In May, the bellwether investment bank Goldman Sachs decided to slash its exposure to Emerging Markets. Rising trade tensions between the US and China were blamed for the move.

“We have scaled back overweight exposure to EM (emerging market) currencies and EM debt until we gain clarity on the direction of travel for both US-China trade relations and global growth, with the two being interconnected,” Goldman Sachs Asset Management said in a note.

The challenges are legion. Flows into emerging markets can be dependent on cheap capital from the Federal Reserve and are very sensitive to a change in monetary policy in the U.S. Add to that domestic factors such as high current account deficits, weak currencies and a dependence on commodities, these markets can make for a risky investment, the bank’s analysts added.

It was a shocking about-face for the bank that had proselytised Emerging Markets, convincing investors around the world to take them seriously. Goldman Sachs analyst Jim O’Neill in 2001 invented the term ‘BRICs’ (Brazil, Russia, India, China) and created the idea of Emerging Markets as a concept.

O’Neill was certain that there would be growth across Emerging Markets for many years, and spurred a flood of investment to EMs seeking better returns than were available in the West, with its low interest rates. Yet, as early as 2013, he admitted that the results were disappointing.

It’s clear that the growth he forecast never materialised. From October 2015 through the end of September 2018, the S&P 500 produced a 61.4 per cent total return, including reinvested dividends. The MSCI World Index ex-USA, on the other hand, has produced a 30.6 per cent return, less than half the cumulative return of domestic stocks.

Social development also fails

And the social development that was to come from this wave of investment in EMs also never materialised.

The middle class was supposed to be growing rapidly, creating new markets for conspicuous consumption, all across Emerging Markets – across the world. The theory was that investment in EMs would drive the creation of a large middle class, which would establish a consumer economy and drive out corruption.

It happened, somewhat, in China. But nowhere else. “While people often look around the emerging markets for a repeat performance of China’s economic boom, in reality the overarching theme of a broad, rising EM middle class scarcely exists,” writes commentator Justin Leverenz of Invesco.

“Rather, optimism about this theme was largely conjured up by investors and multinational corporations that observed the nascent expansion of discretionary income in EM and extrapolated it into the next big opportunity across the entire asset class.

Slow growth for South Africa

South Africa should have been the poster child for Emerging Market growth; instead it is a basket case.

With its vast mineral resources, South Africa should be thriving, with investment pouring into social programmes – just like O’Neill promised us.

Instead, the country entered a recession earlier this month—the first since 2009. Weak growth is expected next year. Joblessness is over 37 per cent. Vast numbers have simply given up on looking for work. The murder rate is also rising. The country’s sovereign debt has been downgraded to junk by all of the big credit-rating agencies. The rand has fallen nearly 20 per cent this year.

India is struggling with unemployment

For a while, India seemed to be among the most successful of EMs, as internal consumption rose on the back of a new middle class.

But it became clear earlier this month, that it wasn’t sustainable. Official government figures revealed that the economy had been slowing for three quarters. After months of denial, the government also admitted that unemployment is higher than it has been for four decades. Now, Arvind Subramanian, a well-regarded economist who was till last year one of Modi’s most senior advisers, has argued in a Harvard working paper that India’s official figures overestimate growth by several percentage points.

It’s ironical, but it’s about politics

And Turkey, Mexico, Russia and Brazil are all weak and struggling. The Russian economy is still entirely based on oil sales. Turkish companies are overburdened with foreign currency debt, and a political regime that has disconnected with the country’s businesses and people. Mexico is mired in slow growth.

Behind all this is political failure – obvious in Turkey and Brazil, but also visible in Russia, India and South Africa.

When the investor money was flowing in, not enough investment was made in productive growth. Similarly, not enough reforms were undertaken to underpin the middle class. The transition from emerging to emerged just didn’t happen.

Now that the money is gone, these countries are paying the price. Let’s hope political change will keep it from being a too-high price.

L'articolo Investment Cut Means Trouble For Struggling Countries proviene da InsideOver.

On July 22, 2019, Iran announced the arrest of 17 Iranian citizens on charges of spying for the US, a claim that President Donald Trump dismissed as “totally false.” This came just after Iran seized a British oil tanker in the Persian Gulf. These events culminate weeks of growing tension between Iran and the US.

In the past, the price of oil would have skyrocketed on such clear and present dangers. Yet the price of oil has hovered between about $55 to about $65 per barrel during the entire period.  Yet the S&P 500 has gradually moved higher throughout the entire time, without missing a beat.

How is this possible? “We have moved into a demand-led market, away from a producer-led market,” comments Nick Butler, chair of the Policy Institute at King’s College London.

“OPEC’s glory days are over. The world’s call on the cartel’s oil is down to levels not seen since the early 1980s,” he adds.

Demand is weak and OPEC cuts won’t matter

The weakening global economy just isn’t supporting sufficient demand for oil, Butler continues.

“Over the past five years, the market’s move from being producer-led to a situation where the risks to prices, even after they have fallen from $110 a barrel in the early months of 2014 to around $60 now, are still predominantly on the downside,” Butler explains.

In the past, there would still have been market reaction to the loss of production from Venezuela, Libya and Iran. But traders have simply paid no attention.

