Coronavirus reveals American Decline; investors seek Chinese assets as
'Safe Haven'
Newsletter published on March 18, 2020
(1) Coronavirus reveals Decline of US; Chinese assets perceived as Safe
Haven
(2) Coronavirus reveals American Decline
(3) Money Managers flee Western chaos for Chinese stability; Chinese
assets now seen as a Safe Haven
(4) China's GDP shrank 9% in Q1 during Coronavirus peak
(5) U.S. coronavirus testing failure: Flawed tests, Red Tape, resistance
to WHO German test
(6) Ambrose Evans-Pritchard: Deflationary Depression will break the
capitalist system; Fed must be unshackled like BoJ
(7) Get Ready, A Bigger Disruption Is Coming
(8) Globalists May Soon Become an Extinct Species
(1) Coronavirus reveals Decline of US; Chinese assets perceived as Safe
Haven
- by Peter Myers, March 19, 2020
For the first time, financial media (Bloomberg) reveal that the world's
biggest money managers now see Chinese assets as a Safe Haven.
This despite the contraction in China's economy during Q1, when the
Coronavirus was at its peak.
The perception of China as a Safe Haven contrasts with perceived chaos
in the libertarian West - which failed to act decisively.
The West will be forced to jettison Globalisation.
The relative decline of the US and the rise of China, revealed by their
contrasting management of the Coronavirus challenge, will usher in a new
world of intense competion between the two blocs.
I believe that the Culture War of recent decades will also be ended by
the Coronavirus, not immediately but over the next decade, as internal
divisions dissipate when national survival is at stake.
It's unlikely that these changes would be sought by the Deep State;
therefore, the claim that the Coronavirus was a US attack on China is
further undermined.
(2) Coronavirus reveals American Decline
Coronavirus Is China's Chance to Weaken the Liberal Order
The democratic world order survived the crash of 2008. It may not be so
fortunate this time.
By Hal Brands
As markets gyrate and the world faces the possibility of a punishing
recession, comparisons to the last global economic crisis are
inevitable. The financial collapse of 2008 was not simply an economic
shock, it was also a profound strategic shock to American power.
Assuming the coronavirus ends up hitting the world's democracies as hard
as many predict, it could deal another staggering blow to the U.S. and
the international order it leads. If we now look back on 2008 as the end
of America's unchallenged post-Cold War primacy, we might one day look
back on 2020 as the moment when Washington's global authority truly
began to buckle.
It's hard to remember now, but the two decades after the Cold War were a
golden era for American power. Washington was geopolitically supreme;
democratic practices and institutions had spread more widely than ever
before. The dynamic U.S. economy was leading the world into an era of
ever-deeper and seemingly ever-more-profitable globalization. There were
some clouds on the horizon: A costly and chastening war in Iraq, signs
of growing restiveness by autocratic powers such as China and Russia.
Nonetheless, it was America's "unipolar moment."
Then the financial crisis delivered its three-fold shock. First, it took
the luster off the U.S. model — its economic model, primarily — and
raised profound questions about the basic competence of American
leaders. Second, it lent respectability to the thesis that autocratic
governments might actually outperform their democratic counterparts in
terms of delivering stable growth and managing crises. Third, it
turbocharged Chinese geopolitical assertiveness and fueled fears of
American decline.
In international affairs, the psychological balance of power — the
world's sense of who is rising and who is falling — often changes far
more rapidly than the physical balance of power. The 2008 crisis shifted
that psychological balance dramatically, creating a widespread — if
premature — perception that the American era had reached its end.
The parallels to today's crisis are alarming. I wrote a few weeks ago
that Beijing' bungling of its initial response to the outbreak showed
that the Chinese Communist Party remains ill-suited to global
leadership. But as the crisis has progressed, it has begun to seem that
the U.S. may suffer even greater damage to its international position
and prestige.
