Cambodia’s Foreign Policy: Challenges and prospects


January 29, 2019

Cambodia’s Foreign Policy: Challenges and prospects

Dr.Chheang Vannarith, President of Asian Vision Institute

In terms of contribution to peace, Cambodia has deployed more than 5,000 troops under the framework of the United Nations to various conflict zones. KT/Mai Vireak

Strategically located at the center of the Mekong Region and Southeast Asia, Cambodia has great potential to become a bridging state in the region and strengthen its leadership role within ASEAN and other sub-regional institutions, argues Chheang Vannarith.

Image result for D r.Chheang Vannarith

Small states such as Cambodia have fewer foreign policy options, given the narrowing strategic space for small states to manoeuver. In such a transitional period, Cambodia has to adjust and adapt in order to survive and thrive.

Foreign policy is not only the extension of domestic politics but also the adaptation to external dynamics. Cambodia’s worldview is dynamic – it continues to observe the main trends of regional and global politics, from which multiple futures can be formed.

Image result for National Institute for Diplomacy and International Relations (NIDIR)

Cambodia’s National Institute for Diplomacy and International Relations (NIDIR)

 

Cambodia’s foreign policy has been robustly reformed over the past three years, especially in capacity building and strategic analysis. We have established the National Institute for Diplomacy and International Relations (NIDIR) to equip diplomats with analytical as well as soft skills. We need a few more years to see the fruits of this capacity-building programme.Image result for CAMBODIA

The  Founding principles of Cambodia’s Foreign Policy are permanent neutrality, non-alignment, peaceful co-existence, non-interference, no military alliances or military pacts, and no foreign military bases on its soil. The tenets of Cambodia’s development foreign policy objectives are economic development and poverty reduction, peace and security, cultural identity, and the national role in the global community.

How to transform the regional and international environment into a source of national development has been the priority of Cambodia’s foreign policy. Cambodia has been promoting an open and inclusive international economic multilateral system that is based on international laws and norms.

As a small and open economy, Cambodia is very much connected with other economies, relying on external markets and the inflow of foreign capital and technology. Hence, Cambodia is committed to upholding economic multilateralism through promoting a rules-based international order. Towards this, reforming and making the World Trade Organization (WTO) more relevant to both developed and developing countries is critically important to save the global trading system.

Asean is the cornerstone of Cambodia’s foreign policy as it provides an important shield to protect the sovereignty and independence of its member states, whilst also mitigating and filtering interference from major powers. As long as ASEAN members stay united to protect each other’s interests, I believe that ASEAN can navigate through uncertain and challenging times ahead. Cambodia has largely benefited from ASEANean’s economic integration, although the development gap remains an issue.

Within the context of contestation in the Asia Pacific region, the best scenario of a regional order, from the Cambodian perspective, would be an Asean-driven regional order. Neither a US-centric regional order nor Sino-centric regional order will make our region stable. Only ASEAN can ensure that regional cooperation and integration remain on track, although at a slow pace. Consultation and consensus, non-interference, and equal sovereignty are the norms that need to be nurtured.

National role perception

The perception of Cambodia’s national role does matter in foreign policy. Cambodia aims to become a peace contributor, civilization connector, and a bridging state in the Mekong region and ASEAN. In terms of contribution to peace, Cambodia has contributed more than 5,000 troops under the framework of the United Nations to various conflict zones. Currently, we have 810 troops conducting missions in four countries, including South Sudan, Mali, Central African Republic, and Lebanon.

This month, Cambodia hosted the launch of the Asian Cultural Council (ACC) with the aim to further connect civilisations in Asia and beyond. Building synergies between cultural diversity and sustainable development, peace, connectivity, and innovation is a new era of Cambodia’s cultural diplomacy, which is more proactive and dynamic. Cambodia has more to contribute to the Asian century under the framework of the ACC.

Strategically located at the Hub of the Mekong Region and Southeast Asia, Cambodia has great potential to become a bridging state in the region. To realise this vision, Cambodia needs to build its democratic governance to become a source of inspiration for other regional countries, strengthen its leadership role within ASEANean and other sub-regional institutions, and maintain trust and good relations with all Asian powers, especially China, India, and Japan.