Nor are the projected OPEC production cuts likely to change the overall lack of concern. These are planned to take 1.2 million barrels per day off the market. But the price of oil has not risen in response to the announcement.

“OPEC production adjustments have historically not been able to match the velocity of demand declines during recessions, leading to rising inventories, contangoes and lower prices,” industry analysts at investment bank Goldman Sachs write.

US Shale boosts confidence in increasing supply

From the point of view of investors, it is not so much the momentary status of demand, but rather the assuredness of continually increasing supply that has taken the price of oil off the list of game-changing factors.

US American shale production has gone from practically nothing as little as 10 years ago to 16.6 million barrels per day, and with further increases predicted over the next five years. This has occurred despite the fact that many US shale oil producers are not making a profit, due to the low price of oil. So, as far as many economists are concerned, higher oil prices are only good for the US economy, and ultimately for the rest of the world, as sufficient supply is a powerful force for economic stability.

Markets follow where oil leads

Surprisingly, as the markets cease to see the price of oil as having much affect on stock prices, they do continue to follow it as an indicator of economic strength or weakness.

Stocks have become far less of a lead indicator and more of a concurrent indicator than they have been,” says Julian Emanuel, head of equities and derivatives strategy at BTIG.  We look to the price of oil to see when a recession is coming, or if growth is in store, he adds.

Russia’s power grab contained

Russia is also losing revenue because of the low price of oil, and oil and gas sales are responsible for more than 60 per cent of Russia’s exports and provide more than 30 per cent of the country’s gross domestic product.

Yet Russian President Vladimir Putin apparently isn’t worried. He claims that $40 per barrel is more than enough for the state budget, and at that price, Moscow can replenish its gold and forex reserves.

“Russia doesn’t need oil prices to be too high and sees a price of $60-$65 per barrel as quite satisfactory,” Putin said at a recent press conference.

“The Russian processing industry itself is not interested in very high oil prices. Well, the average price around $60-$65 per barrel is quite satisfactory, we don’t need to drive up the price to the top, we already have a decent margin, in terms of budget.”

Yet Russia agreed to the recent OPEC production cuts without much discussion. Putin needs the revenue to finance his ever-increasing defence demands: Russian military spending fell to about $64 billion in 2018, according to the Stockholm International Peace Research Institute. According to the Institute, Russia needs close to $10 billion for its nuclear programme alone, and that figure is considered a low estimate.

Conclusion: A shift in geopolitics and economic power

It’s a bit early to write off oil producers as an economic power. At the same time, the ability for OPEC to destabilise the West with control of oil, as it did in the 1970s, is no longer a threat. And thus the markets keep their eye more on high-tech, and less on commodities.

L'articolo Why Oil Doesn’t Matter Anymore proviene da InsideOver.

In June, she appeared on the American TV show “The Daily Show with Trevor Noah.” Asked why she took over the IMF in the midst of the financial crisis, Christine Lagarde quipped: “Whenever the situation is really, really bad, you call in the woman.”

On the same show, Lagarde got into a sarcastic vein: “Here’s where President Trump is wrong: Raising tariffs doesn’t help; it doesn’t impact China, it only impacts companies that are importing goods, and ultimately hurts the consumers.”  How to repair trade discussions? “We need adults in the room…”

That quote hits hard, as Lagarde will, as the ECB president, be involved in trade discussions between the US and Europe. Lagarde’s predecessor, Mario Draghi, lambasted Trump recently after a presidential tweet complained that ECB policy unfairly weakened the euro (on the same day, Trump also complained that the German DAX stock exchange was “unfair to the US” because stocks rose higher).

But Lagarde, whose charm is legendary, also showed a steel lining when she presided over the rehabilitation of the Greek economy, after that country became the first ever to default on a loan from the IMF in 2015. When then Greek Prime Minister Alexis Tsipras balked at reforms, Lagarde famously replied: “We do not have a choice as to who represents a country… ” Lagarde forced the Greek government to toe the line and make the reforms that the IMF and the Eurogroup demanded.

Lagarde will face a total revamp at the ECB

Lagarde will not lack equally daunting challenges at the head of the ECB. The central bank’s fundamental monetary policy has not been reviewed for many years, and creating one that is better adapted to our volatile economic times will be her first task. Then, the ECB’s failure to boost inflation must be confronted; the policies initiated by Lagarde’s predecessor Draghi have had little effect.

The ECB has called for structural reforms in the 28 Member States in vain for many years. Lagarde will have to show that she can influence national politicians in ways that Draghi was not able to.

Her background as a politician and a diplomat, as well as her skills honed in working with all kinds of professionals at the IMF, will be severely tested in this job.

A meteoric rise to power

But she has shown remarkable resilience in the past. Lagarde broke through the glass ceiling early in her career. Former head of the international law firm Baker McKenzie, Lagarde innovated with a client-first approach that boosted revenue.

After a stint at the prestigious Center for Strategic and International Studies, the Washington, D.C.-based think tank that is ranked among the top in the world for foreign policy and defense thought leadership, Lagarde returned to France to become Trade Minister in the government of Dominique de Villepin. In this role, she succeeded in promoting French exports, finding ways to provide credits via the EU’s Cap Export Mechanism.