America's reputation for basic competence and steadiness has always been
critical to its global leadership. Who wants to join the posse if the
sheriff can't shoot straight? That reputation was already suffering
under President Donald Trump, and it has taken a further hit because of
the coronavirus. The list of the administration's failures is long: The
failure to take advantage of the breathing space that early travel
restrictions helped purchase; the failure to acknowledge the severity of
the crisis; the failure to respond with alacrity when weaknesses such as
severe shortfalls in testing capacity became clear; the failure to
communicate accurate and timely information to the public; the failure
to convey a sense of calm and determined leadership; the failure to
effectively coordinate with international partners. And that list is all
the more depressing given that other countries equally surprised by the
outbreak have reacted so much more adeptly.
The 2008 crisis was so damaging because it revealed that economic
policymakers who confidently claimed to have tamed the business cycle
did not realize that their policies had also permitted vast, systemic
vulnerabilities that nearly plunged the world into depression. What
international observers are seeing today is that the country that claims
to lead the world has so far turned in a distinctly underwhelming
performance in dealing with the greatest global crisis of this century.
The coronavirus saga is also certain to set off another round of debate
on the merits of democracy and authoritarianism. The irony is abundant.
It was actually the authoritarian characteristics of the Chinese system
that initially allowed the virus to spread, and some democracies —
notably South Korea and Taiwan — have done remarkably well in responding
to the outbreak. Yet the fact that China subsequently claimed to have
gotten a handle on the epidemic by energetically enforcing a draconian
lockdown of the affected population, while the world's leading democracy
dithered in its own response, will be used by proponents of
authoritarianism to argue that their system is best equipped for crisis.
More recent events are further advancing the narrative. As America
struggles to test its citizens and build adequate stockpiles of basic
health-care supplies, such as masks, the Chinese government (and
prominent Chinese firms) are providing supplies to countries such as
Italy and even the U.S. itself. Beijing has promised additional funds to
aid World Health Organization programs in poor countries, and the
Communist Party propaganda arm has touted these contributions for all
they are worth, while also alleging that the virus somehow originated in
the U.S.
Only a few weeks ago, when the impact of the coronavirus was still
heavily concentrated in China, the dominant narrative was that Beijing
was once again the new "sick man of Asia." Now, the theme seems to be
that the coronavirus shows just how badly America's relative power and
prestige have fallen. After 2008, this perception led to a surge in
China's willingness to defy the U.S. and its friends and allies in the
South China Sea, in international institutions, and in negotiations on
global responses to climate change. No doubt the coronavirus will
stimulate new Chinese efforts to displace and discredit American
leadership in global affairs. ...
(3) Money Managers flee Western chaos for Chinese stability; Chinese
assets now seen as a Safe Haven
All the Chinese Assets Loved by World's Biggest Money Managers
Bloomberg News
March 17, 2020, 6:01 AM EDT
{photo} China's government bonds seen to offer attractive yields Yuan
expected to be stable versus emerging market currencies
As the world struggles to price the economic impact of the coronavirus,
Chinese assets have offered a spot of relative calm for foreign
investors looking to escape volatility elsewhere.
The country is home to the only stock market among the world's 20
largest that is yet to slip into bear territory. Investors say they are
confident of a stable currency outlook, with the yuan at its strongest
level since May last year versus a basket of trading-partner currencies.
Chinese government bonds are seen as attractive in a world where
treasury yields are nearing zero.
To be sure, the extent to which China can continue to offer shelter is
debatable. Dismal economic data this week underlined the mounting
challenges for the country given its reliance on trade with a world
gripped by a global pandemic. Overseas investors net sold Chinese stocks
for a fifth straight session on Tuesday, and the CSI 300 Index briefly
touched a seven-month low.
But other assets continue to find favor with foreign investors:
Yield Matters
Eric Liu, portfolio manager China Bonds, BlackRock (Singapore) Ltd.
We plan to increase Chinese bond holdings and believe other
international investors will also do so since the U.S.-China spread
offers remarkable advantage in value and margin of safety. Five-year or
longer duration is our pick since the spread between long- and short-end
is at a medium level and has room to compress in the future.
Haven Characteristics
George Sun, head of global markets, Greater China, BNP Paribas China Ltd.
If you watch the correlation between CNH and JPY, Chinese assets now
have quite obvious characteristics of safe-haven assets. We recommend
increasing long duration positions of government bonds and policy bank
bonds. We expect the yuan will head to 6.80 against the dollar in the
coming six months, though at this moment the yuan might also face
depreciation pressure due to USD liquidity tightening.