Prospects

Cambodia’s Foreign  Policy will become more robust in response to fast-changing regional and global geo-politics. We have only one choice: adapt or be left behind. Cambodia must adapt itself to an evolving World Order as well as the contest to establish a new regional order in the Asia-Pacific. We need to be steadfast and stay ahead of the curve in our foreign policy strategic vision and tactical approaches. Capacity building and human capital are even more critical. Cambodia needs to invest more in research capacity in order to have more informed foreign policy making and develop a new generation of professional diplomats who are capable of analyzing international trends and building trust and friendship around the globe.

To fill the research capacity gap, Asian Vision Institute (AVI) is founded to conduct academic and policy researches in order to inform policy makers and stakeholders in Cambodia and the region. Multi-stakeholder dialogues on national and international issues need to be encouraged as Cambodia is looking for innovative ideas and solutions. AVI, by connecting people, knowledge and actions in Asia, can help Cambodia to ride the tide of the Asian century.

Dr. Chheang Vannarith is President of Asian Vision Institute

 

Trump, Macron, and the Poverty of Liberalism


January 24, 2019trump macron

Trump, Macron, and the Poverty of Liberalism

by

https://www.project-syndicate.org/commentary/trump-macron-inequality-and-trust-by-kishore-mahbubani-2019-01

If liberals want to defeat populists, there is only one route: regain the trust of the voters that form much of their base. The choice for liberals is clear: they can feel good by condemning their opponents, or they can do good by attacking the elite interests that have contributed to their opponents’ success

 

DAVOS – No Western liberal would disagree that Donald Trump’s election was a disaster for American society, while that of Emmanuel Macron was a triumph for French society. In fact, the opposite may well be true, as heretical as that sounds

.The first question to ask is why people are engaged in violent street protests in Paris, but not in Washington, DC. I have personally experienced these Paris protests, and the smell of tear gas on the Champs-Élysées reminded me of the ethnic riots I experienced in Singapore in 1964. And why are the protesting? For many, at least initially, it is because they didn’t believe that Macron cared for or understood their plight.

Macron is trying to implement sensible macroeconomic reform. The proposed increases in taxes on diesel fuel would have reduced France’s budget deficits and helped lower its carbon dioxide emissions. His hope was that a stronger fiscal position would increase confidence and investment in the French economy so that the bottom 50% of society would eventually benefit. But for people to endure short-term pain for long-term gain, they must trust their leader. And Macron, it appears, has lost the trust of much of that bottom 50%.

By contrast, Trump retains the trust and confidence of the bottom half of US society, or at least the white portion of it. At first sight, this seems strange and paradoxical: the billionaire Trump is socially much further from the bottom 50% than the middle-class Macron is. But when Trump attacks the liberal and conservative US establishments, he is seen as venting the anger of the less well-off toward an elite that has ignored their plight. His election may, therefore, have had a cathartic effect on the bottom 50%, which may explain the lack of street protests in Washington or other major American cities.

And these Americans have much to be angry about. Most tellingly, the United States is the only major developed society where the average income of the bottom half has not just stagnated but declined markedly, as Danny Quah of the National University of Singapore has documented. Even more shockingly, the average income of the top 1% was 138 times that of the bottom 50% in 2010, up from 41 times higher in 1980.By contrast, Trump retains the trust and confidence of the bottom half of US society, or at least the white portion of it. At first sight, this seems strange and paradoxical: the billionaire Trump is socially much further from the bottom 50% than the middle-class Macron is. But when Trump attacks the liberal and conservative US establishments, he is seen as venting the anger of the less well-off toward an elite that has ignored their plight. His election may, therefore, have had a cathartic effect on the bottom 50%, which may explain the lack of street protests in Washington or other major American cities.

And these Americans have much to be angry about. Most tellingly, the United States is the only major developed society where the average income of the bottom half has not just stagnated but declined markedly, as Danny Quah of the National University of Singapore has documented. Even more shockingly, the average income of the top 1% was 138 times that of the bottom 50% in 2010, up from 41 times higher in 1980.

There is no single explanation for why inequality in the US has rocketed while the economic interests of the bottom 50% have been ignored. But we can obtain at least a partial answer by looking at the two principles of justice that Harvard philosopher John Rawls articulated in his famous book A Theory of Justice. The first principle emphasizes that each person should have “an equal right to the most extensive liberty,” while the second says that social and economic inequalities are to be arranged so that they are to “everyone’s advantage.”

The undeniable fact is that Western liberals have emphasized the first principle over the second in both theory and practice, prioritizing individual liberty and worrying far less about inequality. They believe that as long as elections take place and people can vote freely and equally, this is a sufficient condition for social stability. It follows, therefore, that those who fail economically do so because of personal incompetence, not social conditions.

