbacks.

But what about the economy?

Market turmoil, if sustained, can feed into the “real” economy. Initial public offerings might get postponed due to a lack of risk appetite. Financial costs for corporations might increase as the risk premium over (presumably risk-free) US Treasury bond yields widens. Leveraged takeovers might fail due to lack of financing.

A recent survey of purchasing managers in the manufacturing sector (ISM) showed many companies reporting a noticeable slowdown in business. On the other hand, the (much more important) service sector painted a more benign picture.

Undoubtedly, employment growth is slowing down, while the rate of unemployment has begun to increase slightly. Consumer confidence is between mediocre and abhorrent. Adjusted for inflation, retail sales declined in 15 out of the past 20 months. While personal disposable incomes are still growing by a low single-digit percentage, little is left after accounting for inflation.

Even the current large fiscal deficit of 6–9% of GDP fails to stimulate the economy; the government sector deficit instead translates into a surplus for the foreign sector (a mirror image of the US trade deficit).

Investors hoping that falling interest rates benefit stocks might be disappointed. Financial markets have anticipated those cuts for years, as evidenced by the negative slope in the yield curve.

Now would be a good time to go through portfolios and ask questions. “Would I buy this entire company at this price?” (the question of valuation) and “Would I be comfortable holding this company if the stock market closed for 10 years?” (question of quality).

Yes, in the long run, stocks go up, thanks to the inflationary bias of our fiat system. In the short- and medium-term, the stock market doesn’t owe you anything.

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Japanese Rate Hikes Cause Colossal Losses in World Markets appeared first on Fair Observer.

He also reported some of what he learned from his conversations with people who attended the recent summit of the Shanghai Cooperation Organization.

“Three key topics were discussed:

–   Non-dollar finance

–   Military cooperation

–   New trade rules

Premier Modi was strategically absent.

Note: It is important to understand that the SCO is seen as a security organization, not quite like NATO yet, but its activities primarily focus on security. Initially centered on establishing border security between China and the republics of the former USSR, its scope has expanded to include trade security, economic security, cyber security, etc. The BRICS is primarily focused on trade, and the SCO – on security; there’s some overlap between the two.

Regarding the first topic – non-dollar finance – several key projects were addressed. Work involved allocating funds, personnel, and other resources to:

1. BRICS Bridge: Consensus was reached to proceed with using the ‘BRICS Bridge’ to replace the USD in all military and arms trade among member states.

The BRICS Bridge purportedly utilizes gold-based digital tokens and other derivatives as a medium for transactions involving any combination of currencies, including digital currencies, with a focus on CBDCs. Notably, pilot transactions have already begun for trading energy, commodities, and arms, mostly at the level of single-digit millions.

This system employs highly secure, permissionless, and trustless blockchain technology, likely based on Ethereum (ETH), including smart contracts and various types of mixers to obfuscate transacting entities’ identities for a fee. It’s confusing, but one interesting feature of BRICS bridge is the ability to transact via SWIFT as well. The infrastructure is reportedly developed in Solidity, with engineering conducted concurrently by multiple ‘very agile’ teams across different countries under the coordination of a ‘prominent software and hardware corporation.’

2. New Non-dollar Finance Mechanics: A significant discussion revolved around establishing a new risk-free standard to replace T-bills as a risk-free asset. This problem is seen by many as the most difficult to solve. In June, during the recent BRICS meeting of foreign ministers, several technical proposals on the topic were presented to the finance working group.

There was some informational ‘echo’ that one could observe; most notably (I’m quoting from the sources linked):

1. July 4, President of Belarus, whose country has just become a full member of the SOC, suggested stepping up practical interaction across the entire complex agenda of the Shanghai Cooperation Organization. He suggested starting with finance.

‘As a priority matter, Belarus sees the creation of a mechanism for bilateral payments using national currencies and the creation of a collective financial institution of the Shanghai Cooperation Organization,’ he stated. The president noted that Shanghai Cooperation Organization countries account for a considerable share of the world’s population and the world’s GDP. ‘Only our organization includes two most powerful leaders – China and the Russian Federation. And we still have this awe for the  US dollar. Well, let’s finally take certain steps in order to reduce dependence on the dollars. And you will see how those, who wave around the dollar club, understand that things can no longer continue like that. We see all of it but we don’t take action. While people are waiting,’ the Belarusian leader noted.

2. July 3, One of Russia’s key bankers, Andrey Kostin, suggested that all cross-border transaction work be conducted in strict confidentiality:

‘I see very clearly how each of our appearances, especially with such coverage, prompts someone in the US Embassy, perhaps the Second Secretary, to sit and record everything. We’ve observed that regardless of the steps we take, their reaction is very swift,’ noted Mr. Kostin, speaking at the Financial Congress of the Bank of Russia, streamed on the bank’s YouTube channel. ‘Whenever VTB representatives discuss international settlements, a delegation promptly arrives and begins pressuring local authorities about what they shouldn’t do. How many times have I been asked, “What’s happening in China?” Our response has always been, “Everything is fine for us in China.” Then, on June 12, we faced new special sanctions against our bank in Shanghai,’ added the head of VTB.

Note that only one of the two contending presidential candidates in the US takes notice of what’s going on. Former president of the United States, Donald Trump on All In podcast:

‘We are losing a lot of countries on the dollar. I mean they’re going like flies. If we ever lose that, that’s the equivalent of losing a war. That would really make us third-world. We have lost so many countries, I looked the other day. So Russia is gone. You take a look: Ukraine doesn’t sort of exist in a sense, nobody knows what’s going on there, but when you look at China, it’s essentially gone, they’re trying to get out of it, they’re our primary competitor. Iran is not there. The other day I read that Saudi Arabia is willing to now go in various different currencies instead of the dollar. This is a tragedy, this is a big thing that is happening against our country and we cannot let that happen.’”

Some days later I shared with our group of friends a link that had come to my attention and that I thought further clarified the meaning of the BRICS initiatives. It contains the reflections of precious metal broker Andy Schectman. He offers his take on:

·         the changing status of gold,

·         mBridge, a multi-central bank digital currency (CBDC) platform and potential rival to SWIFT,

·         Digital CBDCs

·         and the imminent emergence of the “Unit,” described as the future BRICS currency.

I then made the following comment and asked three questions.

“All I know about Schectman is that he’s CEO & president of Miles Franklin Precious Metal Investments, which could explain his bias in favor of gold or his higher than normal expectations for its future role. But his explanation of the mechanics of a carefully crafted new global payments system designed to be backed by 40% gold and 60% commodities in the framework of BRICS and the BIS sounds credible.

So here are three basic questions:

• How solid is the logic concerning the repatriation of gold and what appears to be a concerted effort to craft this into an effective international system?
• How much of this is simply ‘good intentions,’ unlikely to see the light of day?
• Assuming that there will be resistance from the US side, what form might that resistance take and how effective is it likely to be?”

Alex responded quickly with his response to the first two questions.

“A lot of self-declared ‘gold’ experts just play on people’s fears only to sell them some ‘gold savings account’ or ‘gold-backed credit card,’ a scheme in which you buy gold through them, have them store it at a presumably safe (from US confiscation) location. Usually, they won’t buy any gold and just take your money until the Ponzi scheme collapses.

But let’s assume these guys have no nefarious intentions and analyze their claims.

Repatriation of gold: During the cold war, Germany, France, the Dutch and other Western nations had some of their gold stored in London and New York to prevent confiscation in case the Russians should invade Western Europe. Germany and the Netherlands repatriated a good portion of their gold held in London and New York during 2014-2016:

The NY Fed does not report who withdraws gold; we only know about it if reported by the countries holding / repatriating said gold.

The latest data point is from May 2024. The last withdrawal happened in August 2021 (4 tonnes). During 2023, a total of 130 tonnes have been added by an unknown country (could be Turkey, who we know stored gold with NY Fed before, or other US-friendly Arab or Asian countries).

From the NY Fed data we cannot substantiate the claim of countries repatriating gold ‘en masse’ (unless NY Fed makes the numbers up).

For London, the most important trading place for physical gold, the LBMA (London Bullion Market Association) publishes monthly data of precious metals ‘held in London vaults’ (which is a bit vague):

We can observe a modest decline from 9,700 tonnes in August 2021 to 8,600 tonnes in June 2024. The UK has no gold mines; hence any gold additions must be imported.

The Indian repatriation of 100 tonnes is confirmed by media reports that ‘the Reserve Bank of India held 822.10 tons of gold at March-end, of which 408.31 tons were held domestically.’

The break-down between gold held locally and abroad is now almost 50:50 (408 + 414 tonnes), meaning the ratio was previously more tilted towards gold held abroad (308 + 514).

For a gold-loving nation like India 822 tonnes is not a lot; especially per-capita. The German Bundesbank holds 3,355 tonnes or 1.27 ounces per capita compared to 0.02 ounces per capita in India (63 times less).

Now, central bank gold ownership is often dwarfed by private ownership. For example, German private individuals are estimated to hold 11,000 tonnes (4.2 ounces per capita) while Indian private ownership is estimated at 25,000-27,000 tonnes (0.58 ounces per capita).

Increased Indian household wealth is likely to increase the amount of gold held per capita. Gold demand, and therefore gold imports, is already so strong it often creates a problem for the Indian current account balance (gold imports mean dollars leaving the country). Indian governments regularly try to discourage imports by tariffs, which leads to gold smuggling.

The South-African repatriation seems to be more a case of selling the table silver for lack of other funds: https://www.bloomberg.com/news/articles/2024-02-21/south-africa-goes-for-gold-taps-reserves-to-curb-runaway-debt

Saudi Arabia (323 tonnes) and Egypt (126 tonnes) are the only countries mentioned  with noteworthy gold holdings. Nigeria (21 tonnes) and Ghana (8) have little, while Cameroon and Senegal have no reported gold holdings according to the World Gold Council. The news of Saudi gold repatriation is based on an anonymous source.

I am not denying that gold repatriation is happening; I am just not impressed with the amounts reported.

However, significant movement of gold can be observed via Switzerland, home of three of the worlds’ largest gold refineries. Over the past decade, around 15,000 tonnes of gold have been exported to predominantly Asian countries, while most of the (grade-adjusted) gold has been supplied by the UK, USA and Emirates.

Conclusion: the movement of gold from West to East is nothing new; it has been ongoing for more than a decade. Eventually, western vaults will run empty, probably caused by (or causing) a run on gold.

Yes, China is probably underreporting its gold purchases / holdings (makes sense if you want to ‘catch up’ on Western holdings without upsetting the apple cart, meaning pushing the price of gold up).

Yes, confiscating Russian assets and cutting them off the dollar market was a wake-up call for many non-US aligned countries.

Yes, central banks have been buying a lot of gold recently (see my article on Fair Observer).

But is this enough to declare the ‘end of the dollar?’ I see little alternatives available currently.

Regarding the ‘re-monetization’ of oil and gold:

• Oil is a terrible store of value, since it is a) toxic, b) has high storage costs relative to its value and c) is being consumed.
• Gold is a great store of value, but a terrible means of exchange (in its physical form). Gold may be useful in restoring confidence in a fiat currency after a collapse in trust.

Regarding BRICS currency basket with 40% gold:

Emerging countries with fast growth usually have large trade deficits, and often have little or no gold reserves. Of what value would be a basket of currencies with little or no external value or use be? Surplus countries would be interested only in the gold part, and deficit countries would quickly run out of gold to deliver.”

Edward helps us to understand that a lot of things are going on in the background. Alex sees reasons for not expecting rapid changes.

We will be exploring these two contrasting vantage points in September when we resume the weekly publication of “Money Matters.” The months between now and the end of the year promise to be very interesting from a geopolitical perspective. The BRICS summit in October, which should have the effect of modifying some of our perceptions.

Join the debate

Money Matters…, is dedicated to developing this discussion and involving all interested parties.

We invite all of you who have something to contribute to send us your reflections at dialogue@fairobserver.com. We will integrate your insights into the ongoing debate. We will publish them as articles or as part of the ongoing dialogue.

*[Fair Observer’s “Crucible of Collaboration” is meant to be a space in which multiple voices can be heard, comparing and contrasting their opinions and insights in the interest of deepening and broadening our understanding of complex topics.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Crucible: Money Matters in a Multipolar World, Part 11 appeared first on Fair Observer.

How significant is this headline from Watcher.guru, which could look to some people like a turning point? “After Pausing BRICS, Saudi Arabia Starts Issuing US Dollar Bonds.”

The article concludes with this: “However, Saudi Arabia has not officially confirmed if it wants to join BRICS or reject the invitation. We have to wait and watch for an official statement from the Kingdom on its decision to join the alliance.”

The fundamentals don’t change, but I’m sure they don’t tell the whole story. Is it even possible even to begin speculating sanely, let alone draw conclusions about which laws produce which effects?

Still, I find nothing astonishing or revealing when I read that “these bonds are solely aimed at institutional investors. The issuance is managed by leading US banks such as Citi, Goldman Sachs, JP Morgan, HSBC, Morgan Stanley, and SNB Capital, among others. Therefore, Saudi Arabia is working closely with the US institutional banks for the dollar-denominated bonds.”

Does this simply reflect the current strong position of the dollar or is it a significant bet on the future?

Edward promptly offered his own strategically ambiguous take on the question of Saudi intentions by posting this photo of Dr. Ali Rashid Al Nuami, Saudi Arabia’s representative at the 10th BRICS Parliamentary Forum in St. Petersburg. He was present, but with something of a scowl on his face (at least at the moment the photo was taken).

Alex contributed a more detailed response that offered much needed clarity without resolving a question that both Saudis and Americans, as Alex explains, prefer to keep shrouded in mystery. Here, on the question of the Saudis’ use of dollars, are what Alex calls his “two cents.”

Saudi Arabia has already $279 billion in government debt outstanding.

The local currency is too small and not fungible in international markets, hence not suited for issuing debt.

Due to oil exports, a large part of revenue is in United States dollars (USD); hence, issuing debt in USD makes sense.

Issuing USD debt also serves as a “hedge” against USD debasement (devaluation). If the USD falls, USD-denominated debt also shrinks (if measured in another currency; the Saudi riyal is pegged to USD, so not much there is reprieve from falling USD if measured in riyal, but you get the idea).

A broader question: Why does Saudi Arabia have to issue debt at all? Saudi Arabia has a current account surplus of 6% of GDP and only a slight government deficit of 2% of GDP. However, this is very much dependent on oil prices. In 1987, for example, when oil prices fell to $8 a barrel, the government had a deficit of 25% of GDP. In 2008, when oil prices reached $140 a barrel, a surplus of 30% resulted. Being an established issuer of debt, with long-standing credit ratings (currently “A”), helps when one is forced to issue debt in times of budget problems.

Saudi Arabia is very aware that the “oil age” will eventually come to an end. Former oil minister Ahmed Zaki Yamani famously said, “The stone age didn’t end for lack of stones,” implying that the oil age will not end for lack of oil. Saudi Arabia is hence trying to diversify away from oil (airline, luxury accommodation, tourism etc).

Saudi Arabia has experienced rapid population growth from 4 million people in 1961 to 34 million last year. In order to prevent locals from revolting against an unelected royal family, they have to be kept happy. Additional government spending can be useful in this regard. Locals already enjoy a personal income tax rate of 0%, while corporate taxes are low, too (20%).

Government spending is also necessary for large purchases of US-made military equipment. Pre-9/11, military spending averaged around $20 billion annually. After 9/11, military spending increased to $60–$90 billion, which can be seen as “protection money” to be paid to the US in exchange for not instigating a palace coup. During his term, US President Donald Trump boasted about the amount of arms sold to Saudi Arabia.

The 2017 detention and torture of 400 of “Saudi’s most powerful people” at the Riyadh Ritz Carlton might have been a counter-coup or simply a shake-down of people who were thought to have excessively enriched themselves to the detriment of the state (estimated $28 to $107 billion were recovered).

The headline is therefore not only wrong (Saudi Arabia didn’t “start” issuing USD bonds), but also wrongly suggest the Saudis were in the BRICS camp.

Each time the Saudis mention the possibility of selling Treasury bonds, the US mentions the “Saudi passports found on the sidewalk in Manhattan” after the 9/11 attacks (in clear terms: “We will tell the American public who really was behind 9/11, instigate a palace coup and have the Yemeni Houthis lob a bunch of rockets into your refineries/oil installations).”

Journalism and the question of context

Everything Alex cites is public information. Vinod Dsouza, the journalist who produced the story for Watcher.guru, obviously had access to that information. He could have put together the data as Alex has done and provided a truly enlightening analysis that takes into account the rich complexity of the trio of actors whose complex relationships are at play: Saudi Arabia, BRICS and the US. But as often in this type of journalism, rather than seeking to stimulate the public’s reflection, Dsouza pushed a simplified message. In this case, as Alex shows, this message was simply wrong.

In fairness, however, to Dsouza, he did make this point in the article: “The move suggests that Saudi Arabia might reject the BRICS invitation as it wants the US dollar to flow into its economy.” But even in that acknowledgement of the fact that Saudi Arabia has not joined BRICS, the message that its hesitation is based on its desire to keep USD flowing “into its economy” is so simplistic as to be wrong. As Alex explains, it isn’t about what the nation “wants,” but the convenience of using the existing components of the international system as works today in the most efficient way.

Watcher.guru describes itself as “a leading source in finance, with a focus on cryptocurrency, Bitcoin, Ethereum, Blockchain, DeFi, and more. Our goal is to build a trusted and influential media platform for a worldwide community involved in rebuilding the current financial state to a decentralized system.”

Perhaps it would be better “trusted” and more “influential” if it offered some authentic analysis, such as Alex has provided in our ongoing dialogue. Instead, Watcher.guru appears content with publishing articles highlighting random observations followed by partial and misleading conclusions. I am not suggesting that the website is spreading disinformation or even misinformation (the less intentional form of dupery). But like much of the press, its journalism appears to privilege simplistic, shocking headlines and facile conclusions over solid insight.

Again, to be fair, the website describes its philosophy thus: “Unlike other news sources, we focus on speed as a main priority. Watcher Guru is known for its speed when it comes to news, thus we publish headline-like alert reports first, as our editorial team works on an article to provide context to those who need it.”

The problem may lie in the understanding of context. Alex has provided multiple elements of context. Dsouza’s article is, at best, minimalist. I highlight this contrast to demonstrate the principle we at Fair Observer are following in our “Crucible of Collaboration.” For any serious question — and most people would acknowledge that Saudi Arabia’s geopolitical alignment is a serioius question — context is more than a few random facts and statistics. Our “crucible” is a place of exchange in which the confrontation of contrasting interpretations can lead to greater clarity.

At Fair Observer, we intend to continue developing our Crucible of Collaboration with “Money Matters…” and extend the principle to other topics in the news. We invite readers with their own insights or interrogations to join and enrich the debate. One of our aims is to help all of us to make sense of the headlines we see elsewhere!

Join the debate

“Money Matters…” is dedicated to developing this discussion and involving all interested parties.

We invite all of you who have something to contribute to send us your reflections at dialogue@fairobserver.com. We will integrate your insights into the ongoing debate. We will publish them as articles or as part of the ongoing dialogue.

*[Fair Observer’s “Crucible of Collaboration” is meant to be a space in which multiple voices can be heard, comparing and contrasting their opinions and insights in the interest of deepening and broadening our understanding of complex topics.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Crucible: Money Matters in a Multipolar World, Part 10 appeared first on Fair Observer.

The EU initiated anti-subsidy investigations on Chinese EVs on June 12. From the moment these began, Germans from the government to industry insiders expressed opposition. Chancellor Olaf Scholz even publicly stated that the German automotive industry would be able to compete with Asian car manufacturers.

Typically, a company applies for an investigation. This time, the EU Commission initiated an investigation on its own. So why does European Commission President Ursula von der Leyen not even give the German automotive industry a chance for “fair competition?” The EU clearly had a pre-established position, and the results of the investigation are foreordained. It only targets China; one can only call it another witch hunt. 

The EU’s anti-subsidy investigation on Chinese EVs launched in October 2023. Von der Leyen warned that the vehicles would “flood” into Europe. This had the potential to destroy the continent’s automotive industry. It was a reasonable fear; from 2012 to 2013, China damaged Europe’s solar energy industry by selling and illegally dumping €21 billion (over $22 billion) of solar panels there.

Von der Leyen intended to use this new investigation to further transform the EU into a geopolitical institution, which has been a core goal of hers since she took office. Von der Leyen is running for re-election as EU Commission president, and if that fails, she could try for the position of NATO Secretary-General with French and United States aid. So she is simultaneously using the investigation to gather political support, as she presents herself as a hardliner against China in her campaign.

But at what cost is she doing all this? Perhaps the destruction of the Eurasian continent due to trade conflicts? That’s not her concern.

Right-wing protectionism attempts to protect European industry

There’s been a significant rightward shift in the EU’s politics, as evidenced by the results of the 2024 EU parliamentary elections. This change undoubtedly casts a heavy shadow over China’s tariff policy. Rising conservative European forces will inevitably use trade protectionism to defend their own industries and employment. In response, these member states have further strengthened their demands to protect their own automotive jobs. Currently, at least seven EU countries provide land subsidies for industrial investment and several more provide preferential loans to enterprises.

This move completely caters to right-wing populism. (What comes after the rightward turn? The last time Europe faced the storm of populism and trade protectionism was in Germany before World War II.) Given China’s cost and technological advantages in EVs and wind power, the EU’s restrictions will also delay its efforts in energy conservation and emission reduction. This further delays its goals to address global climate change, which is incongruous with the EU’s claims of leading global climate governance.