Philosophical Differences
Paras Anand, chief investment officer for Asia Pacific at Fidelity
International
Statements from the People's Bank of China last year suggest a
philosophical distance from the policies of other central banks,
preferring to use a broader combination of fiscal and monetary measures
to support the economy as trade tensions escalated over the last 13
months. This is important as investors think through whether the USD,
which has been a default safe haven currency, will continue to be so in
the same way over the coming years.
Not Like the Others
Cary Yeung, head of greater China debt at Pictet Asset Management (HK) Ltd.
Chinese bonds have low correlation with other asset classes and continue
to offer attractive yields while staying relatively immune from market
volatility. We remain confident that now is a good entry point for
foreign investors given the still-decent yield and a relatively stable
currency outlook.
The yuan has been, and is expected to remain, relatively stable against
other emerging market currencies on the back of inflows into the bond
market. Also playing a part in contributing to the yuan's stability are
shrinking imports, a decline in the short-to-medium term of outbound
traveling as well as the wide interest rate differential between China
and other developed markets, including the U.S.
Risk-off
Hayden Briscoe, head of fixed income for Asia-Pacific at UBS Asset
Management Hong Kong Ltd.
As the USD comes under pressure, we do not think the PBOC is looking for
the yuan to appreciate. We think they will try to keep the currency
close to 6.95 to 7 per USD. In the global risk-off environment, a lot of
volatilities are on the rise, but there is a lot of resilience in this
currency.
At the moment we expect the spread to compress back to 150 bps in the
second half of this year. If the situation get worse, we expect the
spread to go to 100 bps.
Easing Expectations
Jason Pang, a fixed-income portfolio manager at JPMorgan Asset Management
Although the rate of reported new virus infections has declined
meaningfully in China, the economy is likely to remain under some degree
of pressure. Taking this into consideration, we should still expect some
targeted easing within this market. That will continue to gradually
support Chinese government bond yields.
Opportunities Overseas
Edmund Goh, Asia fixed-income investment director, Aberdeen Standard
Investments
Onshore Chinese credit has gotten more expensive and we see better
spread value in USD markets for Chinese issuers. We are positioned long
duration against the benchmark and are looking for good entry
opportunities for some Chinese USD issuers in the Asian markets.
The ability to hedge the yuan will matter more than a view on the yuan
for now. Volatility in the yuan has picked up in the last 12 months
compared to the past.
Could Be Worse
Chaoping Zhu, Global market strategist at JP Morgan Asset Management.
There used to be strong expectation for a V-shaped rebound in the second
quarter when domestic activities normalize. However, the rebound might
be weaker than expected should the global economy enter a recession in
the second quarter. This might cause additional pressure on the A-share
market, although there are still more certainties than in the other markets.
— With assistance by Lucille Liu, Jing Zhao, Xize Kang, Qizi Sun, and Amy Li
(4) China's GDP shrank 9% in Q1 during Coronavirus peak
MARCH 17, 2020 / 9:57 AM / UPDATED 11 HOURS AGO
Goldman sees China's economy shrinking 9% in first quarter amid
coronavirus outbreak
BEIJING/SHANGHAI (Reuters) - Goldman Sachs said on Tuesday that China's
economy will likely shrink 9% in the first quarter, underscoring how the
coronavirus has disrupted normal business activities, while China
reported an uptick in new cases of the disease, most of them imported.
Goldman cut its estimate for China's first-quarter gross domestic
product growth to a 9% contraction, from a previous forecast of 2.5%
growth, citing "strikingly weak" economic data in January and February
that was reported on Monday. It also lowered its full-year GDP forecast
to 3% growth from an earlier estimate of 5.5%.
For the fourth straight day, imported coronavirus cases in China
outnumbered cases of local transmission. ...
(5) U.S. coronavirus testing failure: Flawed tests, Red Tape, resistance
to WHO German test
How U.S. coronavirus testing stalled: Flawed tests, red tape and
resistance to using the millions of tests produced by the WHO
By Peter Whoriskey and Neena Satija
March 16, 2020 at 6:30 PM EDT
When Olfert Landt heard about the novel coronavirus, he got busy.
