World Politics News   Articles for World Politics Course

For those of you who are still mystified by the LIBOR scandal, here’s a very good explanation of how Barclay’s made lots of money manipulating interest rates.  http://www.businessinsider.com/how-barclays-made-money-on-libor-manipulation-2012-7.  The Economist also has a great article on the scandal:  “The Rotten Heart of Finance.” http://www.economist.com/node/21558281

We have had a fairly hot and dry summer in South Hadley, but not nearly as hot as in some other areas of the US.  Many are reluctant to attribute this weather to climate change (there is, in fact, a huge difference between weather and climate), but some scientists are beginning to make the connection in public. http://www.washingtonpost.com/blogs/capital-weather-gang/post/noaa-scientist-80-percent-chance-todays-heat-records-due-to-climate-change/2012/07/10/gJQAdv9waW_blog.html.  The situation in India also appears to be somewhat precarious.  http://www.livemint.com/2012/07/09224449/Is-India-facing-another-drough.html?atype=tp

The world just gets weirder every day.  Today, France, Germany, and the Netherlands all sold government bonds at a negative interest rate.  Such a rate means that investors are actually paying the states to hold their money safely.  The following data are from “Mish’s Global Economic Trend Analysis.”  The blog is supremely pessimistic on European economic affairs, but it has almost invariably been accurate in its assessments.

• Germany: Germany sold 3.290 billion euros of six-month Treasury bills, known as Bubills, at an average yield of -0.0344%. The record lows was previously -0.0122% seen at an auction Jan. 9.
• France: France sold EUR 3.917 billion of 13-week Treasury bills at an average yield of -0.005%, down from 0.048% a week ago, and it sold EUR 1.993 billion of 24-week Treasury bills at an average yield of -0.006%, down from 0.096% last week.

We should take this development as a fear index: investors are truly worried that bad stuff is happening and they simply want security, and they are willing to pay for such security.   The reason?  Investors are convinced that both Spain and Italy are close to a sovereign debt default.

• Yield on 10-Year Spanish Government Bond closed at 7.062%
• Yield on 10-Year Italian Government Bond closed at 6.015%

Yields of 7 percent on 10 year bonds are almost impossible to repay–at the end of 110 years, the state essentially has to pay back twice what it borrowed.

To make matters worse (and even more complicated), China is experiencing price deflation, a phenomenon usually associated with a serious recession or depression.  This chart gives a good idea of how prices are following the pattern of 2007-08.

The global economy is getting difficult to interpret.

I apologize for not posting the last few days–I was in Maine with my college buddies celebrating the 4th of July.  We had a great time re-enacting the Age of Aquarius.

I missed out on much news apparently–I didn’t have internet access.  I’m still obsessing about the LIBOR scandal.  It bothers me a great deal that the American media has paid so little attention to what is a breathtaking example of greed gone wild.  The American media pays a lot of lipservice to what it calls the “free” market.  When evidence surfaces that one of the most important determinants of interest rates in the world is in fact a manifestation of very rich interests colluding to set a price independently of supply and demand, I am at a loss to explain the silence.  But there is not a single person in the United States who was unaffected by this crime, mostly by paying higher interest rates than they otherwise would have had to.

The BBC has an interesting article on how liberal (Western) ideas infiltrate into China.  The transmission of ideas is an age-old process, but it seems to have accelerated through all the mechanisms afforded by globalization.  How the Chinese government can manage this process remains to be seen.

There have been some rather astonishing developments in the financial world surrounding how a critical interest rate has been determined in the recent past.  There is a rather arcane interest rate–the London Interbank Offered Rate (LIBOR)–that determines how much interest major banks charge each other for short term loans.  In the past, the LIBOR was determined on a daily basis by a panel in London who received information on how much interest individual banks were charging each other.  The panel would take all this information and determine an average of the rates and publish the LIBOR.  Then other financial institutions would set their interest rates on the basis of the LIBOR (depending on risk–the higher the risk, the higher the rate).

Obviously the system relied on the independence of the rates given to the LIBOR panel.  We simply assumed that banks would not collude and doctor their rates so that the final LIBOR rate would be to their advantage.  Unfortunately, that assumption overestimated the integrity of the banks.  We are now learning that Barclay’s Bank, a 332-year old venerable institution, was actively involved in manipulating the information they sent to the panel.  Since it is impossible for a single institution to collude, it is clear that other banks are involved, and the email trail is

Aaron David Miller has an essay in Foreign Policy arguing that intervention in Syria would be a disaster.  It is not a comfortable analysis since we all would like to think that there is some option to help the Syrian people.  But Miller’s arguments are tough to refute.  Somehow we have to figure out how to address his concerns so that humanitarian intervention can become a more viable policy alternative.

The UN has begun talks on a new treaty to control the sales of arms globally.  This measure is long overdue, but it is easy to imagine the difficulties in forging such a treaty.  Illicit arms are easy to procure in the world and they are used mostly by war lords in local conflicts.  But the normal state-to-state arms sales are also highly problematic–just because legitimate authorities are involved is no reason to think that the weapons are not badly used as well.  We’ll see what the National Rifle Association says about the proposed treaty.

We have a mainstream liberal narrative of the Arab Spring–that the Arab nation was embracing secular society and throwing out old-fashioned dictatorships.  The narrative has many, many flaws and inconsistencies, but the narrative has been hard to shake.  Nasser Rabbat of MIT has a very insightful alternative explanation which deserves a close read.

