personal capacity: I wish to comment on the press statement by Jagdeep
Singh Deo as reported in Berita Daily and many other newspapers on 24
2017 was a year of smooth tailwinds, even though everyone was
mesmerized by the Trump reality show. Heading into 2018, one issue on
everyone’s minds is whether headwinds will finally catch up when the
tide goes out.
ALL markets function on a heady mix between greed and fear. When the markets are bullish, the investors know no fear and regulators think they walk on water. When fear grips the markets, and everyone is staring at the abyss, all eyes are on the central banks whether they will come and rescue the markets.
Last year was one of smooth tailwinds, even though everyone was mesmerised by the Trump reality show.
Heading into 2018, one issue on everyone’s minds is whether headwinds will finally catch up when the tide goes out.
Last week at a Tokyo conference, Fed vice chairman Randy Quarles was visibly confident about the US economy. Real gross domestic product (GDP) growth through the final three quarters of 2017 averaged almost 3%, faster than the 2% average annual pace recorded over the previous eight years.
The European recovery, barring Brexit, looked just as rosy. Eurozone growth has stepped up to 2.7% in 2017, with inflation at around 1.2% and unemployment down to 8.7%, the lowest level recorded in the eurozone since January 2009.
In Asia, 2017 Chinese GDP grew by 6.9% to 59.7 trillion yuan or US$9.4 trillion, just under half the size of the United States. With per capita GDP reaching US$8,836, China is expected to reach advanced country status by 2022.
Meanwhile, the Indian economy has recovered from its stumble last year and may overtake China in growth speed in 2018, with an estimated rate of 7.4%.
The tailwinds behind the growth recovery seem so strong that the IMF’s January world economic outlook for 2018 sees growth firming up across the board. The IMF’s headline outlook is “brighter prospects, optimistic markets and challenges ahead.”
Expressing official prudence, “risks to the global growth forecast appear broadly balanced in the near term, but remain skewed to the downside over the medium term.”
Having climbed almost without pause in most of 2017 to January 2018, the financial markets skidded in the first week of February. On Feb 5, the Dow plunged 1,175 points, the biggest point drop in history. The boom in 2017 was too good to be true and fear came back with the re-appearance of volatility.
Amazingly, the drop of around 11% from the Dow peak of 26,616 on Jan 26 to 23,600 on Feb 12 was followed by a rebound of 9% in the last fortnight.
Global stock market indices became highly co-related as losses in Wall Street resulted in profit taking in other markets which then also reacted in the same direction.
Will headwinds disrupt the market this year or will there be tailwinds like the economic forecasts are suggesting?
What makes the reading for 2018 difficult is that the current buoyant stock market (and weak bond market) is driven less by the real economy, but by the current loose monetary policy of the leading central banks.
With clearer signs of firming real recovery, central banks are beginning to hint at removing their decade long stimulus by cutting back their balance sheet expansion and suggesting that interest rate hikes are in the books.
The projected three hikes for Fed interest rates in 2018 augur negatively on stock markets and worse on bond markets.
The broad central bank readout is as follows.
The Bank of England and the Fed are leaning on the hawkish side, the European Central Bank (ECB) is divided and the Bank of Japan will still be on the quantitative easing stance.
In his first testimony to Congress, the new Fed chairman Jay Powell was interpreted as hawkish. In his words, “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2% on a sustained basis. In the FOMC’s view, further gradual increases in the federal funds rate will best promote attainment of both of our objectives.”
What is more interesting is the divided stance facing the ECB. In his latest statement to the European Parliament, ECB president Mario Draghi reaffirmed that the eurozone economy is expanding robustly. Because inflation appears subdued, although wage growth has picked up, he argued that “patience and persistence with respect to monetary policy is still needed for inflation to sustainably return to levels of below, or close to, 2%.”
In an unusually critical and almost unprecedented article published last month by Project Syndicate, the former ECB Board member and deputy president of the Bundesbank Jurgen Stark called the ECB “irresponsible”, suggesting that its refusal to normalise policy faster is drastically increasing the risks to financial stability. In short, the bigger partners in Europe think tightening is the right way to go.
If both central banks begin to reverse their loose monetary policy and unwind their balance sheets, liquidity will become tighter and interest rates will rise.
Financial markets have therefore good reason to be nervous on central bank policy risks.
There is ample experience of mishandling of policy reversals.
After the taper tantrum of 2014, when markets fell on the fear of the Fed unwinding too early and too fast, central bankers are particularly aware that they are walking a delicate tightrope.
If they reverse too fast, markets will fall and they will be blamed. If they reverse too slow, the economy could overheat and inflation will return with a vengeance, subjecting them to more blame.
In the meantime, trillions of liquid funds are waiting in the sidelines itching to bet on market recovery at the next market dip. But this time around, it is not the market’s invisible hand, but visible central bank policies that may pull the trigger.
Man-made policies will always be subject to fickle politics. The raw fear is that once the market drops, it won’t stop unless the central banks bail everyone out again. This means that central bankers are still caught in their own liquidity trap. Blamed if you do tighten, and damned by inflation if you don’t.