Founder of a small Berlin-based company, the ponytailed 54-year-old
first raced to help German researchers come up with a diagnostic test
and then spurred his company to produce and ship more than 1.4 million
tests by the end of February for the World Health Organization.
"My wife and I have been working 16 hours a day, seven days a week, ever
since," Landt said by phone about 1 a.m. Friday, Berlin time. "Our days
are full."
By contrast, over the same critical period, U.S. efforts to distribute
tests ground nearly to a halt, and the country's inability to produce
them left public health officials with limited means to determine where
and how fast the virus was spreading. From mid-January until Feb. 28,
fewer than 4,000 tests from the U.S. Centers for Disease Control and
Prevention were used out of more 160,000 produced.
The United States' struggles, in Landt's view, stemmed from the fact the
country took too long to use private companies to develop the tests. The
coronavirus pandemic was too big and moving too fast for the CDC to
develop its own tests in time, he said.
"There are 10 companies in the U.S. who could have developed the tests
for them," Landt said. "Commercial companies will run to an opportunity
like this."
As the coronavirus continues to spread across the United States, causing
more than 80 deaths and over 4,000 confirmed cases, the struggles that
overwhelmed the nation's testing are becoming clearer.
First, the CDC moved too slowly to tap into the expertise of academia
and private companies such as Landt's, experts said. For example, it
wasn't until last week that large companies such as Roche and Thermo
Fisher won approval from the Food and Drug Administration to produce
their own tests.
Moreover, while FDA and CDC officials have attributed some of the
testing delays to their determination to meet exacting scientific
standards they said were needed to protect public health, the government
effort was nevertheless marred by a widespread manufacturing problem
that stalled U.S. testing for most of February.
The CDC has yet to fully explain the nature of the manufacturing problem
but told The Washington Post on Monday that the design could also have
resulted in flawed tests.
The U.S. Department of Health and Human Services, which oversees the
CDC, said earlier this month that it is investigating the defect in many
of the initial coronavirus test kits. ...
Shortly after publication of the virus's genome in early January, German
researchers announced they had designed a diagnostic test. Then, within
days, scientists at the CDC said they'd developed one, too, and even
used it detect the first U.S. case. ...
In fact, the U.S. efforts to distribute a working test stalled until
Feb. 28, when federal officials revised the CDC test and began loosening
up FDA rules that had limited who could develop coronavirus diagnostic
tests. ...
"It took [the CDC] awhile to come up with the test, honestly," said Alex
Greninger of the University of Washington.
His lab had developed its own test and began seeking approval to use it
on patients on Feb. 18. But that test, along with others that had been
developed in various academic centers and hospitals, could not be used
on patients until the FDA relaxed its testing rules on Feb 29. ...
"What surprised me the most was to hear how much emphasis there is at
CDC on quality control — to the point where, in my opinion, it really
compromised surveillance," said Michelle Mello, a professor of law and
medicine and Stanford who recently wrote a paper about the delays in
testing for coronavirus in the United States. "You can't track what you
don't see." ...
Even if those problems are resolved, however, those critical early
delays, when the CDC was struggling to issue tests to the states,
significantly damaged efforts to contain the spread of the coronavirus,
experts said. ...
Thomas Frieden, an infectious disease physician who served as CDC
director under former president Barack Obama, called on Sunday for an
"independent group" to investigate what went wrong with the CDC's
testing process. He said in the past, the CDC moved quickly to produce
tests for diseases such as H1N1, or swine flu.
"We were able to get test kits out fast," Frieden said on CNN.
"Something went wrong here. We have to find out why so we can prevent
that in the future."
Frieden said the agency has been muzzled under President Trump and
despite the multitude of problems with the rollout of testing, "the CDC
is still the greatest public health institution in the world."
(6) Ambrose Evans-Pritchard: Deflationary Depression will break the
capitalist system; Fed must be unshackled like BoJ
The moment when monetary 'shock and awe' finally fails has arrived: what
do we do next?