Lagarde returned to France in June 2005 to join Prime Minister Dominique de Villepin’s government as trade minister before (briefly) becoming minister for agriculture and fisheries in 2007. As trade minister, she encouraged foreign investment in France and the opening of new markets for French products, particularly in the technology sector, helping exporters through the Cap Export mechanism, which she launched in September 2005.

In 2007, Lagarde joined the government again as finance minister – the first woman to ever hold this position in a Group of Eight country. She promoted a conservative approach to labour issues and fiscal stimulation. During this time, her career suffered its only stain, as a French court judged her as having been “negligent” in the Bernard Tapie scandal, in which that businessman received 400 million euros from the French treasury in illicit financing.

In 2011, Lagarde became head of the International Monetary Fund, although she had no training as an economist. She proved adept at working with staff and in managing the Greek economic crisis as well as in helping the EU to come through its euro crisis.

Can Lagarde make this transition to running a central bank, from managing an international agency?

The Wall Street Journal voted yes: “Some ECB watchers express surprise that a non-economist should run the ECB. A cynic might say that given the repeated failure of econometric PhDs to correctly forecast the European economy, and the failure to reach the inflation target, she has as good a chance as anyone. But in my view, Lagarde has the perfect background: the barriers to ECB action are political and legal, and as a lawyer-turned-politician, she fits the bill perfectly.”

One cannot, in fact, question Lagarde’s proven abilities as an influencer and as a communicator. But, at the ECB, she will have to manage an economy with 28 separate heads, and with only limited powers to intervene. Is Lagarde going to rise to the challenge?

L'articolo Christine Lagarde Is Also A Person With Sense Of Humour proviene da InsideOver.

‘Redneck’ is a slang American term for “a working-class person, especially a politically reactionary one, from a rural area.” It has nothing to do with race.

Most people think that this is this kind of person who supports US President Donald Trump, but that’s actually not true: exit polls from the last election show that Trump supporters are relatively affluent. What’s more shocking is the fact that nearly half have college degrees.

Some say that Trump supporters are just people who think like rednecks, allowing popular mythology to replace logic. They are the same kind of people who used to go around calling everyone “Communists” because they cared about social welfare. Trump would have thrived even more in that time, with his ‘get what we want’ mantra.

Trump’s most recent pronouncement on the Federal Reserve was pure ‘redneck’, and it resonated with the Good Ol’ Boys, but also with a lot of people who should be educated enough to know better. “We don’t have a Fed that knows what it’s doing,” Trump informed us on July 5, 2019, in a chat with reporters at the White House. “If we had a Fed that would lower interest rates, we would be like a rocket ship.”

This plays nicely on commonplace stereotypes: ‘America is filled with energy, and only held back by a bunch of evil regulators,’ so the popular mythology has it. It is amazing that regulators should be judged by values, and not by concrete results.

Ironically, the man Trump blames for all this, Federal Reserve Chairman Jerome Powell, was appointed by Trump himself. Powell has stood up to Trump on numerous occasions. But now Trump is talking about “demoting” Powell, a move to take control of the central bank that even Republican senators aren’t willing to accept. It’s also hard to point the finger at an “evil regulator” when you gave him the job, but we all know that logic is irrelevant…

Pump it up, harder, harder

Given that the US economy isn’t doing too badly, what is the real reason Trump is raving about interest rates?

Well, the 2020 election isn’t far off, and Trump would like to pump a lot of easy money into the economy to please voters. Of course, there isn’t a great deal of room to pump into, because interest rates aren’t particularly high. In fact, they are way below what interest rates have been in most of the recent past.

Trump has very little real political capital to spend, as laureate economist Paul Krugman writes: “Trump’s current rage at the Fed should be understood mainly as an expression of frustration over the failure of his 2017 tax cut… The tax cut was a political bust: Trump isn’t getting much credit for good economic numbers, and a plurality of the white working-class voters, on whom the tweeter in chief depends, believe (correctly) that his policies mainly benefit people richer than themselves.”

Why won’t the Fed reduce interest rates?

 At its last meeting on June 19, the Fed kept the benchmark fed funds rate steady between 2.25 per cent and 2.5 per cent.

The Fed’s announcement noted that the US economy is expanding at a “moderate pace,” but that there were a number of uncertainties looming – Trump’s trade war is the biggest one – and that US inflation is still too low.

The Fed noted that the trade war has hurt “American manufacturers, farmers and exporters,” but not so much China, its intended target.

Economists noted that the Fed does not just set interest rates, it reacts to market forces. The most recent report on job creation in the US was robust, with 224,000 jobs added in the month of June. This supported the Fed’s decision to leave rates alone.

What is bothering economists is the uncertainty about what course the Fed will take. Because the Fed is giving no clear signal about what it is likely to do in the future, businesses are holding back on investment, and capital that might have flowed into the country is also dammed up for the time being.

“The Fed has been playing a game of chicken with us,” one economist complained.

Would interest rate cuts do any good?

Given that rates are already very low, serious economists don’t believe that cutting interest rates would have much effect anyway.

