How to not be a VICTIM of western sanctions

 

Currency warrior: why Trump is weaponising the dollar

Businesses in countries such as Russia are testing the power of the reserve currency but it could benefit from any global instability writes Sam Fleming in The FT


In an industry long dominated by the dollar, it was a move that carried obvious symbolic weight. 

Last summer Russian diamond miner Alrosa tested a new system for selling its rocks in roubles to clients in countries such as China and India, as an alternative to the US currency. 

Since then the company has conducted about 50 transactions under the mechanism, using a range of currencies, says Evgeny Agureev, Alrosa’s director of sales, who says avoiding dollar conversion allows transactions to be conducted more speedily. 

“The number and volume of these transactions is relatively small . . . but we think it is valuable for our clients to have a variety of options for settlement to choose from,” he says in an email, adding that the “world changes and we need to respond”. 

Though under consideration for several years, the initiative by the partly state-owned miner is a sign of a growing appetite to find ways of shaking off the stranglehold the US dollar has long held on global commerce and finance. Those efforts have taken on high urgency given Donald Trump’s increasingly aggressive use of US economic and financial weaponry to get his way in foreign affairs. 

The president has thus far engaged in minimal military conflict, but he has proved an unusually pugnacious currency warrior, as he pairs a tendency to talk down the dollar’s value in his quest for a smaller trade deficit with an unusual willingness to use the currency’s global heft as a tool of foreign policy. 

Critically, sanctions, which can block foreign officials or corporations from accessing vast swaths of dollar-dominated commerce and finance, are being deployed against Russia, Iran, North Korea, Venezuela and a host of other countries, alongside tariffs and other restrictions on key companies such as telecoms manufacturer Huawei. As a result, economies including China and Russia are examining mechanisms to curtail their reliance on the dollar, while European capitals are seeking ways of circumventing America’s new barriers on dealings with Iran. 

To date the initiatives amount to less than a pinprick in the US currency’s hegemonic status, as underscored by the modest scale of Alrosa’s foreign exchange innovation. But Mr Trump’s unilateralist approach has unquestionably unleashed a phase of experimentation elsewhere, prompting some analysts to ask whether, in the longer term, the US dollar’s supreme position in the global financial system could be shaken as other nations revolt against what they see as Mr Trump’s arbitrary use of American power. 

Adam M Smith, a former Treasury and White House official who is now a partner at law firm Gibson, Dunn & Crutcher, says the manner in which Mr Trump is wielding America’s economic power is unprecedented, as he uses sanctions, tariffs, trade negotiations and export controls interchangeably. 

“He is using the importance and attractiveness of the US market to the rest of the world as a coercive tool to get others to bend to his will,” says Mr Smith. “Does the very aggressive use of these economic tools make it more urgent for countries to find ways to avoid the US market? Probably. However, the urgency may not mean that most countries will be successful in finding effective workarounds.” 

America has long enjoyed a singular economic arsenal thanks to the ubiquity of the dollar and the centrality of its economy and financial system to global commerce. Although America’s share of global gross domestic product may have declined, its currency still accounts for over 60 per cent of international debt, according to a speech by European Central Bank official Benoît Cœuré in February, and leads the euro both as a global payment currency and in foreign exchange turnover. It dominates pricing of commodities such as oil and metals and accounts for about 40 per cent of cross-border financial transactions. 

The dollar’s share of global foreign exchange reserves has slipped in the 10 years since the financial crisis, but at 62 per cent of the total it still dwarfs all rivals. The euro has lost greater ground over the same time, now standing at just over 20 per cent. The Chinese renminbi is just a few per cent of global reserves, and a mere 2 per cent of international payments, according to the global transfer network, Swift. 

This unique place at the heart of the global economic system gives the US government enormous power. Using the dollar almost invariably means touching a US financial institution, says Eswar Prasad, a professor of economics at Cornell University. This immediately puts you within the reach of US government and regulators. 

The US toolkit is particularly potent thanks to the use of “secondary” sanctions. Normal US sanctions aim to prevent American citizens from dealing with a given country or party, but secondary measures allow the government to penalise third parties that do business with a sanctioned country. 