Ambrose Evans-Pritchard
17 MARCH 2020 o 6:06AM
The Federal Reserve's Jay Powell is running out of tricks, but he still
has a few more
The world's central banks have exhausted almost all their usable
ammunition under existing rules yet still failed to calm markets or to
unfreeze critical parts of the global financial system.
This moment what we all feared. The danger now is that global recession
- it is no longer 'if', we are weeks into it already - will morph into
something more intractable: a deflationary depression with a wave of
defaults that breaks the capitalist system as we know it.
So what can be done? Let me take an instant stab. Either the rules are
changed fast or we risk uncontrolled global liquidation. The US Federal
Reserve must be unshackled to act as a buyer-of-last-resort for the
corporate debt markets, for great swaths of the credit system, and for
Wall Street equity indexes.
The European Central Bank must acquire powers to act as a genuine
lender-of-last resort for eurozone sovereign states. It must do exactly
what Christine Lagarde refused to do when she blurted out last week that
"the ECB is not here to close bond spreads" - an expression lifted word
for word from the German board member, Isabel Schnabel, which tells us
who is in charge of that institution in the post Draghi era.
This must be backed by a fiscal blitz even greater than in 2008-2009,
with pledges to "socialise" the drastic losses faced by industry and
private firms. What was done for banks last time despite misconduct must
now be done for others.
There must be tax holidays, sweeping state guarantees for firms, credit
forbearance, a temporary suspension of mortgage payments (pushing out
the maturity), and moral hazard be damned - all under the umbrella of
financial repression. Both the US and the EU need fiscal New Deal
packages near $1.5 trillion between them to launch recovery, much like
the Schumer plan in the US, and in Europe's case funded collectively
through eurobonds.
What has happened over recent days is not a matter of panic. It is
accurate market pricing of 'sudden stops' across all major blocs. It
reflects the collapse in earnings and the spread of insolvency risk. It
is a rational response to the self-evident lack of coherent political
leadership or a functioning G20 world community that is capable of
containing either Covid-19 or the economic chain-reaction that might unfold.
As a result, forced sales are occurring on a huge scale across
interlinked markets for mechanical reasons. The pandemic has shown that
the supposedly-safe structure built by regulators after the Lehman
meltdown is a Maginot Line. Critics warned that this would happen when
the next black swan arrived.
As a recent report for the G20 put it: "the risk of an unexpected
reversal of abundant global liquidity hangs over the world economy.
Strong contagion across markets could make the endogenous dynamics of
global liquidity very dangerous." Did anybody heed the warning? No.
Europe will discover quickly - perhaps within days - that the
sticker-plaster job by EU leaders after the EMU debt crisis has resolved
nothing. The failure to establish some form of fiscal union during the
Draghi reprieve leaves the euro system exposed to the sovereign bank
'doom loop' of 2011-2012. In key respects it is even more toxic today.
The Fed did only half the job on Sunday night with its emergency cut of
100 basis points and its plan for $700bn of QE over the next six months.
But we are getting there. The measures should (fingers crossed) prevent
a repeat of the frightening moves that we saw in US treasury yields on
Friday.
We know roughly what happened. The 'relative value' trade in the
Treasury market so favoured by hedge funds blew up and caused a cascade
of deleveraging. These funds buy cash bonds while selling offsetting
futures to pocket the arbitrage gain. Margins are wafer thin so they
leverage up. It is easy money until the normal correlations go haywire.
The US Treasury market is the anchor of the global financial system. It
cannot break down without causing everything, everywhere, to unravel.
That is what we faced going into the weekend.
The Fed has defused another dangerous landmine by renewing dollar bank
swap lines to fellow central banks. These FX lines are what saved the
European banking system in 2008 when wholesale capital markets froze and
Europe ran out of dollars. Only the Fed can print US currency and act as
the superpower backstop for the world's dollarised financial system.
Nobody was sure whether they still existed in Donald Trump's Washington.
Now we know they do.
What the Fed has not done yet is to shore up markets for commercial
paper, certificates of deposit, and other parts of the credit system. It
has not so far offered limitless cheap loans through the TAF term
auction facility. "We have nothing to announce on direct lending," said
Fed chief Jay Powell. The markets did not like the sound of that.
