by Alex Evans | Dec 5, 2007 | Climate and resource scarcity, Cooperation and coherence, Global system
Amid the torrent of news about (a) ongoing turmoil in financial markets and (b) rocketing prices in the real economy for energy and food, it’s fascinating to watch two worlds – the financial economy and the real economy – colliding. All of a sudden, various of globalisation’s chickens are coming home to roost – energy security, food security, hedge funds and financial innovation, to name just a few. And the worrying thing is that as policymakers play catch-up with these esoteric, highly specialised issues, it’s becoming increasingly clear that no-one has a clear strategic overview of what’s happening.
Start , for instance, with a quick snapshot of the financial markets situation from NY Times columnist Paul Krugman:
How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world. This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.
Chip Mason, founder of Legg Mason (one of the world’s largest money managers, with $1 trillion of assets under management) says that credit markets are the worst he’s seen in 47 years in the business: “It is a very unusual situation. I have not seen anything like this, where nothing is traded.” Nor is the UK proving immune to the crunch. As Nouriel Roubini notes, two days ago the one month Libor inter-bank interest rate spiked 60 basis points from its Friday levels – to its highest level in nine years.
Already, a kind of inquest on financial innovation is opening up in some quarters. Krugman quotes Bill Gross – the managing director of Pimco, a leading bond manager – thus: “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.” (See also Gross’s more detailed – and very downbeat – assessment on Pimco’s own website.) Krugman’s own view: “The bottom line is that policy makers left the financial industry free to innovate — and what it did was to innovate itself, and the rest of us, into a big, nasty mess.”
But there’s disagreement over how much the current turmoil matters for the real economy. Not much, says former Bank of England Monetary Policy Committee member Willem Buiter: “The good news in all this is that much of the financial sector has become quite detached from the real economy. The implosion of much of this formerly privately profitable but never socially productive financial intermediation will have little if any adverse macroeconomic effect.” A lot, says Nouriel Roubini: “it does not make sense to avoid bailing out the real economy – and preventing a massive global loss of incomes and jobs – just in order to punish reckless lenders and investors in the financial market and thus avoid moral hazard.”
There’s disagreement too over what needs to happen on interest rates. Roubini thinks it’s urgent, but Wolfgang Munchau begs to differ: “The inflation outlook would justify a neutral policy stance at best. A bias towards low interest rates got us into this mess. Low interest rates will not get us out of it. Central banks should keep their cool.”
The question of inflation brings us neatly over to the real economy, and to prices for energy, crops and other commodities (another issue that we’ve been following here in recent months). If the financial turmoil does present a serious downside risk for growth, at the same time as energy and food prices – for which demand is relatively inelastic – proceed inexorably upwards, does that herald a return to 1970s-style stagflation?
Krishna Guha did a handy analysis piece on that question in the FT on Monday, and concluded that there was indeed at least “a whiff” of the s-word in the air, but that over a 1-2 year time horizon, “the world may see low growth or high inflation – but probably not sustained stagflation in any large economy”.
(I’m not so sure. The more I look at energy and food trends, the more it looks like we may have seen a structural shift towards long term higher prices for both. True, a slowdown in emerging economies would let off some steam. But it would take a very hard landing in China and India to eradicate the massive growth in their demand for energy and agricultural products of recent years. And it will still take a very large amount of investment – in energy infrastructure, in agricultural acreage expansion- to keep up with even lower end demand projections for these commodities.)
But here’s the thing. I know more or less enough about energy and agriculture to form my own views about what’s happening on that front. But I’m completely reliant on interpreters (like the ones I’ve quoted above) to explain the credit crunch to me. And I have no real way of evaluating which of them is right and which of them is wrong.