The consequences for non-US institutions of failing to comply with US rules can be severe. In 2014, for example, BNP Paribas was hit by a penalty of nearly $9bn by the US authorities in connection with sanctions violations, as well as being forced to temporarily suspend part of its US dollar clearing work. 

While Washington’s use of sanctions has been on the rise for decades, Mr Trump has emerged as a particular enthusiast. Data compiled by Gibson Dunn show 1,474 entities were subject to sanctions designations in 2018 — 50 per cent higher than in any previous year for which it has kept records. 

The power of these tools has been felt across markets. The Treasury’s decision to sanction metal groups Rusal and parent company En+ led to a surge in aluminium prices, before it agreed to ease its stance if its major shareholder, Oleg Deripaska, gave up control. Sanctions were lifted in January. 

Last August Turkey was plunged into a currency crisis as the US imposed swingeing tariffs on its steel and aluminium exports, on top of sanctions on senior ministers. 

The US Congress has equally been aggressive in pushing sanctions. In April a cross-party group of senators led by Republican Marco Rubio and Democrat Bob Menendez demanded sanctions against senior Chinese Communist party officials in response to alleged human rights abuses against Uighurs and other Muslim minorities in the northwestern province of Xinjiang. 

This month senators demanded the more rigorous enforcement of US regulations against Chinese companies that seek access to US markets. Hawks such as Mr Rubio want to take matters further and more closely examine China’s ready access to US finance. 

“China poses the greatest long-term threat to US national and economic security. At a minimum, American investors should be aware of where their money is going when it comes to Chinese investments,” said Mr Rubio. 

The Trump administration’s aggressive use of sanctions carries multiple risks. It is not only rivals who are upset: the US has at times also incensed close allies, which for decades have viewed Washington as a reliable steward of orderly global markets. 

In the longer term it could accelerate a trend in which other countries wish to reduce their reliance on the dollar for its main three purposes — as a store of value, a unit of account and a medium of global exchange. In the very long run, some specialists fear the US dollar’s totemic status at the centre of the global economy could be eroded, or even supplanted, just as the British pound was by the dollar during the interwar period. 

Richard Nephew, a former US government sanctions specialist who is now programme director at Columbia University’s Center on Global Energy Policy, says that for at least the next five to 10 years the world is locked into the dollar as the default currency. 

But he argues there will be an evolution towards a system where the US is not the sole significant trading currency. US policy today “will increase the speed with which that transition takes place”. 

A recent report from the Center for a New American Security think-tank argues that a host of factors could conspire to weaken the impact of America’s economic policy arsenal over the longer term. Critically, it says that if the US attempts to reduce its economic, financial and trading connections with key overseas economies, “over time US coercive economic leverage over those economies will diminish”. 

Russia has been at the forefront of attempts to de-dollarise, spurred on by the punishing impact of US sanctions on its economy. “We are not ditching the dollar, the dollar is ditching us,” Russia’s president Vladimir Putin said late last year. “The instability of dollar payments is creating a desire for many global economies to find alternative reserve currencies and create settlement systems independent of the dollar.” 

Russia’s central bank last spring sold $101bn worth of dollars from its reserves, shifting the holdings into renminbi, euros and yen, according to official data published in January with a six-month delay. Fifteen per cent of Russia’s reserves were in the Chinese currency last summer, the data showed, three times the proportion at the end of the first quarter of 2018. 

For its part, China has experimented with denominating oil futures in its currency as well as working on its own international payments system. 

In June Russia agreed with China at a summit between Xi Jinping and Mr Putin to do more trade in their respective currencies. The rouble and renminbi’s share of Chinese imports into Russia edged up from 17 per cent in 2017 to 24 per cent in 2018, according to economist Dmitry Dolgin of ING. 

Yet for all the political attention, the two countries’ attempts to reduce the dollar’s role remain in their infancy. For example, China and Russia set up a non-dollar direct settlement plan to help with their gas pipeline deals around 2015. However, in practice, the Chinese side uses it as little as possible, in part because of the risk of rouble volatility. 

China has also harboured aspirations to turn its Belt and Road Initiative into a platform for boosting the international use of the renminbi. But it would in practice have to dramatically liberalise its capital controls to gain widespread acceptance as a reserve currency. 