There are no clear tailwinds or headwinds in 2018 – only lots of uncertain turbulence and murky central bank tea leaves. Fear and greed will dominate the markets in the days ahead.
AFTER two Category 5 hurricanes (Harvey and Irma) hit the US in October, followed by Maria hitting Puerto Rico, no one can deny that natural disasters are devastating.
With three hurricanes costing an estimated US$385bil, with less than half insured, the poor are suffering the most because they cannot afford to rebuild as the rich.
This year alone, monsoon floods in Bangladesh, India and Nepal have left millions homeless. This year will therefore break all records as Munich Re-insurance data suggests that 2016 natural disaster losses were only US$175bil, already 28.6% higher than the 30 years (1986-2015) annual average of US$126bil.
But how much of these natural disasters are man-made?
Despite US President Trump being sceptical of climate change, the US Global Change Research Program Climate Science Report published this month concludes that “it is extremely likely that human activities, especially emissions of greenhouse gases, are the dominant cause of the observed warming since the mid-20th century”.
Carbon dioxide concentration already exceed 400 parts per million, last occurred about 3 million years ago, when both global average temperature and sea level were significantly higher than today. Roughly one third of carbon emission is due to residential heating/cooling, one third for transport and one third for industrial production.
Human activities on Mother Earth include over-consumption of natural resources, cutting down forests, polluting waters and excessive cultivation/development that caused desertification or soil erosion. You see this from warmer surface and oceanic temperatures; melting glaciers; diminishing snow cover; shrinking sea ice; rising sea levels; ocean acidification; and declining tree and fish stock.
Oceans warming up
Hurricanes are caused by oceans warming up, building energy and vapour levels that create freak typhoons, tornados and massive downpours. At the same time, droughts are also occurring with more frequency for longer.
Scientists estimate that global average sea level has risen by about 7-8 inches since 1900, with almost half that rise occurring since 1993. Everyday, we hear new extreme events, such as unusually heavy rainfall, heatwaves, large forest fires, floods or landslides.
Climate warming is most observable in the water-stressed Middle East and the North Africa/Sahel region, where rapid population growth created desertification, food shortages, civil conflicts and ultimately, outward migration towards cooler climates, especially Europe. This hot region accounts for 60% of global war casualties since 2000, with 10 million outward refugees. About 90% of the world’s refugees and asylum seekers come from four regions with half under the age of 18 years.
A 2016 World Bank report estimated that these water-stressed countries’ GDP could be reduced by up to 6%, with dire consequences on stability. Without water, industries cannot function, food cannot be cultivated and health can deteriorate due to disease from water-shortage and drought.
European estimates suggest that each refugee costs roughly US$11,600 per person to maintain and there are already one million trying to enter Europe last year. The OECD has classified countries such as Afghanistan, Central African Republic, Iraq, Somalia, Sudan, Syria and Yemen as extreme fragile.
The world is already reaching a critical turning point. If the Paris Climate Accord can be implemented, with or without the United States, there is some chance of averting further global warming.
But closer home, we are already witnessing the effects of climate change on our daily lives.
In 1972, Hong Kong experienced a devastating landslide near Po Shan Road in Mid-Levels, which caused 67 deaths and collapse of two buildings. One cause was unstable ground following heavy rainfall from Typhoon Rose eleven months prior to the incident.
This tragedy in densely populated Hong Kong resulted in rigorous slope protection and inspection of drains to ensure that these slips do not occur again. I lived near Po Shan Road and admired how Hong Kong engineers regularly inspected the slope protection measures and that the drains were always clear.
In 1993, the collapse of Highland Towers in Kuala Lumpur was partly attributed to the clearing of the hilltop above Highland Towers, which led to soil erosion and the weakening of the foundations. By the time the residents detected cracks in the buildings, it was already too late. Some of my personal friends were among the 48 persons who were killed in that collapse.
Last weekend, Penang (where I live) had the worst rainstorm and floods because we were hit by the tail end of strong winds from Typhoon Damrey, one of the strongest to hit Vietnam in 16 years, leaving 61 people dead. Driving along Penang Bridge, I can see that the continued hilltop developments in Penang are leaving soiled scars on the previously pristine landscape, I am reminded of Highland Towers and Po Shan incidents. Natural disasters are acts of god, but the size of their impact on human lives are completely within our control.
Soil erosion does not happen overnight, and require responsible developers and conscientious governments, as well as concerned citizens, to be continually vigilant that maintenance of roads and drains, including soil inspections, are serious business with serious consequences.
Modern technology can provide drones and inbuilt sensors that can detect whether erosion is reaching critical levels. Regular maintenance of drains and checks on stability of the soil, especially where there has been recent clearing of trees in steep slopes, will forewarn us all of impending accidents.
As cities are building more and more on hillsides subject to torrential rain, Penang should seek technical expertise from Hong Kong which has extensive expertise on the maintenance of steep hill slopes that are subject to typhoons and sudden rainfall.
Landslides are today used more in political terms than in real terms. The next time landslides happen, residents who watch daily the erosion of their natural environment will know who is really looking after their interests.