As I’ve argued here before, there simply isn’t a case to be made that the cause of the European sovereign debt crisis is excessive social spending.  “Excessive” is a relative term, and what actually determines spending that can’t be sustained over time is the underlying productivity of the economy.  Many countries, like Germany and Sweden spend a great deal of money on social welfare programs but they have very productive economies (output per worker) that can afford such spending.  Matthew O’Brien has a nice article in The Atlantic with a great chart that demonstrates the link.

The UN has brokered a peace plan for Syria, but it allows Assad to participate in a peace conference.  The original draft of the resolution had excluded people in the government who were responsible for the shooting of civilians, but the Russians objected and insisted that Assad and his people be allowed to attend.  That outcome is unfortunate as long as Assad believes that he has a chance to remain in power–nothing will be accomplished.  But if the Russians are truly serious about peace they will use the conference as an opportunity to allow Assad to step down and to give him refuge.  A miserable outcome for those of us who wish to see Assad prosecuted for war crimes, but the only real possibility for ending the violence in Syria.

We are getting more analyses of the EU summit meeting last Thursday and Friday, and it appears that the measures adopted–the decision to lend money directly to stricken banks and not just to the governments of those banks and the decision to begin thinking about some variation of eurobonds–signal the strength of the anti-austerity forces.  The Greek elections and the powerful victory of the the Socialists in France weakened the ability of Germany to maintain its hard line against both policies.  How this will affect Chancellor Merkel in German domestic politics remains to be seen.  The successes of the anti-austerity politicians, however, remain unknowable:  all the new policies require money and it is not clear from where the money will come.

Mexico will hold its presidential election on Sunday and it appears as if the candidate from the Institutional Revolutionary Party (PRI) will win.  Enrique Peña Nieto is a very charismatic leader, but has hardly distinguished himself in his political career.  The other two candidates have failed to capture the imagination of the public.  Mexico obviously suffers from the violence of the drug wars, but as long as the US remains such a lucrative market it is hard to see how Mexico could reasonably suppress that violence.  In other respects, the Mexican economy is doing well and that stability could explain the lackluster political campaign.

The Economist has published an interesting essay on the wealth of China’s leaders.  It seems as if the Chinese have learned some of the wrong lessons from the American political economy.  Wealth and power often go together, but they always make bad public policy.

As Turkish-Syrian tensions rise, and the prospect of a wider war looms, we need to get more substantive information on Turkish foreign policy.  Here is a news article from the Persian Gulf about Turkish fears of a rise in tension in the region. Meanwhile, the US and others try to figure out the Russian stance on Syria.

The cat and mouse game between Iran and the West on the oil sanctions continues.  The EU sanctions are supposed to go into effect on 1 July, but it will be difficult to enforce.  The more serious problem for the Iranians is the precipitous drop in the price of crude over the last month (about 20%).  Meanwhile, the US has granted China a waiver from economic sanctions because it has reduced its purchases from Iran by about 25%.  Obviously, that is less than the Americans would have preferred, but enforcing the sanctions on China would have compromised many other objectives in US-China policy.  Iran is arming its naval vessels in the Persian Gulf with shorter range missiles, indicating that it continues to fear an attack.

Source: The Economist, 15 June 2012

For those of you who are interested in arms control and disarmament, the most recent Stockholm International Peace Research Institute (SPIRI) yearbook was publishedearlier this month.  You can access it here.  It is one of the most reliable and respected sources of global information on arms flows and conflict resolution.

International tensions are escalating over Syria.  Turkey is mobilizing forces along the Syrian border and NATO has backed Turkey in its dispute with Syria over the downed Turkish fighter plane.  The Russians are trying to explore options with Kofi Annan’s peace plan, and Assad is remaining totally defiant.  An escalation of violence would bring in Iran and most likely Israel.  If there ever was a time for high-power diplomacy, now is the time; it does not, however, appear to be in the cards.

Stephen Walt has an interesting essay on the strategic consequences of an Iranian nuclear bomb.  The argument that nuclear weapons are inherently stabilizing is an idiosyncratic one, but it is certainly intriguing (and not completely off the wall).  Give this essay a close read and see where the logic takes you.

There is incredible pressure building on the EU in anticipation of this coming week’s summit meeting of EU heads of state.  Economic data from China, India, Brazil, and the US all indicate that the global economy is slowing down much faster than expected.  Since many of the EU economies are dependent on exports, there is a sense that European economic growth will slow as well.  The EU needs to articulate a long-term plan that seems feasible in order to avoid increased pressure on the weaker economies such as Greece and Spain.  The new Greek Prime Minister will not be at the meeting due to eye surgery, but the Greeks still intend to ask for a two year extension on its bail-out conditions.

Mohammed Morsi, the Muslim Brotherhood candidate, was named the victor in the Egyptian presidential election.  The official announcement confirms what many people had suspected, and an announcement in favor of Shafiq would have been highly controversial.  In his first speech, Morsi said all the right things.  What remains to be seen, however, is how he can govern under the current strictures of military rule.

Turkey has requested a NATO meeting to discuss its downed fighter jet.  The injection of NATO into the Syrian situation ushers in a new phase of the attempt to put together a humanitarian intervention.  NATO could offer a viable alternative to the UN mission, currently hamstrung by the Russian and Chinese positions.  We’ll see whether NATO official wishes to take the opportunity.