In Europe, frustrations have been growing at the continent’s faltering attempts to boost the euro’s global role alongside the dollar. Top French officials including François Villeroy de Galhau, governor of the Banque de France, have called for greater use of the euro in international transactions in a bid to challenge the dollar’s dominance. European Commission president Jean-Claude Juncker last year said it was an “aberration” that the EU paid for more than 80 per cent of its energy imports in dollars despite only 2 per cent of imports coming from the US. 

Yet the pattern since the financial crisis has if anything been a decline in the euro’s international role. Gita Gopinath, the IMF’s chief economist, points to a reduction in euro invoicing and international financial transactions. “The dollar on the other hand has gained relative to the euro in the last 10 years,” she says. 

Meanwhile progress on a high-profile mechanism backed by major European countries that aims to sustain trade with Iran despite newly imposed US sanctions has been painfully slow.   

Sigal Mandelker, the Treasury official in charge of enforcing sanctions, points out that despite European efforts to keep their businesses invested in Iran following Mr Trump’s withdrawal from the nuclear deal, the companies “got out in droves”. 

“There are people out there who argue we have overused the tool,” says Ms Mandelker, “[but] if you look at our objectives and how we are using the tool, you will see that what we have been doing systemically is to change behaviour, to disrupt the flow of bad money, and to go after entities and individuals who pose national security and illicit finance risk.” 

For all the warnings that the US will undermine its own currency by being so aggressive, there is little sign of any diminished appetite for using the greenback. Kevin Hassett, the outgoing chairman of Mr Trump’s Council of Economic Advisers, says: “If you thought that the Trump policies were imperilling the status of the dollar, then your case would be stronger if you showed that the dollar had collapsed a lot under Trump policies . . . But the move in the dollar has been kind of the opposite of that.” 

Ms Gopinath is sceptical about the chances of near-term change. “You are hearing more noise right now for other currencies to become truly global currencies. But the data do not show a more forceful dynamic in this direction and it would take a lot more than what we’re seeing now for there to be a switch.” 

Indeed, the irony is that if the president ends up triggering global instability via his policies, investors may end up flocking all the more enthusiastically towards dollar assets. That was after all the phenomenon during the financial crisis, when a mortgage meltdown that was made in the US prompted global investors to scamper for the safety of government bonds, and it has been the same story more recently as Mr Trump’s trade wars drove down US bond yields. 

“Anything Trump creates to foment uncertainty and instability will only end up strengthening the dollar,” says Mr Prasad. Over time, other countries will indeed get tired of this and shift away from the dollar as a unit of account and a medium of exchange, he adds, but “in the foreseeable and longer future the dollar’s role as the dominant store of value is unlikely to be challenged.”

Marx takes on Keynes, Friedman and Schumacher

The ultimate Davos debate: 

If you could construct the best panel at a World Economic Forum debate, this would be it. But what would they say about present problems? Read on …

What if Karl Marx and Keynes, Friedman and Schumacher were at the 43rd World Economic Forum in Davos, Switzerland? Photograph: Laurent Gillieron/AP

Imagine that you could construct the ultimate Davos panel. From the annals of history you can choose any quartet that could put the world to rights in an hour-long talk, the format beloved of the World Economic Forum.

Klaus Schwab, the man who has been organising the forum since 1971, ensured there were plenty of stellar names strutting their stuff in the high Alps last week. Davos attendees could watch Nouriel "Dr Doom" Roubini cross swords with Adam Posen, recently a member of the Bank of England's monetary policy committee about the merits of quantitative easing. They could listen to Mark Carney, soon to take over from Sir Mervyn King at Threadneedle Street, warn that the global economy is far from out of the woods. George Soros held forth on drugs; Facebook's Sheryl Sandberg spoke passionately about sexual stereotyping; David Cameron called for the G8 to act against tax avoidance and corruption.

But how about this for a panel? Karl Marx, John Maynard Keynes, Milton Friedman and Fritz Schumacher, all no longer with us, kept in line by the IMF's Christine Lagarde, thankfully still alive and kicking, and one of the standout performers last week.

Lagarde kicks off our fantasy discussion with a few words of introduction. She says business leaders have left Davos in a slightly better frame of mind not because of the millions of words spouted in Davos, but because of three little words spoken by the president of the European Central Bank, Mario Draghi, in London in July. Those words were "whatever it takes", a commitment by the ECB to buy up the bonds of troubled eurozone countries in unlimited quantities. That has removed one of the big tail risks to the global economy – a chaotic break-up of the eurozone. But, she adds, any recovery in 2013 will be fragile and timid, and there is a risk of a relapse. "Turning first to you Karl, how do you see things".

