The Dollar is Central to the Next Crisis

By Alasdair Macleod – Re-Blogged From GoldMoney

Introduction And Summary

It is now possible to pencil in how the next credit crisis is likely to develop. At its centre is an overvalued dollar over-owned by foreigners, puffed up on speculative flows driven by interest rate differentials.  These must be urgently corrected by the European Central Bank and the Bank of Japan if the distortion is to be prevented from becoming much worse.

The problem is compounded because the next crisis is likely to be triggered by this normalisation. It can be expected to commence in the coming months, even by the year-end. When flows into the dollar subside and reverse, bond yields can be expected to rise sharply in all the major currencies. There will also be a number of other unhelpful factors, particularly rising commodity prices, the timing of the Trump stimulus and trade tariffs pushing up price inflation. Coupled with a declining dollar, price inflation and therefore interest rates are bound to rise significantly.

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Trade Gap Widens Most Since 2015 as China Deficit Hits Record

By Bloomberg – Re-Blogged From Newsmax

The U.S. trade deficit widened in July by the most in three years and the gap with China hit a record as the Trump administration imposed tariffs on a range of Chinese goods, prompting retaliatory levies from Beijing.

The gap increased 9.5 percent to $50.1 billion, the biggest since February, from a revised $45.7 billion in the prior month, Commerce Department data showed Wednesday.

Exports fell 1 percent, driven by steep drops in shipments of aircraft and soybeans, while imports rose 0.9 percent in a broad-based gain.

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California Assembly Advances Pipe Dream 100% Clean Electricity Bill

By Larry Hamlin — Re-Blogged From WUWT

The L. A. Times reported that the California Assembly voted out a bill requiring that the states electricity will be 100% clean energy by the year 2045.

Additionally SB 100 would also require that renewable energy targets for California be raised from 50% to 60% by year 2030.

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Turkey’s Detention of Pastor Andrew Brunson Prompts U.S. Sanctions. What’s At Stake?

Re-Blogged From Stratfor

The Big Picture

The distance between Turkey and the United States has been growing as each pursues security and economic imperatives at the expense of the other. In our annual forecast, Stratfor mentioned that U.S. rival Russia would use its “deepening ties to widen Turkey’s rifts with NATO and with the European Union,” just one of many stressors taxing the U.S.-Turkey relationship.

 

See 2018 Annual Forecast

See Middle East and North Africa section of the 2018 Annual Forecast

What Happened?

On Aug. 1, the United States sanctioned two Turkish government ministers in response to what Washington views as the “unjust and unfair” detention of Andrew Brunson, an evangelical pastor who has lived and worked in Turkey for two decades. Turkey’s government has promised to retaliate.

How Did Turkey and the United States Get Here?

The sanctions on Turkish government officials because of Brunson’s detention represent the culmination of increasing tension between Ankara and Washington. For months, they have disagreed over issues as wide ranging as Turkey’s demands for the extradition of Islamic cleric Fethullah Gulen, Turkey’s relationship with Russia and its threats to the NATO alliance, Turkey’s history of flouting Iran sanctions, conflicting U.S.-Turkish policies in Syria and more.

What Do These Sanctions Mean for Turkey’s Economy?

The economic sanctions themselves are largely symbolic — they only affect the two ministers’ personal finances — but their imposition is just one of many external factors wreaking havoc on its economy and contributing to the further depreciation of its currency, the lira. And Turkey has a history of exacerbating domestic economic strains with its foreign policy decisions.

 

The sanctions on Turkish government officials because of Brunson’s detention represent the culmination of increasing tension between Ankara and Washington.

 

In part because of the country’s flagging economy, there has been an unusual coalescing of its many feuding political parties. Now that Washington has implemented sanctions, all the parties can join together to blame the United States for Turkey’s economic woes.

What Do the Sanctions Mean for American Businesses in Turkey?

Turkey’s legal system, its recently expanded counterterrorism laws and the current hypernationalist political atmosphere give Ankara license to crack down on anything that it deems a security threat. There is a strong possibility of increased harassment of U.S. travelers and businesses, as well as a disruption of business operations for companies with U.S. ties.

What Are the Foreign Policy Implications?

The United States and Turkey maintain the largest and second-largest militaries in NATO, respectively. A serious rift between them would result in disruptions and confusion within the NATO alliance. This would be a boon for Russia, which would welcome a less cohesive NATO. Moscow could use the potential disruptions — especially in the Black Sea — as an opportunity to break down Turkey’s traditional role as NATO’s southeastern flank against Russia. The Kremlin may also decide to shift more of its forces to its western military region to face off against NATO in Eastern Europe.

