FINANCIAL TIMES TUESDAY JULY 24 2012 ★ 9 COMMENT We have entered the world of disaster economics A slowdown

That is exactly what has happened you use the definition of “disaster” default risk is deemed low, bonds are have overstated the degree to which is good for Gillian Tett with corporate bonds in recent years, advanced by the economist Robert better than equities for “protection”; quantitative easing, not fear, has not to mention with sovereigns such Barro – namely at least a 10 per cent but in markets where default risk is reduced bond yields. Second, it re the bond markets going as Greece. But in Germany and the decline in national gross domestic higher, equities and bonds are implies that the investor grab for China and mad? It is a question that US government bond yields have product per capita – there were 58 correlated. Fulcrum thinks there is a safe assets may not be a short-term Amany investors might ask. recently hit multi-decade lows. disasters in the 20th century. But clear statistical way to tell which phenomenon; “disaster risk” could For as anxiety has erupted in the Short-term to medium-term bonds crucially, only two of these occurred country is in which camp: when the influence asset prices for a long good for eurozone, something striking has are paying negative real returns. between 1950 and 2000; most modern sovereign CDS spread jumps above time. Third, there is a bigger point: occurred with respect to US Why? One explanation is that the investors built their careers in a 200bp, bond and equities move the financial world may need to Treasuries and German Bunds. CDS market overstates default risk. world without disaster risk. together. But when CDS spreads are overhaul its investment frameworks. the world If you look at the credit derivatives Another – increasingly popular – below 200bp, government bonds When portfolio theory developed in market – the place where investors idea is that bond investors are retain their “safe” status, and yields the second half of the 20th century, judge the risk of bond default – complacent about Germany and the The grab for safe assets and CDS prices are uncorrelated. financiers assumed that the world government bonds are getting riskier, US. A thoughtful new paper from may not be a short­term Spain and Greece are in the first would always be fairly stable; but as Michael Pettis not just in places such as Greece but Joshua Rosner, the investment camp, and France is almost in that Mr Barro’s work shows, this low- in supposed havens such as Germany, analyst, predicts that German bond trend. The financial world group too. But the US and Germany disaster period may have been an hina’s official growth rate has too. Two years ago, for example, the yields could soon rise as investors may need to overhaul its are in the second group. Hence bond exception to the norm. The idea that fallen sharply; its real growth credit default spread on a German wake up to the costs of a eurozone yields can fall – even as default investors always want to maximise Crate may be substantially Bund stood at 40 basis points – bailout. The gap could also be investment frameworks concerns rise in a moderate way. returns in a rational way, not lower; the country is tipping into meaning that it cost €40,000 to blamed on deflation fears, a liquidity This argument has shortcomings. “insure” against Armageddon, may deflation; and Premier Wen Jiabao insure €10m of bonds each year trap or government meddling (ie It does not take account of how have been a function of an unusual has warned, yet again, that the against default. Recently, though, the quantitative easing.) But now the world has changed. expected inflation or deflation affects time, not a timeless truth. Perhaps economy is under serious pressure. spread has been well above 100bp, But another intriguing idea that is And so investor behaviour has bond prices. Nor does it recognise the world will return to that era; China seems to be heading towards and could rise again if Angela creating a market buzz has been shifted too, Fulcrum says. For the other asset classes. Frightened but do not bet on it soon. In a world a hard landing and Beijing, many Merkel, the German chancellor, opts advanced by economists at Fulcrum key point to understand about investors might choose to buy of “disaster” economics, in other Chinese and foreign experts warn, for more bailouts. US bonds have Asset Management (including Gavyn investing is that assets have two commodities or corporate bonds, words, bond markets could remain must cut interest rates drastically also become riskier, judging by credit Davies in an FT blog post.) This functions: they can produce returns, instead of government bonds. And “baffling” for a long time; unless, of and expand credit, so saving itself default swap prices, as Congress blames a psychological-cum- but they also offer protection. When while a 200bp “tipping point” seems course, an inflation or political shock and the world from disaster. remains gridlocked on fiscal policy. generational shift among investors disaster risk is low, investors stress to work well in the eurozone, it is creates an explosion of default fears They are wrong. What