Some measures require changes in US law. Treasury Secretary Steve
Mnuchin said over the weekend that he would seek to revive the Fed's
suspended emergency powers. "Certain tools were taken away that I'm
going to go back to Congress, and ask for," he said.
The Fed's hands are tied for now. A puritanical bank-bashing Congress
stripped the institution of key prerogatives after the Lehman crisis.
The Fed can no longer rescue a single bank in trouble (there must be at
least five). Nor can it issue blanket guarantees of bank debt and money
market funds, or issue instant loans to stem stress in commercial paper
and asset-backed securities.
In my view, Congress will have to go even further and let the Fed buy
company bonds, ETFs, and other private assets, as the ECB or the Bank of
Japan are allowed to do. In extremis, the Fed may have to soak up some
of the $3.4 trillion tranche of BBB-rated bonds perched precariously
above junk and at risk of a roll-over funding shock.
This would compress spreads and help head off a credit crunch. The Fed
could in theory go down the rating ladder and do whatever it takes - all
the way to junk if necessary. The line is arbitrary.
Will any of this happen? Yes, because the American political class has
woken up to the potential disaster coming their way. Donald Trump likes
fiscal and monetary largesse. He will not hesitate.
Europe is another matter. The EU fiscal package so far is less than
0.3pc of GDP. This does not move the macroeconomic needle. Nor does the
ECB's extra bond purchases of €120bn, spread over nine months, a tiny
fraction of what the US is doing.
Brussels is to activate an emergency clause allowing governments to
breach the Stability Pact and spend more to fight the coronavirus. That
is wholly inadequate.
The most vulnerable states are being left to fend for themselves. They
happen to be Italy and Spain, both now in the grip of hair-raising
lockdowns; as well as Portugal and Greece, with double-digit reliance on
tourism. The old 'PIGS' are being thrown under the bus again. The
eurozone should be careful. The surge in peripheral risk spreads last
week hit the semi-core and even France. There were signs that markets
were once again trading EMU break-up risk.
"An every-man-for-himself approach will not be enough to stabilise the
eurozone. We think it requires pooling of balance sheets," said Evercore
ISI.
Yes, Germany is issuing credit guarantees of up to €550bn through the
state-owned KfW development bank to shore up the country's industrial
machine, if need be.
But what about Italy? Its economy has all but collapsed. Its debt ratio
could be nearing 145pc of GDP by the end of the year. There are ever
louder warnings that it will need a massive rescue from the eurozone
bail-out fund (ESM), which would require the approval of the German
Bundestag and the Dutch Tweede Kamer, and turn into a political nightmare.
This structure is untenable. Either Germany and the northern creditor
states bite the bullet and agree to debt pooling, joint bond issuance,
fiscal integration, and a pan-EMU bank deposit insurance - with all this
implies for the evisceration of parliamentary democracy in Europe's
nation states - or world markets will again lose faith in the viability
of monetary union.
They do not have long to make up their minds.
(7) Get Ready, A Bigger Disruption Is Coming
Get Ready, A Bigger Disruption Is Coming
The Covid-19 pandemic reflects a systemic crisis akin to the seminal
crashes of the 20th century.
By Pankaj Mishra
March 16, 2020, 11:00 PM GMT+10
(This is the first in a two-part series.)
As global supply chains break, airlines slash flights, borders rise
within nation-states, stock exchanges convulse with fear, and recession
looms over economies, from China to Germany, Australia to the United
States, we can no longer doubt that we are living through extraordinary
times.
What remains in question, however, is our ability to comprehend them
while using a vocabulary derived from decades when globalization seemed
a fact of nature, like air and wind. For the coronavirus signals a
radical transformation, of the kind that occurs once in a century,
shattering previous assumptions.
In fact, the last such churning occurred almost exactly a century ago,
and it altered the world so dramatically that a revolution in the arts,
sciences and philosophy, not to mention the discipline of economics, was
needed even to make sense of it.
The opening years of the 20th century, too, were defined by a free
global market for goods, capital and labor. This was when, as John
Maynard Keynes famously reminisced, "the inhabitant of London could
order by telephone, sipping his morning tea in bed, the various products
of the whole earth."