Becoming bald: A view of the clearing work seen at Bukit Relau which was visible from the Penang Bridge in November last year. GEORGE
Seeking solutions: Penang Forum member and soil expert Dr Kam Suan Pheng giving her views during the dialogue sessio
Speaking out: Penang Forum members protesting outside the CAP office in George Town. Don’t just make it about worker safety
https://youtu.be/QB45Q2_mOG0 Suspicious activity: A photo taken from Penang social activist Anil Netto’s blog showing an active
THIS month, two Category 4 hurricanes hit the United States within 17 days of each other. In Asia, North Korea is threatening nuclear Armageddon, and floods and famine are putting thousands of lives at risk from Bangladesh to Yemen. How can one survive in this chaotic era?
A first step must be to make sense of the apparent chaos. Hurricanes Harvey and Irma have proved that climate change is not fake science, but real threats to home and security. When hailstones the size of golf balls hit Istanbul in the middle of summer, even the agnostics accept that climate change is serious business.
The biggest uncertainty that has hit Asia recently is the shock that North Korea has not only developed possibly a hydrogen bomb, but also the missile capability to deliver it even to the United States. This has changed the geopolitical balance not only in North Asia, but globally because it is no longer possible for the United States alone to contain nuclear proliferation.
Physics teaches us that chaos is often a characteristic of transition from one order to another. Chaos is also a pattern in which there is apparently no discernible pattern.
But there is a seismic transition from a unipolar world led by the United States to a multi-polar world of competing powers and ideology, particularly after the 2007 global financial crisis. As the share of US GDP in the world declines relative to the rest, the rise of China, India and increasing assertion by Russia and non-state players like IS means that the United States’ ability to dominate militarily and ideologically is being challenged.
At the same time, increasing stresses from social inequalities and paranoia of terror, immigration and job loss have tilted the United States to become more inward looking. The Trump administration has dramatically begun to dismantle the neoliberal order of multilateral trade and finance that shaped US foreign policy since the end of the Second World War.
There is a raw open division within the United States in outlook and values. The Democratic Left believes in maintaining the old order of moral leadership on human rights, democracy and multilateral global stability and prosperity. The Republican Right questions these beliefs and prefers America First, negotiating bilaterally to achieve that premier status.
Earlier this year, the Pentagon asked the Rand Corporation to conduct a review on “Alternative Options for US Policy toward the International Order”. The key questions for the New Global Order are: Who sets the rules and how binding are the rules?
The study breaks the future order into two camps of rule-makers – the US and its allies or a concert of great powers. Under such a division, there are two conditions where rules are binding – one dominated by the US camp to enforce rules and the other where the great powers agree to a global constitutional order enforced by institutions. The other two conditions where rules are not binding involve a coalition of states aligned to counteract against revisionism and a new concert of great powers.
The immediate problem with the Rand categorisation of New Order Visions is that the existing liberal, rules-based order is not being challenged by others, but by the US itself.
First, after German Chancellor Angela Merkel’s comment earlier this year that Europe must begin to look after its own interests, it is no longer clear that America’s traditional allies are going to follow the US leadership when there are serious disagreements on trade, climate change and immigration. It is no coincidence that the largest trade imbalances are no longer between China or oil producers with the US, but between Europe and the United States. Germany alone is running a current account surplus equivalent to around 8% of GDP.
Second, within the Middle East, alliances are shifting almost by the day. The quarrel between Saudi Arabia and Qatar has riven the Gulf Cooperation Council, while Turkey is playing an increasingly pivotal role within the shifting alliances.
Third, North Korea’s bid for nuclear power membership, despite being a small state, means that Great Powers may have to accommodate new players whether they like it or not.
Fourth, climate change in the form of Hurricanes Harvey and Irma demonstrate that nature can impose larger and larger economic losses on nations and regions, which will require global public goods that the current order is neither willing to fund, nor able to agree on how to address. The economic losses from Harvey alone is estimated at US$180bil, equivalent to the annual GDP of a middle-income economy. The existing multilateral bodies such as the United Nations and the World Bank are facing serious resource shortages relative to these new global demands.
The bottom line is that the current order has neither the resources nor the collective will to enforce rules when the human population growth puts increasing competition for scarce water, food and territorial spaces. Chaos arises from the breakdown of rules and borderlines.
In short, globalisation of trade, information and human migration has meant that traditional borders in many regions are becoming non-enforceable. For example, it is 101 years since the 1916 Sykes-Picot Agreement divided up the collapsing Ottoman Empire into British, French and Russian spheres of interest and eventual control. These borders were drawn and enforced by the Great Powers through their military superiority.
Seen from the long lens of history, with the Great Powers being unwilling to put troops on the ground to enforce borders drawn up under the colonial era, these artificial borders are failing.
A hallmark of the times is that even the best of think tanks cannot map out how to navigate through this era of disruptive technology, unpredictable climate and shifting alliances and interests. What history teaches us is that the fault lines will be at the borderlands, at the confluence of emerging forces and stresses.
We should therefore be prepared for not only disruption at the borderlands of physical space, but within the realms of cyberspace.