is Normally this would imply that around the concept of “disaster”. the former; when the risk rises, they unclear how it applies to the US. in Germany (or the US) – and those happening in China may be just bond yields should also rise. After During most of the past few focus on the latter. If this disaster theory has a grain bonds and credit derivatives markets what it and the world need. After all, classic investment theory decades, Fulcrum argues, investors However, the nature of this of truth – as I suspect it does – there finally come into line. many failed attempts, over the past suggests that bond prices fall (and and economists did not discuss approach can vary across markets. are at least three implications. First, six months we may have been seeing yields rise) with higher credit risk. “disaster” much. Little wonder: if In countries where government it suggests that governments may [email protected] the beginning of China’s urgently needed rebalancing, in which it will correct over-reliance on investment in favour of more consumption. The process will not be easy. Debt levels have risen so quickly that unless many years of over-investment are quickly reversed, China will face serious problems, Assad’s regime maybe even a crisis – but the sooner China starts rebalancing, the less painful it will be. With China’s consumption share of gross domestic product at barely more than half the global average, however, and with is finished – the highest investment rate in the world, rebalancing will require effort. The key to raising the consumption share of growth is to get household income to rise from its do not mourn unprecedentedly low share of GDP. This requires China to increase wages, revalue the renminbi and, most importantly, reduce the enormous tax that households implicitly pay to borrowers in the its passing form of artificially low interest rates. But these measures will slow

Rather than demanding the security establishment. It struck that Beijing reverse the the Assad clan network, the mix of security state and gangster process, we should be enterprise that makes up this relieved China is finally regime. Family, clan, predatory business interests and the security solving its problems praetorians are all enmeshed. David Gardner Maher al-Assad, the president’s volatile younger brother, commands growth. The implicit “financial the army’s only two reliable strike repression” tax, especially, is both When a dictatorship cannot regain forces, the Fourth Armoured Division the major cause of China’s economic control over a country in revolt for and the Republican Guard – made imbalance and the source of its 18 months despite repeated up, like the security services, mainly spectacular growth. Forcing up the offensives, when it cannot police the of the Alawite minority to which the real interest rate is the most countryside away from the main Assads belong, a heterodox branch important step Beijing can take to roads, cannot secure the capital or of Shia Islam in a country that is redress the domestic imbalances and its main trading hub, cannot even three-quarters Sunni. But even the of a shrinking regime. Loyalist forces giving officers and officials until the to reduce wasteful spending. protect its innermost citadels and shabbiha, mostly Alawite militia have over-run two districts of the end of this month to defect, may And this seems to be happening. has to pull troops from its borders built around smuggling gangs that capital after 10 days of fighting but hasten that process. Beijing has reduced interest rates to protect its palaces, it is finished. have been carrying out sectarian meanwhile Aleppo, the commercial It is natural to worry about what twice this year and reluctant policy This is the case with the dictatorship cleansing in the Alawite heartlands capital, has erupted. The Assads will replace the Assads, but not in makers are under intense pressure of Bashar al-Assad, who is still in the north-west, are often led by cannot be everywhere at once. a way that encourages them to fight to reduce them further, but with trying to kill his way out of the the president’s cousins and relatives, When they do fall, there is natural on. Their 42-year tyranny was a inflation falling much more quickly crisis, even as poorly armed rebels such as Nameer al-Assad in Latakia. concern about what will replace known quantity in a dangerously than interest rates, the real return swarm through Syria’s cities and The supply of Assads is not them – especially since the Wahhabi volatile region. For nearly four for household depositors has soared his supporters melt away. He is inexhaustible, and some at least of Saudis and Qataris are directing decades not a shot was fired across in recent months, as has the real finished. their followers must be wondering their support towards the Islamist the Golan Heights, seized by Israel cost of borrowing. China is repairing Last week’s insurgent bombing of where they are taking them. This Muslim Brotherhood. Yet despite the from Syria in the 1967 Arab-Israeli one of its worst distortions. his security cabinet in Damascus month’s defection of Manaf Tlas, a regime’s slaughter of (mostly Sunni) war and