As the various worlds of the economy continue to collide, an integrated perspective of all of these issues is becoming increasingly urgent. And here’s what should really worry all of us: who the hell does understand both worlds? Almost certainly not any one policymaker, central banker or committee. Yet these are the people we trust to make crucial decisions on this tangled web. Increasingly, we’re going to come to see this perfect storm above all as a crisis in our ability to take and implement effective decisions. More on that in a future post…
by Alex Evans | Dec 4, 2007 | Climate and resource scarcity
So says International Food Policy Research Institute head Joachim von Braun in an exclusive interview with the Guardian today:
“Demand is running away. The world has been consuming more than it produces for five years now. Stocks of grain – of rice, wheat and maize – are down at levels not seen since the early 80s,” said von Braun, whose organisation is the world’s largest alliance of agricultural researchers, economists, and policy experts.
So far, crises have been averted because states have eaten into national stocks, but this could be set to change because China, in particular, has run down its supplies.
“Over the next 12 to 24 months we are in a fairly risky situation. Large consuming nations, particularly China, will feel pressed to enter international markets to bid up prices to unusual levels,” von Braun warned ahead of a speech today to the institute’s AGM in Beijing …
The social tensions caused by rising food prices are already evident, says von Braun. “The first sign was the tortilla riot in Mexico city, where 70,000 took to the streets. I think that was only the beginning – there will be more,” said von Braun. “For a year or two countries can stabilise with stocks. But the risk comes in the next 12 to 24 months. The countries that cannot afford to buy will be the losers, while those with huge foreign exchange reserves will bid up the world market.”
by Alex Evans | Nov 22, 2007 | Influence and networks
Dan Drezner is pondering how to answer all the people who ask him “how do you successfully pursue a career in foreign policy?”. He finds that Peter Singer at Brookings proffers the following advice:
by David Steven | Nov 15, 2007 | North America
In the National Review, Grover G. Norquist (slogan: “Getting the Government’s Hands Off Our Money, Our Guns, Our Lives”) wonders why Warren Buffet opposes the abolition of America’s inheritance tax (or ‘death tax’ as Norquist prefers):
At first blush, you might expect “the Oracle of Omaha” to be a big proponent of death-tax repeal. The CEO of Berkshire Hathaway is the third-richest person in the world (according to Forbes magazine) and is worth about $52 billion. Yet Buffett is one of the biggest proponents of the death tax.
It’s an interesting question. So what’s the answer? According to Norquist, it’s because Buffet is a ‘leach’, driven by pure cynicism and self-interest:
Buffett has major investments in companies that sell life insurance. The death tax has helped make him rich while it has made other families poor. What’s sad and ironic is that it takes families with the resources of the Buffetts (and the Hiltons and the Kardashians) to set up the trusts and life-insurance schemes that are necessary to avoid paying the death tax.
And yet, nowhere in the article does he even mention that Buffet is so opposed to kids inheriting money that is he giving away most of his:
Buffett does not believe that it is wise to bequeath great wealth… Having put his two sons and a daughter through college, the Omaha investor contents himself with giving them several thousand dollars each at Christmas. Beyond that, says daughter Susan, 33, ”If I write my dad a check for $20, he cashes it.”
Buffett is not cutting his children out of his fortune because they are wastrels or wantons or refuse to go into the family business — the traditional reasons rich parents withhold money. Says he: ”My kids are going , to carve out their own place in this world, and they know I’m for them whatever they want to do.” But he believes that setting up his heirs with ”a lifetime supply of food stamps just because they came out of the right womb” can be ”harmful” for them and is ”an antisocial act.”
To him the perfect amount to leave children is ”enough money so that they would feel they could do anything, but not so much that they could do nothing.” For a college graduate, Buffett reckons ”a few hundred thousand dollars” sounds about right.
Buffet plans to donate $44bn to charity over the next few years – with most of it going to help the Gates Foundation fight poverty around the world. It’s the biggest philanthropic gift the world has ever seen.
You’d think Norquist might have wanted to mention this as he lays into Buffett. After all, he has a reputation for rectitude and honesty to protect… Oh wait, it’s that Grover Norquist, the one who stuck his trout into the trough provided by disgraced (and jailed) lobbyist Jack Abramoff. The one a Senate committee exposed as a money-launderer. I suppose he can distort Buffet’s motives as much as he likes then…
by Alex Evans | Nov 15, 2007 | Conflict and security, Cooperation and coherence, UK
Gordon Brown’s first foreign policy speech, delivered on Monday evening at Mansion House, was nicely drafted, well argued and competently delivered. Its central argument: that “international institutions built [in 1945] for just 50 sheltered economies in what became a bipolar world … are not fit for purpose in an interdependent world of 200 states where global flows of commerce, people and ideas defy borders”.