“I don’t think rate cuts will actually help much,” says Megan Greene, an economist with the Harvard Kennedy School of Government. “There is not a credit supply problem. It’s a credit demand problem. The cost of borrowing is hardly a constraint. Nobody is reporting problems getting credit.” Greene said that cutting rates might boost stocks, but just for a quick hit.

So Trump might not even get what he wants with a rate cut. “He doesn’t have any real ideology,” Greene commented.

Or as Krugman puts it: “The common principle is simple: Monetary policy should be whatever serves Donald Trump’s interests. Nothing else matters.”

L'articolo Trump and the Federal Reserve: ‘Redneck’ Monetary Policy proviene da InsideOver.

In France, 65% of those who employ maids today pay them on the books – a sharp change from 10 years ago when nearly all maids were a part of the informal economy.

Today, “le travail au noir” (working in the dark or in the black) has declined to about 10% from about 11% of GDP in 2014, according to the Conseil Economique, Social et Environmental. In Italy, the shadow economy has dropped to 19.5% of GDP in 2018, from 22.97% in 2015, according to a study by the consultancy A.T. Kearney. The Italian statistical authority, ISTAT, notes a decline in illegal work since 2017.

In Spain, the shadow economy contracted sharply between 2003 and 2015, dropping to about 18% from nearly 23% of GDP. Portugal saw a drop of the same magnitude for that period.

What drives this decline in the shadow economy in countries where illegal working is socially accepted?

Cultural Change

People work in the shadow economy out of necessity, or because it is culturally accepted. “The informal economy is another safety net for some Italians. The authorities, especially at the local level, are aware of this situation and tolerate — and often encourage — different kinds of evasion and ways to ‘cheat’ the central government. Local political leaders see this as a way to avoid social unrest and sometimes to gain the support of voters,” writes the Stratfor consultancy.

Yet this climate is changing in France, Italy, Spain and Portugal, as Millennials and Gen-Xers feel less secure when they are not within the law.

“Millennials in Europe entered the workforce shortly after the dot-com bubble burst, and amid fear of a European equivalent of 9/11, making political as well as financial security highly salient concerns that were also reflected in the labour market at the time,” writes one commentator.

Millennials in Europe are also grounded in the common experience of increasing technological, societal and economic development. What this means is that they trust in the companies they work for, and tend to be conservative about workplaces and the law. Millennials like flexible, innovative work styles, but aren’t comfortable with non-compliance.

“Our data show that Millennials are as likely to believe that employees should comply with authority as older generations.” As the commentator notes, Gen-Xers fit this pattern as well. They, too, grew up in unstable economic periods and adhere to officially recognised ways of working.

Technology supports legal working

The growth of the ICT economy around the world is often blamed as a driver of illegal working. It is true that many businesses operate on the black market over the Net.

Yet a recent study shows that the use of new technology and the Internet is helping to move workers in the shadow economy to the real one. Workers in the informal economy generally find that they need a cell phone. The mobile phone is like an open door to all sorts of services. Most of these services require some form of banking, and that is available to illegal workers, often for the first time.

But the mobile phone does more: It allows illegal workers, who often have limited ability to find work, to connect with potential employers. For example, an illegal worker cited in the study found that he can use the Internet to get merchandise and find the cheapest outlets. Then he uses the Internet to find places where the merchandise is sold.  But, to take advantage of these opportunities, a legal business in some form has to be in place, and so the worker is integrated into the official economy.

No one claims that this kind of integration will take place on a massive scale. Lack of education can still bar the way for many illegal workers. The New York Times recently did a study of illegal work for the Italian fashion industry, and showed how lack of access to the official workplace kept workers in the shadow economy.

Still, the bridge created by new technology is one that an increasing number of illegal workers are crossing to become legitimate. The move has been helped by simplification of the regulations regarding starting a business – this has notably been the case in France and Spain. The 2014 reforms in Italy have also taken a step in this direction.

Repressive measures have been applied to the shadow economy around Europe with limited success. On the other hand, Cultural change, new technology and the gradual automation of most manual labor will do much to reduce the shadow economy.

L'articolo The Shadow Economy Declines in Southern Europe proviene da InsideOver.

The launch of Facebook’s cryptocurrency, “Libra”, on June 18, 2019, is an ambitious attempt by Facebook to diversify its business and move into financial services. One has to admire the scale of the move, but one also has to wonder if Facebook can pull it off, and what it will mean for banks. Because, if it works, it’s going to eat the lunch of every consumer banking operation in the world, according to analysts. “It could turn into a shadow bank,” warns German member of the European Parliament Markus Ferber.

Zuckerberg: “send money as easily as messages”

 The initial objectives for Libra are ambitious enough, although no mention is made of banking in the announcement by Facebook CEO Mark Zuckerberg.

Libra’s mission is to create a simple global financial infrastructure that empowers billions of people around the world. It’s powered by blockchain technology and the plan is to launch it in 2020.

Being able to use mobile money can have an important positive impact on people’s lives, as it limits the neccessity for cash, which can be insecure, and tranfer fees are avoided. This is especially important for people who don’t have access to traditional banks or financial services. Right now, there are around a billion people who don’t have a bank account but do have a mobile phone.

Zuckerberg says that he wants Facebook users “to send money on Facebook as easily as they exchange photos and messages.”

