Putin, Party of One: Obama ‘Leads’ Ousting from G-8, But Russia Finds New Friends

Leaders of the G-8 met at the Dutch prime minister’s residence Monday night and decided to reduce the size of their fraternity to seven.The White House was quick to paint the meeting and its outcome as the president’s idea.

In what is called The Hague Declaration, leaders of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, along with the president of the European Council and the president of the European Commission, affirmed support for Ukraine’s “sovereignty, territorial integrity and independence.”

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China’s Economic Cold War on the United States

Read the recent report by Congress on China’s Huawei Technologies and ZTE Corp. and you could be excused for a sense of déjà vu. It sounds like it came from the U.S.-Soviet era. One passage: “The opportunity exists for … espionage by a foreign nation-state already known to be a major perpetrator of cyber espionage.”  Many are worried that Congress has gone too far. But the truth is it hasn’t gone far enough.  Once the world admitted China to the World Trade Organization in 2001, we welcomed the country into our free-markets. We trusted the global economy would evolve toward free and fair trade. We then set our policies on cruise control, assuming the world would follow the U.S. model.

Instead, China got a hand on the steering wheel: It turned the rules of global business in its favor. We woke up to find a hijacking of our free-market system. China was manipulating its currency, subsidizing its firms, undermining nascent U.S. firms, erecting trade barriers, and stealing intellectual property. China was using its firms as instruments of state capitalism—it even coordinated them to monopolize critical resources such as steel and rare earths.

We are now at odds with China. We are essentially in an economic cold war. The Huawei report—a notable bipartisan effort—documents as much. After hollowing out many manufacturing industries—tires, consumer electronics, auto parts, steel—China has gone after tech-heavy industries like telecommunications.

The report focuses on national-security risks posed by Huawei and ZTE: spying via backdoor software implants, cyber attacks on key networks, and inserting malicious software in security systems. These are serious allegations: Imagine if China used Huawei equipment to shut down American water and electrical systems.

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Global military spending is now an integral part of capitalism

  China’s surge in military spending gains headlines, partly because of the ominous implications regarding its regional contest with Japan, but it’s the deeper structures of military spending in general that are far more compelling.

There are few surprises about the distribution of military spending: for all the current focus on China’s growing military outlays and it is significant that they have embarked on a sequence of double-digit increases as a percentage of GDP the United States still accounts for 40 per cent of such expenditures. However, the distribution is not the only thing that matters; it’s the sheer scale of such investment $1.756tn in 2012. The “peace dividend” from the end of the cold war has long since bitten the dust. Global military spending has returned to pre-1989 levels, undoubtedly a legacy of the war on terror and the returning salience of military competition in its context. In fact, by 2011 global military spending was higher than at any year since the end of the second world war.

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G-20 Plus Five: The Economic Forum’s Mixed Record

G20Plus5

It is time to take stock of the G-20. Just over five years ago, during the free fall of the global financial crisis, representatives from 20 of the world’s leading economies agreed to gather twice a year in order to develop a more sustainable regulatory framework for financial institutions.

 

There have been many signs of promise. The group has agreed on a new framework for regulatory standards for each country’s most important financial institutions and tasked a Financial Stability Board (FSB) with monitoring adherence to them. But the G-20 has also fallen short of some expectations. Although there have been improvements in global financial regulation over the past five years, serious flaws remain.

 

The G-20 has already addressed the main pillars of financial regulatory reform. The most important decision concerned international bank capital regulations. Prior to the G-20, there were serious problems. The Basel II agreement, initially published in June 2004, gave banks enormous discretion in determining whether they met minimum capital standards. That agreement was also undermined by the fact that the United States decided not to live up to it.

 

The Basel III regulations, which were agreed upon in 2011, were a great improvement. The first important step was that all the G-20 countries agreed to recognize the regulations and task a new body, called the Regulatory Consistency Assessment Programme (RCAP), with monitoring, assessing, and evaluating the implementation of new, more stringent capital standards. The RCAP audits the regulatory frameworks of participating countries and issues formal publications evaluating their progress. It has the authority to request improvements as necessary, and has done so. In each of the four countries it has reviewed, it has requested improvements — 90 of them, in the case of China. In a preliminary assessment, the European Union was declared materially noncompliant on two items, and the United States was declared materially noncompliant on one item.