Trade protectionist policies initiated by the US have also propelled the growing protectionism within the EU. In 2022, the US introduced the Inflation Reduction Act, which provides up to $7,500 in tax credits for new EVs and loans for used EVs. This move raised concerns within the EU about the impact on its own automotive industry and has led to the adoption of trade protectionist measures.

Meanwhile, the US’s recent trade war and decoupling practices against China have intensified the EU’s concerns about its own industrial development and security. In May 2024, the US announced an increase in tariffs on Chinese EVs from the previous 25% to 100%. The European Commission immediately followed suit by firing at Chinese EVs. This was hardly a coincidence.

The EU’s discriminatory subsidies and weaponized tariffs

For a long time, China and Europe have maintained a “cold politics, hot economy” model of cooperation — ideological differences do not affect both sides as important trade partners. However, this new emotional prejudice will chill the few commonalities between China and Europe. Von der Leyen seems to have forgotten that it was Europe itself that initiated the subsidy era in the field of new energy.

On February 1, 2023, von der Leyen officially launched the Green Deal Industrial Plan. This relaxed restrictions on government subsidies to enterprises, which is usually prohibited by the rules of the EU single market. But under the current policy on batteries, EU member states can offer financial assistance to battery manufacturers.

This plan was originally intended to improve Europe’s competitiveness in the field of clean energy, but its actual implementation has created discriminatory subsidies. According to statistics, the EU has provided €3 billion ($3.2 billion) in subsidies to battery manufacturers.

This EU tariff investigation has exposed the division within the EU, with countries like Germany and Hungary expressing opposition. Meanwhile, countries that do not export their own cars to China, represented by France, support the EU’s imposition of tariffs. In fact, Paris plans to raise the threshold for Chinese EVs entering the EU market, forcing Chinese manufacturers to invest and construct factories in France. As early as May, French Finance Minister Bruno Le Maire publicly stated that he welcomes the automotive manufacturer BYD to build factories there.

Like France, those who support increasing tariffs on Chinese cars have communicated with Chinese officials and car companies, expressing their will to cooperate. These countries do not oppose Chinese EVs, but rather the fact that they cannot benefit from them. They hope the companies will cooperate to drive the development of Europe’s automotive industry.

Objectively speaking, this goal is not difficult to achieve. Before this tariff policy started, manufacturers such as BYD had already started building factories in the EU. However, if Europeans use tariffs as a weapon to force China to build factories on their soil, that is a different story.

Can the EU’s automotive industry really develop if Chinese EVs are kept away? The protective tariffs have achieved nothing but delaying the use of low-cost, low-carbon energy in Europe by a few years. The EU’s anti-subsidy investigations can’t solve the problems faced by the EU in related industries, but may further worsen the situation. European consumers welcome inexpensive electric vehicles as well as low-carbon energy; after the anti-subsidy investigation, the EU members may have to buy Chinese EVs at higher prices. The only group not grateful for the reduced carbon dioxide emissions because of China is the EU, which has chosen a tariff war.

Europe and China could cooperate

The cooperation potential between China and Europe’s automotive industries far exceeds their differences. With electrification and intelligentization — the use of artificial intelligence with decision-making capability — the proportion of the cost of chips in car prices will rise dramatically. Although the Netherlands has photolithography technology and Germany has polysilicon, the majority of the chip industry’s profits goes to the US and the non-European countries like Japan and South Korea.

In this regard, China and Europe have common interests. China must develop its own chip industry. With its production capacity, the chip prices will definitely be reduced followed by the increased proportion of its chips in the global market. This is already in effect.

From January to May 2024, China’s integrated circuit export amounted to 444.73 billion renminbi (over $62 billion), a year-on-year increase of 21.2%, even exceeding the 20.1% of cars. It became the country’s second-largest industry with year-on-year growth. China has already occupied the popular mature process nodes of 28-40nm. Most car chips use 28nm or 40nm chips, so cooperating with China to use its chips can greatly reduce the production cost. The two countries would gain a competitive edge over US and Korean cars.

If the European automotive industry can’t cooperate with China in this game, Europe cannot participate as a player. Rather, it would be more like a bargaining chip. Habeck’s visit to China is a signal that Berlin has reached a consensus with Beijing to “decrease the impact” while Paris is still facing choices.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Launching Tariffs Targeted at Chinese Automakers? Not Right, EU. appeared first on Fair Observer.

On June 19, Edward Quince, playing the literary critic, offered this succinct commentary on the tone of the G7’s pronouncement to the rest of the world:

If you were Mr Xi Jinping, you probably noticed how harsh the most recent G7 communiqué language was in relation to China.

Frankly, if it weren’t for the calendar, I would think it was written by a sovereign of some colonial power trying to reign in its subjects who have gone rogue: We will take this money from you, and we will spend it this way (and listen to us, what we are doing is legal, all in accordance to “our respective legal systems”), and those guys must stop doing this, and those guys must start doing that, we will punish them this way, and we will hit those guys that way… And all of that is of course, “consistent with all applicable laws and our respective legal systems.”

Sitting in Beijing, would you conclude that you need to obey, compromise a little, compromise a lot or get ready for a long confrontation?

Intransigence and indifference to the idea of opening a dialogue with other emerging poles in a visibly changing world order have become the watchwords of the Western alliance.

Changing his focus from the G7’s bombastic expression of the required attitudes, principles and rules it associates with its vaunted “free and open rules-based international order,” Edward followed up on July 5 with a focused look at what is concretely happening with the G7’s unacknowledged rivals: BRICS and the Shanghai Cooperation Organization (SCO). In its current form, and before its next wave of expansion likely to occur during its annual summit in October, BRICS already represents a GDP superior to the G7. And it is only just beginning to define the elements of its system, and notably its financial tools.

The BRICS have allegedly already advanced to practical implementation of an alternative non-dollar financial system based on gold derivatives, smart contracts, permissionless and trustless blockchains.

A few notes from my conversations with people who attended the recent summit of the Shanghai Cooperation Organization:

Three key topics were discussed:

·         Non-dollar finance

·         Military cooperation

·         New trade rules

Premier Modi was strategically absent.

Note: It is important to understand that the SCO is seen as a security organization, not quite like NATO yet, but its activities primarily focus on security. Initially centered on establishing border security between China and the republics of the former USSR, its scope has expanded to include trade security, economic security, cyber security, etc. The BRICS is primarily focused on trade, and the SCO on security; there’s some overlap between the two.

Regarding the first topic, ie non-dollar finance, several key projects were addressed. Work involved allocating funds, personnel, and other resources to:

1. BRICS Bridge: Consensus was reached to proceed with using the ‘BRICS Bridge’ to replace the USD in all military and arms trade among member states.

The BRICS Bridge purportedly utilizes gold-based digital tokens and other derivatives as a medium for transactions involving any combination of currencies, including digital currencies, with a focus on CBDCs. Notably, pilot transactions have already begun for trading energy, commodities and arms, mostly at the level of single-digit millions.

This system employs highly secure, permissionless, and trustless blockchain technology, likely based on Ethereum (ETH), including smart contracts and various types of mixers to obfuscate transacting entities’ identities for a fee. It’s confusing, but one interesting feature of BRICS bridge is the ability to transact via SWIFT as well. The infrastructure is reportedly developed in Solidity, with engineering conducted concurrently by multiple “very agile” teams across different countries under the coordination of a “prominent software and hardware corporation.”

2. New Non-dollar Finance Mechanics: A significant discussion revolved around establishing a new risk-free standard to replace T-bills as a risk-free asset. This problem is seen by many as the most difficult to solve. In June, during the recent BRICS foreign ministers’ meeting, several technical proposals on the topic were presented to the finance working group.

There was some informational “echo” that one could observe; most notably (I’m quoting from the sources linked):

• July 4, President of Belarus, whose country has just become a full member of the SOC, suggested stepping up practical interaction across the entire complex agenda of the Shanghai Cooperation Organization. He suggested starting with finance.

“As a priority matter Belarus sees the creation of a mechanism for bilateral payments using national currencies and the creation of a collective financial institution of the Shanghai Cooperation Organization,” he stated. The president noted that Shanghai Cooperation Organization countries account for a considerable share of the world’s population and the world’s GDP. “Only our organization includes two most powerful leaders – China and the Russian Federation. And we keep trembling around U.S. dollars. Well, let’s finally take certain steps in order to reduce dependence on the dollar. And you will see how those who wave around the dollar club understand that things can no longer continue like that. We see all of it, but we don’t take action. While people are waiting,” the Belarusian leader noted.

• July 3, One of Russia’s key bankers, Andrey Kostin, suggested that all cross-border transaction work be conducted in strict confidentiality: “I see very clearly how each of our appearances, especially with such coverage, prompts someone in the US Embassy, perhaps the Second Secretary, to sit and record everything. We’ve observed that regardless of the steps we take, their reaction is very swift,” noted Mr. Kostin, speaking at the Financial Congress of the Bank of Russia, streamed on the bank’s YouTube channel. “Whenever VTB representatives discuss international settlements, a delegation promptly arrives and begins pressuring local authorities about what they shouldn’t do. How many times have I been asked, ‘What’s happening in China?’ Our response has always been, ‘Everything is fine for us in China.’ Then, on June 12, we faced new special sanctions against our bank in Shanghai,” added the head of VTB.

Note that only one of the two contending presidential candidates in the US appears to have noticed what’s going on. Former President Donald Trump had this to say on an All In podcast:

“We are losing a lot of countries on the dollar. I mean they’re going like flies. If we ever lose that, that’s the equivalent of losing a war. That would really make us third world. We have lost so many countries. I looked the other day. So, Russia is gone. You take a look: Ukraine doesn’t sort of exist in a sense. Nobody knows what’s going on there, but when you look at China, it’s essentially gone. They’re trying to get out of it, they’re our primary competitor. Iran is not there. The other day, I read where Saudi Arabia is willing to now go in various different currencies instead of the dollar. This is a tragedy. This is a big thing that is happening against our country and we cannot let that happen.”

It may be fitting that Edward ends with this quotation from Trump, who, thanks in part to a failed assassination attempt, appears to have consolidated his position against a waning incumbent President Joe Biden in the upcoming election. Biden’s silence on this question is deafening. Does he have nothing to say? He certainly cares.

Edward’s contributions leave us with the impression that, in contrast with the dynamic focus of everyone involved in BRICS, the Western bloc, especially in its incarnation as the G7, exists less an institution seeking to shape a changing world than as the remnant of a self-admiring fan club dedicated to two things:

• celebrating, for lack of a founding constitution, the historical idea of a rules-based international order,
• the pursuit of the war in Ukraine viewed as a holy Crusade that permits it to maintain its faith.

The G7 believes it has given the world its shape, and — like the God of Genesis during the seven days of creation — looked at its work and “saw that it was good.” BRICS, in contrast, is busy putting numerous elements in place with a view to designing a new shape to the world. Edward imagines President Xi’s reaction, but it is the entire world that now finds itself wondering whether the choice is “to obey, compromise a little, compromise a lot, or get ready for a long confrontation.” The rhetoric of the G7’s communiqué indicates that the West sees that confrontation as already taking place in Ukraine, mentioned 52 times in that document. BRICS, in contrast, was not mentioned once.

Join the debate

Money Matters…, is dedicated to developing this discussion and involving all interested parties.

We invite all of you who have something to contribute to send us your reflections at dialogue@fairobserver.com. We will integrate your insights into the ongoing debate. We will publish them as articles or as part of the ongoing dialogue.

*[Fair Observer’s “Crucible of Collaboration” is meant to be a space in which multiple voices can be heard, comparing and contrasting their opinions and insights in the interest of deepening and broadening our understanding of complex topics.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Crucible: Money Matters in a Multipolar World, Part 9 appeared first on Fair Observer.

We pay the rich interest on that debt — paying money for money. Most of us pay well over half of our paycheck to private banks for rent, mortgages, car loans, student loans, credit card payments and more. Wouldn’t it be nice if we didn’t need to borrow from the rich to get a loan for a new car or house or to start a business?

Turns out we don’t have to! The answer is public banking, and it’s already been working for more than a century — in North Dakota, of all places!

The Bank of North Dakota serves its state

Back in 1919, a populist political organization called the Nonpartisan League won a majority in the state legislature — don’t ever say you can’t change anything by voting! It created the Bank of North Dakota (BND), the only state-owned bank in the country. The BND’s job, according to its charter, is “encouraging and promoting agriculture, commerce, and industry” in the public interest.

The goal from the outset was to free the state’s farmers from becoming debt-dependent on the big private banks in the Twin Cities, Chicago and New York City. Since World War II, the BND has been turning profits over to North Dakota’s general fund, frequently saving the state from budget shortfalls. In 2011, for example, the bank contributed $70 million to the state budget.

Ownership is the key difference that sets the Bank of North Dakota apart from other banks. The traditional private banking model is set up to enrich its owners: the shareholders. By contrast, public banks are owned by the public — the people who live in the state or community that bank exists to serve.

And the people are well-served by the BND. That’s why North Dakota, one of the reddest of red states, continues to operate what amounts to a socialist enterprise. Even though other banks and Republicans might loathe its existence, the BND is far too popular and helpful to kill off.

That’s because the BND exists to serve the public, not to extract profits for the rich. The bank’s charter requires it. As an article from Salon describes, “Through its Partnership in Assisting Community Expansion, for example, it provides loans at below-market interest rates to businesses if and only if those businesses create at least one job for every $100,000 loaned.” The 49 states that don’t have a public bank are sitting ducks for Wall Street banks to extract profits, privately financing public infrastructure and loans for important projects like new schools. Expensive bonds can mean repayments up to ten times the value of the original loan. These schemes also mean enormous fees and unnecessary risk because bankers are trying to make as much profit as possible.

The BND is more stable than even the biggest private banks. Back during the 2008 financial crisis, The Wall Street Journal wrote, “It is more profitable than Goldman Sachs Group Inc., has a better credit rating than J.P. Morgan Chase & Co. and hasn’t seen profit growth drop since 2003.”

That’s right, it’s also super profitable! The BND posted record profits in 2023. It holds more than $10 billion in assets and has a $5.8 billion lending portfolio.

The bank also exists as a counterexample to bankers’ claims that they must offer outrageous salaries to retain talent. The BND’s executives are state employees making less than $400k a year. That’s a far cry from investment bankers on Wall Street. All of the BND’s costs are lower than private banks. Another article notes, “no bonuses, fees, or commissions; only branch office; very low borrowing costs; and no FDIC premiums.”

Private banks fear public banks

This all sounds amazing, right? So why don’t we already have public banks in every state and large city in the country? Private bankers will cite startup costs, government inefficiency, conflicts of interest or lack of expertise. As one industry spokesperson told Vox, “Our position hasn’t been secret… We’re opposed to the concept in general.” 

That’s putting it mildly. The truth is, private banks are scared to death of the competition. As writer Ellen Brown said, “the public banking model is simply more profitable and efficient than the private model. Profits, rather than being siphoned into offshore tax havens, are recycled back into the bank, the state and the community.” 

Public banks could easily push private banks right out of business. Fortunately, back in 1920, the BND has already survived a constitutional challenge that went all the way to the Supreme Court. 

Do you remember how during the 2008 financial crisis we started hearing about private banks that were “too big to fail?” Bankers and our own government kept telling us that some banks were so big that if we let them fail, they could take the entire American economy down with them. That’s why I think too big to fail is too big to exist.

Let’s change our banking

Here’s an idea! How about the next time a too-big-to-fail bank starts to go under, the government does something different? Instead of forcing a sweetheart sale to a competitor, it could seize that bank’s assets and use them to establish public banks? I bet it would have huge positive public benefits.

Once we have lots of public banks, excessive profits could be handed out to the public in the form of dividend checks, like Alaska does with its oil fund nest-egg. In 2023, every Alaskan got a check for $1,300. Can you imagine if your state sent you a check because its public bank made too much money last year? It’s not impossible to imagine.

We don’t need the rich to have banking. In fact, the Bank of North Dakota proves that so much of what we accept about private banks is unnecessary: systemic risk, excessive fees for things like overdrafts, exorbitant charges for loans and bonds and massive profit extraction. We don’t need to accept any of those things. There is a living, breathing alternative right here in the United States. We should take our inspiration and run with it.

Let’s make them pay.

[Let’s Make Them Pay first published this piece.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post North Dakota’s Revolutionary Bank Could Save People From the Rich appeared first on Fair Observer.

Mutual funds began in the US a century ago. This financial instrument in 1924 was popular with our parents’ generation. Their advantages include diversification, professional management, affordability, daily liquidity, variety of choices by region, sector, company size or investment style and automatic reinvestment of dividends and capital gains.

However, most mutual funds come with considerable up-front sales charges as well as annual fees, eating into returns over longer periods. Making matters worse, up to 96% of all active US equity funds underperformed their benchmark over a 15-year period, as described in this earlier article. They underperform the market.

The emergence of ETFs

A relatively new type of fund has been cannibalizing mutual funds in recent years. Known as exchange-traded funds (ETFs), the first such fund was launched in Canada in 1990. In 1993, the first ETF was launched in the US. ETFs took time to catch on before growing rapidly in popularity. They seek to track an index, which is typically weighted as per market capitalization, in order to capture the risk and return of a given market. ETFs comprised only 1% of total fund trading in 2000. The crash of the dotcom bubble in 2001 boosted the popularity of ETFs, and a graph on the popular site Investopedia reveals that they have really taken off since 2010. 

Since most mutual funds underperform the market and ETFs are largely so-called passive investment vehicles that replicate the market, why would someone pay higher fees for an inferior performance?

Before we carry on, it is important to understand what active and passive investment means. “Active” describes the process of actively selecting a few stocks, hoping their performance would beat a broad index, like the S&P 500. “Passive”, on the contrary, involves simply replicating the performance of said index. Once funds are invested according to the weights prescribed by the index, the manager can fold his hands and remain passive. 

Why do ETFs perform better and what are the risks?

Why are an increasing number of investors switching to so-called passive investment vehicles? Since there is no need to do any security research, passive ETFs can do without hiring expensive analysts. This allows them to charge much smaller fees and outperform the mutual funds.

The State Street Global Advisors SPDR S&P 500 ETF Trust (symbol “SPY”), with more than $500 billion in assets, charges annual fees of less than a tenth of one per cent, ie <0.1%. By contrast, Capital Group’s “Growth Fund of America,” the largest active US equity mutual fund, carries an expense ratio of 0.63% — more than 6 times as much as “SPY.” In addition, investors in the active fund need to digest a front-load of up to 5.75%.

Unsurprisingly, passive ETF have been cannibalizing active mutual funds over the past years. Conversely, since 2017, US equity mutual funds had only one month of net inflows, and 87 months of outflows.

According to fund analytics firm Morningstar, active US equity funds saw outflows of $290 billion over the past 12 months, while their passive counterparts enjoyed inflows of $320 billion. Passively managed equity vehicles now make up more than 60% of the total funds invested in markets.

As the share of passively managed investment grows, so does their ownership of individual stocks. In some companies, passive investors are already in the majority. Take Central Garden and Pet (symbol “CENT”), for example, where 60% of shares are owned by passive vehicles. Those funds are not interested in the fundamentals of the company such as sales, earnings or dividends. The company might announce terrible results, and passive investors would not sell a single share. It could, theoretically, be approaching bankruptcy, and, as long as the company remains in the index the fund tracks, the fund would not sell. 

Passive investment vehicles are insensitive to price. They are always fully invested. If fresh money comes in, the funds buy no matter what. Regular contributions to retirement accounts (“401k”) lead to a continuous stream of money driving index members share prices regardless of fundamentals.

As more investors become price insensitive, you expect to see more “crazy” price movements, leaving rational investors scratching their head. A rally induced by the recent index inclusion of Super Micro Computer (symbol SMCI) serves as an example. The company’s stock price rose from $284 at the end of 2023 to $1,229 on March 8, 2024, shortly before its inclusion into the S&P 500 Index on March 18. It has since lost around 37% of its value.

Erratic price movements could lead to the impression fundamentals did not matter anymore. Inexperienced investors might be tempted to bet on so-called “momentum” stocks, or worse, options, with quickly eroding time value.

Of course, indiscriminate inflows could reverse. An aging population of investors might want to cash out of stocks, realizing their capital gains. Persistent outflows would lead to selling, with the sellers, again, being insensitive to price. 

So, are ETFs a cure, or rather a curse in disguise?

Low-fee, passive index ETF are the most efficient investment vehicle available to individual investors. For each individual the decision to move into passive ETF is, undoubtedly, rational. However, individual rational behavior doesn’t guarantee a rational outcome in aggregate. For investors as a group, the outcome might be detrimental.

[Fair Observer’s interns, working as a team, edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Are ETFs Now Cannibalizing Mutual Funds, and Is That Good? appeared first on Fair Observer.

The 2023 banking crisis, headlined by the collapse of Silicon Valley Bank, exposed the challenges banks face with their large and growing share of uninsured deposits. Uninsured depositors could trigger runs on banks when they perceive unmanageable risks, the paper noted. The paper was discussed at a recent conference co-hosted by the Wharton Initiative on Financial Policy and Regulation (WIFPR) with Yale’s Tobin Center for Economic Policy.

Goldstein and Davila provide a framework to determine the optimal level of deposit insurance to stave off bank runs. The framework allows ways to measure the welfare impact of changes in deposit insurance coverage limits, and the costs it will entail. The authors demonstrate the efficacy of the framework by applying it to the 2008 financial crisis. As it happens, that crisis triggered the most recent change in deposit insurance to $250,000 per account; the previous limit had been $100,000, since 1980.