secured against Syrian This cannot help but reduce was devastating. He lost at least Republican Guard general, stripped civilians, and a few attested rebel counter-attack in the 1973 war. investment growth, and so China’s four of his top enforcers, including away the regime’s last Sunni veneer. atrocities, there have been no mass But this should not blind us to GDP growth rate must fall sharply. his brother-in-law, Assef Shawkat, The Assads’ decision to unsheathe reprisals against the minorities. This how the Assads are brutalising their China bulls, late to understand the the brains behind the Assad clan the sectarian knife, to corral Syria’s suggests discipline and deliberation people now, or make us forget what unhealthy implications of the and reportedly also his cousin, minorities into its camp, has by opposition forces on the ground: they did in Lebanon and Iraq before. distortions that generated so much intelligence chief Hafez Makhlouf, destroyed the fiction that it is the the regional military councils and They played divide-and-rule with and growth, have finally recognised how brother of Rami Makhlouf, the vital antidote to Sunni extremism. the local co-ordinating committees of within Lebanon’s mosaic of sects urgent rebalancing is, but they still financier of the enterprise. As minority Kurds, Christians and activists driving the civic uprising. during three decades of occupation. fail to understand that this cannot Of itself, the bombing is not a Druze start drifting towards the As in Libya, an international alliance They provided the main pipeline into happen at high growth rates. China’s game-changer; the Assads still opposition, this is now a straight It is natural against the Assads may have Iraq for Sunni jihadists to wage investment growth rate must fall for command far superior firepower. But fight between the Alawites and the something to work with. attrition against US occupying forces many years before the household its emblematic power is irresistible. Sunnis – and their foreign backers. to worry Turkey’s role could be important, and to slaughter Shia civilians. income share of GDP is high enough On top of the stream of defections Iran and Russia have stood with about what especially if it can moderate Gulf Posturing as the “beating heart of for consumption to replace and desertions from the Syrian army, the regime, but they cannot fight influence on the Muslim Brotherhood Arabism” and the fulcrum of an axis The euro ­ not investment as the engine of growth. the regime now has to contend with its battles. In the Sunni camp, will replace and prevent Syria from being sucked of resistance to Israel and western inflation ­ As China rebalances we would informers who have infiltrated its Saudi Arabia, Qatar and Turkey the regime, further into the regional contest designs in the region, the Assads’ should worry expect slowing growth and rapidly inner sanctum. Until the July 18 have stepped up aid, with the US in between Sunni and Shia. Russia may Syria was always willing to fight the ECB, says rising real interest rates, which is attack, the Assads had managed to the background. Rebel forces have a known be useful in identifying elements of to the last Palestinian or Lebanese. Lorenzo Bini exactly what we are seeing. Rather instil terror of retribution inside the gained momentum since late spring quantity in the present Syrian state that could The job now is to hasten its end, not Smaghi than panicking and demanding that castle walls. Now it is they and their and have crystallised into provincial serve as interlocutors on its future. to mourn its passing. Beijing reverse the process, we entourage who are running scared. commands. How much fighting there a volatile An ultimatum from the Free Syrian ft.com/alist should be relieved that China is This was not just a deadly blow to is to come depends on the cohesion region Army, the rebel military umbrella, [email protected] finally solving its problems. But won’t slower growth create social dislocation in China and economic dislocation around the world? No, not if it is managed well. Remember that Chinese rebalancing requires household to income America needs no more neo­imperial nonsense grow faster than GDP for many years, and if Chinese growth slows even to 3 per cent, as I expect it will, could not save him. The US was and Georgia, we undid the good region democracy is a bus you get US is not the 38th parallel, but the but household income continues Pat Buchanan looking inward in 1992, as it does work of Reagan and drove Moscow off when it reaches your stop. 2,000-mile border with Mexico. growing at 5-6 per cent, this is far today. As Mitt Romney burnishes his back into alliance with Beijing. We must roll up the empire and Elsewhere in Asia, it is Russia’s from being socially disruptive. riumphant in the first Gulf foreign policy credentials this week, US influence in the Middle East put America first again. We should land that China covets but India’s What the rest of the world needs war, George H.W. Bush, in he should keep this lesson in mind. is at a nadir. Our alliances with swiftly complete Barack Obama’s that China holds. Vietnam and the from China is not