 

Another achievement of the G-20 was the creation of a regulatory framework for over-the-counter-derivatives, risky financial instruments that were at the center of the last financial crisis. Before the crisis, there were essentially no regulations on the riskiest derivatives trading and there was no transparency in the derivatives marketplace. Now the majority of these transactions are bound to multilateral standards of transparency and regulation. Although these ideas were discussed by the G-20, ultimately the United States and Europe — where 85 to 90 percent of derivatives trading is conducted — are primarily responsible for implementing them. Although most countries have passed laws implementing these regulations, it is too early to tell whether they are working.

 

A third accomplishment of the G-20 was its reforms to international regulations on rating agencies. Before the crisis, ratings agencies, which are responsible for assessing the ability of debtors to pay back what they borrow, were unregulated in most G-20 countries. After the crisis, it was clear that this was a grave mistake. The industry was highly concentrated, with two U.S. firms controlling more than 80 percent of the market. But the ratings issued by these agencies were often sloppily fabricated.

 

The assumption behind the new regulations was that greater transparency and scrutiny of ratings agencies would encourage competition and improve overall performance. Preliminary data suggest that the plan has worked. In the United States and the EU, new entrants have joined the market and a greater number of firms are now rating financial institutions and asset-backed securities.

 

The G-20 has also succeeded at regulating hedge funds. Before the crisis, hedge funds were dealt with in different ways in different countries. (Even the EU lacked a single regulatory framework.) All G-20 economies, with the exception of Brazil, have now passed hedge fund regulations as part of broader efforts to regulate and supervise the shadow banking sector, which involves entities and activities (including hedge funds) that exist fully or partially outside the regular banking system.

 

Finally, the G-20 has made major progress on standards for winding down troubled banks. During the crisis, the lack of such standards proved to be a major problem, as the lack of a common playbook worsened market jitters. The need for a clear resolution scheme is especially relevant for large cross-border banks, which are especially difficult to unravel and are concentrated in the United States and the EU.

 

Resolution regimes require a clear operational authority to stabilize the bank, as well as a clear legislative framework that allows authorities to force creditors to take losses. It is already evident that such a system is easier to build in the United States than the EU. The United States already has a clear authority, the FDIC, which is responsible for taking control of the parent company of the distressed financial group. It has always been capable of keeping distressed operations open by injecting extra liquidity. The FDIC can also access an Orderly Liquidation Fund (OLF), administered by the U.S. Treasury, to finance a “bridge” bank, which is authorized to hold the assets and liabilities of an insolvent bank. A bridge bank is charged with continuing the operations of the insolvent bank until the bank becomes solvent through acquisition by another entity or through liquidation.

 

The EU is only halfway there. Although Europe has agreed on the procedure to resolve a bank, the proposed common fund for that kind of activity is, at 55 billion euro, still too small given the size of the EU banking market, and will only come in place too late. In practice, national governments will still likely be responsible for providing most of the money to assist their ailing banks, which would only worsen the distortions in European financial markets.

 

LONG ROAD AHEAD

 

The G-20 still has plenty of work in coming years. New financial regulatory items have emerged on the agenda, including regulation of the non-bank financial sector. International standards for the non-bank financial sector are far less developed than those for banking. In July 2013, the FSB published a list of nine insurance companies (five are European, three are American, and one is Chinese) that it deemed systemically important. It will soon publish a similar list for other finance and asset management companies. Although the size of total assets of insurers and asset management companies is far below that of the banking sector, and systemic risks are much lower, their business models and risk diversification still require proper supervision.

 

The G-20 regulations have also not yet solved the problem posed by central counterparties (CCPs), the entities that increasingly serve as an exchange for derivatives transactions. They play a critical role, but are still under-regulated: at periods of financial stress, they may not be able to meet the liquidity needs of their members. If inadequately managed, CCPs could become the Fukushimas of global finance. CCP board members need to take a much more hands-on approach to insulating risks coming from CCPs.

 

The G-20 also needs to place greater emphasis on macroeconomics, especially when it comes to coordinating exit policies from the unconventional monetary policy that developed countries have pursued since the start of the crisis. The prospect of the end of such policies — namely, the U.S. Federal Reserve’s decision to draw down its bond-buying program — has already led capital to flee emerging markets. Similar policies are sure to follow in the other developed countries. Whether central banks will take the global dimension into account remains an open question.