Yet there was no doubt when China joined the World Trade Organization in 2001 that “creative destruction” in developed economies would follow, entailing millions of job losses. These economies’ elites – whether in the US, France, or elsewhere – had a responsibility to help those who were losing their jobs. But no such help was forthcoming.

For this reason, liberals may have made a strategic mistake by focusing their anger on Trump himself. Instead, they should ask themselves why much of the bottom 50% trusts him (and may yet re-elect him). And if they were honest, liberals would admit that they have effectively let the bottom half of society down.

If liberals want to defeat Trump, there is only one route: regain the trust of the voters that form much of his base. This will require them to restructure their societies so that economic growth benefits the bottom half more than the top 1%. In theory, this can be done easily. In practice, however, major vested interests will invariably seek to block reform. The choice for liberals is clear: they can feel good by condemning Trump, or they can do good by attacking the elite interests that contributed to his election.

.If liberals can do the latter, Trump’s election would be seen by future historians as a necessary wake-up call, while Macron’s merely created the illusion that all was well. These historians might then conclude that Trump’s election was ultimately better for American society than Macron’s was for France.

 

 

Japan First


January 13, 2019

shinzo abe japanese flag

Japan First

Japanese nationalists, starting with Prime Minister Shinzo Abe, need no encouragement to follow US President Donald Trump’s example. But if they do, they will echo the worst aspects of contemporary America – and throw away the best of what the US once had to offer.

Image result for whaling in japan

TOKYO – Even whales have now been affected by US President Donald Trump. This year, Japan will withdraw from the International Whaling Commission and resume commercial whaling. Prime Minister Shinzo Abe’s conservative government claims that eating whale meat is an important part of Japanese culture, even though the number of Japanese who actually do so is tiny compared to a half-century ago. And leaving the IWC will mean that Japanese whalers can fish only in Japan’s coastal waters, where the animals are relatively few.

The truth is that the decision was a gift to a few politicians from areas where whaling is still practiced, and to nationalists who resent being told by foreigners in international organizations what Japan can and cannot do. It is an entirely political act, inspired, according to the liberal Asahi Shimbun, by Trump’s insistence on “America First.” This is a matter of Japan First. Even though Trump is unlikely to mind, Japan’s insistence on whaling is bad for the country’s image.Abe, himself a staunch Japanese nationalist, has a complicated relationship with the United States.Image result for nobusuke kishi and Abe


Abe, himself a staunch Japanese nationalist, has a complicated relationship with the United States.Like his grandfather, Nobusuke Kishi, also a nationalist who was arrested as a war criminal in 1945, but who then became a loyal anti-communist ally of the Americans, Abe does everything to stay close to the US, while also wanting Japan to be first. One of his dreams is to finish his grandfather’s attempt to revise the postwar pacifist constitution, written by the Americans, and come up with a more patriotic, and possibly more authoritarian document that will legalize the use of military force.

Abe, himself a staunch Japanese nationalist, has a complicated relationship with the United States. Like his grandfather, Nobusuke Kishi, also a nationalist who was arrested as a war criminal in 1945, but who then became a loyal anti-communist ally of the Americans, Abe does everything to stay close to the US, while also wanting Japan to be first. One of his dreams is to finish his grandfather’s attempt to revise the postwar pacifist constitution, written by the Americans, and come up with a more patriotic, and possibly more authoritarian document that will legalize the use of military force.

Japan has to be a stalwart American ally. Germany and Italy, the other defeated powers in World War II, have NATO and the European Union. Japan has only the 1960 Treaty of Mutual Cooperation and Security with the US to protect itself against hostile powers, and the rise of China terrifies the Japanese. That is why Abe was the first foreign politician, after British Prime Minister Theresa May, to rush to congratulate Trump in person in 2017.

In some important ways, Japan has benefited greatly from being under America’s wing, and from the postwar constitution, which is not just pacifist, but more democratic than anything the country had before, enshrining individual rights, full suffrage, and freedom of expression. Constitutionally unable to take part in military adventures, except as a highly paid goods producer during America’s various Asian conflicts, Japan, rather like the countries in Western Europe, could concentrate on rebuilding its industrial power.