Marx: "The capitalist class gathered in Davos has spent the last few days wringing their hands about unemployment and the lack of demand for their goods. What they seem incapable of recognising is that these are inevitable in a globalised economy. There is a tendency towards over-investment, over-production and a falling rate of profit, which, as ever, employers have sought to counter by cutting wages and creating a reserve army of labour. That's why there are more than 200 million people unemployed around the world and there has been a trend towards greater inequality. It is possible that 2013 will be better than 2012 but it will be a brief respite."

Lagarde: "That's a gloomy analysis, Karl. Wages are growing quite fast in some parts of the world, such as China, but I'd agree that inequality is a threat. The IMF's own research shows that inequality is correlated to economic instability."

Marx: "It is true that the emerging market economies are growing rapidly now but in time they too will be affected by the same forces."

Lagarde: "Maynard, do you think things are as bleak as Karl says?

Keynes: "No I don't Christine. I think the problem is serious but soluble. When we last faced a crisis of this magnitude we responded by aggressive loosening of monetary policy – driving down both short-term and long-term interest rates – and by the use of public works to boost aggregate demand. In the US, my friend Franklin Roosevelt supported legislation that allowed workers to organise. After the second world war, the international community created the IMF in order to smooth out balance of payments imbalances, prevent beggar-my-neighbour currency wars and control movements of capital. All these lessons have been forgotten. The balance between fiscal and monetary policy is wrong; currency wars are brewing; the financial sector remains largely unreformed, and aggregate demand is weak because workers are not getting a fair share of their productivity gains. Economics is stuck in the past; it is as if physics had not moved on since Kepler."

Lagarde: "I gather from what you are saying, Maynard, that you do not approve of the way George Osborne is running the UK economy."

Keynes: "The man has taken leave of his senses. Britain has a growth problem, not a deficit problem."

Lagarde: "I daresay Milton that you disagree with everything Maynard has said? You would make the case, presumably, for nature's cure?"

Milton Friedman: "Some of my friends in the Austrian school of economics would certainly favour doing nothing in the hope of a cleansing of the system, but I wouldn't. Unlike Maynard, I wouldn't support measures that would increase the bargaining power of trade unions and I've never been keen on public works as a response to a slump.

"But I would certainly support what Ben Bernanke has been doing with monetary policy in the US and would support even more drastic action if it proved necessary."

Lagarde: "Such as?"

Friedman: "Well, I think monetary policy should be set in order to hit a target for nominal output – the increase in the size of the economy unadjusted for inflation. If that growth is too high, central banks should tighten policy. If it is too low, the trend since the crisis broke, they should loosen it. In extreme circumstances, I'd favour policies that blur the distinction between monetary and fiscal policy. That's what I mean when I talk about helicopter drops of money into the economy."

Lagarde: "Fritz, you have been sitting there patiently listening to Karl, Maynard and Milton. How do you assess the state of the world?

Fritz Schumacher: "I am greatly disturbed by the way the debate is being framed. There is an obsession with growth at all costs regardless of the environmental costs. Climate change was rarely mentioned in Davos: this after a year of extreme weather events. It is frightening that so little attention has been paid to global warming, and almost criminally neglectful of governments not to use ultra-low interest rates to invest in green technologies.

"As has been the case in the past, recessions have pushed green issues down the political agenda. In good times policymakers say they are in favour of sustainable development, but the pledges are forgotten as soon as unemployment starts to rise. Then it is back to business as usual: more roads, expanding airports, tax cuts to encourage consumption. When scientists are warning that global temperatures are on course to rise several degrees above pre-industrial levels on unchanged policies, this is the economics of the madhouse."

Lagarde: "Maynard, what's your response to that?"

Keynes: "I agree with him. If I were advising Roosevelt today I would be calling for a Green New Deal. I find it hard to envisage a world without growth, something that is politically unacceptable in the developing world in any case. But Fritz is right, we need smarter, cleaner growth. As you yourself said last week, Christine, if we carry on as we are the next generation will be 'roasted, toasted, fried and grilled'."