The United States is also traditionally the largest arms exporter to Turkey, so damaged relations between the two could drive Ankara toward alternative suppliers. And given the two countries’ interconnectedness in a number of defense industry areas, a U.S. cancellation of arms deals with Turkey (seen in the U.S. threat to cancel F-35 fighter shipments to Ankara) could result in significant short-term defense disruptions that would affect the many countries involved in the F-35 program.

A serious rift between the Turkey and the United States would result in disruptions and confusion in the NATO alliance as a whole. This would be a boon for Russia, which would welcome a less cohesive NATO.

Furthermore, a schism could damage U.S. interests in the Middle East. The harm would be particularly evident in northern Syria and northern Iraq, where Turkey could be even more proactive in undermining the Syrian Democratic Forces (SDF), as well as the Kurdistan Workers’ Party and its allies in northern Iraq. This approach would clash with U.S. efforts to emphasize the defeat of violent extremist groups like the Islamic State by maintaining a stable SDF presence in Syria and a stable environment in northern Iraq. The United States could also potentially lose access to its air base in Incirlik, Turkey, though it has enough alternative basing rights in the Mediterranean and the Gulf region to mitigate such a loss.

One final negative implication for U.S. policy in the Middle East could involve Turkey’s refusing to enforce U.S. economic sanctions against Iran over its nuclear program. Some of those penalties will be reapplied on Aug. 6 and Nov. 4. Turkey is likely weighing two competing imperatives. It needs to protect its fragile economy, which could not withstand additional external shocks from more U.S. sanctions. But it also could choose to trade with Iran in order to poke a hole in U.S. efforts to limit Iran’s economic activity. For this type of retaliation, Turkey would need to rely more on its fair-weather relationship with the European Union, which is currently in a fairly positive place.

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What if Brexit Happened Without an Exit Deal?

Re-Blogged From Stratfor

Highlights

  • If the March deadline for the United Kingdom to exit the European Union arrives without a Withdrawal Agreement between both parties, Brexit would happen with no transition period, forcing businesses to immediately adjust to the new rules defining EU-UK relations.
  • Under a “no-deal” scenario, British exporters would face EU tariffs that are low on average, but high in specific sectors like automobiles and agriculture.
  • The strongest economic effect of a no-deal scenario would be felt in the United Kingdom and its close trade partners, like Ireland, the Netherlands and Belgium.
  • Without a deal, London and Brussels would probably arrange temporary agreements to minimize disruptions while they continued to negotiate.

EU Chief Brexit Negotiator Michel Barnier (R) and Britain's Brexit Minister Dominic Raab hold a joint press conference after their meeting at the European Commission in Brussels on July 26, 2018.

(JOHN THYS/AFP/Getty Images)

 

Negotiators for the United Kingdom and the European Union are racing the clock to reach agreements on a long list of remaining issues before the United Kingdom formally leaves the bloc on March 29, 2019. Ongoing discussions are focused on a Withdrawal Agreement that would establish the legal terms of the Brexit and a political declaration outlining the general framework for future ties between the European Union and the United Kingdom. London and Brussels would ideally like both documents to be finalized in time to be signed during a European Council summit in October. But negotiators are still far apart on both deals, opening the door for a no-deal scenario, in which Brexit would happen without any prearranged conditions. If that happened, the economies and the political and institutional systems of both would have to cope with a number of possibly disruptive effects.

 

The Big Picture

Stratfor’s Annual Forecast noted that the European Union and the United Kingdom would spend the year trying to figure out what their future relationship would look like in the wake of Brexit. Furthermore, it said that disagreements over the future of the Irish border would be one of the main obstacles to a deal, and that the British government would remain internally divided on the approach to negotiations. The complications leave open the possibility that the Brexit date will arrive with no agreement over how to handle a host of issues.

 

See 2018 Annual Forecast

See Europe section of the 2018 Annual Forecast

See Brexit and Beyond

The Current Situation

London and Brussels are already aligned on several aspects of the Withdrawal Agreement. For example, the United Kingdom has agreed to pay its “Brexit bill” — some 39 billion pounds ($52 billion) to the European Union to honor its financial commitments to the bloc, and both have pledged to preserve the residency rights of EU citizens living in the United Kingdom and likewise of British citizens on the Continent. They have also negotiated a transition period that would allow the United Kingdom to remain within the EU single market until December 2020. This would give both parties time to adapt to the new reality and to negotiate a trade agreement.