But the democracy that Americans are still proud of installing after 1945 has also been hindered by US interference. Like Italy, Japan was on the front lines in the Cold War. And, like Italy’s Christian Democrats, Japan’s conservative Liberal Democratic Party benefited for many years from huge amounts of US cash to make sure no left-wing parties came to power. As a result, Japan became a de facto one-party state.

This led to a kind of schizophrenia among Japan’s conservative nationalists like Abe. They appreciated American largesse, as well as its military backing against communist foes. But they deeply resented having to live with a foreign-imposed liberal constitution. Like the Tokyo War Crimes Tribunal in 1946, in which foreign judges tried Japan’s wartime leaders, the constitution and all it stands for is seen as a national humiliation.

The Japanese right would like to overturn much of the postwar order, established by the US with the support of Japanese liberals. Abe’s revisionist project does not only concern the pacifist Article 9, which bars Japan from using armed force, but also matters like education, emergency laws, and the role of the emperor.

To change Article 9, the current coalition government would need support from two-thirds of the Diet, as well as a popular referendum. After his landslide election victory in 2017, Abe has the required parliamentary majority. Whether he would win a referendum is still doubtful, although he has vowed to test this soon.

On education, he has already won some important victories. “Patriotism” and “moral education” are now official goals of the national curriculum. This means, among other things, that obedience to the state, rather than individual rights and free thought, is instilled at an early age. It also means that the history of Japan’s wartime role, if taught in classrooms at all, will be related more as a heroic enterprise, in which the young should take pride.

In the past, the US, despite all its own flaws and criminal conflicts, still stood as a force for good. An ideal of American openness and democracy was still worthy of admiration. At the same time, again as in the case of Western Europe, dependence on US military protection has had a less positive affect. It made Japan into a kind of vassal state; whatever the Americans wanted, Japan ends up having to do. This can have an infantilizing effect on politics.

In the age of Trump, America is no longer so dependable. This might at least help to concentrate Japanese minds on how to get on in the world without the Americans. But the US has also ceased to be a model of freedom and openness. On the contrary, it has become an example of narrow nationalism, xenophobia, and isolationism. Japanese nationalists need no encouragement to follow this model. If they do so, Trump certainly will not stand in their way. They will echo the worst aspects of contemporary America – and throw away the best of what the US once had to offer.

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Trump vs. the Economy


 

Trump vs. the Economy

December 30, 2018  by

https://www.project-syndicate.org/commentary/trump-behavior-causes-stock-market-drop-by-nouriel-roubini-2018-12

Between publicly chastising US Federal Reserve Chair Jerome Powell and escalating his trade war with China, US President Donald Trump has finally rattled the markets. While investors were happy to look the other way during the first half of Trump’s term, the dangerous spectacle unfolding in the White House can no longer be ignored.

NEW YORK – Financial markets have finally awoken to the fact that Donald Trump is US president. Given that the world has endured two years of reckless tweets and public statements by the world’s most powerful man, the obvious question is, What took so long?

For one thing, until now, investors had bought into the argument that Trump is all bark and no bite. They were willing to give him the benefit of the doubt as long as he pursued tax cuts, deregulation, and other policies beneficial to the corporate sector and shareholders. And many trusted that, at the end of the day, the “adults in the room” would restrain Trump and ensure that the administration’s policies didn’t jump the guardrails of orthodoxy.

These assumptions were more or less vindicated during Trump’s first year in office, when economic growth and an expected increase in corporate profits – owing to forthcoming tax cuts and deregulation – resulted in strong stock-market performance. In 2017, US stock indices rose more than 20%.

But things changed radically in 2018, and especially in the last few months. Despite corporate earnings growing by over 20% (thanks to the tax cuts), US equity markets moved sideways for most of the year, and have now taken a sharp turn south. At this point, broad indices are in correction territory (meaning a 10% drop from the recent peak), and indices of tech stocks, such as the Nasdaq, are in bear-market territory (a drop of 20% or more).

Though financial markets’ higher volatility reflects concerns about China, Italy and other eurozone economies, and key emerging economies, most of the recent turmoil is due to Trump. The year started with the enactment of a reckless tax cut that pushed up long-term interest rates and created a sugar high in an economy already close to full employment. As early as February, growing concerns about inflation rising above the US Federal Reserve’s 2% target led to the year’s first risk-off.

Then came Trump’s trade wars with China and other key US trade partners. Market worries about the administration’s protectionist policies have waxed and waned throughout the year, but they are now reaching a new peak. The latest US actions against China seem to augur a broader trade, economic, and geopolitical cold war.

