Monday March 11th
One of the many curiosities about the post-pandemic global economy is the way in which interest rates may or may not have helped to bring inflation down. In some circles it has been called the war on inflation and people in those same circles are close to declaring victory.
Conventional economic models, especially the ones used by central banks, link interest rates to shop prices via the labour market. Higher interest rates mostly do their work by slowing the economy, weakening the labour market (lowering wage demands) and, therefore, reducing price pressures. That’s the theory anyway. And the evidence is that the theory doesn’t really stack up in the real world: interest rates went up and inflation came down without any discernible impact on either the labour market or the broader economy. With the result that nobody really knows why inflation has come down. Not even the central bankers, who are the ones claiming responsibility for successfully defeating inflation, despite having no idea how they achieved it. They want plaudits for the economy’s ’soft landing’ - victory in the war on inflation with little collateral damage - but just don’t ask them how they defeated the enemy.
In Russia, the war on inflation has two remarkable features. It’s another outcome that defied all forecasts and is a victory claimed by two key participants. Given the war in Ukraine, few observers thought that Russia could contain a rise in inflation caused by a massive upsurge in state spending on the military. There are worker shortages in Russia, especially in key armaments industries, and wages have been boosted as a result. Nevertheless, inflation has been contained. As in much of the western world, nobody is quite sure why.
The Russian central bank and the finance ministry are, separately, claiming credit.As do their counterparts everywhere else, the bankers point to higher interest rates. But they cannot say how they produced Russia’s soft landing. Moscow’s bean counters at the finance ministry claim their introduction of exchange controls were the dominant factor. Again, nobody seems to know. The biggest surprise of all is that the economy appears to be in much better shape than anybody expected, given the cost of war and the consequences of international sanctions.
Tuesday March 12th
Although Russia’s war with Ukraine represents an obvious threat to Europe, particularly in terms of the ‘want will Putin do next?’ question, there is in Asia a widely shared perception that the outcome of the war will have profound implications for the region. Victory for Putin could embolden the Chinese with respect to their ambitions for Taiwan. Japan’s post-WW2 ‘non-militarisation’ is slowly being eroded and some analysts think explicit Japanese support for Taiwan isn’t too far away. South Korea no longer has to worry about support for Ukraine driving Pyongyang closer to Moscow - that ship has sailed, carrying thousands of containers of North Korean arms to the front line. Visitors to Seoul report increased chatter amongst S. Korean officials calling for a tougher line and more money and arms for Kyiv.
The other question, asked pretty much everywhere throughout Europe and Asia, is ‘what will Trump 2.0 do?’ Conventional wisdom has long been that the former President has zero interest in helping Ukraine, is an admirer of Putin and is consumed by anti-China antipathy. Hungary’s boss, Victor Orban, stirred this pot with a recent explanation for Trump’s oft repeated claim that, as President, he will stop the Ukraine war within 24 hours. Orban said that Trump will do this via a total and permanent cessation of military and financial support for Kyiv. That will, according to Orban-Trump logic, drive Ukraine to the negotiating table.
Trump’s hostility towards China has long been the bedrock of his support from the hard right of the Republican Party. Indeed, suspicion of China is perhaps the last bi-partisan issue in Washington DC.
A measure calling for TikTok to be separated from its Chinese owners just passed in Congress. The video-sharing app is widely thought to be under the control of the Chinese Communist Party. It is quite hard - virtually impossible actually - to find anything on TikTok criticising the CCP. TikTok is thought to have sophisticated algorithms targeting the Chinese diaspora. And to exert political influence where it should not. So, China hawks in the U.S. have been dismayed to find Trump suddenly coming out in support for TikTok.
It appears that someone with a $33 billion stake in TikTok paid a visit to Mar-a-Lago just before Trump came out in support of the company. Cynics have suggested Trump’s transactional approach to most things, combined with his current need for lots of cash, might have something to do with his volte face on at least one prominent Chinese issue. The anti-China wing of the Republican Party (ie, all of that Party) are nonplussed. No doubt they will get over it.
Wednesday March 13th
Vladimir Putin adopted a familiar pose on Russian state TV today, playing the roles of statesman and peacemaker. It’s probably fair to ask why he bothers. One answer, the upcoming Russian Presidential election, provides only a partial explanation, given Putin’s certainty of re-election. It’s almost impossible to register a protest in Russia, although the late opposition leader Alexy Navalny did make the almost whimsical suggestion that anti-Putin citizens should all turn up at polling stations on the strike of midday.