Schumacher: "I couldn't have put it better myself."

£1m buys foreign investors right to live in Britain

Foreign millionaires are flocking to use a little-known immigration scheme that allows wealthy individuals to jump to the top of the queue for permanent residency.

The most recent figures from the Home Office show that more than 400 people applied to use the investor visa scheme in the 12 months to the end of June. This compares with a total of 331 people in 2011 and fewer than 200 in 2009. Photo: PA

By Harry Wilson

9:30PM BST 06 Oct 2012

Rich Russians and Chinese are increasingly using "investor visas" that allow wealthy foreigners to effectively buy the right to live in the UK in return for buying at least £1m of gilts or shares and bonds in British companies.

Top London private bankers have expressed concerns at the number of people using the scheme to gain permanent resident status, arguing that the authorities should consider raising the amount of money needed to gain residency.

"The £1m threshold was put in place more than 20 years ago and is not the obstacle it once was. We have seen a huge increase in demand from Russians, Chinese and people from the Middle East wanting to move to London and it is clear that given the unlimited demand the time may have come to charge more for entry," said on senior London banker.

The most recent figures from the Home Office show that more than 400 people applied to use the investor visa scheme in the 12 months to the end of June. This compares with a total of 331 people in 2011 and fewer than 200 in 2009.

Mark Pihlens, chief executive of Invest UK, which advises wealthy foreigners on investing in Britain, said political instability in the Middle East as well as China and Russia had driven the spike. "People want to take out a second option on where they and their children can live," he said. 2012

Wealthy foreign nationals can speed up the process by investing greater amounts. Investments of more than £5m and £10m mean permanent residency could be gained within as little as two years.

Another balanced perspective on the global economic crisis

By Chan Akya

The trick to flying is to fall ... and miss. Douglas Adams, Hitchhiker's Guide to the Galaxy

Douglas Adams should have been around now, but tragically died a few years ago aged in his late forties (rather than at '42'). If he had been around, perhaps he would have given some wise counsel to world leaders who all seem out at sea in attempting to handle a crisis that wasn't necessarily of their making but almost seems certain to be their undoing.

The weekend saw political parties in the United States failing to agree on a program to adjust let alone cut sharply the country's yawning budget deficit. Alongside, the seventh regime change since the beginning of 2010 in Europe after this week's booting out of Spain's prime minister Jose Luis Rodriguez Zapatero marks yet another chapter of voters throwing not just the baby out with the bathwater, but in this case also the midwife and the entire bedroom. (See The men without qualities, Asia Times Online, October 29, 2011).

Cue the markets pushing Spanish and Italian yields to record levels this week, and even "reassuring" statements from rating agencies about US creditworthiness being shrugged off. The talk in Europe is now when, not if, Italy and Greece leave the euro; speculation has even mounted about the tenability of the French fiscal position.

Meanwhile banks on both sides of the Atlantic are being pummeled into submission with eye-watering declines in share price which the banks are attempting to correct by shedding thousands of employees. The count this year so far is that over 200,000 banking jobs will be lost in the major financial centers of the West - in effect reversing the entire marginal hiring by the industry since 2008. Alongside business sentiment continues to fall, and as companies postpone indefinitely their plans to invest, the job market isn't going to bounce back anytime soon.

Then there is the economic data. European data is no surprise except to those who have been sleeping for a while, but the ugly numbers from US gross domestic product on Tuesday showed declining inventories - exactly the kind of multiplier effect on the negative end of the spectrum that predicts further and sharper economic pain.

Game theory
Politicians in the US and Europe need to be aware of two basic tenets of government:
a. If you are going to bluff, do it big and do it early;
b. If you are going to panic, do it early and do it big.

The unsaid supplemental rule here is: don't do both. This is the reason for the opening quote from Douglas Adams.

Suspension of disbelief is an art form but apparently also broadly applicable to various aspects of modern life ranging from market sentiment to voter angst. There is very little certainty about any initiative, which basically calls for strong confidence in one's ability to achieve something and more importantly in one's ability to convince the other side of one's confidence in respect to the same. For the markets, the common thread is really one of credibility, not of credit worthiness.