“The deposit insurance limit is updated every once in a while, but not very rigorously or not with much data or science behind it,” Goldstein said. “What we wanted to ask is, can we have a framework that will guide policymakers on what that limit should be?”

The pros and cons of deposit insurance

Optimal deposit insurance limit would essentially have to be “socially optimal” in a way that maximizes the welfare or utility among economic agents or people, Goldstein continued. “It entails a cost-benefit analysis to see whether the benefit of changing the limit is significant enough relative to the cost.”

The benefits are clearly in helping create a more stable banking environment. “When you have more deposit insurance, it reduces the probability of a run and a bank failure,” Goldstein said. “Depositors might run on a bank when they think that their money is at risk. But if you insure them, their money is not at risk.” Governments will typically meet the costs of providing that insurance through taxation.

The paper noted that after the introduction of the federal deposit insurance in 1934 (with a limit of $2,500 per account), the number of bank failures dramatically reduced. More than 13,000 US banks failed between 1921 and 1933 in the midst of the Great Depression, but only 4,057 banks failed between 1934 and 2014.

While deposit insurance helps reduce bank failures, it involves a moral hazard, where market participants could, for instance, go lax in running the banking system. That possibility underscores the need to design optimal levels of deposit insurance coverage.

Designing the deposit insurance framework

The framework in the paper incorporates the tradeoffs that policymakers would have to consider in determining the optimal deposit insurance limit. It visualizes an environment with uncertainty about the profitability of banks’ investments, where both fundamental-based and panic-based failures are possible. It then mimics deposit insurance arrangements and weighs the implications for social welfare with varying degrees of coverage.

Essentially, the tradeoffs boil down to two possible scenarios: On the one hand, a marginal change in deposit insurance coverage may substantially reduce the likelihood of bank failure with significant gains from avoiding that failure. In such a situation, it is optimal to increase the level of coverage, the paper stated. On the other hand, when bank failures are frequent and when the social cost of subsequent interventions is high, the optimal route would be to decrease the level of coverage, it added. It might be unwise to incur the social cost of intervention, for instance, when it is very costly to raise resources through distortionary taxation, the authors wrote.

Goldstein said the framework incorporates four ingredients: One is the likelihood of a bank failure. The second is the cost of funds for the government to provide deposit insurance. The third is the relationship between the benefit from deposit insurance and the probability of a crisis, such as bank run. The fourth is the likely damage from a run.

Determining the right insurance coverage

When the authors applied their framework to the change in the deposit insurance limit in early 2008, they came up with an optimal level of coverage of $381,000 per account. That is substantially higher than the decision back then to raise the coverage limit to $250,000 in October 2008. Even so, the welfare gains are “very large” from increasing the coverage from the earlier limit of $100,000, they stated in their paper. They also qualify their choice of $381,000 as the coverage limit by noting that it is “perhaps more aligned with the extended guarantees that were implemented soon after” the 2008 financial crisis.

Incidentally, in March 2023, after Silicon Valley Bank and Signature Bank collapsed, the Treasury, the Federal Reserve and the FDIC extended to them a “systemic risk exception,” where it made whole all of the bank’s depositors. Taxpayers will not bear the losses from the two banks, they announced in their joint statement.

That one-time exception was widely seen as an attempt to prevent a contagion effect where depositors across the banking industry might feel vulnerable. Silicon Valley Bank’s assets were eventually moved to a bridge bank the FDIC set up, and New York Community Bancorp took over select parts of Signature Bank. The episode prodded policymakers and regulators into exploring ways to strengthen the banking system from bank failures.

Pointers for bank regulators

Goldstein recalled that after the 2023 crisis, many policymakers and legal scholars called for unlimited deposit insurance. “Our paper exactly goes against that. There is a benefit. There is a cost. You want to find the optimal balance between the cost and the benefit.”

Goldstein said that while it would be prudent to revisit deposit insurance limits from time to time, it would be unwise to change it too often. “It would be good to have a dynamic adjustment of the deposit insurance limit, but it might be infeasible because you can’t readjust it every month.”

Their paper also looks at how emerging economies should set their insured limits. In most European countries, the current deposit insurance coverage limit is 100,000 euros ($108,000 at the current exchange rate).

Goldstein and Davila do not, of course, provide a fail-safe way to prevent bank failures, but stated that their analysis provides the tools to build a “theory of measurement for financial regulation that can be applied to a wide variety of environments.” The ability to measure aspects such as “the sensitivity of bank failures to changes in the level of coverage and the relevant fiscal externalities associated with such a policy change” can potentially guide regulators, they added.

Goldstein said that their framework may end up capturing too many moving pieces that may be seen as “noisy,” but argued that it is still a step forward. “It’s better to have a noisy framework than have no framework at all. The way that this policy has been set over the years was very arbitrary.”

Deposit insurance helps minimize or prevent bank runs, but it must be accompanied by other actions to strengthen the banking system, Goldstein said. Among his suggestions: increased scrutiny of mid-sized banks, more imaginative stress tests and more effective capital and liquidity regulation.

In the first quarter of 2024, the US banking industry showed growth in net income, along with favorable asset quality, according to an FDIC report. But it continues to face “significant downside risks” from inflation, interest rates and geopolitical uncertainty, it noted. It specifically mentioned a deterioration in certain loan portfolios such as commercial real estate and credit cards.

[Knowledge at Wharton first published this piece.]
[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Deposit Insurance Revisited: Can More Coverage Stop Bank Panic? appeared first on Fair Observer.

Dear friends,

As fair observers, we have embarked on a wide open discussion about global trends concerning means of payment, currencies, trade and geopolitics. We agree that this is a transitional moment in history, in which the burning question of dedollarization is on many people’s minds. There are a lot of factors at play. As such, it requires literally thinking outside of multiple boxes.

In other words, we welcome discussion that is as open as possible, precisely because reaching a firm and convincing conclusion about the likelihood, the timing or the extent of the dethroning the dollar as the world’s reserve currency is highly unlikely. In such cases, the principle of democracy — rather than, say, “the wisdom of crowds” — requires that we share enough of our collective insights to allow even those at a great distance from the “science” to have a grasp of the way things may be trending.

Because we acknowledge this as a transitional moment of history, evidence from multiple sources tells us that dedollarization is real, if only in the sense that it’s being more and more frequently talked about. That remains true even where there is no evidence justifying the suspicion that today’s efforts at dedollarization might succeed in the kind of coup d’état some people imagine.

To place the focus on history, I submit the following representation of the trends over the past eight decades.

Warm regards,

Peter 

************************************

I was pleased to see Ed Quince’s succinct response to this:

I like your categorization — it does outline the lifecycle of the USD as the world reserve currency very well. It also seems prudent to assume that the future will bring more choice and flexibility to the world.

Alex also approved, offering his own extended reflections.

One thing that is missing so far: we should get the “official” narrative. Of course, no official will admit that “the end for the dollar is near.” And the Europeans will have different views than the US. And, of course, the BRICS+ in turn will have even more radically different views. The hard part is to get people on the record; I assume the subject is so sensitive that nobody wants to go on the record.

But it would be great if anyone had a source that would be able to contribute anonymously. I am still searching for papers to the tune of “Reforming the International Monetary System” but wasn’t very successful. Any leads or connections at IMF, World Bank, European Central Bank, BIS, other central banks or think tanks are greatly appreciated. I am absolutely certain that discussions regarding the future of our monetary system are held among Western powers, who want to preserve the status quo, and emerging powers, who would like to change it.

The Europeans had to play their hand very carefully, being entirely dependent on the US after the destruction of their industrial base during WWII. A lot of their gold had been moved to New York, for fear of Russian invasion. The US took a dedicated path towards demonetization of gold, leaving the Federal Reserve without a single ounce of gold. But this only works if other countries follow suit; Germany had to promise the US not to purchase any gold with USD proceeds from its rising trade surplus (the “Blessing Letter”). As a “work-around,” Germany exempted purchases of gold from VAT, thereby encouraging its population to increase savings in gold. The amount of gold held by Germans is unknown, due to the decentralized and often anonymous nature of gold ownership, but according to polls Germans might own 11,000 tons (which would exceed the amount held by the US Treasury).

This might turn out to be a smart move. Why? In case of a currency crisis, the ECB would not sell its gold, but rather purchase additional gold, thereby achieving three purposes:

Afraid Germans won’t part with their gold? As frugal as Germans are, being attracted by substantial seasonal sales promotions, they sure will take advantage of a scenario where the ECB (or Bundesbank) declares “We will be bidding for gold EUR 10,000 per ounce (or any other arbitrary number) for the next two weeks only.”

The Federal Reserve does not own any gold. It had to turn over its gold to the US Treasury, receiving a non-redeemable gold “certificate,” valuing gold at $42.22 an ounce. It’s worthless. Over 80% of the Treasury’s gold is under control of the military (West Point, NY and Fort Knox, KY), underlining the importance of gold holdings for the US (despite downplaying it perpetually). You can see it here under “gold stock” (valued at $11 billion, pay attention to footnote 1).

The ECB system of central banks owns 10,792 tonnes, valued at market value. The ECB could buy or sell gold if it wanted to. The Federal Reserve cannot sell any gold since it does not own any. It probably cannot purchase any gold either, since US Code 5117 makes it unlawful to value gold at a price different from the last official price of $42.22 per ounce (for transactions among public entities). Why? Because Nixon merely ‘temporarily suspended’ gold convertibility – hence enormous amounts of gold are theoretically still owed to foreign official holders (central banks) of US dollars. The Federal Reserve would hence immediately have to recognize large write-downs on any gold purchased at market prices. But I am sure that would be their least concern in case of a currency crisis.

You can probably see how the Europeans and the Americans are set up differently to deal with a currency crisis (due to the role of gold). It is a pre-programmed collision course, and it is hard to see how an agreement would be found during a “Bretton Woods” 2.0. And we haven’t even started to include any BRICS.

The US has one ace up its sleeve: gold held by the Federal Reserve Bank of New York for “foreign official accounts” (non-US central banks, sovereign wealth funds). And it’s a lot. You can see it here under position 4, “earmarked gold.” 7.9 billion dollars, duly valued at $42.22, which comes out to 188.7 million ounces or 5,869 tons, worth around $430 billion.

The US might just choose to never return those tons to their rightful owners. What are they going to do? Invade New York? French President Georges Pompidou, pursuing his predecessor De Gaulle’s stated concerns, sent a French frigate to New York in early August 1971 to exchange dollars into gold. On August 15, Nixon closed the “gold window.” The convertibility of the dollar into gold did NOT exist for US citizens (which had been forced to hand over their private gold holdings in 1933). It existed for non-US central banks, but only as long as the bluff wasn’t called. The French called the bluff, and the game was over. But it failed to dethrone the US dollar!

Of course, a lot of conspiracy theories have spun up surrounding gold, but the above is all well documented and withstands any scrutiny. Gold, this inert stupid little metal, extracted from the earth under enormous efforts, has all but vanished from the eye of the public. But behind the scenes, the chess pieces are being moved quietly, by velvet-gloved hands, setting up the game of currencies for an epic battle.

Join the Debate

Money Matters…, is dedicated to developing this discussion and involving all interested parties.

We invite all of you who have something to contribute to send us your reflections at dialogue@fairobserver.com. We will integrate your insights into the ongoing debate. We will publish them as articles or as part of the ongoing dialogue.

Money Matters… in a Multipolar World!

*[Fair Observer’s “Crucible of Collaboration” is meant to be a space in which multiple voices can be heard, comparing and contrasting their opinions and insights in the interest of deepening and broadening our understanding of complex topics.]

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Crucible: Money Matters in a Multipolar World, Part 6 appeared first on Fair Observer.

Ethiopia is the most populous nation in East Africa. In the 20th century, it faced economic troubles and civil war between communist and non-communist forces. Today, it is quickly developing, building infrastructure and factories. Much of the capital for this development comes from foreign partners, especially China, whose ambitious Belt and Road Initiative has focused on this core of the Horn of Africa. Ethiopia’s industrial sector now employs millions of people, and Ethiopians are growing more prosperous. Yet it is not rosy for everyone; indeed, any development this large and fast will have uneven effects on the human lives involved in it.

Three women, three lives

It is easy to misunderstand industrialization in Ethiopia and China’s growing involvement. Made in Ethiopia takes a look at these developments through the lives of three women: a factory worker, a local farmer and a Chinese factory director who is charged with filling no fewer than 30,000 jobs.

The documentary takes a close and long look at the period between 2019 and 2023. It raises profound questions about what is fair and for whom in Ethiopia’s growing factory towns. These characters struggle to defend their own wellbeing in a rapidly changing, chaotic world. The trade-offs materialize in the concrete struggles of people’s lives. Still, people fight and they persevere.

Watching the characters navigate tricky terrain inevitably makes you reflect on how challenging it is to build prosperity for all.

Making a film in a tumultuous time

I am an Emmy-nominated Ethiopian American anthropologist and filmmaker. I served as an executive producer of the documentary along with Anna Godas, Oli Harbottle, Susan Jakes and Roger Graef.

First-time directors Xinyan Yu and Max Duncan shot the film over the course of four years, through both the pandemic and a civil war. I was living in Ethiopia when this film was shot and remember when Max and Xinyan started this journey. Ethiopia was in a very different place than it is now. The directors captured a particularly dynamic few years and indeed the pandemonium of a country that is rapidly accelerating towards the future.

The filmmakers had unprecedented access to the Eastern Industrial Zone (EIZ) in Dukem, Ethiopia. Dukem is a farming town that is home to the largest and first Chinese industrial park in Ethiopia. Located 40 kilometers outside of Addis Ababa, the EIZ is considered the benchmark for the development of industrial parks in Ethiopia and was established to accelerate the process of industrialization and job creation financed by Chinese investors.

Made in Ethiopia screens today in Washington, DC, which is home to the largest population of Ethiopians outside of Ethiopia. There, the film finds its largest Ethiopian audience yet and hopefully an even larger audience of global development policymakers.

Breaking through conventional thinking

The film reminds me that the power of cinema lies in its ability to take an audience into your mind’s eye. The film calls on all who see it to consider what lies beyond the binaries of technocratic frameworks.

Recently, The New York Times published the headlines “Why It Seems Everything We Think We Knew About the Global Economy is No Longer True.” People are coming to understand the limits of conventional thinking in policy circles. We need new perspectives on growth, development and the global economy. Long-form storytelling enables us to delve deep into local communities’ experiences. Everyday people on the ground understand things that Washington- and London-based think tanks and international institutions easily ignore.

To be sure, this is not the first time we have realized that reality is complicated. Chimamanda Adichei warned us about the danger of a single story and Michel-Rolph Trouillot highlighted how perception can distort reality in his tour de force Silencing the Past. Yet we need many reminders because it is so easy to get stuck in lazy thinking, stereotypes, soundbites and echo chambers.

Made in Ethiopia invites audiences to practice perceiving the more complicated layers of China’s expansion into Ethiopia. The film aims to give the viewer a more rounded understanding of what is going on and what exactly might make for a better life for ordinary Ethiopians.

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post A New Documentary Highlights China’s Expansion Into Ethiopia appeared first on Fair Observer.

The reasons cited for the downgrade include pressure on the banking system from the sovereign debt crisis (since Egyptian banks are some of the largest holders of Egyptian sovereign debt), constraints on the availability of hard currency, expected negative impact on capitalization due to expected depreciation of the pound, and the perceived inability of the Egyptian government to shore up the banking system in case of a crisis. This downgrade in the credit rating comes as the net foreign asset deficit of the Egyptian banking sector hit a new high of $24.5 billion as of March, compared to $23 billion in February, showing the increased vulnerability of the sector.

The vulnerability is compounded by the weakness of the national foreign currency reserves, which stood at a meager $32.4 billion as of March. These reserves are the main resource that the government can call upon, not only to meet its debt obligations, but to rescue Egyptian banks if they fail to meet their obligations in foreign currency.

Egypt’s IMF Loan Now Shows Sure Fire Signs of Failure

The situation is further compounded by another vulnerability, which was stated to be a factor in the downgrade, although Fitch alluded to in the report. This would be the $11 billion (340 billion Egyptian pounds) worth of treasury bills held by non-residents, what is commonly known as “hot money.” If a mass exodus of these investments took place, similar to the $20 billion (610 billion Egyptian pounds) exodus that took place in March 2022 due to the war in Ukraine, precipitating the current debt crisis, the consequences would be catastrophic. Indeed, an outflow of such a magnitude would push the banking sector to the edge of the abyss, a crisis which the regime would be almost powerless to stop.

The downgrade also comes at a moment when the debt crisis seems to be deepening, with pressure from President Abdel Fattah el-Sisi’s allies mounting and no financial aid appearing in sight. For example, the regime’s Gulf allies seem to have agreed on a unified position: before they will provide aid, Sisi is expected to comply with three main conditions. First is the devaluation of the Egyptian pound, which is a logical ask considering that the Gulf is expected to be the primary buyer of regime-held assets and a devaluation would make these assets cheaper. Second is a change in personnel for those responsible for managing the Egyptian economy. Considering that the management of the economy is highly centralized and militarized, this is a direct attack on the regime’s economic policy and even on the presidency.

Third, and most important, is the demilitarization of the economy, a prospect that seems to be far-fetched at the moment, with no concrete steps taking place since the crisis began. The consequences of the sluggish rate of reform have been all too real. Since the government announced the sale of 32 state-owned companies, the first in the fire sale privatization program, not one significant sale has been concluded, with the Gulf demanding a demilitarization of the economy before buying into state-owned assets. The slow pace of the privatization program is a result of the lack of reforms.

The regime, however, seems to be playing a high-stakes game of chicken, hoping that the “too big to fail” logic would prevail in the event of a crisis and that the international community would intervene to stave off a complete collapse. This logic was clearly reflected in the regime budget for next year, which assumes that the main source of public revenues will come from loans, at an estimated share of 49.2% of the budget. In comparison, taxes constitute 35.2% of the state budget. This logic presumes the continued availability of external sources of financing, despite the regime’s current difficulties in soliciting international capital inflows. It comes at a time when Egypt has been ranked the country with the third highest risk of default after Ghana and Ukraine, according to Bloomberg. Continued access to international capital inflows is wishful thinking under these conditions.

Who Will Buy America’s Debt Now?

For this reason, the regime is not only facing a sovereign debt crisis, but a banking crisis as well. The exposure is stemming from obligations in foreign currencies, placing the regime in a uniquely vulnerable position. Indeed, if the major banks are unable to meet their obligations, the state will not be able to step in to shore up the banks. Simply put, the regime does not have enough hard currency reserves in its coffers to do that, and its access to quick liquidity is limited. This could potentially be catastrophic for Egyptian banks, leading to possible collapse of the sector or to its being cut off from international financial markets—which for a peripheral economy like Egypt would be catastrophic and would require immediate international intervention.

Indeed, as long as the sovereign debt crisis remains unresolved, this scenario continues to become more likely, threatening catastrophic consequences for the Egyptian economy and the mass of the citizenry. Barring the very unlikely setup of a currency swap line with the US Federal Reserve, there is no other avenue other than another rescue package from the International Monetary Fund, with a much larger value, and even more stringent conditions that the regime will most likely attempt to circumvent.

[Arab Digest first published this article and is a partner of Fair Observer.]

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Egypt’s Banking System Is Getting Closer to the Edge appeared first on Fair Observer.

We need capitalism with restraints, checks and balances. This includes reallocating taxes through welfare schemes for the poor and paying attention to economic sectors that stop growing or die due to market forces.  Retraining redundant labor in new jobs in growth areas is crucial. A capitalist system should focus on self-sufficiency and empower people towards this goal. This also helps redundant labor needing retraining and is also a lifestyle choice for some.

Correcting the Misplaced Shareholder Value Perspective

The undue focus on shareholder value needs correction to ensure fairness to employees. As a society we do not want people obsessed with materialism. Studies reveal that materialistic people are more likely to have low self-esteem, be unhappy, and struggle to maintain healthy relationships. There is a negative association between materialism and well-being. 

‘Shareholder Value’ is now a reviled term. Shareholders with greedy expectations epitomize a materialistic system. Forbes states “A sole focus on shareholders is financially, socially and economically wrong.” Even Jack Welch himself—the idea’s leading exponent—in 2009 had come to call it “the dumbest idea in the world.” This mindset has created a vicious circle of pressures on employees. The resultant cost-cutting and redundancies have caused immense social distress. It’s plain mean.

Minimalism, Self-Sufficiency, and the Keynesian Transformation

In an evolutionary context, minimalism and self-sufficiency relate to economist John Keynes’ 1930 prediction that by 2030, capital investment and technological progress would raise living standards eightfold. He believed people would work as little as fifteen hours a week, devoting the rest of their time to leisure and “non-economic purposes.” According to Keynes, the pursuit of affluence would fade, and “the love of money as a possession… will be recognized for what it is, a somewhat disgusting morbidity.”

Although this Keynesian transformation has yet to occur, Keynes’ ideas remain relevant. For example, GDP per person in the US has increased more than sixfold in a century, and there is now a vigorous debate on the “feasibility and wisdom of creating and consuming ever more stuff, year after year.” Moreover, concerns about climate change and other environmental threats have led to the emergence of a “degrowth” movement, which calls on advanced countries to embrace zero or even negative GDP growth.

The pinnacle of Keynes’ end state of leisure is material saturation. This article suggests achieving the same state through minimalism and self-sufficiency.