Tan Sri Andrew Sheng writes on global issues from an Asian perspective.
Behind BJ Cove houses at Lintang Bukit Jambul 1 is an IJM Trehaus Project. Approximate Coordinates : 5°20’38.47″N,100°16′..
OVER the Chinese New Year holidays, we were all treated to the Trump Reality Show, changing the world we thought we understood with various tweets or executive orders.
This behaviour reminded me of the Chinese philosopher Zhuangzi waking up and was not sure he was a man dreaming that he was a butterfly, or a butterfly dreaming that it was a man. Mr Trump is either a butterfly disguised as President or a truly smart politician disguised as a butterfly. The tragedy is that the rest of us have to live with the consequences.
This week, after humiliating Mexico and reversing his position on Nato, Trump and his advisers have switched to stoking a currency fire, accusing China and Japan of manipulating their currency and even suggesting that Berlin is exploiting a “gross undervalued” euro.
Whatever you think of Trump, he was smart enough to appoint someone like Steve Bannon as his chief strategist. You always can judge a leader by the people he or she surrounds himself with. Steve Bannon is pure American success story – Harvard trained, ex-Goldman Sachs, ex-navy, and founding entrepreneur of Breitbart news, a platform that claims to represent the alt-right and third most influential news channel after Bloomberg and Reuters.
In a remarkable 2014 speech (https://www.buzzfeed.com/lesterfeder/this-is-how-steve-bannon-sees-the-entire-world), Bannon claimed that (this) … “is a crisis both of our church, a crisis of our faith, a crisis of the West, a crisis of capitalism.”
Taken on its own, there is nothing wrong with someone having a view of the world in crisis. But Bannon is now in a pivotal position to do something about it.
The dollar has maintained its position as a global standard because it is convenient, cheap to use and a store of value that has so far been subject to minimal political interference.
The rest of the world is now stuck with a “damned if we do, and damned if we don’t” dilemma. If we continue to rely on the dollar, how do we avoid being accused as manipulators, when in reality, so far the market forces are stronger than any central bank on its own? If we don’t rely on the dollar, we will anyway be accused as manipulators, particularly if the currency depreciates against the dollar.
In other words, what is at stake is not a crisis of the West or its faith (which the Rest cannot change), but a crisis of faith within the Rest on the leadership in the West. The dollar remains the anchor of global stability, but when the solo anchor itself is adrift, we need to find alternative anchors. Single anchors are efficient but dangerous if they wobble. We need two or three anchors to triangulate global stability.
Here is another inconvenient truth – it’s Trump’s dollar, but the Rest’s savings. Based on the US Bureau of Economic Analysis, the US has net global liabilities of US$7.8 trillion or 41.7% of GDP at the end of the third quarter 2016. This has deteriorated from US$2.5 trillion or 16.8% of GDP at the end of 2010. The cumulative current account deficit (from trade) between end 2010-2016 Q3 was only US$2 trillion, which meant that the rest (US$3.3 trillion) was due to valuation changes (change in US dollar exchange rate) or financial account flows.
In other words, it is capital flows rather than trade that is the major driver of the exchange rate, with interest rate differentials influencing also the exchange rate.
If that is the case, going forward, the US net debt position will depend largely on the future global savers, mostly Europe and Asia. And if the savers are subject to constant lecturing by the Trump Administration, an alt-dollar solution will have to be found.
During the Asian financial crisis, Europe sided with the US to reject an Asian Monetary Fund in a move against regionalisation. But if today, the America First strategy is designed at isolating the Rest, then the Rest must unite to protect global trade and investments. If the non-dollar zone can maintain currency stability against the dollar, then there will be less accusations of currency manipulation, forcing the debate into how the US can restore its own fiscal and trade balance to maintain its own savings equilibrium.
In short, the Rest needs to remind the US that she is important, but cannot blame the Rest for all her own problems.
The reserve currency central banks have a major role to ensure currency stability, which can be only preserved by ensuring liquidity and discipline. So far, the Fed has shown responsible leadership, with strong support from the European Central Bank, Bank of England, Bank of Japan and the People’s Bank. But if the dollar is being politicised, then alternatives can and should be found.
All options are now on the table. If the US is no longer dependent on oil and energy, then oil and energy suppliers can price oil trade in currencies other than the dollar. We have seen this before in the competition between different technology standards. The leading standard becomes dominant because it is willing to provide public goods (lots of freebies). But when the dominant standard becomes predatory or extractive in using its monopoly position, then it is time to use alternative standards.
No one should take their position or customers from granted. The Rest will not stand still whilst Trump and his cohorts decide to change allies and foes by the tweet. None of us are against the dollar but for global stability, common sense and mutual respect. The euro, sterling, yen, yuan and SDR’s time has come.
By Andrew Sheng
Rash move: The effectiveness of Trump’s executive order banning citizens of seven countries from entering the US is highly questionable. — AFP
WHEN the world’s most powerful man conducts diplomacy over Twitter, keeping his words to 140 characters, we’d better prepare ourselves for trouble.