An additional worry is that Trump’s other policies will have stagflationary effects (reduced growth alongside higher inflation). After all, Trump is planning to limit inward foreign direct investment, and has already implemented broad restrictions on immigration, which will reduce labor-supply growth at a time when workforce aging and skills mismatches are already a growing problem.

Moreover, the administration has yet to propose an infrastructure plan to spur private-sector productivity or hasten the transition to a green economy. And on Twitter and elsewhere, Trump has continued to bash corporations for their hiring, production, investment, and pricing practices, singling out tech firms just when they are already facing a wider backlash and increased competition from their Chinese counterparts.

Emerging markets have also been shaken by US policies. Fiscal stimulus and monetary-policy tightening have pushed up short- and long-term interest rates and strengthened the US dollar. As a result, emerging economies have experienced capital flight and rising dollar-denominated debt. Those that rely heavily on exports have suffered the effects of lower commodity prices, and all that trade even indirectly with China have felt the effects of the trade war.

Even Trump’s oil policies have created volatility. After the resumption of US sanctions against Iran pushed up oil prices, the administration’s efforts to carve out exemptions and bully Saudi Arabia into increasing its own production led to a sharp price drop. Though US consumers benefit from lower oil prices, US energy firms’ stock prices do not. Besides, excessive oil-price volatility is bad for producers and consumers alike, because it hinders sensible investment and consumption decisions.

Making matters worse, it is now clear that the benefits of last year’s tax cuts have accrued almost entirely to the corporate sector, rather than to households in the form of higher real (inflation-adjusted) wages. That means household consumption could soon slow down, further undercutting the economy.

More than anything else, though, the sharp fall in US and global equities during the last quarter is a response to Trump’s own utterances and actions. Even worse than the heightened risk of a full-scale trade war with China (despite the recent “” agreed with Chinese President Xi Jinping) are Trump’s public attacks on the Fed, which began as early as the spring of 2018, when the US economy was growing at more than 4%.

Given these earlier attacks, markets were spooked this month when the Fed correctly decided to hike interest rates while also signaling a more gradual pace of rate increases in 2019. Most likely, the Fed’s relative hawkishness is a reaction to Trump’s threats against it. In the face of hostile presidential tweets, Fed Chair Jerome Powell needed to signal that the central bank remains politically independent.

But then came Trump’s decision to shut down large segments of the federal government over Congress’s refusal to fund his useless Mexican border wall. That sent markets into a near-panic, and the government shutdown was soon followed by reports that Trump wants to fire Powell – a move that could turn a correction into a crash. Just before the Christmas holiday, US Treasury secretary Steven Mnuchin was forced to issue a public statement to placate the markets. He announced that Trump was not planning to fire Powell after all, and that US banks’ finances are sound, effectively highlighting the question of whether they really are.

Recent changes within the administration that do not necessarily affect economic policy making are also rattling the markets. The impending departure of White House Chief of Staff John Kelly and Secretary of Defense James Mattis will leave the room devoid of adults. The coterie of economic nationalists and foreign-policy hawks who remain will cater to Trump’s every whim.

As matters stand, the risk of a full-scale geopolitical conflagration with China cannot be ruled out. A new cold war would effectively lead to de-globalization, disrupting supply chains everywhere, but particularly in the tech sector, as the recent ZTE and Huawei cases signal. At the same time, Trump seems to be hell-bent on undermining the cohesion of the European Union and NATO at a time when Europe is economically and politically fragile. And Special Counsel Robert Mueller’s investigation into Trump’s 2016 election campaign’s ties to Russia hangs like a Sword of Damocles over his presidency.

Trump is now the Dr. Strangelove of financial markets. Like the paranoid madman in Stanley Kubrick’s classic film, he is flirting with mutually assured economic destruction. Now that markets see the danger, the risk of a financial crisis and global recession has grown.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

 

 

In Defense of the Fed


December 26, 2018

jerome powell fed

In Defense of the Fed

Despite howls of protest from market participants and rumored threats from an unhinged US president, the Federal Reserve should be congratulated for its commitment to normalizing interest rates. There is simply no other way to break the US economy’s 20-year dependence on asset bubbles.