Although virtually all media coverage of the speech – Times, BBC, PA, Independent, Telegraph, New York Times, Melanie Phillips in predictable form in the Spectator, Jonathan Freedland in the Guardian – led exclusively either on Iran or on the relative weight accorded to the UK’s relationship with US and EU, this was really a speech about multilateral reform. In particular, it was about reforming international institutions to equip them to deal with six new trends: “failed states and rogue states”; terrorism; global flows of capital, goods and services; the emergence of China and India; climate change; and “a new global competition for natural resources”, especially energy.
(It’s interesting, by the way, that he emphasised natural resource scarcity, rather than just energy security on its own. To give credit where it’s due, Brown spotted that agenda well before most of his peers: the Treasury’s December 2004 paper on long term economic challenges for the UK, for instance, made the same point. It’s also very interesting that Brown has instructed the Prime Minister’s Strategy Unit to undertake a review of the UK’s food security, as reported in the Observer last weekend. I’m doing a presentation for the Strategy Unit team in a couple of weeks’ time, which I’ll post here once I’ve written it.)
But as the New Statesman put it pithily in their leader this week, the real question for Gordon Brown’s multilateral reform agenda is “how will he succeed when others have failed?”.
Take, for instance, what he had to say on conflict in fragile states, where there was a strong call for moving from a reactive to a preventive stance on conflict, and for “the first internationally agreed procedures to prevent breakdowns of states and societies”. Fine in principle – but hard to see how Brown will make much headway on this given that moves in 2005 and 2006 to arm the new UN Peacebuilding Commission with a prevention mandate quickly foundered in the face of ferocious developing country opposition.
Similarly, there was a proposal for “Security Council peacekeeping resolutions and UN Envoys [to] make stablisation, reconstruction and development an equal priority”. Again, this was a little unclear: no mention of the Peacebuilding Commission here either, or of the fact that one area where the UN has actually got much better is in integrated mission planning.
But the really key section was the last one, on renewing multilateralism at the global level, where Brown argued the need to “judge success not by the number of initiatives in conference halls but by practical action for change”, and that “we need fewer rather than more international bureaucracies”. So, he went on, we need:
- A less introspective EU – “outward looking, open, internationalist, able to effectively respond both through internal reform and external action to the economic, security and environmental imperatives of globalisation”;
- Security Council reform – where Brown noted that “permanent members do not include Japan, India, Brazil, Germany, or any African country”;
- A broader G8 “to encompass the influential emerging economies now outside but that account for more than a third of the world’s economic output”;
- A “new coalition of democracies and civic societies joining together as allies for progress, with leaders in politics, economics and civil society all pushing forward reform”;
- A transformed IMF “with a renewed mandate that goes far beyond crisis management to crisis prevention”, with particular focus on early warning;
- On environmental protection, a “strengthened role” for the UN and the World Bank becoming “a bank for the environment” as well as for poverty reduction.
It’s hard to argue against any of these ambitions. But it’s also hard to avoid the impression that a lot of them were lifted directly from the 2004 High Level Panel report, as if the 2005 World Summit had not yet taken place (coincidentally, David Miliband chose this week to deliver a speech which revolved around a multilateral institution – this time the EU – being at a “fork in the road”. Sound familiar?)
Nonetheless, what Brown has achieved here is to set out a pretty good framework – a ‘scaffolding’, if you will – on which he can hang fresher and more detailed foreign policy ideas in due course. To my mind, there was just one key trick that he missed. For all that Brown correctly identifies the emergence to global prominence of China and India as a game-changing development, what he doesn’t do in this speech is take the next step and ask: given that effective multilateralism will increasingly depend on Chinese and Indian buy-in, what do they want from it?
Update: Daniel Korski at ECFR is annoyed that Brown didn’t mention enlargement.