And indeed, since Donald Trump took over as President of the United States, there has been a series of totally unpredictable and unconventional decisions made, some mind boggling, even bordering on insanity.
And it has just been a little over two weeks since he moved into the White House.
There is no question that many Americans are troubled by a possible mass influx of refugees from the Middle East and Africa.
This does not involve just the US but also affects several parts of Europe, including Britain, France and Germany, which explains why politicians who play the right-wing card – with the anti-immigrant agenda – are winning.
Trump clearly understands the pulse of the average American, especially those in the rural mid-west, the US heartland.
These are folks who watch conservative Fox TV and whose interaction with people of other races, religions and cultures is limited.
They are not like the liberal city folks of New York or Los Angeles, who turn up at airports and train stations, waving placards and hugging Syrian refugees, as shown on international TV news.
It is probably a different story in Montana, Nebraska, Arkansas or South Carolina but we do not hear the voices of these rural folks on CNN.
Trump won simply because he understood the fears of the average American well. He has continued to play the Islamophobia card because he knows his fearmongering works.
It doesn’t help that most of these refugees want to go to the US or Britain and not the Muslim-majority nations of the Middle East. The question remains if these Arab countries are even offering places to the refugees or do the refugees themselves prefer Western secular and democratic values.
Nationalist politicians have already whipped up anger, pointing out that if these Middle East refugees hate Western culture so much and refuse to assimilate, then why should they be let in.
But Trump’s executive order banning the citizens of seven countries from entering the US, supposedly to protect the nation from “radical Islamic terrorists”, is highly questionable, especially its effectiveness.
The president has signed the order temporarily suspending the entry of people from Iraq, Syria, Sudan, Iran, Somalia, Libya and Yemen into the US for at least 90 days.
This is odd because if we wish to identify terrorism acts, then surely there’s a high number of terrorists from Egypt, Turkey, Saudi Arabia, Pakistan, the United Arab Emirates, Indonesia and Afghanistan. Why were these countries not on the list?
Obviously, Trump did not want to offend US allies, especially Saudi Arabia and Pakistan. Despite the US’ constant lecture on democracy, we all know these two countries are often “spared”, despite their horrifically poor human rights record because they are strategically important to the US. We also should not forget that at one time, the vital oil supply was from Saudi Arabia.
The fact is that in the past four decades, 3,024 people have been killed by foreign terrorists on US soil.
The reality is that the Sept 11 attacks, perpetrated by citizens of Saudi Arabia, the UAE, Egypt and Lebanon, account for 98.6% of those deaths – 15 of the 19 Sept 11 hijackers once called Saudi Arabia home.
In fact, over that period, no American has been killed on US soil by anyone from the nations named in the present president’s executive order.
The San Bernardino massacre, in which 14 people were killed and 22 injured in 2015 was carried out by Syed Rizwan Farook, who is of Pakistani descent, and his wife Tashfeen Malik, who grew up in Saudi Arabia.
The Pulse nightclub attack in Orlando, where 49 died and 53 were injured last year, was carried out by Omar Mateen, a US citizen of Afghan descent.
The Boston Marathon bombing in 2013 was orchestrated by the Tsarnaev brothers, both of whom were Russian, killing three and injuring several hundred people.
But as the world jumped on Trump, news reports have emerged that Kuwait does the same.
Syrians, Iraqis, Iranians, Pakistanis and Afghans have reportedly not been able to obtain tourism or trade visas to Kuwait since 2011.
Passport holders from the countries are not allowed to enter the Gulf state while the blanket ban is in place, and have been told not to apply for visas, it has been reported.
Likewise, the ban on citizens from fellow Muslim-majority nations has failed to prevent Kuwait from being targeted in a number of terrorist attacks over the past two years – including the bombing of a mosque in 2015 which left 27 Kuwaitis dead.
Kuwait is the only country in the world to officially bar entry to Syrians, until the US named Syria among the seven countries whose citizens were banned from entering its borders.
What Trump is doing – and he may not even realise it with his defiant-style of leadership – is making the US a much more dangerous place to live in now, not a safer place as he had hoped.
There will be homegrown terrorists, including Americans – and even radicals entering the US holding other passports – who plan to carry out their crazy acts.
He has also made the work and lives of career diplomats more difficult with his brazen diplomacy. It came as no surprise that 900 State Department diplomats signed a memo to oppose his ban.
According to CNN, the “memo of dissent” warned that not only will the new immigration policy not keep America safe but it will harm efforts to prevent terrorist attacks.
The ban “will not achieve its stated aim of protecting the American people from terrorist attacks by foreign nationals admitted to the United States,” the memo reportedly noted.
Trump has actually provided oxygen to the radicals, who will now thump the noses of moderates in Muslim countries.
There should be no surprises if the recalcitrant Trump expands his list of countries whose citizens would be banned from entering the US.
It won’t be wrong to suggest that 2017 will be a Year of Living Dangerously under Trump. Let’s be prepared for the unexpected from him.
