Tag Archives: global economy

Global Implications of Rising Interest Rates in the United States

Markets around the world are watching the United States Federal Reserve Bank and its anticipated move to increase interest rates in the United States this afternoon. The Fed is widely expected to increase interest rates by .25 points today. For seven years, interest rates in the United States have been kept near zero in an effort to stimulate the economy. While inflation remains well below the Fed’s two percent target and unemployment is falling, albeit slowly, markets are watching for the Fed’s statement to signal whether it will continue to increase rates in 2016.

The US Federal Reserve’s Open Market Committee sets national monetary policy, largely by setting its benchmark interest rate on which many other interest rates in the country are based. But the interest rate has wide-ranging implications for the global economy. An increase in the Fed rate would likely result in an increase in the value of the US dollar relative to other global currencies, making US exports less competitive abroad. Because oil is priced in US dollars, an increase in the value of the dollar could make oil more expensive for other countries by increasing its price relative to local currency values. It would increase the cost of borrowing for both private individuals and countries.

What do you think? What are the likely impact of an increase in interest rates in the United States on the US economy and economies around the world? Should the Fed increase interest rates? Why?

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Brinkmanship and the U.S. Debt Ceiling Standoff

A tense meeting between President Obama and House Speaker Boehner this morning at the White House.

Brinkmanship is defined by Merriam-Webster as “the art or practice of pushing a dangerous situation or confrontation to the limit of safety especially to force a desired outcome.”  It was a common practice during the Cold War standoff between the U.S. and the Soviet Union, when strategists such as Herman Kahn and Thomas Schelling mined metaphors like “rocking the boat” and the game of “chicken” to analyze superpower brinkmanship.

The logic of brinkmanship as a bargaining strategy is that by raising the stakes and threatening to let events spiral out of control you can coerce the opposing actor to back down and accept your demands.  During the Cuban Missile Crisis President Kennedy’s decision to place a naval “quarantine” around Cuba increased the chances of a naval clash and subsequent escalation between tense, nuclear-armed adversaries.  In this crisis, both sides used the very real threat of impending doom to wring concessions from the other.

Today we are witnessing a good example of brinkmanship in the standoff between President Obama and Congressional Republicans  over raising the debt ceiling.  The August 2nd deadline is looming for the U.S. to raise the ceiling or risk defaulting on its obligations–not quite as bad an outcome as nuclear holocaust, but bad enough that many analysts are using the terms “apocalypse” and “armageddon” to describe the economic consequences of a default.  For analyses of the consequences of a default for the U.S. and the global economy see here, here, and here.  Summing up the concerns, a senior economist at Wells Fargo is quoted in a recent Huffington Post article as saying: “It would be an earth-shattering event. It’s taken as a given that U.S. Treasuries are a safe asset. Once you question that assumption, it shakes the foundations of global finance, and the way it’s been established over the last 50 years.” Yet despite these dangers, President Obama walked out of talks last week and House Speaker John Boehner broke off talks last night, raising the heat and signaling that they were willing to court economic disaster if the other side didn’t budge. Some analysts believe that the willingness of some Congressional Republicans to accept the prospect of no deal by August 2nd gives them the upper hand in negotiations, and analysts such as Thomas Schelling would agree. The problem with brinkmanship, however, is that it requires increasing the likelihood of catastrophe, and if that catastrophe happens both sides have lost.

What do you think?  Who is playing the game of brinkmanship better in this standoff?  How will it end?  Are both sides acting irresponsibly by raising the risks of economic disaster, or is one side more to blame for holding the economy hostage to extract self-interested concessions?

Five Stories You Might Have Missed

Over the past week we’ve seen a lot of news from the domestic U.S. political front: Obama’s speech at the Democratic National Convention, McCain’s pick of Sarah Palin for his Vice Presidential candidate.  What’s been going on in the rest of the world?  Here are five important stories from the past week.

1. The worldwide economic downturn continued last week.  On Friday, the Japanese government announced a new economic stimulus package.  Analysts are holding out little hope that it will make much of a difference.  In the United Kingdom, Chancellor Alistair Darling conceded that the current crisis will likely be “profound and longlasting.”  He forecasted that it might be the worst economic crisis faced by the United Kingdom in the past 60 years.  Similarly, figures released by the Canadian government last week show that the country is on the brink of recession, with gross domestic product growing by  a mere 0.1% in the second quarter.  All of this suggests that the current economic crisis is global in scope and potentially long in duration.

2. Ongoing political violence in Thailand last week culminated in the closure of three major international airports and blockades of the country’s rail, road, and port infrastructure.   Earlier in the week, protestors had laid siege to state buildings.  The protestors—a loose coalition of business, royalists, and activists under the banner of the People’s Alliance for Democracy—are demanding the resignation of Prime Minister Samak Sundaravej and his government.  So far, the military has refused to become involved in the political crisis.

3. In an interview on Tuesday, Zwelinazima Vavi, leader of the Congress of South African Trade Unions, declared that South Africa would need to radically change its economic policies to avoid the “ticking bomb” of poverty, unemployment and crime.  Vavi is a close ally of Jacob Zuma, the leader of the African National Congress and the person mostly likely to become president of South Africa after Thabo Mbeki’s term expires next year.  Many analysts believe Vavi’s views reflect the policies favored by Zuma.  Many South Africans believe the economic policies pursued by Mbeki have not improved the quality of life for ordinary people.  His complete interview is available through the Financial Times website.

4. The North Korean government announced on Tuesday that it would suspend the processing of disabling its nuclear facilities and was considering reactivating the Yongbyon reactor.  The announcement, which North Korea maintains is a response to the failure of the United States to make good on promises made during the six party talks, raises new concerns about the effectiveness of the talks and the progress made there.  On Thursday, South Korea announced that it would drop the label “main enemy” when referring to North Korea in its biannual defense white paper.  According to Major Seo Young-suk, the decision to drop the term “does not mean that we have changed our stance.  North Korea is still a substantial and present threat.”

5. In a report issued Thursday, the World Health Organization (WHO) condemned health inequalities between rich and poor around the world, describing them as “unfair, unjust, and avoidable.”  According to the WHO “a toxic combination of bad policies, economics, and policies [was] killing people on a grand scale.”  The complete report, entitled Social Determinants of Health, is available through the WHO website.