Ukraine and the IMF

It feels a long time since I posted. In geopolitics, the Syrian war entered a new phase. In economics, the IMF decided to add the yuan to its collection of reserve currencies, and the US Federal Reserve raised rates after seven years at 0%.

What brought me out of hibernation is that Ukraine is about to default on its debt to Russia, and the IMF is about to change its own rules so it can still lend to Ukraine after the default occurs. Michael Hudson has a long article placing these moves in a broader context of geopolitical struggle.

Angela Merkel, the Putin of Europe

I was trying to sum up Merkel's significance and this phrase came to mind. All it means is that Merkel is the preeminent European leader at this time.

Country shopping

I suspect that the migrant tide surging into Europe in recent months, ultimately means the end of relaxed attitudes towards immigration and border control, and the beginning of a new politics of "immigration restriction". Trump in America, and Orban in Europe, are just the start. However, for now those forces are not in power (Orban rules in Hungary, but he's an outcast in Brussels), and their positions are shunned by an establishment which extends across politics, business, the media, and the academy.

One small feature of this intellectual landscape is the "open borders" movement. I find it hard to say whether these people are subliminally influential, or just ideologically notable for presenting the extreme position. In any case, the debate pro and con often takes the form of (pro) an open-borders advocate presenting a simple-minded economic argument that purports to demonstrate why unrestricted immigration is good for Gross National Product, and (con) an open-borders opponent fulminating about the replacement of a country's traditional race, religion, and culture by immigrants who will not assimilate.

It may be that the open borders opponents will win without constructing an economic counter-ideology - indeed, their position may be mostly negative and critical, that the kind of economics which supports open borders is biased, blind, and false. Anyway, I would certainly agree that the models used by the open borders advocates don't describe what is actually happening (nor are they supposed to; they are models of the better world where open borders is official policy); and I have not seen, say, a simple neoclassical model of what's going on in Europe. Until today, I wouldn't even have known where to begin in making such a model.

But now, thanks to two words seen in a blog comment, I do know where that academic work of modeling the European migration wave could start. The magic words are: country shopping. Let the microeconomic analysis begin!

Towards a history of the 21st century world economy

Building on the remark in the previous post, I can form a quick thesis about epochs in the world economy in the 21st century.

Back in the mid-00s, Brad Setser ran a blog tracking foreign currency reserves of the world's central banks. (After 2008, he disappeared into the Obama administration Treasury.) It was from that blog, I am sure, that I learned of what some were calling "Bretton Woods 2.0" - the original Bretton Woods being the system of exchange rates set up by the world powers after World War 2, one of many new global institutions created at that time, when the victorious US was fully half of the world economy...

"Bretton Woods 2.0" has had a number of meanings. Sometimes it refers to the new order which followed Nixon's abandonment of fixed exchange rates and the gold standard in 1971, in favor of a floating petrodollar. It was also bandied about in 2008 as a name for the financial new world order that the G20 would create, as it took over from the G8 as the chief locus of global economic governance. It never quite fulfilled that role, I think, but nonetheless we did end up with a distinctive new balance - more on that in a moment.

But back in the mid-00s, BW 2.0 referred to the situation in which China funded the US by buying Treasuries in vast quantities. That situation itself emerged, on the Chinese side, from a desire not to experience a currency crisis like the Asian export economies of 1998 did, and on the US side, from the post-9/11 economic strategy of low interest rates and a housing boom...

Setser and other commenters often remarked on the unsustainability of BW 2.0. In any case, when the global financial crisis ("the GFC", as we call it in Australia) hit in late 2008, we entered a new epoch in which the developed economies relied on ultra low interest rates and continued Chinese growth, to keep going.

The events of 2015 may be ending that regime, because China's own strategy of export-driven growth has reached its limit, and now they need to become an economy driven more by internal consumption. They're also putting those accumulated reserves to work geopolitically with schemes like the Belt-Road initiative and the new development banks (reminiscent of the post-WW2 construction of new global institutions; then America led, now it's China).

ZIRP in the long view

I just woke up to find out that the US Federal Reserve announces its interest rate at the end of the hour. Apparently this will affect the fates of a number of struggling economies, such as Brazil.

Anyway, the other day I ran across this remark, which puts the current epoch of Fed interest rates in perspective:

"The western world continues to depend on a life-support system, namely zero interest rates, combined with Chinese growth."

Yuan dynasty

The first ATM for China UnionPay that I have seen. CCB staff member "Magic" said it had been there since the branch opened in November.

Meanwhile in Ufa

No talk of defaults there.

Some links about Greece

In the preceding post, I presented a political speculation about the future of Greece. In doing so, I leapt right over the economic details, the current negotiations, etc., which I have just not studied - too complicated, too fast-moving.

