Anatole Kaletsky

Why markets don’t fear a government shutdown

Anatole Kaletsky
Sep 26, 2013 14:44 UTC

Now that the worldwide panic over U.S. monetary policy has subsided, Washington is brewing another storm in a teacup: the budget and Obamacare battle that reaches a climax next Monday, followed by the debt limit vote required to prevent a mid-October Treasury default. The ultimate outcome of these crises is a foregone conclusion. As Senator John McCain told the press this week: “We will end up not shutting down the government and not de-funding Obamacare.” He could surely have added that a Treasury default is also out of the question.

But how exactly will Washington manage to dodge these bullets? As McCain added, “I don’t know what all the scenes are, [although] I’ve seen how this movie ends.” Markets understandably fear that all the plot twists leading up to a seemingly satisfactory resolution could produce an economic horror film, crushing business and consumer confidence, damaging economic growth and triggering a major sell-off in global stock markets. That, after all, is exactly what happened when the U.S. Treasury almost defaulted in July 2011.

What, then, are the chances of similar disruption in the weeks ahead? The risks this time are much smaller than in 2011 because of four events that have transformed the dynamics of U.S. budget battles.

First and foremost, the 2012 election decisively shifted Washington’s balance of power, not only by providing President Obama with a new democratic mandate, but also by transforming the political incentives for both sides. Until last November, Obama risked losing his bid for re-election if fiscal gridlock damaged the economic recovery. The Republicans, by contrast, could hope to benefit from any setbacks to economic growth. Now, the tables are turned. Obama will never again face voters and so can afford to risk a budgetary confrontation. Republican congressmen, on the other hand, stand to lose their own seats and their party’s control of Congress by overplaying their hand, especially when opinion polls suggest that Republicans will be blamed if a budget breakdown damages growth or triggers a setback on Wall Street.

Secondly, the U.S. budget outlook has been transformed as deficits have melted away in the face of economic recovery. As a result, public paranoia about government borrowing has diminished, along with popular support for painful budget cuts.

The markets and Bernanke’s “taper tantrums”

Anatole Kaletsky
Sep 19, 2013 16:22 UTC

So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since May 21, when Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve Board’s monetary expansion. Throughout these four months, I have argued in this column that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as evidenced by the huge moves in share prices, currencies and bonds on Wednesday after the Fed announced that it would do exactly what Bernanke had suggested all along — namely, nothing.

The Fed’s decision not to cut back on its $85 billion of monthly bond purchases, even by some small symbolic amount such as $5 billion, stunned the markets — but only because analysts had refused to believe what Bernanke, along with most other central bankers around the world, was saying throughout the period since May 21. The Fed chairman repeatedly stated that tapering would begin only if and when there was consistent evidence that U.S. employment conditions were improving. Bernanke also stated that, even after tapering started, the Fed would not allow U.S. monetary conditions to tighten and would keep short-term interest rates near zero for a very long period — at least until 2015, and quite possibly beyond.

Why, then, were investors so surprised when the Fed officially implemented exactly what Bernanke had promised? And now that the Fed has put its money where Bernanke’s mouth was, how will the global economy and financial markets react?

Dalian Man

Anatole Kaletsky
Sep 11, 2013 21:02 UTC

The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the “summer Davos” that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite’s hopes and fears.

The biggest surprise at this week’s Dalian forum was the East-West divergence of opinion on the economic outlook, both in the months ahead and in the very long term. Western economists mostly believe that developing countries in general, and China in particular, are threatened by serious financial crises as U.S. monetary policy begins to be tightened, probably as soon as the Federal Reserve Board’s meeting next week. The consensus view is that emerging economies have invested and borrowed too much, taking advantage of the Fed’s easy money and will now face painful deleveraging similar to what Europe and the U.S. experienced five years ago. This deleveraging means, in turn, that the glory days for developing economies are probably over — and most of these countries, perhaps including China, may never escape the “middle-income trap” that has prevented further progress in many developing economies. The trap starts to hobble growth when per capita incomes rise to around $10,000 and many of the obvious opportunities for catching up with Western productivity are exhausted. China’s is $9,160 according to the IMF.

When I travelled to China this week, I expected obsessive discussion of the recent shift of economic sentiment against developing countries and the resulting collapse of bonds, shares and currencies in most emerging markets this year. And indeed warnings of ruinously compounding debt burdens and dangerously unsustainable investment bubbles did dominate Western presentations, both in Dalian and at an earlier academic seminar in Shenzhen, organised by Tsinghua University and the Institute for New Economic Thinking.

Syrian intervention invokes Europe’s history

Anatole Kaletsky
Sep 5, 2013 14:51 UTC

The prospect of Congressional approval for a U.S. attack on Syria is probably good news for the world economy and financial markets, since the impact on the oil price of an intense but strictly time-limited military action is likely to be a classic case of “buy on the rumor and sell on the news.” History suggests that the moment U.S. bombs start raining down on Syria, oil prices will pull back and stock markets around the world will rise. But what about the bigger picture? How will a U.S. bombing campaign affect the stability of the Middle East and global geopolitics?

To consider these questions it helps to recall that the main principle underlying the United Nations Charter is non-intervention by foreign governments in the affairs of sovereign states. Morally, this principle is hard to justify. It conflicts with the “duty to protect” civilians from barbarous treatment by their own rulers, which Western governments have invoked when crossing international borders in response to massacres in former Yugoslavia, Sudan and Sierra Leone — and should have invoked, with hindsight, to stop Hitler in the 1930s and prevent the Rwandan genocide in 1994.

Why, then, is non-intervention still recognized as the bedrock of modern international law? A standard answer is the Peace of Westphalia — a series of treaties in 17th century Europe that legally enshrined national self-determination and inviolability of borders for the first time. But why should the world today still be bound by these 400-year-old ideas?