Sensitive to his company’s poor image following several major data protection scandals, Zuckerberg explains that Facebook will not ‘own’ Libra; there will be a Switzerland-based non-profit Libra Association with 100 corporate and not-for-profit members at the outset. 27 major companies, including Mastercard, PayPal, Uber and Spotify have already signed up for a trial membership in the association, although none have reportedly yet paid the $10 million subscription fee. Mastercard’s executive vice president Jorn Lambert told Reuters that if the project experiences too much regulatory pushback “we might not launch.”

Facebook has already set up an independent subsidiary called Calibra to provide online wallets where users can keep their Libra coins – it is notable that the company has promised that no data used with Calibra would be used by Facebook for targeted advertising, its only other source of revenue.

Libra is not bitcoin!

Libra is nothing like bitcoin, or Ethereum, or other cryptocurrency. Libra is what is technically called a ‘stablecoin,’ meaning that it is pegged to a basket of assets. So the price of Libra will not fluctuate; it will always have a fixed value (unlike bitcoin and the other cryptos). Libra will also not be traded on exchanges. The stablecoin idea has existed for some time, and several major investment banks have created them, because they offer the stability of a fixed price with the electronic advantages of a token.

Cryptocurrency is technically not money, despite its name. It is actually a new class of asset, similar to a commodity, like gold, that people may use for payments or savings. Because cryptocurrency is on the blockchain, it can do many things that euros and dollars cannot, and it can do them automatically, without any danger of human intervention.

What’s more, transactions made in cryptocurrencies are kept safe on a special computerised and distributed ledger which is virtually impregnable to hackers. This is why Facebook can offer its 1.56 billion daily active users the use of Libra, and can manage the enormous volume of small transactions it will generate – who will resist paying for their Uber with Libra?

 Libra is not a bank…yet

It should be made clear that Libra is not a bank. The Swiss Association cannot obtain money from any central banks in the way operating banks do. But if Libra succeeds in attracting billions in exchanges of national currencies, the temptation for it to provide banking services will be difficult to resist. Facebook has already stated that credit services may be the next offer on Libra’s agenda.

But even if Libra never becomes a bank, it will undoubtedly soak up lots of money from people who would otherwise have put theirs in banks. It will also provide virtually free payment services, and banks and fintech companies make a lot of money from payments. Obviously, Libra will also enable Facebook to compete with Apple and Google Pay, and other financial services provided by tech companies.

Will Libra work?

For now, financial analysts are lining up to praise the Libra project. For example, Douglas Anmuth of JPMorgan said Libra would help Facebook diversify its revenue sources “while also empowering billions of people.” Investment bank Canaccord Genuity analysts say that Libra could disrupt and markedly change consumer financial services.

And Libra has already attracted the notice of regulators around the world, and their reaction could affect Facebook’s chances of success. While the project does not differ in principle from other cryptocurrency stablecoin platforms that are already in operation, Libra could be destabilizing, given that more than a billion Facebook subscribers could take it up. Certainly the announcement has helped to push up the prices of bitcoin and other ‘altcoins’ and is expected to support the cryptocurrency industry overall.

Will Libra eat the banks’ lunches? Jamie Dimon, chairman and CEO of JPMorgan, has warned that a great threat to banks was bound to emerge from giant tech companies. Maybe this is it – but we’re not yet certain.

L'articolo Facebook Launches Libra Cryptocurrency – Banks Beware! proviene da InsideOver.

As US President Donald Trump arrived in London, he took a moment to praise former London mayor and current candidate for the prime minister’s seat, Boris Johnson: “I think Boris would do a very good job. I think he would be excellent,” Trump told The Sun. “I like him. I have always liked him. I don’t know that he is going to be chosen, but I think he is a very good guy, a very talented person.”

Ironically, Trump’s praise came only a few days after Johnson had been ordered to appear before a judge to answer three charges of misconduct in a public office following an allegation that he lied about the size and timing of Britain’s contributions to the EU.

Trump, who’s told a few “porkies” of his own – the experts count about 10,000 misleading statements or outright falsehoods – probably only admires Johnson more, not so much for not telling the truth, but rather for pulling together a media persona that doesn’t have to. This is very much what Trump’s other ally, Brexit campaigner Nigel Farage, has done as well – Trump also singled Farage out as a “great guy.”

A New Kind of Demagogue

Like Trump, Johnson has built a following based on what people actually believe, not what is real.

Psychologists call this creating a kind of feedback loop: with some lacking perspective, Trump’s supporters seek confirmation of false ideas like “Barack Obama is not American,” or “There are scores of rusting factories in the US that we can easily put back to work.” Trump’s supporters believe this sort of thing, and when Trump says it too, they get a good feeling that goes way beyond learning what is true or not.”

“Researchers at the University of California, Berkeley, have shown that feedback, rather than hard evidence, boosts people’s sense of certainty when learning new things or trying to tell right from wrong. Developmental psychologists have found that people’s beliefs are more likely to be reinforced by the positive or negative reactions they receive in response to an opinion, task or interaction, than by logic, reasoning and scientific data.”

Johnson, who made a splash as Mayor of London, being a lively and humorous speaker, has created this kind of feedback loop with his supporters.

