ESADEgeo Daily Digest, 10/10/2018

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The New York Times – Andrew Ross Sorkin / The unknowable fallout of China’s trade war nuclear option

  • Even in the gloomiest of doomsday scenarios, there is one weapon that has long been considered unthinkable: the Chinese, the biggest holder of US foreign debt with more than $1 trillion, publicly taking a step back from buying US Treasuries — or worse, dumping what they own in the open market.
  • China has lately reduced its holdings of United States government debt, and a growing number of financiers, economists and geopolitical analysts are quietly raising the prospect that China may look to its ability to influence interest rates as its ultimate Trump card.
  • China selling Treasuries would thus hurt the US, but it would simultaneously severely damage the value of China’s own Treasury holdings. China’s economy may be too fragile to risk doing anything that would cause instability.
  • If China were to use its nuclear option and the markets didn’t react, it would lose influence in stark fashion. If it worked — but was more effective than expected — China could inflict unintended damage on its own economy.
  • Brookings – Kemal Derviş & Caroline Conroy / What’s behind Trump’s trade war?

Financial Times – Martin Wolf / How to avoid the next financial crisis

  • An analysis of post-crisis performance by the latest IMF World Economic Outlook shows that the 2008 crash was a western financial crisis, but a global economic crisis. China’s stimulus program of about 10 per cent of GDP greatly cushioned the impact.
  • The evidence that output shortfalls are cumulative destroys the argument against strong and sustained policy support in high-income countries. However, stronger fiscal policy responses would have reduced the need for so long a period of unconventional monetary policies.
  • Similarly, the greater the support for the damaged financial sector, argues the WEO, the stronger the rebound. This evidence gives no support to “liquidationism” — the view that banking collapses and depressions are benign purgatives.
  • The October Global Financial Stability Report suggests that we must ignore bankers’ bleating against regulation: above all, we must keep capital requirements up.

Brookings – Kemal Kirişci & Onur Bülbül / What’s behind Erdoğan’s apparent support for the liberal international order?

  • At the United Nations General Assembly last month and in a recent op-ed, Turkish President Recep Tayyip Erdoğan enthusiastically defended free trade, multilateralism, and the international liberal order. But Turkey’s recent record doesn’t match this rhetoric.
  • Given the economic realities that Turkey is facing and the country’s track record on economic and democratic backsliding, President Erdoğan’s embrace of the liberal order sounds more like trying to save the day than a sincere commitment.
  • The litmus test will be if Erdoğan puts his words into action and revives Turkey’s independent regulatory institutions, re-instates the rule of law, and expands democratic governance. Otherwise, it is very difficult to see how he will overcome the irony of maintaining an illiberal rule at home while advocating for a liberal one internationally.

Financial Times – Edward Luce / Nikki Haley’s demise paves the way for unbridled ‘America First’

  • Nikki Haley, who yesterday announced her resignation as US ambassador to the UN, is the most high-profile casualty so far of the infighting skills of National Security Advisor John Bolton. She is unlikely to be the last.
  • Haley’s resignation strips one of the last remaining layers between Trump and an unbridled Boltonian contempt for virtually any international institution.
  • At the very least, Bolton’s tightening grip is likely to result in increasingly sharp US alienation from most forms of international co-operation. Chief targets include the World Trade Organization, NATO and the UN.
  • The upshot will be to give more license to other great powers, chiefly Russia and China, to follow their own paths with greater impunity.


The selected pieces do not necessarily reflect the views of Javier Solana and ESADEgeo. The summaries above may include word-for-word excerpts from their respective pieces.

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