Jan 2, 2017 … With his extreme views and bulldozing style, President-elect Donald Trump is set
to create an upheaval, if not revolution, in the United States …
Jan 20, 2017, marked the inauguration of the 45th President of the United States, Donald J Trump. Next week, the Lunar Year of the Monkey ends, ushering in the Year of the Rooster. This is where monkey business ends and the chickens come home to roost.
Trump’s election marks a watershed between the old liberal order and a new populist phase that is clearly a rejection of the old order. Former German Foreign Minister Joschka Fischer defined this change as “Goodbye to the West” – a concept that the US was committed to the defence of its allies, mostly Western Europe, Australia and Japan.
Trump has turned the old establishment on its head. Policy is not made by consensus, but by tweets. World thought leader Mohamed El-Erian, whom I had the great fortune to moderate at his keynote address to the Asian Financial Forum in Hong Kong earlier this week, argued that the world is at a T-junction.
The old order has come to a dead-end. It is not even at the cross-roads, where you have the option of moving forward. At a T-junction, you either move right or move left. Volatility and the range of possibilities have increased, because no one knows which policy and which rule will change with the next tweet.
There is, of course, no difficulty in picking where Trump will move. Indeed, anyone who said Trump is unpredictable is wrong – he is very predictable.
He will do whatever is in his best interest, saying that it is in America’s interest. He will move right, because the populist sentiment has rejected the old leftist liberal order. Our only concern is – how far right will he go? Based upon the inclinations of his appointees so far, it looks pretty far right.
Trump’s election marks a very important juncture in Pax Americana. Two Democratic presidents marked the rise of the present American Exceptionalism – Franklin D Roosevelt (1933-1945) and John F Kennedy (1961-1963). The first brought in the New Deal to get America out of the Great Recession and then won the Second World War, confirming the new American order. The second inaugurated a more inclusive America, ushering global idealism of the American dream, providing aid, trade and culturally, an Age of Camelot.
Trump’s ascension signals the end of the rule-based era for the public good, with a new era of clear and present self-interest, changing allies and allegiances by the tweet. Allies and foes alike do not know how to react to this new Art of the Deal.
Crossing the river by feeling the stones is possible, when there are still some stones. But crossing the swamp where waters are murky with crocodiles and leeches will be much more complicated.
I was forced to dust off my copy of German historian Oscar Spengler’s Decline of the West, written between 1911 and 1922, to get a sense of how we should think about this era from a long-term historical perspective. Vastly simplifying his magnum opus, Spengler’s thesis is that when parlimentarian politics fail, history tends to replace disorder with great men like Julius Caesar or Napoleon.
Of course, one has to recognise that troubled times do not always get great statesmen, but may get little despots and decadent failures like Caligula or Nero, who eventually bankrupted Rome.
A significant minority of Americans voted for Trump because he argued that he could make America great again. But the irony is not that America is weak, but that America is strong and on the verge of achieving the strongest recovery among the advanced economies.
The perceived weakness comes from the insecurity of a significant majority of the working class that has become disadvantaged, not by globalisation, but by the benign neglect of the Washington/Wall Street elite who favoured themselves at the expense of the working class.
Globalisation has not failed. It is the high priests of globalisation trying to deflect the populist anger against anyone but themselves that created Trump. The same high priests are joining the Trump camp, cheering the markets for the greater suckers.
What are Asians going to do in this Trumpian Reality Show?
First, we need to distinguish the signal from the noise.
All the breast-beating at the Davos World Economic Forum this week was about how the caviar-champagne-forecasters got it all wrong. They were simply too self-congratulatory, self-referential and self-satisfied. They did not do the reality checks of simply looking at what was truly happening – the anger of the masses.
Second, despite the fact that the dollar is strong and will remain strong if Trump gets his economic policies right, the US is still funded by global savings – mostly from Asia. Asia remains the world’s largest and fastest growing region with the highest savings. What we need to do is to channel that savings to Asian markets, even as the US and European banks retreat home.
Third, the Trans-Pacific Partnership (TPP) was always an empty promise because going forward, technology and moving manufacturing jobs back to the US will not create greater exports for US trading partners.
The Asian global supply chain is changing very fast from all points-to-one market (US) to point-to-point; South-to-South, because with more than half of world population and a growing middle class, the potential for global trade, investment and financial expansion is still in trade between India, China, Indonesia and all the emerging markets of the world.
If the US turns inward under Trump, then Asians need to heed Franklin Roosevelt’s wake-up call at his inauguration, “the only thing we have to fear is fear itself”.
Under Trump, we have much to fear, but remember, it’s “his dollar, but our savings”. The US Bureau of Economic Analysis data showed that the US had net foreign liabilities of US$7.8 trillion or 41.8% of GDP at the end of the third quarter 2016. In the Year of the Rooster, this is not chicken-feed.
As America moves to a new T-(for Trump) junction, the choice is not between left or right, but between a Great America or a small-minded America.
Time for Asians to think and act for themselves.
By Andrew Sheng
Tan Sri Andrew Sheng writes on global issues from an Asian perspective.
In the lead-up to January 20 when Donald Trump becomes US president, Asians are guessing about the outlook for their savings.