 

NEW HAVEN – I have not been a fan of the policies of the US Federal Reserve for many years. Despite great personal fondness for my first employer, and appreciation of all that working there gave me in terms of professional training and intellectual stimulation, the Fed had lost its way. From bubble to bubble, from crisis to crisis, there were increasingly to question the Fed’s stewardship of the US economy.

Image result for trump and the fed

That now appears to be changing. Notwithstanding howls of protest from market participants and rumored That now appears to be changing. Notwithstanding howls of protest from market participants and rumored unconstitutional threats from an unhinged US President, the Fed should be congratulated for its steadfast commitment to policy “normalization.” It is finally confronting the beast that former Fed Chairman Alan Greenspan unleashed over 30 years ago: the “Greenspan put” that provided asymmetric support to financial markets by easing policy aggressively during periods of market distress while condoning froth during upswings.

Since the October 19, 1987 stock-market crash, investors have learned to count on the Fed’s unfailing support, which was justified as being consistent with what is widely viewed as the anchor of its dual mandate: price stability. With inflation as measured by the Consumer Price Index averaging a mandate-compliant 2.1% in the 20-year period ending in 2017, the Fed was, in effect, liberated to go for growth.

And so it did. But the problem with the growth gambit is that it was built on the quicksand of an increasingly asset-dependent and ultimately bubble- and crisis-prone US economy.

Greenspan, as a market-focused disciple of Ayn Rand, set this trap. Drawing comfort from his tactical successes in addressing the 1987 crash, he upped the ante in the late 1990s, arguing that the dot-com bubble reflected a new paradigm of productivity-led growth in the US. Then, in the early 2000s, he committed a far more serious blunder, insisting that a credit-fueled housing bubble, inflated by “innovative” financial products, posed no threat to the US economy’s fundamentals. As one error compounded the other, the asset-dependent economy took on a life of its own.

As the Fed’s leadership passed to Ben Bernanke in 2006, market-friendly monetary policy entered an even braver new era. The bursting of the Greenspan housing bubble triggered a financial crisis and recession the likes of which had not been seen since the 1930s. As an academic expert on the Great Depression, Bernanke had argued that the Fed was to blame back then. As Fed Chair, he quickly put his theories to the test as America stared into another abyss. Alas, there was a serious complication: with interest rates already low, the Fed had little leeway to ease monetary policy with traditional tools. So it had to invent a new tool: liquidity injections from its balance sheet through unprecedented asset purchases.

The experiment, now known as quantitative easing, was a success – or so we thought. But the Fed mistakenly believed that what worked for markets in distress would also spur meaningful recovery in the real economy. It raised the stakes with additional rounds of quantitative easing, QE2 and QE3, but real GDP growth remained stuck at around 2% from 2010 through 2017 — half the norm of past recoveries. Moreover, just as it did when the dot-com bubble burst in 2000, the Fed kept monetary policy highly accommodative well into the post-crisis expansion. In both cases, when the Fed finally began to normalize, it did so slowly, thereby continuing to fuel market froth.

Here, too, the Fed’s tactics owe their origins to Bernanke’s academic work. With his colleague Mark Gertler of NYU, he argued that while monetary policy was far too blunt an instrument to prevent asset-bubbles, the Fed’s tools were far more effective in cleaning up the mess after they burst. And what a mess there was! As Fed governor in the early 2000s, Bernanke maintained that this approach was needed to avoid the pitfalls of Japanese-like deflation. Greenspan concurred with his famous “mission accomplished” speech in 2004. And as Fed Chair in the late 2000s, Bernanke doubled down on this strategy.

For financial markets, this was nirvana. The Fed had investors’ backs on the downside and, with inflation under control, would do little to constrain the upside. The resulting “wealth effects” of asset appreciation became an important source of growth in the real economy. Not only was there the psychological boost that comes from feeling richer, but also the realization of capital gains from an equity bubble and the direct extraction of wealth from the housing bubble through a profusion of secondary mortgages and home equity loans. And, of course, in the early 2000s, the Fed’s easy-money bias spawned a monstrous credit bubble, which subsidized the leveraged monetization of housing-market froth.

And so it went, from bubble to bubble. The more the real economy became dependent on the asset economy, the tougher it became for the Fed to break the daisy chain. Until now. Predictably, the current equity market rout has left many aghast that the Fed would dare continue its current normalization campaign. That criticism is ill-founded. It’s not that the Fed is simply replenishing its arsenal for the next downturn. The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values.