 

Overall, the G-20 has taken a big step toward instituting better global governance and a more consistent regulatory framework for financial markets. Five years on, the G-20 countries — and especially the United States and Europe, where the seeds of the last financial crisis were sown — have largely delivered on their commitments. Better rules are in place on bank capital, derivatives, ratings agents, hedge funds, and bank liquidation. How these rules are enforced will matter, of course, but at least the rules exist. Initial reports on the implementation of the new Basel III rules, which are key to the entire framework, are already promising.

 

That raises the question of how the G-20 has managed to enforce its agenda without possessing coercive authority. One important factor has been the quality and dedication of its leadership. The past and current chairs of the FSB, Mario Draghi and Mark Carney, were instrumental in driving the process forward. But another factor has been the subtle effectiveness of peer pressure. Although the G-20 cannot force any single country to pass regulations, each country is very aware of being observed by the others. No member of the group has wanted to be accused of shirking its responsibilities. For now, that should be enough for the G-20 to move forward on its remaining agenda.

 

Tokyo bitcoin exchange files for bankruptcy

The Mt. Gox bitcoin exchange in Tokyo filed for bankruptcy protection Friday and its chief executive said 850,000 bitcoins, worth several hundred million dollars, are unaccounted for.  The exchange’s CEO Mark Karpeles appeared before Japanese TV news cameras, bowing deeply. He said a weakness in the exchange’s systems was behind a massive loss of the virtual currency involving 750,000 bitcoins from users and 100,000 of the company’s own bitcoins. That would amount to about $425 million at recent prices.  The online exchange’s unplugging earlier this week and accusations it had suffered a catastrophic theft have drawn renewed regulatory attention to a currency created in 2009 as a way to make transactions across borders without third parties such as banks.  It remains unclear if the missing bitcoins were stolen, voided by technological flaws or both.

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Europe repeating all the errors of Japan as deflation draws closer

Europe is one shock away from a deflation trap.  A surprise anywhere in the world is all that it needs: an upset in China as the credit bubble pops, or a global bond shock as the US Federal Reserve winds down monetary stimulus.  Producer price inflation (PPI) fell to -1.4pc in the eurozone in October.  This is how deflation becomes lodged in the price chain.  “Prices are sticky for a while as you approach zero inflation, but once you break through the ice into deflation things can move fast, as we’ve seen in Greece,” said Julian Callow, global strategist at Barclays.”  The European Central Bank needs to act before the horse has already bolted.”  Mr Callow said excess industrial plant in China is exporting deflation across the world.  China’s fixed capital investment over the past year has been $4 trillion, compared with $3 trillion for the entire EU and $3 trillion for the US.  This has grown eightfold in a decade.  It is a vast new source of supply for a saturated global economy.  China itself is now in PPI deflation.

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Greenland’s Rare Earths Gold Rush

Gravgaard_GreenlandRare2_650.jpgBenedikte Vahl, a retired schoolteacher, has just one hope for Narsaq, her hometown of colorful wooden houses on a fjord in southern Greenland: that a mine will open soon in nearby Kuannersuit, bringing badly needed jobs and investment. Times are so tough that, over the past five years, more than 600 of her neighbors have left an already small municipality of 7,000. Mining might be the last hope. “I see no other solution,” Vahl says.  Kuannersuit has long been of interest to geologists. It is filled with pretty stones such as the pink tugtupite (“reindeer blood” in Greenlandic) and is home to more than 200 rare minerals, 15 of which cannot be found anywhere else in the world. But these days, all eyes are on the region’s so-called rare earth elements — raw materials essential to technology products such as cell phones, wind turbines, and hybrid cars. For years, China has held a near monopoly on the global supply, controlling an 85 percent share. (That figure is down from a high of 95 percent a year ago, thanks to U.S. and Australian efforts to start mining their own rare earths.) Kuannersuit contains as much as 10 million tons of such metals and could potentially produce 40,000 tons a year. In total, Greenland could potentially produce upward of 20 to 25 percent of the world’s supply.