Trump is particularly difficult to read because he made so many wild statements on the campaign trail. Everyone accepts that campaigning politicians promise heaven and deliver mostly hell, but when they win elections, most become much more sober. So far, it looks like Trump’s policy will follow his campaign threats.
The Trump presidency will be bi-polar – either highly successful if he reboots American dynamism, or one that may bankrupt the country trying, including getting involved in another war.
His rise to power has been accompanied by wild swings in investor mood as markets yo-yo from hesitation to rally, with the Dow currently peaking.
So far, Trump family members appear to have more clout than was the case with any previous , with perhaps the exception of President Bill Clinton.
Disappointingly, the favourite to be Trump’s treasury secretary is ex-Goldman Sachs banker Steven Mnuchin, which means Wall Street would have another insider running the status quo. It remains to be seen whether he can simultaneously deliver the promised spending on infrastructure, tax cuts for the rich and containment of effects of a stronger dollar.
All signs are that the dollar will strengthen, bringing echoes of the famous phrase, “my dollar, your problem”. In its latest health check on the US economy, the International Monetary Fund reported in June that “the current level of the US dollar is assessed to be overvalued by 10-20 per cent and the current account deficit is around 1.5-2 per cent larger than the level implied by medium term fundamentals and desirable policies”. The IMF thinks that the risk of the dollar surging in value is high, and estimates a 10 per cent appreciation would reduce American GDP by 0.5 per cent in the first year and 0.5-0.8 per cent in the second year.
Trump is likely to be highly expansionary in his first year because the Republicans, having control of the Congress, Senate and the White House, must revive growth and jobs to ensure voters give them a second term. Note carefully that Trump’s election promises of stopping immigration, scrapping the Trans-Pacific Partnership (TPP) trade deal, imposing sanctions on China and cancelling the North American Free Trade Agreement (NAFTA) are all inflationary in nature.
This is why if the Fed does not raise interest rates in December this year, it may be under pressure next year not to take any action to slow a Trump economic recovery. The Fed’s independence will be called into question, since Trump’s expansionary policy will put pressure on his budget deficit and national debt, already running at 3 per cent and 76 per cent of GDP respectively. A 1-per-cent increase in nominal interest rates would add roughly 0.7 per cent to the fiscal deficit, making it unsustainable in the long run.
Those who think that recovery in US growth would be good for trade are likely to be disappointed. So far, the recovery (which is stronger than in either Europe or Japan) has led to little increase in imports, due to three effects – lower oil prices, the increase in domestic shale oil production and more onshoring of manufacturing. The US current account deficit may worsen somewhat to around 4 per cent of GDP, but this will not improve unless sanctions are imposed on both China and Mexico, which would in turn hurt global trade.
Why is a strong dollar risky for the global economy?
The answer is that the global growth model would be too dependent on the US, while the other economies are still struggling. Europe used to be broadly balanced in terms of current account, but has moved to become a major surplus zone of around 3.4 per cent of GDP. Germany alone is running a current account surplus of 8.6 per cent of GDP in 2016, benefiting hugely from the weak euro.
Japan has moved back again to a current surplus of 3.7 per cent of GDP, but the yen remains weak at current levels of 107 to the dollar. I interpret the Bank of Japan’s QQE (qualitative and quantitative easing) as both a financial stability tool and also one aimed at ensuring that the capital outflows by Japanese funds would outweigh the inflows from foreigners punting on a yen appreciation.
The Bank of Japan’s unlimited buying of Japanese government bonds at fixed rates would put a cap on losses for pension and insurance funds holding long-term bonds if the yield curve were to steepen (bond prices fall when interest rates rise). Japanese pension and insurance funds have been large investors in US Treasuries and securities for the higher yield and possible currency appreciation.
In short, the capital outflow from Japan to the dollar is helpful to US-Japan relations. Prime Minister Shinzo Abe was the first foreign leader to call on Trump and likely dangled a carrot: Tokyo will fund Trump’s expansionary policies so long as Japan is allowed to re-arm.
From 2007 to 2015, US securities held by foreigners increased by $7.3 trillion to $17.1 trillion, bringing its gross amount to 94 per cent of GDP, official figures show. Japan already holds just under $2 trillion of US securities and, as a surplus saver, has lots of room to buy more.
The bottom line for Asia? Don’t expect great trade recovery from any US expansion. On the other hand, Asian investors will continue to buy US dollars on the prospects of higher interest rates and better recovery. This puts pressure on Asian exchange rates.
Of course, it’s possible that US fund managers will start investing back in Asia, but with trade sanctions and frosty relations between US-China in the short-term, US investors will stay home. If interest rates do go up in Asia in response to Fed rate increases, don’t expect the bond markets to improve. The equity outlook would depend on individual country responses to these global uncertainty threats.
Think Asian By Andrew Sheng, a former central banker, writes on global issues from an Asian perspective.
Disruptive Donald J.Trump, US president-elect policies
Mar 5, 2016 … Modern finance and money being managed like a Ponzi scheme! Economic Collapse soon? Ponzi schemes and modern finance. Andrew…
Oct 3, 2016 … We will know by November, By Andrew Sheng Tan Sri Andrew Sheng is Distinguished Fellow, Asia Global Institute, University of Hong Kong.