The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy. It is great to be a fan of the Fed again.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

 

May’s BreXit Christmas


December 25, 2018

Image result for may's brexit goodbye

May’s BreXit Christmas

by

https://www.project-syndicate.org/commentary/exit-from-brexit-referendum-by-jacek-rostowski-2018-12

After invoking Article 50 of the Treaty of Lisbon prematurely, British Prime Minister Theresa May has spent the past 21 months dancing around the impossibility of a quick withdrawal from the European Union. But with the House of Commons set to reject the exit deal she negotiated with EU leaders, the music is about to stop.

 

LONDON – British Prime Minister Theresa May’s plan to withdraw her country from the European Union in an orderly fashion is collapsing. Though she has survived a no-confidence vote, in January the House of Commons will almost certainly reject the exit deal she negotiated with EU leaders. In order to avoid a chaotic “no-deal” Brexit, her government will have to ask the EU for an extension on the departure date, or withdraw its “intention to leave” notification, at least temporarily.

Either way, the next step would be to hold a second referendum with the option of a so-called exit from Brexit, which would reverse the 2016 decision to leave. Voters could still decide to back May’s deal, opt for a “Norway-style” arrangement, or crash out of the EU with no deal. But recent polling suggests that the choice of remaining in the EU would win the day.

How did a country with 400 years of constitutional governance and a culture of political compromise end up here?

Most commentators point to the seemingly insoluble problem of the . Under the 1998 Good Friday Agreement, which put an end to decades of violent hostility between Protestants and Catholics in Northern Ireland, Britain agreed to permit the free movement of persons, goods, and some services across the border with the Republic of Ireland. A binding international treaty with no provision for exit, the Good Friday Agreement was signed under the assumption that both Britain and Ireland would remain in the EU indefinitely.

May’s deal with the EU includes a “backstop” that would prevent the reintroduction of a hard border between Northern Ireland and the Irish Republic in the absence of a formal post-Brexit trade deal. The problem is that well over 100 members of May’s own party have rejected the backstop outright and will vote against her deal for that reason alone, making it dead on arrival.

But the Irish backstop is, in fact, a side issue. Even if there were no Irish problem, an orderly Brexit would have been impossible within the two years allotted to the UK under Article 50 of the Treaty of Lisbon. As I pointed out in October, British manufacturing supply chains are so deeply integrated with those of continental Europe that they could not survive the sudden establishment of customs and other checks on the British border. Britain’s automotive, aerospace, and precision-instruments industries would be decimated.

To be sure, many non-European countries export large volumes of industrial goods to the EU. But, unlike British goods, these generally cross the EU border only once. The same would hold true for Britain’s goods only aftert he country disentangles itself from the web of European supply chains. That task alone would be comparable to the restructuring of post-communist countries following the collapse of the Council for Mutual Economic Assistance (Comecon, the Soviet-era trade bloc). Completing it could well take five or more years.

After the 2016 referendum, May’s government should have had an adult discussion about the shape Brexit would take, rather than simply declaring, “Brexit means Brexit.” Scenarios in which the UK could remain in the single market, the customs union, or both were on offer from the EU. The government also should have done far more to apprise the business community of its plans.

Moreover, if the intention was always to leave both the single market and the customs union, retaining only a free-trade agreement with Europe, the government should have made clear that it would need an “implementation period” of at least five years to do this in an orderly manner. During this time it would be bound by European laws – including its obligation to pay around £13 billion ($16.4 billion) per year to the EU budget. May should not have invoked Article 50 until all of these decisions had been made, communicated to the relevant parties, and agreed upon at least in principle.

One reason May’s government ended up taking the exact opposite approach is that neither senior politicians nor bureaucrats understood the degree to which the British economy is intertwined with Europe. The fact that a quick Brexit into a free-trade agreement is logistically impossible seems to have been totally lost on them.

But the bigger problem was that a balanced consideration of possible options would have laid bare the lie upon which the “Leave” campaign was based. The idea that Britain could secure a “bespoke deal” and maintain “frictionless” access to the single market while pursuing its own trade accords elsewhere was always a fantasy.

Fearing the political consequences of acknowledging this basic truth, May adopted a completely unrealistic negotiating strategy, hoping that “some kind of Brexit” would happen before the British public realized it had been duped. Today, just three months before the departure date, this deeply deceitful démarche has disintegrated before May’s eyes – as well it should.

Jacek Rostowski was Poland’s Minister of Finance and Deputy Prime Minister from 2007 to 2013.