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Geography in the News: International Shipping Chokepoints

Chokepoints

Egypt’s stability and security remain uncertain. Amid calls by opposition supporters for the president’s removal in early 2011, the country erupted into widespread demonstrations against the government and President Hosni Mubarak was removed. General elections brought Muslim Brotherhood candidate Mohamed Morsi into power, he subsequently was overthrown by the military.  These actions sparked speculation about Egypt’s strategic geographic position in the region. Widespread unrest could jeopardize security of the Suez Canal, which is an important world oil chokepoint.  While incredibly important and providing passage for a large portion of the oil that arrives in the North America and Europe from the Middle East, the Suez Canal is but one narrow strait (called “chokepoints”) through which oil passes on its way to oil-dependent countries. According to an article by Business Insider, seven oil chokepoints of the world are crucial to the world economy. These chokepoints moved about half of the world’s oil production of 84 million barrels per day (bbl/d) in 2010.

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The sultan’s dream

ABDUL MEJID I, the Ottoman’s 31st sultan, had a dream. Reigning between 1839 and 1861, the determinedly Western-leaning sultan envisaged the construction of a submerged tunnel under the Bosphorus Straits connecting Asia to Europe. A French architect duly came up with a blueprint. But a dearth of technology and cash stood in the way.  The sultan’s dream is now coming true, 150 years later. The world’s first sea tunnel linking two continents will be inaugurated on October 29th, marking the 90th anniversary of the founding of Ataturk’s Republic. Stretching over 76km (47 miles), and with 1.4km of it laid at the bottom of the sea, the $3 billion “Marmaray” rail system will “eventually link London to Beijing, creating unimagined global connections” boasts Mustafa Kara, mayor of Istanbul’s Uskudar district, where the tunnel comes out.

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India tops new global slavery index

WhereHaveAlltheChineseMELBOURNE: About 14 million Indians are living in conditions of modern-day slavery, nearly half of 30 million across the world, according to the first Global Slavery Index published today.  The Global Slavery Index 2013, which surveyed 162 nations, was compiled by Australia-based rights organisation Walk Free Foundation using a definition of modern slavery that includes debt bondage, forced marriage, trafficked into brothels and the use of children in the military.  The Foundation’s estimate of 29.8 million slaves worldwide is higher than other attempts to quantify modern slavery. The UN estimates almost 21 million people are victims of forced labour.  India (13,956,010), China (2,949,243), Pakistan (2,127,132) and Nigeria (701,032) have the highest numbers of people enslaved, the rights group claimed.

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US government employees head back to work

Hundreds of thousands of US government employees are back at work after President Barack Obama signed a law ending a 16-day government shutdown and extending the US debt limit.  The cross-party deal came hours before the US government risked running out of money to pay its bills.  “There are no winners,” Mr Obama said, adding the US would “bounce back”.  The deal followed 16 days of partial government shutdown, which began when Congress failed to agree on a budget.  Congress voted through the deal less hours before a deadline to raise the $16.7tn (£10.5tn) debt limit.  The measure approved in Washington funds the government to 15 January, and extends the US Treasury’s borrowing authority until 7 February.  The deal does not resolve the budgetary issues that fiercely divide Republicans and Democrats. Instead, it establishes a cross-party committee of legislators tasked with crafting a long-term budget deal and reporting back to Congress by mid-December.

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Where Have All the Workers Gone?

It became fashionable after the Soviet Union’s collapse to say that breakneck economic growth was the only thing postponing the Chinese Communist Party’s (CCP) day of reckoning. Communist ideology was discredited, went the argument, but as long as the economic pie kept growing, citizens would set aside broader concerns and take their piece. But what if growth were interrupted by, say, a global financial crisis, collapse of world trade, and mass layoffs on the Chinese factory floor? The music would stop, the masquerade party would end, and Jennifer Connelly would smash her way through David Bowie’s bubble prison, so to speak. Except that it didn’t. The Chinese economy faced exactly this cataclysmic scenario in the final months of 2008.

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Obama secretly signing away U.S. sovereignty

Despite the government shutdown, the Obama administration has continued secret negotiations to complete what is known as the Trans-Pacific Partnership, or TPP.  The expansive plan is a proposed free-trade agreement between the U.S., Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.  The agreement would create new guidelines for everything from food safety to fracking, financial markets, medical prices, copyright rules and Internet freedom.  The TPP negotiations have been criticized by politicians and advocacy groups alike for their secrecy. The few aspects of the partnership leaked to the public indicate an expansive agenda with highly limited congressional oversight.