We live in an age of science and technology, so strictly speaking science should be able to forecast the future and help us make decisions better. But in this Age of Uncertainty, the best economic models did not predict the global financial crisis.
How did the ancients attempt to make better decisions? They relied on history, their own experience or oracles, astrology or mumbo-jumbo. In a situation of uncertainty, you make decisions on the basis of information that you have, and if don’t have that information, you simply have to consult someone or something you believe in.
Some people turn to old sacred text, such as the Bible, with a priest to interpret what God intends. The Greeks used the Delphic Oracle, dating back to 1,400 BC, whose predictions were in riddles that were interpreted by the female diviners. Divination was then serious business, with astronomers studying the stars for some cosmic order.
Most people think that Chinese philosophy began with Confucius [551-479 BC], but his school became famous because it compiled the existing ancient books into the Five Classics, of which the I Ching (or Book of Change) is one. The problem with any translation of ancient text is that we can never differentiate translations from interpretation. How an ancient text is read depends very much upon the translators’ biases or ignorance. This is why reading of sacred text is always personal.
My own view is that the I Ching deserves to be considered a book of early Chinese science, rather than as a book on divination, considered at best as pseudo-science.
The I Ching comprises two books, an earlier classic dated to roughly 1,000 BC, and an interpretive text written about 400-600 years later. The earlier classic comprises the Eight trigrams, attributed to Fuxi, one of the legendary founders of China, and the 64 hexagrams, reputedly invented by Duke Zhou, one of the founders of the Zhou dynasty. In simple terms, the Eight trigrams simply stand for eight possible situations, from good to bad; whereas the 64 hexagrams stand for 64 possible predictive outcomes. The later text is attributed to Confucius and his disciples, which helps the interpretation of what the hexagrams mean. To use the I Ching for divination or decision purposes, you randomly choose a hexagram and then consult the I Ching for what it means.
Herein lies a fundamental difference in decision making between Western science and the Chinese approach to life.
Science developed in the West partly because of the alphabetic language, derived from the Arabs, which means that you can define words and meaning much more precisely, since the English language comprises today over a million words. As the philosopher Wittgenstein argued, all concepts are defined by language.
The Chinese language, on the other hand, is basically ideogramatic and phonetic, meaning that each character comprises radicals that originally were pictures. For example, the character for man can easily be identified as a drawing of a standing man. Because there are limited sounds for each character, each character carries four or five tones, and complex words comprise combinations of different characters. Most people can read basic Chinese with about two to three thousand characters, with the maximum number of characters being roughly 50,000. Complex words are combinations of two or three characters.
Given limited sounds, tones and characters, the Chinese language is not as precise as English. A single character can have different meanings and different sounds, so that Chinese words and phrases can only be understood in context. So when I hear a Chinese speak, I often have to ask in what context is that particular sound/word being used? In other words, we have to add contextual information in order to interpret the meaning of what is being said.
Western science, following the Aristolean logic, is essentially reductionist and linear, seeking cause and effect. The language enables the conceptualisation to be precise and the logic flow to be consistent. The imprecision inherent in the Chinese language means that conceptual thinking is more organic and fluid, and subject to interpretation, including guessing.
In other words, whilst natural sciences could be more precise in communication between two machines, the communication between two human beings carry a huge amount of uncertainty. The social sciences are much more qualitative because one human being cannot by definition fully comprehend the other person’s life experience, values and preferences. Uncertainty is built into the social sciences.
Modern economics dealt with this problem by assuming perfect information, which actually assumed away uncertainty. Economic models based on such perfect information and rational players (mechanical decision-making) gave rise to precise or “optimal”, first-best outcomes. The first best ideal is then thought to be a natural outcome, and life will simply revert back to equilibrium or a stable situation.
Real life is obviously not so simple. The eight trigrams mean that in binary good and bad or black and white terms, there are eight possible outcomes in any decision: good, bad and six mixtures of good/bad. The 64 hexagrams makes life even more complicated, since black and white are only two possible manifestations of any system, the rest being 62 shades of grey (mixture of black and white).
By definition, any fundamentalist view of life is more likely to be wrong, because life is mostly shades of grey.
The best games that illustrates this difference between Western and Chinese thinking are the games of chess and Go (weiqi). Chess has defined linear moves with six types of pieces. It forces one to think logically and sequentially. Go comprises only black and white pieces, but the player has to think spatially, playing the piece in any position on the board, continually trying to outguess the other player.
Without understanding these fundamental differences in language, context and decision-making under uncertainty, it would be difficult to bridge the yawning gap between both sides of the Pacific. It also means that the Chinese approach to economics and geo-politics will be quite different than is more commonly interpreted outside China.
By Andrew Sheng, Asia News Network
The writer, a Distinguished Fellow with the Asia Global Institute, writes on global issues from an Asian perspective.
Mar 5, 2016 … Modern finance and money being managed like a Ponzi scheme! Economic
Collapse soon? Ponzi schemes and modern finance. Andrew…