Think about this broadly - if the European Union had stepped out and initiated a broad program to buy every unsubscribed bond from Greece, Italy, Spain et al in the beginning of 2010, would any of the problems really have gotten out of hand since then? Instead, they embarked on a series of "limited" interventions, which have been fruitless precisely because everyone knows they are limited.

It's a bit like walking into battle carrying a single revolver - everyone knows you only have six bullets, and once they dodge those you are the one in serious trouble. If on the other hand the other side has no clue about your weapons and ammunition, the battle is most likely won without firing a single shot.

In the end, this is the primary reason for the Keynesian policies of the past three years to have failed utterly. They were simply insufficient, vastly under-estimating the true economic damage wrought by the 2007-8 financial crisis (I really shouldn't be dating this financial crisis, given that it very much continues to this day). This was then a case of bluffing late and bluffing small time. I am of course happy with this failure because, as I argued before, the demographic necessity of the West was to embrace poverty either broadly through inflation or narrowly through significant write-offs in savings and investments.

So much about the Keynesian failures, but how did the Austrian School followers do in their neck of the woods? Not too well I am afraid. Austrian principles such as credit tightening in a crisis, allowing banks and companies to go bust without hesitation were observed in the exception (Lehman Brothers) rather than the rule (countless US and European banks).

Even in the case of sovereign debt, the demands for austerity (Greece) were trivial and the penalties for noncompliance, laughable ("You veel resign Mr Papanderou, ja?"). This isn't the way that free markets work.

If you really wanted to stem the moral hazard tide, the best way would have been to rescue depositors but let the banks go into administration. That would have ended up costing Ireland a fraction of what the country has spent on its banks since the beginning of 2008, primarily to mollify German bankers who had made incredibly stupid lending decisions (see (F)Ire and Ice", Asia Times Online, November 20, 2010) in the first place.

Even in the US, research has shown that in situations where private institutions purchased mortgages at deep discounts from the banks (or more likely from the Federal Deposit Insurance Corporation, which rescued the banks), the turnaround has been palpable. Mortgages have been quickly modified, some useless tenants kicked out while a majority see their payments adjusted to more affordable levels along which they also have upside participation. In contrast, the government-rescued banks still carry billions of zombie mortgages and have simply failed to address them adequately if at all.

This isn't a surprise as the banks invested government bailouts not into their decrepit operations but rather in punting across their fixed-income books, essentially loading up on a whole bunch of underpriced assets. Some of these assets rose in price, but some others have since fallen back over the course of this year.

"Those damn Europeans sold from summer," exclaimed an American banker by way of explanation of his horrific trading losses in the second half of this year. "Yes, but what were you doing with a 30x leverage position on your books in the first place?" I countered, to no avail. "What else could I do - everyone else was hiring in 2009 and management asked me why I wasn't" he replied. That is moral hazard in practice for you. A game of passing the parcel where everyone knows that the parcel contains an explosive device that may be set off by movement, time or just randomly.

The way forward
How do I expect this all to be resolved? This presupposes that I do expect this situation to be resolved in the first place, which I really can't see at this stage. Among all the worst body of options out there, it is my belief that the following combination is likely to produce the most acceptable solution from here on:
1. An unpopular Obama administration attempts to reverse the mollycoddling of US banks going toward the elections. This means a crackdown on banking system leverage, proprietary trading and a long look at jailing a bunch of bankers. This would also involve taking a couple of US banks (you know who you are) to the proverbial cleaners, in essence allowing a controlled bankruptcy of those institutions.
2. Meanwhile the Europeans simply go ahead and commit big time to Keynesian solutions, essentially overruling the German opposition. The European Central Bank indulges in significant and unlimited quantitative easing, while European governments turn their back on austerity.

In this combination, the following market impacts come through:
a. A significant decline in the value of the euro against the US dollar, perhaps approaching parity or worse;
b. A sharp decline in global stock prices followed by a sharp rally next year;
c. Rampant inflation in the Western world that helps to push up commodity prices after the initial decline;
d. Recovery in European sovereign bonds for the short-term.

In every possible way of looking at all this though, I cannot help but admit to a strong whiff of wishful thinking in all this. Oh well, it is Thanksgiving after all.

