Bond markets, safe assets and political freedom

Helen Thompson and Adam Tooze take us beyond Brexit to look at the global situation and the bigger threats we face. Italy, Germany, Iran, Saudi Arabia, Argentina, Russia, Trump vs. the Fed, the US vs. China, Hong Kong, the dollar, the euro, climate change, oil: an amazingly wide-ranging conversation that somehow manages to connect it all up.

Talking Points: 

Christine Lagarde will take up her post at the ECB relatively soon. Does her most recent speech fit into a narrative of a French victory in the euro struggles?

• Lagarde has clearly asserted the necessity of continuing the Draghi agenda, but augmenting it with fiscal action. That’s the big question mark.
• There are still fundamental, unresolved issues: banking union and Italy’s sovereign debt.

The condition for making Italian fiscal activism safe would be some agreement to collectivize a large portion of Italy’s sovereign debt. How that’s accounted for, and whose balance sheet it would fall onto is the real issue.

• Do you really want to activate a major fiscal stimulus in the German economy?
• This might be a good moment for a political deal between the North and South because the engine of German manufacturing is slowing down.

What’s happening in Germany is less to do with the Eurozone and more to do with China and to some extent the Eurodollar system. 

• The Germany economy is export-centric. It won’t respond to stimulating domestic demand.
• If we accept that the status quo is dangerous, then fiscal policy has to be more transformative.
• Trying to figure out what is actually causing the weakness in the world economy is perhaps more important than the confrontation between Trump and the Fed.

Something weird is going on in global capital markets, which means that the Americans are suffering basically no bond-market punishment despite extraordinary dysfunction. 

• At the same time, interest rates have plunged.
• This allows Trump to politicize things further.
• It’s both a return of the past, and something entirely new.
• The eurozone does appear to have a disciplinary role. The idea of a euro-state leaving the eurozone still seems unconscionable.  

China clearly wants to escape a dollar world. Could this deal with Iran make it possible?

• They want to be able to buy oil in their own currency.
• But the dollar and the U.S. banking system are still America’s ultimate weapons.

How big is the risk of a major global economic slowdown? 

• It’s already happening in Germany, Latin America, South Africa... 
• The question is scope: it hasn’t yet spread to the services sector. 
• There’s a variety of different economic ailments, but this is a real risk.

Mentioned in this Episode:

• Adam’s recent article in the NYTimes

Further Learning: 

• Why is Trump attacking the Fed? 
• Adam Tooze on Europe
• Adam Tooze on the US vs. China

And as ever, recommended reading curated by our friends at the LRB can be found here: lrb.co.uk/talking

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