faster growth but TOctober 1991, went before the Having learnt from his father’s Turkey and Saudi Arabia are frayed. work, end the war in Afghanistan Philippines are defying Beijing’s more demand. Rebalancing will UN to declare that the US’s goal was defeat, George W. Bush offered a Pakistan bristles. Israel impatiently and close US bases in central Asia. claims to the Spratly Islands. Japan provide that, although the trade now to build a “New World Order”. “more humble” policy. But after dismisses our pathetic pleas for it We should tell Ukraine and Georgia is showing a resolve to hold the surplus will probably rise before it Rejecting this as Wilsonian September 11, he had a Damascene to stop building settlements. And as that Nato membership is closed. No Senkaku Islands. Let the neighbours begins to decline. This will result in utopianism, my 1992 presidential conversion, went nation-building in the Muslim Brotherhood rose when US interest there justifies risking a do the containment. falling prices for hard commodities, campaign called for an end to US Afghanistan and Iraq, and declared Hosni Mubarak fell in Cairo, so it clash with Russia. Let us tell In the Islamic world, Victor Hugo’s and so will hurt countries such as military intervention where no vital the US’s goal was “to end tyranny in looks likely to rise again when Vladimir Putin that if he stays out dictum applies: stronger than all the Australia and Brazil, but rising interest was imperilled, for federal our world”. Americans responded by Bashar al-Assad falls in Damascus. of our yard, we will stay out of his. armies of earth is the power of an Chinese demand and lower action to secure our southern border relieving the Republican party of America needs a new foreign Half a century ago, Dwight idea whose time has come. Islamic commodity prices are good for global and for a halt to the outsourcing of both houses of Congress in 2006 and policy rooted in today’s reality, not Eisenhower told John F. Kennedy to fundamentalism and ethno- growth overall. US manufacturing jobs. the presidency in 2008. in yesterday’s cold war or in start pulling troops out of Europe, or nationalism, the two forces tearing It is too early to say whether or We advocated a Hamiltonian policy We cannot afford any more neo- tomorrow’s dream of global else the continent would end up countries apart from central Africa not China has really begun its great to support industry and a imperial nonsense. With trillion- democracy. For as Turkey’s Recep permanently dependent on the US. to south Asia, are not problems that rebalancing. Among other things, Jeffersonian foreign policy of dollar deficits, a soaring national Tayyip Erdogan reminds us, in his Was Ike not right? Europeans should can be solved by Seal Team Six. this would mean the rapid growth in peaceful commerce with all nations debt, and 10,000 baby boomers take full responsibility for their own Let us cease our interventions and state sector wealth – which mainly but entangling alliances with none. reaching eligibility for Social defence. The near debacle in Libya, call a halt to our endless hectoring. benefits China’s political elite – must And we were denounced as Security and Medicare every day, the where Britain and France might How other nations rule themselves is slow sharply. It is likely that the isolationists and protectionists. US is beginning to break under the RIGHT have been fought to exhaustion by not really the US’s business. If there elite will resist this ferociously. We We lost. But Mr Bush lost too, strain of its commitments. Muammer Gaddafi had not the US is nation-building to be done, let it should expect tremendous pressure when Ross Perot, running on the What doth it profit a man if he intervened, exposed the atrophied begin here. The watchword of the to reverse the process. Commodity same theme – putting America first – gain the whole world but suffer the THINKING state of Nato’s European members. Romney campaign and presidency exporters and China’s economic elite stripped away a third of the coalition loss of his soul? A biblical hubris South Korea has a population should be enlightened nationalism. may not like it, but this is a good Richard Nixon and Ronald Reagan took hold of our republic. By twice that of North Korea and an Time, again, to put America first. sign for nearly everyone else. put together, leaving Mr Bush with pushing Nato into Russia’s front FT comment series by eminent economy 40 times as large. What an incumbent’s smallest share of the yard, planting bases in central Asia, Republican politicians and are US soldiers still doing in the The writer is a political commentator The writer is a finance professor at vote since William Howard Taft. dispatching democracy crusaders to writers including Francis Fukuyama demilitarised zone? The frontier and a two-time candidate for the Peking University and a senior Mr Bush’s foreign policy record subvert regimes in Ukraine, Belarus that will determine the fate of the Republican nomination for president associate at the Carnegie Endowment

JULY 24 2012 Section:Features Time: 23/7/2012 - 18:44 User: paleita Page Name: COMMENT USA, Part,Page,Edition: USA, 9, 1