Self-Sufficiency – A Human Rights Perspective

“Give a man a fish and he will eat for a day. Teach a man to fish and he will eat for the rest of his life”, Chinese Proverb.

Self-reliance is an important social and economic idea. The United Nations High Commissioner for Refugees (UNHCR) defines it as “ the social and economic ability of an individual, a household or a community to meet essential needs (including protection, food, water, shelter, personal safety, health and education) in a sustainable manner and with dignity.” Self-reliance, as a programme approach, refers to developing and strengthening livelihoods of persons of concern, and reducing their vulnerability and long-term reliance on humanitarian/external assistance.”

In November 2005, the UN Economic and Social Council General discussed the “Right to Work,” stating that “the right to work is an individual right that belongs to each person and is at the same time a collective right.” The UN puts the onus on governments to ensure this right to work without discrimination. “The national employment strategy must take particular account of the need to eliminate discrimination in access to employment. It must ensure equal access to economic resources and to technical and vocational training, particularly for women, disadvantaged and marginalized individuals and groups, and should respect and protect self‑employment as well as employment with remuneration that enables workers and their families to enjoy an adequate standard of living.” The UN 1994 comment states “The ‘right of everyone to the opportunity to gain his living by work which he freely chooses or accepts”.

The Emory Law Journal published a 2015 paper titled “An International Human Right to Self-Sufficiency”. It stated “Various phrases in past treaties, recent developments in human rights law, and the rising need for the new/emerging right’s recognition lead to the conclusion that there is an emerging international human right to self-sufficiency. All people have a right to live in a community where they are free to take whatever steps they feel necessary in order to thrive in a self-sufficient manner if they choose to, especially in times of need, and state governments worldwide have the duty to create the atmosphere where self-sufficiency can flourish.”

Therefore, people have the right to choose minimalism and self-sufficiency as their lifestyle. If they do, it is the government’s responsibility to support this way of life without discrimination and with access to economic resources and training. This is important, as discrimination can naturally occur when the new model challenges the old one. Governments must understand how the two models – old and new – fit together.

The Backpacker’s Secret: Minimalism and Self-Sufficiency

International backpackers know the secret to being self-sufficient: minimalism.

Minimalism is deliberate. We choose to live with only the things we need – those items that support one’s purpose. It does not mean renouncing all materialism for a difficult life of discomfort.

Minimalism requires a series of smart and independent choices, free from  social pressures to ‘keep up with the Joneses’. For example, why buy an expensive car when your office is only two km away from home, the grocer is on the ground floor of your house, and public transport is fantastic? Or why should a single person buy a 3000 sq ft house and spend their time cleaning it or hiring expensive helpers, when their real need is likely a small New York style Studio of 550 sq ft? Is there a need to clutter your house with stuff that you rarely use? Do you need a wardrobe with 30 shirts when you only wear 3?

By keeping  our needs to a minimum, we need to work less to earn less to support this way of life. We also avoid the adverse mental effects of the debt trap of rampant consumerism.  Like the backpacker, we can then be one with nature or whatever is our true calling. Minimalism is a recurring theme in my other SSRN working paper “Post-Religion – A Charter of Religious and Human Values”. We should combine minimalism with gratitude. This can be a formula for tremendous personal power and happiness.

We need to spend time doing the things we want to rather than what life forces us to do. A Harvard Business Review (HBR) 2018 article states that “9 out of 10 people are willing to earn less money to do more-meaningful work”. It reflects the frustration of people caught up in the spider web of capitalism. Capitalism can exploit factory workers in third-world countries, leaving their conditions often little better than slaves.

The International Backpacker Is a Free Trainer

At a philosophical level, there is some truth to Ayn Rand’s thinking. A degree of selfishness is necessary in the pursuit of one’s personal happiness. Let’s take the example of the lifelong backpacker. He or she rejects conventional roles in organizations, opting for ad-hoc roles to make money for their next trip instead. They reject conventional marriages and prefer short-term relationships as part of their journey. And they may even reject parenthood. This is a very different life with lessons that organizations cannot teach.

Less is more. Backpackers are modern day gypsies. They know how to live in smaller places and manage their health on the road. They make new social bonds on each trip and contribute to that place with new ideas and ways of working. Then they move on without attachments. Their whole goal is to be happy living a life of minimalism.

Backpackers are often the most open, liberated, and spiritual people. They love offbeat authentic tourism, in small villages and homestays. These are often in remote rural scenic areas. They bring with them international ideas. The locals also learn English over time, and they transfer so many other life skills that help build local economies.

Self-reliance (Aatmanirbharta) and Social Acceptance

Self-reliance, or self-sufficiency, is not only from an individual’s choice perspective. It is also important for social and economic policy. Society must accept people who adopt alternative ways of life, treating them with respect and without disdain or reprimand.. According to the UN, the government has an important role in providing the economic resources and training to support those seeking self-sufficiency.

The backpacker is only one example of self-sufficiency and minimalism. We must explore the idea in more detail.

There are three critical ideas that any government exploring self-reliance or self-sufficiency ought to explore:

1. Food Self-Sufficiency

Reducing poverty starts with education. People should not have to work for food when it is basic and simple to grow it at home. They can even trade the surplus for spare cash. What they need is training to give them this choice.

A family of five can be self-sufficient in as little as 5,500 sq ft. It may surprise some, but there is an economic surplus from selling the excess produce. This helps them cover other needs, such as buying grains, insurance, clothing, and entertainment. A family in California seen on www.urbanhomestead.org proves this to us.

Governments need to provide financial and training support to facilitate family farming. A focus on intensive farming using hydroponics with cash crops would be helpful. It is important to adopt this high-yield approach and keep it pesticide and GMO free using organic compost. In particular the Kratky method is very low-maintenance, saving money in equipment, electricity, nutrients and water. My earlier SSRN Working paper on New Economics (see its annexure 1) provides details on intensive farming and hydroponics focused on cash crops. 

The state must provide cheap land in the rural hinterlands, albeit in scenic places. This will help attract international backpackers and create a secondary income stream. We need at least natural water, low-cost (e.g., gravel) roads for car access, and some subsidies for solar power. A country like India, rich in natural beauty, can use this model to develop its rural hinterlands.

2. Housing Self-Sufficiency

Many people spend 30 years of their career saving and paying off the mortgage for the house they retire in. That is their life’s only real aim. That’s a huge waste of a lifetime. They could have enjoyed their life doing the things close to their heart if they had the time and resources. So, let’s explore how we can empower the next generation to do more with less.

We live in amazing times with amazing construction technology. Both revisiting ancient technologies, such as mud and inventing modern futuristic technologies. We need to focus on empowering the next generation with these basic skills. For example, to construct with Auroville-style natural (mud, stone, straw/thatch) and waste material (glass, plastic, rubber, stone (e.g., marble chips), AAC/concrete, fly ash). Or with CalEarth style earthbag architecture. Or with dramatic modern techniques that can much reduce costs. We discuss two here.

Binishell inflatable concrete houses offer a permanent design at a “very low cost, instant construction, easy implementation, and resistance to natural disasters”. We can construct Binishells in a fraction of the normal time and cost. The specifics will depend on the systems used, the project size and other conditions, including site and geology. Replacing steel rebar with GFRP (Glass reinforced FRP) rebar can also reduce costs. State governments can help to spread related knowledge,  skills training,and encourage private players to rent out the reusable inflatable balloons needed.

There is also a Concrete Canvas Shelter inflatable version, like Binishells. This offers an almost instant construction (one hour) with a lifespan of 10 years. Earth Berming is also possible i.e., covering with sand or earth fill to improve insulation. We need to take this technology to the next level to construct basic houses that last 30 years or more.

State governments must help to create basic construction standards for one level houses, and structural approval processes, albeit these are not needed for concrete canvas shelters. They must encourage awareness of such low-cost housing and even help the creation of online websites for commercial job bidding. After all, once trained, the same skill has commercial value.

3. Skills Self-Sufficiency

Our schools and college system creates workers for factories, clerks for offices, the occasional manager, and leader. This education system meets the needs of modern-day economics. The focus is on GDP as opposed to Gross National Happiness (GNH), a measure used in the Kingdom of Bhutan.

The Oxford Poverty and Human Development Initiative (OPHI) states that “The (GNH) concept implies that sustainable development should take a holistic approach towards notions of progress and give equal importance to non-economic aspects of wellbeing.” The GNH Index includes nine domains – psychological wellbeing, health, education, time use, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, and living standards.

To align with GNH, we must adopt the self-sufficiency and minimalism concepts. We need the next generation to have the necessary skills for self-sufficiency. We want them to think minimalism. Start them young. Teach them intensive farming, Do-It-Yourself (DIY) construction, and homestay management for low-budget international backpacker tourism.

Governments need to create an alternative Secondary School four-year applied training path. This is from the 8th to the 12th standard. It would use local language online videos and live training, and apprenticeship (in all areas) to allow a certification program. This alternative schooling should be available to whoever wants it.

Governments currently do not recognize self-sufficiency as a human right. Doing so can provide an alternative economic model. We need to look at self-sufficiency in conjunction with international backpacker tourism. This will help to develop remote yet scenic places in the rural hinterlands. It would bring new skills to local populations through their interactions with outsiders. Self-sufficiency is not a challenge to existing economic models. In fact, it reinforces these developing, often ignored remote areas. This will also reflect in new demand for goods and services and in taxes. Hence, governments need to provide the necessary ecosystem for self-sufficiency to thrive.

[Tasheanna Williams edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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For years, doomsdayers have been trumpeting the dollar’s demise. Once the Japanese yen was deemed a rival. Then, it was the euro. Now, it is the Chinese renminbi, also known as the yuan. Yet these fears are exaggerated. The reason is simple. People invest in the dollar because the American economic model is still the most dynamic in the world. The US has top universities, great laboratories, ease of setting up businesses, investors, depth of markets and culture of innovation are still unparalleled. 

Yet the dollar is unlikely to have the same dominance as in the past for a very simple reason. The hegemony of the US was historically unprecedented. Sir Arthur Harris, known as “Bomber” Harris, had bombed Germany into oblivion. The US had dropped two nuclear bombs on Japan. France had been occupied by Germany, and the UK was victorious but exhausted. Russia was still under Joseph Stalin and had been decimated by Nazi Germany.

After World War II, the US was the only game in town, the American economy was 50% of the global GDP, the US was the factory of the world and the dollar replaced the pound to emerge as the top dog. Since then, no other economy has held a candle to the American one. Yet others are on the up, and the dollar’s status is not as dominant as before.

Rivals Emerge but Still Lag Behind

China has risen like a phoenix after two centuries of ignominy. It, and not the US, is now the workshop of the world. As a result, China is the biggest importer of commodities. Russian gas, Saudi oil and Brazilian soybeans all make their way to this giant Asian market. So, it is only natural that some trade is denominated in renminbi/yuan. As a trade currency, the yuan is picking up. In China’s cross-border transactions, the yuan reached 48.4% and the dollar declined to 46.7% from 48.6% a month earlier.

Yet there is no challenge to the status of the dollar as the reserve currency. There is nothing today that can replace it. For one thing, the yuan is not freely convertible. Under President Xi Jinping, China has tightened currency and capital controls. Even Jack Ma, the richest Chinese entrepreneur, has been brought to heel. Yet convertibility is only one of many shortcomings the currency has, and wealthy Chinese still go to great lengths to take their money out of the country and invest it in real estate in Vancouver, shares in Western companies and plain simple dollars. No American billionaire or millionaire thinks of storing wealth in yuan.

To put it bluntly, China lacks investor protections, institutional quality and capital market openness. The Middle Kingdom also has an opaque banking system with a mountain of non-performing loans, a gigantic real estate bubble, poor enforcement of contracts, and arbitrary and draconian regulations. Yes, China is the top global factory now but it still has not figured out how to create a financial system that is efficient, transparent and trustworthy.

The euro has problems too. The jury is still out on whether the euro will survive in the long term. At the heart of the matter is the fundamental difference between the north and the south. The Greek debt crisis threw the eurozone into disarray. Italy’s burgeoning debt, sclerotic growth and aging population threatens to sink the euro ship. 

Furthermore, Europe lacks US-style deep capital markets, banking, fiscal and political union. Will German taxpayers bail out Italian banks? Also, European bond markets are more fragmented and shallower than their American counterparts. There are simply not enough high-quality euro-denominated assets for investors to buy and sell.

Other currencies cannot be challengers. The pound fell from grace many decades ago. Post-Brexit, the British economy is caught in a low-wage, low-productivity and low-growth spiral. Cool Britannia is distinctly uncool these days. India, a fast rising former British colony, is growing impressively fast, but it has a very long way to go before its currency becomes a medium of exchange internationally.

Dreams of a BRICS currency will remain dreams. These economies have little in common with each other. Russia, Brazil and South Africa remain exporters of commodities. China is the global industrial superpower, and India is striving to boost manufacturing after decades of focus on services. Jim O’Neill, the former Goldman Sachs banker who coined the term BRICS for these five countries, has concluded that this proposed currency means little for the US-centered global financial system.

Dreams of gold replacing the dollar run into liquidity issues. The crypto mirage has now well and truly crashed. Other ideas of using a basket of currencies are simply too unwieldy. As yet, there is no alternative in sight to the dollar, flawed though it may be.

As geopolitical analyst Ian Bremmer wrote, “the dollar continues to be widely used for funding, pricing, trade invoicing and settlement, and cross-border borrowing and lending even when the US is not involved.”  A brief look at the graph below tells us all that we need to know about the global importance of the dollar.

There is also another important statistic that Bremmer touts. Central banks hold $12 trillion in dollars as foreign exchange reserves. This figure has declined since 1999 but “it is still nearly twice that of the euro, yen, pound, and yuan combined – the same as it was a decade ago.” The Chinese yuan comprises a measly 3% of foreign exchange reserves. 

Despite the US Federal Reserve following a policy of quantitative easing that dramatically devalues the dollar, China has felt compelled to keep purchasing dollar-denominated assets. Even the weaponization of the dollar against Russia has not forced a change in Chinese policy when it comes to keeping these assets. 

The graph below captures the dominance of the dollar as the world’s reserve currency. For all the chatter by analysts, geopolitical gurus and media pundits, this domination is not yet under threat.

The dollar dominates because it is stable, liquid, safe and convertible. As stated earlier, the US is still the largest and most innovative economy in the world. American financial markets are the largest, deepest and most liquid in the world. Assets around the world are denominated in dollars, giving many investment options to those who hold the currency. The dollar also continues to be a safe haven for non-Americans, including people from the BRICS economies. 

Top Dog Status Secure but Not Eternal

As stated earlier, the US economy is the largest and most dynamic in the world. American educational, economic and political institutions inspire global credibility and confidence. India’s blue-blooded Indian Administrative Service (IAS) officers who rule the country are willing to give their right arm to send their children to Harvard or MIT, and even Emperor Xi himself sent his daughter to Harvard.

The inherent strength of the US is a cliché that everyone parrots. The US has everything to be top dog from the most powerful military to a robust economy. Innovative companies such as Google, Apple and Tesla sprout up ceaselessly in the US and become dominant global players. Ultimately, people trust the US. They buy into the myth of Harvard and Hollywood, giving the US not only hard power but also what Joseph Nye calls soft power.

Yet all of this trust is also fragile. As we think about the dollar, Americans are playing political football yet again with its debt ceiling. Democrats want to spend like no tomorrow. Republicans cannot countenance any increase in taxes. And the American citizenry has gotten used to pain-free goodies racked up on Uncle Sam’s credit card. Thus, fiscal deficits continue to grow. Quantitative easing, the de facto printing of money, has fueled asset bubbles that are deflating as the Federal Reserve raises interest rates to combat inflation.

Smaller banks are going under and big banks are buying them up. Too big to fail has become even bigger to fail, amplifying moral hazard and systemic risk. The US financial sector is a world leader, but it is not as stable or resilient as it once was. The military-industrial complex demands ever increasing investment, while higher education costs an arm and a leg. Healthcare is stratospherically expensive and yields worse outcomes than economies that spend far less on it. In fact, American life expectancy recently declined and so, too, did social mobility. For too many, the great American dream has turned into the terrible American nightmare, straining the very fabric of society.

If the US continues to fragment, if American democracy keeps becoming even more dysfunctional and if Americans lose faith in their institutions—as many did on January 6, 2021—then the dollar may not remain top dog. Nothing lasts forever. For now though, reports of the dollar’s death are greatly exaggerated.

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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The mechanism by which globalization spread throughout the world, the key strand of its DNA, has been the “free trade” treaty. 

“We’ve had 30 years of free trade agreements and bilateral investment treaties,” points out Luciana Ghiotto, a researcher at CONICET-Argentina and associate researcher with the Transnational Institute. “They’ve created this enormous legal architecture, what one friend of ours calls the ‘corporate architecture of impunity,’ which has spread like grass and gives legal security and certainty to capital. It has nothing to do with the protection of human rights or environmental rights.”

Indeed, among the many problems associated with the expansion of world trade has been environmental degradation in the form of land, air, and water pollution. More recently, however, attention has turned to the more specific problem of carbon emissions, which are largely responsible for climate change. According to the World Trade Organization, the production and transport of goods for export and import account for 20-30 percent of global carbon emissions.

Embedded in many of the treaties governing trade and investment are clauses that give corporations the right to sue governments over regulations, particularly those addressing the environment and climate change, that adversely affect the expected profit margins of those businesses. These investor-state dispute settlement (ISDS) provisions have a “chilling effect on the regulatory system because governments, worried that they will be sued, decide to delay reforms related to climate change,” points out Manuel Perez Rocha, an associate fellow of the Institute for Policy Studies in Washington. “There have been several cases around the world where companies were able to defeat regulatory changes that favor the climate.” Trade rules that privilege corporations over the environment are particularly influential in the realm of agriculture, which is an extractive industry no less powerful than mining.

“The global system of trade and investment contributes to the monopoly control by just a few transnational corporations over fossil-fuel-guzzling agrobusiness, whose products are often transported thousands of miles before they reach a dinner table,” relates Jen Moore, an associate fellow at the Institute for Policy Studies. “At the same time. the system has been decisive in making the lives of millions of small-scale farmers more precarious, undermining their role as a better alternative to mass monoculture operations.”

Carbon emissions are not the only byproduct of the agrobusiness that global trade sustains. “There’s also methane emissions,” adds Karen Hansen-Kuhn, program director at the Institute for Agriculture & Trade Policy. “A lot of methane comes from meat production. Nitrous oxide, which is 265 times more potent than carbon and stays in the atmosphere over 100 years, results from chemical fertilizers.”

These perspectives on global trade—and more environmentally sound alternatives to the “free trade” model—were presented at a December 2022 webinar sponsored by Global Just Transition project of the Institute for Policy Studies and the Ecosocial and Intercultural Pact of the South.

The Rise of “Free Trade”

Throughout the modern era, states throughout the world protected their domestic economies through tariffs on foreign goods and restrictions on foreign investment. Behind these protective walls, states helped local farmers and businesses compete against cheaper imports and deep-pocketed investors.

But states that depended increasingly on exports of cheap industrial goods and surplus food—aided by transnational companies eager to boost their profits—lobbied for the reduction of these barriers. Arguments for “free trade,” traditionally linked to the presumed benefits of globalization, emerged within the most powerful economies in the nineteenth century, but it was more recently, in the 1970s, that states and international institutions dramatically revived this discourse under the banner of “neoliberalism.”

“When we talk about the circulation of capital, we’re talking about trade,” explains Luciana Ghiotto. “That is, import and export for states and the circulation of thousands of vessels and planes for the transport of commodities all around the world. One of the aims of capital is to make that circulation faster, simpler, and easier. Who would not want to make trade easier or faster? Well, the state.”

Faster and more efficient trade, while more profitable for corporations, also has meant a number of negative consequences for states such as job loss among domestic producers. Because of the wide array of free trade agreements and bilateral investment treaties now in force—and the power invested in international bodies to enforce these agreements—states have lost many of the tools they once used to protect or develop national industries.

The spread of the free-trade orthodoxy has had a major impact on the energy industry, which has in turn pushed up carbon emissions. Ghiotto points to the efforts of fossil-fuel corporations to protect their investments in Russia after the collapse of the Soviet Union as a primary motivation to negotiate an Energy Charter Treaty (ECT) in the early 1990s, which guaranteed free trade in global energy markets. The ECT was originally signed by 53 European and Central Asian countries. Today, another 30 countries from Burundi to Pakistan are in the queue for membership.

“The ECT is actually a treaty made specially to protect fossil fuel Industries,” Ghiotto continues. “It’s already been used by investors to protect their investments in the face of state policies. But that was 30 years ago. Now, because of the global climate crisis, states are pushing for other kinds of regulations that are jeopardizing the investments of these corporations.”

Energy companies have taken states to dispute settlements in 124 cases, with around 50 against Spain alone because of its reforms in the renewable energy sector. Companies “have used the ECT as a legal umbrella in order to increase business and profits, or simply to protect their investments against state regulation,” Ghiotto adds. Italy, for instance, instituted a ban on offshore drilling only to be hit by a suit from the UK energy company Rockhopper. In November 2022, the ECT arbitration panel ordered the Italian government to pay the company 190 million Euros plus interest.

“Investors in the mining and oil sector have launched 22 percent of the claims against Latin American states,” she reports. “There was the big case of Chevron against Ecuador. But there have been others. For instance, Ecuador had to pay a $374 million penalty to the French oil company Parenco after the state changed some clauses regarding the amount of taxes the company had to pay in order to give back some of the revenues to the Ecuadorian people.”