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Shutdown, USA

The US budget crisis dominating global headlines can be divided into two parts. First there’s the shutdown of US government services, a threshold that has already been crossed, shuttering various federal agencies in the United States. This is not only with historical precedent (a Republican-controlled Congress shut the Clinton government down in 1995 for 28 days), but also predictable given the bitter bipartisan politics that have descended over Washington in the past few years.  But then there’s part two of the crisis: an October 17th deadline for raising the US debt ceiling. Here is an issue with consequences that could transcend domestic politics, whether or not the players involved care to acknowledge it. For an intensely bleak view as to what these consequences might entail, refer to the recently-released US Treasury Department report on the subject. The report describes a failure to raise the debt ceiling as a “catastrophic” event that would lead to a freeze in credit markets, a precipitous drop in the value of the US dollar, and a spike in interest rates, among other economic shocks. To be sure, this would be an event that sent shockwaves throughout the global economy.

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World should ‘de-Americanise’, says China following default fears

The looming prospect of a US default on debt prompted China to call for the world to “de-Americanise”, amid warnings of a new global recession.  In China, Xinhua, the official government news agency, said that as American politicians continued to flounder over a deal to break the impasse, “it is perhaps a good time for the befuddled world to start considering building a de-Americanised world”.  The jibe came as Christine Lagarde, the International Monetary Fund chief, raised the spectre of a repeat of the 2008 financial crash as hopes dwindled for a resolution of the crisis over the debt ceiling and partial government shutdown.  Harry Reid, the leader of the Democrat-controlled Senate and Mitch McConnell, who heads the Republican minority, met on Sunday for “preliminary” talks following the acrimonious collapse of negotiations between the White House and Republicans in the lower chamber.

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Debt ceiling crisis has other nations angry and scared

While many abroad have considered a US government shutdown unfortunate and potentially damaging to the global economy, it is a development the world has survived before. But the last time the US came close to defaulting on a sovereign debt obligation was in 1790, when the country was a backwater ex-British colony, a bit player on the world stage.  More recent examples of sovereign default include Mexico (1982), Russia (1998), Argentina (2001) and Greece (2012). Each of those sparked global financial crises that required US intervention. It is unsurprising, then, that with the US itself possibly causing the economic conflagration, foreign observers are hitting the panic button.

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Get your fiscal house in order: China warns US as Asia expresses concern for $1.3tn of investments

China, the biggest foreign creditor of the United States, has waded into the American budget crisis, warning Congress that it must resolve the political impasse over the debt ceiling without further delay.  The Chinese Vice Foreign Minister, Zhu Guangyao, told America’s deadlocked politicians on Monday that “the clock is ticking” and called on them to approve an extension of the national borrowing limit before the federal government is projected to run out of cash on 17 October.

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Is Saddam Hussein’s fortune in a warehouse in Moscow? Mystery over £16.75bn piles of cash left at airport for six years

A cargo of 20billion euros in cash (£16.75billion) has lain unclaimed at a Moscow airport for six years amid allegations it could be the secret fortune of Saddam Hussein.  The stash, now under high security in a cargo depot, is held on 200 wooden pallets each worth 100 million euros, enough to keep the entire NHS going for almost two months.  Russian customs have demanded the real owner of the booty “presents himself” to claim the fortune, but while a number of bogus and unconvincing attempts have been made to obtain it, no-one has satisfied the authorities that they are the rightful recipient.  ‘It is possible that this is the money of Saddam Hussein,’ an anonymous intelligence source told Moskovsky Komsomolets newspaper.  The cash mountain, all in 100 euro notes, was flown to Sheremetyevo Airport in Moscow from Frankfurt on 7 August 2007 and it has remained frozen there ever since.

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If Republicans Want To Shut Down Washington, They’ll Have To Ask China’s Permission First

In their never-say-die efforts to defeat Obamacare, Tea Party Republicans brought the federal government a giant step closer to shutdown last night. What they seem not to have considered is how America’s foreign creditors will react.  Although China, Japan, and other major creditor nations have no dog in the Obamacare fight, they have a strong interest in preserving America’s basic financial, economic, and social stability. From their point of view, the Tea Party contingent is not following the script and a corrective may prove necessary.  If the creditor nations were to sell just a small proportion of their American assets, they could send Wall Street into a tailspin, with unpleasant implications for many Republicans.

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