An Influential Economist admits the wrongness of economic dogma

Stephen King




Monday, 21 November 2011

This week I'm going to take a step back and offer my "Top 10 Beliefs Strongly Held in 2007 Which Now Turn Out to Have Been Hopelessly Wrong".







Belief No 1: Inflation targeting delivers prosperity and stability.



In the late 1980s, central bankers the world over became enamoured with inflation targeting. Scarred from the inflationary excesses of the 1970s, price stability seemed eminently desirable. Yet the single-minded pursuit of low inflation also revealed a remarkable ignorance of earlier periods of economic instability which didn't involve very much inflation, at least not of the conventional kind.



Japan had an almighty financial bubble in the late 1980s yet, relative to other nations, enjoyed a remarkably low inflation rate. The US had extraordinarily low inflation in the 1920s but, funnily enough, the decade ended with the Wall Street Crash.







Belief No 2: Japan screwed up but the West knows better



As an argument reflecting cultural and national supremacy, this takes some beating. The Japanese supposedly failed to do the right things. In particular, they didn't loosen monetary or fiscal policy until it was too late. The US wasn't going to make the same mistake. The collapse in stock prices in 2000 thus brought on a dose of the monetary vapours. US interest rates dropped dramatically as the Federal Reserve tried to prevent "another Japan". The policy worked, but only by ramping up house prices, household debt and the mortgage-backed securities market.



The US now faces a situation perhaps even worse than Japan's. The economy has stagnated, risk aversion has increased, government bond yields have plunged, the budget deficit is out of control, government debt has been downgraded, deleveraging is rife and long-term unemployment has soared.







Belief No 3: Governments don't default



Everyone knew that the emerging nations defaulted like clockwork but that developed nations were somehow different. Surely they would never treat their creditors with such disdain. It just wasn't cricket.



Yet cross-border holdings of capital had risen to unprecedented levels. And, within the eurozone, nations had lost the option of printing money. So we now have a situation where, within the eurozone, southern debtors owe money to northern creditors yet, as a consequence of the financial crisis, don't have a lot of spare cash. No surprise, then, that default has suddenly become a – previously unlikely – option.







Belief No 4: Globalisation is good for everyone



The idea was simple. As economies became ever-more integrated – through the opening up of trade and capital flows – resources would be allocated more efficiently, the global economic pie would get bigger and everyone, potentially, would become richer.



Now that western economies have stagnated, household incomes have declined and pension pots are dwindling, the argument doesn't look quite so clever. The pie has indeed become bigger – largely the result of persistent growth in the emerging world – but it's been sliced up in unexpected ways. Not everyone's a winner after all.







Belief No 5: Equities are a good long term investment



This all went wrong at the beginning of the Millennium. The FTSE 100 peaked just shy of 7,000 at the very end of 1999. That now seems a long time ago. While there's been the occasional big rally since then, the falls have been even larger. Despite the extraordinary deterioration in government fiscal positions across the world, risk-averse investors have preferred to buy Treasuries, gilts and Bunds than equities.







Belief No 6: The emerging world cannot decouple



Oh yes it can. While economic activity in the Western world is no higher than it was at the end of 2007, before the world suffered the full force of the financial meltdown, activity in the emerging world is dramatically higher. Chinese GDP, for example, is about 40 per cent higher than it was in 2007.







Belief No 7: Markets work



Some markets work, others don't. Monopolies and oligopolies can't always be broken up but anyone who's bothered to open an economics textbook knows they don't always deliver the best outcomes for society as a whole.







Belief No 8: Global markets trump national states



This was an extension of Francis Fukuyama's "End of History and the Last Man", the idea that western liberal democracies and market-driven economies had triumphed, paving the way for a new era of commonly shared values and beliefs. Yet, as we've lurched from one crisis to the next, the return of national self-interest has been remarkable, not least in the eurozone.







Belief No 9: House prices always rise



No they don't. This discovery lies at the heart of the problems now dragging down western economic activity through a process of persistent deleveraging.







Belief No 10: Nothing can travel faster than the speed of light



My defence of economists. Yes, we got a lot of things wrong. My profession hardly covered itself in glory. But if the boffins at Cern are proved right, our most fundamental beliefs about the universe may also be wrong. If Einstein couldn't get it right, it merely shows that even the cleverest human is fallible.



Stephen King is the group chief economist at HSBC