Agriculture and Climate Change

Global food production generates 17 billion tons of greenhouse gasses every year. That’s about a third of the 50 billion tons of such gasses emitted annually. The production of beef and cow milk are the worst offenders, largely because of the methane that’s released by the animals themselves. But other major contributors include soil tillage, manure management, transportation and fertilizers.

“Along with Greenpeace and Grain, our institute has been working with scientists to think about how increased fertilizer use is affecting climate change,” Karen Hansen-Kuhn reports. “Fertilizer use has been increasing all over the world. It’s a key part of Green Revolution practices. The scientists we worked with found that the use of nitrogen fertilizer, bringing together the natural gas and the energy used in production along with transportation and the impacts in the field, amounts to more than 21 percent of emissions from agriculture, and it’s been growing.”

According to a map of excess nitrogen per hectare of cropland, countries like China, Netherlands, Saudi Arabia, Pakistan, Egypt, and Venezuela are using more nitrogen for fertilizers than the crops can even absorb. “This excess contributes to more emissions and causes other problems, for instance with run-off into waterways,” she continues. “The incentives right now in the agricultural system are for extreme overproduction, especially around commodity crops, like corn, soybeans, and wheat, which require these cheap chemical inputs.”

Many of these commodity crops are produced for export. The Netherlands is the world’s second largest exporter of food; China is the second largest importer of food but also the sixth larger exporter. The challenge is to continue to feed the world while reducing the use of so much fertilizer. “Many countries are advancing important agroecological solutions like crop rotation, using plants that fix nitrogen in the soil, and doing more composting,” Hansen-Kuhn adds. “These techniques are under the control of farmers, so they don’t rely on imports or trade in these chemical inputs.”

Another strategy, embraced by the European Union, has been to use trade rules to reduce the carbon content of imports and exports. “In Europe, they are currently in the process of finalizing a Carbon Border Adjustment Mechanism,” she reports. “The CBAM mostly applies to things like aluminum, steel, and cement, but fertilizer is part of it as well. A lot of firms in Europe are modernizing their plants so they’ll be more energy efficient. And they say they need protection in order to do that. Under this plan, fertilizer imports coming from other countries that don’t have the same environmental standards would be subject to a fee tied to the price of carbon.”

In theory, the CBAM would push exporting countries to raise their environmental standards and/or make their fertilizer production more efficient. “Maybe these plants will become more efficient,” she adds. “But maybe some firms will just decide to produce fertilizer in other countries. Or maybe in cases where a country has two factories, it will just export from the efficient factory, and there’s no change in emissions.”

On top of that, the CBAM will affect countries very differently. “Most of the fertilizer imports into the EU come from nearby countries like Russia or Egypt,” she continues. “But some imports come from countries like Senegal, where the fertilizer exports to Europe amount to 2-5 percent of their entire GDP. So, the CBAM would be a huge problem for such countries. And there’s nothing in this initiative that would give countries the technology they need to make changes. In fact, there are strong incentives against that in the trade deals. The CBAM provision specifically says that all of the resources generated by the carbon fee will be kept internally to foster the transition within Europe.”

Although CBAM may make European trade greener, it may also widen the “green gap” between Europe and the rest of the world. “We need a transition to agroecology, but what we’re getting in the trade deals lock in new incentives to continue with business as usual,” Hansen-Kuhn concludes. “If we look at the renegotiated NAFTA, there’s a new chapter on agricultural biotechnology that streamlines the process for approving both GMOs and products of gene editing. There are also restrictions on seed saving and sharing. And this new NAFTA will probably be the model for other agreements like the Indo-Pacific Economic Framework.”

Action at the Global Level

Civil society organizations have been pushing for a legally binding treaty at the UN level to make businesses responsible for human rights violations and environmental crimes connected to their operations.

“Since the UN is made up of states, the more industrialized countries who can invest in the world are opposed to such a binding treaty,” Luciana Ghiotto points out. “In the United States, Canada, and Japan, we’ve seen debates about holding companies responsible for human rights violations throughout the production chain. It’s a relatively new political process. But it’s an example of civil society organizations putting a question of human rights and environmental rights at the center of discussion.”

Efforts at the international level are very complicated, Manuel Perez Rocha concedes: “For instance, the World Bank has the International Centre for the Settlement of Investment Disputes (ICSID) through which corporations can sue states.” He recommends a more regional approach. “We have proposed a dispute resolution center for Latin America that countries could use after pulling out of ICSID. “Unfortunately, most progressive countries have not embraced this,” he reports.

One of the challenges to persuading governments to embrace these alternatives is corruption. “There’s a tremendous circle of corruption,” he adds. “We’re talking here about the revolving door where public officials who negotiate these treaties then become private lawyers or counselors or board members of the corporations who are lobbying for their adoption. This corruption helps explain why governments sign these treaties even if they’re going to be sued.”

He points as well to the issue of access to critical minerals needed in the green energy transition. “The Biden administration is trying to combat fossil fuels at the cost of communities that live around the deposits of critical minerals like lithium and cobalt,” Perez Rocha explains. “There are a lot of concerns among native populations about how to make this transition to a so-called clean economy without violating human rights and destroying the environment.”

Trade has been a mechanism to make deals around these minerals. “These efforts at near-shoring and friend-shoring have been ways to control the supply chains around minerals and metals,” notes Jen Moore. “The United States in particular but also Canada have made themselves clear: to be identified as a ‘friend’ is to have an FTA or a bilateral investment treaty.”

There have been other actions at the global level related to climate issues and jobs. For instance, the United States brought action against India in the WTO in 2014 over domestic content provisions in its effort to boost solar energy. India returned the favor two years later over similar domestic content provisions in state-level solar policy. “The WTO deemed both rules illegal,” Karen Hansen-Kuhn recalls. “In the United States, the programs continued, I don’t think any changes were made. But when we think of a just transition, it has to be about not just reducing emissions but about creating jobs.”

Resistance to Business as Usual

Resistance to the corporate-friendly trade architecture has come from many corners of the globe. “From the perspective of my work with mining-affected people,” Jen Moore reports, “there’s been a rise in resistance from farmers, indigenous peoples, and other communities facing the detrimental Impacts of this highly destructive model of capitalist development that’s been accompanied by violent repression and militarization and often targeted violence against land and environment defenders.”

For example, after buttressing the fossil-fuel status quo for three decades, the Energy Charter Treaty is no longer unassailable. In November, the German cabinet announced that the country would withdraw from the ECT. It joins a number of European countries—Italy, France, the Netherlands, Poland, Spain, Slovenia, and Luxembourg—that have made similar announcements. “In times of climate crisis, it is absurd that companies can sue for lost profits from fossil investments and compensation for coal and nuclear phase-outs,” points out the deputy leader of the parliamentary group of the Greens in the German parliament.

The treaty has a surprise for countries that want out: signatories withdrawing from the ECT are still bound by the treaty for 20 years. There’s also a related problem involving the provisions of other trade treaties.

“European countries are pushing to update treaties with Mexico, Chile, and others to include clauses like the investor-state dispute mechanism, which also allow energy corporations to sue governments,” notes Manuel Perez Rocha. “This is nothing short of neocolonialism being exercised against countries on the periphery.” In response, he urges the “strengthening of national judicial systems so that companies will feel more protected by national systems and not pursue options at the supranational level.”

The backlash to the ECT is nothing new. “The system has created a lot of resistance and critiques since practically day one,” Luciana Ghiotto adds. “I was raised in the spotlight of the battle of Seattle in 1999 against the WTO and the struggles against the Free Trade Area of the Americas.”

Karen Hansen-Kuhn agrees that it’s necessary to claim victories. “Civil society helped weaken the ISDS system,” she notes. “With the Transatlantic Trade and Investment Partnership, massive opposition to ISDS was a major reason it fell apart..”

Another form of pushback comes from the field itself. “On our website, we’ve started tracking the adoption of agroecological approaches, which are not just about the inputs but instead look at the fuller picture including food sovereignty, namely each community’s right to choose the food systems it wants,” Hansen-Kuhn continues. She points to Mexico phasing out GMO corn, which relies heavily on the pesticide glyphosate. The government made that decision because of input from civic movements. After objections from the U.S. government, Mexico backtracked somewhat on that commitment by applying the phase-out only to corn for human consumption.

“Mexico is making some concessions, for example allowing GMO for animal feed, but otherwise it’s standing firm despite enormous pressure,” she concludes. “That’s not a complete transition to agroecology, but here’s a country deciding that it will make a change in its food system regardless of what the trade deals say.”

“It’s important to recall the totality of the system supporting corporate control around the world,” Jen Moore says. “Sometimes it feels like we make only piecemeal attempts to go after it.”

Manuel Perez Rocha agrees. “We need to discuss alternatives from different perspectives, which would put an end to the patriarchal, neocolonial capitalist system,” he suggests. “But while we strive for a utopian vision, we also should discuss more realistic, more feasible, and more concrete alternatives. For instance, companies can sue states. Why shouldn’t states have the right to sue companies? Affected communities should also have access to dispute resolutions. We should eliminate the privileges of foreign investors, like the ‘national treatment’ clause, that tie governments down in their efforts to promote local, regional, and national development.”

The Global South has begun to develop a unified voice in the debate on a just energy transition. “In Latin America, we have said that there is no new green deal with FTAs and bilateral investment treaties,” Luciana Ghiotto reports. The region has seen the rise of a number of dynamic organizations from the rural activists in Via Campesina to various indigenous movements and feminist movements articulating a feminist economy. Meanwhile, certain countries have taken the lead. “In its constitution, Ecuador prohibited entry into any international agreements that include international arbitration that compromises the country’s sovereignty,” she adds. “The new neoliberal government is struggling with dozens of lawyers to find a way around it, but they still can’t.”

Another example of successful resistance is the growth of the climate justice movement, which goes well beyond environmental protection and has linked activists across struggles from economic justice and human rights to agroecology and post-growth economics.

“After the disruptions of the last couple years, we can come together more in person,” Karen Hansen-Kuhn notes. “Movements require building relationships in person. We need to come together to build these alternatives.”

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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As of now, Egypt does not seem to have followed the IMF’s policy recommendations. In making the recommendations, the IMF demonstrated a systemic misunderstanding of the fundamental dynamics of Egypt’s political economy. This misunderstanding is bound to exacerbate Egypt’s economic problems and exacerbate the current crisis.

The Military Likes Moolah

For decades, the military has had first claim on Egypt’s resources. The IMF recommends that the military give up its privileged economic position. It also calls for leveling the playing field between the public and private sector. Yet signs abound already that the regime is circumventing these recommendations. In fact, it is deepening the economic footprint of the military.

In January, Sisi issued a presidential decree assigning prized land to the military. The military now has land two kilometers wide on both sides of 31 roads. The military uses this tactic to gain control over commercially viable pieces of land, which it then uses for profit-generating activities. 

Sisi’s government has also instituted an amendment of the 1975 Law 30, which regulates the operation of the Suez Canal Authority. This came only a few days after the IMF deal. Prima facie, this amendment carries out the IMF’s recommendations. It creates the “Suez Canal Fund,” which will invest surplus revenue from the canal’s operations. This fund will also be able “to lease, sell, and purchase assets, establish companies, and invest in financial instruments.”

However, the devil lies in the details. A statement from the president reveals that the new fund will be under the control of a “sovereign entity,” a euphemism for the security services. Furthermore, the amendment provides for no parliamentary supervision for the fund. This means that the military will be able to siphon off hard currency from this fund, which could prove critical for meeting both Egypt’s debt obligations and the import needs of the population. 

Finally, the government has no real plan to sell off state-owned assets as part of the effort to meet its debt obligations. Of the 32 companies it is selling off, only two of them are military-owned. Watanya, the petrol station chain, seems to have been subjected to asset stripping. Most of Watanya’s assets have been moved to ChillOut, another military-owned chain. Deals that have been done are also in trouble. In February, ADNOC acquired half of Total’s fuel stations . There are reports that this Emirati state-owned company is backing out of the deal.

It is clear that, as many predicted, the IMF’s recommendations are meeting stiff resistance. Hence, their implementation is extremely unlikely.

Increasing Inflation and Rising Debt Spell Trouble Ahead

Inflation rose from 21.9% in December to 26.5% in January. Food prices are up. Bread, meat and poultry cost a lot more. The IMF recommended “a shift to a flexible exchange rate while taking measures to help shield the Egyptian population from a mounting cost-of-living crisis.” Inherent in this recommendation is an admission. This shift will exacerbate inflation and worsen the cost-of-living crisis.

In January, Al Jazeera reported that the Egyptian pound had lost half of its value since March. Bloomberg has observed that devaluation has already hurt the Egyptian economy. As of February, the private sector had declined for 26 consecutive months. Scarcities persist and the private sector is struggling. Business sentiment has sagged to its third lowest level since April 2012. Remember, this was a time when the Muslim Brotherhood was in power. 

Finally, Egyptian debt is showing worrisome trends. Even though external debt has declined by 0.5% on a quarterly basis, short-term debt has increased from 11.48% in September 2021 to 27.4% in September 2022. This rapid increase is alarming. Sisi’s regime faces pressure to repay its debt even as investor confidence remains low. So, the regime is relying on short-term borrowing to solve the problem. This debt comes at a higher price. It is issued with higher interest rates, driving up Egypt’s cost of servicing this debt. Unsurprisingly, Moody has downgraded Egypt’s credit rating from B2 to B3, piling up even more pressure on the Sisi regime.

In essence, the prospects for IMF’s policy recommendations are poor. Indeed some of its recommendations will only deepen the crisis and increase poverty. The only possible and durable solution to the crisis is a radical transformation of Egypt’s model of crony capitalism. The IMF economic policy recommendations cannot succeed under the country’s current political system, which the institution implicitly supports.Without a comprehensive understanding of Egypt’s political economy, the IMF will continue to throw good money after bad and its loans will only enrich elites in Sisi’s military regime while inflicting pain on Egypt’s long-suffering people.

[Arab Digest first published this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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A previous article by Fair Observer, “Is The Gold Standard Alive or Dead,” came to the conclusion that a gold standard would be unworkable due to its deflationary bias.  Deflationary bias in terms of gold represents large disadvantages. For example, if a nation backs its currency with the stock of gold, it is faced with the following problem: the above-ground stock of gold is around 200,000 tonnes, while mining produces only about 3,500 tonnes per year. This means that the stock of gold increases by only 1.75% a year. That low growth rate directly dictates the rate at which the money supply in that economy can grow. This would simply not be enough to accommodate population growth and productivity, resulting in a decline in the overall prices of goods and services. So why are central banks, who are surely aware of these limitations to the gold standard, frantically accumulating gold?

A survey by the 2022 Gold Reserves studied 56 central banks, and provided very interesting insights. When asked which topics they considered relevant for “reserve management decisions”, respondents named “low / negative interest rates” as the number one item (chosen by 91% of respondents), followed by inflation (88%) and geopolitical instability (84%). The fact that “low / negative interest rates” was ranked so highly as an influencer of monetary policy is somewhat ironic, since interest rates are typically controlled by central banks themselves. 

Is the Gold Standard Now Alive or Dead?

The same could be said about inflation, although many experts attribute the 2022 inflationary surge to the unprecedented fiscal stimuli alloted in response to COVID-19, as well as the persisting supply chain bottlenecks that occurred when countries went into lockdown. When analyzing the survey results concerning factors relevant to the decision of whether or not to hold gold, two common answers by central banks raise eyebrows: (1) “anticipation of changes in the international monetary system” (which 20% of respondents deemed “somewhat relevant”), and (2) as “part of de-dollarization policy” (which 9% of respondents deemed “somewhat relevant”). While these statistics may seem negligible, their responses  are actually quite revolutionary. 

These insights most likely came from central banks in developing countries, and are an expression of concern regarding the stability of our current international monetary system, which is currently dominated by the US dollar. The severe economic sanctions placed on Russia in response to its invasion of Ukraine have rendered its dollar reserves useless, a fact which has not gone unnoticed by other countries. As a result, many developing countries are now questioning the continued use of US dollars as reserves.

When asked about the reasons for increasing their gold reserves, 39% stated that they did so “as a buffer against balance of payment crises”, while 34% (up from 13% in 2021) claimed their increases in gold serve as a “backstop for the domestic financial system”.

A balance of payment crisis is a common occurrence in developing nations, when import costs, to be paid in dollars, exceed the value of export profits over an extended period of time, leading to an overall shortage of dollars.

But can gold really be used as a “backstop for the domestic financial system”?

Is the Reckless Swiss National Bank Endangering Its Independence?

Can gold really jumpstart the economy?

In case of a breakdown of the international monetary system, the primary concern of most governments will be to prevent the collapse of the domestic banking system, as it would lead to widespread economic depression and civil unrest. Commercial banks will be largely insolvent if this occurs, due to devastating credit losses. Central banks would have to extend fresh loans to reliquefy commercial banks, which they could potentially accomplish with gold reserves.

But is there enough gold to back all currency? The answer is surprisingly simple; yes, there is technically always enough gold – it just depends on the price. However, it also depends on what is defined as “money”.

For example, the current outstanding value of US currency (dollar bills and coins) is about $2.3 trillion. The US government also owns 261.4 million ounces of gold. At the current price of $1,875 per ounce, US gold reserves are worth approximately $490 billion. In order to back all outstanding currency with gold reserves, the price of gold would have to reach $8,800 per ounce, roughly five times higher than it is today.

If gold were to cover all money created by the Federal Reserve (which is equal to its current liability of $8.4 trillion) the price of gold  would have to be upwards of $32,000 per ounce (nearly eighteen times the current price of gold).

If you add to that sum the $17.7 trillion in US bank deposits, the correlating price of gold required would come close to $100,000 per ounce, a practically inconceivable amount compared to today. Furthermore, the widest measure of money in the US, total credit market debt outstanding, has accrued a hefty $92 trillion, which would require a gold price of more than $350,000 per ounce to be fully insured. 

The Reality of Bank Deposits

A bank deposit is a digital token. You cannot take it home. Traditional bank deposits are not issued by a central bank – they are conducted by commercial banks. The moment you walk into a bank and deposit cash, you exchange a central bank’s liability against the liability of a commercial bank. Your counterparty has changed, unbeknown to most.

Bank deposits cannot, in aggregate, be converted into central bank-issued currency, since, as we saw above, the amount of bank deposits ($17.7 trillion) exceeds the amount of available currency ($2.3 trillion) by a factor of eight.

Bank deposits are supposed to match central bank-issued money one-to-one, but with certain limits. In the US, bank deposits are “insured” by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account. According to the FDIC’s 2021 annual report, the Deposit Insurance Fund (DIF) had assets of $124 billion, or 0.7% of all US bank deposits, a mere drop in the ocean of the $17.7 trillion that Americans have deposited into commercial banks – deposits they will eventually want back. Most people think of bank deposits as “money”, when in fact, they are nothing but stablecoin (with a very questionable stabilization mechanism).

Central Banks and the Potential of Digital Currency

A functioning monetary system is crucial for any society, so central banks have contingency plans for all kinds of calamities. Bundesbank, the German central bank, had hidden an entire set of alternate bank notes worth 15 billion deutsche mark (approximately $7.5 billion) in the basement of a house camouflaged as a residential villa in the suburbs of Frankfurt. Bank notes with a new design were ready to be exchanged overnight in case the existing ones had been rendered unusable. The list of potential threats included poisoning, nuclear contamination or attempts to derail the economy by mass introduction of counterfeit bank notes.

According to the CBDC tracker, a website which monitors the status of Central Bank Digital Currency (CBDC) projects across the globe, all major central banks are either in the beginning stages of research or piloting for the introduction of a retail CBDC. The advantages of a retail CBDC for the average user are not immediately clear, but become more evident with further research. 

Most of what we call “money” is digital already. Instant settlement options are being offered by private sector companies (such as Venmo, Zelle, and Cash App), which offer currency for users to trade and distribute that is not backed by a central bank. The massive popularity of these apps have effectively cut time and costs of cross-border transactions across the globe. 

However, a retail CBDC would have one major advantage: being able to offer central bank-issued money directly to users. Currently, the only way for citizens to get access to central bank-issued money is by obtaining cash via a commercial bank. Having a CBDC would allow  central banks in crisis to credit users with new currency, enabling them to bypass commercial banks completely. 

However, for this method to be effective, users would need to establish digital wallets and be comfortable using them. The introduction of CBDC has the potential to resolve many monetary inconveniences. Central banks with gold reserves would be able to offer both partial or full gold-backing for their digital currency. However, countries lacking in gold would not be able to participate in a gold-backed monetary system, and may have to back their currencies with other items, such as government-owned land or the rights to raw materials to be mined in the future.

While unprecedented, combining a 5,000-year store of value (gold) with modern technology (digital currency) could turn out to be just the tool the world needs to reset its monetary system. Once confidence in the novel CBDC system has been established, gold backing could be gradually removed, and the cycle of credit-based monetary expansion could begin anew.

Gold is the anathema to a fiat-based monetary system. Record gold purchases by central banks are a red flag regarding the stability of our current monetary system. When central banks embrace gold, it is an indicator that they are losing trust in the current system. 

This phenomenon was seen previously during the financial crisis of 2008, when commercial banks refused to lend each other money on an unsecured basis. Central banks lacking in gold reserves have good reason to increase their holdings, as it could help them establish their own digital currencies and avoid future financial ruin. Historically, central banks tend to prepare for the worst. Will the combination of gold reserves and digital currency be enough to bail us out? We can only wait and see. [Hannah Gage edited this piece]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post The Great Gold Rush: Central Banks in Frenzy appeared first on Fair Observer.