This maker as well as consumer of global capitalism could invest "his
wealth in the natural resources and new enterprises of any quarter of
the world." He could also "secure forthwith, if he wished it, cheap and
comfortable means of transit to any country or climate without passport
or other formality."
Such an economically enmeshed world seemed to many the perfect insurance
against war — a contemporary version of such optimism was Thomas
Friedman’s "Golden Arches" Theory, according to which no two countries
with McDonald’s restaurants would go to war.
The First World War not only brought the period of friction-free
globalization to a gruesome end. It also cruelly exposed an
intelligentsia which had believed in irreversible progress and now was
forced to acknowledge that, as an embittered Henry James wrote to a
friend in August 1914, "the tide that bore us along was then all the
while moving to this grand Niagara."
As with our own crisis, the seminal crashes of the 20th century — the
First World War followed by the Great Depression — were harder to grasp
because their principal causes were set in motion decades before, and
largely neglected by mainstream politicians and commentators.
Democracy, whether as an emotive ideal of equality or as representative
institutions based on a widening adult male suffrage, had steadily
become the central principle of the modern world, especially as
industrial growth generated new inequalities.
Repeatedly frustrated, the aspiration for democracy helped fuel the rise
of both left and far-right political movements, pitting them against
established ruling elites.
The firebrands found their most committed supporters in the exploited
populations of then-rapidly growing cities. Filled mostly with people
freshly uprooted from the countryside, sundered from traditional
livelihoods, and forced to live in urban squalor, the world’s great
cities had started to become hotbeds of discontent in the late 19th century.
The problems of how to accommodate rising aspirations for equality
through inequality-generating economies were particularly acute for
nation-states such as Germany, Italy and Japan, that were trying to
catch up with economically advanced Western countries.
Once the series of economic shocks that began in the late 19th century
climaxed in the Great Depression, the elevation of the far-right to
power, and intensified conflicts between states, was all but guaranteed.
In our own conjuncture, all ingredients of the previous calamity are
present, if ominously on an unparalleled scale.
For decades now, de-industrialization, the outsourcing of jobs, and then
automation, have deprived many working people of their security and
dignity, making the aggrieved in even advanced Western countries
vulnerable to demagoguery. At the same time, stalled economic
modernization or a botched process of urbanization in "catch-up" powers
like India and Russia, has created, in almost textbook fashion, the
political base for far-right figures and movements.
The financial crisis of 2008, which has caused deeper and longer damage
than the Great Depression, may have discredited the globalizing elite
that promised prosperity to all, creating broad scope for opportunistic
demagogues like Donald Trump. Yet few lessons were learnt from the
collapse of global markets as the tide moved faster to Niagara. This is
why the crisis of our time is as much intellectual as it is political,
economic and environmental.
One sign of analytic deficiency is that the prescriptions for multiple
malaises have remained the same in much mainstream politics and
journalism: more economic "reforms," largely in the direction of global
free markets, reheated Cold War slogans about the superiority of
"liberal democracy" over "authoritarianism," and aspirations for a
return to "decency" and "global leadership."
These hopes for a return to the pre-2008 political and ideological
status quo are often leavened with a heightened, if ineffectual, concern
about climate change. Their inadequacy will become clearer in the months
to come when afflicted nations as much as individuals are tempted to
self-isolate, sacrificing many holy cows to the existential urgency of
survival. The coronavirus, devastating in itself, may prove to be only
the first of many shocks that lie ahead.
This column does not necessarily reflect the opinion of Bloomberg LP and
its owners.
To contact the author of this story: Pankaj Mishra at
To contact the editor responsible for this story: James Gibney at
(8) Globalists May Soon Become an Extinct Species
Globalists May Soon Become an Extinct Species
The disruptions caused by the spread of the coronavirus mean supply
chains will be moved closer to home rather than in foreign lands.
By A. Gary Shilling
The coronavirus may force countries to move production closer to home.
A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey
consultancy, and author of "The Age of Deleveraging: Investment
Strategies for a Decade of Slow Growth and Deflation." Some portfolios
he manages invest in currencies and commodities.