Trump and Farage thrive off Twitter

Brexit Party leader Nigel Farage has been equally adept at creating a feedback loop that thrives on fables and myths, as his party’s recent scoring of 31.7 per cent at the European Parliament elections on May 26 once again shows.

“Mr Farage has woven this combination of pride and resentment into a compelling anti-establishment narrative. Brussels bureaucrats are intent on turning an enterprising nation into a vassal of the European super-state, he says, and the British establishment is too craven and corrupt to see what is happening,” writes The Economist.

New technology makes it easier for this kind of politician to keep in close touch with their believers.

“From Trump’s hyper-active social media presence, we see a novel political relationship between Trump and his followers. By the very nature of social media, the visibility of a post is inherently related to popularity, to the amount of likes, retweets, and views. Due to this intimate connection between public popularity and the influence and presence of Trump’s medium of choice, we can see the beginning of a new, arguably more ‘democratic’ mode of political dissemination. This emergent phenomenon of political communication thereby creates a political system in which political discourse is now effectively produced by citizens at large, for the people determine for themselves what political figures and ideologies are deemed worthy of popularity through the largely democratic process of voting through likes and retweets. Trump’s campaign is truly innovative for this reason,” writes political science commentator Jordan Hollinger.

This kind of feedback loop has permitted Farage to pull together what some might call a naïve vote against immigration with all sorts of frustrated people who blame the government for their ills. They know nothing about the European Union, and so were easily persuaded that it is a kind of freedom-destroying “Soviet Union.” So Trump and Farage have created a world in which, as Dick Morris, Chief Strategist for former President Bill Clinton, said:

The Internet will be the Congress. The Internet will be the Parliament. The Internet will be the election

And no one really knows what kind of world it will be.

L'articolo Trump in London Finds Allies Who Understand Him proviene da InsideOver.

Brexit is an economic disaster. This is not an argument up for debate. Statistics show that Brexit is already costing the UK billions – in GDP decline, in investment decline, in tax revenue decline – and that is not all.

“The UK could have had tens of thousands more police officers and nurses if Brexit had not happened. This isn’t a forecast, but an estimate of what Brexit has already cost us,” says the Centre for European Reform. Brexit is not hurting Europe as much as it is the UK, but the damage is severe. The cost of Brexit to the British economy is running at £40 billion (€45.4 billion) a year. A damaging no-deal scenario could see Britain crashing out of the European Union without a deal, which could trigger a deep and damaging recession with worse consequences for the UK economy than the 2008 financial crisis, the Bank of England has warned.

A no-deal Brexit would send the British economy into a tailspin, the bank says. GDP could fall by as much as eight percent next year, exceeding the depth of the recession that followed the 2008-2009 financial crisis.

The central bank says that, since the vote on 23 June 2016, the economy had lost about two percent of Gross Domestic Product. And the UK economy will continue to slow.

Brexit will also cost each British household £2,200 (€2.500) by 2020, according to a report by the OECD. By 2030, the OECD says, GDP will have been reduced by an additional five percent or more, with the cost of Brexit equivalent to £3,200 (€3,600) per household (in today’s prices). This jibes with the UK Treasury’s prediction that the economy would be six percent smaller by 2030.

Foreign investment in the UK is also forecast to decline sharply off, according to a Centre for Economic Performance-London School of Economics study. With Brexit, the UK will see a 22 percent fall in foreign direct investment over the next decade. About half of the FDI into the UK has come from the EU; this will obviously sharply decline after Brexit.

With Brexit, the UK will face tariffs in exporting to Europe. The annual direct cost of new tariffs and non-tariff barriers will be around £27 billion (€30.6 billion) for UK firms (equivalent to 1.5 per cent GVA) according to the consultancy Oliver Wyman.

As if all this weren’t enough, the Chancellor of the Exchequer Philip Hammond admitted on 28 November 2018, that the UK will be worse off “in pure economic terms” under all possible Brexit outcomes.

Costs to the EU

A no deal scenario would have immediate, but much less serious, consequences for the EU, with total costs at about €40 billion per year, according to German think tank Bertelsmann Stiftung. Germany would lose €10 billion, France, €8 billion, and Italy €4 billion – the remaining losses would be unevenly divided among the other 25 Member States.

On average, EU member states do about eight percent of their trade with Britain, compared with Britain’s 44 percent with the EU, according to Foreign Policy economists.

They can also relatively easily replace British suppliers with those from other Member States. However, some EU member states would suffer more than others.

“The regions affected the most are typically those that have strong industry, for example the automotive industry in countries like Germany, and parts of Spain and Italy. Also, financial services and IT services trade with the UK would be affected. And generally, we find that highly productive regions (like some Scandinavian hubs) would lose out the most”, the economist Dominic Ponattu of Bertelsmann Stiftung says.

New tariffs will cost EU businesses around £31 billion (€35.2 billion) for EU-28 firms (or equivalent to 0.4 percent of GVA), according to the Oliver Wyman study.

Economic arguments for Brexit are simply fake news

Consider that Brexit scraped through the 23 June 2016 Referendum vote on a 51.9 per cent majority, on the basis that the UK economy would prosper on its own.