The Greek national economy grew by 2.2% in the first three quarters of 2019. Unemployment fell to 16.6% in late 2019 though it still remained the highest in the EU. In 2020, Greek Prime Minister Kyriakos Mitsotakis initiated a gradual and promising recovery due to a series of reforms, tax cuts and investment promises. These measures eventually led to growth.

Despite the pandemic and its consequent series of lockdowns that had partly interrupted the process of economic growth by affecting fundamental sectors such as tourism and the naval industry, the Greek economy is now growing steadily. A report by the European Commission forecasted an increase of 6% in the national GDP by the end of 2023. The report proposed a plan to bolster the economy, making 2023 a year for Greek economic recovery. 

The transcript has been edited for clarity.

Alissa Claire Collavo: After more than ten years of crisis, the Greek economy is showing signs of growth. In September 2019, the newly-elected Mitsotakis announced a series of fast-track reforms which the parliament later approved. These aimed at spurring investments and accelerating growth by the end of 2023. What has Greece learned from the economic crisis?

Dimitris Katsikas: The new government has undertaken new measures to increase growth in Greece because their big bet was to make the debt more sustainable. They also wanted the EU to reduce Greece’s fiscal targets. 

To achieve these two goals, the government proposed reforms. One of them was to reduce taxation rates and to improve tax collection. Tax reforms were the main issue during the crisis.

Furthermore, the introduction of the new pension law led to an increase in household disposable income. The government also encouraged investments that had suffered during the crisis. 

Collavo: The so-called “hot money” has done well investing in Greece. Traders looking for short-term returns have profited. Will long term investment follow?

Katsikas: After such a huge economic and financial crisis, Greece had little money left. Therefore, it welcomed foreign investment of all sorts.

The pandemic caused a setback to the economy. Lockdowns affected foreign exchange earners such as tourism and the shipping industry. Things have changed in 2022 and are looking to improve further in 2023.

Collavo: What are the main sectors for investments aside from tourism in Greece?

Katsikas: The main sectors remain tourism, real estate and resorts.  During 2019, there was an increase in bread and breakfast investments. The mortgage system had collapsed and people started renovating their apartments. This was especially the case in the most touristic areas where owners were allowed to shorten leases, creating an inflow of investments. 

Greece is also trying to attract more investments in the urban project around the Ellinikon International Airport. New sectors like IT, research and logistics are attracting investment. So is infrastructure such as the expansion of the ports of Piraeus and Alexandroupolis. These ports have successfully attracted investors from China and Saudi Arabia. Companies from France, Russia and Korea have also come flocking.

Investment in the energy sector has already brought good results too.

Collavo: What is the growth forecast? How will this concretely reflect in the daily life of Greek citizens?

Katsikas: The Greek economy registered its first positive growth right before the pandemic. Unemployment fell to 16.6.% in 2019 from 18.5% in 2018. In 2023, things are improving but wages in part-time/temporary jobs continue to be low. Unemployment continues to remain high and, as a result, wage growth is low.

In 2022, about 4.03 million people were employed in Greece, compared to 3.93 million in 2021 and 3.88 million in 2020. The economy of Greece is finally improving.

[Sukhjeet Kaur edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Will Greece Recover From Its Debt Crisis by the End of 2023? appeared first on Fair Observer.

Both India and Vietnam face a security dilemma because of China’s regional power ambitions. They fear Asian domination by a single power. Being China’s neighbors, India and Vietnam are rightly insecure about their borders. China has invaded both countries in the past: India in 1962 and Vietnam in 1979. 

Han and Hindu Nationalism Come Face to Face

To raise the cost of another Chinese military aggression, India and Vietnam are joining hands to counter Beijing. New Delhi and Hanoi completed 50 years of diplomatic engagement last year. It is the last five years that have been the most consequential in their diplomatic history though. During this period, the countries have been intensifying cooperation and are in a position to act in concert on many fronts.

The Dragon Spits Fire

Assertive Chinese behavior in the last few years has rattled India and Vietnam. Be it salami slicing in the Himalayas or expansive territorial claims in the South East China Sea, Beijing has upped the ante. 

Countries on China’s periphery have borne the brunt of the dragon’s fire. For example, China claims portions of Indian territory in the western and eastern sectors of its border with India. Beijing also frequently crosses into the Indian side of the disputed border. 

Similarly, Beijing continues to claim all of the South China Sea, disregarding the sovereign rights and claims of Vietnam, the Philippines, Indonesia, Taiwan, Malaysia and Brunei. China has also repeatedly targeted Vietnamese fishing boats and carried out maritime activities in disputed areas in the Paracel islands chain. Vietnam claims these islands as its territory. So does Taiwan. However, Beijing exercises de facto control over the island chain. China also controls the Spratly Islands and Woody Island. Beijing is turning these disputed territories into military installations in the South China Sea. 

The roots of China’s assertive behavior lie in its self-perception. Beijing views itself as a natural Asian hegemon with great power status. Now, China is seeking to become a superpower and challenge the US for the top of the global totem pole.

New Delhi and Hanoi, like Tokyo and Canberra, do not accept China’s self-proclaimed hegemony. These countries do not see themselves as subordinate to Beijing. Naturally, they are critical of any attempts by China to dominate the post-World War II regional order. 

This is also true of the other players in the region. They might not admit it openly, but Malaysia, Indonesia, Singapore and South Korea are uncomfortable with Beijing’s unilateral attempts to dominate the region. However, the fear of a backlash from Beijing, a sizable number of citizens of Chinese origin in their own territories and economic dependence on China prevent these countries from voicing their worries. 

Even in 1978, Lee Kuan Yew, the then prime minister of Singapore, caught the Chinese leader Deng Xiaoping by surprise, admitting that he was more concerned about Beijing than about Hanoi. Deng had gone to Singapore to mobilize Lee Kuan Yew’s support against an ambitious Vietnam. The canny Singaporean statesman perceptively understood that the long-term challenge emanated from Beijing. Since then, it is clear that Beijing has aroused feelings of insecurity amongst its neighbors in Southeast and East Asia.

The fear of outright dominance by a single power compels Asian nations like India, Japan, Malaysia, Indonesia, Singapore and Vietnam to seek multipolarity. These nations believe that multipolarity will maintain a stable regional order. Therefore, their geopolitical and diplomatic strategy aims to counter China. These Asian nations are only following what eminent theorists like Henry Kissinger and John Mearsheimer have long posited about achieving a balance of power in international relations. 

Coalescing around shared interests such as respect for sovereignty and territorial integrity, and freedom of navigation of the seas helps regional powers build a coalition against China. Like other Asian countries, both India and Vietnam have concerns about China’s Belt and Road Initiative. Both want a multipolar, rules-based regional order that  constricts the space for unilateral adventures by Beijing. Therefore, the recent “Comprehensive Strategic Partnership” announced by Hanoi and New Delhi seeks to make structural and institutional changes that make multipolarity a reality. 

From the mid-1970s, New Delhi and Hanoi were on the same side of the geopolitical and ideological fault lines in Asia. Vietnam was communist and India was socialist. Both were close allies of the Soviet Union and harbored a deep distrust of the United States. 

Communist Vietnam soon found that ideological similarities could not avoid geopolitical rivalries. Deng was deeply perturbed about the deepening Soviet-Vietnamese relations. Deng sought to teach the Vietnamese a lesson for “backstabbing” Beijing and siding with Moscow. Deng believed that Hanoi sought regional dominance in Southeast Asia and he wanted China to have that privilege.

Vietnam’s invasion of Cambodia to overthrow the Pol Pot regime further poisoned its relations with Beijing. China was Pol Pot’s benefactor. Beijing saw Pol Pot’s regime as a bulwark against Soviet influence in Southeast Asia. Once Vietnam got rid of Pol Pot in Cambodia, Deng attacked Vietnam in 1979. India stood by Vietnam. Moraji Desai, the then Indian prime minister, issued a statement calling for an immediate withdrawal of Chinese troops from Vietnam as the first step towards ensuring peace in Southeast Asia. Atal Bihari Vajpayee, India’s then foreign minister, shortened his visit to China in protest against this invasion. 

Polygamous Foreign Policy

Over the years, New Delhi and Hanoi have followed a multidirectional foreign policy. Neither wanted to anger their giant northern neighbor. Both regularly championed the idea of “strategic autonomy” that focuses on avoiding sclerotic alliances and security commitments. Given the structural changes in Asian geopolitics due to China’s rise, both India and Vietnam are moving closer.

Yet there are limits to Vietnam’s relationship with India. Retired Singaporean diplomat Bilahari Kausikan believes that given their relatively small sizes and strategic location, major Southeast Asian countries have no choice but to pursue a polygamous foreign policy. As a result, these countries seek friendship with all and confrontation with none. Vietnam is no exception.

By simultaneously juggling many relationships and contradictions, Vietnam aims to diversify its partners. Fundamentally, Vietnam uses these partnerships to pursue its national interests. India is following the same mantra. India buys oil from Russia, conducts military exercises with the US and welcomes investment from Japan. It is friends with Israel and, at the same time, maintains relationships with Iran. Like India, Vietnam also has meaningful strategic partnerships in place with all five members of the UN Security Council. Both India and Vietnam have defied conventional Cold-War era wisdom of making binary choices. 

Indo-Vietnamese Push for Multipolarity

Over the last few years, Vietnam has become a focal part of India’s “Act East Policy.” As a result, defense and security collaboration have improved. This includes joint exercises and training programs, cooperation and trade in defense equipment. New Delhi has also given $600 million of defense lines of credit to Hanoi. 

Increasing trade and commercial linkages have brought both countries together. Bilateral trade has ballooned from $200 million in 2000 to $14.114 billion in 2021-2022. Several Indian companies are investing in Vietnam. They are in diverse sectors such as IT, education, real estate, textiles and garments, healthcare, solar technology, consumer goods, and agricultural products. India is supporting Vietnam with infrastructure and connectivity projects, development and capacity-building assistance, and digital connectivity. Despite Chinese apprehensions, India also has oil exploration projects with PetroVietnam in the South China Sea. Cooperation in science and technology has also grown at a healthy pace. 

Slowly and surely, a silent change is unfolding in Asian waters. China’s increasing aggression is no longer going unanswered. The Indo-Pacific will not become a Chinese lake. Regional powers are responding. Not only the US and Japan but also India and Vietnam are working more closely together to preserve a multipolar Asia. 

[Contributing Editor and CFO Ti Ngo edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Vietnam and India Are Now Acting to Contain Aggressive China appeared first on Fair Observer.

The US claims to be a representative democracy, meaning the people’s elected officials are obligated to consider their constituents’ ideas, interests, concerns, and welfare in making political decisions. However, the reality is that US politicians feel indebted to the megadonors who finance their elections, and as a result, choose to serve not the people who voted them into power, but the financiers who made their election to office a reality. 

Will American Democracy Perish Like Rome’s?

The rich have US politicians on a leash. In 2017, the then president, Donald Trump, was accused of meeting with his 2016 campaign megadonor, Sheldon Adelson, for counsel on how to address the mass shooting in Las Vegas, a horrific attack that killed 59 people and injured over 500 at a country music festival. That was two days before Trump finally arrived in Las Vegas to meet with the surviving victims and the families mourning the dead. Trump has denied these allegations, claiming that the timing of his meeting with Adelson was purely coincidental, and had nothing to do with the fact that Adelson had major investments in Las Vegas.

The US electoral system is incredibly corrupt, as demonstrated by its recent election of the House Speaker, an event that will go down in history as one of the most notorious examples of the inefficiency of American politics. The country seems to be exclusively  run by two conflicting political parties: the Democrats and the Republicans. Consequently, the nation has become extremely politically polarized, and many Americans experience daily frustration and anger over conflicting political beliefs. 

Economic disparity and discrimination are particularly oppressive to minority groups including Native Americans, blacks, Latinos, and now Muslims. The gap between the rich and the poor is deep and ever-widening. Approximately 32% of all wealth in the US is held by only 1% of the population, an alarmingly disproportionate statistic. Even more concerning is that at the same time, over 11% of Americans live below poverty level.

A 2020 article by The New York Times described the economic disparities in the United States quite accurately, stating that, “Americans may be equal, but some are more equal than others.” Even when the US is in a deep deficit, the government tax policy consistently favors the rich, despite the fact that 60% of Americans believe the nation’s wealthiest should pay more taxes.

The Trump Dynasty is as Dysfunctional as the Windsors

The United States government (USG) is entangled with the rich, the “deep state” of America. By definition, any  government whose power, either overtly or covertly, is controlled by a small group of wealthy constituents, is called plutocracy. Former US president Jimmy Carter once alluded to the plutocracy of the US political system, describing it as, “an oligarchy with unlimited political bribery.”

The Incentive for Corruption

Because political candidates in America require substantial funding to run their campaigns, they become obliged to the rich. To win a Senate seat, a candidate spends an average of over $10 million. According to The Washington Post, the 2016 presidential candidates, Hilary Clinton and Donald Trump, spent a combined sum of over one billion dollars on their political campaigns.

The wealthy also use their power to manipulate the media, flooding broadcasting platforms with polarizing advertisements and persuading the American public that the only votes that count are votes for either the Democratic or Republican parties. 

This sort of propaganda makes many Americans feel overwhelmed and confused about  which candidate they  should be voting for, and some even choose to abstain from voting at all because they don’t support either candidate. Many Americans are ignorant that the elections are a scheme to make them think about having a voice in the government. However, the choice of who ultimately becomes president, congressman, or other official is usually left to the two political parties at the mercy of the rich. 

Even at the state level, wealthy Americans control political candidates and elected officials by donating to their campaigns. The rich also use their financial power to marginalize certain communities through a process called gerrymandering, in which the boundaries of electoral districts are strategically drawn in a way which favors one political party over the other. . Minorities, the poor, and the least educated are usually the victims of this unethical practice.

Understanding Racial and Partisan Gerrymandering

A Call For Reform

Without ethical standards in place to ensure equal opportunity and constitutional rights for all citizens, democracy can easily become what John Adams called, “the tyranny of the majority.” Thomas Jefferson also purportedly claimed that democracy can often resemble mob rule, and this comparison has a ring of truth.

The USG must reform.The country’s current system is riddled with corruption and will not be sustainable long term, as evidenced by the 2021 insurrection at the U.S. capitol building. At the very least, steps must be taken to make sure that campaign funding is democratic and fair first by cutting all  government funding to individual campaigns and political parties, and instead requiring the media to allocate “equal air time” at no cost to candidates. Second, the USG must create and enforce regulations to limit campaign funding and prevent “megadonors” from manipulating elections and government policy.

To alleviate the megadonors’ influence, the USG could limit all contributions from all sources equal to what an average-income American is willing to contribute to a candidate. PACs, unions and other associations can multiply that amount by the number of their active members. However, no member can be allowed to double-dip, individual and in group.

Only when the United States takes steps to implement these changes will the nation begin its ascension to true democracy. 
[Hannah Gage edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post The Truth About US Democracy appeared first on Fair Observer.

“The dollar became a powerful tool in managing and controlling the global economy through several historical and political events. One of the main reasons was the Bretton Woods Agreement in 1944, which established the US dollar as the world’s primary reserve currency. The agreement also pegged other currencies to the dollar, making it the standard for international trade and finance. Additionally, the economic and military dominance of the United States after World War II solidified the dollar’s position as a dominant currency. The establishment of the International Monetary Fund and the World Bank, both of which use the dollar as their primary currency, further reinforced its role in the global economy. Over time, the widespread use of the dollar in international trade and finance has made it a key tool for managing and controlling the global economy.”

Fair Observer’s Breakfast Conversation with New Friend Chad, aka ChatGPT

That was helpful, but I wasn’t totally satisfied, so I reminded Chad that there may have been more to it and followed up with this question: “You failed to mention another critical event that increased the role of the dollar: Nixon’s decoupling of the dollar from gold. Don’t you think that was important?”

Always humble, Chad offered this much more satisfying response: “I apologize for not including the decoupling of the dollar from gold in my previous answer. Yes, that was indeed an important event in the history of the dollar. In 1971, President Nixon suspended the convertibility of the US dollar into gold, effectively ending the Bretton Woods system. This move allowed the US to print more dollars and helped to finance government spending and international trade, increasing the global demand for the currency. The dollar’s dominant position in the world economy was further solidified by the fact that most countries continued to hold dollars as their primary reserve currency even after the end of the Bretton Woods system. The decoupling of the dollar from gold thus played a significant role in the dollar’s rise as a powerful tool in managing and controlling the global economy.”

Thank you, Chad. This is a state of affairs that economist Michael Hudson has explored in depth in his book, Super Imperialism and elsewhere. He considers it a very unlevel playing field when one country obliges the rest of the world to hold its money, meaning that the more it goes into debt the richer it becomes and the more every other country in the world becomes dependent on the health of that country’s economy! It has literally made the dollar monopoly money.

*[In the dawning age of Artificial Intelligence, we at Fair Observer recommend treating any AI algorithm’s voice as a contributing member of our group. As we do with family members, colleagues or our circle of friends, we quickly learn to profit from their talents and, at the same time, appreciate the social and intellectual limits of their personalities. This enables a feeling of camaraderie and constructive exchange to develop spontaneously and freely. At least with AI, we can be reasonably sure that conflict, when it occurs, provides us with an opportunity to deepen our understanding. And with AI we can be certain that it will be handled civilly. After all, there’s no way to punch a disembodied voice in the mouth.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Breakfast with Chad – Dollar hegemony appeared first on Fair Observer.

Poor economies are now paying more for stuff, getting less for their exports and seeing rising deficits. In turn, these increase debts. And rising interest rates, a necessity because central banks have to combat inflation, mean that the cost of servicing existing debt and of borrowing new debt has shot up. As a result, there is a food and debt crisis in the poorest countries. Countries like Sri Lanka, Pakistan, Bangladesh and Argentina are going with a begging bowl to the International Monetary Fund (IMF).

It is not just the poor who are suffering. Europe is going through a tremendous crisis. Elections in Italy, Hungary and Sweden have reflected that phenomenon. Germany is under tremendous strain. German industry is reeling: the legendary Mittelstand is turning into Mittel-kaput.  Deutsche Bank economist Stefan Schneider has said: “When we look back at the current energy crisis in 10 years or so, we might consider this time as the starting point for an accelerated deindustrialization in Germany,”

Singh takes the view that quantitative easing that began with the 2007-08 financial crisis followed by lots of pandemic spending has created a perfect storm. The former was akin to the Spanish discovery, loot to be precise, of silver in the New World that caused asset bubbles, especially in stock markets and housing. The latter led to governments ballooning deficits and debts. The Russia-Ukraine War has pricked the bubble and the chickens have now come home to roost.

Glenn Carle is more optimistic. He points out counterpoints to the alarming stresses and trends that Singh emphasizes. Carle makes the case that inflation is down in the US, growth trends are strengthening and the shift to renewable energy is slowly but surely occurring. As per this retired CIA officer, “as goes the US economy, so goes the world economy” even though 18-24 months later. 

Yet Carle is not pollyannaish either. He points out that 350 million people are starving today. The Russia-Ukraine War has led to a global food crisis. Risks of economic, social and political collapse have increased. For Americans, the cost of gas is the issue. For many other countries, the crisis is far more existential.

The food, fertilizer and fuel crisis is something that concerns the Global South. India as the leader of the G20 had highlighted this crisis in a recent conference in New Delhi. In short, poor countries are suffering terribly.

Singh adds that the US has the advantage of cheap gas, top universities and new technologies. The American economic engine can turn these new technologies into successful businesses. However, American success might be on the backs of European failure. As European businesses go under because of expensive gas prices, American companies might take their place. So, the American economy might do well at the cost of economies in many other parts of the world.

Carle sees a silver lining. He thinks American technologies, especially in green energy, will eventually benefit the rest of the world.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Exclusive: Where is the Global Economy Headed in 2023? appeared first on Fair Observer.

With the benefits of the 2017 goods and services tax (GST) coming into play, India has finally become a common market. India has also brought in reforms such as the Real Estate Bill and the Insolvency and Bankruptcy Code that have increased the formalization of its economy, bringing large efficiency gains. Furthermore, India is building infrastructure at a record pace that will have a massive multiplier effect on growth rates in the years ahead.

Incomes are rising, the middle class is growing, urbanization is increasing and the rural-urban divide is decreasing. This is boosting consumption and Indias are spending more on health, education, leisure, technology and lifestyle products. As of January 28, 2022, India is home to 85 unicorns with a total valuation of $287.89 billion.

At a time when geopolitical tensions between China and the West are rising, India is the only economy with the scale, the population and the markets to be a driver of global growth. This India story is yet to be understood fully and the panel at IIT Gandhinagar sought to make sense of it.

The views expressed in this article/video are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Live: India as a Driver of Global Growth appeared first on Fair Observer.

Rising inflation means an end to the Goldilocks economy of low interest rates that began in 1991. Then, the Soviet Union fell. In 1992, Deng Xiaoping’s Nanxun tour, the historic tour of South China, put China firmly on the market reforms path. As a result, China became the factory of the world. This entry of hundreds of millions of workers from the former communist and socialist economies dampened labor costs. Inflation declined dramatically, allowing low interest rates to prevail. Central banks failed to calibrate this dramatic shift in the new realities regarding inflation.