But the Withdrawal Agreement is not complete, and several sticky issues remain unresolved, including future cooperation on police and judicial issues and the role of the European Court of Justice in the United Kingdom after Brexit. But by far the most controversial issue remains the eventual status of the border between Northern Ireland and the Republic of Ireland. Both parties want the border to remain open, but they cannot agree on a way to accomplish that. In March, negotiators settled on a “backstop option” that would leave Northern Ireland in the EU customs union if a better solution cannot be found before Brexit day arrives. In July, however, the British House of Commons voted to make that option illegal, possibly complicating the chances of reaching a border agreement (the bill has yet to be ratified by the House of Lords).

 

British Prime Minister Theresa May’s government is internally divided between those who want to keep close ties with the European Union and factions pushing for a hard exit. This has forced May to seek compromise with both groups, often resulting in complex policy proposals. Further complicating the situation are the divisions in the British Parliament between hardliners and softliners, meaning that even if May can hold her government together, she cannot guarantee that her proposals will pass parliamentary muster. The European Union, in the meantime, says that it will not approve an ad hoc agreement with the United Kingdom, insisting that it must follow an existing trade model, whether that be membership in the single market or the customs union or a free trade agreement.

 

British Trade With the EU

What a No-Deal Scenario Would Mean For Trade

If the two sides fail to reach a Withdrawal Agreement by early 2019, or if they sign a deal that either the British Parliament or the European Council reject, it would most likely force the United Kingdom to exit the European Union under a no-deal scenario. While EU rules allow for the negotiation period to be extended after the March 2019 deadline, the bloc would likely demand concessions on a soft exit in exchange, a prospect that British politicians could find unacceptable.

Without the Withdrawal Agreement, beginning March 30, 2019, the United Kingdom would find itself suddenly out of the single market, and EU laws and regulations would no longer apply to it. The European Union would treat the United Kingdom as it would any other country with which it has no agreements, applying tariffs and customs controls, and enforcing EU sanitary and phytosanitary standards for British goods. The new border controls would cause delays at borders and ports, and supplies of food and other goods would stack up as they awaited inspection. (The British government recently suggested that in a no-deal scenario, it could waive checks to keep traffic moving, but it would require the European Union to do the same.)

Without a deal, World Trade Organization (WTO) rules would govern relations between the European Union and United Kingdom. British exporters would have to contend with EU tariffs that are low on average (roughly 5 percent). However, the rates run higher in specific sectors (10 percent for cars, for example, and an average of 11 percent on agricultural products). EU exporters, in turn, would have to deal with whatever tariffs London decides to impose. Even if the United Kingdom unilaterally reduced or eliminated its own tariffs to prevent an escalation of the price of imports, non-tariff barriers (such as standards and regulations) would still create obstacles for bilateral trade. The United Kingdom could try to remain aligned with EU standards and regulations to limit disruptions in trade, but it’s only natural that over time, the two would progressively drift apart.

 

EU Import Tariffs, Select Goods

The effects of a no-deal situation would be even more pronounced in the case of services, which constitute about 80 percent of the British economy. The British financial sector would lose the “passporting rights” that allow companies to sell their services within the single market without having to apply for authorization in each country. Without those rights, the financial services sector, which accounts for more than 6 percent of Britain’s gross domestic product, would be among the main losers. Although not every financial activity would be affected in the same way (banks that operate domestically would not be as affected as other activities that rely on foreign customers), a no-deal could deal a heavy blow to the sector.

 

 

UK Financial Services Trade with EU Countries

And the impact on services would go well beyond finance. Providers of professional and business services, like legal, accounting, advertising, architectural and engineering services, now have relatively unrestricted access to EU countries through the single market. In a no-deal scenario, London would have to reach specific agreements with Brussels to preserve this access. Similarly, a no-deal would mean that for British airlines to maintain the access to European markets that they now enjoy though the European Common Aviation Area, London would have strike a new agreement with the European Union. At the same time, to preserve their access to the single market, companies in a wide range of other sectors would have to move some of their operations to continental Europe.

Under a no-deal scenario London would be free to sign free trade agreements with any countries it wishes to (such as the United States and Australia). But negotiating, ratifying and enforcing such deals takes years. In the meantime, the United Kingdom would lose access to the free trade agreements that the European Union already has with countries like Canada, Japan and South Korea.

What Else Would Be Affected?

If no Withdrawal Agreement is signed, the future of the roughly 3.6 million EU citizens living in the United Kingdom and the 1 million British nationals living in the European Union would be thrown into doubt. There would not be massive deportations, but they would remain in a legal limbo for weeks, if not months, until their status was defined.