Putin’s latest remarks contained little that is new. He says Russia is prepared for peace talks if other parties respect the ‘facts on the ground’. That, of course, is code for Russia’s opening negotiating position: it gets to keep the bits of Ukraine it currently occupies and will almost certainly demand more territory in any talks. Putin also made demands for unspecified ‘security guarantees’. He also said he ‘trusts nobody’ which at least has the merit of being true. How he can get guarantees from anyone he does not trust remains to be seen.
Another state media outlet, this time in China, has just published a 6000 word essay extolling the reforming instincts and actions of Xi Jinping. Apparently, the Chinese leader is on a par with late great reformer Deng Xiaoping, the man who, in the late 1970s set China on its path to economic growth. That growth miracle has been stuttering recently and the essay is an attempt to persuade the international community that Chinese economic development is not only in the rear view mirror. China’s problem is that most of the policies that Xi actually implements act as an impediment to growth. Undoing Deng’s collective leadership model in favour of a single man at the top is but one key difference. Deng also separated the communist party from the state, something that Xi has acted at every opportunity to reverse.
Thursday March 14th
Germany is feeling the heat over its refusal to send sophisticated cruise missiles to Ukraine. That’s a decision already taken, without negative consequences, by France and the UK, making Germany’s reticence particularly hard to understand. One leading German politician has reportedly explained all this with reference to “one or two things, that cannot be discussed publicly, that rightly make him [German Chancellor Scholz] hesitant.”
These closely guarded secrets were apparently revealed to Germany’s defence committee on Monday. Scholz himself has previously claimed that he cannot supply Taurus missiles to Kyiv because that would involve putting German soldiers on the ground in Ukraine, such are the technical complexities involved in the deployment of those weapons. Scholz has already disclosed that French and British military personnel are in Ukraine helping to fire their own cruise missiles. Scholz hasn’t been able to explain why it’s okay for others to do what Germany cannot or why it seems perfectly acceptable for him to leak sensitive intelligence about close allies.
As Russia heads to its Presidential ‘election’ this weekend, its economy is defying all predictions - and sanctions. Consumer confidence is soaring, wages are rising at double digit rates, poverty has fallen dramatically, unemployment is at a historic low and the rouble is strong. Putin himself has said that Russia is short of about 2.5 million workers - employers hang on to workers and are paying them more.
It’s all down to the war economy of course. Government spending is behind the economic good times. Inevitably, there are questions over the long term sustainability of Moscow’s fiscal largesse. You can only run down your (much depleted) foreign exchange reserves - and assets of your sovereign wealth fund - once. Inflation is already a concern and could get much worse, particularly if the central bank is forced into more monetary financing of government spending. But the economy is not giving any Russian voters a reason to doubt Putin.
Friday March 15th
Trying to get a handle on who has contributed the most to Ukraine’s war effort is a slippery task. The public row between France and Germany over the best way to help Kyiv is actually a debate about the transatlantic alliance rather than money. France wants an explicit acknowledgment that the US has gone missing while Germany still thinks America is its most important partner. Call that touchingly naive or just plain wrong - either way, French frustration with Germany has spilled out into the public domain. Berlin retorts with ‘we have spent three times as much as you’ - which is a point but is in fact beside the point. Aid to Ukraine is, in the wider scheme of things, a trivial fraction of everybody’s GDP.
This was the week when Macron finally twigged that America really isn’t coming to Europe’s rescue and that helping Ukraine to deter Russia effectively is best viewed as buying a very cheap piece of catastrophe insurance.
The catastrophe would, in the first instance, be Russia’s absorption of Ukraine. Former Russian President Medvedev took a break yesterday from his almost daily calls for Putin to nuke Berlin, Paris and London. Instead, he gave details about how Moscow intends to eradicate Ukrainian identity. Russia wants nothing at all left of anything that might be labelled Ukrainian.
Macron’s simple point is that Europe is making a big mistake if it thinks Putin will stop at Ukraine. Of course, nobody knows what Putin will do, but why not buy some insurance against war in the Baltics and/or Poland? Which would certainly drag in the rest of NATO.
Germany’s Taurus cruise missiles have been the focus of the Franco-German spat. Those missiles, unlike their French and British counterparts can be pre-programmed to detonate only when a specific part of a building or bridge has been breached. A bit like an elevator, the Taurus can be told to hit a particular floor of a building. That makes them particularly effective and much more likely to be able to destroy the Kerch bridge, the one that connects Crimea with Russia. In a kind of metaphor for the state of Europe’s defence industries, all Taurus production lines are currently idle. The missiles cost about $1.5 million each and take 2 years to produce. Germany’s reluctance, says Scholz, is because German technicians would have to be on the ground to program the missiles. Others say it would only take a matter of weeks before Ukrainians could be fully trained.