The “Leave” faction had two arguments, both of them economic ones. Yet one was, what some may call, racist nonsense, and the other was just plain nonsense.

Academic research has confirmed the fact that fear of immigration was the main driver behind the Brexit vote. So when Brexit leader Boris Johnson, currently one of the top candidates to replace Theresa May as prime minister, claims that Brexit means the UK taking control of its destiny, he’s full of hot air.

What’s more, independent research shows that immigration is good for the UK economy – it boosts productivity. So anti-immigration sentiment in the UK has little basis in fact – this may not, of course, be true in other countries in Europe, but it is crystal clear for the UK.

The second argument for Brexit runs as follows: “We pay the EU £350 million per week. Let’s give it to the National Health Service instead.”

In fact, the Brexiteers have made all this up. The actual direct contribution to the EU by the UK is about £171,000 (€194,000) per week, according to statistician Anthony B. Masters. Ironically, Brexit has already cost the UK Treasury more than the £350 million per week that was supposed to go to the NHS, an independent study shows. Instead, the health service is seeing a budget squeeze.

But this is only the direct contribution by the UK. It does not take into consideration all of the EU programmes that fund startups, farming, infrastructure projects etc.

The only valid arguments for Brexit are those that discuss UK law and policy-making. Anglo-Saxon common-law jurisprudence doesn’t mix well with the Continental legal systems, all derived from the Napoleonic Code. The two systems come into serious conflict at the European Court of Justice, and British lawyers have been unhappy about the outcomes for a long time.

Similarly, there are aspects of economic and political policy – like the euro – that the UK governing class really doesn’t care to swallow.

These are matters, however, that can be resolved over time from a position within the EU. It isn’t necessary to create an economic disaster, one that in no way benefits any of the partners.

L'articolo Brexit Costs UK at Least 40 billion per Year proviene da InsideOver.

The jingoistic attacks on world trade by the Trump administration have already hurt economic growth in Europe. Europe, just starting out on an uneven recovery, could plunge into recession if world trade is disrupted further.

Oxford Economics in London estimates that a full-blown trade war, including auto tariffs, would shrink the European economy more than 1 per cent and cost 1.6 million jobs.

“A trans-Atlantic trade war would have a severe economic impact on both the European and U.S. economies,” Oxford Economics said in a report in August. “There would be no winners.”

Cost to the US of trade war with China and Europe? About $62 billion, according to Oxford Economics’ recent report.

Cost to the global economy of this disruption of trade? $800 billion, the report says. The result is the looming breakdown of an increasingly integrated global trading system that has, over the course of seven decades, been key to the development of the European and American economies, as well as driving the development of emerging markets.

Now this carefully developed system is unravelling. The World Trade Organization (WTO), which stands behind global trade, is under attack by the Trump administration, which is blocking the reappointment of its judges.

And, notes George Washington Law School Professor Steve Charnovitz, the Trump administration is illegally holding bilateral negotiations on trade with China, a direct affront to the WTO. “It’s frontier justice,” Charnovitz insists.

The WTO system has a basic tenet: It’s about reciprocity.

Says the Brookings Institution in a study: “The underlying principle of reciprocity that served to influence early trade negotiations after WWII turns out to have been an important international force allowing governments to coordinate and simultaneously lower trade barriers. Furthermore, this reciprocal balance of trade obligations across countries is what has allowed them to keep the trade barriers low toward one another, for the most part, over the past 60 years.”

Why Trade Agreements Make World Trade Work

We have grown accustomed to a certain level of economic ability thanks to reciprocal trade agreements.

But, back in 1930, most of the world did just the opposite. Starting with the US, and its Smoot-Hawley tariffs, nearly the entire developed world raised protectionist barriers.

“This led to the virtual halting of international commerce,” explains Brookings.

“Smoot-Hawley contributed to the early loss of confidence on Wall Street and signalled U.S. isolationism. By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail.

Within two years some two dozen countries adopted similar ‘beggar-thy-neighbour’ duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.

In 1948, after the devastating effects of depression and war, the General Agreement on Tariffs and Trade (GATT) was signed by 23 nations. Ultimately, 150 signed, and this led to the creation of the WTO in 1995.

Through the GATT and WTO negotiations, the principle of reciprocity enabled trade relations among the participating countries to remain in balance. One of the issues that has arisen in recent years is that China’s not conforming to the reciprocity model, and, as Italian Prime Minister Giuseppe Conte has noted, this is why the WTO needs reform.

But reforming the WTO is one thing, destroying it is another – it goes against the very fabric of how international trade works today. International production activities have a new structure, and trade has restructured in consequence.

“Traditionally, trade was driven by the exchange of finished goods, but the dissemination of global value chains (where production is fragmented and dispersed across national boundaries) means that the exchange of components, machinery, and services represents more than two-thirds of the value of international trade,” Brookings explains.

“Two main policy implications should be readily apparent. One, imports are ever more essential to sustain export activities, making protectionism costlier. And two, leveraging the growth potential of the global value chain calls for international trade disciplines that match the reality of international trade operations.”

In other words, international trade is an integrated network. When disputes arise, the entire network is affected.