But even though I haven't looked for that information, it has come my way anyway. Here, links whose content I do not exactly endorse, but which would be useful in developing a comprehensive assessment of the situation.

A brief prediction of Greek doom, from Germany.

An angry statement that the Greeks are freeloaders who should simply pay back all they owe, and get used to being poorer. Especially see the exchanges in the comments, between Lubos and G. Saprokos.

Via Mike Shedlock: a Greek political committee calls the debts odious and default-worthy; the Greek central bank says default and exit would be bad but could happen; and Mish estimates how much money Greece's creditors are going to lose.

Greece approaching default

This blog exists to discuss "defaultonomics", so with Greece on the brink, I have to say something. But the truth is, I have little to say, and I'm not even sure if this is very important.

There is so much happening in the world; even if we focus just on Europe, Greece appears to be just one of many crises for the EU, alongside Libya, Iran, and Ukraine... and the long-run meaning of what happens to Greece, may be inseparable from what becomes of that broader gestalt.

I don't do broad political speculation here, but, what the hell, let's spin a scenario... Russia is pressing against NATO and EU from the east. Russia's dream would be to see Europe, especially Germany, kick out America, and form a partnership with Russia, from Dublin to Vladivostok. In the short term, Russia will settle for working with any dissatisfied force in Europe, from Hungary's Orban to France's Le Pen.

Meanwhile, in the Middle East, Islamist Turkey dreams of reestablishing its Ottoman influence, from the Balkans to the Sunni Arab world. Russia's struggle with pro-American Europe already intersected with Turkey's power, when EU regulators tried to restrict Russian control of the planned South Stream pipeline, and Russia responded by cancelling it, and initiating a substitute project with Turkey...

If Greece crashes out of the eurozone, we might see it become another intersection of Russian and Turkish deal-making: Greece becoming another disorderly Balkan state in Turkey's neo-Ottoman sphere of influence, and an ally of Russia's attempt to bring the EU to heel.

Links

A local radio program will have an episode on the subject of debt tomorrow. They are soliciting listener contributions, and I might tell them about this blog. Or I might not. But meanwhile, I can list a few links I've been sitting on:

In the end it's not enough simply to have wakened to the existence of the debt pyramid that is today's world economy; one should also have some notion of a better alternative. A conservative answer is a good, conservative place to start in addressing that question.

Deliberate debt default as a strategy for America. "This satire will hopefully inspire some new thinking on debt and survival."

Mass defaults as inevitable, given the magnitude and ubiquity of the world's debts.

Under new management

Another thing that puzzles me, is how big contemporary organizations sometimes bring in outsiders to run them, people who get paid enormous fees, and who will immediately start talking about what a great brand this is, how "we" in the organization need to uphold its traditions, and so on, even though they have no previous ties to the organization or even (in many cases) to the country in which it is based. It's as if there is a separate universe of CEOs and executive managers, who rotate among companies and countries, while the people beneath them stay put, professionally and geographically.

It reminds me of the almost universal modern demand for an "independent central bank", because it seems to be a consequence of a ubiquitous belief system, rather than a symptom of rule by a particular clique. Of course, there are people who will tell you that today's central banks are all run by a single clique, namely whoever it is that is behind the Bank of Independent Settlements in Switzerland. And I dare say that the phenomenon of the outsider executive who immediately assumes local color has plenty of historical precedents.

Still, I think there's something to my intuitions here. The phenomena of cosmopolitan executive churn, and politically disinterested banker-technocrats, look specific to the age of neoliberal economic globalization. A new age of mercantilist civilization-states and politicized local economies, will do a lot of things differently.

Japan and America

Japan has replaced China as America's largest foreign creditor. But I think it's the US government which holds more US government debt than anyone else, and similarly that the Japanese government owns most of its own debt. Japan and America are also together in not joining China's new development bank, the AIIB.

Greece

I haven't been paying attention to Greece. But now learn via Lubos that Greece may choose to start defaulting on debt payments to the IMF, less than a week from now. Also see: speech by Greek finance minister Yanis Varoufakis, made in mid-March. He mentions debt-deflation.

Deflation

It's a topic which lurks at the edges of today's discourse of financial doom. It seems to be what happens when the inflation of asset values ends; an implosion of value and economic activity. The nemesis to the hubris of the central banks, perhaps.

As I often do, I am speaking intuitively, reading between the lines of the voluminous and contradictory economic opinions out there. I don't know what its role will be, but intuition says that in the unfolding saga of the post-2008 global economy, deflation will have its moment.

"Greece is the new Cuba"

TI found a friend blogging Guardian articles about Greece being a new model for social change, and this phrase came to me. I immediately googled to see if it was already out there. There was precisely one hit, a Twitter user, @loalvaro. I couldn't find the individual tweet in question, but a search within Twitter revealed another inventor for the phrase, @LiaCeli... So here's my claim to at third place.

sent from my Huawei