After the 2007-08 financial crisis, central banks did not only lower interest rates but also practiced quantitative easing. This policy is a modern way of printing money. This monetary easing, the unleashing of liquidity in the economy, led to asset market bubbles. This has parallels with the Spanish and Portuguese finding silver in modern day Latin America, a third of which found its way into China and led to the collapse of the Ming Dynasty.

That La La Land era of low inflation and low interest rates is now over. The Soviet collapse in 1991 caused a benign supply side shock. The Russian invasion of Ukraine in 2022 has caused a malign supply side shock. Now, interest rates have to rise to keep the price of milk, bread, eggs and butter, if you can afford it, in check. However, rising interest rates will make life difficult for businesses and households with mortgages.

Debt has become more expensive and servicing the debt has become more difficult. Indebted households, companies and countries will now be in trouble. During the COVID era, fiscal loosening, i.e. spending more than earning, increased debts dramatically. Servicing these debts has just got more difficult.

On June 28, the World Bank observed that 58% of the world’s poorest countries are in debt distress. The danger is spreading to some middle-income countries too. In the words of the World Bank: “High inflation, rising interest rates, and slowing growth have set the stage for financial crises of the type that engulfed a series of developing economies in the early 1980s.”

China’s economic decline has lowered Chinese demand for commodities from suppliers from places like Latin America and Africa. These economies now have to pay higher bills at the same time as many face an earnings crisis. Their current account deficits are rising and so are their debts. Countries like Argentina, Turkey. Ghana and Sri Lanka are being called submerging economies.

Rising inflation, interest rates and debt are causing a massive squeeze on the global economy. After the heady days of fiscal loosening and quantitative easing, a prolonged global recession and a decade of low growth, if not stagnation, loom ahead. The chickens have come home to roost.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Explainers: Is a Global Recession Coming? appeared first on Fair Observer.

Alan Greenspan, former chairman of the Federal Reserve Bank, in a 2016 interview stated “If we went back to the gold standard as it existed prior to 1913 it would be fun. Remember that the period 1873 to 1913 was one of the most progressive periods economically that we have had in the United States.”

Current chairman Jerome Powell, however, does not think a return to the gold standard would be a good idea. Economist John Maynard Keynes famously referred to gold as a “barbarous relic,” which was no longer needed as a backing for currency.

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What is a gold standard and why is gold valuable?

A gold standard is a monetary system where a country’s currency has its value linked to gold. This can be done directly, by setting a fixed price of gold to the dollar, or indirectly, by other currencies setting a fixed price in relation to the dollar, thereby linking indirectly to gold. One could imagine a full gold standard, where 100% of paper money issued must be backed by gold. Another option is a partial backing, covering only a fraction of money supply that is backed by gold. Under the Bretton Woods currency system, only non-US official holders of dollars (i.e. central banks) were able to exchange dollars into gold at the fixed price of $35 per ounce. Private ownership of gold in the US was outlawed under President Franklin Delano Roosevelt in 1933. President Ford legalized gold ownership in 1974.

The amount of above-ground gold is limited (estimated around 200,000 tonnes). The amount of gold contained in ores has been declining as most rich deposits have been exploited. The average grade of gold mines has fallen to 1 to 5 grams per ton. Large amounts of energy are needed (to crush and transport rock, for example), limiting how much gold can be economically mined. Over the past decade, annual mining output ranged from 2,800–3,600 tonnes, adding less than two percent annually to the stock of gold available.

Pros and cons of a gold standard

The idea behind a gold standard is to ensure a stable currency that is the bedrock of a well-functioning economy. A currency collapse impoverishes large sections of the population. This could lead to political extremism, and, ultimately, threaten democracy. Historians point out how hyperinflation in Germany led to the rise of Nazis.

There are several advantages to a gold standard, which are as follows:

1. Linking the growth of money supply to the growth of gold stocks would keep inflation in check, thereby ensuring monetary stability.
   
2. Government spending would be limited to the amount of tax receipts. Any deficit financing via debt issuance would require additional gold.
   
3. Central banks would be immune from political pressure as the amount of money in circulation is determined by gold.

However, there are considerable drawbacks, which are as follows:

1. Under a gold standard, growth of money in circulation would be severely restricted and could suffocate economic growth.
   
2. Fixed supply of money would be deflationary, and most likely lead to a period of depression with bankruptcies and high unemployment.
   
3. The expansion of money supply would depend on successful gold mining operations and continued investment in exploration of new deposits.
   
4. Gold standards in the past might only have worked because the stock of existing gold was much lower. So an increase in the stock of gold was possible. The 46% growth rate of gold stock between 1900 and 1909 would be impossible to repeat today.
   
5. Policy makers would be unable to respond to economic shocks.
   
6. Not all countries have equal access to gold for lack of gold mines or existing reserves.
   
7. International trade deficits, if settled in gold, would, over time, lead to a depletion of gold reserves, leading to a balance of payments crisis coupled with the inability to pay for critical imports.
   
8. In the (unlikely) event that the amount of gold available would allow for additional debt to be issued, who would be entitled to do so? The government? Banks? Households? Who would decide on who has access to fresh debt?

The problem with a gold standard

In August 1971, US President Richard Nixon “temporarily” suspended the convertibility of the US dollar into gold, effectively ending the gold standard. Since then, the total amount of US dollar debt outstanding has increased from $1.6 billion to $92 trillion — an annual expansion rate of 8%. During the same time, gross domestic product (GDP) has grown from $1.1 billion to $25.7 trillion, an annual increase of 5.8%. Debt, synonymous with “money,” is growing faster than GDP.

Most economic activity is dependent on the availability of credit. An increase of average 30-year mortgage rates in the US from 2.7% at the end of 2020 to over 7% in October 2022 has led to a decrease in existing home sales from 6.5 million to 4.1 million, a 36% reduction. Potential homeowners without access to debt would have to accumulate the entire purchase price through savings for an “all-cash” deal, which would exclude most people from being able to afford a home in their lifetime.

Proponents often counter that a gold standard could be flexible, with adjustments of the amount of gold backing (downwards) or the price of gold (upwards, hence devaluing the currency) as necessary. But how would that be different from the current system? A flexible gold standard would let imbalances accumulate over time, require large adjustments, introduce speculation, financial friction, and potentially unintended consequences. The cure could turn out to be worse than the disease.

The current monetary system is unsustainable

The current fiat monetary system seems unsustainable in the long run, for mathematical reasons. 

First, it is impossible to create money without simultaneously creating an equal amount of debt. The current system is “damned” to increase debt continuously to enable the economy to grow. Given positive interest rates, debt with interest owed is an exponential function (interest on interest in subsequent periods), which is a problem in a world of finite resources.

Second, the marginal utility of debt has decreased as debt levels increased. Since 2007, US GDP increased by $11 trillion, while the amount of debt outstanding grew by $40 trillion. In other words, an additional dollar of debt generates only 27 cents of additional GDP. Interest on debt is owed annually (and increases the debt pile), while GDP resets on January 1^st to zero. It gets harder and harder to generate additional GDP with additional debt.

Third, the amount of interest due on rising debt levels is reaching dangerous levels. According to the Institute of International Finance (IIF), the global ratio of debt to GDP stands at 343%. If we (generously) assume an interest rate of three percent, more than 10% of GDP is siphoned off the economy for interest payments – every year. This does not even include repayment of principal.

Is return to the gold standard inevitable?

Would a crisis or collapse in the current system open the way for a return to the gold standard? Central banks, while denying gold had any monetary function, still hold more than 36,000 tonnes of gold valued at more than $2 trillion at current market prices ($1,838 per ounce; 1 metric tonne = 32,150.75 troy ounces). Central banks reduced their gold holdings from 1968 to 2008. Interestingly, gold sales ceased after the “Great Financial Crisis” of 2008/9, and central banks began purchasing between 250 and 750 tonnes annually.

Over the past two decades, purchases have been led by countries mostly outside the Organisation for Economic Co-operation and Development (OECD ), led by Russia (1,875 tonnes), China (1,447 tonnes), India (428 tonnes), Turkey (373 tonnes) and Kazakhstan (324 tonnes).

In absolute terms, the largest holders of gold are the US (8,133 tonnes), Germany (3,355 tonnes), the International Monetary Fund (IMF), (2,814 tonnes), Italy (2,452 tonnes) and France (2,437 tonnes), mostly “old world” countries. Members of the euro-area, including the European Central Bank (ECB ), hold a combined 10,771 tonnes. But none of those countries are adding to their holdings, since doing so could signal to markets a dwindling confidence in their own currencies. Emerging market economies have, in absolute terms and relative to GDP, to catch up to developed ones.

The advantage of gold holdings is evident: in a currency crisis, a central bank could arbitrarily set a (dramatically increased) gold price, thereby realizing a large revaluation gain on existing gold holdings. Euro-area central banks could, for example, by raising the price of gold ten-fold, generate a book gain of roughly 6 trillion euros. In a recent interview, Klaas Knot, Governor of the Central Bank of the Netherlands, suggested gold revaluation as a tool to remedy any solvency crisis.

As a bonus, gold revaluation would lead to windfall profits at private owners, potentially providing consumers with a boost in otherwise dire economic circumstances. According to reports, German citizens privately hold more gold than the Bundesbank, Germany’s central bank.

For the US, the outcome is less clear. Data on private ownership of gold in the US is not available. The Federal Reserve, unbeknown to most, does not own any gold. The Gold Reserve Act of 1934 required it to transfer all of its gold to the Treasury. In exchange, the Fed received a “non-redeemable gold certificate,” valued at the “statuary” gold price of $42.22 per ounce, a fraction of today’s market price ($1,838 per ounce). The Fed is “owed” 261 million ounces, but only at the book value of $11 billion, due to the mandatory gold price of $42.22.More than 75% of US gold is actually controlled by the military, as it is stored at West Point and Fort Knox.

The European Central Bank (ECB), on the other hand, values its gold at market prices (currently worth around EUR 600 billion, about $633 billion), listing it above all other assets. The ECB is free to sell or buy gold in the market.

The Federal Reserve cannot sell any gold since it does not own any. It might also have difficulties buying gold at market prices since this would, due to the above-mentioned mandatory gold price of $42.22, create an immediate loss on the position.

The Fed’s hands are tied regarding gold. As the issuer of the world’s reserve currency, demonetizing gold was necessary for the dollar to replace gold as prime reserve asset for central banks around the world.

This reveals a fundamental rift across the Atlantic Ocean: European central bankers are, albeit covertly, gold-friendly, the Federal Reserve is not. The former is ready to use gold as a tool to recapitalize its central bank (and subsequently commercial banks), while the latter is not.

In case of a break-down of the current monetary system, an international conference (akin to Bretton Woods) would unlikely be able to agree on a common position on the role of gold. This would signify the end of the dollar as the world’s reserve currency. In the ensuing turmoil, market participants would value currencies issued by central banks with sufficient gold holdings. Central banks will not revert to a gold standard, given before mentioned disadvantages, but use their revalued holdings to restore confidence in the continued use of paper currencies.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Is the Gold Standard Now Alive or Dead? appeared first on Fair Observer.

This month, the gods have fallen to earth. None other than Mark Zuckerberg fired 11,000 employees, about 13% of his company’s workforce. Other tech companies have also been firing employees. The reason is simple: profitability has been decreasing and share prices have been falling.

Financial reports of many tech companies disappointed markets because of a combination of poor investments, bloated expenditure and iffy vanity projects. Zuckerberg’s fixation with the metaverse has not gone well. Neither has Elon Musk’s takeover of Twitter. Sam Bankman-Fried, the celebrated crypto billionaire is now under arrest.

Atul Singh and Glenn Carle make sense of this collapsing tech bubble, analyze the causes for this collapse and examine its potential consequences.

The views expressed in this video/article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post FO° Exclusive: Why Tech Collapsed and What Happens Now appeared first on Fair Observer.

These trends have become evident in Indonesia, a large developing country in southeast Asia with a population of  277 million. After the hosting of the G20 summit in Bali this November – in a context of a faltering post-COVID global recovery and growing conflict between the West and both Russia and China – now may be the perfect time to consider how technology and politics are interacting in the biggest democracy in the Islamic world. Indeed, promoting digital transformation is one of the country’s G20 priorities.

Indonesian politics goes digital

Indonesia’s rapid democratic transformation got underway with the fall of the nation’s military dictator, Suharto, in 1998. Indonesian politics has since featured regular elections and mostly peaceful handovers of power. Decentralization measures have empowered Indonesia’s provinces and municipalities under the leadership of directly elected local leaders.

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The dictatorship’s “court politics” centralized in the capital Jakarta, with everyone else as passive spectators, has thus been replaced by an astonishingly vibrant and diverse political landscape at all levels of society and across different territories. Indonesians are proud of their country and, with annual GDP growth commonly exceeding 5%, are confident their children will live better than they do. Corruption and maladministration however remain widespread challenges.

The digitalization of Indonesian politics has amplified the country’s democratic trends. Indeed, Internet penetration is high and there are now an estimated 191.4 million social media users in the country, over two thirds of the population. Social media use has risen dramatically across much of Asia, with Hootsuite estimating that Indonesians spend on average over three hours on social media per day.

Joko Widodo, the country’s president, who came to power as an outsider in 2014 and was reelected in 2019, maintains a strong social media presence with almost 50 million followers on Instagram and 19 million on Twitter. Local and regional political leaders have also been able to amass considerable social media audiences and the clout that goes with it.

For activists and ordinary citizens, political use of the Internet media is as diverse as Indonesian society. Progressives use social media to challenge the country’s traditional norms on LGBTQ issues. Environmental activists denounce deforestation and the dumping of plastics in the sea, and Islamic groups recruit new members via well-crafted online messaging.

Censorship in Indonesia: a varying social and political reality

However, there are limits to what can be said online in Indonesia. This is partly determined by social pressures and the uneven enforcement of censorship and blasphemy laws by national and local authorities and courts.

“You can go to jail or be forced to pay huge fines for criticizing how a hospital is run or a local public figure” said Patrick Ziegenhain, a professor of international relations at President University in Cikarang, West Java. “That’s why you have to be careful what you say, but enforcement is rather selective and a bit random.”

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The more religious elements of Indonesian society often take the lead in enforcing social norms. In one case, the popular bar chain Holywings got in trouble for a special promotion offering a free bottle of gin for men named “Muhammad.” This use of the name of the Prophet of Islam sparked outrage among many Muslims.

In 2019, President Joko Widodo chose as his vice-presidential running mate Ma’ruf Amin, a conservative cleric. Just this month, the country adopted a new criminal code which campaigners say poses a threat to women’s and LGBT rights. At the same time, the activities and expression of more radical Islamic groups can be harshly restricted, as are those of separatist movements in territories like the island of Papua and the province of Aceh.

As in the West, there is sometimes a conflict between liberal rights and democracy understood as majoritarianism. As the Bertelsmann Foundation’s Transformation Index entry for Indonesia has noted:

[T]he high levels of support for democracy [in Indonesia] seemingly collide with the simultaneously strong support for nondemocratic stances. For instance, in a September 2019 survey, 52% of Muslim respondents objected to the idea of a non-Muslim becoming governor. … Indeed, for many conservative Muslims, a stronger role for Islam in state organization is not only compatible with democracy – it is, for them, inherently required by democratic values, given that Muslims constitute the largest religious group in Indonesia.

Political use of social media

Use of social media by citizens for political purposes is often superficial. Many young people get most of their news from social media and can be overly trusting of what they encounter. Others may simply not want to express critical views online.

“There is sometimes not enough critical thinking among young people in Indonesia,” says Max, a recent university graduate in political science. “Critical thinking can be seen to be too defiant and so looked down upon. There is a strong conformist culture and not everyone has the courage or the self-confidence to stand up to that.”

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Social media “buzzers,” the local influencers, can acquire vast audiences and occasionally make political comments. Public figures may, rightly or wrongly, attract negative attention and get “mobbed” by hordes of critical commenters online.

So far, the digital transformation of Indonesia does not seem to have led to the intense social and political polarization that we see in many Western countries. As elsewhere however, Indonesian life will continue to be transformed by the adoption of new technologies in many fields.

This is especially so because Indonesia is a highly tech-friendly society. Earlier this month, Ridwan Kamil, governor of West Java, took to Twitter to highlight his province’s promotion of technology in agriculture: motorcycles are being used to plant rice and drones for spraying pesticides or liquid fertilizers.

Technologies empower us but are, arguably, morally neutral and can be used for good or ill. Across the world, how we use new technologies will determine whether these worsen our societal problems or whether we can shift to sustainable societies and maintain our social cohesion.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Digital democracy in Indonesia: an Asian Giant in Constant Transformation appeared first on Fair Observer.

How to lose 1/6th of GDP

The loss is almost entirely due to foreign investments. Around half of the losses of $74 billion (CHF 70 billion) came from fixed income securities. As global bond prices fell, so did the value of these securities. Another $57 billion (CHF 54 billion) came from losses in equities, among them many US technology stocks. The loss wiped out almost three quarters of the bank’s equity. How did we get here?

In March 2009, the SNB began to purchase euros to stop the rise of the Swiss franc. The mission failed, as the euro continued to fall against the Swiss franc (from 1.46 to 1.26). Within two years, investments in foreign currency mushroomed from $50 billion (CHF 47 billion) to $216 billion (CHF 204 billion) by the end of 2010. That year, the SNB lost $27 billion (CHF 26 billion) on foreign investments. Early that year, newspapers such as Neue Zürcher Zeitung der SNB warned of “concentrated risks” and “harsh losses” due to outsized positions in foreign currency.

Doubling down

On September 6, 2011, the SNB announced that it would “set minimum exchange rate at CHF 1.20 per euro” as “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development”. It announced, “With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities”.

Foreign exchange markets are characterized by enormous trading volumes. An average of $7.5 trillion are traded per day. This number is ten times larger than the annual Swiss GDP. Central banks have attempted many times to influence exchange rates. Most attempts have failed. To be fair, some succeeded such as the 1985 Plaza Accord to weaken the dollar and the 1987 Louvre Accord to stop its decline. Note that successful attempts always involved multiple central banks.

Unfortunately, the SNB took its decision unilaterally, without help from the European Central Bank (ECB). The ECB released a statement it had “taken note of this decision, which has been taken by the Swiss National Bank under its responsibility”. This is central banker speak for “good luck – you are on your own”.

The Swiss franc’s share of world currency reserves is less than 3%. It was pure hubris to think the SNB could manipulate the exchange rate of the Swiss franc given how much larger the euro (20%) and US dollar (60%) happen to be.

Did SNB contribute to negative German yields?

For the SNB, a dilemma presented itself: what to do with all the euros purchased? Remember, this was in the middle of the euro crisis. Greek government bonds were yielding over 20% but they were risky. Losing money on such bonds would have looked terrible. Therefore, German government bonds were the go-to solution. This helped drive German government bond yields even lower, increasing the spread to “peripheral” sovereign issuers — the so-called PIIGS; Portugal, Italy, Ireland, Greece, Spain.

Understandably, the ECB was not particularly happy about Swiss purchases of German government bonds. And it led to another problem: acquiring German government bonds at negative yields would effectively be a transfer of wealth from the Swiss to the German taxpayer.

This forced the SNB to venture into other currencies still offering positive yields, like the US dollar, and, by extension, US stocks. At the end of 2021, its holdings exceeded $11 billion in Apple, $9 billion in Microsoft, $5 billion in Amazon and $3 billion each in Tesla, Alphabet A (formerly Google), Alphabet B and Meta (formerly Facebook). In total, the SNB owned 2,719 different US stocks worth $166 billion, a sum of $19,000 per Swiss inhabitant. Among earlier holdings were also 1.8 million shares of Valeant, a healthcare company that turned out to be an accounting fraud, which subsequently saw its stock price fall from over $260 to below $10.

Should a central bank invest in foreign assets?

A central bank generates seigniorage gains by pushing zero-yielding currency into circulation while investing the proceeds in assets, usually bonds, carrying a positive return. If your counterparty is domestic, the transfer of assets stays “within the country.” Some income is being transferred from those domestic counterparts to the central bank. The central bank makes a profit, pays salaries, and transfers the rest to the government. It’s a kind of tax.

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But if you do the same with non-domestic counterparties you are “taxing” other countries’ citizens. US shares purchased by the SNB are not available to other investors or, if they are, then only at a higher price. Perhaps the SNB even contributed to the bubble in technology stocks. Because the SNB was forced to invest its euros and dollars it became what is called a price-insensitive buyer. It had to buy something with the money printed. Price-insensitive participants distort market prices. When an individual distorts markets, he will go to jail. Central bankers face no such consequences.

Negative effects on large-scale purchases of foreign currency are not limited to the asset side of the balance sheet. For every euro, dollar or yen purchased, the SNB sold a corresponding amount of Swiss franc, thereby increasing the amount in circulation dramatically. Such a move, if left unsterilized, can provide the kindling for inflation driven by monetary expansion.

SNB meets Waterloo, causing chaos in markets and billions of losses

Despite massive interventions the SNB was unable to prevent the Swiss franc from strengthening against the euro. By the end of 2014, its foreign currency investments had mushroomed to $540 billion (510 billion CHF), or 76% of GDP. On January 15, 2015, the SNB had to give up its 1.20 CHF/EUR exchange rate barrier it had vowed to defend with “utmost determination”.