“The problem with the U.S.-China trade negotiations is that if the Trump administration’s numerous allegations against the Chinese government are valid, such misbehaviour adversely impacts all advanced economies, not just the U.S. Yet the bilateral nature of the talks allows U.S. negotiators to make ad hoc demands that could benefit U.S. interests (or special interests) to the detriment of other countries,” Charnovitz warns.

But the Trump administration, ignoring the entire basis on which international trade operates, simply imposes tariffs based on its conviction that China is “cheating.”

“The whole point of international trade law is that one country should not have the right to define what constitutes trade cheating,” writes Charnovitz.

Will Trade War lead to War?

There is certainly a real possibility that this could lead to outright war.

“A quote often attributed to the 19th-century French economist, Frédéric Bastiat, goes: ‘When goods do not cross frontiers, armies will.’ It is obvious that the current US-China trade war is stoking geopolitical tensions between the world’s two largest economies and chief political adversaries, as they become more confrontational over their discord on maritime issues in the South and East China seas and over Taiwan,” writes one commentator.

It would be wrong to ignore the possibility that this pattern first trade war and then outright war, could happen again.

L'articolo As the Trade War Unravels, Will Real War Follow? proviene da InsideOver.

As Mario Draghi’s term as president comes to an end, the battle over who will succeed him has brought all of the flaws that plague the European Central Bank to the fore.

“The Eurozone will endure, but it will not prosper,” writes London School of Economics professor John Ryan. With growth sluggish, interest rates kept at near-zero per cent for years, bonds at negative yield levels, the Eurozone economy grinds on, never losing, but never really winning.

So what’s wrong with the ECB? It’s inelastic: it can’t change policies easily. It has put so much money and effort into strategies that have not changed for years, that it now has very little left in its arsenal to effect more change, and Europe needs more without delay.

The two most likely candidates to replace Draghi, the moderate Finnish Central Bank Governor Olli Rehn, and Germany’s central bank governor, the rabid hawk Jens Weidmann of Germany, both want radical changes in the way the ECB works, a move sharply away from current ECB President Mario Draghi’s policies.

Draghi’s “whatever it takes to save the euro” speech in 2012 held the Eurozone together through several crises. “This speech was followed in 2015 by a EUR 2.5 trillion expansion of the ECB’s balance sheet with bond purchases, a policy critical to re-establishing the convergence of interest rates and control over monetary policy across the eurozone,” writes the consultancy Edison Investment Research. This is the controversial policy referred to as Quantitative Easing (QE).

Ineffective policies that have not changed

But Draghi’s policies have not lifted inflation – in fact, the ECB’s forecasts calling for a rise have been wrong, again and again, as research from the Brussels-based Bruegel think tank has shown. And while the European economy is recovering from the 2008-2009 crisis, it cannot be called dynamic.

And balance sheet expansion with bond purchases is likely to continue. Despite its having been formally closed by Draghi in December 2018, he announced in March that it is likely to start up again. He also announced a programme of cheap, long-term loans for banks.

The question is whether, under these conditions, balance sheet expansion can be effective? “QE is not quite the God that failed, but it is the solution that fell at the very least well-short of where people had imagined it would have come” explains Laureate economist Paul Krugman.

QE is not a substitute for economic growth; what the ECB hoped for, that QE would spur real economic growth, has not happened beyond a very limited degree. An expansion of the monetary base, coupled with easy credit, are a kick-start, not a long-term solution.

Need for new Solutions

Weidemann has advocated for this view for a long time. He has persistently called to put an end to QE, to reduce the size of the ECB’s balance sheet, warning that it poses a danger to economic stability in the Eurozone.

Rehn, on the other hand, calls for a rethink, an overall review of strategy, to consider what new strategies are available to the ECB. There is considerable support for this moderate approach; in fact, the US Fed is considering just the same thing.

“I dare say it is important for market observers, lawmakers, and the public to become more comfortable with the benefits of central banks using their balance sheet tools to pursue the public interest,” Boston Federal Reserve Bank President Eric Rosengren recently observed. “In my view, monetary policymakers should give more consideration to structuring the balance sheet to provide more leeway for policy measures to be taken when the next economic downturn occurs.”

Rehn points out that a full-scale review of the ECB’s monetary policy has not taken place since 2003. He called for “a re-examination of the principles, key assumptions and instruments underlying (the ECB’s) monetary policy.”

“The deviation of inflation expectations from the ECB’s target is worrisome in terms of the effectiveness of, and strategy for, monetary policy,” Rehn wrote in an editorial published by the Bank of Finland.

Vast power, far too much power

Then, as always, there are the issues generated by politics. “ECB policymaking has become problematically controversial and politicised,” writes Ryan, who points out that the ECB’s vast power is far too much unchecked power.

“It is, however, not just the vast power with which the ECB holds sway over Europe’s economies that is cause for mounting concern, it is the complete lack of transparency and accountability with which it wields that power,” Ryan continues.

“The ECB is far more independent than the US Federal Reserve, whose legal status is far weaker and which is directly accountable to Congress and the US government. The ECB was supposed to be like the German central bank, the Bundesbank. It has, however, failed to emulate the distinctive attributes that made the Bundesbank successful, such as accountability and interdependence with other democratic institutions.”

L'articolo What’s Wrong with the European Central Bank? proviene da InsideOver.