The coronavirus's depressing effects on the global economy and
disruptions of supply chains is no doubt driving the last nail into the
coffin of the globalists.
They believe in the theory first articulated by Englishman David Ricardo
(1773-1823) that free trade among nations benefits all of them. He
argued for the comparative advantage of free trade and industrial
specialization. Even if one country is more competitive in every area
than its trading partners, that nation should only concentrate on the
areas in which it has the greatest competitive advantage. He used the
example of English-produced wool being traded for French wine—and not
the reverse.
But Ricardo's simple trade model requires economies in static
equilibrium with full employment and neither trade surpluses nor
deficits, and similar living standards. These aren't true in the real
world. Also, Ricardo didn't consider countries at different stages of
economic development and different degrees of economic and political
freedom, or exchange rate manipulations and competitive devaluations
since gold was universal money in his day.
Ricardo also didn't factor in trading partners with huge wage
differences such as the U.S. and China. As a result, China can produce
almost any manufactured good cheaper than America. The result has been
the huge and chronic U.S. trade deficit with China.
Trade wars are normal as countries with insufficient domestic demand to
create full employment strive to unload their problems on trading
partners. They promote weak currencies to make imports more expensive
for residents in order to encourage local production and to make exports
cheaper for foreign buyers. Subsidies for exporting companies, now
widespread in China, are another tried and true technique.
Free trade is rare. Historically, it has been largely confined to
periods when a major global power promoted the free exchange of products
in its own enlightened self-interest. That was true of Great Britain in
the 19th century after it spearheaded the Industrial Revolution and
wanted to insure the easy flow of raw materials for its factories from
abroad and foreign markets for their output. After World War II,
Americans used trade to rebuild Western Europe and Japan to counter the
Soviets, and accepted the lack of reciprocity by some of those lands,
notably Japan. This was cheaper and more acceptable in the Cold War era
than garrisoning more American troops around the world and risking more
military confrontations.
Consequently, there were eight global tariff-cutting rounds in the
post-World War II era, from the 1947 Geneva Round to the Uruguay Round
in 1986-1994. That was it. The 2001 Doha Round has gone nowhere because,
by then, Washington no longer needed to support the free world. Also,
U.S. trade deficits were chronic and growing, especially as
globalization transferred manufacturing jobs to China and other low-cost
Asian countries. U.S. factory positions collapsed from 21.7 million in
1979 to 11.5 million in 2010, with only a modest recovery after the
Great Recession to 12.9 million in February of this year.
Largely as a result of these developments, real wages for most Americans
have been flat for several decades, making voters mad as hell. President
Donald Trump played to their plights and was elected by blaming weak
incomes on imports and immigrants. Lack of real income growth also
convinced voters in Europe that mainstream politicians weren't
effective. The result was Brexit and an attraction to far right and
extreme left parties.
Globalization not only left the U.S. highly dependent on China for
manufactured goods but also spawned efficient but vulnerable supply
chains. Textiles produced in capital-intensive Chinese factories are
sewn into garments in Vietnam where incomes are only 28% as high,
according to the OECD. Semiconductors from South Korea go into
subcomponents in Taiwan and are assembled into smart phones in China for
export to the U.S.
The coronavirus's disruption of supply chains not only unhinges U.S.
imports but also raises national security concerns. China is the world's
biggest supplier of active pharmaceutical ingredients and the Indian
generic drug industry, which the Food and Drug Administration says
supplies 40% of U.S. generic drugs, relies on China for most of its
active ingredients.
Even after the virus scare subsides, look for more pressure from
Washington for more reliable sources of goods, among other protectionist
measures. Domestic producers will benefit but so too will those in
Mexico. The results will be lower global efficiency and slower economic
growth.
And don't believe the protectionists' siren songs that American jobs and
incomes will benefit. As in the 1930s, the economy-depressing effects of
trade barriers will dominate.
{Comment (Peter M.): the author omits to mention that the protectionist
1950s & 1960s were a golden era. This is routinely omitted by Free
Traders. But the Boomer generation remember.}
This column does not necessarily reflect the opinion of Bloomberg LP and
its owners.
To contact the author of this story: Gary Shilling at
To contact the editor responsible for this story: Robert Burgess at
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