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The announcement occurred during European trading hours (10:30am CET) on a Thursday. The Swiss currency briefly shot up by a staggering 40% against the euro. Postfinance (Swiss postal bank) had to suspend foreign currency trading for its customers. Swiss stocks fell the most in 25 years. Shares of Julius Baer lost 23% on rumors of currency losses. FXCM, the largest US retail FX broker, needed a $300 million cash infusion after customers were unable to repay losses incurred. Citigroup, Deutsche Bank and Barclays lost a combined $400 million. Everest Capital, a hedge fund, lost virtually all its $830 million as it had bet on the Swiss franc to weaken. Homeowners in Austria, Poland and Hungary were thrown into financial trouble as they had taken out mortgages in Swiss francs to benefit from low interest rates. Swiss franc-denominated loans accounted for 15% to 35% of total mortgages in those countries.

Could not wait for the weekend

Market-moving decisions are usually released on weekends, when all financial markets are closed, allowing investors enough time to analyze the news. Publishing a dramatic decision in the middle of a trading day is highly unusual and unprofessional. What could have convinced the SNB to do so, nevertheless? The weekend was only one day away. Why couldn’t the release wait, given the mayhem it was bound to cause?

The most likely explanation is that the imminent publication had leaked. Swiss franc futures contracts traded in Chicago show a suspicious burst of activity 39 minutes before the announcement. On the following Monday, Christine Lagarde, then the managing director of the International Monetary Fund, mentioned that “very few people were informed of the move ahead of time. My understanding is that very, very, very few people were informed ahead of anything.” It seems that some of those people used inside information for personal gain. Once a leak occurred, rumors would have started flying, and the SNB would have been asked to comment. This would have forced their hand to immediately release the fateful statement.

“Poor advertisement for Swiss reliability” titled a story in The Financial Times. The entire episode does not shine a good light on the SNB. In addition, no lessons seem to have been learned, as the balance sheet continued to grow after this debacle. At the end of 2021, the SNB’s balance sheet exceeded $1.1 trillion (CHF 1.05 trillion), equal to 144% of GDP. Foreign currency investments of around 130% of GDP, and 30% in foreign stocks, can hardly be described as prudent. In terms of balance sheet size relative to GDP the SNB exceeds the Bank of Japan (129%), the European Central Bank (67%), the US Federal Reserve (34%) and the People’s Bank of China (32%).A large balance sheet relative to the GDP limits potential future moves in case of economic or monetary turmoil. It also amplifies losses. The SNB’s mandate is to “act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability.” Engaging in failed currency and balance sheet adventures on a massive scale seems contradictory to its mandate. The supervisory board of the SNB should put an end to this casino mentality, or risk losing the independence of the Swiss central bank.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Is the Reckless Swiss National Bank Endangering Its Independence? appeared first on Fair Observer.

Among the cascading effects of inflation on the global economy is the negative impact it has on the market dynamics that drive illicit trade. Specifically, high levels of inflation can have a disastrous impact on consumer purchasing power. In turn, reduced purchasing power coupled with increased poverty reduces consumer “product affordability,” which is widely regarded as the primary driver for illicit trade. When prices rise faster than incomes, people can afford to buy fewer goods and services and cheaper goods including illicit and black-market products become more tempting.

Inflation leads to illicit trade

This phenomenon is playing out in real time in Turkiye, where inflation is at a 25-year high of 86%, causing a notable erosion of consumer purchasing power that further incentivizes consumers to consider illicit products. Recent interviews with Turkish consumers of both legal and illegal products showed that the most important determinant for choosing illicit goods over legal equivalents was the lower price of the illegal goods.

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Turkiye already faced challenges from illicit trade on multiple fronts. For example, it is an important source country for illicit plant protection products, counterfeit goods are widespread, and it grapples with the harmful effects of illicit tobacco, alcohol and petroleum products. Moreover, the government’s goal of making Turkiye a top pharma hub by 2023 is threatened by a growing market for illegal pharmaceuticals.

The consequences of this illicit activity can be dire. In December 2021 a mass poisoning caused by illicit alcohol claimed the lives of at least 75 people. In November 2020, the World Health Organization  (WHO) issued a medical alert cautioning that batches of falsified Harvoni, an antiviral medicine used to treat chronic Hepatitis C, were discovered in Turkiye.

The challenge for Turkiye lies not just with mitigating illicit trade at home, but due to its geographical location as a gateway to Europe, it must also address illicit trade across its borders. It is known as a critical transshipment point for counterfeit and pirated finished goods and components across a variety of industry sectors. It is, for example, the leading source of fake clothing and accessories seized at EU borders in addition to being an established transshipment route of illicit alcohol and related packaging from Russia and neighboring countries (who are manufacturing at scale) to the Middle East.

The situation is exacerbated by the sizable depreciation of the Turkish lira, which drives international demand for exported Turkish fakes, as such items became cheaper to traders buying in US Dollars and Euros. Meanwhile, recent government-imposed price hikes and tax increases on alcohol, tobacco and petroleum products have put upward pressures on retail prices for these products, making them more expensive to consumers and incentivizing demand for cheaper, unregulated illicit alternatives.

The Turkish government must step up

Given these dynamics, the problem of illicit trade in Turkiye can only be expected to intensify. Consequently, the Turkish government will necessarily need to be more vigilant in its efforts to root out this illegal activity.

A new report, Inflation, product affordability, and illicit trade: Spotlight on Turkiye, by TRACIT, aims to increase awareness on these issues and proposes several policy recommendations that target some of the main illicit trade issues facing the country.

For the government to succeed, controls to fight illicit trade will require concerted, sustained and joined up efforts between all responsible government bodies and law enforcement agencies. These efforts must be supplemented with adequate budget allocations and clear objectives to ensure long term successful implementation of anti-illicit trade efforts.

The notoriously slow adjudication process must be streamlined and criminal penalties strengthened to deter repeat offenders. The government must also commit to tackling pervasive corrupt practices that continue to facilitate illicit trade, especially at the level of customs, local officials, law enforcement authorities and the judiciary. As long as corruption persists within government agencies, any attempt to improve and strengthen enforcement actions will have limited effect.

Finally, partnerships with the private sector should be encouraged, as these can play an important role in improving enforcement actions. With real-time access to commercial data and private sector intelligence, enforcement agencies can improve the effectiveness of their operations and risk assessment techniques. Rights holders can also be more effective partners in investigations when they are informed by authorities of potential illicit trade affecting their brands, resulting in more deterrent criminal proceedings.

It is our hope that the report and its recommendations will provide the Turkish government and other impacted stakeholders with practical examples of reforms and controls they can implement to more effectively mitigate illicit trade in Turkiye.

[Read the report and full set of recommendations at https://www.tracit.org/publications.html.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Soaring Inflation in Turkiye Is Now Boosting Illicit Trade appeared first on Fair Observer.

These corrections have occurred because of rising interest rates. Central bankers have raised them because inflation has reached a multi-decade high level. This has caused equity markets to fall. In the case of emerging markets, this fall has generally been steeper. US investors have pulled in money from abroad to invest at home after the Fed started raising interest rates.

Indian equities have fared better than other emerging markets and even better than the US market. Domestic inflows have mitigated foreign outflows. In the new global order, India’s economic model is fundamentally sound. Prospects of multi-decade consumption-led growth are strong. India is also poised to benefit from western economies diversifying their supply sources as US-China tensions rise.

As is well known, one-year returns can vary a lot from a market’s long-term performance. Public markets are invariably volatile. Now, the Russia-Ukraine War and the supply side shock from China have increased volatility. If we discount short-term volatility and assess long-term performance, India is the only major global economy other than the US that has delivered long-term equity returns over the past decade. 

Long-Term Equity Returns Across Major Global Markets

Sectors Doing Well and Not-So-Well

During the July 1 to September 30 quarter, most sectors in India except information technology (IT) and energy were up. They have recovered from their lows early this year amid an improving outlook. Consequently, most sectors posted moderate gains or losses year-to-date in dollar terms, despite a depreciation of approximately 9% of the rupee against dollar. 

So far, the IT sector is the worst performer, declining by 33% in 2022. Slowdown in key markets such as the US and Europe has hurt his sector. A talent shortage and wage pressures in India as well as competition from the new digital economy companies has put further downward pressure on the IT sector. The healthcare sector also declined 19% this year, reversing some of its gains made during the pandemic. 

The utilities sector has performed best this year. It is up by 37%. This sector has done well because of a huge conglomerate. It comprises 50% of the sector and has expanded aggressively into various industries such as energy, utilities, ports, and cement.

India’s Sector Performance for the Three- and Nine-Months Ending September 30, 2022

Inflation High but Under Control

Like much of the rest of the world, inflation in India has risen. It crossed the 6% upper tolerance limit set by the Reserve Bank of India (RBI), the country’s central bank, during the January 1 to March 31 quarter and has remained around 7% over the next two quarters. This is nothing when compared to Turkey where inflation is estimated to have crossed 160% or Argentina where this figure is over 80%. Inflation even in Germany has crossed over 10% and has reached 7.7% in the US.

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Considering India imports almost all its energy, inflation is not that high. It has hit India hard though because the percentage of low-income households is still quite high. Since May 2022, the RBI has increased interest rates from 4% to 5.9% and is expected to raise rates further.Despite the central bank tightening monetary policy, India’s growth forecast remains robust amid a global slowdown. The International Monetary Fund (IMF) projects India’s real gross domestic product (“GDP”) to grow by 6.1% in 2023, compared to 1%, 0.6% and 4.4% increases for the US, the euro area and China, respectively. In 2022, the IMF expects India to grow by 6.8%, compared to 1.6%, 2.1% and 3.2% GDP growth for the US, euro area and China respectively^..

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Indian Equities, Global Markets: What Is the Story? appeared first on Fair Observer.

Having worked as the CEO of a multi-district milk producers co-operative society as well as the managing director of an apex agriculture marketing co-operative NAFED, I would like to share with the readers how the two systems differ. But more importantly, what can be done to make procurement of cereals and pulses as transparent as the milk procurement operations?

Let us first look at the similarities before we discuss the differences. The commonality between milk producers and farmers who grow cereals and pulses is that both are marginal and small producers. Very few of them have physical assets or production surpluses. Neither has the infrastructure to market their produce independently and directly to the market. The volumes they produce also make it difficult for them to add value at the farm gate. Both need the intervention of their co-operative or a state agency to get a fair and remunerative price. In fact, on the face of it, a milk producers co-operative has a greater challenge, since the product is extremely perishable, whereas both cereals and grains have a longer shelf life.

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Perhaps, it is this aspect of perishability that makes the milk producers more disciplined, for unless they pour the milk at the procurement center within the designated time, they will literally miss the milk van. However, more than that, it is the robust system set in place by Verghese Kurien, known as the “Father of the White Revolution” in India, that ensures complete transparency and absolute ease of doing business, First, the member can pour any quantity, from less than a liter to multiples thereof. After it is measured, it is checked for quality, and although today the content in fat and solids is measured by a machine, from the earliest times, a lactometer and a centrifuge machine were installed in every primary procurement center to record the quality. The price per liter of milk was contingent on the quality of milk, and there was a positive incentive for better quality. 

Cereals and pulses: a different story

However, when it comes to procurement of cereals and pulses, the complexity takes on a new dimension. The first issue is that of the sheer volume on account of the seasonality of the production cycle. The second is the absence of grading /sorting machines at most of the procurement centers. Therefore, the decision concerning whether the produce adheres to FAQ (fair average quality) norms is based on what the procurement officer on the spot decides.  There is the permanent risk  of a genuine (human) mistake. But there is equally a risk of  establishing perverse incentives and encouraging collusion, for if the produce is below FAQ, then the stock value will be significantly diminished, and if non-FAQ stock is procured, it will receive the Minimum Support Price (MSP) for which it is otherwise ineligible.

No wonder then, that while, over the years, the business of Amul and milk producers’ societies has been growing, becoming ever more salient, the procurement operations of FCI and Nafed continue to be  mired in controversy. Significantly,milk collection is undertaken every single day, 365 days a year, whereas the procurement operations for cereals and pulses occur once a year and in an episodic fashion. Moreover, unlike Amul, which has devoted its time, energy, and domain expertise to ensure both forward and backward linkages, the same cannot be said for Nafed and the state marketing agencies. Another important factor is liquidity. 

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Although milk is literally a liquid product, the sector is not beset with liquidity issues. The producers receive their payment on a daily or weekly basis. On the other hand, FCI and Nafed often face a cash crunch as they are dependent on a budget line, and even bank guarantees have a certain limit. As such, even though the payment systems have become quite streamlined thanks to IT interventions, the basic problem of a lack of resources to ensure timely payments remains, and this affects the trust the system grants to the farmer. This may explain why the stranglehold of the intermediary (arthiya) over the procurement of cereals and pulses continues to remain as strong as ever.

There is one more lesson to be learned from studying the workings of a milk producers society. This relates to the well-established system of strengthening the equity base of the co-operative society, at all levels. Thus, if the milk producer is receiving forty rupees per liter of milk as the procurement price from the district milk union, it would retain a small amount ― say 25 to 50 paise per liter of milk ― to be allocated to the equity of the society. Over weeks and months, this amount totals up to a few thousand rupees, if not a lakh or more, thereby enabling the primary society to build its basic infrastructure: a state of the art office, a motorcycle for the veterinary field assistant, or a refrigerator for storing vaccines and medicines. Likewise, the district milk union also retains a small amount for its equity fund, thereby making the co-operative independent of government; both in terms of funds and its internal operations.

Daring to imagine the future and making it happen

Is there a way out? Certainly. It is high time the newly created ministry of co-operation led by Amit Shah brings out a compendium of best practices in cooperation that can be replicated in sectors other than milk and applied in states beyond Gujarat and Maharashtra, where the co-operative movement is quite salient and strong. Because only when the procurement of an entire range of commodities ― from oranges in Tamenglong (Manipur) and apples in Uttarkashi to raw honey in the Sundarbans ― is put on an even and transparent keel will the rural economy receive the necessary impetus. Successful co-operative professionals as well as elected officials may be appointed as professors of practice in the regional and district level cooperative training institutions and farmers should be encouraged to undertake study visits across the country.

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The reach of the co-operative sector is extensive, but many have become mere agencies implementing government programs. We can only hope that an exposure to some of the successful societies will prove inspirational, as well as meaningful.  Secondly, the Agri Infra fund announced by the prime minister, as well as the Rural Infrastructure Development Fund (RIDF) of National Bank for Agriculture and Rural Development (NABARD) must be used to set up a network of grading and sorting machines in all the procurement centers so that the farmers can get their produce sorted and graded against the parameters on which procurement will be made. It is true that the initial costs at Rs twenty odd lakh rupees per machine may be on the higher side, but it will have multiple positive fallouts, the most important being the ushering in of transparency and fair play in these operations.

At the end of the day, we need interventions, both in terms of processes as well as technologies, to help the primary producers in sectors other than milk reap similar benefits and set in motion a virtuous cycle of economic transformation in the hinterland.
[The Print first published a version of this article.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post Can India’s Ailing Agricultural Procurement Find a New Model? appeared first on Fair Observer.

The Dragon in the Room

Why is love in the air for Australia and Japan? 

The answer is simple: China. 

The Middle Kingdom has taken an increasingly assertive posture in the Indo-Pacific. Beijing has made “historical claims” on the Senkaku islands claimed by Tokyo. It has increased its military maneuvers in the South and East China Seas, building artificial islands and bases. Closer to Canberra, China has intensified maritime activities in the South Pacific islands. It has even signed a pact with the strategically located Solomon islands. Such actions have fuelled insecurity in Tokyo and Canberra.

On the economic front, new realities have emerged. After the economic liberalization in the Deng Xiaoping era, China grew rapidly. Given the gigantic Chinese market, most Asian countries wanted to prosper from the China story. Trade increased exponentially.

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China-Japan trade grew dramatically as well. In 2021, China was Japan’s biggest trade partner and the trade volume crossed $370 billion. China-Australia trade grew too and reached $245 billion in 2020. Under Chinese President Xi Jinping, the country began to weaponize trade and bully its trading partners into submission. When Australia called for an independent probe into the origins of the COVID-19 virus, Beijing responded with a range of strict trade reprisals against Australian imports. Naturally, this made policymakers in Tokyo and Canberra cautious. They are attempting to change their trading patterns and rely less on China.

Strange Bedfellows

A century ago, Australia feared “economic infiltration” and racial takeover by the Japanese. In 1901, Australia implemented its White Australia Policy to exclude non-white immigrants and keep Australia a European nation. In World War II, both Japan and Australia were locked in a bitter conflict in Papua New Guinea. Mutual suspicion ran high and bilateral relations reached the nadir. In those years, Australia increasingly looked towards the US and Western Europe for identity, inspiration and security. It did not want much to do with its near abroad full of ragtag Asians. Much of Asia, especially Japan, saw Australia as a genocidal white outpost in their neighborhood.

In the 1950s and 1960s, mutual suspicion decreased. Both Japan and Australia were worried about a rising Indonesia. They shared concerns about Indonesian strongman Sukarno who was one of the founding fathers of the Non-Aligned Movement (NAM). As American allies, Japan and Australia were naturally concerned about Sukarno’s nationalist assertions and NAM.

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As a result, Intelligence cooperation between Japan and Australia slowly grew. This was accompanied by a commerce treaty signed in 1957 between Tokyo and Canberra. Gradually, closer economic ties decreased historic suspicions. Japan became Australia’s largest trading partner from the late 1960s onwards to 2007 when China replaced it. Additionally, Japan and Australia were also part of the American security architecture in the region. The US-led hub and spoke system contained the communists in the region during the Cold War. 

Unpacking the Updated JSDC 

As pointed out earlier, the new JSDC signed by Tokyo and Canberra comes at a time of rising Chinese ambition. Xi’s China seeks to extend its sphere of influence in Asia. Beijing’s rising influence comes at the cost of regional powers who do not subscribe to the Chinese worldview. They are anxious and want to oppose China. As a result, Asia is profoundly fractured. 

In this new geopolitical scenario, the JSDC makes sense. It builds local capacity to counter China. Japan and Australia do not entirely have to rely on the US to maintain peace and stability in the region. Both countries are deepening their military partnership. They are increasing interoperability, intelligence sharing, military exercises and defense activities on each other’s territories,

The two powers further seek to build on the Reciprocal Access Agreement (RAA) signed in January 2022. Besides Australia, the US is the only country with which Japan has signed the RAA. Japan also has an Acquisition and Cross-servicing Agreement (ACSA) with Australia. This agreement allows reciprocal provision of supplies and services between their defense forces. They are also collaborating in space, cyber and regional capacity building.

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The JDSC marks a shift in traditional Japanese reluctance to act proactively on military matters. In the last few decades, Japan punched under its weight in military issues. This was primarily due to its war-renouncing constitution. The updated JSDC reflects the internal debate in Japan over the role of its military and the country’s role in the world. Various Japanese strategists have called for revising Japan’s National Security Strategy. They are pushing for Japan to take an active regional role. Moreover, policymakers in Canberra are also stepping on the gas. Australia is on a shopping spree for military technologies from nuclear-powered submarines to unmanned aircraft and hypersonic missiles.

The JSDC’s focus on intelligence cooperation is significant because both Japan and Australia have formidable geospatial capabilities in electronic eavesdropping and high-tech satellites. Experts believe that such intelligence cooperation will also provide a template for Japan to deepen intelligence cooperation with like-minded partners.

Secure Economics and Regional Dynamics

Japan and Australia now recognize that economics is closely tied to security. In this new deglobalizing world, words like friendshoring and secure supply chains have come into play. OPEC+ has cut oil production despite repeated US requests and sided with Russia. The US and the UK first supplied vaccines to their own populations before giving them to Europe or Asia. China used personal protective equipment for its people during the COVID-19 pandemic. For this reason, Tokyo and Canberra want to set up a secure economic relationship in what the Pentagon calls a volatile, uncertain, complex and ambiguous world.

The Russia-Ukraine War has hit Japan hard. The country imports most of its energy. Supplies from Russia’s Sakhalin-2 project have stopped and Japan faces an energy shortage. Rising energy prices have increased its expenses and increased input costs for its products. Therefore, Japanese Prime Minister Fumio Kishida has made energy resilience a priority. In this context, Australia is a reliable and valuable energy supplier to Japan. Already, Canberra is Tokyo’s biggest supplier of LNG and coal. Both countries seek to deepen this relationship.

Both countries have further announced an Australia-Japan critical minerals partnership. These minerals include rare earths that are crucial in clean energy technologies like solar panels, electric vehicles and batteries. These could well be the oil of the future. Japan as a leader in many of these technologies and Australia as an exporter of minerals might have a win-win long term relationship on the cards.

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The US also figures prominently in the updated JDSC. Japan and Australia have asked Washington to fill in the gaps for sustainable infrastructure needs. This is part of the role the Quad — the US, Japan, India, and Australia — seeks to play in countering China’s Belt and Road Initiative. 

To counter China, Japan and Australia also support ASEAN’s centrality in the Indo-Pacific. They have also reiterated their desire to implement the 2050 Strategy for Blue Pacific Continent through the Pacific Islands Forum. This initiative seeks to develop cooperation with Pacific Island countries in critical infrastructure, disaster recovery, and maritime security. This is a multilateral play to counter the Big Brother model that China follows and provide assistance for smaller countries from medium-sized powers they trust. Japan and Australia share concerns about Myanmar and North Korea as well.

In the new world order that is emerging, regional powers are assuming more importance. The US is tired after two decades of war in Iraq and Afghanistan. It cannot write a blank check for Indo-Pacific security and single-handedly take on China. Therefore, the US is leaning on allies to step up. This makes the updated JSDC important. In the words of Professor Haruko Satoh of Osaka University, “Strengthening the Japan-Australia partnership is crucial for the US-led hub and spokes security system in Asia.”

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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