The United Kingdom would be free to set an independent immigration policy, and considering that this was one of the key issues in the Brexit referendum campaign, London would probably impose restrictions, such as work visas or annual quotas, on future migrants from the European Union. Associations representing sectors from tech and manufacturing to construction and tourism have warned that doing so could create a shortage of skills in the British economy, as it would be harder (or at least involve more layers of bureaucracy) for British employers to hire workers from the European Union. Should the United Kingdom decide to impose restrictions for short-term visitors as well, the tourism sector would feel the pinch. And should the European Union retaliate by imposing visas for British tourists, that would hurt tourism destinations like Spain and Portugal.

At the same time, in a no-deal scenario, British individuals, companies and institutions would lose access to EU financing in areas such as education and scientific research. The European Union would also likely restrict, or even exclude, British participation in continental projects such as the Galileo GPS system or in regulatory entities such as the European Medicines Agency.

Without a Withdrawal Agreement, London would probably refuse to pay the Brexit bill, at least initially. That would leave less money for the EU budget and force spending cuts. The British government would be able to redirect that money to domestic needs, such as compensating British farmers for lost access to EU agricultural subsidies. But refusing to pay the Brexit bill would sour UK-EU relations and make it harder for London and Brussels to negotiate the bilateral agreements needed to cope with the effects of Brexit. As a result, London would probably agree to make the payment at some point.

The Economic Impact Would Be Spread Unevenly

Trade, supply chains, capital movement and migration flows between the European Union and United Kingdom are so tightly entwined that the economic impact of a no-deal scenario would be felt in both. But the effects would be spread unevenly. A recent International Monetary Fund (IMF) report found that if the European Union and the United Kingdom start trading under WTO rules, the economic growth of the 27 remaining EU countries would fall by as much as 1.5 percent by 2030. Countries with close ties to the United Kingdom like Ireland, the Netherlands, Denmark and Belgium would feel a particular sting, but the pain would be much milder in those with bigger economies or weaker UK ties like Italy or Spain. The biggest downturn would come in the United Kingdom itself, where the economy could contract by as much as 4 percent in the decade after Brexit. According to the IMF, softer versions of Brexit (like a comprehensive free trade agreement or remaining in the single market) would lead to softer economic impacts everywhere.

In January, British media published a leaked internal British government document that paints an even darker picture. That report estimated that British economic growth would be reduced by as much as 8 percent in the first 15 years after Brexit in a no-deal situation, compared to reductions by 5 percent under a free trade deal and by 2 percent with membership in the single market. Impact reports by private companies offer different figures, but most agree that trade under WTO rules would be the most disruptive scenario for both the United Kingdom and the European Union, and that the British would feel the strongest impact.

The unprecedented situation presented to Europe’s political, economic and institutional actors by a no-deal scenario would generate confusion and uncertainty. But the chaos would not necessarily last for a long period or affect every aspect of EU-UK relations the same way. Even in a no-deal scenario, both parties would still be interested in reaching a permanent trade agreement, which means that negotiations between London and Brussels would likely continue. In the meantime, the United Kingdom and the European Union would probably reach temporary deals to try to minimize disruptions as much as possible, with many people carrying out business as usual while they waited for further instructions. A no-deal scenario would trigger a significant change after four and a half decades of British membership in the EU, but while its ties with the Continent would be disrupted, they would not be completely severed.

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Socialist Democrats: “No Borders, No Wall, No USA At All”

By Michael Snyder – Re-Blogged From Freedom Outpost

No matter how globalism is repackaged, it always smells the same way in the end. For decades, the globalists have subtly (or sometimes not so subtly) been moving us toward a world in which national borders have essentially been made meaningless. The ultimate goal, of course, is to merge all the nations of the world into a “one world socialist utopia” with a global government, a global economic system and even a global religion. The European Union is a model for what the elite hope to achieve eventually on a global scale. The individual nations still exist, but once inside the European Union you can travel wherever you want, economic rules have been standardized across the Union, and European institutions now have far more power than the national governments. Liberty and freedom have been greatly restricted for the “common good”, and a giant horde of nameless, faceless bureaucrats constantly micromanages the details of daily life down to the finest details. With each passing day, the EU becomes more Orwellian in nature, and that is why so many in Europe are completely fed up with it.

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Back Under U.S. Sanctions, Iran Looks for a Plan B

Re-Blogged From Stratfor

Highlights

  • Iran’s strategy to get the European Union and other economic partners to push back against unilateral U.S. sanctions will fail.
  • As sanctions hit Iran’s economy, the country will eventually have to resume negotiations with the United States, but it will try to wait until President Donald Trump leaves office.
  • In the meantime, Tehran will consider restarting its nuclear program as leverage in talks with the United States to keep other more important issues off the table.

A picture from March 2017 shows an oil facility on Kharg Island on the Iranian coast.

(ATTA KENARE/AFP/Getty Images)

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